As Filed with the Securities
and Exchange Commission on October 2, 2009
Registration Statement No.
333-161991
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 1
TO
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VERICHIP CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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3669
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06-1637809
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1690 South Congress Avenue,
Suite 200
Delray Beach, Florida
33445
(561) 805-8008
(Address, including zip code,
and telephone number, including area code, of registrant’s
principal executive offices)
William J. Caragol
Acting Chief Financial
Officer
VeriChip Corporation
1690 South Congress Avenue,
Suite 200
Delray Beach, Florida
33445
Phone:
(561) 805-8008
Fax:
(561) 805-8001
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copy to:
Tammy L.
Knight, Esq.
Holland & Knight
LLP
One East Broward Boulevard,
Suite 1300
Fort Lauderdale, Florida
33301
Phone: (954) 525-1000
Fax: (954) 463-2030
Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable
after the effective time of the merger described herein.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, please check
the following
box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
þ
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(Do not check if a smaller reporting company)
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the commission,
acting pursuant to said Section 8(a), may determine.
The
information in this joint proxy statement/prospectus is not
complete and may be changed. We may not sell the securities
offered by this joint proxy statement/prospectus until the
registration statement filed with the Securities and Exchange
Commission is effective. This joint proxy statement/prospectus
does not constitute an offer to sell or a solicitation of an
offer to buy any securities in any jurisdiction where an offer,
solicitation or sale is not permitted.
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SUBJECT
TO COMPLETION, DATED OCTOBER 2, 2009
MERGER
PROPOSED — YOUR VOTE IS VERY IMPORTANT
To the stockholders of VeriChip Corporation and Steel Vault
Corporation:
On behalf of the boards of directors of VeriChip Corporation and
Steel Vault Corporation, we are pleased to deliver our joint
proxy statement/prospectus for the proposed merger involving
VeriChip and Steel Vault. We are seeking the approval of both
VeriChip and Steel Vault stockholders with respect to this
transaction.
In the proposed merger, Steel Vault will become a wholly-owned
subsidiary of VeriChip. Upon completion of the merger, holders
of Steel Vault common stock will be entitled to receive
0.5 shares of VeriChip common stock for each share of Steel
Vault common stock then held by them. No fractional shares of
VeriChip common stock will be issued in connection with the
proposed merger. Instead, VeriChip will make a cash payment to
each Steel Vault stockholder who would otherwise receive a
fractional share. For purposes of illustration only, if the
merger had been consummated on September 4, 2009, the last
trading day prior to announcement of the merger, each share of
Steel Vault common stock, which had a closing price of $0.29 per
share, would have been exchanged for 0.5 shares of VeriChip
common stock with a value of $0.37 (based on VeriChip’s
common stock closing price of $0.74 per share on that same
date). By comparison, if the merger had been consummated on
October 1, 2009, the latest practicable date before the
printing of this joint proxy statement/prospectus, each share of
Steel Vault common stock, which had a closing price of $0.85 per
share, would have been exchanged for 0.5 shares of VeriChip
common stock with a value of $1.27 (based on the closing price
of VeriChip’s common stock of $2.53 per share on that same
date). Because VeriChip stock and cash paid in lieu of
fractional shares of VeriChip stock together represent 100% of
the merger consideration, the value of the overall merger
consideration to Steel Vault stockholders on those dates,
respectively, was $0.37 per share and $1.27 per share. VeriChip
and Steel Vault estimate that VeriChip will issue approximately
4,937,485 shares of VeriChip common stock in the merger
based on the number of shares of Steel Vault common stock
outstanding on September 25, 2009, and will reserve an
additional approximately 3,932,214 shares of VeriChip
common stock for issuance in connection with VeriChip’s
assumption of Steel Vault’s outstanding options and
warrants.
The shares of VeriChip common stock issued to Steel Vault
stockholders in connection with the merger are expected to
represent approximately 26.3% of the outstanding shares of
VeriChip common stock immediately following the consummation of
the merger, based on the number of shares of VeriChip common
stock and Steel Vault common stock outstanding on
September 25, 2009. VeriChip common stock is traded on the
Nasdaq Capital Market under the trading symbol “CHIP,”
and Steel Vault common stock is quoted on the OTC
Bulletin Board under the trading symbol
“SVUL.OB.” Following the completion of the merger,
VeriChip plans to change its ticker symbol on the Nasdaq Capital
Market from “CHIP” to “PSID.” On
October 1, 2009, the latest practicable date before the
printing of this joint proxy statement/prospectus, the closing
sale price of VeriChip common stock was $2.53 as reported on the
Nasdaq Capital Market, and the closing sale price of Steel Vault
common stock was $0.85 as reported on the OTC
Bulletin Board.
VeriChip shares a common ownership, or control group, with Steel
Vault. As of September 25, 2009, Scott R. Silverman,
VeriChip’s chief executive officer and executive chairman
and Steel Vault’s chairman, beneficially owned, directly or
indirectly, 49.4% of VeriChip’s outstanding common stock
and 53.7% of Steel Vault’s outstanding common stock. For
VeriChip and Steel Vault to complete the merger, VeriChip
stockholders must vote to approve the issuance of shares of
VeriChip common stock in connection with the merger. In
addition, the holders of a majority of the outstanding shares of
Steel Vault common stock must vote to approve and adopt the
merger agreement. VeriChip will hold a special and annual
meeting and Steel Vault will hold a special meeting of
stockholders to obtain these approvals.
The boards of directors of VeriChip and Steel Vault, based on
the recommendation of the special committee of independent
directors of the applicable company, unanimously recommend the
merger and believe that the combination of the two companies is
advisable and in the best interest of their respective
stockholders based upon the analysis, investigation and
deliberation conducted by both VeriChip and Steel Vault.
We encourage you to read this joint proxy
statement/prospectus for important information about the merger,
the special and annual meeting of VeriChip and the special
meeting of Steel Vault.
In particular, you should carefully
consider the discussion in the section of this joint proxy
statement/prospectus entitled “Risk Factors” beginning
on page 22.
Your vote is very important, regardless of the number of shares
you own. Whether or not you plan to attend the special and
annual meeting of stockholders of VeriChip or the special
meeting of stockholders of Steel Vault, please take the time to
vote by completing and mailing the enclosed proxy card and
returning it in the preaddressed envelope provided as soon as
possible.
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Sincerely,
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Sincerely,
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SCOTT R. SILVERMAN
Chief Executive Officer and Executive Chairman of
the Board of Directors of
VeriChip Corporation
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WILLIAM J. CARAGOL
Chief Executive Officer, President
and Acting Chief Financial Officer of
Steel Vault Corporation
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This joint proxy statement/prospectus is dated
October •, 2009, and is first being mailed to the
stockholders of VeriChip and Steel Vault on or about
October 5, 2009.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this joint
proxy statement/prospectus. Any representation to the contrary
is a criminal offense.
SOURCES
OF ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important
business and financial information from other documents filed by
VeriChip with the Securities and Exchange Commission, or SEC.
Those documents include important information about VeriChip
that is not included in or delivered with this joint proxy
statement/prospectus. You can obtain any of the documents filed
with the SEC from VeriChip and Steel Vault, as the case may be,
or through the SEC or the SEC’s website. The address of
that site is
http://www.sec.gov.
Stockholders of VeriChip and Steel Vault may obtain documents
filed with the SEC or documents incorporated by reference in
this joint proxy statement/prospectus, when available, free of
cost, by directing a written or oral request to the appropriate
company at:
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VeriChip Corporation
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Steel Vault Corporation
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1690 South Congress Avenue, Suite 200
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1690 South Congress Avenue, Suite 200
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Delray Beach, Florida 33445
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Delray Beach, Florida 33445
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Telephone:
(561) 805-8008
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Telephone: (561) 805-8000
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Attention: Investor Relations
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Attention: Investor Relations
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In addition, if you have questions about the merger,
VeriChip’s special and annual meeting, or Steel
Vault’s special meeting, or if you need to obtain copies of
this joint proxy statement/prospectus, proxy cards, or other
documents incorporated by reference into this joint proxy
statement/prospectus, you may contact Allison Tomek by mail at
1690 South Congress Avenue, Suite 200, Delray Beach,
Florida 33445 or by telephone at
(561) 805-8008.
You will not be charged for any of the documents you request.
If you would like to request documents, in order to ensure
timely delivery, you must do so at least five business days
before the date of the special and annual meeting of VeriChip
and the special meeting of Steel Vault. This means you must
request this information no later than November 3, 2009.
VeriChip and Steel Vault, as the case may be, will mail properly
requested documents to requesting stockholders by first class
mail, or another equally prompt means, within one business day
after receipt of such requests.
See “Where You Can Find More Information.”
VERICHIP
CORPORATION
NOTICE OF
SPECIAL AND ANNUAL MEETING OF STOCKHOLDERS
TO BE
HELD NOVEMBER 10, 2009
To the stockholders of VeriChip Corporation:
You are cordially invited to attend the special and annual
meeting of stockholders of VeriChip Corporation, which will be
held on November 10, 2009, at 9:00 a.m., Eastern
Standard Time, at VeriChip’s principal executive offices
located at 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445. If you owned VeriChip common stock at the
close of business on September 25, 2009, you may vote at
this meeting or any adjournments or postponements thereof.
The enclosed notice of meeting identifies each business proposal
for your action. The board of directors unanimously recommends
the following proposals:
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Recommended
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Proposal
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Vote
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1.
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To approve the issuance of shares of VeriChip common stock to
Steel Vault stockholders pursuant to the agreement and plan of
reorganization, dated as of September 4, 2009, among
VeriChip, VeriChip Acquisition Corp., a wholly-owned subsidiary
of VeriChip, and Steel Vault, as amended on October 1, 2009;
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FOR
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2.
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To approve and adopt an amendment to VeriChip’s certificate
of incorporation to change VeriChip’s name to
“PositiveID Corporation” at the effective time of the
merger;
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FOR
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3.
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To approve and adopt an amendment to VeriChip’s certificate
of incorporation to increase the total number of authorized
shares of VeriChip capital stock from 45 million shares, of
which 40 million shares are common stock, to
75 million shares, of which 70 million shares will be
common stock;
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FOR
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4.
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To elect five directors to hold office until the 2010 Annual
Meeting of Stockholders and until their successors have been
duly elected and qualified;
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FOR
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5.
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To approve and adopt the VeriChip Corporation 2009 Stock
Incentive Plan;
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FOR
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6.
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To approve the potential issuance of shares of VeriChip common
stock in excess of 19.99% of VeriChip’s outstanding common
stock upon conversion of VeriChip’s Series A Preferred
Stock;
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FOR
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7.
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To ratify the appointment of Eisner LLP as VeriChip’s
independent registered public accounting firm for the year ended
December 31, 2009;
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FOR
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8.
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To approve an adjournment or postponement of the special and
annual meeting, if necessary; and
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FOR
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9.
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To transact such other business as may properly come before the
special and annual meeting or any adjournments or postponements
thereof.
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As VeriChip has not yet held its 2009 annual meeting, the
special and annual meeting of stockholders will present to the
stockholders for their vote, proposals relating to corporate
governance, such as those presented in proposals 3, 4, 5,
and 7, as well as the proposals relating to the merger
(proposals 1 and 2) and to a potential issuance of VeriChip
common stock associated with a recent financing transaction
(proposal 6). Approval of the matters to be voted on at the
special and annual meeting, other than proposal 1, is not a
condition to the merger. The approval of proposal 1 is not
conditioned on the approval of the VeriChip name change proposal
or any other VeriChip proposal; however, the VeriChip name
change proposal will be effected only if the merger has taken
place and is therefore contingent on approval of proposal 1.
The board of directors is not aware of any other proposals for
the special and annual meeting.
A joint proxy statement/prospectus containing information about
the matters to be acted on at the special and annual meeting and
a form of proxy are enclosed with this notice of special and
annual meeting.
If you plan to attend the special and annual meeting, please
mark the appropriate box on your proxy card to help us plan for
the special and annual meeting. You will need an admission card
to attend the special and annual meeting. If your shares are
registered in your name, you are a stockholder of record. Your
admission card is attached to your proxy card, and you will need
to bring it with you to the special and annual meeting.
If your shares are in the name of your broker or bank, your
shares are held in “street name.” Ask your broker or
bank for an admission card in the form of a legal proxy to bring
with you to the special and annual meeting. If you do not
receive the legal proxy in time, bring your brokerage statement
with you to the special and annual meeting so that we can verify
your ownership of our stock on the record date and admit you to
the special and annual meeting. However, you will not be able to
vote your shares at the special and annual meeting without a
legal proxy.
Your vote is important regardless of the number of shares you
own. We encourage you to vote by proxy so that your shares will
be represented and voted at the special and annual meeting even
if you cannot attend. All stockholders can vote by written proxy
card. Many stockholders also can vote by proxy via a touch-tone
telephone from the U.S. and Canada, using the toll-free
number on your proxy card or via the internet using the
instructions on your proxy card. In addition, stockholders may
vote in person at the special and annual meeting, as described
above.
Each stockholder is urged to vote promptly by signing and
returning the enclosed proxy card, using the telephone voting
system, or accessing the world wide website indicated on your
proxy card to vote via the internet. If a stockholder decides to
attend the special and annual meeting, he or she may revoke
their proxy and vote the shares in person.
Sincerely,
SCOTT R. SILVERMAN
Chief Executive Officer and
Executive Chairman of the Board of
Directors of
VeriChip Corporation
Delray Beach, Florida
October •, 2009
STEEL
VAULT CORPORATION
NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
TO BE
HELD NOVEMBER 10, 2009
To the stockholders of Steel Vault Corporation:
You are cordially invited to attend the special meeting of
stockholders of Steel Vault Corporation, which will be held on
November 10, 2009, at 9:30 a.m., Eastern Standard
Time, at Steel Vault’s principal executive offices located
at 1690 South Congress Avenue, Suite 200, Delray Beach,
Florida 33445. If you owned Steel Vault common stock at the
close of business on September 25, 2009, you may vote at
this meeting or any adjournments or postponements thereof.
The enclosed notice of meeting identifies each business proposal
for your action. The board of directors unanimously recommends
the following proposals:
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Recommended
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Proposal
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Vote
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1.
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To approve and adopt the agreement and plan of reorganization,
dated as of September 4, 2009, among Steel Vault, VeriChip
and VeriChip Acquisition Corp., a wholly-owned subsidiary of
VeriChip, as amended on October 1, 2009;
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FOR
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2.
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To approve an adjournment or postponement of the special
meeting, if necessary; and
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FOR
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3.
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To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
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Approval of the matters to be voted on at the special meeting,
other than approval of proposal 1, is not a condition to
the merger.
The board of directors is not aware of any other proposals for
the special meeting.
A joint proxy statement/prospectus containing information about
the matters to be acted on at the special meeting and a form of
proxy are enclosed with this notice of special meeting.
If you plan to attend the special meeting, please mark the
appropriate box on your proxy card to help us plan for the
special meeting. You will need an admission card to attend the
special meeting. If your shares are registered in your name, you
are a stockholder of record. Your admission card is attached to
your proxy card, and you will need to bring it with you to the
special meeting. If your shares are in the name of your broker
or bank, your shares are held in “street name.” Ask
your broker or bank for an admission card in the form of a legal
proxy to bring with you to the special meeting. If you do not
receive the legal proxy in time, bring your brokerage statement
with you to the special meeting so that we can verify your
ownership of our stock on the record date and admit you to the
special meeting. However, you will not be able to vote your
shares at the special meeting without a legal proxy.
Your vote is important regardless of the number of shares you
own. We encourage you to vote by proxy so that your shares will
be represented and voted at the special meeting even if you
cannot attend. All stockholders can vote by written proxy card.
Many stockholders also can vote by proxy via a touch-tone
telephone from the U.S. and Canada, using the toll-free
number on your proxy card or via the internet using the
instructions on your proxy card. In addition, stockholders may
vote in person at the special meeting as described above.
Each stockholder is urged to vote promptly by signing and
returning the enclosed proxy card, using the telephone voting
system, or accessing the world wide website indicated on your
proxy card to vote via the internet. If a stockholder decides to
attend the special meeting, he or she may revoke their proxy and
vote the shares in person.
Sincerely,
WILLIAM J. CARAGOL
Chief Executive Officer, President and
Acting Chief Financial Officer of
Steel Vault Corporation
Delray Beach, Florida
October •, 2009
TABLE OF
CONTENTS
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70
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70
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72
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79
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86
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88
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88
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88
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89
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89
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89
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89
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89
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90
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90
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90
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90
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90
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91
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91
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91
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91
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iii
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Page
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92
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92
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92
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93
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94
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95
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96
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96
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97
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97
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99
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100
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101
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102
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104
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105
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106
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109
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120
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125
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134
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148
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149
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158
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160
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163
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167
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169
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173
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180
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182
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182
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182
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FS-1
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FS-45
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II-1
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II-5
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II-6
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ANNEX A-1 — Agreement and Plan of Reorganization
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iv
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ANNEX A-2 — Amendment #1 to Agreement and Plan of
Reorganization
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ANNEX B — Opinion of Ladenburg
Thalmann & Co. Inc.
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ANNEX C — Opinion of Hyde Park Capital Advisors,
LLC
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ANNEX D — Certificate of Amendment of Certificate
of Incorporation of VeriChip
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ANNEX E — VeriChip Corporation 2009 Stock
Incentive Plan
|
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EX-3.1
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EX-5.1
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EX-8.1
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EX-23.1
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EX-23.2
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EX-23.3
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EX-99.1
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EX-99.2
|
v
QUESTIONS
AND ANSWERS
The following questions and answers are intended to briefly
address some commonly asked questions regarding the VeriChip
special and annual meeting and the Steel Vault special meeting,
and in particular, the merger. These questions and answers may
not address all questions that may be important to you as a
VeriChip or Steel Vault stockholder. Please refer to the more
detailed information contained elsewhere in this joint proxy
statement/prospectus and the annexes attached to this joint
proxy statement/prospectus.
|
|
|
|
Q:
|
Why am I
receiving these materials?
|
|
|
|
|
A:
|
VeriChip and Steel Vault are sending you these materials to help
you decide how to vote your shares of VeriChip or Steel Vault
stock with respect to the proposed merger. A copy of the
agreement and plan of reorganization, as amended, or merger
agreement, is attached as
Annex A-1
and
Annex A-2
to this joint proxy statement/prospectus.
|
The merger cannot be completed unless a majority of Steel Vault
stockholders approve and adopt the merger agreement, and
VeriChip stockholders approve the issuance of VeriChip common
stock in the merger. VeriChip is holding its special and annual
meeting of stockholders and Steel Vault is holding its special
meeting of stockholders to vote on the proposals necessary to
complete the merger. Information about these meetings, the
merger and the other business to be considered by stockholders
is contained in this joint proxy statement/prospectus.
VeriChip and Steel Vault are delivering this joint proxy
statement/prospectus to you as both a joint proxy statement of
VeriChip and Steel Vault and a prospectus of VeriChip. It is a
joint proxy statement because the boards of directors of
VeriChip and Steel Vault are soliciting proxies from their
respective stockholders. It is a prospectus because VeriChip
will issue shares of its common stock in exchange for shares of
Steel Vault common stock in the merger.
GENERAL
QUESTIONS AND ANSWERS ABOUT THE MERGER
|
|
|
|
Q:
|
What is
the proposed transaction?
|
|
|
|
|
A:
|
VeriChip, VeriChip Acquisition Corp., a wholly-owned subsidiary
of VeriChip, and Steel Vault have entered into a merger
agreement pursuant to which VeriChip Acquisition Corp. will
merge with and into Steel Vault. In connection with the merger,
VeriChip will acquire all of the outstanding shares of common
stock of Steel Vault. VeriChip shares a common ownership, or
control group, with Steel Vault. As of September 25, 2009,
Scott R. Silverman, VeriChip’s chief executive officer and
executive chairman and Steel Vault’s chairman, beneficially
owned, directly or indirectly, 49.4% of VeriChip’s
outstanding common stock and 53.7% of Steel Vault’s
outstanding common stock. After the merger, Steel Vault will be
a wholly-owned subsidiary of VeriChip and each share of Steel
Vault common stock then outstanding will be canceled and
automatically converted into the right to receive
0.5 shares of VeriChip common stock. The total number of
shares of VeriChip common stock issuable as merger consideration
is subject to adjustment, as is more fully described under
“The Merger Agreement — Exchange of Shares.”
No fractional shares of VeriChip common stock will be issued in
connection with the merger. Instead, VeriChip will make a cash
payment to each Steel Vault stockholder who should otherwise
receive a fractional share. VeriChip stockholders will continue
to own their existing shares in VeriChip.
|
|
|
|
|
Q:
|
Why are
VeriChip and Steel Vault proposing the merger?
|
|
|
|
|
A:
|
The boards of directors of VeriChip and Steel Vault believe that
the combination of VeriChip and Steel Vault will benefit the
stockholders of both companies by eliminating redundant
management and other expenses and creating a combined company
that will have a stronger capital base and improved operating
efficiencies. To review the reasons for the merger in greater
detail, see “The Merger — VeriChip’s Reasons
for the Merger” and “The Merger — Steel
Vault’s Reasons for the Merger.”
|
vi
|
|
|
|
Q:
|
When do
VeriChip and Steel Vault expect to complete the
merger?
|
|
|
|
|
A:
|
VeriChip and Steel Vault expect to complete the merger after all
conditions to the merger in the merger agreement are satisfied
or waived. VeriChip and Steel Vault currently expect to complete
the merger by the end of 2009. However, it is possible that
factors outside of either company’s control could require
VeriChip or Steel Vault to complete the merger at a later time
or not to complete it at all.
|
|
|
|
|
Q:
|
What
conditions are required to be satisfied to complete the
merger?
|
|
|
|
|
A:
|
VeriChip and Steel Vault are not required to complete the merger
unless certain specified conditions are satisfied or waived.
These conditions include, but are not limited to:
|
|
|
|
|
|
|
•
|
approval of the issuance of shares of VeriChip common stock in
the merger by the VeriChip stockholders;
|
|
|
|
|
•
|
approval and adoption of the merger agreement by the holders of
a majority of the outstanding shares of Steel Vault common
stock; and
|
|
|
|
|
•
|
effectiveness of the Registration Statement on
Form S-4,
of which this joint proxy statement/prospectus is a part.
|
There can be no assurance that these conditions to complete the
merger will be satisfied. For a more complete summary of the
conditions that must be satisfied or waived prior to the
effective time of the merger, see “The Merger
Agreement — Conditions to Completion of the
Merger.”
|
|
|
|
Q:
|
When will
I be able to sell my shares?
|
|
|
|
|
A:
|
Upon completion of the merger, all shares of VeriChip common
stock received by Steel Vault stockholders in connection with
the merger will be tradable on the Nasdaq Capital Market. If a
Steel Vault stockholder is considered an affiliate of VeriChip
or Steel Vault under the Securities Act, in order to sell shares
of VeriChip common stock received in connection with the merger,
that stockholder must comply with the resale provisions of
Rule 144 under the Securities Act or sell the shares as
otherwise permitted under the Securities Act. For a more
complete description of these restrictions, see “The
Merger — Restriction on Resales of VeriChip Common
Stock by Affiliates.”
|
|
|
|
|
Q:
|
Are there
risks associated with the merger that I should consider in
deciding how to vote?
|
|
|
|
|
A:
|
Yes. There are a number of risks related to the merger that are
discussed in this joint proxy statement/prospectus and in other
documents incorporated by reference. You should read carefully
the detailed description of the risks associated with the merger
and industry and business risks related to VeriChip, Steel Vault
and their respective businesses, as described in “Risk
Factors.”
|
|
|
|
|
Q:
|
What are
the tax consequences of the merger?
|
|
|
|
|
A:
|
Assuming the merger is consummated, as described in the merger
agreement and this joint proxy statement/prospectus, it is the
opinion of Holland & Knight LLP that the merger will
be treated as a “reorganization” under
Section 368(a) of the Internal Revenue Code and that Steel
Vault stockholders will not recognize any gain or loss by reason
of the merger, except with respect to any cash received in lieu
of a fractional share interest in VeriChip common stock, subject
to the limitations described under “Material United States
Federal Income Tax Consequences.”
|
Please review carefully the information under “Material
United States Federal Income Tax Consequences” for a
description of the material United States federal income tax
consequences of the merger. The tax consequences to you will
depend on your own situation. Please consult your tax advisors
for a full understanding of the tax consequences of the merger
to you.
vii
|
|
|
|
Q:
|
Are
VeriChip stockholders or Steel Vault stockholders entitled to
dissent and require appraisal of their shares?
|
|
|
|
|
A:
|
No. Neither VeriChip stockholders nor Steel Vault
stockholders have dissenters’ rights of appraisal under
Delaware law in connection with the merger or any other
proposals to be voted upon at the meetings. For a more complete
description, see “The Merger — Appraisal
Rights.”
|
|
|
|
|
Q:
|
What do I
need to do now?
|
|
|
|
|
A:
|
After carefully reading and considering the information
contained in this joint proxy statement/prospectus, please vote
your shares as soon as possible so that your shares will be
represented at your respective company’s meeting. Please
follow the instructions set forth on the proxy card, or on the
voting instruction form provided by the record holder if your
shares are held in the name of your broker or other nominee.
|
|
|
|
|
A:
|
You may vote before the VeriChip special and annual meeting or
the Steel Vault special meeting in one of the following ways:
|
|
|
|
|
|
|
•
|
use the toll-free number shown on your proxy card;
|
|
|
|
|
•
|
visit the website shown on your proxy card to vote via the
internet; or
|
|
|
|
|
•
|
complete, sign, date and return the enclosed proxy card in the
enclosed postage-paid envelope.
|
You may also cast your vote in person at your respective
company’s meeting.
If your shares are held in “street name,” through a
broker, bank or other nominee, that institution will send you
separate instructions describing the procedure for voting your
shares. “Street name” stockholders who wish to vote at
the meeting will need to obtain a proxy form from the
institution that holds their shares.
|
|
|
|
Q:
|
Can I
revoke or change my vote after I have delivered my
proxy?
|
|
|
|
|
A:
|
Yes. You may revoke or change your vote at any time before your
proxy is voted at the VeriChip special and annual meeting or the
Steel Vault special meeting, as applicable. You can do this in
any of the three following ways:
|
|
|
|
|
|
|
•
|
by sending a written notice to the Secretary of VeriChip or the
Secretary of Steel Vault, as applicable, in time to be received
before the VeriChip special and annual meeting or the Steel
Vault special meeting, as applicable, stating that you would
like to revoke your proxy;
|
|
|
|
|
•
|
by completing, signing and dating another proxy card and
returning it by mail in time to be received before the VeriChip
special and annual meeting or the Steel Vault special meeting,
as applicable, or, if you submitted your proxy through the
internet or by telephone, by submitting a proxy card at a later
date, in which case your later-submitted proxy will be recorded
and your earlier proxy revoked; or
|
|
|
|
|
•
|
if you are a holder of record, by attending the meeting and
voting in person. Simply attending the VeriChip special and
annual meeting or Steel Vault special meeting without voting
will not revoke your proxy or change your vote.
|
If your shares of VeriChip common stock or Steel Vault common
stock are held in an account at a broker or other nominee and
you desire to change your vote, you should contact your broker
or other nominee for instructions on how to do so.
|
|
|
|
Q:
|
What
should I do if I receive more than one set of voting materials
for the VeriChip special and annual meeting or the Steel Vault
special meeting?
|
|
|
|
|
A:
|
You may receive more than one set of voting materials for the
VeriChip special and annual meeting or the Steel Vault special
meeting, including multiple copies of this joint proxy
statement/prospectus and
|
viii
|
|
|
|
|
multiple proxy cards or voting instruction cards. For example,
if you hold your shares of VeriChip common stock or Steel Vault
common stock in more than one brokerage account, you will
receive a separate voting instruction card for each brokerage
account in which you hold shares of VeriChip common stock or
Steel Vault common stock. If you are a holder of record and your
shares of VeriChip common stock or Steel Vault common stock are
registered in more than one name, you will receive more than one
proxy card. Please complete, sign, date and return each proxy
card and voting instruction card that you receive.
|
|
|
|
|
Q:
|
What
happens if I am a stockholder of both VeriChip and Steel
Vault?
|
|
|
|
|
A:
|
If you are a stockholder of both VeriChip and Steel Vault, you
will receive two separate packages of proxy materials. A vote as
a Steel Vault stockholder for the proposal to approve and adopt
the merger agreement will not constitute a vote as a VeriChip
stockholder for the proposal to issue VeriChip common stock
pursuant to the merger agreement, or vice versa. Therefore,
please sign, date and return all proxy cards that you receive,
whether from VeriChip or Steel Vault, or vote as both a VeriChip
stockholder and Steel Vault stockholder by internet or telephone.
|
QUESTIONS
AND ANSWERS FOR VERICHIP STOCKHOLDERS
|
|
|
|
Q:
|
When and
where is the special and annual meeting of VeriChip
stockholders?
|
|
|
|
|
A:
|
VeriChip will hold a special meeting of its stockholders on
November 10, 2009, at 9:00 a.m., Eastern Standard
Time, at VeriChip’s principal executive offices located at
1690 South Congress Avenue, Suite 200, Delray Beach,
Florida 33445.
|
|
|
|
|
Q:
|
Who can
vote at the VeriChip special meeting?
|
|
|
|
|
A:
|
All VeriChip stockholders of record as of the close of business
on September 25, 2009, the record date for the VeriChip
special and annual meeting, are entitled to receive notice of
and to vote at the VeriChip special and annual meeting.
|
|
|
|
|
Q:
|
How can I
obtain admission to the VeriChip special and annual
meeting?
|
|
|
|
|
A:
|
You will need an admission card to attend the VeriChip special
and annual meeting. If your shares are registered in your name,
you are a stockholder of record. Your admission card is attached
to your proxy card, and you will need to bring it with you to
the VeriChip special and annual meeting. If your shares are in
the name of your broker or bank, your shares are held in
“street name.” Ask your broker or bank for an
admission card in the form of a legal proxy to bring with you to
the VeriChip special and annual meeting. If you do not receive
the legal proxy in time, bring your brokerage statement with you
to the VeriChip special and annual meeting so that VeriChip can
verify your ownership of VeriChip stock on the record date and
admit you to the VeriChip special and annual meeting. However,
you will not be able to vote your shares at the VeriChip special
and annual meeting without a legal proxy.
|
|
|
|
|
Q:
|
Will
there be any other business conducted at the VeriChip special
meeting?
|
|
|
|
|
A:
|
The other items of business to be conducted at the VeriChip
special and annual meeting are to:
|
|
|
|
|
|
|
•
|
approve and adopt an amendment to VeriChip’s certificate of
incorporation to increase the total number of authorized shares
of VeriChip capital stock from 45 million shares, of which
40 million shares are common stock, to 75 million shares,
of which 70 million shares will be common stock, as
described in proposal 3;
|
|
|
|
|
•
|
elect five directors to hold office until the 2010 Annual
Meeting of Stockholders and until their successors have been
duly elected and qualified, as described in proposal 4;
|
|
|
|
|
•
|
approve and adopt the VeriChip Corporation 2009 Stock Incentive
Plan, as described in proposal 5;
|
ix
|
|
|
|
|
|
•
|
approve the potential issuance of shares of VeriChip common
stock in excess of 19.99% of VeriChip’s outstanding common
stock upon conversion of VeriChip’s Series A Preferred
Stock, as described in proposal 6;
|
|
|
|
|
|
|
•
|
ratify the appointment of Eisner LLP as VeriChip’s
independent registered public accounting firm for the year ended
December 31, 2009, as described in proposal 7; and
|
|
|
|
|
|
|
•
|
approve an adjournment or postponement of the special and annual
meeting, if necessary, as described in proposal 8.
|
|
|
|
|
Q:
|
What vote
is required to approve the proposals at the VeriChip special and
annual meeting?
|
|
|
|
|
A:
|
To approve the issuance of shares of VeriChip common stock to
Steel Vault stockholders pursuant to the merger
agreement:
The affirmative vote of a majority of
the votes cast by the VeriChip stockholders present in person or
represented by proxy at the special and annual meeting and
entitled to vote thereon.
|
To approve and adopt an amendment to VeriChip’s
certificate of incorporation to change its name and increase the
total number of authorized shares
: The
affirmative vote of the holders of a majority of the voting
power of all then outstanding shares of VeriChip capital stock
entitled to vote generally in the election of directors.
To elect five directors:
The affirmative vote
of a plurality of the votes cast by the VeriChip stockholders
present in person or represented by proxy at the special and
annual meeting and entitled to vote thereon.
To approve and adopt the VeriChip Corporation 2009 Stock
Incentive Plan
: The affirmative vote of a majority of the
votes cast by the VeriChip stockholders present in person or
represented by proxy at the special and annual meeting and
entitled to vote thereon.
To approve the potential issuance of shares of VeriChip
common stock in excess of 19.99% of VeriChip’s outstanding
common stock upon conversion of VeriChip’s Series A
Preferred Stock:
The affirmative vote of a
majority of the votes cast by the VeriChip stockholders present
in person or represented by proxy at the special and annual
meeting and entitled to vote thereon.
To ratify the appointment of Eisner LLP as VeriChip’s
independent registered public accounting firm for the year ended
December 31, 2009
: The affirmative vote of a
majority of the votes cast by the VeriChip stockholders present
in person or represented by proxy at the special and annual
meeting and entitled to vote thereon.
To approve an adjournment or postponement of the special and
annual meeting, if necessary
: The affirmative
vote of a majority of the stockholders entitled to vote at the
special and annual meeting, present in person or by proxy.
Your vote is very important. You are encouraged to submit a
proxy as soon as possible.
|
|
|
|
Q:
|
What
constitutes a quorum?
|
|
|
|
|
A:
|
VeriChip’s amended and restated bylaws provide that the
presence in person or by proxy of the holders of shares
representing a majority of the voting power of all the
outstanding shares of capital stock entitled to vote at the
annual and special meeting will constitute a quorum except as
otherwise provided by law.
|
|
|
|
|
Q:
|
How will
VeriChip stockholders be affected by the merger and share
issuance?
|
|
|
|
|
A:
|
After the merger, each VeriChip stockholder will have the same
number of shares of VeriChip common stock that the stockholder
held immediately prior to the merger. However, because VeriChip
will be issuing new shares of VeriChip common stock to Steel
Vault stockholders in the merger, each outstanding share of
VeriChip common stock immediately prior to the merger will
represent a smaller percentage of the aggregate number of shares
of VeriChip common stock outstanding after the merger. As a
result of the merger, each VeriChip stockholder will own shares
in a larger company with more net assets.
|
x
|
|
|
|
Q:
|
What if I
do not vote on the proposals?
|
|
|
|
|
A:
|
If you are a VeriChip stockholder and you fail to vote, or fail
to instruct your broker or other nominee how to vote, on the
proposal to:
|
|
|
|
|
|
|
•
|
approve the issuance of VeriChip common stock pursuant to the
merger agreement, as described in proposal 1, it will have
no effect on the outcome of the vote for the proposal.
Similarly, if you respond with an “abstain” vote, your
proxy will have no effect on the outcome of the vote for the
proposal.
|
|
|
|
|
•
|
approve and adopt an amendment to VeriChip’s certificate of
incorporation to change its name and increase the total number
of authorized shares, as described in proposals 2 and 3, it
will have the same effect as a vote against the proposal. If you
respond with an “abstain” vote, your proxy will have
the same effect as a vote against the proposal.
|
|
|
|
|
•
|
elect five directors to hold office until the 2010 Annual
Meeting of Stockholders and until their successors have been
duly elected and qualified, as described in proposal 4,
brokers will be entitled to vote those shares with respect to
the election of directors. Votes that are withheld with respect
to this matter will be excluded entirely from the vote and will
have no effect, other than for purposes of determining the
presence of a quorum.
|
|
|
|
|
•
|
approve and adopt the VeriChip Corporation 2009 Stock Incentive
Plan, as described in proposal 5, it will have no effect on
the outcome of the vote for the proposal. Similarly, if you
respond with an “abstain” vote, your proxy will have
no effect on the outcome of the vote for the proposal.
|
|
|
|
|
|
|
•
|
approve the potential issuance of shares of VeriChip common
stock in excess of 19.99% of VeriChip’s outstanding common
stock upon conversion of VeriChip’s Series A Preferred
Stock, as described in proposal 6, it will have no effect
on the outcome of the vote for the proposal. If you respond with
an “abstain” vote, your proxy will have no effect on
the outcome of the vote for the proposal. A broker non-vote will
have no effect on the outcome of the vote for the proposal.
|
|
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•
|
ratify the appointment of Eisner LLP as VeriChip’s
independent registered public accounting firm for the year ended
December 31, 2009, as described in proposal 7, it will
have no effect on the outcome of the vote for the proposal.
Similarly, if you respond with an “abstain” vote, your
proxy will have no effect on the outcome of the vote for the
proposal.
|
|
|
|
|
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|
•
|
approve an adjournment or postponement of the special and annual
meeting, if necessary, as described in proposal 8, it will
have no effect on the outcome of the proposal. A broker non-vote
will have no effect on the outcome of the vote for the proposal.
|
Approval of the approval of the issuance of VeriChip common
stock pursuant to the merger agreement is required for
completion of the merger. The approval of the issuance of
VeriChip common stock pursuant to the merger agreement is not
conditioned on the approval and adoption of the amendments to
VeriChip’s certificate of incorporation; however, the
approval and adoption of the amendment to VeriChip’s
certificate of incorporation to change VeriChip’s name to
“PositiveID Corporation” will be effected only if the
merger has taken place and is therefore contingent on approval
of the issuance of VeriChip common stock pursuant to the merger
agreement.
|
|
|
|
Q:
|
How will
my proxy be voted?
|
|
|
|
|
A:
|
All shares of VeriChip common stock entitled to vote and
represented by properly completed proxies received prior to the
VeriChip special meeting, and not revoked, will be voted at the
VeriChip special meeting, as instructed on the proxies. If you
properly complete, sign and return a proxy card, but do not
indicate how your shares of VeriChip common stock should be
voted on a matter, the shares of VeriChip common stock
represented by your proxy will be voted as the VeriChip board of
directors recommends and therefore:
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|
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|
|
•
|
“FOR” the proposal to approve the issuance of shares
of VeriChip common stock to Steel Vault stockholders in the
merger;
|
xi
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•
|
“FOR” the proposal to approve and adopt an amendment
to VeriChip’s certificate of incorporation to change
VeriChip’s name to “PositiveID Corporation” at
the effective time of the merger;
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|
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•
|
“FOR” the proposal to approve and adopt an amendment
to VeriChip’s certificate of incorporation to increase the
total number of authorized shares of VeriChip capital stock from
45 million shares, of which 40 million shares are
common stock, to 75 million shares, of which
70 million shares will be common stock;
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•
|
“FOR” the proposal to elect five directors to hold
office until the 2010 Annual Meeting of Stockholders and until
their successors have been duly elected and qualified;
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|
•
|
“FOR” the proposal to approve and adopt the VeriChip
Corporation 2009 Stock Incentive Plan;
|
|
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|
•
|
“FOR” the proposal to approve the potential issuance
of shares of VeriChip common stock in excess of 19.99% of
VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock;
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•
|
“FOR” the proposal to ratify the appointment of Eisner
LLP as VeriChip’s independent registered public accounting
firm for the year ended December 31, 2009; and
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•
|
“FOR” the adjournment or postponement of the special
and annual meeting, if necessary.
|
|
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|
Q:
|
If my
shares of VeriChip common stock are held in “street
name” by my broker or other nominee, will my broker or
other nominee vote my shares of VeriChip common stock for
me?
|
|
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|
A:
|
Unless you instruct your broker how to vote your shares of
VeriChip common stock on the proposal to approve the issuance of
VeriChip common stock to the Steel Vault stockholders pursuant
to the merger agreement, as described in proposal 1, the
proposal to approve and adopt the VeriChip Corporation 2009
Stock Incentive Plan, as described in proposal 5, and the
proposal to approve the potential issuance of shares of VeriChip
common stock in excess of 19.99% of VeriChip’s outstanding
common stock upon conversion of VeriChip’s Series A
Preferred Stock, as described in proposal 6, it will NOT be
voted. Brokers that do not receive instructions are entitled to
vote those shares on the proposals to approve and adopt an
amendment to VeriChip’s certificate of incorporation to
change its name and to increase the total number of authorized
shares, as described in proposals 2 and 3, the proposal to
elect five directors, as described in proposal 4, and the
proposal to ratify the appointment of Eisner LLP, as described
in proposal 7. To approve an adjournment or postponement of
the special and annual meeting, if necessary, as described in
proposal 8, a broker non-vote will have no effect on the
vote of this proposal.
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|
Q:
|
What if I
hold VeriChip stock options or other VeriChip equity-based
awards?
|
|
|
|
|
A:
|
VeriChip stock options and other VeriChip equity-based awards,
including restricted stock, will remain outstanding and will not
be affected by the merger.
|
|
|
|
|
Q:
|
How does
the VeriChip board of directors recommend that VeriChip
stockholders vote?
|
|
|
|
|
A:
|
The VeriChip board of directors unanimously recommends that the
holders of VeriChip common stock vote:
|
|
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|
|
|
|
•
|
“FOR” the proposal to approve the issuance of VeriChip
common stock in the merger;
|
|
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|
|
•
|
“FOR” the proposal to approve and adopt an amendment
to VeriChip’s certificate of incorporation to change its
name;
|
|
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|
|
•
|
“FOR” the proposal to approve and adopt an amendment
to VeriChip’s certificate of incorporation to increase the
total number of authorized shares;
|
|
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|
|
•
|
“FOR” the proposal to elect five directors to hold
office until the 2010 Annual Meeting of Stockholders and until
their successors have been duly elected and qualified;
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|
•
|
“FOR” the proposal to approve and adopt the VeriChip
Corporation 2009 Stock Incentive Plan;
|
xii
|
|
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|
•
|
“FOR” the proposal to approve the potential issuance
of shares of VeriChip common stock in excess of 19.99% of
VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock;
|
|
|
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|
•
|
“FOR” the proposal to ratify the appointment of Eisner
LLP as VeriChip’s independent registered public accounting
firm for the year ended December 31, 2009; and
|
|
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|
•
|
“FOR” the proposal to approve an adjournment or
postponement of the special and annual meeting, if necessary.
|
|
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|
Q:
|
Who can
answer my questions?
|
|
|
|
|
A:
|
If you have any questions about the merger or how to submit your
proxy, or if you need additional copies of this joint proxy
statement/prospectus, the enclosed proxy card or voting
instructions, you should contact:
|
VeriChip
Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8008
Attention: Investor Relations
QUESTIONS
AND ANSWERS FOR STEEL VAULT STOCKHOLDERS
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|
Q:
|
When and
where is the special meeting of Steel Vault
stockholders?
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|
A:
|
Steel Vault will hold a special meeting of its stockholders on
November 10, 2009, at 9:30 a.m., Eastern Standard Time, at
Steel Vault’s principal executive offices located at 1690
South Congress Avenue, Suite 200, Delray Beach, Florida
33445.
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|
Q:
|
Who can
vote at the Steel Vault special meeting?
|
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|
A:
|
All Steel Vault stockholders of record as of the close of
business on September 25, 2009, the record date for the Steel
Vault special meeting, are entitled to receive notice of, and to
vote at, the Steel Vault special meeting.
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|
Q:
|
How can I
obtain admission to the Steel Vault special meeting?
|
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|
A:
|
You will need an admission card to attend the Steel Vault
special meeting. If your shares are registered in your name, you
are a stockholder of record. Your admission card is attached to
your proxy card, and you will need to bring it with you to the
Steel Vault special meeting. If your shares are in the name of
your broker or bank, your shares are held in “street
name.” Ask your broker or bank for an admission card in the
form of a legal proxy to bring with you to the Steel Vault
special meeting. If you do not receive the legal proxy in time,
bring your brokerage statement with you to the Steel Vault
special meeting so that Steel Vault can verify your ownership of
Steel Vault stock on the record date and admit you to the Steel
Vault special meeting. However, you will not be able to vote
your shares at the Steel Vault special meeting without a legal
proxy.
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|
Q:
|
Will
there be any other business conducted at the Steel Vault special
meeting?
|
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|
A:
|
The other item of business to be considered at Steel
Vault’s special meeting is to approve an adjournment or
postponement of the special meeting, if necessary.
|
xiii
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|
Q:
|
What vote
is required to approve the proposals at the Steel Vault special
meeting?
|
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|
A:
|
To approve and adopt the merger agreement:
The
affirmative vote of holders of a majority of the outstanding
shares of Steel Vault’s common stock entitled to vote at
the special meeting.
|
To approve an adjournment or postponement of the special
meeting, if necessary:
The affirmative vote of a
majority in voting power of the Steel Vault shares present in
person or by proxy and entitled to vote on the subject matter.
Your vote is very important. You are encouraged to submit a
proxy as soon as possible.
|
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|
|
Q:
|
What
constitutes a quorum?
|
|
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|
A:
|
Steel Vault’s amended and restated certificate of
incorporation provides that the holders of not less than a
majority in voting power of the shares entitled to vote at any
meeting of stockholders, present in person or by proxy, will
constitute a quorum, unless or except to the extent that the
presence of a larger number may be required by law.
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|
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|
Q:
|
What if I
do not vote on the proposals presented?
|
|
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|
|
A:
|
If you are a Steel Vault stockholder and you fail to vote, or
fail to instruct your broker or other nominee how to vote, on
the proposal to:
|
|
|
|
|
|
|
•
|
approve and adopt the merger agreement, as described in
proposal 1, it will have the same effect as a vote against
the proposal. If you respond with an “abstain” vote,
your proxy will have the same effect as a vote against the
proposal.
|
|
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|
•
|
to approve an adjournment or postponement of the special
meeting, if necessary, as described in proposal 2, an
abstention will have the same effect as a vote against the
proposal. A broker non-vote will have no effect on the outcome
of the vote for the proposal.
|
|
|
|
|
Q:
|
How will
my proxy be voted?
|
|
|
|
|
A:
|
All shares of Steel Vault common stock entitled to vote and
represented by properly completed proxies received prior to the
Steel Vault special meeting, and not revoked, will be voted at
the Steel Vault special meeting as instructed on the proxies. If
you properly complete, sign and return a proxy card, but do not
indicate how your shares of Steel Vault common stock should be
voted on a matter, the shares of Steel Vault common stock
represented by your proxy will be voted as the Steel Vault board
of directors recommends and therefore:
|
|
|
|
|
|
|
•
|
“FOR” the proposal to approve and adopt the merger
agreement; and
|
|
|
|
|
•
|
“FOR” the proposal to approve any adjournment or
postponement of the special meeting, if necessary.
|
|
|
|
|
Q:
|
If I am a
Steel Vault stockholder, should I send in my stock certificates
with my proxy card?
|
|
|
|
|
A:
|
NO. Please DO NOT send your Steel Vault stock certificates
with your proxy card. If the merger is approved, you will be
sent written instructions for exchanging your stock certificates.
|
|
|
|
|
Q:
|
If my
shares of Steel Vault common stock are held in “street
name” by my broker or other nominee, will my broker or
other nominee vote my shares of Steel Vault common stock for
me?
|
|
|
|
|
A:
|
Brokers that hold shares of Steel Vault common stock in
“street name” will vote your shares in accordance with
your instructions. However, if you do not provide your broker
instructions on how to vote on the proposal to approve and adopt
the merger agreement, it will NOT be voted. To approve an
adjournment or postponement of the special meeting, if
necessary, as described in proposal 2, a broker non-vote
will have no effect on the vote of this proposal.
|
You should follow the directions your broker or other nominee
provides.
xiv
|
|
|
|
Q:
|
What if I
hold Steel Vault stock options or other Steel Vault equity-based
awards?
|
|
|
|
|
A:
|
All options to purchase shares of Steel Vault common stock
outstanding at the effective time of the merger will remain
outstanding following the completion of the merger. Upon
completion of the merger, each of the then-outstanding stock
options to purchase shares of Steel Vault common stock will be
assumed by VeriChip. Upon the completion of the merger, all
references to Steel Vault in Steel Vault’s stock plans and
relevant agreements will be deemed to refer to VeriChip. Each
Steel Vault stock option assumed by VeriChip will be exercisable
upon the same terms and conditions as under the applicable Steel
Vault stock plan and relevant agreement except that each Steel
Vault stock option will represent the right to acquire the
number of shares of VeriChip common stock obtained by
multiplying (x) the number of shares of Steel Vault common
stock subject to the Steel Vault stock option by (y) the
exchange ratio of 0.5 (rounded upward to the nearest whole
share). The per share exercise price of each Steel Vault stock
option assumed by VeriChip will be obtained by dividing
(A) the per share exercise price of the Steel Vault stock
option by (B) the exchange ratio of 0.5 (rounded upward to
the nearest whole cent).
|
Upon completion of the merger, each of the then-outstanding
warrants to purchase shares of Steel Vault common stock will be
converted into a warrant to purchase the number of whole shares
of VeriChip common stock obtained by multiplying (x) the
number of shares of Steel Vault common stock subject to such
Steel Vault warrant by (y) the exchange ratio of 0.5
(rounded upward to the nearest whole share). The per share
exercise price of each Steel Vault warrant assumed by VeriChip
will be obtained by dividing (A) the per share exercise
price of the Steel Vault warrant by (B) the exchange ratio
of 0.5 (rounded upward to the nearest whole cent). The terms and
conditions of the Steel Vault warrants will otherwise remain as
set forth in each respective Steel Vault warrant agreement.
In addition, each share of Steel Vault’s restricted common
stock outstanding immediately prior to the effective time of the
merger will be converted into 0.5 shares of VeriChip common
stock.
|
|
|
|
Q:
|
How does
the Steel Vault board of directors recommend that Steel Vault
stockholders vote?
|
|
|
|
|
A:
|
The Steel Vault board of directors unanimously recommends that
Steel Vault stockholders vote:
|
|
|
|
|
|
|
•
|
“FOR” the approval and adoption of the merger
agreement; and
|
|
|
|
|
•
|
“FOR” the adjournment or postponement of the special
meeting, if necessary.
|
|
|
|
|
Q:
|
Who can
answer my questions?
|
|
|
|
|
A:
|
If you have any questions about the merger or how to submit your
proxy, or if you need additional copies of this joint proxy
statement/prospectus, the enclosed proxy card or voting
instructions, you should contact:
|
Steel Vault
Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8000
Attention: Investor Relations
xv
SUMMARY
This summary, together with the preceding Questions and
Answers section, summarizes the material features of the
proposed merger and may not contain all of the information about
the merger that is important to you. To understand the merger
fully and for a more complete description of the terms of the
merger, you should read carefully this entire document and the
documents to which VeriChip and Steel Vault have referred you.
See “Where You Can Find More Information” on page
183.
The
Companies
VERICHIP CORPORATION
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8008
VeriChip was formed as a Delaware corporation by Digital Angel
Corporation, or Digital Angel, in November 2001. In January
2002, VeriChip began its efforts to create a market for radio
frequency identification, commonly known as RFID, systems, that
utilize its human implantable microchip, the VeriChip. On
February 14, 2007, VeriChip completed its initial public
offering in which it sold 3,100,000 shares of its common
stock at $6.50 per share.
On July 18, 2008, VeriChip completed the sale of all of the
outstanding capital stock of Xmark Corporation, its then
wholly-owned Canadian subsidiary, or Xmark, which was
principally all of VeriChip’s operations, to Stanley Canada
Corporation, a wholly-owned subsidiary of The Stanley Works. The
sale transaction was closed for $47.9 million in cash,
which consisted of the $45 million purchase price plus a
balance sheet adjustment of $2.9 million. Under the terms
of the stock purchase agreement, $4.5 million of the
proceeds were held in escrow for a period of 12 months to
provide for indemnification obligations under the stock purchase
agreement, if any. As a result, VeriChip recorded a gain on the
sale of Xmark of $6.2 million, with $4.5 million of
that gain deferred until the escrow was settled. The Xmark
business included all of the operations of VeriChip’s
previously reported healthcare security and industrial segments.
The financial position, results of operations and cash flows of
Xmark have been reclassified as discontinued operations. During
the quarter ended June 30, 2009, VeriChip finalized the
process related to the indemnification obligations supported by
the $4.5 million escrow. On July 20, 2009, VeriChip
received $4.4 million of the previously escrowed funds,
which was net of a $115,000 payment to Stanley Canada as the
final settlement of the final balance sheet adjustment. As a
result, VeriChip recognized a $4.4 million previously
deferred gain in its statement of operations for the three and
six months ended June 30, 2009.
VeriChip has historically developed, marketed and sold RFID
systems used for the identification of people in the healthcare
market. As a result of the sale of Xmark, VeriChip’s only
remaining business is its VeriMed Health Link system, which uses
an implantable passive RFID microchip that is used in patient
identification applications. Each implantable microchip contains
a unique verification number that is read when it is scanned by
its scanner. In October 2004, the U.S. Food and Drug
Administration, or FDA, cleared the VeriMed Health Link system
for use in medical applications in the United States. As of
September 25, 2009, VeriChip has generated nominal revenue
from sales of its Health Link system. The key components of the
Health Link system are a passive microchip, which is
approximately the size of a grain of rice, a fixed location or a
wireless handheld scanner used to read the
16-digit
identification number contained on the microchip, and a secure,
web-enabled database containing a patients’ personal health
record. To complement its healthcare division, VeriChip
established a new subsidiary, VeriGreen Energy Corporation, in
March 2009 to focus and invest in the clean and alternative
energy sector.
VeriChip is currently focused on the development of its Health
Link personal health records business, the development of the
virus triage detection system and the
in vivo
glucose-sensing RFID microchip, as well as the development of
other sensor applications, and is considering and will review
other strategic opportunities. With its cash on hand and the
potential proceeds of up to $10 million from its financing
arrangement with Optimus Technology Capital Partners, LLC, as
more fully described in proposal 6, VeriChip plans to fund
its development programs with Receptors LLC to develop a virus
triage detection system for the H1N1 virus and
1
an
in vivo
glucose-sensing RFID microchip, as more fully
described in the “Recent Developments” section of the
“
Management’s Discussion and Analysis of Financial
Condition and Results of Operations of VeriChip
,” and
to potentially provide funds for working capital and general
corporate purposes.
Upon consummation of the merger, the new combined company will
be called PositiveID Corporation and will offer identification
tools and technologies for consumers and businesses. The
companies believe that the formation of PositiveID Corporation
represents the convergence of a pioneer in personal health
records, VeriChip, with a company in the identity security
space, Steel Vault, which is focused on access and security of a
consumer’s critical data. The companies believe that
joining personal health records and identity security solutions
provides a solid foundation for organic growth and a strong,
flexible platform for future offers. Following the merger and in
execution of its combined PositiveID business plan, management
does not plan to allocate significant capital to the growth of
the implantable microchip business.
VeriChip shares a common ownership, or control group, with Steel
Vault. On August 1, 2008, Digital Angel sold
2,570,000 shares of Steel Vault’s common stock to Blue
Moon Energy Partners, LLC, or Blue Moon, in exchange for
$400,000. The shares represented 49.9% of Steel Vault’s
outstanding common stock at that time and all of the shares that
Digital Angel owned. Mr. Silverman, VeriChip’s chief
executive officer and executive chairman of the board and Steel
Vault’s chairman of the board, is a manager and controls a
member of Blue Moon (i.e., R & R Consulting Partners,
LLC). William J. Caragol, VeriChip’s acting chief financial
officer and Steel Vault’s chief executive officer,
president and acting chief financial officer and director, is
also a manager and member of Blue Moon. In addition, Jeffrey S.
Cobb and Barry M. Edelstein, both or whom are members of
VeriChip’s board of directors, each own a 16.67% interest
in Blue Moon. On November 12, 2008, R & R
Consulting Partners, LLC, or R & R, a holding company
owned and controlled by Mr. Silverman, acquired
5,355,556 shares of VeriChip common stock in exchange for
$750,000 from Digital Angel. As of September 25, 2009,
R & R and Mr. Silverman owned on a combined
basis, approximately 49.4% of VeriChip’s outstanding common
stock. As of September 25, 2009, Mr. Silverman
beneficially owned, directly or indirectly, approximately 53.7%
of Steel Vault’s outstanding common stock, including
2,570,000 shares that are directly owned by Blue Moon.
VERICHIP ACQUISITION CORP.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8008
VeriChip Acquisition Corp. was incorporated in Delaware on
August 25, 2009 and is a wholly-owned subsidiary of
VeriChip, which was formed solely to effect the merger with
Steel Vault and has not conducted any business. Pursuant to the
merger agreement, VeriChip Acquisition Corp. will merge with and
into Steel Vault, and Steel Vault will continue as the surviving
corporation.
STEEL VAULT CORPORATION
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8000
Steel Vault is Delaware corporation incorporated in September
1987. Prior to December 31, 2007, it was a full service
provider of Information Technology (IT) solutions. It delivered
complete lifecycle IT solutions for its customers. Effective
December 31, 2007, Steel Vault sold all of its operating
assets (the business known as InfoTech USA, Inc. or InfoTech).
In connection with the sale of its assets, Steel Vault’s
stockholders also approved an amendment pursuant to which it
changed its name from InfoTech USA, Inc. to IFTH Acquisition
Corp., on December 31, 2007. Additionally, its wholly-owned
subsidiaries changed their names from InfoTech USA, Inc. to IFTH
NJ Sub, Inc. and from Information Technology Services, Inc. to
IFTH NY Sub, Inc.
After the sale of substantially all of Steel Vault’s
operating assets on December 31, 2007, it did not engage in
any operations and did not engage in any business activity.
Other than paying its outstanding liabilities, liquidating our
remaining inventory and collecting its outstanding receivables,
Steel Vault’s primary
2
purpose was to locate and acquire an attractive operating
business. On December 5, 2008, Steel Vault purchased all of
the outstanding membership interests in National Credit
Report.com, LLC, a Florida limited liability company, or NCRC,
and NCRC became Steel Vault’s wholly-owned subsidiary. As a
result, Steel Vault offers consumers a variety of identity
security products and services primarily on a subscription
basis. These services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit
profiles and other personal information, which include credit
reports, credit monitoring and credit scores.
On March 16, 2009, Steel Vault’s stockholders approved
an amendment to change its name from IFTH Acquisition Corp. to
Steel Vault.
As of September 25, 2009, Mr. Silverman beneficially
owned, directly or indirectly, approximately 53.7% of Steel
Vault’s outstanding common stock, including
2,570,000 shares that are directly owned by Blue Moon.
The
Merger Proposal
In the merger, VeriChip Acquisition Corp., a wholly-owned
subsidiary of VeriChip, will merge with and into Steel Vault.
Steel Vault will be the surviving corporation of the merger and
will become a wholly-owned subsidiary of VeriChip. If the merger
becomes effective, each share of Steel Vault common stock then
outstanding will be converted into the right to receive
0.5 shares of VeriChip common stock. No fractional shares
of VeriChip common stock will be issued in connection with the
merger. Instead, VeriChip will make a cash payment to each Steel
Vault stockholder who would otherwise receive a fractional
share. The total number of shares of VeriChip common stock
issuable as merger consideration is subject to adjustment if,
after the date of the merger agreement, but prior to the
effective time of the merger, through a reorganization,
recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in the
capitalization of VeriChip, the shares of issued and outstanding
VeriChip common stock increase or decrease in number, or are
changed into or exchanged for a different kind or number of
securities. Under such circumstances, appropriate adjustments
will be made to provide the holders of Steel Vault common stock
the same economic effect as contemplated by the merger agreement.
Steel Vault stock options and other
awards.
All options to purchase shares of Steel
Vault common stock outstanding at the effective time of the
merger will remain outstanding following the completion of the
merger. Upon completion of the merger, each of the
then-outstanding stock options to purchase shares of Steel Vault
common stock will be assumed by VeriChip. Upon the completion of
the merger, all references to Steel Vault in Steel Vault’s
stock plans and relevant agreements will be deemed to refer to
VeriChip. Each Steel Vault stock option assumed by VeriChip will
be exercisable upon the same terms and conditions as under the
applicable Steel Vault stock plan and relevant agreement except
that each Steel Vault stock option will represent the right to
acquire the number of shares of VeriChip common stock obtained
by multiplying (x) the number of shares of Steel Vault
common stock subject to the Steel Vault stock option by
(y) the exchange ratio of 0.5 (rounded upward to the
nearest whole share). The per share exercise price of each Steel
Vault stock option assumed by VeriChip will be obtained by
dividing (A) the per share exercise price of the Steel
Vault stock option by (B) the exchange ratio of 0.5
(rounded upward to the nearest whole cent).
Upon completion of the merger, each of the then-outstanding
warrants to purchase shares of Steel Vault common stock will be
converted into a warrant to purchase the number of whole shares
of VeriChip common stock obtained by multiplying (x) the
number of shares of Steel Vault common stock subject to such
Steel Vault warrant by (y) the exchange ratio of 0.5
(rounded upward to the nearest whole share). The per share
exercise price of each Steel Vault warrant assumed by VeriChip
will be obtained by dividing (A) the per share exercise
price of the Steel Vault warrant by (B) the exchange ratio
of 0.5 (rounded upward to the nearest whole cent). The terms and
conditions of the Steel Vault warrants will otherwise remain as
set forth in each respective Steel Vault warrant agreement.
In addition, each share of Steel Vault’s restricted common
stock outstanding immediately prior to the effective time of the
merger will be converted into 0.5 shares of VeriChip common
stock. No fractional shares of VeriChip common stock will be
issued in connection with the merger. Instead, VeriChip will
make a cash payment to each Steel Vault stockholder who would
otherwise receive a fractional share.
3
Ownership of VeriChip after the Merger.
Upon
completion of the merger, Steel Vault’s outstanding stock,
options and warrants are expected to be converted into VeriChip
common stock, representing approximately 37.4% of the shares of
VeriChip after the merger on a fully-converted basis, and the
current holders of VeriChip’s outstanding stock, options,
and warrants will retain approximately 62.6% of VeriChip.
The merger agreement, as amended, is attached to this joint
proxy statement/prospectus as Annex A-1 and Annex A-2.
VeriChip and Steel Vault encourage you to read the merger
agreement, as amended, carefully.
Reasons
for the Merger
VeriChip
In reaching its determination to recommend that the VeriChip
board approve the merger agreement, the VeriChip special
committee considered numerous factors in consultation with its
outside legal and financial advisors and VeriChip’s senior
management, including the following material factors and
benefits of the merger, each of which the VeriChip special
committee believed supported its determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the VeriChip special
committee and the Steel Vault special committee and their
respective legal and financial advisors.
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The oral opinion received by the VeriChip special committee on
September 3, 2009 and later confirmed in writing, of
Ladenburg Thalmann & Co. Inc., which we refer to as
Ladenburg, to the effect that, as of that date and subject to
the various assumptions, limitations and qualifications set
forth in its opinion, the common stock exchange ratio in the
merger was fair, from a financial point of view, to the
stockholders of VeriChip (other than Scott R. Silverman, William
J. Caragol, R & R Consulting Partners, LLC, Blue Moon
Energy Partners LLC and their respective affiliates). The full
text of Ladenburg’s written opinion, dated
September 3, 2009, which describes the assumptions made,
matters considered and limitations on the review undertaken, is
attached to this joint proxy statement/prospectus as
Annex B.
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The combined company will be renamed PositiveID and should be in
a stronger competitive position due to its ability to provide
identification tools and technologies to protect consumers and
businesses with an initial focus on the convergence of identity
security solutions and personal health records.
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies; the merger is expected to result in an estimated
combined cost savings of approximately $500,000 annually.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company, higher
share price and potential to improve analyst coverage.
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The merger will create a larger public company.
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The combined businesses of PositiveID and its public company
position will provide the ability to augment organic growth with
strategic acquisitions.
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Steel Vault is obligated to reimburse VeriChip for expenses in
connection with the transaction, up to a maximum of $200,000, if
VeriChip terminates the merger agreement because:
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Steel Vault breaches a representation, warranty or covenant in
the merger agreement that is reasonably likely to have a
material adverse effect on Steel Vault;
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Steel Vault’s board of directors changes its recommendation
in favor of the issuance of shares of VeriChip common stock in
the merger; or
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A willful and material breach by Steel Vault causes the making
of a superior proposal by a third party.
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The VeriChip special committee believes that the above factors
generally supported its determination. The VeriChip special
committee did, however, consider the potential adverse effects
of other factors in connection with the merger. The material
negative factors considered were:
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The cost savings anticipated for VeriChip and Steel Vault as a
combined company may not be achieved;
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Steel Vault’s growth prospects may be less than currently
anticipated and not as great as the growth planned by VeriChip
alone;
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The value of the shares to be received by Steel Vault
stockholders may vary based upon the nature of the fixed
exchange ratio;
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The VeriChip stockholders will suffer dilution if the merger is
consummated; and
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VeriChip stockholders will be subject to risks relating to Steel
Vault’s business, including NCRC.
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In reaching its determination to recommend that VeriChip’s
stockholders vote for the approval of the issuance of VeriChip
common stock pursuant to the merger agreement, VeriChip’s
board of directors considered numerous factors, including the
recommendation of the VeriChip special committee, as well as the
above factors, benefits and adverse effects of the merger
considered by the VeriChip special committee, which the board of
directors believed supported its determinations.
Steel
Vault
In reaching its determination to recommend that the Steel Vault
board of directors approve the merger agreement, the Steel Vault
special committee considered numerous factors in consultation
with its outside legal and financial advisors and Steel
Vault’s senior management, including the following material
factors and benefits of the merger, each of which the Steel
Vault special committee believed supported its determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Steel Vault special
committee and the VeriChip special committee and their
respective legal and financial advisors.
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The opinion received by the Steel Vault special committee and
later confirmed in writing, dated September 4, 2009, of
Hyde Park Capital Advisors, LLC, which we refer to as Hyde Park,
as of that date and subject to the various assumptions and
qualifications set forth in its opinion, the common stock
exchange ratio was fair, from a financial point of view, to the
holders of Steel Vault common stock. The full text of Hyde
Park’s written opinion, dated September 4, 2009, which
describes the assumptions made, matters considered and
limitations on the review undertaken, is attached to this joint
proxy statement/prospectus as Annex C.
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The combined company will be renamed PositiveID and should be in
a stronger competitive position due to its ability to provide
identification tools and technologies to protect consumers and
businesses with an initial focus on the convergence of identity
security solutions and personal health records.
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies; the merger is expected to result in an estimated
combined cost savings of approximately $500,000 annually.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company and
potential to improve analyst coverage.
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The merger will create a larger public company.
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The combined businesses of PositiveID and its public company
position will provide the ability to augment organic growth with
strategic acquisitions.
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The merger will allow stockholders to continue to participate in
any potential growth of the combined company.
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The expectation that the merger will qualify as a transaction of
a type that is generally tax-free for United States federal
income tax purposes.
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In connection with the proposed merger, William J. Caragol
agreed to waive any and all rights he has to any change of
control payment under that certain letter agreement between
Steel Vault and Mr. Caragol dated February 13, 2009.
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The merger agreement provides that Steel Vault has the right to
terminate the merger agreement if, among other reasons, the
board of directors changes its recommendation in favor of the
merger agreement under limited circumstances.
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VeriChip is obligated to reimburse Steel Vault for expenses in
connection with the transaction, up to a maximum of $200,000, if
Steel Vault terminates the merger agreement because:
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VeriChip breaches a representation, warranty or covenant in the
merger agreement that is reasonably likely to have a material
adverse effect on VeriChip or the surviving corporation;
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VeriChip’s board changes its recommendation in favor of the
issuance of shares of VeriChip common stock in the merger; or
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VeriChip agrees to be acquired by a third party.
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The Steel Vault special committee believes that the above
factors generally supported its determination. The Steel Vault
special committee did, however, consider the potential adverse
effects of other factors in connection with the merger. The
material negative factors considered were:
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The common stock exchange ratio is fixed and Steel Vault
stockholders cannot be certain of the dollar value of the merger
consideration to be received in the merger.
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The cost savings anticipated for VeriChip and Steel Vault as a
combined company may not be achieved, or delays or difficulties
in eliminating certain redundant costs of the two companies
could delay or prevent the realization of the anticipated cost
savings.
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It is not a condition to closing that the merger agreement be
approved by a majority of Steel Vault disinterested stockholders
at the special meeting.
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The possibility that the merger may not be completed, or that
completion of the merger may be delayed.
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Steel Vault is required to pay the expenses of VeriChip, up to a
maximum of $200,000, upon the occurrence of the termination of
the merger under certain circumstances.
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In reaching its determination to recommend that Steel
Vault’s stockholders vote for approval and adoption of the
merger agreement, Steel Vault’s board considered numerous
factors, including the following material factors and benefits
of the merger, each of which the board believed supported its
determinations:
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The recommendation of the Steel Vault special committee,
including the above factors, benefits and adverse effects of the
merger considered by the Steel Vault special committee; and
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The opinion of Hyde Park received by the Steel Vault special
committee on September 4, 2009, that, as of that date and
subject to the various assumptions and limitations set forth in
its opinion, the common stock exchange ratio was fair, from a
financial point of view, to the holders of Steel Vault common
stock.
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Despite the foregoing, the potential benefits of the merger
may not be achieved. See the sections entitled “Risk
Factors” on page 22, “The Merger —
VeriChip’s Reasons for the Merger” on page 68,
“The Merger — Steel Vault’s Reasons for the
Merger” on page 70.
Risk
Factors
The “Risk Factors” should be considered carefully by
VeriChip stockholders in evaluating whether to vote for the
proposal to approve the issuance of VeriChip common stock
pursuant to the merger agreement, the
6
proposal to approve and adopt an amendment to VeriChip’s
certificate of incorporation, and by Steel Vault stockholders in
evaluating whether to approve and adopt the merger agreement.
These risk factors should be considered, along with any
additional risk factors in the periodic reports of VeriChip and
Steel Vault filed with the SEC and any other information
included in this joint proxy statement/prospectus. See
“Risk Factors” beginning on page 22.
Recommendations
of the VeriChip Special Committee and Board of Directors with
Respect to the Merger
The board of directors of VeriChip established a special
committee composed of independent members of VeriChip’s
board of directors to review and evaluate the terms and
conditions, and determine the advisability of, the proposed
merger. The members of the special committee were Steven Foland
and Barry Edelstein, all of whom are independent under the
applicable standards of the Nasdaq Capital Market. The special
committee negotiated the terms and conditions of the merger
agreement on behalf of VeriChip and, after careful
consideration, determined that the merger is advisable, fair to
and in the best interests of VeriChip and its stockholders and
recommended that the VeriChip board of directors approve the
merger agreement.
After careful consideration, the VeriChip board of directors,
based on the recommendation of the VeriChip special committee,
determined that the merger is advisable, fair to, and in the
best interests of VeriChip and its stockholders, and approved
the merger agreement and unanimously recommends that VeriChip
stockholders vote “FOR” the proposal to issue VeriChip
common stock pursuant to the merger agreement, “FOR”
the proposal to change VeriChip’s name to “PositiveID
Corporation,” and “FOR” the proposal to approve
an adjournment or postponement of the special and annual
meeting, if necessary.
Recommendations
of the Steel Vault Special Committee and Board of Directors with
Respect to the Merger
The board of directors of Steel Vault established a special
committee composed of independent members of Steel Vault’s
board of directors to review and evaluate the terms and
conditions, and determine the advisability, of the proposed
merger. The members of the special committee were Kevin
McLaughlin and Charles Baker, all of whom were independent under
the applicable standards of the Nasdaq Stock Market. The special
committee negotiated the terms and conditions of the merger
agreement on behalf of Steel Vault and, after careful
consideration, determined that the merger is advisable, fair to
and in the best interests of Steel Vault and its stockholders
and recommended that Steel Vault’s board of directors
approve the merger agreement.
After careful consideration, Steel Vault’s board of
directors, based on the recommendation of the Steel Vault
special committee, determined that the merger is advisable, fair
to, and in the best interests of Steel Vault and its
stockholders, approved and adopted the merger agreement and
declared its advisability, approved the merger and other
transactions contemplated by the merger agreement and
unanimously recommends that Steel Vault stockholders vote
“FOR” the proposal to approve and adopt the merger
agreement, and “FOR” the proposal to approve an
adjournment or postponement of the special meeting, if necessary.
Special
and Annual Meeting of VeriChip Stockholders
You can vote at the VeriChip special meeting if you owned
VeriChip common stock at the close of business on
September 25, 2009, the record date for the VeriChip
special meeting. On that date, there were 13,810,628 shares
of VeriChip common stock outstanding and entitled to vote. You
can cast one vote for each share of VeriChip common stock that
you owned on that date. Approval of the proposal to issue shares
of VeriChip common stock to Steel Vault stockholders pursuant to
the merger agreement requires the affirmative vote of a majority
of the votes cast by the VeriChip stockholders present in person
or represented by proxy at the special and annual meeting and
entitled to vote thereon. Approval of the proposal to approve
and adopt an amendment to VeriChip’s certificate of
incorporation to change VeriChip’s name to “PositiveID
Corporation” at the effective time of the merger and to
increase the total number of authorized shares of VeriChip
capital stock requires the affirmative vote of the holders of a
majority of the voting power of all then outstanding
7
shares of VeriChip capital stock entitled to vote generally in
the election of directors. Approval of the proposal to elect
five directors to hold office until the 2010 Annual Meeting of
Stockholders and until their successors have been duly elected
and qualified requires the affirmative vote of a plurality of
the votes cast by the VeriChip stockholders present in person or
represented by proxy at the special and annual meeting and
entitled to vote thereon. Approval of the proposal to approve
and adopt the VeriChip Corporation 2009 Stock Incentive Plan
requires the affirmative vote of a majority of the votes cast by
the VeriChip stockholders present in person or represented by
proxy at the special and annual meeting and entitled to vote
thereon. Approval of the proposal to approve the potential
issuance of shares of VeriChip common stock in excess of 19.99%
of VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock requires the
affirmative vote of a majority of the votes cast by the VeriChip
stockholders present in person or represented by proxy at the
special and annual meeting and entitled to vote thereon.
Approval of the proposal to ratify the appointment of Eisner LLP
as VeriChip’s independent registered public accounting firm
for the year ended December 31, 2009 requires the
affirmative vote of a majority of the votes cast by the VeriChip
stockholders present in person or represented by proxy at the
special and annual meeting and entitled to vote thereon. The
affirmative vote of a majority of the stockholders entitled to
vote at the special and annual meeting, present in person or by
proxy is required to approve an adjournment or postponement of
the special and annual meeting, if necessary.
As of VeriChip’s record date, VeriChip’s named
executive officers, directors and entities affiliated with them
beneficially owned, in the aggregate, approximately 58.6%
of VeriChip’s outstanding common stock.
Special
Meeting of Steel Vault Stockholders
You can vote at the Steel Vault special meeting if you owned
Steel Vault common stock at the close of business on
September 25, 2009, the record date for the Steel Vault
special meeting. On that date, there were 9,874,971 shares
of Steel Vault common stock outstanding and entitled to vote.
Approval of the proposal to approve and adopt the merger
agreement, which is sometimes referred to as the merger
proposal, requires the affirmative vote of holders of a majority
of the outstanding shares of Steel Vault’s common stock
entitled to vote at the special meeting. The affirmative vote of
a majority in voting power of the Steel Vault shares present in
person or by proxy and entitled to vote on the subject matter is
required to approve an adjournment or postponement of the
special meeting, if necessary.
As of Steel Vault’s record date, Steel Vault’s named
executive officers, directors and entities affiliated with them
beneficially owned, in the aggregate, approximately 68.6% of
Steel Vault’s outstanding common stock.
Opinion
of Financial Advisor to the VeriChip Special Committee
On September 3, 2009, Ladenburg rendered its oral opinion,
subsequently confirmed in writing, to the VeriChip special
committee to the effect that, as of such date and based upon and
subject to the various assumptions, qualifications and
limitations set forth in its opinion, the common stock exchange
ratio in the merger was fair, from a financial point of view, to
the stockholders of VeriChip (other than Scott R. Silverman,
William J. Caragol, R & R Consulting Partners, LLC,
Blue Moon Energy Partners LLC and their respective affiliates).
The summary of Ladenburg’s opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of its written opinion, which is included as
Annex B to this joint proxy statement/prospectus and sets
forth the procedures followed, assumptions made, qualifications
and limitations on the review undertaken and other matters
considered by Ladenburg in preparing its opinion. We encourage
you to carefully read the full text of Ladenburg’s written
opinion. However, neither Ladenburg’s written opinion nor
the summary of its opinion and the related analyses set forth in
this joint proxy statement/prospectus are intended to be, and do
not constitute, advice or a recommendation to any stockholder as
to how such stockholder should act or vote with respect to the
merger. See “The Merger — Opinion of Financial
Advisor to the VeriChip Special Committee.”
8
Opinion
of Financial Advisor to the Steel Vault Special
Committee
On September 2, 2009, Hyde Park delivered its oral opinion,
and subsequently confirmed in writing on September 4, 2009,
to the Steel Vault special committee that, as of
September 4, 2009, and subject to the various assumptions
and limitations set forth in its opinion, the common stock
exchange ratio was fair, from a financial point of view, to the
holders of Steel Vault common stock. The full text of this
opinion is attached to this joint proxy statement/prospectus as
Annex C. Holders of Steel Vault common stock are urged to
read the opinion carefully in its entirety to understand the
procedures followed, assumptions made, matters considered and
limitations on the review undertaken by Hyde Park in providing
its opinion. The opinion of Hyde Park is directed to the Steel
Vault special committee and does not constitute a recommendation
as to how any Steel Vault stockholder should vote with respect
to the approval and adoption of the merger agreement.
Interests
of Certain Persons in the Merger
In considering the recommendations of VeriChip’s and Steel
Vault’s respective boards of directors, you should be aware
that certain directors and officers of VeriChip and Steel Vault
may have interests in the merger that may be different from, or
in addition to, your interests as a stockholder generally and
may create potential and actual conflicts of interest. The
boards of directors of each of VeriChip and Steel Vault were
aware of these interests and considered them when they approved
and adopted the merger agreement and the merger.
The interests of the directors and executive officers include,
among others:
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several of VeriChip’s directors and executive officers
serve or served as directors and officers of Steel Vault (for
more information, see “The Merger — Description
of Contracts and Other Arrangements between VeriChip and Steel
Vault” and “Certain Relationships and Related
Transactions”);
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several of VeriChip’s directors and executive officers
directly or indirectly own an interest in Steel Vault (for more
information, see “The Merger — Description of
Contracts and Other Arrangements between VeriChip and Steel
Vault” and “Certain Relationships and Related
Transactions”);
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Scott R. Silverman, VeriChip’s chief executive officer and
executive chairman and Steel Vault’s chairman, directly or
indirectly controls VeriChip and Steel Vault (for more
information, see “The Merger — Description of
Contracts and Other Arrangements between VeriChip and Steel
Vault” and “Certain Relationships and Related
Transactions”);
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the appointment of four individuals designated by VeriChip and
the appointment of one individual designated by Steel Vault to
serve on the board of directors of VeriChip upon completion of
the merger;
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the employment of certain officers of Steel Vault by VeriChip
upon completion of the merger;
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the acceleration of the vesting of certain Steel Vault equity
awards, including certain Steel Vault equity awards held by
current or former directors and executive officers of VeriChip,
in connection with the completion of the merger;
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the payment of $10,000 to each member of the Steel Vault special
committee and an additional $5,000 fee to the chairman of the
Steel Vault special committee for serving on the Steel Vault
special committee;
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the payment of $20,000 to each member of the VeriChip special
committee and an additional $5,000 fee to the chairman of the
VeriChip special committee for serving on the VeriChip special
committee;
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the continued indemnification of, and provision for
directors’ and officers’ liability insurance coverage
to, current directors and officers of Steel Vault following the
merger; and
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the ownership of Steel Vault stock and options by officers and
directors of VeriChip.
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For additional information regarding the interests of the
executive officers and directors of VeriChip and Steel Vault,
see “The Merger — Interests of Certain Persons in
the Merger” beginning on page 86.
9
Conditions
to Completion of the Merger
The completion of the merger is subject to the prior
satisfaction or waiver of a number of conditions, including the
following:
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no governmental entity will have issued a temporary restraining
order, preliminary or permanent injunction or other order
preventing the merger;
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no governmental entity will have enacted or issued any law,
regulation or order that is in effect and has the effect of
making the merger illegal or otherwise prohibiting the closing;
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VeriChip’s registration statement, of which this joint
proxy statement/prospectus is a part, must be effective, no stop
order suspending its effectiveness may be in effect and no
proceeding for that purpose shall have been initiated or
threatened in writing by the SEC;
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the shares of VeriChip common stock to be issued in the merger
must be approved for listing on the Nasdaq Capital Market,
subject to official notice of issuance;
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the merger agreement must be approved and adopted by the holders
of a majority of the outstanding shares of Steel Vault common
stock entitled to vote at the special meeting;
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the issuance of the shares of VeriChip common stock to be issued
in connection with the merger must be approved by
VeriChip’s stockholders;
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VeriChip and Steel Vault must receive a tax opinion
substantially to the effect that the transactions contemplated
by the merger agreement should qualify as a
“reorganization” within the meaning of Section 368(a)
of the Internal Revenue Code;
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all required consents and approvals must be obtained, unless the
failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material
adverse effect on VeriChip or Steel Vault or to materially
adversely affect the consummation of the merger;
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the representations and warranties of each party in the merger
agreement must be true and correct, subject to various
qualifications;
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the parties must have complied in all material respects with
their respective agreements and covenants in the merger
agreement;
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the parties must each receive a written fairness opinion from
their respective investment banking firms;
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VeriChip must receive letters of resignation necessary to cause
the VeriChip board of directors to be constituted as provided in
the merger agreement, and Steel Vault must provide to VeriChip
the name of the individual designated by Steel Vault to serve on
the board of directors of VeriChip; and
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•
|
Steel Vault must cause that secured convertible promissory note,
dated March 20, 2009, given by Steel Vault to Blue Moon
Energy Partners LLC, to be amended on terms reasonably
acceptable to VeriChip, to eliminate the convertible feature of
such note.
|
Termination
of the Merger Agreement
Before completion of the merger, and subject to certain
qualifications, the merger agreement may be terminated under any
of the following circumstances:
|
|
|
|
|
|
•
|
by the mutual consent of VeriChip and Steel Vault authorized by
their respective boards of directors;
|
|
|
|
|
•
|
by VeriChip or Steel Vault in the event of either: (1) a
breach by the other party of any representation or warranty
contained in the merger agreement, which breach cannot be or has
not been cured within 30 days after the giving of written
notice to the breaching party of such breach, or (2) a
breach by the other party of any of the covenants or agreements
in the merger agreement, which breach cannot be or has not been
cured within 30 days after the giving of written notice to
the breaching party of such
|
10
|
|
|
|
|
|
|
breach and which breach, in each case, is reasonably likely,
individually or in the aggregate, to have a material adverse
effect on the breaching party or the surviving corporation;
|
|
|
|
|
|
|
•
|
at any time prior to the effective time of the merger, by
VeriChip or Steel Vault in the event that the merger is not
consummated by December 31, 2009 or such later date as
Steel Vault and VeriChip may mutually agree, except to the
extent that the failure of the merger then to be consummated
arises out of, or results from, the knowing action or inaction
of the party seeking to terminate under the circumstances set
forth in this bullet point;
|
|
|
|
|
•
|
by Steel Vault or VeriChip in the event (1) the approval of
any governmental authority required for consummation of the
merger and the other transactions contemplated by the merger
agreement shall have been denied by final nonappealable action
of such governmental authority, or such governmental authority
shall have requested the permanent withdrawal of any application
therefor, provided, however, that the party seeking to terminate
the merger agreement pursuant to the circumstances outlined in
this bullet point shall have used commercially reasonable
efforts to prevent the entry of, and to remove, such restraint,
(2) the requisite stockholder approval is not obtained at
the Steel Vault special meeting or at any adjournment or
postponement thereof, or (3) the requisite stockholder
approval is not obtained at the VeriChip special and annual
meeting or at any adjournment or postponement thereof;
|
|
|
|
|
•
|
by Steel Vault prior to obtaining the requisite stockholder vote
in the event that Steel Vault receives and accepts a superior
proposal;
|
|
|
|
|
•
|
by VeriChip in the event that an adverse recommendation change
by Steel Vault has occurred (other than an adverse
recommendation change by Steel Vault occurring as a result of a
VeriChip material adverse effect);
|
|
|
|
|
•
|
by Steel Vault in the event that an adverse recommendation
change by VeriChip has occurred (other than an adverse
recommendation change by VeriChip occurring as a result of a
Steel Vault material adverse effect);
|
|
|
|
|
•
|
by VeriChip in the event that a willful and material breach by
Steel Vault of its non-solicitation obligations under the merger
agreement has occurred, and such breach leads to the making of a
superior proposal; and
|
|
|
|
|
•
|
by Steel Vault in the event that VeriChip receives and accepts
an acquisition proposal with respect to VeriChip.
|
Expenses
and Termination Fees
All fees and expenses incurred in connection with the merger
agreement shall be paid by the party incurring such expenses
whether or not the merger is consummated. However, VeriChip
shall pay (i) all fees and expenses, other than
attorneys’, accountants’, financial advisors’,
and consultants’ fees and expenses, incurred in relation to
the printing and filing with the SEC of this joint proxy
statement/prospectus (including any preliminary materials
related thereto) and this registration statement (including
financial statements and exhibits) and any amendments or
supplements thereto and (ii) the filing fee(s) for this
registration statement; but, if the merger agreement is
terminated for any reason, Steel Vault will repay VeriChip
one-half of all the expenses in clauses (i) and
(ii) actually paid by VeriChip (other than attorneys’,
accountants’, financial advisors’, and
consultants’ fees and expenses).
In addition, each of VeriChip and Steel Vault has agreed to
immediately reimburse the other party for all the transaction
expenses incurred by such other party, up to a maximum of
$200,000, if the merger agreement is terminated upon certain
events.
Solicitation
of Other Offers
Until the merger is completed or the merger agreement is
terminated, Steel Vault has agreed not to take any action with
regard to an acquisition proposal, as described on page 95
of this joint proxy statement/prospectus, unless it receives an
unsolicited acquisition proposal prior to its special meeting
and its board of
11
directors concludes in good faith that such acquisition
proposal is reasonably likely to result in a superior proposal,
as described on page 95 of this joint proxy
statement/prospectus. If Steel Vault receives an acquisition
proposal that its board of directors considers to be a superior
proposal, Steel Vault may, subject to the conditions specified
on page 95 of this joint proxy statement/prospectus,
furnish non-public information regarding itself and its
subsidiaries and may enter into discussions with the person who,
or entity that, made the acquisition proposal.
Steel Vault has agreed to inform VeriChip promptly as to any
acquisition proposals or any inquiries that it reasonably
believes would lead to an acquisition proposal, including the
material terms, conditions and developments of any acquisition
proposals received. Steel Vault has agreed to provide to
VeriChip any non-public information that Steel Vault provides to
a person or entity making an acquisition proposal, subject to
certain exceptions.
Accounting
Treatment of the Merger
VeriChip intends to account for the merger using the acquisition
method of accounting for business combinations, with VeriChip
being considered the acquiror of Steel Vault, in conformity with
accounting principles generally accepted in the United States of
America. This means that VeriChip will allocate the purchase
price to the fair value of assets, including identifiable
intangible assets acquired and liabilities assumed from the
current minority owners of Steel Vault at the effective time of
the merger, with the excess purchase price, if any, being
recorded as goodwill. Under the acquisition method of
accounting, goodwill is not amortized but is tested for
impairment at the time of the acquisition and at least annually
thereafter.
Board of
Directors of VeriChip Following the Merger
Immediately following the effective time of the merger, the
board of directors of VeriChip will consist of five members with
four individuals designated by VeriChip and one individual
designated by Steel Vault. Because the VeriChip board of
directors currently consists of five individuals, it is
anticipated that one of the members of the then-current VeriChip
board of directors will resign from the VeriChip board of
directors
and/or
will
no longer continue to serve as a director.
Governmental
and Regulatory Matters
Neither VeriChip nor Steel Vault is aware of any material
governmental or regulatory approval required for completion of
the merger, other than the effectiveness of the registration
statement of which this joint proxy statement/prospectus is a
part, compliance with applicable corporate law of Delaware, and
compliance with applicable state “blue sky” laws.
Appraisal
Rights
In accordance with Section 262 of the Delaware General
Corporation Law, or DGCL, no appraisal rights will be available
to holders of shares of the Steel Vault common stock. For a more
complete description, see “The Merger — Appraisal
Rights.”
Comparison
of Stockholder Rights
The rights of stockholders of Steel Vault as stockholders of
VeriChip after the merger will be governed by VeriChip’s
existing second amended and restated certificate of
incorporation and its existing amended and restated bylaws, as
such documents may be amended in the future. For a more complete
description, see “Comparison of the Rights of Stockholders
of VeriChip and Steel Vault.”
Market
Price Information
Shares of VeriChip common stock are listed on the Nasdaq Capital
Market under the trading symbol “CHIP.” Following the
completion of the merger, VeriChip plans to change its ticker
symbol on the Nasdaq Capital Market from “CHIP” to
“PSID.” On September 4, 2009, the last full
trading day prior to the public
12
announcement of the proposed merger, VeriChip common stock
closed at $0.74 per share. On October 1, 2009, the latest
practicable date before the printing of this joint proxy
statement/prospectus, VeriChip common stock closed at $2.53 per
share.
The common stock of Steel Vault is quoted on the OTC Bulletin
Board under the trading symbol “SVUL.OB.” On
September 4, 2009, the last full trading day prior to the
public announcement of the proposed merger, Steel Vault common
stock closed at $0.29 per share. On October 1, 2009, the
latest practicable date before the printing of this joint proxy
statement/prospectus, Steel Vault common stock closed at $0.85
per share. The companies urge you to obtain current market
quotations for VeriChip and Steel Vault common stock.
Listing
of VeriChip Common Stock and Deregistration of Steel Vault
Common Stock
VeriChip common stock is currently traded on the Nasdaq Capital
Market under the symbol “CHIP.” Following the
completion of the merger, VeriChip plans to change its ticker
symbol on the Nasdaq Capital Market from “CHIP” to
“PSID.” The VeriChip common stock to be issued in the
merger will be listed for trading on the Nasdaq Capital Market.
If the merger is completed, Steel Vault common stock will cease
to be quoted on the OTC Bulletin Board and will be
deregistered under the Securities and Exchange Act of 1934, or
the Exchange Act, and Steel Vault will no longer file periodic
reports with the SEC.
Material
United States Federal Income Tax Consequences
The merger generally is intended to qualify as a tax-free
transaction, except with respect to any cash received in lieu of
a fractional share interest in VeriChip common stock, and it is
a condition to the merger that VeriChip and Steel Vault each
receive a legal opinion from Holland & Knight LLP to
the effect that the merger will constitute a reorganization
within the meaning of 368(a) of the Internal Revenue Code.
Assuming the merger qualifies as a reorganization, Steel Vault
stockholders who realize a loss as a result of the merger will
not be allowed to recognize such loss for U.S. federal
income tax purposes, and Steel Vault stockholders who realize a
gain as a result of the exchange of Steel Vault common stock for
shares of VeriChip common stock will not be required to
recognize such gain for U.S. federal income tax purposes.
Please review carefully the information under “Material
United States Federal Income Tax Consequences” for a
description of the material United States federal income tax
consequences of the merger beginning on page 181.
This summary may not contain all of the information that is
important to you. You should carefully read this entire document
and the other documents included elsewhere in this joint proxy
statement/prospectus for a more complete understanding of the
merger. In particular, you should read the documents attached to
this joint proxy statement/prospectus, including the merger
agreement, as amended, which is attached to this joint proxy
statement/prospectus as Annex A-1 and Annex A-2.
13
VERICHIP
SUMMARY HISTORICAL FINANCIAL DATA
(In
thousands, except per share data)
The following table sets forth certain of VeriChip’s
consolidated financial data as of and for each of the periods
indicated. The financial information for the years ended
December 31, 2007 and 2008, and as of December 31,
2007 and 2008, is derived from VeriChip’s audited
consolidated financial statements which are included elsewhere
in this joint proxy statement/prospectus. The financial
information for the year ended December 31, 2006 and as of
December 31, 2006 is derived from VeriChip’s audited
consolidated financial statements and the notes thereto as filed
with the SEC on Form 10-K on April 2, 2007. The
financial information for the year ended December 31, 2005
and 2004 and as of December 31, 2005 and 2004 is derived
from VeriChip’s audited consolidated financial statements
and the notes thereto as filed with the SEC on Form S-1/A
on April 7, 2006. The consolidated financial information as
of and for the six month periods ended June 30, 2008 and
2009 is derived from VeriChip’s unaudited consolidated
financial statements included elsewhere in this joint proxy
statement/prospectus. In VeriChip’s opinion, such unaudited
consolidated financial statements include all adjustments
(consisting of normal recurring adjustments) necessary for a
fair presentation of VeriChip’s financial position and
results of operations for such periods. Interim results for the
six months ended June 30, 2009 are not necessarily
indicative of, and are not projections for, the results to be
expected for the full year ending December 31, 2009.
The summary historical financial data is only a summary, and
should be read in conjunction with “
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”,
beginning on page 120 and the consolidated
financial statements and the related notes beginning on
page FS-2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
Year Ended December
31,
(1)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
57
|
|
|
$
|
35
|
|
|
$
|
43
|
|
|
$
|
76
|
|
|
$
|
116
|
|
|
$
|
68
|
|
|
$
|
247
|
|
|
Total cost of products and services
|
|
|
19
|
|
|
|
61
|
|
|
|
275
|
|
|
|
361
|
|
|
|
456
|
|
|
|
35
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
38
|
|
|
|
(26
|
)
|
|
|
(232
|
)
|
|
|
(285
|
)
|
|
|
(340
|
)
|
|
|
33
|
|
|
|
48
|
|
|
Selling, general and administrative
|
|
|
2,304
|
|
|
|
6,746
|
|
|
|
19,775
|
|
|
|
13,184
|
|
|
|
6,981
|
|
|
|
6,393
|
|
|
|
1,930
|
|
|
Research and development
|
|
|
—
|
|
|
|
212
|
|
|
|
712
|
|
|
|
106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other (income) loss
|
|
|
(4,408
|
)
|
|
|
980
|
|
|
|
(7,997
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
Interest and other expense
|
|
|
—
|
|
|
|
839
|
|
|
|
1,213
|
|
|
|
1,392
|
|
|
|
823
|
|
|
|
399
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
2,142
|
|
|
|
(8,803
|
)
|
|
|
(13,935
|
)
|
|
|
(14,967
|
)
|
|
|
(8,144
|
)
|
|
|
(6,759
|
)
|
|
|
(2,011
|
)
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
2,753
|
|
|
|
787
|
|
|
|
3,057
|
|
|
|
1,419
|
|
|
|
1,497
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2,142
|
|
|
|
(6,050
|
)
|
|
|
(13,148
|
)
|
|
|
(11,910
|
)
|
|
|
(6,725
|
)
|
|
|
(5,262
|
)
|
|
|
(2,011
|
)
|
|
Deemed dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholder
|
|
$
|
2,142
|
|
|
$
|
(6,050
|
)
|
|
$
|
(13,148
|
)
|
|
$
|
(11,910
|
)
|
|
$
|
(6,725
|
)
|
|
$
|
(5,263
|
)
|
|
$
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations
|
|
$
|
0.18
|
|
|
$
|
(0.90
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(1.71
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(1.28
|
)
|
|
$
|
(0.45
|
)
|
|
Net income per common share from discontinued operations
|
|
|
—
|
|
|
|
0.28
|
|
|
|
0.07
|
|
|
|
0.35
|
|
|
|
0.26
|
|
|
|
0.28
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholder per common
share
|
|
$
|
0.18
|
|
|
$
|
0.62
|
|
|
$
|
(1.24
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
12,240
|
|
|
|
9,703
|
|
|
|
10,597
|
|
|
|
8,756
|
|
|
|
5,556
|
|
|
|
5,279
|
|
|
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations
|
|
$
|
0.17
|
|
|
$
|
(0.90
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(1.71
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(1.28
|
)
|
|
$
|
(0.45
|
)
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
Year Ended December
31,
(1)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Net income per common share from discontinued operations
|
|
|
—
|
|
|
|
0.28
|
|
|
|
0.07
|
|
|
|
0.35
|
|
|
|
0.26
|
|
|
|
0.28
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholder per common
share
|
|
$
|
0.17
|
|
|
$
|
0.62
|
|
|
$
|
(1.24
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
12,563
|
|
|
|
9,703
|
|
|
|
10,597
|
|
|
|
8,756
|
|
|
|
5,556
|
|
|
|
5,279
|
|
|
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,165
|
|
|
$
|
3,774
|
|
|
$
|
3,229
|
|
|
$
|
7,221
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
Equipment, net of accumulated depreciation and amortization
|
|
|
30
|
|
|
|
45
|
|
|
|
39
|
|
|
|
112
|
|
|
|
126
|
|
|
|
132
|
|
|
|
131
|
|
|
Total
assets
(2)
|
|
|
6,391
|
|
|
|
46,492
|
|
|
|
8,086
|
|
|
|
49,998
|
|
|
|
50,888
|
|
|
|
48,438
|
|
|
|
283
|
|
|
Long-term debt
|
|
|
—
|
|
|
|
7,825
|
|
|
|
—
|
|
|
|
10,753
|
|
|
|
13,635
|
|
|
|
—
|
|
|
|
—
|
|
|
Total debt
|
|
|
—
|
|
|
|
15,825
|
|
|
|
—
|
|
|
|
12,920
|
|
|
|
13,635
|
|
|
|
6,881
|
|
|
|
4,221
|
|
|
Stockholders’ equity (deficit)
|
|
|
5,192
|
|
|
|
21,637
|
|
|
|
2,420
|
|
|
|
25,591
|
|
|
|
22,346
|
|
|
|
28,527
|
|
|
|
(4,012
|
)
|
|
|
|
|
|
(1)
|
|
Income from discontinued operations is comprised of Xmark’s
operations, which were sold in July 2008.
|
|
|
|
(2)
|
|
Includes assets from discontinued operations totaling $0,
$36,766, $0, $46,696, $45,273, $46,495 and $0 for the periods
presented.
|
15
STEEL
VAULT SUMMARY HISTORICAL FINANCIAL DATA
(In
thousands, except per share data)
The following table sets forth certain of Steel Vault’s
consolidated financial data as of and for each of the periods
indicated. The financial information for the years ended
September 30, 2006, 2007 and 2008, and as of
September 30, 2007 and 2008, is derived from Steel
Vault’s audited consolidated financial statements which are
included elsewhere in this joint proxy statement/prospectus. The
financial information for the year ended September 30, 2005
and as of September 30, 2006 is derived from Steel
Vault’s audited consolidated financial statements and the
notes thereto as filed with the SEC on Form 10-K on
December 22, 2006. The financial information for the year
ended September 30, 2004 and as of September 30, 2004
and 2005 is derived from Steel Vault’s consolidated
financial statements and the notes thereto as filed with the SEC
on Form 10-K on December 23, 2005. The consolidated
financial information as of and for the nine month periods ended
June 30, 2008 and 2009 is derived from Steel Vault’s
consolidated financial statements included elsewhere in this
joint proxy statement/prospectus. In Steel Vault’s opinion,
such unaudited consolidated financial statements include all
adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of Steel Vault’s
financial position and results of operations for such periods.
Interim results for the nine months ended June 30, 2009 are
not necessarily indicative of, and are not projections for, the
results to be expected for the full year ending
September 30, 2009.
The summary historical financial data is only a summary, and
should be read in conjunction with
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations of Steel Vault”
beginning on page 164 and
the consolidated financial statements and the related notes
beginning on
page FS-46.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30
|
|
|
For the Year Ended September
30,
(1)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
418
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating expenses
|
|
|
(2,873
|
)
|
|
|
(574
|
)
|
|
|
(678
|
)
|
|
|
(692
|
)
|
|
|
(931
|
)
|
|
|
(612
|
)
|
|
|
(674
|
)
|
|
Interest (expense) income, net
|
|
|
(36
|
)
|
|
|
10
|
|
|
|
13
|
|
|
|
120
|
|
|
|
162
|
|
|
|
162
|
|
|
|
165
|
|
|
Loss on sale of marketable equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
(430
|
)
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(2,491
|
)
|
|
|
(564
|
)
|
|
|
(1,095
|
)
|
|
|
(595
|
)
|
|
|
(769
|
)
|
|
|
(450
|
)
|
|
|
(509
|
)
|
|
Income (loss) from discontinued operations
|
|
|
—
|
|
|
|
353
|
|
|
|
417
|
|
|
|
(23
|
)
|
|
|
(1,373
|
)
(1)
|
|
|
(318
|
)
(2)
|
|
|
(2,172
|
)
(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,491
|
)
|
|
$
|
(211
|
)
|
|
$
|
(678
|
)
|
|
$
|
(618
|
)
|
|
$
|
(2,142
|
)
|
|
$
|
(768
|
)
|
|
$
|
(2,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations —
basic and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.09
|
)
|
|
|
(0.10
|
)
|
|
Net income per common share from discontinued
operations — basic and diluted
|
|
|
—
|
|
|
|
0.07
|
|
|
|
0.08
|
|
|
|
—
|
|
|
|
(0.28
|
)
|
|
|
(0.07
|
)
|
|
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholder per common share-
basic and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding —
basic
|
|
|
7,625
|
|
|
|
5,104
|
|
|
|
5,114
|
|
|
|
5,014
|
|
|
|
4,919
|
|
|
|
4,896
|
|
|
|
4,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
As of June 30,
|
|
As of September 30,
|
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
505
|
|
|
$
|
1,124
|
|
|
$
|
1,256
|
|
|
$
|
405
|
|
|
$
|
372
|
|
|
$
|
1,026
|
|
|
$
|
291
|
|
|
Total assets
|
|
|
1,333
|
|
|
|
1,478
|
|
|
|
1,301
|
|
|
|
2,585
|
|
|
|
4,187
|
|
|
|
6,050
|
|
|
|
7,005
|
|
|
Short term debt
|
|
|
472
|
|
|
|
8
|
|
|
|
—
|
|
|
|
2
|
|
|
|
13
|
|
|
|
10
|
|
|
|
812
|
|
|
Long term debt
|
|
|
163
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stockholders’ (deficit) equity
|
|
|
(222
|
)
|
|
|
1,304
|
|
|
|
1,199
|
|
|
|
1,359
|
|
|
|
2,155
|
|
|
|
4,145
|
|
|
|
4,913
|
|
|
|
|
|
|
(1)
|
|
In the fourth quarter of 2006, Steel Vault recorded an
impairment charge of $924 related to goodwill.
|
|
|
|
(2)
|
|
In the fourth quarter of 2005, Steel Vault recorded an
impairment charge of $529 related to goodwill.
|
|
|
|
(3)
|
|
In the fourth quarter of 2004, Steel Vault recorded an
impairment charge of $701 related to goodwill.
|
|
|
|
(4)
|
|
In the fourth quarter of 2004, Steel Vault recorded an
impairment charge of $1,550 related to deferred taxes.
|
17
SUMMARY
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
DATA
These tables set forth selected unaudited pro forma condensed
combined statement of operations data of VeriChip and Steel
Vault for the six months ended June 30, 2009, and for the
year ended December 31, 2008, as if the merger had become
effective on January 1, 2009 and 2008, respectively. These
tables also set forth selected unaudited pro forma condensed
combined balance sheet data of VeriChip as of June 30,
2009, as if the merger had become effective on that date.
The unaudited pro forma condensed combined financial data in the
table below is provided for illustrative purposes only and does
not purport to represent what the actual consolidated results of
operations or the consolidated financial position of VeriChip
would have been had the merger occurred on the date assumed, nor
is it necessarily indicative of future consolidated results of
operations or financial position.
The unaudited pro forma condensed combined financial data in the
table below does not include the realization of cost savings
from operating efficiencies, revenue synergies or restructuring
costs resulting from the merger. You should read this
information in conjunction with the separate historical
consolidated financial statements and accompanying notes of
VeriChip, which are included in this joint proxy
statement/prospectus beginning on
page FS-2,
and of Steel Vault, which are included in this joint proxy
statement/prospectus beginning on
page FS-46.
The following pro forma condensed combined financial information
has been derived from, and should be read in conjunction with,
the unaudited pro forma condensed combined financial data and
notes thereto included in this joint proxy statement/prospectus
beginning on page 102.
The historical financial information related to the results of
Steel Vault for the twelve months ended December 31, 2008
is represented on a calendar year basis, i.e. fiscal year
September 30, 2008 less the quarter ended December 31,
2007 plus the quarter ended December 31, 2008. The
historical financial information related to the results of Steel
Vault for the six months ended June 30, 2009 were derived
from the sum of the quarters ended March 31, 2009 and
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
For the Twelve Months
|
|
|
|
Ended June 30, 2009
|
|
Ended December 31, 2008
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
458
|
|
|
$
|
59
|
|
|
Loss from continuing operations
|
|
$
|
(525
|
)
|
|
$
|
(16,902
|
)
|
|
Net loss per common share from continuing operations —
basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(1.10
|
)
|
|
Weighted average number of common shares outstanding: Basic and
diluted
|
|
|
17,056
|
|
|
|
15,413
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
|
Balance sheet Data:
|
|
|
|
|
|
Cash
|
|
$
|
1,670
|
|
|
Total Assets
|
|
$
|
12,587
|
|
|
Debt
|
|
$
|
163
|
|
|
Shareholder’s Equity
|
|
$
|
10,018
|
|
18
COMPARATIVE
PER SHARE DATA (UNAUDITED)
The following table summarizes unaudited per share information
for VeriChip and Steel Vault on a historical basis, for VeriChip
on a pro forma combined basis for VeriChip, and an equivalent
pro forma combined basis for Steel Vault. It has been assumed
for purposes of the unaudited pro forma condensed combined
financial data provided below that the merger was completed as
of the beginning of the periods presented, January 1, 2009
and 2008. The following information should be read in
conjunction with:
|
|
|
|
|
|
•
|
the historical audited financial statements of VeriChip as of
and for the years ended December 31, 2008 and
December 31, 2007 beginning on
page FS-18,
and the unaudited historical financial statements as of and for
the six months ended June 30, 2009, beginning on
page FS-2;
|
|
|
|
|
•
|
the historical audited financial statements of Steel Vault as of
and for the years ended September 30, 2008,
September 30, 2007 and September 30, 2006 beginning on
page FS-59
and the unaudited historical financial statements as of and for
the nine months ended June 30, 2009 beginning on
page FS-46; and
|
|
|
|
|
|
|
•
|
the unaudited pro forma condensed combined financial data
beginning on page 102.
|
The pro forma information below is presented for illustrative
purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the
merger had been completed as of the beginning of the period
presented, nor is it necessarily indicative of the future
operating results or financial position of the combined company.
The historical book value per share and the unaudited VeriChip
pro forma book value per share were computed by dividing total
stockholders’ equity by the number of shares of common
stock outstanding at the end of the period. The pro forma income
(loss) from continuing operations per share of common stock of
the combined company is computed by dividing the pro forma
income (loss) from continuing operations available to holders of
shares of the combined company’s common stock by the pro
forma weighted average number of shares outstanding over the
period. The pro forma combined book value per share is computed
by dividing total pro forma stockholders’ equity by the pro
forma number of shares of common stock outstanding at the end of
the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of/for Nine Months
|
|
For Year Ended
|
|
|
|
Ended June 30 2009
|
|
September 30, 2008
|
|
|
|
Steel Vault Historical:
|
|
|
|
|
|
|
|
|
|
Basic (loss) income from continuing operations per common share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.21
|
)
|
|
Diluted (loss) income from continuing operations per common share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.21
|
)
|
|
Dividends declared per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Book value per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of/for Six Months Ended
|
|
For Year Ended
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
VeriChip Historical:
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations per common
share
(1)
|
|
$
|
0.18
|
|
|
$
|
(1.31
|
)
|
|
Diluted income (loss) from continuing operations per common
share
(1)
|
|
$
|
0.17
|
|
|
$
|
(1.31
|
)
|
|
Dividends declared per share
|
|
$
|
—
|
|
|
$
|
1.35
|
|
|
Book value per share
|
|
$
|
0.38
|
|
|
$
|
0.21
|
|
|
|
|
|
|
(1)
|
|
Attributable to a non-recurring $4.4 million previously
deferred gain on the sale of Xmark, which represents $0.35 and
$0.34 of basic and diluted income from continuing operations per
common share.
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
As of/for Six Months Ended
|
|
For Year Ended
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
Steel Vault
Historical:
(1)
|
|
|
|
|
|
|
|
|
|
Basic (loss) income from continuing operations per common share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
Diluted (loss) income from continuing operations per common share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
Dividends declared per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Book value per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.17
|
|
|
Unaudited Pro Forma Combined:
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(1.10
|
)
|
|
Diluted income (loss) from continuing operations per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(1.10
|
)
|
|
Dividends declared per share
|
|
$
|
—
|
|
|
$
|
1.03
|
|
|
Book value per share
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The historical financial information related to the results of
Steel Vault for the twelve months ended December 31, 2008
is represented on a calendar year basis, i.e. fiscal year
September 30, 2008 less the quarter ended December 31,
2007 plus the quarter ended December 31, 2008. The
historical financial information related to the results of Steel
Vault for the six months ended June 30, 2009 were derived
from the sum of the quarters ended March 31, 2009 and
June 30, 2009.
|
20
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
VeriChip’s common stock is traded on the Nasdaq Capital
Market under the symbol “CHIP,” and Steel Vault’s
common stock is quoted on the OTC Bulletin Board under the
symbol “SVUL.OB.” Following the completion of the
merger, VeriChip plans to change its ticker symbol on the Nasdaq
Capital Market from “CHIP” to “PSID.” The
following table sets forth the respective closing prices of
VeriChip’s and Steel Vault’s common stock, and the
equivalent per share value of Steel Vault’s common stock
giving effect to the merger, as of September 4, 2009, the
date immediately prior to public announcement of the execution
of the merger agreement, and October 1, 2009, the latest
practicable trading day before the date of the printing of this
joint proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Price per
|
|
Closing Price per
|
|
|
|
|
|
Share of
|
|
Share of
|
|
Steel Vault
|
|
|
|
VeriChip
|
|
Steel Vault
|
|
Equivalent
|
|
|
|
Common Stock
|
|
Common Stock
|
|
per Share Value
|
|
|
|
September 4, 2009
|
|
$
|
0.74
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
October 1, 2009
|
|
$
|
2.53
|
|
|
$
|
0.85
|
|
|
$
|
1.27
|
|
For the periods indicated, the following table sets forth the
respective
intra-day
high and low sales prices per share of VeriChip’s and Steel
Vault’s common stock as reported on their respective
markets. The per share prices do not include adjustment for
markups, markdowns or commission.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VeriChip Common Stock
|
|
Steel Vault Common Stock
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.50
|
|
|
$
|
4.86
|
|
|
$
|
0.40
|
|
|
$
|
0.20
|
|
|
Second Quarter
|
|
|
9.20
|
|
|
|
4.28
|
|
|
|
0.28
|
|
|
|
0.20
|
|
|
Third Quarter
|
|
|
10.35
|
|
|
|
3.49
|
|
|
|
0.25
|
|
|
|
0.20
|
|
|
Fourth Quarter
|
|
|
4.34
|
|
|
|
2.25
|
|
|
|
0.28
|
|
|
|
0.18
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.77
|
|
|
$
|
1.89
|
|
|
$
|
0.23
|
|
|
$
|
0.17
|
|
|
Second Quarter
|
|
|
2.50
|
|
|
|
1.53
|
|
|
|
0.30
|
|
|
|
0.19
|
|
|
Third Quarter
|
|
|
2.22
|
|
|
|
0.35
|
|
|
|
0.30
|
|
|
|
0.19
|
|
|
Fourth Quarter
|
|
|
0.86
|
|
|
|
0.25
|
|
|
|
0.35
|
|
|
|
0.18
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.64
|
|
|
$
|
0.26
|
|
|
$
|
0.47
|
|
|
$
|
0.15
|
|
|
Second Quarter
|
|
|
0.70
|
|
|
|
0.40
|
|
|
|
0.39
|
|
|
|
0.14
|
|
|
Third Quarter (through September 16, 2009)
|
|
|
1.28
|
|
|
|
0.40
|
|
|
|
0.52
|
|
|
|
0.15
|
|
You are advised to obtain current market quotations for VeriChip
and Steel Vault common stock before making any decision
regarding the merger. The market price of the common stock of
both companies is subject to fluctuation. The dollar value of
the shares of VeriChip common stock that holders of Steel Vault
will receive in the proposed merger and the dollar value of the
Steel Vault common stock they surrender may increase or decrease.
As of September 25, 2009, VeriChip had
13,810,628 shares of common stock issued and outstanding
and approximately 20 stockholders of record. As of
September 25, 2009, Steel Vault had 9,874,971 shares
of common stock issued and outstanding and approximately 55
stockholders of record.
Dividend
Policy
In July 2008, VeriChip declared and in August 2008, VeriChip
paid a special cash dividend of $15.8 million on its
capital stock. Any future determination with respect to the
payment of dividends will be at the discretion of
VeriChip’s board of directors and will be dependent upon
its financial condition, results of operations, capital
requirements, general business conditions, terms of financing
arrangements and other factors that its board of directors may
deem relevant.
Steel Vault has never paid dividends on its common stock and
does not anticipate paying dividends in the foreseeable future.
The decision whether to apply legally available funds to the
payment of dividends on its common stock may be made by its
board of directors from time to time in the exercise of its
business judgment.
21
RISK
FACTORS
In addition to the risks described in each company’s
reports on
Forms 10-K
and
10-Q
relating to each company as an independent business, you should
carefully consider the following matters in deciding whether to
vote in favor of the merger, which include all known material
risks related to the merger. These matters have been grouped
under three separate headings: “Risks Related to the
Merger,” which discusses the risks of combining
VeriChip’s and Steel Vault’s companies, risks under
the merger agreement and potential and actual conflicts of
interest, among other things, “Industry and Business Risks
Related to VeriChip and Its Businesses,” which discusses
the risks of VeriChip’s industry and VeriChip’s
businesses other than those risks related solely to Steel
Vault’s businesses and “Industry and Business Risks
Related to Steel Vault and Its Businesses,” which discusses
the risks of Steel Vault’s industry and Steel Vault’s
businesses. If any of these risks actually materialize, the
business, financial condition or prospects of VeriChip and Steel
Vault may be seriously harmed. In such case, the market price of
VeriChip common stock may decline and you may lose all or part
of your investment. See “Cautionary Statement Concerning
Forward-Looking Statements” on page 36.
Risks
Related to the Merger
Any
delay in completion of the merger may reduce or delay the
benefits expected to be obtained from the merger.
The merger is subject to a number of conditions beyond the
control of VeriChip and Steel Vault that may prevent, delay or
otherwise materially adversely affect its completion. For a more
complete summary of the conditions that must be satisfied or
waived prior to the effective time of the merger, see “The
Merger Agreement — Conditions to Completion of the
Merger.” VeriChip and Steel Vault cannot predict whether
and when these conditions will be satisfied. Any delay in
completing the merger may reduce or delay the synergies and
other benefits that VeriChip and Steel Vault expect to achieve
if they successfully complete the merger within the expected
timeframe and integrate their respective businesses.
The
number of shares that Steel Vault stockholders will be entitled
to receive is fixed; if the market price of VeriChip’s
common stock declines, the value of the VeriChip common stock
being issued to Steel Vault stockholders will be
reduced.
Upon the closing of the merger, each holder of shares of Steel
Vault stock will be entitled to receive a fixed number of shares
of VeriChip common stock for each share of Steel Vault common
stock held by such stockholder at the closing of the merger. The
market value of VeriChip common stock fluctuates based upon
general market and economic conditions, VeriChip’s
businesses and prospects and other factors. Accordingly, even if
the market price of Steel Vault common stock increases prior to
the merger, Steel Vault stockholders will not be entitled to
additional consideration.
There will be no upward adjustment to the common stock exchange
ratio (except for reclassifications to reflect the effect of any
stock split, reverse stock split, stock dividend,
reorganization, recapitalization, reclassification or other like
change with respect to VeriChip common stock), and the parties
do not have the right to terminate the merger agreement based
upon changes in the market price of either VeriChip common stock
or Steel Vault common stock. If VeriChip’s stock price
decreases, Steel Vault stockholders will receive less value for
their shares of Steel Vault common stock.
The
issuance of shares of VeriChip common stock to Steel Vault
stockholders in the merger will substantially reduce the
percentage interests of VeriChip stockholders.
In the proposed merger, Steel Vault will become a wholly-owned
subsidiary of VeriChip. If the merger is completed, VeriChip
will issue approximately 8,869,699 shares of VeriChip
common stock in the merger to Steel Vault stockholders, option
holders and warrant holders (based on the number of outstanding
shares of Steel Vault common stock on the Steel Vault record
date and assuming exercise of all outstanding Steel Vault
options and warrants). Based on the number of shares of VeriChip
and Steel Vault common stock outstanding on the respective
record dates of VeriChip and Steel Vault, Steel Vault
stockholders will own, in the aggregate, approximately 37.4% of
the fully diluted shares of VeriChip common stock immediately
after the merger. The
22
issuance of shares of VeriChip common stock to Steel Vault
stockholders in the merger will cause a significant reduction in
the relative percentage interest of current VeriChip
stockholders in earnings, voting, liquidation value, and book
and market value.
The
significant costs associated with the merger may not prove to be
justified in light of the benefits ultimately realized and could
adversely affect future liquidity and operating
results.
VeriChip estimates that it will incur direct transaction costs
of approximately $0.2 million associated with the merger,
which will be included as a part of the total purchase cost for
accounting purposes. In addition, Steel Vault estimates that it
will incur direct transaction costs estimated to be
approximately $0.2 million, which will be expensed as
incurred for accounting purposes. These numbers are estimates
that are subject to increase. VeriChip and Steel Vault believe
the combined company may incur charges to operations, which are
not currently reasonably estimable, in the quarter in which the
merger is completed or the following quarters, to reflect costs
associated with integrating certain operations of the two
companies. The combined company may incur additional material
charges in subsequent quarters to reflect additional costs
associated with the merger.
Charges
to earnings may adversely affect the market value of the
combined company’s common stock following the
merger.
In accordance with accounting principles generally accepted in
the United States, the combined company will account for the
merger using the acquisition method of accounting, which will
result in charges to earnings that could have a material effect
on the market value of VeriChip common stock following the
closing of the merger. Under the acquisition method of
accounting, the combined company expects to allocate
approximately 28% of the estimated purchase price to Steel
Vault’s net tangible assets, amortizable intangible assets,
and intangible assets with indefinite lives based on their fair
values as of the date of the closing of the merger, and will
record the excess as goodwill. VeriChip will incur additional
depreciation and amortization expense over the useful lives of
certain of the net tangible and intangible assets acquired in
connection with the merger. In addition, to the extent the value
of goodwill or intangible assets with indefinite lives becomes
impaired, VeriChip may be required to incur material charges
relating to the impairment of those assets. These depreciation,
amortization and potential impairment charges could have a
material effect on VeriChip’s results of operations.
The
combined company may be unable to successfully integrate Steel
Vault’s and VeriChip’s operations or to realize the
anticipated benefits of the merger. As a result, the value of
VeriChip common stock may be adversely affected.
VeriChip and Steel Vault entered into the merger agreement
because each company believes that the merger will be beneficial
to each of VeriChip, Steel Vault, and their respective
stockholders. Currently, each company operates as an independent
public company. The new combined company will be called
PositiveID Corporation and will offer identification tools and
technologies for consumers and businesses. The companies believe
that the formation of PositiveID Corporation represents the
convergence of a pioneer in personal health records, VeriChip,
with a leader in the identity security space, Steel Vault, which
is focused on access and security of a consumer’s critical
data. The companies believe that joining personal health records
and identity security solutions provides a solid foundation for
organic growth and a strong, flexible platform for future
offers. Achieving the anticipated synergies, growth
opportunities and cost savings from the merger will depend in
part upon whether the two companies integrate their businesses
in an efficient and effective manner. The companies may not be
able to accomplish this integration process smoothly or
successfully. The companies may not be able to achieve the
anticipated operating and cost synergies or long-term strategic
benefits of the merger. An inability to realize the full extent
of, or any of, the anticipated benefits of the merger, as well
as any delays encountered in the integration process, could have
an adverse effect on the business and results of operations of
the combined company, which may affect the value of the shares
of VeriChip common stock after the completion of the merger.
23
In
order to be successful, the combined company must retain and
motivate key employees, and failure to do so could seriously
harm the combined company.
In order to be successful, the combined company must retain and
motivate executives and other key employees, including those in
managerial, sales and technical positions. Employees of VeriChip
or Steel Vault may experience uncertainty about their future
roles in the combined company until or after strategies with
regard to the combined company are announced or executed. These
circumstances may adversely affect the combined company’s
ability to attract and retain key management, sales and
technical personnel. The combined company also must continue to
motivate employees and keep them focused on the strategies and
goals of the combined company, which may be particularly
difficult because of the potential distractions of the merger.
Resales
of VeriChip common stock following the merger may cause the
market price of VeriChip common stock to decrease.
As of September 25, 2009, VeriChip had
13,810,628 shares of common stock outstanding, and an
aggregate of 1,004,296 shares of VeriChip common stock were
issuable upon the exercise of outstanding employee or director
stock options. VeriChip expects that it will issue approximately
4,937,485 shares of VeriChip common stock in the merger
based on the number of shares of Steel Vault common stock
outstanding on September 25, 2009, and will reserve an
additional approximately 3,932,214 shares of VeriChip
common stock for issuance in connection with VeriChip’s
assumption of Steel Vault’s outstanding options and
warrants. The issuance of these new shares of VeriChip common
stock and the sale of additional shares of VeriChip common stock
that may become eligible for sale in the public market from time
to time upon exercise of options or other rights will increase
the total number of shares of VeriChip common stock outstanding.
This increase will be substantial. Sales of a significant number
of shares of VeriChip common stock could have the effect of
depressing the market price for VeriChip common stock.
The
unaudited pro forma financial statements are not an indicator of
the combined company’s financial condition or results of
operations following the merger.
The unaudited pro forma financial statements contained in this
joint proxy statement/prospectus are not an indicator of the
combined company’s financial condition or results of
operations following the merger for several reasons. The
unaudited pro forma financial statements have been derived from
the historical financial statements of VeriChip and Steel Vault,
and many adjustments and assumptions have been made regarding
the combined company after giving effect to the merger. The
information upon which these adjustments and assumptions have
been made is preliminary, and these kinds of adjustments and
assumptions are difficult to make with complete accuracy. As a
result, the actual financial condition and results of operations
of the combined company following the merger may not be
consistent with, or evident from, these unaudited pro forma
financial statements.
In addition, the actual earnings per share of the combined
company following the merger may decrease below that reflected
in the pro forma financial information, which is lower than
historical results of VeriChip, for several reasons. The
assumptions used in preparing the pro forma financial
information may not prove to be accurate and other factors may
affect the combined company’s actual earnings per share
following the merger. See the section entitled “Unaudited
Pro Forma Condensed Combined Financial Data Reflecting the
Merger” beginning on page 102. Any potential decline in
VeriChip’s earnings per share may cause significant
variations in the stock price of the combined company.
Directors
and officers of VeriChip and Steel Vault may have conflicts of
interest that may influence them to support or approve the
merger.
In considering the recommendations of VeriChip’s and Steel
Vault’s respective boards of directors, you should be aware
that certain directors and officers of VeriChip and Steel Vault
may have interests in the merger that may be different from, or
in addition to, your interests as a stockholder generally and
may create
24
potential and actual conflicts of interest. These interests on
the part of certain directors and officers of VeriChip and Steel
Vault may arise as a result of cross directorships, stock
ownership, intercompany transactions, intercompany agreements
and potential bonus payments. The boards of directors of each of
VeriChip and Steel Vault were aware of these interests and
considered them when they approved and adopted the merger
agreement and the merger. For a detailed discussion of the
interests of the directors and executive officers of VeriChip
and Steel Vault, see the section entitled “The
Merger — Interests of Certain Persons in the
Merger.”
The
fairness opinions obtained by VeriChip and Steel Vault from
their respective special committees’ financial advisors
will not reflect changes in circumstances between signing the
merger agreement and the completion of the merger.
Neither VeriChip nor Steel Vault has obtained updated opinions
as of the date of this joint proxy statement/prospectus from
Ladenburg or Hyde Park, respectively. Changes in the operations
and prospects of VeriChip or Steel Vault, general market and
economic conditions, and other factors that may be beyond the
control of VeriChip or Steel Vault, and on which the fairness
opinions were based, may alter the value of VeriChip or Steel
Vault or the prices of their common stock by the time the merger
is completed. Each fairness opinion is based on the information
in existence on the date of the opinion and will not be updated
as of the time the merger is to be completed. Because VeriChip
and Steel Vault currently do not anticipate asking their
respective financial advisors to update their opinions, the
written opinions dated September 3, 2009 and
September 4, 2009, respectively, do not address the
fairness of the common stock exchange ratio, from a financial
point of view, at the time the VeriChip special and annual
meeting and the Steel Vault special meeting are to be held or at
the time the merger is to be completed. For a description of the
opinions that VeriChip and Steel Vault received from their
respective financial advisors, please refer to “The
Merger — Opinion of Financial Advisor to the VeriChip
Special Committee” and “The Merger — Opinion
of Financial Advisor to the Steel Vault Special Committee.”
Industry
and Business Risks Related To VeriChip and Its
Businesses
Risks
Occasioned by the Xmark Transaction
VeriChip
will be unable to compete with Xmark’s business for four
years from the date of closing.
VeriChip has agreed that, for a period of four years after the
closing of the Xmark Transaction, or July 2012, it will not
(i) directly or indirectly participate with, control or own
an interest in any entity that is engaged in the business of
manufacturing, selling, financing, supplying, marketing or
distributing infant security systems, wander prevention systems,
asset/personnel and identification systems, and vibration
monitoring instruments anywhere in the world or
(ii) solicit, induce, encourage or attempt to persuade any
employee of Xmark to terminate his or her employment
relationship with Xmark, or offer to hire any Xmark employee.
VeriChip’s remaining business, the VeriMed Health Link
business, is not deemed to compete with Xmark’s business.
However, the non-compete provisions will restrict its ability to
engage in any business that competes with Xmark’s business
until July 2012.
Risks
Related to VeriChip’s Health Link Business which Utilizes
the Implantable Microchip
VeriChip
may never achieve market acceptance or significant sales of this
system.
Through September 25, 2009, VeriChip had generated nominal
revenue from sales of the microchip inserter kits. It may never
achieve market acceptance or more than nominal or modest sales
of this system. Following the merger and in execution of its
combined PositiveID business plan, management does not currently
plan to allocate a significant amount of capital to the growth
of the implantable microchip business;
25
nonetheless, VeriChip attributes the modest number of people
who have undergone the microchip implant procedure to the
following factors:
|
|
|
|
|
|
•
|
Many people who fit the profile for which the VeriMed Health
Link system was designed may not be willing to have a microchip
implanted in their upper right arm.
|
|
|
|
|
•
|
Physicians may be reluctant to discuss the implant procedure
with their patients until a greater number of hospital emergency
rooms have adopted the VeriMed Health Link system as part of
their standard protocol.
|
|
|
|
|
•
|
Physicians may be reluctant to discuss the implant procedure
with their patients because of the cost to their patients.
|
|
|
|
|
•
|
The media has from time to time reported, and may continue to
report, on the VeriMed Health Link system in an unfavorable and,
on occasion, an inaccurate manner. For example, there have been
articles published asserting, despite at least one study to the
contrary, that the implanted microchip is not magnetic resonance
imaging, or MRI, compatible. There have also been articles
published asserting, despite numerous studies to the contrary,
that the implanted microchip causes malignant tumor formation in
laboratory animals.
|
|
|
|
|
•
|
Privacy concerns may influence individuals to refrain from
undergoing the implant procedure or dissuade physicians from
recommending the VeriMed Health Link system to their patients.
Misperceptions that a microchip-implanted person can be
“tracked” and that the microchip itself contains a
person’s basic information, such as name, contact
information, and personal health records, may contribute to such
concerns.
|
|
|
|
|
•
|
Misperceptions
and/or
negative publicity may prompt legislative or administrative
efforts by politicians or groups opposed to the development and
use of human-implantable RFID microchips. The Pennsylvania
legislature is considering a law addressing implantable chips
and consumer privacy concerns. The states of Wisconsin,
California, Oklahoma and North Dakota have adopted laws
prohibiting chip implantation without the recipient’s prior
consent. While we support all pending and enacted legislation
that would preclude anything other than voluntary implantation,
legislative bodies or government agencies may determine to go
further, and their actions may have the effect, directly or
indirectly, of delaying, limiting or preventing the use of
human-implantable RFID microchips or the sale, manufacture or
use of RFID systems utilizing such microchips.
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At present, the cost of the microchip implant procedure is not
covered by Medicare, Medicaid or private health insurance.
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At present, no studies to assess the impact of the VeriMed
Health Link system on the quality of emergency department care
have been completed and publicly released.
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VeriChip does not expect to generate revenue from its VeriMed
Health Link business over the next 12 to 18 months.
VeriChip’s VeriMed Health Link business generated gross
sales of $76,000 in 2007 and $43,000 in 2008. VeriChip is
currently focused on the development of its Health Link personal
health record business, the development of the virus triage
detection system and the
in vivo
glucose-sensing RFID
microchip, as well as the development of other sensor
applications, and is considering and will review other strategic
opportunities. However, there can be no assurance that VeriChip
will be able to successfully implement such options or strategic
alternatives.
26
In the
past, VeriChip has failed to meet applicable Nasdaq Stock Market
requirements and was subject to delisting by the Nasdaq Stock
Market. If delisting were to occur in the future, it would
adversely affect the market liquidity of its common stock and
harm its businesses.
On October 21, 2008, VeriChip received a letter from Nasdaq
indicating that it is not in compliance with the Nasdaq’s
requirements for continued listing because, for the 30
consecutive business days prior to October 16, 2008, the
bid price of its common stock closed below the minimum $1.00 per
share price requirement for continued listing under Nasdaq
Marketplace Rule 5450 (the “Rule”) and, its
common stock had not maintained a minimum market value of
publicly held shares (“MVPHS”) of $5 million as
required for continued inclusion by the Rule. On
November 17, 2008, VeriChip received a notice from Nasdaq
indicating that its stockholders’ equity at
September 30, 2008 was less than the $10 million in
stockholders’ equity required for continued listing on The
Nasdaq Global Market under Marketplace Rule 5450(b)(1)(A).
In its notice, Nasdaq requested that VeriChip provide its plan
to achieve and sustain compliance with the continued listing
requirements of The Nasdaq Global Market, including the minimum
stockholders’ equity requirement, before December 2,
2008, which VeriChip complied with. On February 27, 2009,
it filed an application to transfer the listing of its common
stock from the Nasdaq Global Market to the Nasdaq Capital Market.
On March 5, 2009, VeriChip received a notice from Nasdaq
indicating that it had not evidenced compliance with the
$10 million in stockholders’ equity requirement for
continued listing on the Nasdaq Global Market under Marketplace
Rule 5450(b)(1)(A), and that it did not meet the
requirements for continued listing on The Nasdaq Capital Market
because its stockholders’ equity at December 31, 2008
of $2.4 million was below the $2.5 million requirement
under Marketplace Rule 5550(b). As a result, its securities
are subject to delisting. VeriChip appealed the Nasdaq
staff’s determination and requested an oral hearing before
a Nasdaq Listing Qualifications Panel, which took place on
April 23, 2009 and temporarily stayed the delisting of its
common stock. On May 27, 2009, the Nasdaq Hearings Panel
granted its request to remain listed on The Nasdaq Stock Market
and its request to transfer to The Nasdaq Capital Market,
effective May 29, 2009. On July 24, 2009, VeriChip
received a letter from Nasdaq advising that it is in compliance
with all applicable continued listing standards. Additionally,
as of the date of this joint proxy statement/prospectus,
VeriChip meets The Nasdaq Capital Market MVPHS requirement of
$1 million.
On September 30, 2009, VeriChip received a letter from
Nasdaq indicating that, since the closing bid price of
VeriChip’s common stock had been at $1.00 per share or
greater for at least ten consecutive business days, VeriChip had
regained compliance with the Rule. However, there is no
assurance that VeriChip will be able to maintain compliance with
the Nasdaq’s requirements for continued listing in the
future.
If VeriChip did not regain compliance with the Rule by
January 29, 2010, the Nasdaq staff would have provided
written notification that VeriChip’s securities would be
delisted. At that time, VeriChip could have appealed the Nasdaq
staff’s determination to delist its securities to a Listing
Qualifications Panel.
If VeriChip’s common stock were delisted from the Nasdaq
Stock Market, trading of its common stock most likely would be
conducted in the over-the-counter market on an electronic
bulletin board established for unlisted securities, such as the
OTC Bulletin Board. Delisting would adversely affect the
market liquidity of its common stock and harm VeriChip’s
business and may hinder or delay its ability to consummate
potential strategic transactions or investments. Such delisting
could also adversely affect VeriChip’s ability to obtain
financing for the continuation of its operations and could
result in the loss of confidence by investors, suppliers and
employees.
Implantation
of VeriChip’s implantable microchip may be found to cause
risks to a person’s health, which could adversely affect
sales of its systems that incorporate the implantable
microchip.
The implantation of VeriChip’s implantable microchip may be
found, or be perceived, to cause risks to a person’s
health. Potential or perceived risks include adverse tissue
reactions, migration of the microchip and infection from
implantation. There have been articles published asserting,
despite numerous studies to the contrary, that the implanted
microchip causes malignant tumor formation in laboratory
animals. As more people are implanted with VeriChip’s
implantable microchip, it is possible that these and other risks
to health
27
will manifest themselves. Actual or perceived risks to a
person’s health associated with the microchip implantation
process could constrain its sales of the VeriMed Health Link
system or result in costly and expensive litigation. Further,
the potential resultant negative publicity could damage its
business reputation, leading to loss in sales of VeriChip’s
other systems targeted at the healthcare market which would harm
its business and negatively affect its prospects.
If
VeriChip is required to effect a recall of its implantable
microchip, its reputation could be materially and adversely
affected and the cost of any such recall could be substantial,
which could adversely affect its results of operations and
financial condition.
From time to time, implanted devices have become subject to
recall due to safety, efficacy, product failures or other
concerns. To date, VeriChip has not had to recall any of its
implantable microchips. However, if, in the future, it is
required to effect such a recall, the cost of the recall, and
the likely related loss of system sales, could be substantial
and could materially and adversely affect VeriChip’s
results of operations and financial condition. In addition, any
such recall could materially adversely affect its reputation and
its ability to sell its systems that make use of the implantable
microchip which would harm its business and negatively affect
its prospects.
Interruptions
in access to, or the hacking into, VeriChip’s VeriMed
Health Link patient information database may have a negative
impact on its revenue, damage its reputation and expose VeriChip
to litigation.
Reliable access to the VeriMed Health Link patient information
database is a key component of the functionality of
VeriChip’s VeriMed Health Link system. Its ability to
provide uninterrupted access to the database, whether operated
by it or one or more third parties with whom VeriChip contracts,
will depend on the efficient and uninterrupted operation of the
computer and communications systems involved. Although certain
elements of technological, power, communications, personnel and
site redundancy are maintained, the database may not be fully
redundant. Further, the database may not function properly if
certain necessary third-party systems fail, or if some other
unforeseen act or natural disaster should occur. In the past,
VeriChip has experienced short periods during which the database
was inaccessible as a result of development work, system
maintenance and power outages. Any disruption of the database
services, computer systems or communications networks, or those
of third parties that we rely on, could result in the inability
of users to access the database for an indeterminate period of
time. This, in turn, could cause VeriChip to lose the confidence
of the healthcare community and persons who have undergone the
microchip implant procedure, resulting in a loss of revenue and
possible litigation.
In addition, if the firewall software protecting the information
contained in VeriChip’s database fails or someone is
successful in hacking into the database, it could face damage to
its business reputation and litigation.
Regulation
of products and services that collect personally-identifiable
information or otherwise monitor an individual’s activities
may make the provision of VeriChip’s services more
difficult or expensive and could jeopardize its growth
prospects.
Certain technologies that VeriChip currently, or may in the
future, support are capable of collecting
personally-identifiable information. A growing body of laws
designed to protect the privacy of personally-identifiable
information, as well as to protect against its misuse, and the
judicial interpretations of such laws, may adversely affect the
growth of VeriChip’s business. In the U.S., these laws
include the Health Insurance Portability and Accountability Act,
or HIPAA, the Federal Trade Commission Act, the Electronic
Communications Privacy Act, the Fair Credit Reporting Act, and
the Gramm-Leach-Bliley Act, as well as various state laws and
related regulations. Although VeriChip is not a covered entity
under HIPAA, it has entered into agreements with certain covered
entities in which it is considered to be a “business
associate” under HIPAA. As a business associate, VeriChip
is required to implement policies, procedures and reasonable and
appropriate security measures to protect individually
identifiable health information it receives from covered
entities.
28
VeriChip’s failure to protect health information received
from customers could subject it to liability and adverse
publicity, and could harm its business and impair its ability to
attract new customers.
In addition, certain governmental agencies, like the
U.S. Department of Health and Human Services and the
Federal Trade Commission, have the authority to protect against
the misuse of consumer information by targeting companies that
collect, disseminate or maintain personal information in an
unfair or deceptive manner. VeriChip is also subject to the laws
of those foreign jurisdictions in which it operates, some of
which currently have more protective privacy laws. If VeriChip
fails to comply with applicable regulations in this area, its
business and prospects could be harmed.
Certain regulatory approvals generally must be obtained from the
governments of the countries in which its foreign distributors
sell its systems. However, any such approval may be subject to
significant delays or may not be obtained. Any actions by
regulatory agencies could materially and adversely affect
VeriChip’s growth plans and the success of its business.
If
VeriChip fails to comply with anti-kickback and false claims
laws, it could be subject to costly and time-consuming
litigation and possible fines or other penalties.
VeriChip is, or may become subject to, various federal and state
laws designed to address healthcare fraud and abuse, including
anti-kickback laws and false claims laws. The federal
anti-kickback statute prohibits the offer, payment, solicitation
or receipt of any form of remuneration in return for referring
items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. This statute also prohibits
remuneration in return for purchasing, leasing or ordering or
arranging, or recommending the purchasing, leasing or ordering,
of items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. The anti-kickback laws of
various states apply more broadly to prohibit remuneration in
return for referrals of business payable by payers other than
federal healthcare programs.
False claims laws prohibit anyone from knowingly presenting, or
causing to be presented, for payment to third-party payers,
including Medicare and Medicaid, which currently do not provide
reimbursement for its microchip implant procedure, claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services. VeriChip’s
activities relating to the reporting of wholesale or estimated
retail prices of its VeriMed Health Link system, the reporting
of Medicaid rebate information, and other information affecting
federal, state and third-party payment for the VeriMed Health
Link system, if such payment becomes available, will be subject
to scrutiny under these laws.
The anti-kickback statute and other fraud and abuse laws are
very broad in scope, and many of their provisions have not been
uniformly or definitively interpreted by existing case law or
regulations. Violations of the anti-kickback statute and other
fraud and abuse laws may be punishable by criminal
and/or
civil
sanctions, including fines and civil monetary penalties, as well
as the possibility of exclusion from federal healthcare
programs, including Medicare and Medicaid, which currently do
not provide reimbursement for our microchip implant procedure.
VeriChip has not been challenged by a governmental authority
under any of these laws and believes that its operations are in
compliance with such laws. However, because of the far-reaching
nature of these laws, it may be required to alter one or more of
its practices to be in compliance with these laws. Healthcare
fraud and abuse regulations are complex and even minor,
inadvertent irregularities in submissions can potentially give
rise to claims that the statute has been violated. If VeriChip
is found to have violated these laws, or are charged with
violating them, our business, financial condition and results of
operations could suffer, and its management team could be
required to dedicate significant time and resources addressing
the actual or alleged violations.
29
Risks
Related to VeriChip’s Product Development Efforts
VeriChip
and its development partner Receptors LLC are in the early
stages of developing a virus triage detection system for the
H1N1 virus and an
in
vivo
glucose-sensing RFID microchip, the effectiveness of
both of which is unproven.
VeriChip and its development partner Receptors LLC, or
Receptors, are engaged in the research and development of
applying Receptors’ patented AFFINITY by
DESIGN
tm
CARA
tm
platform to the detection and classification of pandemic threat
viruses, such as the H1N1 virus, as well as the research and
development of an
in vivo
glucose-sensing RFID microchip.
The effectiveness of this detection system and the effectiveness
of this sensor/microchip system are yet to be determined. As a
result, there can be no assurance that VeriChip and Receptors
will be able to successfully employ these development-stage
products as diagnostic solutions for either the detection of
strains of influenza and other viruses or for the detection of
glucose
in vivo
. Any failure to establish the efficacy or
safety of these development-stage products could have a material
adverse effect on VeriChip’s business, results of
operations, and financial condition.
VeriChip’s
product research and development activities may not result in a
commercially-viable virus triage detection system or in a
commercially-viable
in
vivo
glucose-sensing RFID microchip.
Both products are in the early stages of development. Both the
virus triage detection system and the
in vivo
glucose-sensing RFID microchip are therefore prone to the risks
of failure inherent in diagnostic product development. VeriChip
and Receptors may be required to complete and undertake
significant clinical trials to demonstrate to the U.S. Food
and Drug Administration, or FDA, that these products are safe
and effective to the satisfaction of the FDA and other
non-United
States regulatory authorities or for their respective, intended
uses, or are substantially equivalent in terms of safety and
effectiveness to existing, lawfully-marketed, non-premarket
approved devices. Clinical trials are expensive and uncertain
processes that often take years to complete. Failure can occur
at any stage of the process, and successful early positive
results do not ensure that the entire clinical trial or later
clinical trials will be successful. Product candidates in
clinical-stage trials may fail to show desired efficacy and
safety traits despite early promising results. If the research
and development activities of VeriChip and Receptors do not
result in commercially-viable products, VeriChip’s
business, results of operations, financial condition, and stock
price could be adversely affected.
Even if the FDA or similar
non-United
States regulatory authorities grant VeriChip regulatory approval
of a product, the approval may take longer than VeriChip
anticipates and may be subject to limitations on the indicated
uses for which the product may be marketed or contain
requirements for costly post-marketing follow up studies.
Moreover, if VeriChip fails to comply with applicable regulatory
requirements, VeriChip may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution.
The
success and timing of development efforts, clinical trials,
regulatory approvals, product introductions, collaboration and
licensing arrangements, any termination of development efforts
and other material events could cause volatility in our stock
price.
Volatility in VeriChip’s stock price will depend on many
factors, including:
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success of the development partnership between VeriChip and
Receptors and related development costs;
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success and timing of regulatory filings and approvals for the
virus triage detection system and the
in vivo
glucose-sensing RFID microchip;
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success and timing of commercialization and product
introductions of the virus triage detection system and the
in
vivo
glucose-sensing RFID microchip;
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introduction of competitive products into the market;
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results of clinical trials for the virus triage detection system
and the
in vivo
glucose-sensing RFID microchip;
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a finding that Receptors’ patented AFFINITY by
DESIGN
tm
CARA
tm
platform is invalid or unenforceable;
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a finding that the virus triage detection system or the
in
vivo
glucose-sensing RFID microchip infringes the patents of
a third party;
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payment of any royalty payments under licensing agreements;
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unfavorable publicity regarding VeriChip, Receptors, or either
of the companies’ products or competitive products;
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termination of development efforts for the virus triage
detection system;
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timing of expenses VeriChip may incur with respect to any
license or acquisition of products or technologies; and
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termination of development efforts of any product under
development or any development or collaboration agreement.
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VeriChip
anticipates future losses and may require additional financing,
and VeriChip’s failure to obtain additional financing when
needed could force VeriChip to delay, reduce or eliminate
VeriChip’s product development programs or
commercialization efforts.
VeriChip anticipates future losses and therefore may be
dependent on additional financing to execute its business plan.
Although VeriChip currently has the funding needed to pay for
the planned development of its current projects, its plans for
expansion may still require additional financing. In particular,
VeriChip may require additional capital in order to continue to
conduct the research and development and obtain regulatory
clearances and approvals necessary to bring any future products
to market and to establish effective marketing and sales
capabilities for existing and future products. VeriChip’s
operating plan may change, and it may need additional funds
sooner than anticipated to meet its operational needs and
capital requirements for product development, clinical trials
and commercialization. Additional funds may not be available
when VeriChip needs them on terms that are acceptable to
VeriChip, or at all. If adequate funds are not available on a
timely basis, VeriChip may terminate or delay the development of
one or more of its products, or delay establishment of sales and
marketing capabilities or other activities necessary to
commercialize its products. Therefore, VeriChip does not know
whether any planned development phases or clinical trials for
the virus triage detection system or the
in vivo
glucose-sensing RFID microchip will be completed on schedule, or
at all. Furthermore, VeriChip cannot guarantee that any planned
development phases or clinical trials will begin on time or at
all.
VeriChip’s future capital requirements will depend on many
factors, including: the costs of expanding VeriChip’s sales
and marketing infrastructure and manufacturing operations; the
degree of success VeriChip experiences in developing and
commercializing the virus triage detection system and the
in
vivo
glucose-sensing RFID microchip; the number and types of
future products VeriChip develops and commercializes; the costs,
timing and outcomes of regulatory reviews associated with
VeriChip’s current and future product candidates; the costs
of preparing, filing and prosecuting patent applications and
maintaining, enforcing and defending intellectual
property-related claims; and the extent and scope of
VeriChip’s general and administrative expenses.
VeriChip’s
future product development efforts may not yield marketable
products due to results of studies or trials, failure to achieve
regulatory approvals or market acceptance, proprietary rights of
others or manufacturing issues.
Development of a product candidate requires substantial
technical, financial and human resources. VeriChip’s
potential product candidates may appear to be promising at
various stages of development yet fail to timely reach the
market for a number of reasons, including: the lack of adequate
quality or sufficient prevention benefit, or unacceptable safety
during preclinical studies or clinical trials; VeriChip’s
or its collaborative development partners’ failure to
receive necessary regulatory approvals on a timely basis, or at
31
all; the existence of proprietary rights of third parties; or
the inability to develop manufacturing methods that are
efficient, cost-effective and capable of meeting stringent
regulatory standards.
VeriChip’s
industry changes rapidly as a result of technological and
product developments, which may quickly render VeriChip’s
product candidates less desirable or even obsolete. If VeriChip
is unable or unsuccessful in supplementing its product
offerings, its revenue and operating results may be materially
adversely affected.
The industry in which VeriChip operates is subject to rapid
technological change. The introduction of new technologies in
the market, including the delay in the adoption of these
technologies, as well as new alternatives for the delivery of
products and services will continue to have a profound effect on
competitive conditions in this market. VeriChip may not be able
to develop and introduce new products, services and enhancements
that respond to technological changes on a timely basis. If
VeriChip’s product candidates are not accepted by the
market as anticipated, if at all, VeriChip’s business,
operating results, and financial condition may be materially and
adversely affected.
If
VeriChip and Receptors are unable to develop and later market
the product candidates in a timely manner or at all, or if
competitors develop or introduce similar products that achieve
commercialization before the product candidates enter the
market, the demand for the product candidates may decrease or
the product candidates could become obsolete.
The product candidates will operate in competitive markets,
where competitors may already be well established. VeriChip
expects that competitors will continue to innovate and to
develop and introduce similar products that could be competitive
in both price and performance. Competitors may succeed in
developing or introducing similar products earlier than VeriChip
and Receptors, obtaining regulatory approvals and clearances for
such products before the product candidates are approved and
cleared, or developing more effective products. In addition,
competitors may have products that have already been approved or
are in a stage of advanced development, which may achieve
commercialization before the product candidates enter the market.
If a competitor’s products reach the market before the
product candidates, they may gain a competitive advantage
,
impair the ability of VeriChip and Receptors to
commercialize the product candidates, or render the product
candidates obsolete. There can be no assurance that developments
by competitors will not render the product candidates obsolete
or noncompetitive. VeriChip’s financial performance may be
negatively impacted if a competitor’s successful product
innovation reaches the market before the product candidates or
gains broader market acceptance.
VeriChip believes that the product candidates have certain
technological advantages, but maintaining these advantages will
require continual investment in research and development, and
later in sales and marketing. There is no guarantee that
VeriChip and Receptors will be successful in maintaining these
advantages. Nor is there any guarantee that VeriChip and
Receptors will be successful in completing development of the
product candidates in any clinical trials or in achieving sales
of the product candidates, or that future margins on such
products will be acceptable.
Risks
Related to the Establishment of VeriChip’s Subsidiary,
VeriGreen Energy Corporation
VeriChip
intends to develop a renewable energy business, a line of
business in which it has limited experience, from which it may
never recover our investment or realize a profit.
In March 2009, after several months of examining a variety of
opportunities in the energy sector, VeriChip established a
subsidiary, VeriGreen Energy Corporation. Following the
enactment of the American Recovery and Reinvestment Act of 2009,
which will invest nearly $79 billion in renewable energy,
energy efficiency and green transportation, VeriChip intends to
invest in clean and alternative energy businesses to complement
its existing healthcare initiatives.
32
VeriChip has limited experience in the renewable energy sector.
In addition to its capital investment, its management’s
focus will also be directed towards this new business. VeriChip
presently, and will likely continue to be for some time, able to
rely only upon its current management and directors for
assistance in executing its business plan. While these
individuals are highly experienced in business generally they
have limited experience in the renewable energy industry. This
lack of experience may hinder VeriChip’s ability to fully
implement its business plan in a timely and cost efficient
manner, which, in turn, may adversely affect its potential
success and profitability. There can be no assurance that it
will recover its investment in this new business, that it will
realize a profit from this new business or that diverting its
management’s attention to this new business will not have
an adverse effect on VeriChip’s existing VeriMed Health
Link business, any of which results may have an adverse effect
on its results of operations, financial condition and prospects.
Industry
and Business Risks Related to Steel Vault and Its
Businesses
Steel
Vault has a history of losses, and expects to incur additional
losses in the future. Steel Vault is unable to predict the
extent of future losses or when it will become
profitable.
For the years ended September 30, 1999 through
September 30, 2008, Steel Vault experienced operating
losses and as of September 30, 2008 its accumulated deficit
was $5.0 million. Steel Vault expects to continue to incur
operating losses for the near future. Its ability in the future
to achieve or sustain profitability is based on a number of
factors, many of which are beyond its control. Even if it
achieves profitability in the future, it may not be able to
sustain profitability in subsequent periods.
Steel
Vault is unable to control many of the factors affecting
consumer spending, and declines in consumer spending could
reduce demand for Steel Vault’s products.
Steel Vault’s business depends on consumer demand for its
products and, consequently, is sensitive to a number of factors
that influence consumer spending, including general economic
conditions, disposable consumer income, fuel prices, recession
and fears of recession, war and fears of war, inclement weather,
consumer debt, conditions in the housing market, interest rates,
sales tax rates and rate increases, inflation, consumer
confidence in future economic conditions and political
conditions, and consumer perceptions of personal well-being and
security. In particular, an economic downturn leads to decreased
discretionary spending, which adversely impacts Steel
Vault’s business. Adverse changes in factors affecting
discretionary consumer spending could reduce consumer demand for
its products, thus reducing its sales and harming its business
and operating results.
Steel
Vault must obtain the subscribers it loses in the ordinary
course of business and, if it fails to do so, its revenue and
subscriber base will decline.
A substantial number of subscribers to Steel Vault’s
consumer products and services cancel their subscriptions each
year. Cancellations may occur due to numerous factors, including:
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changing subscriber preferences;
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competitive price pressures;
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general economic conditions;
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subscriber dissatisfaction;
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cancellation of subscribers due to credit card declines; and
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credit or charge card holder turnover.
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If Steel Vault fails to replace subscribers to its consumer
products and services it loses in the ordinary course of
business, its revenue may decline, causing a material adverse
impact on the results of its operations. There can be no
assurance that it can successfully replace the large number of
subscribers that cancel each year.
33
Marketing
laws and regulations may materially limit Steel Vault’s or
its clients’ ability to offer Steel Vault’s products
and services to consumers.
Steel Vault markets its consumer products and services through a
variety of marketing channels, including direct mail, outbound
telemarketing, inbound telemarketing, inbound customer service
and account activation calls, email, mass media and the
internet. These channels are subject to both federal and state
laws and regulations. Federal and state laws and regulations may
limit its ability to market to new subscribers or offer
additional services to existing subscribers, which may have a
material impact on Steel Vault’s ability to sell its
services.
If
Steel Vault loses its ability to purchase data from any of the
three major credit reporting repositories, which it is able to
do through the three credit data resellers to whom they sell,
each of which is a competitor of Steel Vault, demand for its
services would decrease.
Steel Vault relies on the three major credit reporting
repositories, Equifax, Experian and TransUnion, to provide it
with essential data for its consumer identity theft protection
and credit management services, through its contract with
Equidata, Inc. Its agreement with Equidata, Inc. expires in
October 2009. That agreement may be terminated by them on
30 days’ notice in certain circumstances. Each of the
three major credit reporting repositories owns its consumer
credit data and is a competitor of Steel Vault in providing
credit information directly to consumers, and may decide that it
is in their competitive interests to stop indirectly supplying
data to Steel Vault. Any interruption, deterioration or
termination of Steel Vault’s relationship with Equidata,
Inc., one of its two competitors, or one or more of the three
credit reporting repositories would be disruptive to Steel
Vault’s business and could cause Steel Vault to lose
subscribers.
Steel
Vault’s competitors, including those who have greater
resources and experience than Steel Vault does, may
commercialize technologies that make Steel Vault’s obsolete
or noncompetitive.
There are many public and private companies, actively engaged in
Steel Vault’s line of business and that target the same
markets that it targets. Some of Steel Vault’s current
competitors have significantly greater financial, marketing and
product development resources than Steel Vault does. Low
barriers to entry into its line of business may result in new
competitors entering the markets Steel Vault serves. If Steel
Vault’s competitors market products that are more effective
and less expensive than its products, Steel Vault may not be
able to achieve commercial success.
Steel
Vault’s long-term capital needs may require additional
sources of capital, and there can be no assurances that it will
be successful in negotiating additional sources of long-term
capital.
Steel Vault’s long-term capital needs may require
additional sources of equity or credit. There can be no
assurances that it will be successful in negotiating additional
sources of equity or credit for its long-term capital needs.
Steel Vault’s inability to have continuous access to such
financing at reasonable costs could materially and adversely
impact its financial condition, results of operations and cash
flows.
Additionally, Steel Vault is a publicly-traded company and its
stock is traded on National Association of Securities Dealers,
Inc.’s OTC Bulletin Board, where there is limited
visibility in the investment community. Moreover, Steel
Vault’s share volume averaged less than 5,000 shares
per day during its fiscal year ended September 30, 2008.
Raising equity capital could therefore be challenging for Steel
Vault. Any limitations on its ability to raise equity capital
could significantly impact its ability to fund its operations or
undertake future growth through expansion or acquisition.
Steel
Vault depends on key personnel to manage its business
effectively, and, if it is unable to hire, retain or motivate
qualified personnel, its ability to design, develop, market and
sell its systems could be harmed.
Steel Vault’s future success depends, in part, on certain
key employees, including William J. Caragol, its chief executive
officer, president and acting chief financial officer, as well
as the chairman of its board of directors, and
34
key technical and operations personnel, and on Steel
Vault’s ability to attract and retain highly skilled
personnel. The loss of the services of any of its key personnel
may seriously harm its business, financial condition and results
of operations. In addition, the inability to attract or retain
qualified personnel, or delays in hiring required personnel,
particularly operations, finance, accounting, sales and
marketing personnel, may also seriously harm its business,
financial condition and results of operations. Steel
Vault’s ability to attract and retain highly skilled
personnel will be a critical factor in determining whether we
will be successful in the future.
Directors,
executive officers, principal stockholders and affiliated
entities own a significant percentage of Steel Vault’s
capital stock, and they may make decisions that you do not
consider to be in the best interests of its
stockholders.
As of September 25, 2009, Steel Vault’s current
directors and executive officer beneficially owned, in the
aggregate, approximately 68.6% of Steel Vault’s outstanding
voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial
influence over the election of the board of directors and the
outcome of issues requiring approval by Steel Vault’s
stockholders. This concentration of ownership may also have the
effect of delaying or preventing a change in control of Steel
Vault that may be favored by other stockholders. This could
prevent transactions in which stockholders might otherwise
recover a premium for their shares over current market prices.
Conflicts
of interest may arise between Blue Moon Energy Partners, LLC and
Steel Vault that could be resolved in a manner unfavorable to
Steel Vault.
Questions relating to conflicts of interest may arise between
Blue Moon and Steel Vault, in a number of areas relating to
their ongoing relationships. As of September 25, 2009, Blue
Moon beneficially owned 30.2% of Steel Vault’s outstanding
common stock. Currently, Scott R. Silverman, Steel Vault’s
chairman of the board, is a manager of Blue Moon and controls a
member of Blue Moon and William J. Caragol, Steel Vault’s
chief executive officer, president and acting chief financial
officer, is a manager and member of Blue Moon.
The equity interests of Steel Vault’s directors and
executive officers in Blue Moon could create, or appear to
create, conflicts of interest when directors are faced with
decisions that could have different implications for the two
companies. For example, these decisions could relate to, among
other matters, the desirability of a potential acquisition or
joint venture opportunity or employee retention or recruiting.
Compliance
with changing regulations concerning corporate governance and
public disclosure may result in additional
expenses.
There have been changing laws, regulations and standards
relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act, new regulations promulgated by
the SEC and rules promulgated by the national securities
exchanges and the NASDAQ. These new or changed laws, regulations
and standards are subject to varying interpretations in many
cases due to their lack of specificity, and, as a result, their
application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result
in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, Steel Vault’s efforts to
comply with evolving laws, regulations and standards are likely
to continue to result in increased general and administrative
expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. Steel
Vault’s board members and executive officers could face an
increased risk of personal liability in connection with the
performance of their duties. As a result, Steel Vault may have
difficulty attracting and retaining qualified board members and
executive officers, which could harm its business. If Steel
Vault’s efforts to comply with new or changed laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies, it could be subject to liability
under applicable laws or its reputation may be harmed.
35
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus may contain
“forward-looking statements” about VeriChip and Steel
Vault and their businesses within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs
and assumptions of the management of VeriChip and Steel Vault,
based on information currently available to each company’s
management. When words such as “believes,”
“expects,” “anticipates,”
“intends,” “plans,” “estimates,”
“should,” “likely” or similar expressions
are used, VeriChip and Steel Vault are making forward-looking
statements. Forward-looking statements also include the
information concerning possible or assumed future results of
operations of VeriChip and Steel Vault set forth under
“Summary,” “Risk Factors,” “The
Merger — Background of the Merger,” “The
Merger — VeriChip’s Reasons for the Merger,”
“The Merger — Steel Vault’s Reasons for the
Merger,” “The Merger — Recommendations of
the VeriChip Special Committee and Board of Directors,” and
“The Merger — Recommendations of the Steel Vault
Special Committee and Board of Directors.” All statements
other than statements of historical fact are statements that
could be deemed forward-looking statements, including any
projections of earnings, revenues, synergies, accretion, margins
or other financial items; any statements of the plans,
strategies and objectives of management for future operations,
including the execution of integration and restructuring plans
and the anticipated timing of filings, approvals and closings
relating to the merger or other planned acquisitions; any
statements regarding the benefits, synergies and costs of the
merger; any statements concerning proposed new products,
services, developments or industry rankings; any statements
regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions
underlying any of the foregoing.
Forward-looking statements are not guarantees of performance.
They involve risks, uncertainties and assumptions. The future
results and stockholder values of VeriChip and Steel Vault may
differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these
results and values are beyond VeriChip’s and Steel
Vault’s ability to control or predict. Stockholders are
cautioned not to put undue reliance on any forward-looking
statements. For those statements, VeriChip and Steel Vault claim
the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of
1995.
For a discussion of the most important factors that may cause
actual results to differ materially from those suggested by the
forward-looking statements, please read carefully the
information under “Risk Factors.”
You should read this joint proxy statement/prospectus and the
other documents referred to in this joint proxy
statement/prospectus completely and with the understanding that
actual future results could materially differ from those
anticipated in these forward-looking statements as a result of a
number of factors, including the risk factors described above.
All forward-looking statements attributable to VeriChip and
Steel Vault are expressly qualified by these cautionary
statements. VeriChip and Steel Vault disclaim any obligation to
update any forward-looking statements to reflect events or
circumstances after the date of this joint proxy
statement/prospectus except as required by law.
36
THE
SPECIAL AND ANNUAL MEETING OF VERICHIP STOCKHOLDERS
General
VeriChip is furnishing this joint proxy statement/prospectus to
holders of VeriChip common stock to provide its stockholders
with important information in connection with the solicitation
of proxies for use at the special meeting of VeriChip
stockholders and at any adjournment or postponement of the
special meeting. This includes information regarding the
proposed (i) approval of the issuance of shares of VeriChip
common stock pursuant to the merger agreement,
(ii) approval and adoption of an amendment to
VeriChip’s second amended and restated certificate of
incorporation to change VeriChip’s name to “PositiveID
Corporation” at the effective time of the merger,
(iii) approval and adoption an amendment to VeriChip’s
certificate of incorporation to increase the total number of
authorized shares of VeriChip capital stock from 45 million
shares, of which 40 million shares are common stock, to
75 million shares, of which 70 million shares will be
common stock, (iv) election of five directors to hold
office until the 2010 Annual Meeting of Stockholders and until
their successors have been duly elected and qualified,
(v) approval and adoption of the VeriChip Corporation 2009
Stock Incentive Plan, (vi) approval of the potential
issuance of shares of VeriChip common stock in excess of 19.99%
of VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock,
(vii) ratification of the appointment of Eisner LLP as
VeriChip’s independent registered public accounting firm
for the year ended December 31, 2009, and
(viii) approval of an adjournment or postponement of the
special and annual meeting, if necessary.
VeriChip first mailed this joint proxy statement/prospectus and
the accompanying form of proxy to its stockholders on or about
October 5, 2009.
Date,
Time and Place of VeriChip Special and Annual Meeting
VeriChip will hold a special and annual meeting of its
stockholders on November 10, 2009, at 9:00 a.m.,
Eastern Standard Time, at VeriChip’s principal executive
offices located at 1690 South Congress Avenue, Suite 200,
Delray Beach, Florida 33445.
Purpose
VeriChip
Proposal 1: Approval of the Issuance of VeriChip Common
Stock Pursuant to the Merger Agreement
On September 4, 2009, the board of directors of VeriChip
adopted resolutions approving the issuance of shares of VeriChip
common stock in connection with the merger with Steel Vault.
These shares will not be issued unless the merger is completed.
As of September 25, 2009, Scott R. Silverman,
VeriChip’s chief executive officer and executive chairman
and Steel Vault’s chairman, beneficially owned, directly or
indirectly, 49.4% of VeriChip’s outstanding common stock
and 53.7% of Steel Vault’s outstanding common stock. In
connection with the merger, VeriChip will acquire all of the
outstanding shares of common stock of Steel Vault. After the
merger, Steel Vault will be a wholly-owned subsidiary of
VeriChip. This share issuance proposal is being submitted for
approval by the stockholders of VeriChip pursuant to the
requirements of the Nasdaq Stock Market, LLC applicable to
companies with securities quoted on the Nasdaq Capital Market.
A copy of the merger agreement, as amended, is attached to this
joint proxy statement/prospectus as
Annex A-1
and
Annex A-2.
VeriChip stockholders are encouraged to read the merger
agreement, as amended, in its entirety. For a detailed summary
of the merger agreement, as amended, please see the section of
this joint proxy statement/prospectus entitled “The Merger
Agreement” beginning on page 91.
Vote
Required
The affirmative vote of a majority of the votes cast by the
VeriChip stockholders present in person or represented by proxy
at the special and annual meeting and entitled to vote thereon,
is required to approve the issuance of shares of VeriChip common
stock pursuant to the merger. Abstentions and broker non-votes
have no effect on the outcome of this proposal.
37
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
the issuance of VeriChip common stock in
connection with the merger with Steel Vault.
VeriChip
Proposal 2: Approval and Adoption of an Amendment to the
Second Amended and Restated Certificate of Incorporation of
VeriChip to Change VeriChip’s Name to “PositiveID
Corporation” at the Effective Time of the
Merger
VeriChip is asking its stockholders to approve an amendment to
VeriChip’s second amended and restated certificate of
incorporation to change the name of VeriChip from “VeriChip
Corporation” to “PositiveID Corporation” at the
effective time of the merger. The VeriChip board of directors
believes that changing VeriChip’s name will better reflect
the services to be provided by VeriChip after the completion of
the merger.
The amendment to change VeriChip’s second amended and
restated certificate of incorporation will become effective only
if the merger is completed and only after the completion of the
merger. Annex D to this joint proxy statement/prospectus
contains the form of the proposed amendment to VeriChip’s
second amended and restated certificate of incorporation, which
you are urged to read in its entirety. Approval of the VeriChip
name change proposal is not required for the completion of the
merger.
Vote
Required
Approval of this proposal requires the affirmative vote of the
holders of a majority of the voting power of all then
outstanding shares of VeriChip capital stock entitled to vote
generally in the election of directors. Abstentions and broker
non-votes have the effect of a vote against the proposal.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
the approval and adoption of an amendment
to VeriChip’s second amended and restated certificate of
incorporation to change VeriChip’s name to “PositiveID
Corporation” at the effective time of the merger.
VeriChip
Proposal 3: Approval and Adoption of an Amendment to the
Second Amended and Restated Certificate of Incorporation of
VeriChip to Increase the Total Number of Authorized Shares of
VeriChip Capital Stock from 45 Million Shares, of which 40
Million Shares Are Common Stock, to 75 Million Shares, of which
70 Million Shares Will Be Common Stock
VeriChip’s second amended and restated certificate of
incorporation provides that the total number of shares of
capital stock that VeriChip has the authority to issue is
45 million shares of capital stock, of which
40 million are common stock, par value $0.01 per share.
VeriChip’s board of directors adopted a resolution
recommending that the stockholders approve and adopt an
amendment to VeriChip’s second amended and restated
certificate of incorporation to increase the authorized number
of shares of VeriChip common stock from 40 million shares
to 70 million shares. A copy of the proposed amendment to
the certificate of incorporation is attached to this joint proxy
statement/prospectus as Annex D.
On September 25, 2009, the VeriChip record date,
approximately 13,810,628 shares of VeriChip common stock
were issued and outstanding and approximately
1,004,296 shares of VeriChip common stock were issuable
based on options and other stock-based awards. To complete the
merger, VeriChip expects that approximately
8,869,699 shares of VeriChip common stock will be required
to be issued to holders of shares of Steel Vault common stock
based on the number of outstanding shares of Steel Vault common
stock on the Steel Vault record date and assuming exercise of
all outstanding Steel Vault options, warrants and restricted
stock.
Although the shares of VeriChip common stock currently
authorized under its second amended and restated certificate of
incorporation will be sufficient to complete the merger,
VeriChip’s board of directors believes that the increased
number of authorized shares of common stock contemplated by the
proposed amendment is desirable in order that additional shares
be available for issuance from time to time, without
38
further action or authorization by the stockholders (except as
required by law), if needed for such corporate purposes as may
be determined by the board of directors. Such corporate purposes
might include the acquisition of other businesses in exchange
for shares of VeriChip stock; flexibility for possible future
financings; and attracting and retaining valuable employees and
directors by the issuance of additional stock options or other
equity awards. The board of directors considers the
authorization of additional shares advisable to ensure prompt
availability of shares for issuance should the occasion arise.
Other than the shares to be issued in connection with the
merger, VeriChip has no immediate plans, nor are there any
existing or proposed agreements or understandings to issue any
of the additional shares of common stock other than pursuant to
warrants, options, restricted stock, previously authorized by
the board of directors.
Although an increase in the authorized shares of VeriChip common
stock could, under certain circumstances, also be construed as
having an anti-takeover effect (for example, by permitting
easier dilution of the stock ownership of a person seeking to
effect a change in the composition of the board of directors or
contemplating a tender offer or other transaction resulting in
the acquisition of VeriChip by another company), the proposed
increase in shares authorized is not in response to any effort
by any person or group to accumulate VeriChip common stock or to
obtain control of VeriChip by any means. In addition, the
proposal is not part of any plan by the VeriChip board of
directors to recommend or implement a series of anti-takeover
measures.
Approval of this proposal is not required for the completion of
the merger.
Vote
Required
Approval of this proposal requires the affirmative vote of the
holders of a majority of the voting power of all then
outstanding shares of VeriChip capital stock entitled to vote
generally in the election of directors. Abstentions and broker
non-votes have the effect of a vote against the proposal.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
the approval and adoption of an amendment
to VeriChip’s second amended and restated certificate of
incorporation to increase the total number of authorized shares
of VeriChip capital stock from 45 million shares, of which
40 million shares are common stock, to 75 million
shares, of which 70 million shares will be common stock.
VeriChip
Proposal 4: Election of Five Directors to Hold Office until
the 2010 Annual Meeting of Stockholders and Until Their
Successors Have Been Duly Elected and Qualified
Pursuant to Delaware corporate law, VeriChip is required to hold
an annual meeting to elect directors. VeriChip’s board of
directors currently consists of five directors, serving until
the next Annual Meeting of Stockholders and until their
successors are elected and qualified.
As described under “The Merger — Board of
Directors of VeriChip Following the Merger” beginning on
page 88, immediately following the effective time of the merger,
the board of directors of VeriChip will consist of five members
with four individuals designated by VeriChip and one individual
designated by Steel Vault. Because the VeriChip board of
directors currently consists of five individuals, it is
anticipated that one of the members of the then-current VeriChip
board of directors will resign from the VeriChip board of
directors
and/or
will
no longer continue to serve as a director.
VeriChip’s current board members and classifications are as
follows:
|
|
|
|
|
Name
|
|
Positions with VeriChip
|
|
|
|
Scott R. Silverman
|
|
Executive Chairman of the Board and Chief Executive Officer
|
|
Jeffrey S. Cobb
|
|
Director
|
|
Barry M. Edelstein
|
|
Director
|
|
Steven R. Foland
|
|
Director
|
|
Michael E. Krawitz
|
|
Director
|
39
The terms of these five directors will expire at the 2009
special and annual meeting. The board of directors has
recommended that Scott R. Silverman, Jeffrey S. Cobb, Barry M.
Edelstein, Steven R. Foland, and Michael E. Krawitz be nominated
for re-election.
The board of directors has nominated the following individuals
for election to the board of directors to serve until the 2010
Annual Meeting of Stockholders and until their successors are
elected and qualified.
Scott R. Silverman,
45, has served as VeriChip’s
chief executive officer since August 27, 2009 and its
executive chairman since December 1, 2008. He previously
served as VeriChip’s acting president from March 2007
through May 4, 2007, as VeriChip’s chief executive
officer from December 5, 2006 through July 18, 2008,
as chairman of VeriChip’s board of directors from March
2003 through July 18, 2008 and as a member of
VeriChip’s board of directors from February 2002 through
July 18, 2008. On November 12, 2008, he was again
appointed to VeriChip’s board of directors, to serve as
chairman. He also served as VeriChip’s chief executive
officer from April 2003 to June 2004. He served as the chairman
of the board of directors of Digital Angel Corporation (formerly
known as Applied Digital Solutions, Inc.), or Digital Angel,
from March 2003 through July 3, 2007, and served as chief
executive officer of Digital Angel from March 2003 to
December 5, 2006, and as acting president of Digital Angel
from April 2005 to December 5, 2006. From March 2002 to
March 2003, he served as Digital Angel’s president and as a
member of its board of directors. From August 2001 to March
2002, he served as a special advisor to Digital Angel’s
board of directors. From September 1999 to March 2002,
Mr. Silverman operated his own private investment banking
firm. From October 1996 to September 1999, he served in various
capacities with Digital Angel, including positions related to
business development, corporate development and legal affairs.
Mr. Silverman has served as the chairman of Steel Vault,
since January 2006. Mr. Silverman is an attorney licensed
to practice in New Jersey and Pennsylvania.
Jeffrey S. Cobb,
48, has served as a member of
VeriChip’s board of directors since March 2007.
Mr. Cobb is the chief operating officer of IT —
Resource Solutions, Inc. Prior to April 2004, Mr. Cobb was
the executive vice president and chief operating officer of SCB
Computer Technology Inc. From 1998 to 2002, Mr. Cobb served
as executive vice president and chief operating officer of
Professional Services of SCB Computer Technology Inc.
Mr. Cobb served as a member on the board of directors of
Steel Vault from March 2004 through July 22, 2008.
Mr. Cobb earned his Bachelor of Science in Marketing and
Management from Jacksonville University.
Barry M. Edelstein,
46, has served as a member of
VeriChip’s board of directors since January 2008.
Mr. Edelstein serves as managing partner of Structured
Growth Capital, Inc., a boutique investment banking firm.
Mr. Edelstein served as acting president and chief
executive officer of Destron Fearing Corporation (formerly known
as Digital Angel Corporation), or Destron Fearing, from August
2007 until December 2007. Mr. Edelstein has served as
president and chief executive officer of ScentSational
Technologies, Inc. since January 2003, and is currently its
chairman. From 2000 to 2002, Mr. Edelstein was vice
president of sales and sales operations for Comcast Business
Communications Inc., where he managed the integration of Comcast
Telecommunications Inc. with two other subsidiaries and led a
team that oversaw the sales, marketing, customer care, billing
operations and supplier management function of the company.
Mr. Edelstein has a bachelor’s degree in business
administration from Drexel University and received his law
degree from Widener University School of Law.
Steven R. Foland,
50, has served as a member of
VeriChip’s board of directors since February 2008.
Mr. Foland is currently a private investor and advisor to
businesses in the United States and Asia, and has served as a
managing director and head of investment banking for Merriman
Curhan Ford & Co. from September 2005 until February
2008 and as the senior managing director and head of west coast
investment banking for ThinkEquity Partners from September 2003
until August 2005. He was previously with Morgan Stanley and
Credit Suisse in New York and Hong Kong. Mr. Foland has a
bachelor’s degree in political science from the University
of Michigan and received his law degree from the University of
Notre Dame.
Michael E. Krawitz,
40, served as the chief executive
officer and president of Digital Angel Corporation from December
2006 to December 2007. Prior to that, during his time at Digital
Angel Corporation, he served as assistant vice president and
general counsel beginning in April 1999, and was appointed vice
president and assistant secretary in December 1999, senior vice
president in December 2000, secretary in March 2003,
40
executive vice president in April 2003 and chief privacy officer
in November 2004. From 1994 to April 1999, Mr. Krawitz was
an attorney with Fried, Frank, Harris, Shriver &
Jacobson in New York. Mr. Krawitz has served as a member on
the board of directors of Steel Vault since July 23, 2008.
Mr. Krawitz earned a bachelor of arts degree from Cornell
University in 1991 and a juris doctorate from Harvard Law School
in 1994.
Each of the nominees has consented to be named in this joint
proxy statement/prospectus and to serve as a member of
VeriChip’s board of directors if elected. In the event that
a nominee withdraws or for any reason is not able to serve as a
director, the proxy will be voted for such other person as may
be designated by the board of directors, but in no event will
the proxy be voted for more than five nominees as directors.
VeriChip’s management has no reason to believe that the
nominees will not serve if elected.
Vote
Required
Approval of this proposal requires the affirmative vote of a
plurality of the votes cast by the stockholders represented in
person or represented by proxy at the special and annual meeting
and entitled to vote. You may vote in favor of a nominee, or you
may withhold your vote from a nominee. Votes that are withheld
with respect to this matter will be excluded entirely from the
vote and will have no effect, other than for purposes of
determining the presence of a quorum. Brokers that do not
receive instructions are entitled to vote those shares with
respect to the election of directors.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
each of the five nominees for the
election of directors to hold office until the 2010 Annual
Meeting of Stockholders and until their successors are duly
elected and qualified.
VeriChip
Proposal 5: Approval and Adoption of the VeriChip
Corporation 2009 Stock Incentive Plan
General
A proposal will be presented at the special and annual meeting
to approve and adopt the VeriChip Corporation 2009 Stock
Incentive Plan, or Stock Incentive Plan, which was adopted by
its board of directors on September 16, 2009, subject to
approval by its stockholders. The complete text of the Stock
Incentive Plan is set forth in Annex E to this joint proxy
statement/prospectus, and stockholders are urged to review it
together with the following information, which is qualified in
its entirety by reference to Annex E.
The Stock Incentive Plan will not be effective absent
stockholder approval. The Stock Incentive Plan is designed so
that incentive stock option awards granted pursuant to its terms
would generally be subject to the favorable tax treatment
provided to recipients of incentive stock options under
Section 422 of the Internal Revenue Code of 1986. The Stock
Incentive Plan also is designed so that stock option and certain
restricted and other cash and stock awards granted pursuant to
its terms would generally not be subject to the tax deduction
limits of Section 162(m) of the Internal Revenue Code of 1986.
Section 162(m) prevents a publicly held corporation from
claiming tax deductions for annual compensation in excess of
$1,000,000 to certain of its senior executives. The executives
subject to the limitations of Section 162(m) include any
individual who, as of the last day of the corporation’s
taxable year, is the corporation’s chief executive officer
or among the three highest compensated officers other than the
chief executive officer. Compensation is exempt from this
limitation if it is qualified “performance-based
compensation.”
The purpose of this proposal is to request stockholder approval
of the material terms of the Stock Incentive Plan to qualify
incentive stock awards under the Stock Incentive Plan for
favorable tax treatment and to achieve application of the
qualified performance-based compensation exception to the
Section 162(m) deduction limitation and to comply with the
stockholder approval requirements of NASDAQ Rule 5635(c).
Approval of this proposal will ensure that VeriChip is able to
receive tax deductions for the full amount of performance-based
compensation paid to officers and other employees in the form of
stock options, certain restricted stock awards and other types
of stock-based payments under the Stock Incentive Plan. One of
the
41
requirements for performance-based compensation is that the
corporation’s stockholders must approve the material terms
of the performance-based compensation. The material terms that
must be approved include (1) the employees eligible to
receive the performance-based compensation, (2) the
objectives under which the performance-based compensation will
be determined, and (3) the maximum amount of
performance-based compensation that could be paid to any
executive in a fiscal year.
The following is a summary of the material terms of the Stock
Incentive Plan that stockholders are being asked to approve.
Description
of the Stock Incentive Plan
The following summary of the Stock Incentive Plan is qualified
in its entirety by the terms of the Stock Incentive Plan, which
are attached to this proxy as Annex E.
Purpose.
The purposes of the Stock Incentive Plan are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to
VeriChip’s employees and consultants and to promote the
success of its business and to link participants’ directly
to stockholder interests through increased stock ownership.
Awards.
The Stock Incentive Plan provides for awards of incentive stock
options, nonqualified stock options, restricted stock awards,
performance units, performance shares, stock appreciation
rights, cash awards and other stock based awards. The board of
directors may adopt plans applicable to particular subsidiaries.
With limited exceptions, the rules of such plans may take
precedence over other provisions of the Stock Incentive Plan,
but may not offer the material terms of the Stock Incentive Plan.
Stock
Subject to the Stock Incentive Plan.
Under the Stock Incentive Plan, the aggregate number of shares
of common stock that may be subject to awards under the Stock
Incentive Plan, subject to adjustment upon a change in
capitalization, is 5 million shares, which is approximately
20% of the fully diluted shares outstanding after the merger.
Such shares of common stock may be authorized, but unissued, or
reacquired shares of common stock. Shares of common stock that
were subject to Stock Incentive Plan awards that expire or
become unexercisable without having been exercised in full shall
become available for future awards under the Stock Incentive
Plan.
Administration.
The Stock Incentive Plan may be administered by the board of
directors or by one or more committees of the board, or the
Administrator. The board may require that the Administrator be
constituted to comply with
Rule 16b-3
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), Section 162(m) of the Code, or
both. Subject to the provisions of the Stock Incentive Plan, the
Administrator has the power to determine the terms of each award
granted, including the exercise price, the number of shares
subject to the award and the exercisability thereof. In
accordance with applicable law, the board may, by a resolution
adopted by the board, authorize one or more of our officers to
designate officers (other than the officer so authorized) and
employees to be recipients of stock options and determine the
number of stock options to be granted. Such a board resolution
must specify the total number and the terms, including exercise
price, of the stock options that our officer or officers may
grant.
Eligibility.
The Stock Incentive Plan provides that the Administrator may
grant awards to VeriChip’s affiliates’ employees and
consultants, including non-employee directors. Currently,
VeriChip and its affiliates have approximately 12 employees
and 4 non-employee directors who would be potentially eligible
for awards under
42
the Stock Incentive Plan. The Administrator may grant incentive
stock options only to employees. A grantee who has received a
grant of an award may, if he is otherwise eligible, receive
additional award grants. The Administrator selects the grantees
and determines the number of shares of common stock to be
subject to each award. In making such determination, the
Administrator shall take into account the duties and
responsibilities of the employee or consultant, the value of his
services, his potential contribution to VeriChip’s success,
the anticipated number of years of future service and other
relevant factors. The Administrator may not grant to any
employee, in any fiscal year, stock options to purchase more
than 1,500,000 shares of common stock.
Maximum
Term and General Terms and Conditions of Awards.
The maximum term of any stock option granted under the Stock
Incentive Plan generally may not exceed ten years.
Each award granted under the Stock Incentive Plan is evidenced
by a written agreement between the grantee and VeriChip and is
subject to the following general terms and conditions:
(a)
Termination of Employment.
If a
grantee’s continuous status as an employee or consultant
terminates (other than upon the grantee’s death,
disability, Retirement, Termination for Cause, or Termination by
Employer Not for Cause (each defined below)), the grantee may
exercise his unexercised option or stock appreciation right, but
only within such period of time as is determined by the
Administrator (with such determination being made at the time of
grant and not exceeding three months in the case of an incentive
stock option) and only to the extent that the grantee was
entitled to exercise it at the date of such termination (but in
no event may the option or stock appreciation right be exercised
later than the expiration of the term of such award as set forth
in the award agreement). A grantee’s restricted stock award
shall be forfeited, to the extent it is forfeitable immediately
before the date of such termination, or settled by delivery of
the appropriate number of unrestricted shares, to the extent it
is nonforfeitable. A grantee’s performance shares or
performance units with respect to which the performance period
has not ended as of the date of such termination shall terminate.
(b)
Disability.
If a grantee’s
continuous status as an employee or consultant terminates as a
result of permanent and total disability (as defined in
Section 22(e)(3) of the Code), unless otherwise provided by
the Award Agreement, such termination shall have no effect on
the grantee’s outstanding awards. The grantee’s
outstanding awards shall continue to vest and remain outstanding
and exercisable until they expire in accordance with their
terms. However, in the case of an incentive stock option, any
option not exercised within 12 months after the date of
such termination will be treated as a nonqualified stock option.
(c)
Death.
If a grantee’s continuous
status as an employee or consultant terminates as a result of
the grantee’s death, unless otherwise provided by the Award
Agreement, such termination shall have no effect on the
grantee’s outstanding awards. The grantee’s
outstanding awards shall continue to vest and remain outstanding
and exercisable until they expire in accordance with their
terms. However, in the case of an incentive stock option, any
option not exercised within 12 months after the date of
such termination will be treated as a nonqualified stock option.
(d)
Termination for Cause.
If a
grantee’s continuous status as an employee or consultant is
terminated for Cause, or grantee violates any of the terms of
their employment after they have become vested in any of their
rights under the Stock Incentive Plan, the grantee’s full
interest in such rights shall terminate on the date of such
termination of employment and all rights thereunder shall cease.
Cause shall mean gross negligence, willful misconduct, flagrant
or repeated violations of our policies, rules or ethics, a
material breach by the grantee of any employment agreement
between the grantee and us, intoxication, substance abuse,
sexual or other unlawful harassment, disclosure of confidential
or proprietary information, engaging in a business competitive
with VeriChip ’s business, or dishonest, illegal or immoral
conduct.
(e)
Termination by Employer Not for
Cause.
If a grantee’s continuous status as
an employee or consultant is terminated by the employer without
Cause (Termination by Employer Not for Cause), then,
43
unless otherwise provided by the Award Agreement, such
termination shall have no effect on grantee’s outstanding
awards. Grantee’s awards shall continue to vest and remain
outstanding and exercisable until they expire by their terms. In
the case of an incentive stock option, any option not exercised
within 3 months of the date of termination of employment
due to death will be treated as a nonqualified stock option. In
the case of a grantee who is a director, the grantee’s
service as a director shall be deemed to have been terminated
without Cause if the grantee ceases to serve in such a position
solely due to the failure to be reelected or reappointed, as the
case may be, and such failure is not a result of an act or
omission which would constitute Cause.
(f)
Retirement of Grantee.
If a
grantee’s continuous status as an employee or consultant
terminates after the grantee’s attainment of age 65
(Retirement), then, unless otherwise provided by the Award
Agreement, such termination shall have no effect on
grantee’s outstanding awards. The grantee’s awards
shall continue to vest and remain outstanding and exercisable
until they expire by their terms. In the case of an incentive
stock option, any option not exercised within 3 months of
the termination of grantee’s continuous status as an
employee or consultant due to Retirement will be treated as a
nonqualified stock option.
(g)
Nontransferability of
Awards.
Generally, an award granted under the
Stock Incentive Plan is not transferable by the grantee, other
than by will or the laws of descent and distribution, and is
exercisable during the grantee’s lifetime only by the
grantee. In the event of the grantee’s death, an option or
stock appreciation right may be exercised by a person who
acquires the right to exercise the award by bequest or
inheritance.
Terms and
Conditions of Options.
Each option granted under the Stock Incentive Plan is subject to
the following terms and conditions:
(a)
Exercise Price.
The Administrator
determines the exercise price of options to purchase shares of
common stock at the time the options are granted. As a general
rule, the exercise price of an option must be no less than 100%
of the fair market value of the common stock on the date the
option is granted. The Stock Incentive Plan provides exceptions
for certain options granted in connection with VeriChip’s
acquisition of another corporation or granted as inducements to
an individual’s commencing employment with VeriChip.
(b)
Exercise of the Option.
Each award
agreement specifies the term of the option and the date when the
option is to become exercisable. The terms of such vesting are
determined by the Administrator. An option is exercised by
giving written notice of exercise to VeriChip, specifying the
number of full shares of common stock to be purchased and by
tendering full payment of the purchase price to VeriChip.
(c)
Form of Consideration.
The
consideration to be paid for the shares of common stock issued
upon exercise of an option is determined by the Administrator
and set forth in the award agreement. Such form of consideration
may vary for each option, and may consist of any combination of
cash, cashless exercise, and as permitted by the Administrator,
promissory note, other shares of VeriChip common stock, or any
other legally permissible form of consideration as may be
provided in the Stock Incentive Plan and the Award Agreement.
(d)
Value Limitation.
If the aggregate
fair market value of all shares of common stock subject to a
grantee’s incentive stock option which are exercisable for
the first time during any calendar year exceeds $100,000, the
excess options shall be treated as nonqualified options.
(e)
Other Provisions.
The award agreement
may contain such other terms, provisions and conditions not
inconsistent with the Stock Incentive Plan as may be determined
by the Administrator. Shares of common stock covered by options
which have terminated and which were not exercised prior to
termination will be returned to the Stock Incentive Plan.
44
Stock
Appreciation Rights.
The Administrator may grant stock appreciation rights in tandem
with an option or alone and unrelated to an option. Tandem stock
appreciation rights shall expire no later than the expiration of
the related option. Stock appreciation rights may be exercised
by the delivery to VeriChip of a written notice of exercise. The
exercise of a stock appreciation right will entitle the grantee
to receive the excess of the fair market value of a share of
common stock on the exercise date over the exercise price for
each share of common stock with respect to which the stock
appreciation right is exercised. Payment upon exercise of a
stock appreciation right will be in shares of common stock. No
employee shall be granted, in any fiscal year, stock
appreciation rights with respect to more than
1,500,000 shares of common stock.
Restricted
Stock Awards.
The Administrator may grant awards of restricted shares of
common stock in such amount and upon such terms and conditions
as the Administrator specifies in the award agreement. The
Administrator may or may not grant awards of performance-based
restricted stock. Only the compensation committee of the board
of directors may serve as the Administrator with respect to
awards of performance-based restricted stock.
Restricted
Stock Other Than Performance-Based Restricted Stock.
Restricted stock other than performance-based restricted stock
may be granted to employees and consultants and may be subject
to one or more contractual restrictions applicable generally or
to a grantee in particular, as established at the time of grant
and as set forth in the related restricted stock agreement. The
restricted stock agreement sets forth the conditions, if any,
which will need to be satisfied before the grant will be
effective and the conditions, if any, under which the
grantee’s interest in the restricted shares will be
forfeited. As soon as practicable after a grant has become
effective, the shares will be registered to or for the benefit
of the grantee, but subject to any forfeiture conditions
established by the Administrator. The restricted stock agreement
states whether the grantee has the right to receive any cash
dividends paid with respect to the restricted shares. If the
grantee has no right to receive cash dividends, the Award
Agreement may give the grantee the right to receive a cash
payment in the future in lieu of the dividend payments, provided
certain conditions are met. Common share dividends declared on
the restricted shares after grant but before the shares are
forfeited or become nonforfeitable are treated as part of the
grant of the related restricted shares. A grantee has the right
to vote the restricted shares after grant until they are
forfeited or become nonforfeitable.
Restricted shares may vest in installments or in lump sum
amounts upon satisfaction of the stipulated conditions. If the
restrictions are not satisfied, the shares are forfeited and
again become available under the Stock Incentive Plan.
In the case of restricted stock grants that vest only on the
satisfaction of performance objectives, the Administrator
determines the performance objectives to be used in connection
with restricted stock awards and the extent to which such
objectives have been met. Performance objectives may vary from
participant to participant and between groups of participants
and shall be based upon such performance factors and criteria as
the Administrator in its sole discretion selects.
Performance-Based
Restricted Stock.
The Administrator may make grants of performance-based
restricted stock to employees and consultants. The Administrator
has absolute discretion to establish the performance criteria
that will be applicable to each grant and to determine the
percentage of shares that will be granted upon various levels of
attainment of the performance criteria. To comply with
Section 162(m) of the Code, the establishment of the
performance criteria and the determination of the grant formula
must be made at the time of grant, but in no event later than
90 days after the commencement of the performance
measurement period. The Administrator can select the performance
criteria that will be applicable to a grant of performance-based
restricted shares from the following list: (1) stock price;
(2) average annual growth in earnings per share;
(3) increase in stockholder value; (4) earnings per
share; (5) net income; (6) return on assets;
(7) return on stockholders’ equity;
45
(8) increase in cash flow; (9) operating profit or
operating margins; (10) revenue growth of VeriChip; or
(11) operating expenses.
The related performance-based restricted stock agreement sets
forth the applicable performance criteria and the deadline for
satisfying the performance criteria. No grant of
performance-based restricted shares is effective until the
Administrator certifies that the applicable conditions
(including performance criteria) have been timely satisfied.
The Administrator may also make grants of performance-based
restricted stock subject to one or more objective employment,
performance or other forfeiture conditions applicable generally
or to a grantee in particular, as established by the
Administrator at the time of grant and as set forth in the
related performance-based restricted stock agreement. The
performance-based restricted stock agreement sets forth the
conditions, if any, under which the grantee’s interest in
the performance-based restricted shares will be forfeited. If
the grant or forfeiture conditions with respect to
performance-based restricted shares are not satisfied, the
shares are forfeited and again become available under the Stock
Incentive Plan.
As soon as practicable after a grant has become effective, the
shares are registered to or for the benefit of the grantee, but
subject to any forfeiture conditions established by the
Administrator. The performance-based restricted stock agreement
states whether the grantee has the right to receive any cash
dividends paid with respect to the performance-based restricted
shares. If the grantee has no right to receive cash dividends,
the agreement may give the grantee the right to receive a cash
payment in the future in lieu of the dividend payments, provided
certain conditions are met. Common share dividends declared on
the performance-based restricted shares after grant but before
the shares are forfeited or become nonforfeitable are treated as
part of the grant of the related restricted shares. A grantee
has the right to vote the performance-based restricted shares
after grant until they are forfeited or become nonforfeitable.
No more than 1,500,000 performance-based restricted shares may
be granted to a grantee in any calendar year.
Performance
Units and Performance Shares.
The Administrator may grant awards of performance units and
performance shares in such amounts and upon such terms and
conditions, including the performance goals and the performance
period, as the Administrator specifies in the award agreement.
The Administrator will establish an initial value for each
performance unit on the date of grant.
The initial value of a performance share will be the fair market
value of a share of common stock on the date of grant. Payment
of earned performance units or performance shares will occur
following the close of the applicable performance period and in
the form of cash, shares of common stock or a combination of
cash and shares of common stock.
Cash
Awards.
The Administrator may grant cash awards to a grantee. The amount
of any cash award in any fiscal year of the Company will not
exceed the greater of $300,000 or 100% of the grantee’s
cash compensation for such fiscal year.
Other
Stock Based Awards.
The Administrator may grant other stock-based awards in such
amount and upon such terms and conditions as determined by the
Administrator. Such awards many include the grant of shares of
common stock based on certain conditions, the payment of cash
based on the performance of our common stock and the grant of
securities convertible into shares of common stock.
46
Adjustment
upon Changes in Capitalization.
In the event of changes in VeriChip’s outstanding stock
because of any stock splits, reverse stock splits, stock
dividends, combination or reclassification or other change in
its capital structure, an appropriate adjustment shall be made
by the board of directors in: (i) the number of shares of
common stock subject to the Stock Incentive Plan; (ii) the
number and class of shares of common stock subject to any award
outstanding under the Stock Incentive Plan; and (iii) the
exercise price of any such outstanding award. The determination
of the board of directors as to which adjustments shall be made
shall be conclusive.
Change in
Control.
In the event of a Change in Control, each outstanding award not
yet fully exercisable and vested on the date of such transaction
shall become fully exercisable and vested on the date of such
transaction . Generally, a Change in Control means the
acquisition by any person, of 50 percent or more of
VeriChip’s combined voting power then outstanding
securities, the approval by its stockholders of a merger or
consolidation of VeriChip, the effective date of a complete
liquidation of VeriChip, or consummation of an agreement for the
sale of substantially all of the assets of VeriChip.
In the event of a Change in Control, in addition to the above,
the Administrator, in its sole discretion, may take any of the
following actions, in its sole discretion: (a) provide for
the purchase of any award for an amount of cash equal to the
amount which could have been attained upon the exercise or
realization of such award; (b) make such adjustment to the
awards then outstanding as the Administrator deems appropriate
to reflect such transaction or change;
and/or
(c) provide that each outstanding award shall be assumed or
substituted by any successor corporation.
Amendment
and Termination of the Stock Incentive Plan.
The board of directors may at anytime amend, alter, suspend or
terminate the Stock Incentive Plan. VeriChip must obtain
stockholder approval of any amendment to the Stock Incentive
Plan in such a manner and to such a degree as is necessary and
desirable to comply with
Rule 16b-3
of the Exchange Act or Section 422 or Section 162(m)
of the Code (or any other applicable law or regulation,
including the requirements of any exchange or quotation system
on which our common stock is listed or quoted). No amendment or
termination of the Stock Incentive Plan will impair the rights
of any grantee, unless mutually otherwise agreed between the
grantee and VeriChip, which agreement must be in writing and
signed by the grantee and VeriChip. In any event, the Stock
Incentive Plan shall terminate on September 15, 2019. Any
awards outstanding under the Stock Incentive Plan at the time of
its termination shall remain outstanding until they expire by
their terms.
Federal
Income Tax Consequences
As previously stated, pursuant to the Stock Incentive Plan,
VeriChip may grant either “incentive stock options,”
as defined in Section 422 of the Code, nonqualified
options, restricted stock, stock appreciation rights, stock
awards, performance units, performance shares, cash awards or
other stock based awards.
An optionee who receives an incentive stock option grant will
not recognize any taxable income either at the time of grant or
exercise of the option, although the exercise may subject the
optionee to the alternative minimum tax.
Upon the sale or other disposition of the shares more than two
years after the grant of the option and one year after the
exercise of the option, any gain or loss will be treated as a
long-term or short-term capital gain or loss, depending upon the
holding period. If these holding periods are not satisfied, the
optionee will recognize ordinary income at the time of sale or
disposition equal to the difference between the exercise price
and the lower of (a) the fair market value of the shares at
the date of the option exercise or (b) the sale price of
the shares. We will be entitled to a deduction in the same
amount as the ordinary income recognized by the optionee. Any
gain or loss recognized on such a premature disposition of the
shares in excess of the amount
47
treated as ordinary income will be characterized as long-term or
short-term capital gain or loss, depending on the holding period.
All options that do not qualify as incentive stock options are
referred to as nonqualified options. An optionee will not
recognize any taxable income at the time he or she receives a
nonqualified option grant. However, upon exercise of the
nonqualified option, the optionee will recognize ordinary
taxable income generally measured as the excess of the fair
market value of the shares purchased on the date of exercise
over the purchase price. Any taxable income recognized in
connection with an option exercise by an optionee who is also
VeriChip’s employee will be subject to withholding tax.
Upon the sale of such shares by the optionee, any difference
between the sale price and the fair market value of the shares
on the date of exercise of the option will be treated as
long-term or short-term capital gain or loss, depending on the
holding period. VeriChip will be entitled to a tax deduction in
the same amount as the ordinary income recognized by the
optionee with respect to shares acquired upon exercise of a
nonqualified option.
With respect to stock awards, stock appreciation rights,
performance units and performance shares that may be settled
either in cash or in shares of common stock that are either
transferable or not subject to a substantial risk of forfeiture
under Section 83 of the Code, the grantee will realize
ordinary taxable income, subject to tax withholding, equal to
the amount of the cash or the fair market value of the shares of
common stock received. VeriChip will be entitled to a deduction
in the same amount and at the same time as the compensation
income is received by the participant.
With respect to shares of common stock that are both
nontransferable and subject to a substantial risk of forfeiture
the participant will realize ordinary taxable income equal to
the fair market value of the shares of common stock at the first
time the shares of common stock are either transferable or not
subject to a substantial risk of forfeiture. VeriChip will be
entitled to a deduction in the same amount and at the same time
as the ordinary taxable income is realized by the grantee.
At the discretion of the Administrator, the Stock Incentive Plan
allows a participant to satisfy tax withholding requirements
under federal and state tax laws in connection with the exercise
or receipt of an award by electing to have Shares withheld,
and/or
delivering to VeriChip already-owned Shares.
VeriChip will be entitled to a tax deduction for
performance-based compensation in connection with an award only
in an amount equal to the ordinary income realized by the
participant and at the time the participant recognizes such
income, and if applicable withholding requirements are met. In
addition, Code Section 162(m) contains special rules
regarding the federal income tax deductibility of compensation
paid to VeriChip’s chief executive officer and to each of
our three other most highly compensated executive officers. The
general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that
it does not exceed $1,000,000. However, VeriChip can preserve
the deductibility of certain compensation in excess of
$1,000,000 if it complies with certain conditions imposed by
rules under Code Section 162(m) (including the
establishment of a maximum number of shares with respect to
which awards may be granted to any one employee during one year)
and if the material terms of such compensation are disclosed to
and approved by VeriChip’s stockholders. VeriChip has
structured the Stock Incentive Plan with the intention that
compensation resulting from awards under the Stock Incentive
Plan can qualify as “performance-based compensation”
and, if so qualified, would be deductible. Such continued
treatment is subject to, among things, approval of the Stock
Incentive Plan by VeriChip’s stockholders; accordingly
VeriChip is seeking such approval.
The foregoing is only a summary of the effect of federal income
taxation upon the grantee and VeriChip with respect to the grant
and exercise of awards under the Stock Incentive Plan, does not
purport to be complete, and does not discuss the tax
consequences of the grantee’s death or the income tax laws
of any municipality, state or foreign country in which a grantee
may reside.
Plan
Benefits under the 2009 Stock Incentive Plan
Because future awards under the Stock Incentive Plan will be
granted in the discretion of the compensation committee, the
type, number, recipients, and other terms of such awards cannot
be determined
48
at this time. Information regarding VeriChip’s recent
practices with respect to incentive awards and stock-based
compensation under existing plans is presented in the
“Summary Compensation Table” and these related tables:
“2008 Grants of Plan-Based Awards,” “Outstanding
Equity Awards as of December 31, 2008,” and “2008
Option Exercises and Stock Vesting,” elsewhere in this
joint proxy statement/prospectus, and in VeriChip’s
financial statements for the fiscal year ended December 31,
2008 included in this joint proxy statement/prospectus.
If stockholders decline to approve the Stock Incentive Plan, no
awards will be granted under the Stock Incentive Plan, but
awards may continue to be granted under VeriChip’s other
compensation plans.
Equity
Compensation Plan Information
The following table presents information regarding options and
rights outstanding under VeriChip’s compensation plans as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Available for
|
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
Future Issuance
|
|
|
|
|
Securities to be
|
|
|
Average
|
|
|
Under Equity
|
|
|
|
|
Issued upon
|
|
|
Exercise Price
|
|
|
Compensation
|
|
|
|
|
Exercise of
|
|
|
per Share of
|
|
|
Plans
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding
|
|
|
|
|
Options,
|
|
|
Options,
|
|
|
Securities
|
|
|
|
|
Warrants and
|
|
|
Warrants and
|
|
|
Reflected in
|
|
|
Plan
Category
(1)
|
|
Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
912,285
|
|
|
$
|
3.73
|
|
|
|
135,940
|
|
|
Equity compensation plans not approved by security
holders
(2)
|
|
|
313,122
|
|
|
$
|
6.83
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,225,407
|
|
|
$
|
4.52
|
|
|
|
135,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A narrative description of the material terms of VeriChip’s
equity compensation plans is set forth in Note 5 to
VeriChip’s consolidated financial statements for the year
ended December 31, 2008.
|
|
|
|
(2)
|
|
In addition, VeriChip has made grants outside of its equity
plans and has outstanding options exercisable for
313,122 shares of its common stock. These options were
granted as an inducement for employment or for the rendering of
consulting services.
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Vote
Required
Approval of this proposal requires the affirmative vote of a
majority of the votes cast by the stockholders represented in
person or represented by proxy at the special and annual meeting
and entitled to vote. Abstentions and broker non-votes have no
effect on the outcome of this proposal.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
approval and adoption of the VeriChip
Corporation 2009 Stock Incentive Plan.
VeriChip
Proposal 6: Approval of the Potential Issuance of Shares of
VeriChip Common Stock in Excess of 19.99% of VeriChip’s
Outstanding Common Stock Upon Conversion of VeriChip’s
Series A Preferred Stock
Background
On September 29, 2009, VeriChip entered into a convertible
preferred stock purchase agreement with Optimus Capital
Partners, LLC doing business as Optimus Technology Capital
Partners, LLC, or Optimus, under which Optimus is potentially
committed to purchase up to $10 million of VeriChip’s
convertible Series A
49
Preferred Stock in one or more tranches. Under the terms of the
purchase agreement, VeriChip may present Optimus with a notice
to purchase preferred stock. Optimus is obligated to purchase
such preferred stock on the tenth trading day after the notice
date, subject to satisfaction of certain closing conditions,
including (i) that VeriChip is listed for and trading on a
trading market, (ii) the representations and warranties of
VeriChip set forth in the purchase agreement are true and
correct as if made on each tranche date, (iii) Optimus
shall have received a commitment fee of $800,000 payable only on
the first tranche closing date in the event the gross proceeds
from the first tranche closing exceed $800,000; if such gross
proceeds are less than $800,000 then the entire gross proceeds
must be offset toward the commitment fee and the balance of the
commitment fee must be paid in cash by VeriChip, and if the
commitment fee has not been paid in full by the six-month
anniversary of the first tranche closing date then VeriChip must
pay any remaining amount of the commitment fee in cash on such
date, and (iv) that no such purchase would result in
Optimus and its affiliates beneficially owning more than 9.99%
of VeriChip’s common stock.
Why
VeriChip is Seeking Stockholder Approval
This proposal is being submitted for approval by the
stockholders of VeriChip pursuant to the requirements of the
Nasdaq Stock Market, LLC applicable to companies with securities
quoted on the Nasdaq Capital Market. NASDAQ Rule 5635
requires stockholder approval prior to the issuance of
securities in connection with a transaction other than a public
offering involving the sale, issuance or potential issuance by
VeriChip of common stock (or securities convertible into or
exercisable for common stock) equal to 20% or more of the common
stock or 20% or more of the voting power outstanding before the
issuance for less than the greater of book or market value of
the stock.
VeriChip’s stockholders are being asked to approve this
potential share issuance, because the common stock issuable upon
conversion of the Series A Preferred Stock may exceed
19.99% of the voting power and number of shares of common stock
outstanding on the date such shares of preferred stock are
issued.
Terms of
the Preferred Stock Purchase Agreement and Series A
Preferred Stock
Pursuant to the certificate of designations of preferences,
rights and limitations of Series A Preferred Stock, or the
certificate of designations, that was filed with the Delaware
Secretary of State on September 29, 2009, for the
Series A Preferred Stock, one or more shares of the
Series A Preferred Stock may be converted into shares of
VeriChip common stock, on or after the six-month anniversary of
the issuance date, at a conversion price equal to the closing
bid price on the trading day immediately preceding the notice
date, or the conversion price, by VeriChip or Optimus. If
VeriChip or Optimus exercises this conversion option with
respect to any Series A Preferred Stock, VeriChip will
issue to Optimus the number of shares of VeriChip common stock
equal to (x) $10,000 per share of Series A Preferred
Stock multiplied by (y) the number of shares of
Series A Preferred Stock subject to the notice, divided by
(z) the conversion price with respect to such shares. If
VeriChip exercises the conversion prior to the fourth
anniversary of the issuance of such shares, then, in addition to
the conversion shares, VeriChip must pay to the holder
additional shares with respect to such converted shares:
(i) 35% of the conversion shares if converted after the
six-month anniversary of the issuance date, but prior to the
first anniversary of the issuance date, (ii) 27% of the
converted shares if converted on or after the first anniversary,
but prior to the second anniversary of the issuance date,
(iii) 18% of the converted shares if converted on or after
the second anniversary date, but prior to the third anniversary
of the issuance date, and (iv) 9% of the converted shares
if converted on or after the third anniversary, but prior to the
fourth anniversary of the issuance date.
In the event the closing bid price of VeriChip common stock
during any one or more of the nine trading days following the
delivery of a notice falls below 75% of the closing bid price on
the trading day prior to the notice date and Optimus determines
not to complete the tranche closing, then VeriChip may, at its
option, proceed to issue some or all of the applicable shares,
provided that the conversion price for the preferred stock that
is issued shall reset at the lowest closing bid price for such
nine trading day period.
Pursuant to the certificate of designations, VeriChip may
redeem, for cash, any or all of the Series A Preferred
Stock at any time at the redemption price per share equal to
$10,000 per share of Series A Preferred
50
Stock, or the Series A liquidation value, plus any accrued
but unpaid dividends with respect to such shares of preferred
stock. If VeriChip exercises this redemption option with respect
to any shares of Series A Preferred Stock prior to the
fourth anniversary of the issuance of such preferred stock, then
in addition to the Series A liquidation value plus any
accrued but unpaid dividends, VeriChip must pay to Optimus a
make-whole price per share equal to the following with respect
to such redeemed Series A Preferred Stock: (i) 35% of
the Series A liquidation value if redeemed prior to the
first anniversary of the issuance date, (ii) 27% of the
Series A liquidation value if redeemed on or after the
first anniversary but prior to the second anniversary of the
issuance date, (iii) 18% of the Series A liquidation
value if redeemed on or after the second anniversary but prior
to the third anniversary of the issuance date, and (iv) 9%
of the Series A liquidation value if redeemed on or after
the third anniversary but prior to the fourth anniversary of the
issuance date.
In addition, redemption of the Series A Preferred Stock by
VeriChip, to the extent such preferred stock shall not have been
converted into shares of VeriChip common stock, shall be
mandatory in the event that VeriChip does not receive
stockholder approval for the transactions described in the
purchase agreement on or before March 31, 2010.
The Series A Preferred Stock ranks, with respect to rights
upon liquidation,
winding-up
or dissolution, senior to VeriChip’s common stock and any
other classes of stock or series of preferred stock of VeriChip
and junior to existing and future indebtedness of VeriChip.
Holders of Series A Preferred Stock will receive dividends
on each outstanding share of Series A Preferred Stock,
commencing on the first anniversary of the date of issuance of
any such shares of such preferred stock, which will accrue in
shares of Series A Preferred Stock at a rate equal to 10%
per annum from the date of issuance, except for shares of
Series A Preferred Stock that are redeemed for cash or
converted into shares of common stock prior to the first
anniversary of the issuance date with respect to such shares of
Series A Preferred Stock.
Upon any liquidation, dissolution or winding up of VeriChip,
after payment or provision for payment of debts and other
liabilities of VeriChip, before any distribution or payment is
made to the holders of any other class or series of stock, the
holders of Series A Preferred Stock shall first be entitled
to be paid out of the assets of VeriChip available for
distribution to its stockholders an amount with respect to the
Series A liquidation value, after which any remaining
assets of VeriChip will be distributed among the holders of the
other class or series of stock in accordance with
VeriChip’s certificates of designations and second amended
and restated certificate of incorporation.
To facilitate the transactions contemplated by the purchase
agreement, R & R Consulting Partners, LLC, or
R & R, a company controlled by Scott R. Silverman,
VeriChip’s chief executive officer and executive chairman
of the board, will loan shares of common stock to Optimus equal
to 135% of the aggregate purchase price for each tranche
pursuant to stock loan agreements between R & R and
Optimus. R & R is being paid $100,000 plus 2% interest
for entering into the stock loan arrangement. The aggregate
amount of shares loaned under any and all stock loan agreements,
together with all other shares sold by or on behalf of VeriChip
pursuant to General Instruction I.B.6. to
Form S-3,
can not exceed one-third of the aggregate market value of the
voting and non-voting common equity held by non-affiliates of
VeriChip in any 12 month period. R & R may demand
return of some or all of the borrowed shares (or an equal number
of freely tradable shares of VeriChip common stock) at any time
on or after the six-month anniversary date such borrowed shares
were loaned to Optimus, but no demand may be made if there are
any shares of Series A Preferred Stock then outstanding. If
a permitted return demand is made, Optimus will return the
borrowed shares within three trading days after such demand (or
an equal number of freely tradable shares of VeriChip common
stock). Optimus may return the borrowed Shares to R &
R, in whole or in part, at any time, without penalty or premium.
Further
Information
The terms of the purchase agreement and certificate of
designations are complex and are only briefly summarized above.
For further information on the purchase agreement and
certificate of designations, please refer to the full text of
such agreements and documents included as exhibits to this joint
proxy statement/prospectus.
51
Vote
Required
The affirmative vote of a majority of the votes cast by the
VeriChip stockholders present in person or represented by proxy
at the special and annual meeting and entitled to vote thereon,
is required to approve the issuance of shares of VeriChip common
stock pursuant to the merger. Abstentions and broker non-votes
have no effect on the outcome of this proposal.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“
FOR
” the potential issuance of shares of
VeriChip common stock in excess of 19.99% of VeriChip’s
outstanding common stock upon conversion of VeriChip’s
Series A Preferred Stock.
VeriChip
Proposal 7: Ratification of the Appointment of Eisner LLP
as VeriChip’s Independent Registered Public Accounting Firm
for the Year Ended December 31, 2009
VeriChip’s audit committee has appointed Eisner LLP to
serve as its independent registered public accounting firm for
the year ending December 31, 2009, subject to ratification
by VeriChip’s stockholders. Eisner LLP audited
VeriChip’s consolidated financial statements for the year
ended December 31, 2008.
A representative of Eisner LLP is expected to be present, in
person or by telephone, at the annual and special meeting and
will have an opportunity to make a statement if he or she so
desires. The Eisner LLP representative will also be available to
respond to appropriate questions from stockholders.
AUDIT AND
NON-AUDIT FEES
For the fiscal years ended December 31, 2008 and 2007, fees
for services provided by Eisner LLP were as follows:
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2008
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2007
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A. Audit Fees
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$
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451,143
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$
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391,414
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B. Audit-Related Fees (review of registration statements and
other SEC filings)
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44,320
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35,881
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C. Tax Fees (tax-related services, including income tax advice
regarding income taxes within the United States)
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—
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—
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D. All other fees (acquisition due diligence services)
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—
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—
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Total Fees
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$
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495,463
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$
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427,295
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Pre-Approval
Policies and Procedures
The audit committee has a policy for the pre-approval of all
auditing services and any provision by the independent auditors
of any non-audit services the provision of which is not
prohibited by the Exchange Act of 1934 or the rules of the SEC
under the Exchange Act. Unless a type of service to be provided
by the independent auditor has received general pre-approval, it
will require specific pre-approval by the audit committee, if it
is to be provided by the independent auditor. All fees for
independent auditor services will require specific pre-approval
by the audit committee. Any fees for pre-approved services
exceeding the pre-approved amount will require specific
pre-approval by the audit committee. The audit committee will
consider whether such services are consistent with the
SEC’s rules on auditor independence.
All services provided by and all fees paid to Eisner LLP in
fiscal 2008 and 2007 were pre-approved by VeriChip’s audit
committee.
52
Vote
Required
Approval of this proposal requires the affirmative vote of a
majority of the votes cast by the stockholders represented in
person or represented by proxy at the special and annual meeting
and entitled to vote. Abstentions and broker non-votes have no
effect on the outcome of this proposal.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
ratification of the appointment of Eisner
LLP as VeriChip’s independent registered public accounting
firm for the year ending December 31, 2009.
VeriChip
Proposal 8: Approval of an Adjournment or Postponement of
the Special and Annual Meeting, if Necessary.
VeriChip is asking its stockholders to vote on a proposal to
approve the adjournment or postponement of the VeriChip special
and annual meeting, if necessary.
Vote
Required
The affirmative vote of a majority of the stockholders entitled
to vote at the special and annual meeting, present in person or
by proxy is required to approve any adjournment or postponement
of the special and annual meeting, if necessary.
Recommendation
of the Board of Directors
The board of directors of VeriChip unanimously recommends a vote
“FOR”
the approval of an adjournment or
postponement of the special and annual meeting, if necessary.
Record
Date
The VeriChip board of directors has fixed the close of business
on September 25, 2009 as the record date for determination
of VeriChip stockholders entitled to notice of, and to vote at,
the special and annual meeting. Only holders of record of
VeriChip common stock as of the close of business on that date
are entitled to vote at the special and annual meeting. As of
the record date, there were 13,810,628 shares of VeriChip
common stock issued and outstanding, held by approximately
20 stockholders of record. As of the record date, the
directors and executive officers of VeriChip and their
affiliates beneficially owned 8,150,638 shares, or
approximately 58.6% of the total outstanding shares, of VeriChip
common stock. Each share of VeriChip common stock issued and
outstanding as of the VeriChip record date entitles its holder
to cast one vote at the special and annual meeting.
Voting of
Proxies at the Special and Annual Meeting and Revocation of
Proxies
The VeriChip proxy accompanying this joint proxy
statement/prospectus is solicited on behalf of the board of
directors of VeriChip for use at the VeriChip special and annual
meeting.
General.
Shares represented by a properly
signed and dated proxy will be voted at the special and annual
meeting in accordance with the instructions indicated on the
proxy. Proxies that are properly signed and dated, but which do
not contain voting instructions, will be voted:
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•
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“FOR” the proposal to approve the issuance of shares
of VeriChip common stock to Steel Vault stockholders in the
merger;
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•
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“FOR” the proposal to approve and adopt an amendment
to VeriChip’s second amended and restated certificate of
incorporation to change VeriChip’s name to “PositiveID
Corporation” at the effective time of the merger;
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•
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“FOR” the proposal to approve and adopt an amendment
to VeriChip’s second amended and restated certificate of
incorporation to increase the total number of authorized shares
of VeriChip capital stock from 45 million shares, of which
40 million shares are common stock, to 75 million
shares, of which 70 million shares will be common stock;
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•
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“FOR” each of the five nominees for the election of
directors to hold office until the 2010 Annual Meeting of
Stockholders and until their successors are duly elected and
qualified;
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•
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“FOR” the proposal to approve and adopt the VeriChip
Corporation 2009 Stock Incentive Plan;
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•
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“FOR” the proposal to approve the potential issuance
of shares of VeriChip common stock in excess of 19.99% of
VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock;
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•
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“FOR” the proposal to ratify the appointment of Eisner
LLP as VeriChip’s independent registered public accounting
firm for the year ending December 31, 2009; and
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•
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“FOR” the proposal to approve an adjournment or
postponement of the special and annual meeting, if necessary.
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The proxy holder may vote the proxy in its discretion as to any
other matter that may properly come before the VeriChip special
and annual meeting. Approval of the proposal to issue shares of
VeriChip common stock to Steel Vault stockholders pursuant to
the merger agreement, to approve and adopt the VeriChip
Corporation 2009 Stock Incentive Plan, to approve the potential
issuance of shares of VeriChip common stock in excess of 19.99%
of VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock, and to ratify the
appointment of Eisner LLP as VeriChip’s independent
registered public accounting firm for the year ending
December 31, 2009, each requires the affirmative vote of a
majority of the votes cast by the VeriChip stockholders present
in person or represented by proxy at the special and annual
meeting and entitled to vote thereon. Approval of the proposals
to approve and adopt an amendment to VeriChip’s second
amended and restated certificate of incorporation to change
VeriChip’s name to “PositiveID Corporation” at
the effective time of the merger and to increase the total
number of authorized shares of VeriChip capital stock from
45 million shares, of which 40 million shares are
common stock, to 75 million shares, of which
70 million shares will be common stock requires the
affirmative vote of the holders of a majority of the voting
power of all then outstanding shares of VeriChip capital stock
entitled to vote generally in the election of directors.
Approval of the proposal to elect five directors to hold office
until the 2010 Annual Meeting of Stockholders and until their
successors have been duly elected and qualified requires the
affirmative vote of a plurality of the votes cast by the
VeriChip stockholders present in person or represented by proxy
at the special and annual meeting and entitled to vote thereon.
The affirmative vote of a majority of the stockholders entitled
to vote at the special and annual meeting, present in person or
by proxy is required to approve an adjournment or postponement
of the special and annual meeting, if necessary.
Abstentions.
VeriChip will count a properly
executed proxy marked “ABSTAIN” as present for
purposes of determining whether a quorum is present, but the
shares represented by that proxy will not be voted at the
special and annual meeting. If a VeriChip stockholder abstains
from voting or does not vote (either in person or by proxy), it
will have the same effect as a vote against the proposals to
approve and adopt an amendment to VeriChip’s second amended
and restated certificate of incorporation to change its name and
increase the total number of authorized shares.
Abstentions on all other VeriChip proposals will be treated as
neither a vote “FOR” nor a vote “AGAINST”
the proposal for purposes of determining whether the proposal
has been approved, and thus will have no effect on the outcome
of the votes for such other proposals.
Broker Non-Votes.
If your shares are held by
your broker, except as to the proposals to approve and adopt an
amendment to the second amended and restated certificate of
incorporation to change VeriChip’s name and increase the
total number of authorized shares, elect five directors and
ratify the appointment of Eisner LLP, your broker will not be
able to vote your shares for you on the proposals without
instructions from you on how to vote your shares. You should
follow the directions provided by your broker regarding how
54
to instruct your broker to vote your shares. If a VeriChip
stockholder abstains from voting or does not vote (either in
person or by proxy), it will have the same effect as a vote
against the proposals to approve and adopt an amendment to
VeriChip’s second amended and restated certificate of
incorporation to change its name and increase the total number
of authorized shares. Failure to instruct your broker how to
vote on all other VeriChip proposals will be treated as neither
a vote “FOR” nor a vote “AGAINST” the
proposal for purposes of determining whether the proposal has
been approved, and thus will have no effect on the outcome of
the vote for the proposal.
Voting Shares in Person That are Held Through
Brokers.
If your shares are held by your broker
or another nominee and you wish to vote those shares in person
at the special and annual meeting, you must obtain from the
broker or nominee holding your VeriChip common stock a properly
executed legal proxy identifying you as a VeriChip stockholder,
authorizing you to act on behalf of the nominee at the special
and annual meeting, and identifying the number of shares with
respect to which the authorization is granted.
How to
Revoke a Proxy
If you submit a proxy, you may revoke it at any time before it
is voted by:
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•
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delivering to the secretary of VeriChip a written notice, dated
later than the proxy you wish to revoke, stating that the proxy
is revoked;
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•
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submitting to the secretary of VeriChip a new, signed proxy with
a date later than the proxy you wish to revoke; or
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•
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attending the special meeting and voting in person.
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Notices to the secretary of VeriChip should be addressed to
Secretary, VeriChip Corporation, 1690 South Congress Avenue,
Suite 200, Delray Beach, Florida 33445.
Quorum
To conduct business at the special and annual meeting, a quorum
must be present. VeriChip’s amended and restated bylaws
provide that the presence in person or by proxy of the holders
of shares representing a majority of the voting power of all the
outstanding shares of capital stock entitled to vote at the
annual and special meeting will constitute a quorum except as
otherwise provided by law. VeriChip will treat shares of common
stock represented by a properly signed and returned proxy,
including abstentions and broker non-votes, as present at the
meeting for purposes of determining the existence of a quorum.
If sufficient votes to constitute a quorum are not received by
the date of the special and annual meeting, the persons named as
proxies may propose one or more adjournments of the meeting to
permit further solicitation of proxies. The inspector of
elections appointed for the VeriChip special and annual meeting
will tabulate the votes. The persons named as proxies would
generally exercise their authority to vote in favor of
adjournment.
Solicitation
of Proxies and Expenses
VeriChip and Steel Vault will equally share the costs of
soliciting proxies for their respective meetings. Certain
directors, officers and employees of VeriChip may solicit
proxies, without additional remuneration, by telephone,
facsimile, electronic mail, telegraph and in person. Following
the mailing of this joint proxy statement/prospectus, VeriChip
may request brokers, custodians, nominees and other record
holders to forward copies of this joint proxy
statement/prospectus to persons for whom they hold shares of
common stock and to request authority for the exercise of
proxies.
If your shares are registered in the name of a bank or brokerage
firm, you may be eligible to vote your shares by telephone or
internet. A large number of banks and brokerage firms are
participating in the Broadridge Investor Communication Services
telephone or internet voting program. This program provides
eligible stockholders the opportunity to vote by telephone or
internet. If your bank or brokerage firm is participating in
Broadridge’s program, your voting form will provide
instructions. If your voting form does not reference telephone
or internet information, please complete and return the paper
proxy card in the self-
55
addressed, postage-paid envelope provided. If you have any
questions about executing your proxy or require assistance,
please contact: Allison Tomek, Investor Relations, at
(561) 805-8008.
Contact
for Questions and Assistance in Voting
If you have a question about the merger, or how to vote or
revoke a proxy, or you wish to obtain additional copies of this
joint proxy statement/prospectus, please contact Allison Tomek,
Investor Relations, 1690 South Congress Avenue, Suite 200,
Delray Beach, Florida 33445 by mail or by calling Allison Tomek
at
(561) 805-8008.
Board of
Directors Recommendations
After careful consideration, the board of directors of VeriChip
believes that the merger is consistent with, and in furtherance
of, VeriChip’s long-term business strategy and the merger
is advisable, fair to, and in the best interests of VeriChip and
its stockholders. The VeriChip board of directors unanimously
recommends that its stockholders vote “FOR” the
proposal to approve the issuance of shares of VeriChip common
stock pursuant to the merger agreement, “FOR” the
proposal to approve and adopt an amendment to VeriChip’s
second amended and restated certificate of incorporation to
change its name to “PositiveID Corporation” at the
effective time of the merger, “FOR” the proposal to
approve and adopt an amendment to VeriChip’s second amended
and restated certificate of incorporation to increase the total
number of authorized shares of VeriChip capital stock from
45 million shares, of which 40 million shares are
common stock, to 75 million shares, of which
70 million shares will be common stock, “FOR” the
proposal to elect five directors to hold office until the 2010
Annual Meeting of Stockholders and until their successors have
been duly elected and qualified, “FOR” the proposal to
approve and adopt the VeriChip Corporation 2009 Stock Incentive
Plan, “FOR” the proposal to approve the potential
issuance of shares of VeriChip common stock in excess of 19.99%
of VeriChip’s outstanding common stock upon conversion of
VeriChip’s Series A Preferred Stock, “FOR” the
proposal to ratify the appointment of Eisner LLP as
VeriChip’s independent registered public accounting firm
for the year ended December 31, 2009, and “FOR”
the proposal to approve an adjournment or postponement of the
special and annual meeting, if necessary.
General
Information
Contacting the Board of
Directors.
VeriChip’s board of directors
believes that it is important for it to have a process whereby
its stockholders may send communications to the board of
directors. Accordingly, stockholders who wish to communicate
with the board of directors or a particular director may do so
by sending a communication in writing, whether by letter,
facsimile, or email addressed to the chairman of the board of
directors. VeriChip’s address is 1690 South Congress
Avenue, Suite 200, Delray Beach, Florida 33445 and
facsimile number is
561-805-8001.
For administrative efficiency, all such communications should be
addressed to the chairman of the board of directors, rather than
any other members of the board of directors, and should contain
the stockholder’s contact information, including the
stockholder’s address and telephone number.
Multiple Stockholders Sharing the Same
Address.
Regulations regarding the delivery of
copies of proxy materials and annual reports to stockholders
permit VeriChip, banks, brokerage firms and other nominees to
send one annual report and proxy statement to multiple
stockholders who share the same address under certain
circumstances, unless contrary instructions are received from
stockholders. This practice is known as
“householding.” Stockholders who hold their shares
through a bank, broker or other nominee may have consented to
reducing the number of copies of materials delivered to their
address. In the event that a stockholder wishes to request
delivery of a single copy of annual reports or proxy statements
or to revoke a “householding” consent previously
provided to a bank, broker or other nominee, the stockholder
must contact the bank, broker or other nominee, as applicable,
to revoke such consent. In any event, if a stockholder wishes to
receive a separate joint proxy statement/prospectus for the 2009
special and annual meeting of stockholders, the stockholder may
receive printed copies by contacting Allison Tomek, Investor
Relations, 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445 by mail or by calling Allison Tomek at
(561) 805-8008.
56
Any stockholders of record sharing an address who now receive
multiple copies of VeriChip’s annual reports and proxy
statements, and who wish to receive only one copy of these
materials per household in the future should also contact
VeriChip, Investor Relations, by mail or telephone, as
instructed above. Any stockholders sharing an address whose
shares of common stock are held by a bank, broker or other
nominee who now receive multiple copies of VeriChip’s
annual reports and proxy statements, and who wish to receive
only one copy of these materials per household, should contact
the bank, broker or other nominee to request that only one set
of these materials be delivered in the future.
Stockholder Proposals for 2010 Annual
Meeting.
The deadline for submission of
stockholder proposals, pursuant to
Rule 14a-8
of the Exchange Act, for inclusion in VeriChip’s proxy
statement for the 2010 annual meeting of stockholders is
June 7, 2010. However, if the date of its 2010 annual
meeting is changed by more than 30 days from the date of its
2009 annual meeting, then the deadline is a reasonable time
before VeriChip begins to print and send its proxy materials for
the 2010 annual meeting. Additionally, VeriChip must receive
notice of any stockholder proposal to be submitted at the 2010
annual meeting (but not required to be included in
VeriChip’s proxy statement) no earlier than July 13,
2010 and no later than August 12, 2010, in accordance with
VeriChip’s bylaws; however, in the event that the 2010
annual meeting is called for a date that is not within
45 days before or after the anniversary date of the 2009
annual meeting, to be timely, the stockholder’s notice must
be received not earlier than the opening of business on the
120th day before the 2010 annual meeting and not later than
the later of (x) the close of business on the 90th day
before the 2010 annual meeting or (y) the close of business on
the 10th day following the day on which public announcement
of the date of the 2010 annual meeting is made. Otherwise, the
proxies named by VeriChip’s board of directors may exercise
discretionary voting authority with respect to the stockholder
proposal, without any discussion of the proposal in
VeriChip’s proxy materials.
57
THE
SPECIAL MEETING OF STEEL VAULT STOCKHOLDERS
General
Steel Vault is furnishing this joint proxy statement/prospectus
to holders of Steel Vault’s common stock to provide its
stockholders with important information in connection with the
solicitation of proxies for use at the special meeting of Steel
Vault stockholders and at any adjournment or postponement of the
special meeting. This includes information regarding the
proposed approval and adoption of the merger agreement, and
approval of an adjournment or postponement of the special
meeting, if necessary.
Steel Vault first mailed this joint proxy statement/prospectus
and the accompanying form of proxy to its stockholders on or
about October 5, 2009.
Date,
Time and Place of Steel Vault Special Meeting
Steel Vault will hold a special meeting of its stockholders on
November 10, 2009, at 9:30 a.m., Eastern Standard
Time, at Steel Vault’s principal executive offices located
at 1690 South Congress Avenue, Suite 200, Delray Beach,
Florida 33445.
Purpose
Steel
Vault Proposal 1: The Approval and Adoption of the Merger
Agreement
You are being asked to vote on the approval and adoption of the
merger agreement. In the proposed merger, VeriChip Acquisition
Corp. will merge with and into Steel Vault. As a result of the
merger, Steel Vault will become a wholly-owned subsidiary of
VeriChip, and each share of Steel Vault common stock then
outstanding will be canceled and automatically converted into
the right to receive 0.5 shares of VeriChip common stock.
The total number of shares of VeriChip common stock issuable as
merger consideration is subject to adjustment, as is more fully
described under “The Merger Agreement — Exchange
of Shares.” No fractional shares of VeriChip common stock
will be issued in connection with the merger. Instead, VeriChip
will make a cash payment to each Steel Vault stockholder who
would otherwise receive a fractional share.
A copy of the merger agreement, as amended, is attached to this
joint proxy statement/prospectus as Annex A-1 and
Annex A-2. Steel Vault stockholders are encouraged to read
the merger agreement, as amended, in its entirety. For a
detailed summary of the merger agreement, as amended, please see
the section of this joint proxy statement/prospectus entitled
“The Merger Agreement” beginning on page 91.
Vote
Required
The affirmative vote of holders of a majority of the outstanding
shares of Steel Vault’s common stock entitled to vote at
the special meeting is required to approve and adopt the merger
agreement. Abstentions and broker non-votes will have the effect
of a vote against the proposal.
Recommendation
of the Board of Directors
The board of directors of Steel Vault established a special
committee composed of disinterested members of Steel
Vault’s board of directors to review and evaluate the terms
and conditions, and determine the advisability, of the proposed
merger. The special committee negotiated the terms and
conditions of the merger agreement on behalf of Steel Vault and
determined that the merger is advisable, fair to and in the best
interests of Steel Vault and its stockholders and recommended
that Steel Vault’s board of directors approve the merger
agreement.
Steel Vault’s board of directors, based on the
recommendation of the Steel Vault special committee, determined
that the merger is advisable, fair to, and in the best interests
of Steel Vault and its stockholders approved the merger
agreement and declared its advisability, approved the merger and
other transactions contemplated by the merger agreement, and
unanimously recommends the approval and adoption of the merger
agreement by the stockholders of Steel Vault.
58
The board of directors of Steel Vault unanimously recommends a
vote
“FOR”
the approval and adoption of the
merger agreement.
Steel
Vault Proposal 2: Approval of an Adjournment or
Postponement of the Special Meeting, if Necessary
Steel Vault is asking its stockholders to vote on a proposal to
approve the adjournment or postponement of the Steel Vault
special meeting, if necessary.
Vote
Required
The affirmative vote of a majority in voting power of the Steel
Vault shares present in person or by proxy and entitled to vote
on the subject matter is required to approve an adjournment or
postponement of the special meeting, if necessary. An abstention
will have the same effect as a vote against the proposal. A
broker non-vote will have no effect on the outcome of the vote
for the proposal.
Recommendation
of the Board of Directors
The board of directors of Steel Vault unanimously recommends a
vote
“FOR”
the approval of an adjournment or
postponement of the special meeting, if necessary.
Record
Date
The Steel Vault board of directors has fixed the close of
business on September 25, 2009, as the record date for
determination of Steel Vault stockholders entitled to notice of,
and to vote at, the special meeting. Only holders of record of
Steel Vault common stock as of the close of business on that
date are entitled to vote at the special meeting. As of the
record date, there were 9,874,971 shares of Steel
Vault’s common stock issued and outstanding, held by
approximately 55 stockholders of record. As of the record
date, the directors and executive officers of Steel Vault and
their affiliates beneficially owned 10,280,135 shares, or
approximately 68.6% of the total outstanding shares, of Steel
Vault common stock. Each share of Steel Vault common stock
issued and outstanding as of the Steel Vault record date
entitles its holder to cast one vote at the special meeting.
Voting of
Proxies at the Special Meeting and Revocation of
Proxies
The Steel Vault proxy accompanying this joint proxy
statement/prospectus is solicited on behalf of the board of
directors of Steel Vault for use at the
Steel
Vault
special meeting.
General.
Shares represented by a properly
signed and dated proxy will be voted at the special meeting in
accordance with the instructions indicated on the proxy. Proxies
that are properly signed and dated, but which do not contain
voting instructions, will be voted:
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“FOR” the proposal to approve and adopt the merger
agreement; and
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“FOR” the proposal to approve an adjournment or
postponement of the special meeting, if necessary.
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The proxy holder may vote the proxy in its discretion as to any
other matter that may properly come before the Steel Vault
special meeting. The affirmative vote of holders of a majority
of the outstanding shares of Steel Vault’s common stock
entitled to vote at the special meeting is required to approve
and adopt the merger agreement. The affirmative vote of a
majority in voting power of the Steel Vault shares present in
person or by proxy and entitled to vote on the subject matter is
required to approve an adjournment or postponement of the
special meeting, if necessary.
Abstentions.
Steel Vault will count a properly
executed proxy marked “ABSTAIN” as present for
purposes of determining whether a quorum is present, but the
shares represented by that proxy will not be voted at the
special meeting. If a Steel Vault stockholder abstains from
voting or does not vote (either in person or by proxy), it will
have the same effect as a vote against the proposal to approve
and adopt the merger agreement and the proposal to approve an
adjournment or postponement of the special meeting, if necessary.
59
Broker Non-Votes.
If your shares are held by
your broker, your broker will not be able to vote your shares
for you on the proposals without instructions from you on how to
vote your shares. You should follow the directions provided by
your broker regarding how to instruct your broker to vote your
shares.
If a Steel Vault stockholder abstains from voting or does not
vote (either in person or by proxy), it will have the same
effect as a vote against the proposal to approve and adopt the
merger agreement. Failure to instruct your broker how to vote on
the proposal to approve an adjournment or postponement of the
special meeting, if necessary, will be treated as neither a vote
“FOR” nor a vote “AGAINST” the proposal for
purposes of determining whether the proposal has been approved,
and thus will have no effect on the outcome of the vote for the
proposal.
Voting Shares in Person That are Held Through
Brokers.
If your shares are held by your broker
or another nominee and you wish to vote those shares in person
at the special meeting, you must obtain from the nominee holding
your Steel Vault common stock a properly executed legal proxy
identifying you as a Steel Vault stockholder, authorizing you to
act on behalf of the nominee at the special meeting, and
identifying the number of shares with respect to which the
authorization is granted.
How to
Revoke a Proxy
If you submit a proxy, you may revoke it at any time before it
is voted by:
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delivering to the secretary of Steel Vault a written notice,
dated later than the proxy you wish to revoke, stating that
proxy is revoked;
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submitting to the secretary of Steel Vault a new, signed proxy
with a date later than the proxy you wish to revoke; or
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attending the special meeting and voting in person.
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Notices to the secretary of Steel Vault should be addressed to
the Secretary, Steel Vault Corporation, 1690 South Congress
Avenue, Suite 200, Delray Beach, Florida 33445.
Quorum
To conduct business at the special meeting, a quorum must be
present. Steel Vault’s amended and restated certificate of
incorporation provides that the holders of not less than a
majority in voting power of the shares entitled to vote at any
meeting of stockholders, present in person or by proxy, shall
constitute a quorum, unless or except to the extent that the
presence of a larger number may be required by law. Steel Vault
will treat shares of common stock represented by a properly
signed and returned proxy, including abstentions and broker
non-votes, as present at the meeting for purposes of determining
the existence of a quorum. If sufficient votes to constitute a
quorum are not received by the date of the special meeting, the
persons named as proxies may propose one or more adjournments of
the meeting to permit further solicitation of proxies. The
inspector of elections appointed for the Steel Vault special
meeting will tabulate the votes. The persons named as proxies
would generally exercise their authority to vote in favor of
adjournment.
Solicitation
of Proxies and Expenses
Steel Vault and VeriChip will equally share the costs of
soliciting proxies for their respective meetings. Certain
directors, officers and employees of Steel Vault may solicit
proxies, without additional remuneration, by telephone,
facsimile, electronic mail, telegraph and in person. Following
the mailing of this joint proxy statement/prospectus, Steel
Vault will request brokers, custodians, nominees and other
record holders to forward copies of this joint proxy
statement/prospectus to persons for whom they hold shares of
common stock and to request authority for the exercise of
proxies. In such cases, Steel Vault, upon the request of the
record holder, will reimburse such holders for their reasonable
expenses.
If your shares are registered in the name of a bank or brokerage
firm, you may be eligible to vote your shares by telephone or
internet. A large number of banks and brokerage firms are
participating in the Broadridge Investor Communication Services
telephone or internet voting program. This program provides
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eligible stockholders the opportunity to vote by telephone or
internet. If your bank or brokerage firm is participating in
Broadridge’s program, your voting form will provide
instructions. If your voting form does not reference telephone
or internet information, please complete and return the paper
proxy card in the self-addressed, postage-paid envelope
provided. If you have any questions about executing your proxy
or require assistance, please contact: Allison Tomek, Investor
Relations, at
(561) 805-8000.
Contact
for Questions and Assistance in Voting
If you have a question about the merger, or how to vote or
revoke a proxy, or you wish to obtain additional copies of this
joint proxy statement/prospectus, please contact: Allison Tomek,
Investor Relations, 1690 South Congress Avenue, Suite 200,
Delray Beach, Florida 33445 by mail or by calling Allison Tomek
at
(561) 805-8000.
Board of
Directors Recommendations
After careful consideration, the board of directors of Steel
Vault believes, based on the recommendation of the Steel Vault
special committee, that the merger is advisable, fair to, and in
the best interests of Steel Vault and its stockholders. The
Steel Vault board of directors unanimously recommends that its
stockholders vote “FOR” the proposal to approve and
adopt the merger agreement, and “FOR” the proposal to
approve an adjournment or postponement of the special meeting,
if necessary.
Surrender
of Certificates
Please DO NOT send your Steel Vault stock certificates with your
proxy card. If the merger is approved, you will be sent written
instructions for exchanging your stock certificates.
61
THE
MERGER
General
VeriChip, VeriChip Acquisition Corp., a wholly-owned subsidiary
of VeriChip, and Steel Vault have entered into a merger
agreement pursuant to which VeriChip Acquisition Corp. will
merge with and into Steel Vault. In connection with the merger,
VeriChip will acquire all of the outstanding shares of common
stock of Steel Vault. VeriChip shares a common ownership, or
control group, with Steel Vault. As of September 25, 2009,
Scott R. Silverman, VeriChip’s chief executive officer and
executive chairman and Steel Vault’s chairman, beneficially
owned, directly or indirectly, 49.4% of VeriChip’s
outstanding common stock and 53.7% of Steel Vault’s
outstanding common stock. After the merger, Steel Vault will be
a wholly-owned subsidiary of VeriChip and each share of Steel
Vault common stock then outstanding will be canceled and
automatically converted into the right to receive
0.5 shares of VeriChip common stock. The total number of
shares of VeriChip common stock issuable as merger consideration
is subject to adjustment, as is more fully described under
“The Merger Agreement — Exchange of Shares.”
No fractional shares of VeriChip common stock will be issued in
connection with the merger. Instead, VeriChip will make a cash
payment to each Steel Vault stockholder who would otherwise
receive a fractional share. VeriChip stockholders will continue
to own their existing shares in VeriChip.
Background
of the Merger
On November 12, 2008, VeriChip announced its intention to
explore potential strategic transactions with third parties,
while continuing to develop its VeriMed Health Link business.
Over the next several months, VeriChip evaluated and considered
a number of possible strategic transactions but determined for
various business reasons not to pursue such transactions. During
such time, the board of directors of VeriChip held several
meetings with management to discuss the various possible
strategic alternatives.
In the February 2009, VeriChip announced that it was going to
remain focused on both its healthcare business including its
VeriMed Health Link business, and the possible development of
the glucose sensing microchip, and strategic opportunities in
the healthcare, identification and clean and alternative energy
sectors. In March, 2009, the Company established a new division
to evaluate clean and alternative energy companies for potential
strategic transactions or investment and as a result established
a new subsidiary, VeriGreen Energy Corporation. The board of
directors of VeriChip continued to have meetings with management
to discuss VeriChip’s current business and possible
strategic alternatives.
In August 2009, VeriChip announced that it was continuing to
evaluate several potential strategies to maximize stockholder
value, including active discussions with a number of third
parties, and as part of that evaluation process, VeriChip’s
management and board of directors were in informal discussions
with Steel Vault’s management and board of directors
regarding alternatives that VeriChip and Steel Vault might
employ to maximize the stockholder value of both companies.
The informal discussions progressed so that, by the middle of
August 2009, the boards of directors of VeriChip and Steel Vault
decided that they should evaluate a possible business
combination of the two companies due to the potential synergies
between the two companies and the benefits of combining the two
businesses together to create a new company to provide
identification tools and technologies for consumers and
businesses.
On August 17, 2009, Steel Vault’s board of directors
determined, as a result of the related party nature of the
transaction, that it was advisable to establish a special
committee of the board of directors to evaluate the proposed
transaction with VeriChip and to negotiate the terms of any such
transaction. The board of directors designated Kevin McLaughlin
(chair) and Charles Baker as the members of the Steel Vault
special committee.
On August 17, 2009, VeriChip’s board of directors also
determined that as a result of the related party nature of the
transaction, it was advisable to establish a special committee
of the board of directors to evaluate the proposed transaction
with Steel Vault and to negotiate the terms of any such
transaction. The board of
62
directors designated Steven Foland (chair) and Barry Edelstein
as the members of the VeriChip special committee.
At that time, each board of directors delegated to their
respective special committee the authority to investigate and
negotiate a potential transaction with the other party, and to
take all other actions it deemed necessary to pursue such
mandate, including the hiring of independent legal and financial
advisors. The resolutions appointing the special committees of
each company only granted the special committees authority to
consider the proposed transaction between VeriChip and Steel
Vault, and therefore the special committees did not consider any
strategic alternatives to the proposed transaction.
The committee chairs performed due diligence with management of
both companies prior to retaining bankers.
The VeriChip special committee held a meeting on the afternoon
of August 17, 2009 to discuss potential legal and financial
advisors to assist the special committee in fulfilling its
duties and evaluating the possible transaction with Steel Vault.
On August 17, 2009, the VeriChip special committee engaged
the law firm of Holland & Knight LLP to act as the
committee’s legal advisor. On August 17, 2009, the
VeriChip special committee received a presentation from its
legal counsel regarding the special committee’s fiduciary
duties in evaluating a transaction with Steel Vault. After
interviewing several investment banking firms, the special
committee, at a meeting held August 19, 2009, elected to
retain Ladenburg Thalmann & Co. Inc. as its
independent financial advisor to provide an opinion regarding
fairness in connection with a possible business combination with
Steel Vault. The special committee selected Ladenburg
Thalmann & Co. Inc. based on its independence,
reputation and experience in representing special committees in
similar types of transactions.
On August 19, 2009, VeriChip and Steel Vault entered into a
mutual non-disclosure agreement which permitted their respective
advisors to conduct in-depth due diligence. Both companies
proceeded thereafter to exchange due diligence material and to
conduct due diligence. Also during this period, the VeriChip
special committee directed its counsel to distribute a draft
merger agreement to the Steel Vault special committee and its
counsel, and to begin negotiations of the merger agreement.
The Steel Vault special committee held several meetings during
the week of August 17, 2009 to discuss the engagement of
potential legal and financial advisors to assist the special
committee in fulfilling its duties and evaluating the possible
transaction with VeriChip. After interviewing several law firms,
the special committee, at a meeting held August 21, 2009,
elected to retain Fowler White Boggs P.A. as the special
committee’s independent legal counsel.
On August 21, 2009, Holland & Knight LLP
circulated a draft merger agreement to the VeriChip and Steel
Vault special committees and to Steel Vault’s special
committee’s legal advisor.
On August 18, 19, and 20, 2009, the Steel Vault special
committee interviewed several investment banking firms.
On August 24, 2009, Mr. Foland, the Chairman of the
VeriChip special committee, had a call with Ladenburg to discuss
the due diligence materials, the process Ladenburg plans to use
to conduct its analysis on the fairness of the transaction, and
valuation and pricing issues.
Following several telephonic discussions with its legal counsel
to discuss the selection of an independent financial advisor, on
August 25, 2009, the Steel Vault special committee engaged
Hyde Park Capital Advisors, LLC as its independent financial
advisor to provide an opinion regarding fairness in connection
with a possible business combination with VeriChip. The special
committee selected Hyde Park Capital Advisors, LLC based on its
independence and its reputation and experience in representing
special committees in similar types of transactions.
On the afternoon of August 25, 2009, the VeriChip special
committee held a telephonic meeting to discuss the process,
pricing, and potential benefits and risks of the proposed merger
to the stockholders of VeriChip. On the evening of
August 25, 2009, Mr. Foland had a telephonic meeting
with legal counsel to discuss the status of the transaction.
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Following the hiring of their financial advisors, VeriChip and
Steel Vault provided both special committees and their
respective advisors with financial and other information, and
both special committees and their advisors conducted a number of
due diligence and management meetings in Delray Beach, Florida
and by telephone. In particular, on August 26, 2009,
representatives from Ladenburg attended an in-person meeting
with the management of VeriChip and Steel Vault and conducted a
financial review of VeriChip and Steel Vault, including
investigations of the companies’ backgrounds, current
operations and assets, liquidity and financial statements,
future expectations and projections and other relevant data
regarding both VeriChip and Steel Vault.
On August 26, 2009, the VeriChip special committee and
VeriChip’s legal counsel met telephonically to discuss the
terms of the merger agreement and the special committee’s
questions and comments to the merger agreement.
On August 26, 2009, the Steel Vault special committee met
with its legal counsel to discuss the special committee’s
fiduciary duties in evaluating a transaction with VeriChip,
management’s role in considering strategic alternatives to
the proposed merger, the terms of the merger agreement and the
special committee’s questions and comments to the merger
agreement and the proposed business combination.
On August 26, 2009, counsel to the Steel Vault special
committee delivered the special committee’s initial
comments to the merger agreement to VeriChip’ counsel,
Holland & Knight LLP. On August 27, 2009, counsel
for VeriChip and the Steel Vault special committee had an
extensive telephone conference to discuss the terms of the
merger agreement.
On August 27, 2009, representatives from Hyde Park attended
an in-person meeting with management of VeriChip and Steel Vault
to discuss the background of both companies from a business and
financial perspective and the rationale for the merger.
On August 27, 2009, Mr. Foland had a telephonic
meeting with representatives from Ladenburg regarding its
in-person meeting with management. Later on August 27,
2009, Mr. Foland and Mr. Edelstein discussed the
status of Ladenburg’s meeting with management.
On August 27, 2009, Ladenburg sent out a supplemental due
diligence request list seeking additional information relating
to Steel Vault and its subsidiaries.
On August 28, 2009, Holland & Knight LLP
circulated a revised draft of the merger agreement to the
members of both special committees, to counsel for the Steel
Vault special committee, and to both company’s financial
advisors.
On August 29 and 30, 2009, management responded to additional
due diligence requests from both companies financial advisors.
On August 31, 2009, the special committees met with their
respective financial and legal advisors to review and discuss
the status of the proposed merger, including the due diligence
conducted to date and the analysis being conducted by each of
the companies financial advisors.
On September 1, 2009, Mr. Foland had a telephonic
meeting with representatives from Ladenburg regarding the status
of their financial analyses with respect to the common stock
exchange ratio.
On the morning of September 2, 2009, the VeriChip special
committee had an in-person meeting with representatives from
Ladenburg to discuss the preliminary draft of the fairness
opinion presentation. The VeriChip special committees and
Ladenburg also discussed the strategic implications and
potential benefits and risks of the proposed merger to the
VeriChip stockholders.
On the morning of September 2, 2009, the Steel Vault
special committee had an in-person meeting with representatives
from Hyde Park and the special committee’s legal counsel.
Representatives of Hyde Park discussed with the Steel Vault
special committee the financial terms of the transaction and
presented certain financial analyses conducted with respect to
the transaction. Hyde Park then delivered its oral opinion
(which was subsequently confirmed in writing) to the special
committee that the common stock exchange ratio was fair, from a
financial point of view, to Steel Vault’s stockholders.
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On the afternoon of September 2, 2009, the board of
directors of Steel Vault had an in-person meeting to discuss the
status of the merger. At such meeting, Hyde Park telephonically
presented its fairness opinion presentation to the board. Hyde
Park then delivered its oral opinion (which was subsequently
confirmed in writing) to the board that the common stock
exchange ratio was fair, from a financial point of view, to
Steel Vault’s stockholders.
On the afternoon of September 2, 2009, the board of
directors of VeriChip had an in-person meeting to discuss the
status of merger. Mr. Foland updated the board on
Ladenburg’s progress in connection with rendering its
fairness opinion.
On September 3, 2009, the VeriChip special committee had a
telephonic meeting with representatives from Ladenburg and
Holland & Knight to discuss Ladenburg’s fairness
opinion presentation. Representatives of Ladenburg reviewed with
the VeriChip special committee the financial terms of the
transaction and discussed certain financial analyses conducted
with respect to the common stock exchange ratio. Ladenburg then
delivered its oral opinion (which was subsequently confirmed in
writing) that the common stock exchange ratio was fair, from a
financial point of view, to VeriChip’s stockholders.
On September 4, 2009, the VeriChip special committee met to
consider the proposed transaction. A representative of
Holland & Knight LLP reviewed the terms of the merger
agreement and legal issues relating to the proposed merger
transaction. The committee discussed the fairness opinion
presentation it received from Ladenburg on September 3,
2009. After deliberation, the VeriChip special committee
unanimously determined the merger to be advisable, fair to, and
in the best interests of VeriChip and its stockholders and
recommended that VeriChip’s board of directors approve the
merger agreement.
Following the VeriChip special committee meeting,
VeriChip’s board of directors met to consider the proposed
transaction. After receiving the recommendation of the VeriChip
special committee, the board of directors unanimously determined
the merger to be advisable, fair to, and in the best interests
of VeriChip and its stockholders, approved the merger agreement,
and recommended that VeriChip’s stockholders vote in favor
of the issuance of shares of VeriChip common stock in the merger.
On September 4, 2009, the Steel Vault special committee met
to consider the proposed transaction. At the meeting, the Steel
Vault special committee considered the structure, terms and
effects of the transaction. A representatives of Fowler White
Boggs P.A. reviewed the terms of the merger agreement and legal
issues relating to the proposed merger transaction. After
deliberation, the Steel Vault special committee unanimously
determined the merger to be advisable, fair to, and in the best
interests of Steel Vault and its stockholders and recommended
that Steel Vault’s board of directors approve the merger
agreement.
Following the Steel Vault special committee meeting, Steel
Vault’s board of directors met to consider the proposed
transaction. After receiving the recommendation of the Steel
Vault special committee, the board of directors unanimously
determined the merger to be advisable, fair to, and in the best
interests of Steel Vault and its stockholders, approved and
adopted the merger agreement and declared its advisability,
approved the merger and other transactions contemplated by the
merger agreement, and recommended that Steel Vault’s
stockholders vote in favor of the approval and adoption of the
merger agreement.
On September 4, 2009, the parties signed the merger
agreement. On September 8, 2009, VeriChip and Steel Vault
issued a joint press release announcing the execution of the
merger agreement.
Description
of Contracts and Other Arrangements Between VeriChip and Steel
Vault
Director
and Officer Roles and Relationships with VeriChip’s
Subsidiaries
Several of VeriChip’s directors and executive officers have
served and, in certain cases, continue to serve as directors and
officers of Steel Vault. By virtue of the relationships
described below, certain of VeriChip’s directors and
executive officers may face situations in which there are actual
or apparent conflicts of interest that could interfere, or
appear to interfere, with their ability to act in a manner that
is in VeriChip’s best business interests.
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At the board level:
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Two of VeriChip’s five directors — Scott R.
Silverman and Michael E. Krawitz — currently serve on
the five-member board of directors of Steel Vault.
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Mr. Silverman serves as the chief executive officer and
executive chairman of VeriChip’s board of directors and as
the chairman of the board of directors of Steel Vault.
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Mr. Silverman is a manager of Blue Moon, which company
holds 2,570,000 shares of Steel Vault common stock.
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•
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Mr. Silverman owns and controls R & R, which
holds 5,355,556 shares of VeriChip common stock and owns a
50% interest in Blue Moon.
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•
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Jeffrey S. Cobb and Barry M. Edelstein, both of whom are members
of VeriChip’s board of directors, each own a 16.67%
interest in Blue Moon.
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•
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Mr. Caragol, the acting chief financial officer of
VeriChip, and the chief executive officer, president and acting
chief financial officer of Steel Vault, owns a 16.67% interest
in Blue Moon.
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Mr. Krawitz, a member of VeriChip’s board, serves as
the chair of the audit committee and as a member of the
compensation committee and the nominating and governance
committee of Steel Vault.
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•
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Mr. Cobb, a member of VeriChip’s board of directors,
served as a member of Steel Vault’s board of directors
until his resignation from the Steel Vault board of directors on
July 22, 2008.
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•
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Kevin H. McLaughlin, a member of Steel Vault’s board of
directors, resigned as VeriChip’s chief executive officer
and as a member of VeriChip’s board of directors effective
December 2, 2006.
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At the officer level:
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•
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Mr. Silverman, who served as VeriChip’s acting
president from March 2007 through May 4, 2007, chief
executive officer from December 5, 2006 through
July 18, 2008 and previously from April 2003 through June
2004, currently serves as the chief executive officer and
executive chairman of VeriChip and the chairman of Steel Vault.
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•
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Mr. Caragol has served as acting chief financial officer of
VeriChip since January 1, 2009, and previously served as
president of VeriChip since May 2007, chief financial officer
since August 2006, treasurer since December 2006, and secretary
since March 2007. Mr. Caragol has served as Steel
Vault’s chief executive officer, president and a member of
its board of directors since December 3, 2008 and as acting
chief financial officer since October 24, 2008.
Mr. Caragol served as acting chief executive officer of
Steel Vault from October 24, 2008 until December 3,
2008, when he was appointed chief executive officer.
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In their various capacities with VeriChip’s former parent
company, Digital Angel, which was also formerly the parent
company of Steel Vault, Messrs. Silverman, Edelstein,
McLaughlin and Krawitz were granted stock option awards to
purchase shares of common stock of Steel Vault.
Messrs. Cobb and Caragol also hold stock option awards to
purchase shares of common stock of Steel Vault. In their various
capacities with Digital Angel, Messrs. Silverman,
McLaughlin and Krawitz were granted stock options to purchase
shares of common stock of VeriChip.
Common
Ownership
VeriChip shares a common ownership, or control group, with Steel
Vault. On August 1, 2008, Digital Angel sold
2,570,000 shares of Steel Vault’s common stock to Blue
Moon Energy Partners, LLC, or Blue Moon, in exchange for
$400,000. The shares represented 49.9% of Steel Vault’s
outstanding common stock at that time and all of the shares that
Digital Angel owned. Mr. Silverman, VeriChip’s chief
executive officer and executive chairman of the board and Steel
Vault’s chairman of the board, is a manager and controls a
member of Blue Moon (i.e., R & R Consulting Partners,
LLC). Mr. Caragol, VeriChip’s acting chief financial
officer and Steel Vault’s chief executive officer,
president and acting chief financial officer and director, is
also a
66
manager and member of Blue Moon. On November 12, 2008,
R & R Consulting Partners, LLC, or R & R, a
holding company owned and controlled by Mr. Silverman,
acquired 5,355,556 shares of VeriChip common stock in
exchange for $750,000. As of September 25, 2009,
R & R and Mr. Silverman owned on a combined
basis, approximately 49.4% of VeriChip’s outstanding common
stock. As of September 25, 2009, Mr. Silverman
beneficially owned, directly or indirectly, approximately 53.7%
of Steel Vault’s outstanding common stock, including
2,570,000 shares that are directly owned by Blue Moon.
Related
Party Financing
On June 4, 2009, VeriChip closed a debt financing
transaction with Steel Vault for $500,000 pursuant to a secured
convertible promissory note. The two year note is collectible on
demand on or after June 4, 2010, accrues interest at a rate
of twelve percent and is secured by substantially all of Steel
Vault’s assets, including the assets of NCRC and the
security interest held by VeriChip on the assets is senior to
any other security interest on the assets pursuant to a
Subordination and Intercreditor Agreement between VeriChip and
Blue Moon. The note can be prepaid at any time without penalty
and matures on June 4, 2011. The unpaid principal and
accrued and unpaid interest under the note can be converted at
any time into common stock of Steel Vault at a price of $0.30
per share. The principal is convertible into
1,666,667 shares of Steel Vault common stock.
The financing transaction included a common stock purchase
warrant sold to VeriChip to purchase 333,334 common shares of
Steel Vault at a price of $0.30 per share, which we refer to as
the VeriChip Warrant. The VeriChip Warrant is currently
exercisable and is void after June 4, 2014. The note and
VeriChip Warrant were issued to VeriChip pursuant to a
Convertible Note and Warrant Subscription Agreement, dated
June 4, 2009, between VeriChip and Steel Vault, which
provides that Steel Vault will file a registration statement for
the public resale of the shares underlying the note and VeriChip
Warrant upon notice that VeriChip elects to convert all or part
of the note into common stock of Steel Vault.
The financing transaction also included a guaranty of collection
given by Mr. Caragol for the benefit of Steel Vault, for
which Mr. Caragol received a common stock purchase warrant
from Steel Vault to purchase 500,000 common shares of Steel
Vault at a price of $0.30 per share.
Upon consummation of the merger, VeriChip shall forgive the
principal and interest due under the note and the VeriChip
Warrant will be cancelled.
Sublease
On October 8, 2008, Steel Vault entered into a sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida, consisting approximately 7,911 feet
of office space, which space VeriChip shares with Steel Vault.
The rent for the entire twenty-one-month term of the sublease is
$158,000, which Steel Vault paid in one lump sum upon execution
of the sublease. VeriChip reimbursed Steel Vault for one-half of
the sublease payment, representing VeriChip’s share of the
total cost of the sublease. In addition, in order to account for
certain shared services and resources, VeriChip and Steel Vault
operate under a shared services agreement, in connection with
which Steel Vault currently pays VeriChip $6,500 a month. During
the six and three months ended June 30, 2009, VeriChip
recorded $45,000 and $21,000, respectively, for shared services
fees from Steel Vault. VeriChip did not record any payments for
shared services fees from Steel Vault for the six and three
months ended June 30, 2008.
For additional related party transactions of VeriChip, see
“Certain Relationships and Related Transactions”
beginning on page 150.
Recommendations
of the VeriChip Special Committee and Board of Directors With
Respect to the Merger
After careful consideration, the VeriChip special committee
determined that the merger is advisable, fair to and in the best
interests of VeriChip and its stockholders and recommended that
the VeriChip board of directors approve the merger agreement.
67
After careful consideration, the VeriChip board of directors,
based on the recommendation of the VeriChip special committee,
(i) determined that the merger is advisable, fair to, and
in the best interests of VeriChip and its stockholders,
(ii) approved and adopted the merger agreement, the merger
and the other transactions contemplated by the merger agreement,
(iii) approved the making of an amendment to the VeriChip
second amended and restated certificate of incorporation in
order to change its name to “PositiveID Corporation”
at the effective time of the merger, and (iv) recommended
that the VeriChip stockholders vote “FOR” the proposal
to issue VeriChip common stock pursuant to the merger agreement,
“FOR” the proposal to amend VeriChip’s second
amended and restated certificate of incorporation to change
VeriChip’s name to “PositiveID Corporation” at
the effective time of the merger and “FOR” the
proposal to approve an adjournment or postponement of the
special and annual meeting, if necessary.
VeriChip’s
Reasons for the Merger
Special
Committee Reasons for the Merger
In reaching its determination to recommend that the VeriChip
board approve the merger agreement, the VeriChip special
committee considered numerous factors in consultation with its
outside legal and financial advisors and VeriChip’s senior
management, including the following material factors and
benefits of the merger, each of which the VeriChip special
committee believed supported its determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the VeriChip special
committee and the Steel Vault special committee and their
respective legal and financial advisors.
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•
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The oral opinion received by the VeriChip special committee on
September 3, 2009 and later confirmed in writing, of
Ladenburg to the effect that, as of that date and subject to the
various assumptions, limitations and qualifications set forth in
its opinion, the common stock exchange ratio in the merger was
fair, from a financial point of view, to the stockholders of
VeriChip (other than Scott R. Silverman, William J. Caragol,
R & R Consulting Partners, LLC, Blue Moon Energy
Partners LLC and their respective affiliates). The full text of
Ladenburg’s written opinion, dated September 3, 2009,
which describes the assumptions made, matters considered and
limitations on the review undertaken, is attached to this joint
proxy statement/prospectus as Annex B.
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The combined company will be renamed PositiveID and should be in
a stronger competitive position due to its ability to provide
identification tools and technologies to protect consumers and
businesses with an initial focus on the convergence of identity
security solutions and personal health records.
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies; the merger is expected to result in an estimated
combined cost savings of approximately $500,000 annually.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company, higher
share price and potential to improve analyst coverage.
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The merger will create a larger public company.
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The combined businesses of PositiveID and its public company
position will provide the ability to augment organic growth with
strategic acquisitions.
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Steel Vault is obligated to reimburse VeriChip for expenses in
connection with the transaction, up to a maximum of $200,000, if
VeriChip terminates the merger agreement because:
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Steel Vault breaches a representation, warranty or covenant in
the merger agreement that is reasonably likely to have a
material adverse effect on Steel Vault;
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Steel Vault’s board of directors changes its recommendation
in favor of the issuance of shares of VeriChip common stock in
the merger; or
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A willful and material breach by Steel Vault causes the making
of a superior proposal by a third party.
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The VeriChip special committee believes that the above factors
generally supported its determination. The VeriChip special
committee did, however, consider the potential adverse effects
of other factors in connection with the merger. The material
negative factors considered were:
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The cost savings anticipated for VeriChip and Steel Vault as a
combined company may not be achieved;
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Steel Vault’s growth prospects may be less than currently
anticipated and not as great as the growth planned by VeriChip
alone;
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The value of the shares to be received by Steel Vault
stockholders may vary based upon the nature of the fixed
exchange ratio;
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VeriChip stockholders will suffer dilution if the merger is
consummated; and
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VeriChip stockholders will be subject to risks relating to Steel
Vault’s business, including NCRC.
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The foregoing discussion summarizes the material factors
considered by the VeriChip special committee in its
consideration of the merger agreement and the merger. After
considering these factors, the VeriChip special committee
concluded that the positive factors relating to the merger
agreement and the merger substantially outweighed the potential
negative factors. In view of the wide variety of factors
considered by the VeriChip special committee, and the complexity
of these matters, the VeriChip special committee did not find it
practicable to quantify or otherwise assign relative weights to
the foregoing factors. In addition, individual members of the
VeriChip special committee may have assigned different weights
to various factors. The VeriChip special committee recommended
approval of the merger agreement based upon the totality of the
information presented to and considered by it.
Board
Reasons for the Merger
In reaching its determination to recommend that VeriChip’s
stockholders vote for the approval of the issuance of VeriChip
common stock pursuant to the merger agreement, VeriChip’s
board considered numerous factors, including the recommendation
of the VeriChip special committee, as well as the above factors,
benefits and adverse effects of the merger considered by the
VeriChip special committee, which the board believed supported
its determinations.
The foregoing discussion summarizes the material factors
considered by the VeriChip board in its consideration of the
merger agreement and the merger. After considering these
factors, the VeriChip board concluded that the positive factors
relating to the merger agreement and the merger substantially
outweighed the potential negative factors. In view of the wide
variety of factors considered by the VeriChip board, and the
complexity of these matters, the VeriChip board did not find it
practicable to quantify or otherwise assign relative weights to
the foregoing factors. In addition, individual members of the
VeriChip board may have assigned different weights to various
factors. The VeriChip board recommended approval of the merger
agreement based upon the totality of the information presented
to and considered by it.
THE VERICHIP SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED THAT
THE VERICHIP BOARD OF DIRECTORS APPROVE THE MERGER AGREEMENT. AS
A RESULT, THE VERICHIP BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS OF VERICHIP VOTE “FOR” THE
PROPOSAL TO ISSUE VERICHIP COMMON STOCK PURSUANT TO THE
MERGER AGREEMENT, “FOR” THE PROPOSAL TO AMEND
VERICHIP’S SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE VERICHIP’S NAME TO “POSITIVEID
CORPORATION” AT THE EFFECTIVE TIME OF THE MERGER AND
“FOR” THE PROPOSAL TO APPROVE AN ADJOURNMENT OR
POSTPONEMENT OF THE SPECIAL AND ANNUAL MEETING, IF NECESSARY.
69
Recommendations
of the Steel Vault Special Committee and Board of Directors With
Respect to the Merger
After careful consideration, the Steel Vault special committee
determined that the merger is advisable, fair to, and in the
best interests of Steel Vault and its stockholders and
recommended that the Steel Vault board of directors approve the
merger agreement.
After careful consideration, the Steel Vault board of directors,
based on the recommendation of the special committee,
(i) determined that the merger is advisable, fair to, and
in the best interests of Steel Vault and its stockholders,
(ii) approved and adopted the merger agreement and declared
its advisability, and approved the merger and the other
transactions contemplated by the merger agreement and
(iii) recommended that the Steel Vault stockholders vote
“FOR” the proposal to approve and adopt the merger
agreement and “FOR” the proposal to approve an
adjournment or postponement of the special meeting, if necessary.
In considering the recommendation of Steel Vault’s board
with respect to the merger agreement, you should be aware that
some directors and officers of Steel Vault may have interests in
the merger that are different from, or are in addition to, the
interests of Steel Vault’s stockholders. See “The
Merger — Interests of Certain Persons in the
Merger.”
Steel
Vault’s Reasons for the Merger
Special
Committee Reasons for the Merger
In reaching its determination to recommend that the Steel Vault
board approve the merger agreement, the Steel Vault special
committee considered numerous factors in consultation with its
outside legal advisors and Steel Vault’s senior management,
including the following material factors and benefits of the
merger, each of which the Steel Vault special committee believed
supported its determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Steel Vault special
committee and the VeriChip special committee and their
respective legal and financial advisors.
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•
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The opinion of Hyde Park received by the Steel Vault special
committee on September 2, 2009 (later confirmed in writing
on September 4, 2009) stating that, as of
September 4, 2009, and subject to the various assumptions
and qualifications set forth in its opinion, the common stock
exchange ratio was fair, from a financial point of view, to the
holders of Steel Vault common stock. The full text of
Hyde Park’s written opinion, dated September 4,
2009, which describes the assumptions made, matters considered
and limitations on the review undertaken, is attached to this
joint proxy statement/prospectus as Annex C.
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The combined company will be renamed PositiveID and should be in
a stronger competitive position due to its ability to provide
identification tools and technologies to protect consumers and
businesses with an initial focus on the convergence of identity
security solutions and personal health records.
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•
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies; the merger is expected to result in an estimated
combined cost savings of approximately $500,000 annually.
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•
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company and
potential to improve analyst coverage.
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•
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The merger will create a larger public company.
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The combined businesses of PositiveID and its public company
position will provide the ability to augment organic growth with
strategic acquisitions.
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The merger will allow stockholders to continue to participate in
any potential growth of the combined company.
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The expectation that the merger will qualify as a transaction of
a type that is generally tax-free for United States federal
income tax purposes.
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70
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In connection with the proposed merger, William J. Caragol
agreed to waive any and all rights he has to any change of
control payment under that certain letter agreement between
Steel Vault and Mr. Caragol dated February 13, 2009.
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The merger agreement provides that Steel Vault has the right to
terminate the merger agreement if, among other reasons, the
board of directors changes its recommendation in favor of the
merger agreement under limited circumstances.
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VeriChip is obligated to reimburse Steel Vault for expenses in
connection with the transaction, up to a maximum of $200,000, if
Steel Vault terminates the merger agreement because:
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VeriChip breaches a representation, warranty or covenant in the
merger agreement that is reasonably likely to have a material
adverse effect on VeriChip or the surviving corporation;
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VeriChip’s board changes its recommendation in favor of the
issuance of shares of VeriChip common stock in the merger; or
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VeriChip agrees to be acquired by a third party.
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The Steel Vault special committee believes that the above
factors generally supported its determination. The Steel Vault
special committee did, however, consider the potential adverse
effects of other factors in connection with the merger. The
material negative factors considered were:
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The common stock exchange ratio is fixed, and Steel Vault
stockholders cannot be certain of the dollar value of the merger
consideration to be received in the merger.
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The cost savings anticipated for VeriChip and Steel Vault as a
combined company may not be achieved, or delays or difficulties
in eliminating certain redundant costs of the two companies
could delay or prevent the realization of the anticipated cost
savings.
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It is not a condition to closing that the merger agreement be
approved by a majority of Steel Vault disinterested stockholders
at the special meeting. As of September 25, 2009,
affiliates of VeriChip, which includes directors and officers of
VeriChip, collectively, together with their associates and
affiliates, beneficially owned approximately 9.8 million
shares, or 65.4% of Steel Vault common stock. These directors
and officers have indicated that they plan to vote their shares
in favor of the merger agreement, and their votes will count in
determining whether a majority of Steel Vault stockholders has
approved and adopted the merger agreement.
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The possibility that the merger may not be completed, or that
completion of the merger may be delayed.
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Steel Vault is required to pay the expenses of VeriChip, up to a
maximum of $200,000 upon the occurrence of the termination of
the merger under certain circumstances.
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The foregoing discussion summarizes the material factors
considered by the Steel Vault special committee in its
consideration of the merger agreement and the merger. After
considering these factors, the Steel Vault special committee
concluded that the positive factors relating to the merger
agreement and the merger substantially outweighed the potential
negative factors. In view of the wide variety of factors
considered by the Steel Vault special committee, and the
complexity of these matters, the Steel Vault special committee
did not find it practicable to quantify or otherwise assign
relative weights to the foregoing factors. In addition,
individual members of the Steel Vault special committee may have
assigned different weights to various factors. The Steel Vault
special committee recommended approval of the merger agreement
based upon the totality of the information presented to and
considered by it.
71
Board
Reasons for the Merger
In reaching its determination to recommend that Steel
Vault’s stockholders vote for approval and adoption of the
merger agreement, Steel Vault’s board considered numerous
factors, including the following material factors and benefits
of the merger, each of which the board believed supported its
determinations:
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The recommendation of the Steel Vault special committee,
including the above factors, benefits and adverse effects of the
merger considered by the Steel Vault special committee; and
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The opinion of Hyde Park received by the Steel Vault special
committee on September 4, 2009, that, as of that date and
subject to the various assumptions and limitations set forth in
its opinion, the common stock exchange ratio was fair, from a
financial point of view, to the holders of Steel Vault common
stock. The full text of Hyde Park’s written opinion, dated
September 4, 2009, which describes the assumptions made,
matters considered and limitations on the review undertaken, is
attached to this joint proxy statement/prospectus as
Annex C.
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The foregoing discussion summarizes the material factors
considered by the Steel Vault board in its consideration of the
merger agreement and the merger. After considering these
factors, the Steel Vault board concluded that the positive
factors relating to the merger agreement and the merger
substantially outweighed the potential negative factors. In view
of the wide variety of factors considered by the Steel Vault
board, and the complexity of these matters, the Steel Vault
board did not find it practicable to quantify or otherwise
assign relative weights to the foregoing factors. In addition,
individual members of the Steel Vault board may have assigned
different weights to various factors. The Steel Vault board
recommended the approval and adoption of the merger agreement
based upon the totality of the information presented to and
considered by it.
THE STEEL VAULT SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED
THAT THE STEEL VAULT BOARD OF DIRECTORS APPROVE THE MERGER
AGREEMENT. AS A RESULT, THE STEEL VAULT BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF STEEL VAULT VOTE
“FOR” THE PROPOSAL TO APPROVE AND ADOPT THE
MERGER AGREEMENT AND “FOR” THE PROPOSAL TO
APPROVE AN ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL
MEETING.
Opinion
of Financial Advisor to the VeriChip Special Committee
Pursuant to the letter agreement dated August 19, 2009, the
VeriChip special committee engaged Ladenburg to provide an
opinion regarding fairness to the VeriChip special committee in
connection with the merger. On September 3, 2009, Ladenburg
rendered its oral opinion to the VeriChip special committee
(which was subsequently confirmed in writing by delivery of
Ladenburg’s written opinion dated September 3,
2009) to the effect that, as of September 3, 2009, the
common stock exchange ratio in the merger was fair, from a
financial point of view, to the stockholders of VeriChip (other
than Scott R. Silverman, William J. Caragol, R & R
Consulting Partners, LLC, Blue Moon Energy Partners LLC and
their respective affiliates).
Ladenburg’s opinion was directed to the VeriChip special
committee and only addressed the fairness, from a financial
point of view, of the common stock exchange ratio in the merger
and does not address any other aspect or implication of the
merger. The summary of Ladenburg’s opinion in this joint
proxy statement/prospectus is qualified in its entirety by
reference to the full text of its written opinion, which is
included as Annex B to this joint proxy
statement/prospectus and sets forth the procedures followed,
assumptions made, qualifications and limitations on the review
undertaken, and other matters considered by Ladenburg in
preparing its opinion. We encourage you to carefully read the
full text of Ladenburg’s written opinion. However, neither
Ladenburg’s written opinion nor the summary of its opinion
and the related analyses set forth in this joint proxy
statement/prospectus are intended to be, and do not constitute
advice or a recommendation to any stockholder as to how such
stockholder should act or vote with respect to the merger or any
other matter relating thereto.
Ladenburg’s opinion is for the use and benefit of the
VeriChip special committee in connection with its consideration
of the merger. Ladenburg’s opinion may not be used by any
other person or for any other
72
purpose without Ladenburg’s prior written consent.
Ladenburg’s opinion should not be construed as creating any
fiduciary duty on its part to any party.
Ladenburg was not requested to opine as to, and its 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, whether we should complete the merger, and other
alternatives to the merger that might exist for us. Ladenburg
does not express any opinion as to the underlying valuation or
future performance of VeriChip or Steel Vault or the price at
which VeriChip’s or Steel Vault’s securities might
trade at any time in the future.
Ladenburg’s analysis and opinion are necessarily based upon
market, economic and other conditions, as they existed on, and
could be evaluated as of, September 3, 2009. Accordingly,
although subsequent developments may affect its opinion,
Ladenburg assumed no obligation to update, review or reaffirm
its opinion to us or any other person.
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 a draft of the merger agreement dated as of
September 3, 2009 and a draft of the waiver agreement
between William J. Caragol and Steel Vault dated
September 1, 2009.
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•
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Reviewed publicly available financial information and other data
with respect to VeriChip that Ladenburg deemed relevant,
including the Annual Report on
Form 10-K
for the year ended December 31, 2008, the Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2009, and the Current Report
on
Form 8-K
filed August 31, 2009.
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•
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Reviewed non-public information and other data with respect to
VeriChip.
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|
•
|
Reviewed publicly available financial information and other data
with respect to Steel Vault that Ladenburg deemed relevant,
including the Annual Report on
Form 10-K
for the year ended September 30, 2008, the Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2009, and the Definitive
Proxy Statement on Schedule 14A filed February 9,
2009, as amended.
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•
|
Reviewed non-public information and other data with respect to
Steel Vault, including, financial projections for the periods
through December 31, 2012, or the projections, and other
internal financial information and management reports.
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•
|
Reviewed and analyzed the merger’s pro forma impact on
VeriChip’s outstanding securities and stockholders
ownership.
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•
|
Considered the historical financial results and present
financial condition of VeriChip and Steel Vault.
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•
|
Reviewed and compared the trading of, and the trading market
for, each of the VeriChip common stock and the Steel Vault
common stock, and two general market indices.
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•
|
Reviewed the exchange ratio implied by the respective stock
prices of the VeriChip common stock and the Steel Vault common
stock over various periods.
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•
|
Reviewed and prepared a sum of the parts analysis of
VeriChip’s assets.
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|
•
|
Reviewed and analyzed Steel Vault’s projected unlevered
free cash flows derived from the projections 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 Steel Vault.
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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 Steel Vault.
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73
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|
•
|
Reviewed and discussed with VeriChip’s and Steel
Vault’s management certain financial and operating
information furnished by them, including financial analyses and
the projections with respect to VeriChip’s and Steel
Vault’s business and operations.
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•
|
Performed such other analyses and examinations as were deemed
appropriate.
|
In arriving at its opinion, with VeriChip’s consent,
Ladenburg relied upon and assumed, without assuming any
responsibility for independent verification, the accuracy and
completeness of all of the financial and other information that
was supplied or otherwise made available to Ladenburg and
Ladenburg further relied upon the assurances of VeriChip and
Steel Vault 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 the
projections reviewed, Ladenburg assumed that such information
was reasonably prepared on a basis reflecting the best currently
available estimates and judgments, and that such information
provided a reasonable basis upon which it could make its
analysis and form an opinion. The projections were solely used
in connection with the rendering of Ladenburg’s fairness
opinion. Stockholders should not place reliance upon such
projections, as they are not necessarily an indication of what
Steel Vault’s revenues and profit margins will be in the
future. The projections were prepared by Steel Vault management
and are not to be interpreted as projections of future
performance, or guidance, by Steel Vault. Ladenburg did not
evaluate the solvency or fair value of VeriChip or Steel Vault
under any applicable foreign, state or federal laws relating to
bankruptcy, insolvency or similar matters. Ladenburg did not
physically inspect VeriChip’s or Steel Vault’s
properties and facilities and did not make or obtain any
evaluations or appraisals of either company’s assets and
liabilities (including any contingent, derivative or
off-balance-sheet assets and liabilities). Ladenburg did not
attempt to confirm whether VeriChip and Steel Vault had good
title to their respective assets.
Ladenburg assumed that the merger will be consummated in a
manner that complies in all respects with applicable foreign,
federal, state and local laws, rules and regulations. Ladenburg
assumed, with VeriChip’s consent, that the final executed
forms of the merger agreement do not differ in any material
respect from the drafts Ladenburg reviewed and that the merger
will be consummated on the terms set forth in the merger
agreement, without further amendments thereto, and without
waiver by VeriChip of conditions to any of its obligations
thereunder or in the alternative that any such amendments or
waivers thereto will not be detrimental to VeriChip or its
stockholders (other than Scott R. Silverman, William J. Caragol,
R & R Consulting Partners, LLC, Blue Moon Energy
Partners LLC and their respective affiliates) in any material
respect. Also, based upon discussions with VeriChip management,
Ladenburg assumed that the merger will qualify as a plan of
reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended.
In connection with rendering its opinion, Ladenburg performed
certain financial, comparative and other analyses as summarized
below. Each of the analyses conducted by Ladenburg was carried
out to provide a different perspective on the merger, and to
enhance the total mix of information available. Ladenburg did
not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support its
opinion. Further, the summary of Ladenburg’s analyses
described below is not a complete description of the analyses
underlying Ladenburg’s opinion. The preparation of a
fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Ladenburg made
qualitative judgments as to the relevance of each analysis and
factors that it considered. Also, Ladenburg may have given
various analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than
other assumptions, so that the range of valuations resulting
from any particular analysis described above should not be taken
to be Ladenburg’s view of the value of VeriChip and Steel
Vault’s assets. The estimates contained in Ladenburg’s
analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual
values or actual future results, which may be significantly more
or less favorable than suggested by such analyses. Also,
analyses relating to the value of businesses or assets neither
purport to be appraisals nor do they necessarily reflect the
prices at which businesses or assets may actually be sold.
Accordingly, Ladenburg’s analyses and estimates are
inherently subject to substantial uncertainty. Ladenburg
believes that its analyses must be considered as a whole and
that selecting portions of
74
its analyses or the factors it considered, without considering
all analyses and factors collectively, could create a misleading
or incomplete view of the process underlying the analyses
performed by Ladenburg in connection with the preparation of its
opinion.
The summaries of the financial reviews and analyses include
information presented in tabular format. To fully understand
Ladenburg’s financial reviews and analyses, you must read
the tables together with the accompanying text of each summary.
The tables alone do not constitute a complete description of the
financial analyses, including the methodologies and assumptions
underlying the analyses, and if viewed in isolation could create
a misleading or incomplete view of the financial analyses
Ladenburg performed.
The analyses performed were prepared solely as part of
Ladenburg’s analysis of the fairness of the exchange ratio
used in the merger from a financial point of view to the
stockholders of VeriChip (other than Scott R. Silverman, William
J. Caragol, R & R Consulting Partners, LLC, Blue Moon
Energy Partners LLC and their respective affiliates), and were
provided to the VeriChip special committee in connection with
the delivery of Ladenburg’s opinion. Ladenburg’s
opinion was just one of the several factors the VeriChip special
committee took into account in making its determination to
approve the merger, including those described elsewhere in this
joint proxy statement/prospectus.
Stock
Performance Review
Ladenburg reviewed the daily closing market price and trading
volume of VeriChip’s and Steel Vault’s common stock
for the
12-month
period ended August 31, 2009 and noted the following:
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•
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VeriChip’s common stock’s mean stock price over the
12 month and last 90 day period was $0.48 and $0.49,
respectively.
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•
|
VeriChip’s mean and median volume over the
12-month
period was 29,916 and 15,930 shares per day.
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•
|
Steel Vault’s mean stock price over the
12-month
and
last 90 day period was $0.31 and $0.28, respectively.
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•
|
Steel Vault’s mean and median volume was comparatively
lower than VeriChip’s common stock at approximately 3,437
and 100 shares per day over the
12-month
period.
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Historical
Exchange Ratio Review
Ladenburg reviewed the historical implied exchange ratio between
the common stock price of VeriChip and Steel Vault and noted the
following:
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•
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The implied average ratio over the last 30 and 90 days was
0.59 times and 0.58 times, respectively.
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•
|
The implied average ratio based on the volume weighted mean over
the last 30 and 90 days was 0.50 times and 0.55 times,
respectively.
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•
|
Over the last twelve month period ended August 31, 2009,
the implied daily exchange ratio was above 0.5 approximately
78.9% of the time.
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Valuation
Overview & Implied Exchange Ratio
Ladenburg generated an indicated equity valuation range for
VeriChip based on a sum-of-the-parts analysis of between
$6.5 million and $8.2 million. The sum-of-the-parts
analysis is based on an adjusted book value approach and was
used because VeriChip has no significant operating assets that
generate revenue, and has primary assets consisting of cash and
intangibles. The indicated equity value range derived for
VeriChip implied an indicated equity value range per share of
between $0.47 and $0.59, based on 13.804 million and
13.833 million shares outstanding, respectively, utilizing
the treasury stock method.
Ladenburg generated an indicated valuation range for Steel Vault
based on a discounted cash flow analysis, a comparable company
analysis and a comparable transaction analysis each as more
fully discussed below. Ladenburg utilized the minimum and
maximum values to arrive at an indicated equity value of between
75
approximately $2.0 million to approximately
$4.6 million. The indicated equity value range derived for
Steel Vault implied an indicated equity value range per share of
between approximately $0.19 and $0.40, based on
10.605 million and 11.395 million shares outstanding,
respectively, utilizing the treasury stock method.
Ladenburg calculated the implied exchange ratio range based on
the indicated equity value per share ranges for VeriChip and
Steel Vault at between 0.32 and 0.86. The low end of the range
was derived by comparing the maximum value for VeriChip with the
minimum value for Steel Vault, and the high end of the range was
derived by comparing the minimum value for VeriChip with the
maximum value for Steel Vault. Ladenburg noted that the exchange
ratio of 0.50 times was within the implied exchange ratio range
based on the company’s respective equity values.
Sum of
the Parts Analysis
The sum-of-the-parts analysis is based on an adjusted book value
approach and was used because VeriChip has no significant
operating assets that generate revenue, and has primary assets
consisting of cash and intangibles. Ladenburg utilized
VeriChip’s balance sheet as of June 30, 2009 and
adjusted the assets to include additional value for intangibles
of between $1.25 million and $3.0 million, relating to
the value of the RFID intangibles, health care database and
Nasdaq listing, to derive an indicated equity value range of
between approximately $6.5 million and approximately
$8.2 million.
Discounted
Cash Flow Analysis
A discounted cash flow analysis estimates value based upon a
company’s projected future free cash flow discounted at a
rate reflecting risks inherent in its business and capital
structure. Unlevered free cash flow represents the amount of
cash generated and available for principal, interest and
dividend payments after providing for ongoing business
operations.
While the discounted cash flow analysis is the most scientific
of the methodologies used, it is dependent on projections and is
further dependent on numerous industry-specific and
macroeconomic factors.
In order to utilize the discounted cash flow analysis to
indicate a value for Steel Vault, Ladenburg utilized the
projections, which forecast a significant increase in revenues
from FY2009 to FY2010 from $1.6 million to approximately
$19.8 million based on projected increases in subscribers
as a result of additional directed marketing spend.
The projections also forecast Steel Vault to reach EBITDA
profitability by part way through 2010 and for the full year
2011. For purposes of Ladenburg’s analyses,
“EBITDA” means earnings before interest, taxes,
depreciation and amortization.
To arrive at a present value, Ladenburg utilized discount rates
ranging from 34.5% to 36.5%. This was based on an estimated
weighted average cost of capital of 35.4% (based on an estimated
weighted average cost of debt of 10.1% and 37.2% estimated cost
of equity). The cost of equity calculation was derived utilizing
the Ibbotson build up method utilizing appropriate equity risk,
industry risk and size premiums and a company specific risk
factor, reflecting the risks associated with the early stage
operations of Steel Vault, low barriers to entry and significant
competition, pricing risk, and risks related to the ability to
increase subscribers and reduce churn rates.
Ladenburg presented a range of terminal values at the end of the
forecast period by applying a range of long term perpetual
growth rates of between 4.0% and 5.0%, and calculated a range of
indicated enterprise values. Ladenburg then deducted net debt of
approximately $0.51 million (which includes approximately
$0.69 million in interest bearing debt less approximately
$0.18 million in cash) to derive an indicated equity value
range of approximately $4.1 million to approximately
$4.6 million. For purposes of Ladenburg’s analyses,
“enterprise value” means equity value plus all
interest-bearing debt less cash.
76
Comparable
Company Analysis
A selected comparable company analysis reviews the trading
multiples of publicly traded companies that are similar to Steel
Vault with respect to business and revenue model, operating
sector, size and target customer base.
Ladenburg identified the following seven companies that it
deemed comparable to Steel Vault with respect to their industry
sector and operating model:
Experian PLC
Equifax, Inc.
First Advantage Corporation
Fair Isaac Corp.
Intersections, Inc.
ID Watchdog, Inc.
TheStreet.com, Inc.
All of the comparable companies, with the exception of
TheStreet.com, Inc., were involved in the consumer credit
security industry. Four of the comparable companies (Experian,
Equifax, First Advantage and Fair Isaac) primarily offer their
services to businesses, while the other three offer most of
their services directly to consumers on a subscription basis.
As Steel Vault is an early-stage company, all of the comparable
companies are much larger than Steel Vault both in terms of
revenue and enterprise value. Unlike Steel Vault, all of the
comparable companies are also profitable (with the exception of
ID Watchdog).
Multiples utilizing enterprise value were used in the analyses.
For comparison purposes, all operating profits including EBITDA
were normalized to exclude unusual and extraordinary expenses
and income.
Ladenburg generated the following multiples worth noting with
respect to the comparable companies:
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Enterprise Value Multiple of
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Mean
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Median
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High
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Low
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LTM revenue
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1.99
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x
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2.04
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x
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3.89
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x
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0.27
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x
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2009 revenue
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1.72
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x
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1.78
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x
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2.81
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x
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0.22
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x
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2010 revenue
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1.66
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x
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1.70
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x
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2.73
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x
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0.19
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x
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2008 EBITDA
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7.4
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x
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7.6
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x
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9.9
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x
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3.2
|
x
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Despite Steel Vault’s strong projected revenue growth rate,
Ladenburg expects Steel Vault’s valuation multiples to be
below the mean of the comparable companies with respect to
CY2009 revenue and current run-rate revenue because of the
significant risks related to low barriers to entry, significant
competition, dependency on sales and marketing programs with
corporate affiliates and future capital needs.
Based on the above factors, Ladenburg applied revenue multiples
of between 1.30 times and 1.80 times to Steel Vault’s
CY2009 revenue and current run-rate revenue of approximately
$1.6 million and $2.3 million, respectively. The
implied range of indicated enterprise values for Steel Vault was
then determined by weighting the above indications equally.
Ladenburg then deducted net debt of approximately
$0.51 million to derive an indicated equity value range of
approximately $2.0 million to approximately
$3.0 million.
None of the comparable companies have characteristics identical
to Steel Vault. An analysis of publicly traded comparable
companies is not mathematical; rather it involves complex
consideration and judgments concerning differences in financial
and operating characteristics of the comparable companies and
other factors that could affect the public trading of the
comparable companies.
Comparable
Transaction Analysis
A comparable transaction analysis involves a review of merger,
acquisition and asset purchase transactions involving target
companies that are in related industries to Steel Vault. The
comparable transaction analysis generally provides the widest
range of values due to the varying importance of an acquisition
to a buyer (i.e.,
77
a strategic buyer willing to pay more than a financial buyer) in
addition to the potential differences in the transaction process
(i.e., competitiveness among potential buyers).
Information typically is not disclosed for transactions
involving a private seller, even when the buyer is a public
company, unless the acquisition is deemed to be
“material” for the acquirer. As a result, the selected
comparable transaction analysis is limited to transactions
involving the acquisition of a public company, or substantially
all of its assets, or the acquisition of a large private
company, or substantially all of its assets, by a public company.
Ladenburg located seven merger and acquisition transactions and
one PIPE transaction announced since January 2007 involving
target companies that are either involved in the credit
reporting and information security sector,
and/or
provide information services to consumers based on a
subscription based model, and for which detailed financial
information was available.
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Target
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Acquirer
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First Advantage Corporation
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First American Corp
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Thinkorswim Group, Inc.
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TD Ameritrade
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Match.com Europe
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MEETIC
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Search America
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Experian
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|
Digimarc Corp.
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L-1 Identity Solutions
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Digital Instructor, LLC
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AdEx Media
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Veda Advantage Limited
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Pacific Equity Partners
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LifeLock
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Goldman Sachs Group
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Based on the information disclosed with respect to the targets
in each of the comparable transactions, Ladenburg calculated and
compared the enterprise values as a multiple of LTM revenue and
LTM EBITDA.
Ladenburg noted the following with respect to the multiples
generated:
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Multiple of Enterprise Value to
|
|
Mean
|
|
Median
|
|
High
|
|
Low
|
|
|
|
LTM revenue
|
|
|
2.90
|
x
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|
|
2.02
|
x
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|
|
6.33
|
x
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|
|
1.15
|
x
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|
LTM EBITDA
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10.9
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x
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11.4
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x
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|
15.3
|
x
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5.5
|
x
|
Ladenburg also noted that implied transaction multiple for
LifeLock, which had a PIPE transaction at an implied revenue
multiple of 2.62 times in January 2008.
Despite Steel Vault’s strong projected revenue growth rate,
Ladenburg expects Steel Vault’s valuation multiples to be
below the mean of the comparable transactions with respect to
CY2009 revenue and current run-rate revenue because of the
significant risks related to low barriers to entry, significant
competition, dependency on sales and marketing programs with
corporate affiliates and future capital needs.
Based on the above factors, Ladenburg applied revenue multiples
of between 1.50 times and 2.00 times to Steel Vault’s
CY2009 revenue and current run-rate revenue of approximately
$1.6 million and $2.3 million, respectively. The
implied range of indicated enterprise values for Steel Vault was
then determined by weighting the above indications equally.
Ladenburg then deducted net debt of approximately
$0.51 million to derive an indicated equity value range of
approximately $2.4 million to approximately
$3.4 million.
None of the target companies in the comparable transactions have
characteristics identical to Steel Vault. Accordingly, an
analysis of comparable business combinations is not
mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating
characteristics of the target companies in the comparable
transactions and other factors that could affect the respective
acquisition values.
Conclusion
Based on the information and analyses set forth above, Ladenburg
delivered its written opinion to the VeriChip special committee,
which stated that, as of September 3, 2009, based upon and
subject to the assumptions made, matters considered, procedures
followed and limitations on its review as set forth in the
opinion, the exchange ratio to be paid by VeriChip in the merger
is fair, from a financial point of view, to the
78
stockholders of VeriChip (other than Scott R. Silverman, William
J. Caragol, R & R Consulting Partners, LLC, Blue Moon
Energy Partners LLC and their respective affiliates).
As part of its investment banking business, Ladenburg regularly
is engaged in the evaluation of businesses and their securities
in connection with mergers, acquisitions, corporate
restructurings, negotiated underwritings, private placements and
for other purposes. VeriChip determined to use the services of
Ladenburg because it is a recognized investment banking firm
that has substantial experience in similar matters. Ladenburg
has received a fee in connection with the preparation and
issuance of its opinion and will be reimbursed for its
reasonable expenses, including attorneys’ fees. Also,
VeriChip has agreed to indemnify Ladenburg and related persons
and entities for certain liabilities that may relate to, or
arise out of, its engagement. Further, Ladenburg has not
previously provided, nor are there any pending agreements to
provide, any other services to VeriChip or Steel Vault.
In the ordinary course of business, Ladenburg, certain of
Ladenburg’s affiliates, as well as investment funds in
which Ladenburg or its affiliates may have financial interests,
may acquire, hold or sell long or short positions, or trade or
otherwise effect transactions in debt, equity, and other
securities and financial instruments (including bank loans and
other obligations) of, or investments in, VeriChip, Steel Vault,
or any other party that may be involved in the merger and their
respective affiliates.
Under Ladenburg’s policies and procedures, its fairness
committee did not approve or issue this opinion and was not
required to do so. Further, Ladenburg’s opinion does not
express an opinion about the fairness of the amount or nature of
the compensation, if any, to any of VeriChip’s or Steel
Vault’s officers, directors or employees, or class of such
persons, relative to the compensation to VeriChip’s
stockholders.
Opinion
of Financial Advisor to the Steel Vault Special
Committee
The Steel Vault special committee retained Hyde Park to act as
its financial advisor and to provide an opinion regarding
fairness to the Steel Vault shareholders in connection with the
merger. On September 2, 2009, Hyde Park rendered its oral
opinion to the Steel Vault special committee (which was
subsequently confirmed in writing by delivery of Hyde
Park’s written opinion dated September 4,
2009) to the effect that, as of September 4, 2009, the
common stock exchange ratio in the merger was fair, from a
financial point of view, to the public stockholders of Steel
Vault.
Hyde Park’s opinion was directed to the Steel Vault
special committee and only addressed the fairness, from a
financial point of view, of the common stock exchange ratio in
the merger and does not address any other aspect or implication
of the merger. The summary of Hyde Park’s opinion in this
joint proxy statement/prospectus is qualified in its entirety by
reference to the full text of its written opinion, which is
included as Annex C to this joint proxy
statement/prospectus and sets forth the procedures followed,
assumptions made, qualifications and limitations on the review
undertaken, and other matters considered by Hyde Park in
preparing its opinion. We encourage you to carefully read the
full text of Hyde Park’s written opinion. However, neither
Hyde Park’s written opinion nor the summary of its opinion
and the related analyses set forth in this joint proxy
statement/prospectus are intended to be, and do not constitute
advice or a recommendation to any stockholder as to how such
stockholder should act or vote with respect to the merger.
In connection with its opinion, Hyde Park made certain reviews,
analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Hyde Park also took into account its
assessment of general economic, market and financial conditions,
as well as its experience in investment banking transactions and
securities and business valuation, in general. Hyde Park’s
due diligence and analyses with regards to the merger included,
but was not limited to, the items summarized below.
1. Conducted meetings with members of the senior management
team of Steel Vault in person and via teleconference, including
William J. Caragol, the president, chief executive officer and
acting chief financial officer, at which the operations,
financial condition, future prospects, and projected operations
and performance of Steel Vault were discussed;
79
2. Conducted meetings with members of the senior management
team of VeriChip in person and via teleconference, including
Scott R. Silverman, chairman and chief executive officer, and
William J. Caragol, acting chief financial officer, at which the
operations, financial condition, future prospects, and projected
operations and performance of Steel Vault and of VeriChip were
discussed;
3. Reviewed the financial statements and filings with the
SEC, including the annual report on
Form 10-K
for the fiscal year ended September 30, 2008, and the
quarterly reports on
Form 10-Q
for the fiscal quarters ended December 31, 2008, March 31,
2009 and June 30, 2009 for Steel Vault, and the annual
report on
Form 10-K
for the fiscal year ended December 31, 2008, and the
quarterly reports on
Form 10-Q
for the fiscal quarters ended March 31, 2009 and
June 30, 2009 for VeriChip;
4. Reviewed certain publicly available business and
financial information for each of Steel Vault and VeriChip, and
the industries in which they operate;
5. Reviewed financial projections for Steel Vault prepared
by Steel Vault management for the fiscal years 2009 through
2012, which we refer to as the Steel Vault forecasts;
6. Reviewed the merger agreement;
7. Reviewed a schedule of cost savings expected to be
realized as a result of the merger, as prepared by the
management of Steel Vault, which we refer to as the cost savings;
8. Reviewed the pro forma impact of the merger on Steel
Vault and VeriChip;
9. Reviewed the historical trading price and trading volume
of the Steel Vault common stock, the VeriChip common stock and
the publicly-traded securities of certain other companies that
Hyde Park deemed relevant;
10. Reviewed the exchange ratio implied by the respective
stock prices of the VeriChip common stock and the Steel Vault
common stock over various periods;
11. Reviewed and prepared a sum of the parts analysis of
Steel Vault’s assets;
12. Reviewed and analyzed Steel Vault’s projected
unlevered free cash flows derived from the projections and
prepared a discounted cash flow analysis;
13. Compared the financial performance of Steel Vault and
the prices and trading activity of the Steel Vault common stock
with those of certain other publicly-traded companies that Hyde
Park deemed relevant;
14. Compared certain financial terms of the merger to
financial terms, to the extent publicly available, of certain
other business combination transactions that Hyde Park deemed
relevant; and
15. Conducted certain other analyses and considered certain
other factors as Hyde Park deemed appropriate.
In performing its analyses and rendering its opinion with
respect to the merger, Hyde Park, with Steel Vault’s
consent:
1. Relied upon the accuracy, completeness, and fair
presentation of all information, data, advice, opinions and
representations obtained from public sources or provided to it
from private sources, including the management of Steel Vault
and VeriChip, and did not independently verify that information;
2. Assumed that any estimates, evaluations, forecasts and
projections, as well as the cost savings, furnished to Hyde Park
were reasonably prepared and based upon the best currently
available information and good faith judgment of the person
furnishing the same;
3. Assumed that information supplied to Hyde Park and
representations and warranties made in the merger agreement were
substantially accurate;
4. Assumed that all of the conditions required to implement
the merger would be satisfied and that the merger would be
completed in accordance with the merger agreement without any
amendments thereto or any waivers of any terms or conditions
thereof; and
80
5. Assumed that all governmental, regulatory or other
consents and approvals necessary for the consummation of the
merger would be obtained without any adverse effect on Steel
Vault, VeriChip or the contemplated benefits expected to be
derived in the merger.
In Hyde Park’s analysis and in connection with the
preparation of its opinion, Hyde Park made numerous assumptions
with respect to industry performance, general business, market
and economic conditions and other matters, many of which are
beyond the control of any party involved in the merger. To the
extent that any of the foregoing assumptions or any of the facts
on which its opinion was based prove to be untrue in any
material respect, its opinion cannot and should not be relied
upon. Hyde Park did not make any independent evaluation,
appraisal or physical inspection of the solvency of Steel Vault
or VeriChip or of any specific assets or liabilities (contingent
or otherwise). Hyde Park’s opinion should not be construed
as a valuation opinion, credit rating, solvency opinion, and an
analysis of the creditworthiness of Steel Vault or VeriChip or
otherwise as tax advice or as accounting advice. Hyde Park was
not requested to, and did not, provide advice concerning the
structure, the specific amount or form of the consideration, or
any other aspect of the merger, or provide advisory services
other than the delivery of its opinion. Hyde Park was not
requested to, and did not, solicit any expressions of interest
from any other parties with respect to the sale of all or any
part of Steel Vault, VeriChip or any other alternative
transaction. Hyde Park did not participate in negotiations with
respect to the terms of the merger agreement or the merger and,
therefore, Hyde Park assumed that such terms were the most
beneficial terms, from Steel Vault’s perspective, that
could, under the circumstances, be negotiated among the parties
to the merger agreement and the merger. In addition, Hyde Park
did not express any opinion as to the market price or value of
the Steel Vault common stock or VeriChip common stock after
announcement of the merger. In rendering its opinion, Hyde Park
relied upon the fact that the Steel Vault special committee and
Steel Vault had been advised by counsel as to all legal matters
with respect to the merger, including whether all procedures
required by law to be taken in connection with the merger had
been duly, validly and timely taken; and Hyde Park did not make,
and assumed no responsibility to make, any representation, or
render any opinion, as to any legal matter.
Hyde Park prepared its opinion effective as of September 4,
2009. Hyde Park’s opinion was necessarily based upon
market, economic, financial and other conditions as they existed
and could be evaluated as of September 4, 2009, and Hyde
Park disclaimed any undertaking or obligation to advise any
person of any change in any fact or matter affecting its opinion
which may have come or been brought to the attention of Hyde
Park after September 4, 2009. Notwithstanding and without
limiting the foregoing, in the event that there was any change
in any fact or matter affecting its opinion after
September 4, 2009 and prior to the completion of the
merger, Hyde Park reserved the right to change, modify or
withdraw its opinion.
The basis and methodology for Hyde Park’s opinion have been
designed specifically for the express purposes of the Steel
Vault special committee and may not translate to any other
purposes. Hyde Park’s opinion was not a recommendation as
to how the Steel Vault special committee or any stockholder
should vote or act with respect to any matters relating to the
merger, or whether to proceed with the merger or any related
transaction, nor did it indicate that the consideration paid was
the best possibly attainable under any circumstances. Instead,
it merely stated whether the exchange ratio in the merger was
fair to Steel Vault shareholders within a range suggested by
certain financial analyses. The decision as to whether to
proceed with the merger or any related transaction may depend on
an assessment of factors unrelated to the financial analysis on
which Hyde Park’s opinion was based. Hyde Park’s
opinion should not be construed as having created any fiduciary
duty on the part of Hyde Park to any party.
Hyde Park’s opinion may be included in its entirety in any
proxy statement distributed to stockholders of Steel Vault in
connection with the merger or other document required by law or
regulation to be filed with the SEC, and may be summarized or
the existence of its opinion may otherwise be referenced in
those documents, provided that any summary or reference language
shall be subject to prior approval by Hyde Park. Except as
described above, without Hyde Park’s prior consent, its
opinion may not be quoted from or referred to, in whole or in
part, in any written document or used for any other purpose.
Hyde Park had not been requested to opine as to, and its opinion
did not address: (i) the fairness of any portion or aspect
of the merger to the holders of any class of securities,
creditors or other constituencies of
81
Steel Vault or VeriChip, or any other party other than those set
forth in its opinion; (ii) the relative merits of the
merger as compared to any alternative business strategies that
might exist for Steel Vault, VeriChip or any other party, or the
effect of any other transaction in which Steel Vault, VeriChip
or any other party might engage; (iii) the fairness of any
portion or aspect of the merger to any one class or group of
Steel Vault’s or any other party’s security holders
vis-à-vis any other class or group of Steel Vault’s or
such other party’s security holders (including without
limitation the allocation of any consideration amongst or within
such classes or groups of security holders); or
(iv) whether or not Steel Vault, VeriChip, their respective
security holders or any other party is receiving or paying
reasonably equivalent value in the merger.
In preparing its opinion to the Steel Vault special committee,
Hyde Park performed a variety of analyses, including those
described below. The summary of Hyde Park’s valuation
analyses is not a complete description of the analyses
underlying Hyde Park’s opinion. The preparation of an
opinion regarding fairness is a complex process involving
various quantitative and qualitative judgments and
determinations with respect to the financial, comparative and
other analytic methods employed and the adaptation and
application of these methods to the unique facts and
circumstances presented. As a consequence, neither an opinion
regarding fairness nor its underlying analyses is readily
susceptible to partial analysis or summary description.
Hyde Park arrived at its opinion based on the results of
all analyses undertaken by it and assessed as a whole and did
not draw, in isolation, conclusions from or with regard to any
individual analysis, analytic method or factor. Accordingly,
Hyde Park believes that its analyses must be considered as a
whole and that selecting portions of its analyses, analytic
methods and factors, or focusing on information presented in
tabular format, without considering all analyses and factors or
the narrative description of the analyses, could create a
misleading or incomplete view of the processes underlying its
analyses and opinion.
In performing its analyses, Hyde Park considered general
business, economic, industry and market conditions, financial
and otherwise, and other matters as they existed on, and could
be evaluated as of, the date of its written opinion. No company,
transaction or business used in Hyde Park’s analyses for
comparative purposes is identical to Steel Vault, VeriChip or
the merger. Hyde Park made judgments and assumptions with regard
to industry performance, general business, economic, regulatory,
market and financial conditions and other matters, many of which
are beyond the control of Steel Vault and VeriChip, such as the
impact of competition on the business of Steel Vault and on the
industry generally, industry growth and the absence of any
adverse material change in the financial condition and prospects
of Steel Vault or its industry or in the markets generally. Hyde
Park believes that mathematical analyses (such as determining
average and median) are not by themselves comprehensive methods
of using selected company data but must be considered together
with qualities, judgments and informed assumptions to arrive at
sound conclusions. While the results of each analysis were taken
into account in reaching its overall conclusion with respect to
fairness, Hyde Park did not make separate or quantifiable
judgments regarding individual analyses. The implied reference
range values indicated by Hyde Park’s analyses are
illustrative and not necessarily indicative of actual values or
predictive of future results or values, which may be
significantly more or less favorable than those suggested by the
analyses. In addition, any analyses relating to the value of
assets, businesses or securities do not purport to be appraisals
or to reflect the prices at which businesses or securities
actually may be sold, which may depend on a variety of factors,
many of which are beyond the control of Steel Vault and Hyde
Park. Much of the information used in, and accordingly the
results of, Hyde Park’s analyses are inherently subject to
substantial uncertainty.
Hyde Park’s opinion was provided to the Steel Vault special
committee in connection with its consideration of the merger and
was only one of many factors considered by it in evaluating the
merger. Neither Hyde Park’s opinion nor its analyses
were determinative of the merger consideration or of the views
of the Steel Vault special committee or management of Steel
Vault with respect to the merger.
The following is a summary of the material analyses prepared in
connection with Hyde Park’s opinion rendered on
September 4, 2009. The order of the analyses does not
represent relative importance or weight given to those analyses
by Hyde Park. The fact that any specific analysis has been
referred to in the summary below is not meant to indicate that
such analysis was given greater weight than any other analysis.
The analyses summarized below include information presented in
tabular format. The tables alone do not constitute a complete
description of the analyses. Considering the data in the tables
below without considering the full
82
narrative description of the analyses, as well as the
methodologies underlying and the assumptions, qualifications and
limitations affecting each analysis, could create a misleading
or incomplete view of Hyde Park’s analyses.
For purposes of its analyses, Hyde Park reviewed a number of
financial and operating metrics including mainly revenues and
EBITDA, EBITDA defined as the amount of the relevant
company’s earnings before interest, taxes, depreciation,
and amortization for a specified time period.
Unless the context indicates otherwise, enterprise values used
in the selected companies analysis described below were
calculated using the closing price of Steel Vault common stock
and the common stock of the selected companies listed below as
of September 1, 2009, and the enterprise values for the
target companies used in the selected transactions analysis
described below were calculated as of the announcement date of
the relevant transaction, based on the purchase prices to be
paid in the selected transactions. Accordingly, this information
does not necessarily reflect current or future market
conditions. Estimates of projected revenues and EBITDA for Steel
Vault were based on estimates provided by Steel Vault
management. Estimates of projected revenues and EBITDA for the
selected companies listed below were based on publicly available
research analyst estimates for the selected companies.
Total
Consideration
Hyde Park calculated an implied value for total consideration
paid by VeriChip to Steel Vault shareholders of
$4.16 million in equity value, or $0.43 per share, and
$5.20 million in enterprise value. This implied purchase
price was derived by using an average share value of $0.50 for
VeriChip in exchange for two shares of Steel Vault, implying a
value of $0.25 per share for 9.6 million shares outstanding
for a total implied share value of $2.40 million. Taking
into account the 8.143 million options and warrants
outstanding and applying a Black- Scholes valuation methodology
resulted in an implied total value of $1.76 million for the
total options and warrants, bringing the total equity value for
Steel Vault shareholders to $4.16 million or $0.43 per
share. Enterprise value was determined by adding to the implied
total equity value the funded debt of $640,000, plus the net
working capital deficit of $398,000. This resulted in total
enterprise value of $5.20 million.
Premiums
Paid Analysis
Hyde Park compared the premiums paid by acquirers on other
comparable public company mergers and acquisitions during 2007,
2008 and 2009 year-to-date as compared to the premium paid
to Steel Vault shareholders.
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The premiums paid over the closing share price before
announcement for public companies that were acquired that were
between $3 million and $100 million in value were
45.2%, 26.1% and 36.3% for 2009 year-to-date through
August 31, 2009, 2008 and 2007, respectively.
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The implied premium paid to Steel Vault shareholders based on
total equity consideration of $0.43 per share when including
options and warrants is 49.4% over the closing share price of
$0.29, and 116.6% over the closing bid price of $0.20 per share,
on September 1, 2009.
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Trading
Analysis
Based upon Steel Vault having effectively restarted operations
in February, 2009, Hyde Park reviewed the average daily closing
market price of VeriChip’s and Steel Vault’s common
stock for the prior 30, 60, 90 and 120 day periods, and
average trading volumes for the last three months, as of
September 1, 2009, and noted the following:
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VeriChip’s average common stock price over the 30, 60, 90
and 120 day periods ranged from $0.49 to $0.50 and the mean
of the averages was $0.49 per share.
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•
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VeriChip’s average daily trading volume over the last there
months was 16,532 shares per day.
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•
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Steel Vault’s average common stock price over the 30, 60,
90 and 120 day periods ranged from $0.28 to $0.33 and the
mean of the averages was $0.30 per share.
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•
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Steel Vault’s average daily trading volume mean over the
last three months was 1,333 shares, which was substantially
lower than VeriChip’s average volume of 16,532 for the same
period.
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Steel
Vault Valuation
Hyde Park calculated an indicated valuation range for Steel
Vault based on multiple valuation methodologies including
comparable company analysis, precedent transaction analysis,
discounted cash flow analysis, strategic value analysis, and a
sum of parts analysis, each as more fully discussed below. Hyde
Park utilized the average value range derived from this approach
to arrive at an indicated equity value range of between
approximately $2.5 million to approximately
$3.7 million. The indicated equity value range derived for
Steel Vault implied an indicated equity value range per share of
between approximately $0.26 and $0.39, based on 9.6 million
shares outstanding.
Steel
Vault Comparable Companies Analysis
A comparable company analysis reviews the trading multiples of
publicly traded companies that are similar to Steel Vault with
respect to business and revenue model, operating sector, size
and target customer base.
Hyde Park calculated multiples of enterprise value to 2009
projected revenue and considered certain financial data for
Steel Vault and ten selected companies that provide retail
credit services, business-to-business credit services, and
business-to-business research services. None of the comparable
companies have characteristics identical to Steel Vault. An
analysis of publicly traded comparable companies is not
mathematical; rather it involves complex consideration and
judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors
that could affect the public trading of the comparable companies.
Because Steel Vault has negative projected EBITDA for 2009,
comparable EBITDA multiples were not deemed relevant. As Steel
Vault is an early-stage company, all of the comparable companies
are much larger than Steel Vault both in terms of revenue and
enterprise value. Unlike Steel Vault, all of the comparable
companies are also profitable (with the exception of ID
Watchdog).
The selected companies were:
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Intersections, Inc.;
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ID Watchdog, Inc.;
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Reed Elsevier, NV;
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Dun & Bradstreet Corp.;
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FactSet Research Systems, Inc.;
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Emperian, plc.;
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Equifax, Inc.;
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•
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First Advantage Corp.;
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•
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Trimble Navigation Limited; and
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•
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L-1 Identity Solutions, Inc.
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This selected companies analysis indicated the following:
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Multiple Description
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Low
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High
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Mean
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Median
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Enterprise Value as a Multiple of:
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2009E Revenue
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0.9
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x
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3.9
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x
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2.1
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x
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1.9x
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Hyde Park applied multiple ranges based on this selected
companies analysis to corresponding financial data for the above
mentioned business segments, including estimates provided by
VeriChip’s management.
84
This selected companies analysis indicated an implied reference
range enterprise value of $3.1 million to
$3.4 million, an equity value of $2.4 million to
$2.8 million and a per share value of $0.25 to $0.29.
Steel
Vault Precedent Transactions Analysis
A precedent transaction analysis involves a review of merger,
acquisition and asset purchase transactions involving target
companies that are in related industries to Steel Vault.
Information typically is not disclosed for transactions
involving a private seller, even when the buyer is a public
company, unless the acquisition is deemed to be
“material” for the acquirer. As a result, the selected
precedent transaction analysis is typically limited to
transactions involving the acquisition of a public company, or
substantially all of its assets, or the acquisition of a large
private company, or substantially all of its assets, by a public
company.
Hyde Park calculated multiples of enterprise value to 2009
projected revenue based on the purchase prices paid in three
selected publicly-announced transactions. None of the target
companies in the precedent transactions have characteristics
identical to Steel Vault.
The selected transactions (and date of announcement) were:
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Acquirer
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Target
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Date of Announcement
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First American Corp.
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First Advantage Corp.
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June 2009
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L-1 Identity Solutions
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Digimarc Corp.
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March 2008
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Bessemer Venture Partners
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LifeLock, Inc.
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January 2008
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This selected transactions analysis indicated the following:
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Multiple Description
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Low
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High
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Mean
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Median
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Enterprise Value as a Multiple of:
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2009E Revenue
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1.1
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x
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2.6
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x
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2.0
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x
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2.4x
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Hyde Park applied multiple ranges based on this selected
transactions analysis to corresponding financial data for the
above mentioned business segments. This selected transactions
analysis indicated an implied reference range enterprise value
of $3.3 million to $3.8 million, an equity value of
$2.7 million to $3.2 million and a per share price of
$0.28 to $0.33.
Steel
Vault Discounted Cash Flow
Analysis.
A discounted cash flow analysis estimates value based upon a
company’s projected future free cash flow discounted at a
rate reflecting risks inherent in its business and capital
structure. Unlevered free cash flow represents the amount of
cash generated and available for principal, interest and
dividend payments after providing for ongoing business
operations. While the discounted cash flow analysis is the most
scientific of the methodologies used, it is dependent on
projections and is further dependent on numerous
industry-specific and macroeconomic factors.
Hyde Park calculated the net present value of the unlevered,
after-tax cash flows based on estimates provided by Steel
Vault’s management. In performing this analysis, Hyde Park
did not use the weighted average cost of capital (WACC) of the
comparable public company group because it was determined that
this group of much larger and more substantial companies would
not share the same risk adjusted discount rate as Steel Vault,
which is more of a
start-up
company comparatively. Hyde Park used venture like discount
rates ranging from 38.0% to 42.0%, based on the early stage
nature of Steel Vault’s business operations. Hyde Park
calculated a terminal value by using a terminal EBITDA multiple
of 5.0x to 7.0x. This discounted cash flow analysis indicated an
implied reference range enterprise value for Steel Vault of
approximately $4.2 million to $6.4 million, equity
value range of $3.5 million to $5.5 million and a per
share value range of $0.37 to $0.57.
Strategic
Value Analysis.
Hyde Park calculated Steel Vault estimated enterprise value
based on a per subscriber value. The indicated range of price
per subscriber is the price that a strategic acquirer may place
on Steel Vault’s
85
subscribers if Steel Vault were more mature and did not have
continuing operations contingent upon securing additional
capital.
The selected companies were:
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ID Watchdog, Inc.; and
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•
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LifeLock, Inc.
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This selected companies analysis indicated the following:
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Multiple Description
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Low
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High
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Enterprise Value Per Subscriber:
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$
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314
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$
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462
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Hyde Park applied per subscriber valuation numbers to Steel
Vault’s current subscriber base of approximately 14,100.
This metric implies an enterprise value range of
$4.0 million to $5.9 million, an equity value range of
$3.3 million to $5.2 million and a per share value
range of $0.35 to $0.54.
Sum-of-the-Parts
Analysis.
Hyde Park calculated Steel Vault’s enterprise value based
on a deteriorated financial condition with no access to
additional capital resulting in a forced asset sale. This
approach would provide a downside value to help evaluate the
potential transaction. Under this scenario the asset value is
derived from an estimate of the Steel Vault brand value and a
reduced subscriber value of $75 to $150 per subscriber, less
Steel Vault’s funded debt and working capital deficit. This
method implies an enterprise value range of $1.3 million to
$2.9 million, an equity value of 0.3 million to
$1.8 million, and a per share value of $0.03 to $0.19.
Summary.
Based on its combined analyses of Steel Vault, Hyde Park
determined an implied reference range enterprise value of Steel
Vault of $3.0 million to $4.2 million, an equity value
range of $2.5 million to $3.7 million, and an implied
price per share of $0.26 to $0.39. This compares favorably to
the consideration offered to Steel Vault shareholders of $0.43
per share as implied consideration, consisting of implied share
value, option value, and warrant value.
Other
Matters.
Hyde Park was engaged by the Steel Vault special committee
pursuant to a letter agreement dated August 25, 2009 to
provide an opinion to the Steel Vault special committee
regarding the fairness, from a financial point of view, to the
public stockholders of Steel Vault of the common stock exchange
ratio in the merger. As part of its investment banking business,
Hyde Park regularly is engaged in the evaluation of businesses
and their securities in connection with mergers, acquisitions,
corporate restructurings, private placements and for other
purposes. Steel Vault determined to use the services of Hyde
Park because it is a recognized investment banking firm that has
substantial experience in similar matters. Pursuant to the
engagement letter, Steel Vault paid Hyde Park a customary fee
for its services, a portion of which became payable upon the
execution of Hyde Park’s engagement letter, and the balance
of which became payable upon the delivery of Hyde Park’s
opinion, regardless of the conclusion reached therein. No
portion of Hyde Park’s fee is contingent upon the
successful completion of the merger. Steel Vault also agreed to
reimburse Hyde Park for certain out-of-pocket expenses and to
indemnify Hyde Park, its affiliates and certain related parties
against certain liabilities and expenses, including certain
liabilities under the federal securities laws arising out of, or
relating to, Hyde Park’s engagement. Other than this
engagement, Hyde Park did not provide, and has not provided,
other financial advisory services to Steel Vault or to VeriChip.
Interests
of Certain Persons in the Merger
In considering the recommendations of VeriChip’s and Steel
Vault’s respective boards of directors, you should be aware
that certain directors and officers of VeriChip and Steel Vault
may have interests in the
86
merger that may be different from, or in addition to, your
interests as a stockholder generally and may create potential
and actual conflicts of interest. The boards of directors of
each of VeriChip and Steel Vault were aware of these interests
and considered them when they approved and adopted the merger
agreement and the merger.
The interests of the directors and executive officers include,
among others:
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Two of VeriChip’s five directors — Scott R.
Silverman and Michael E. Krawitz — currently serve on
the five-member board of directors of Steel Vault.
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Mr. Silverman serves as the chief executive officer and
executive chairman of VeriChip’s board of directors and as
the chairman of the boards of directors of Steel Vault.
Mr. Silverman served as VeriChip’s acting president
from March 2007 through May 4, 2007, chief executive
officer from December 5, 2006 through July 18, 2008
and April 2003 through June 2004.
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Mr. Silverman is a manger of Blue Moon, which company holds
2,570,000 shares of Steel Vault common stock.
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Mr. Silverman owns and controls R & R, which
holds 5,355,556 shares of VeriChip’s common stock and
owns a 50% interest in Blue Moon.
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Jeffrey S. Cobb and Barry M. Edelstein, both of whom are members
of VeriChip’s board of directors, each owns a 16.67%
interest in Blue Moon.
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Mr. Caragol, the acting chief financial officer of
VeriChip, and the chief executive officer, president and acting
chief financial officer of Steel Vault, owns a 16.67% interest
in Blue Moon.
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Mr. Krawitz serves as the chair of the audit committee and
as a member of the compensation committee and the nominating and
governance committee of Steel Vault.
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Mr. Cobb, a member of VeriChip’s board of directors
served as a member of Steel Vault’s board of directors
until his resignation from the Steel Vault board of directors on
July 22, 2008.
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Kevin H. McLaughlin, a member of Steel Vault’s board of
directors, resigned as VeriChip’s chief executive officer
and as a member of VeriChip’s board of directors effective
December 2, 2006.
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Mr. Caragol has served as acting chief financial officer of
VeriChip since January 1, 2009, and previously served as
president of VeriChip since May 2007, chief financial officer
since August 2006, treasurer since December 2006, and secretary
since March 2007. Mr. Caragol has served as Steel
Vault’s chief executive officer, president and a member of
its board of directors since December 3, 2008 and as acting
chief financial officer since October 24, 2008.
Mr. Caragol served as acting chief executive officer of
Steel Vault from October 24, 2008 until December 3,
2008 when he was appointed chief executive officer.
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In their various capacities with VeriChip’s former parent
company, Digital Angel, which was also formerly the parent
company of Steel Vault, Messrs. Silverman, Edelstein,
McLaughlin and Krawitz were granted stock option awards to
purchase shares of common stock of Steel Vault.
Messrs. Cobb and Caragol also hold stock option awards to
purchase shares of common stock of Steel Vault. In their various
capacities with Digital Angel, Messrs. Silverman,
McLaughlin and Krawitz were granted stock options to purchase
shares of common stock of VeriChip.
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The appointment of four individuals designated by VeriChip and
the appointment of one individual designated by Steel Vault to
serve on the board of directors of VeriChip upon completion of
the merger.
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The employment of certain officers of Steel Vault by VeriChip
upon completion of the merger.
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The acceleration of the vesting of certain Steel Vault equity
awards, including certain Steel Vault equity awards held by
current or former directors and executive officers of VeriChip,
in connection with the completion of the merger. The following
chart sets forth, as of September 25, 2009, the number of
unvested stock options, shares of restricted Steel Vault common
stock, and unvested Steel Vault
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restricted stock units held by Steel Vault’s current chief
executive officer, president and acting chief financial officer
and non-employee directors as a group:
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Unvested Restricted
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Unvested
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Name and Principal Position
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Restricted Stock
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Stock Units
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Stock Options
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William J. Caragol, Chief Executive Officer, President, Acting
Chief Financial Officer and Director
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—
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Non-employee directors as a group (4 individuals)
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500,000
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The payment of $10,000 to each member of the Steel Vault special
committee and an additional $5,000 fee to the chairman of the
Steel Vault special committee for serving on the Steel Vault
special committee.
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The payment of $20,000 to each member of the VeriChip special
committee and an additional $5,000 fee to the chairman of the
VeriChip special committee for serving on the VeriChip special
committee.
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The continued indemnification of, and provision for
directors’ and officers’ liability insurance coverage
to, current directors and officers of Steel Vault following the
merger.
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The ownership of Steel Vault stock and options by officers and
directors of VeriChip.
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Completion
and Effectiveness of the Merger
The merger will be completed when all of the conditions to
completion of the merger are satisfied or waived, including the
approval and adoption of the merger agreement by the holders of
a majority of the outstanding shares of Steel Vault common stock
entitled to vote at the special meeting. The merger will become
effective upon the filing of a certificate of merger in the
office of the Secretary of State of the State of Delaware.
Board of
Directors of VeriChip Following the Merger
Immediately following the effective time of the merger, the
board of directors of VeriChip will consist of five members with
four individuals designated by VeriChip and one individual
designated by Steel Vault. Because the VeriChip board of
directors currently consists of five individuals, it is
anticipated that one of the members of the then-current VeriChip
board of directors will resign from the VeriChip board of
directors
and/or
will
no longer continue to serve as a director.
Treatment
of Steel Vault Common Stock
Upon completion of the merger, each share of Steel Vault common
stock then outstanding will be canceled and automatically
converted into the right to receive 0.5 shares of VeriChip
common stock. No fractional shares of VeriChip common stock will
be issued in connection with the merger. Instead, VeriChip will
make a cash payment to each Steel Vault stockholder who would
otherwise receive a fractional share. For purposes of
illustration only, if the merger had been consummated on
September 4, 2009, the last trading day prior to
announcement of the merger, each share of Steel Vault common
stock, which had a closing price of $0.29 per share, would have
been exchanged for 0.5 shares of VeriChip common stock with
a value of $0.37 (based on VeriChip’s common stock closing
price of $0.74 per share on that same date). By comparison, if
the merger had been consummated on October 1, 2009, the
latest practicable date before the printing of this joint proxy
statement/prospectus, each share of Steel Vault common stock,
which had a closing price of $0.85 per share, would have been
exchanged for 0.5 shares of VeriChip common stock with a
value of $1.27 (based on the closing price of VeriChip’s
common stock of $2.53 per share on that same date). VeriChip and
Steel Vault estimate that VeriChip will issue approximately
4,937,485 shares of VeriChip common stock in the merger,
based on the number of shares of Steel Vault common stock
outstanding on September 25, 2009, and will reserve an
additional approximately 3,932,214 shares of VeriChip
common stock for issuance in connection with VeriChip’s
assumption of Steel Vault’s outstanding options and
warrants.
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The total number of shares of VeriChip common stock issuable as
merger consideration is subject to adjustment if, after the date
of the merger agreement, but prior to the effective time of the
merger, the shares of issued and outstanding VeriChip common
stock increases, decreases or changes into or is exchanged for a
different kind of number of securities, to provide the holders
of Steel Vault common stock the same economic effect as
contemplated by the merger agreement prior to such event.
Exchange
of Steel Vault Common Stock for VeriChip Common Stock
As soon as reasonably practicable after the effective time of
the merger, VeriChip will cause the exchange agent to mail to
the holders of record of Steel Vault common stock a letter of
transmittal and instructions on how to surrender Steel Vault
stock certificates in exchange for VeriChip common stock
certificates. Upon surrendering their Steel Vault common stock,
the letter of transmittal and any other documents required by
the exchange agent, the holders of Steel Vault stock
certificates will be entitled to receive a certificate
representing that number of whole shares of VeriChip common
stock which that holder has the right to receive. Any fractional
share of Steel Vault common stock shall be rounded up to the
nearest whole share of Steel Vault common stock.
Accounting
Treatment
VeriChip intends to account for the merger using the acquisition
method of accounting for business combinations, with VeriChip
being considered the acquiror of Steel Vault, in conformity with
accounting principles generally accepted in the United States of
America. VeriChip estimates it will allocate approximately 28%
of the purchase price to the fair value of assets, including
identifiable intangible assets acquired and liabilities assumed
from Steel Vault at the effective time of the merger, with the
excess purchase price, if any, being recorded as goodwill. Under
the acquisition method of accounting, goodwill is not amortized
but is tested for impairment at the time of the acquisition and
at least annually thereafter.
Governmental
and Regulatory Matters
Neither VeriChip nor Steel Vault is aware of any material
governmental or regulatory approval required for completion of
the merger, other than the effectiveness of the registration
statement of which this joint proxy statement/prospectus is a
part, compliance with applicable corporate law of Delaware, and
compliance with applicable state “blue sky” laws.
Material
United States Federal Income Tax Consequences
The merger generally is intended to qualify as a tax-free
transaction, except with respect to any cash received in lieu of
a fractional share interest in VeriChip common stock, and it is
a condition to the merger that VeriChip and Steel Vault each
receive a legal opinion from Holland & Knight LLP to
the effect that the merger will constitute a reorganization
within the meaning of 368(a) of the Internal Revenue Code.
Tax matters are very complicated, and the tax consequences of
the merger to you will depend on the facts of your own
situation. You should consult your tax advisor for a full
understanding of the tax consequences of the merger to you.
This summary may not contain all of the information that is
important to you. You should carefully read this entire document
and the other documents included elsewhere in this joint proxy
statement/prospectus for a more complete understanding of the
merger. In particular, you should read the documents attached to
this joint proxy statement/prospectus, including the merger
agreement, as amended, which is attached to this joint proxy
statement/prospectus as
Annex A-1
and
Annex A-2.
Appraisal
Rights
In accordance with Section 262 of the DGCL, no appraisal
rights will be available to holders of shares of the Steel Vault
or VeriChip common stock.
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Listing
of VeriChip Common Stock to be Issued in the Merger
VeriChip has agreed to cause the shares of VeriChip common stock
issued in the merger to be approved for listing on the Nasdaq
Capital Market, subject to official notice of issuance.
Cessation
of Trading and Deregistration of Steel Vault’s Common
Stock
If the merger is consummated, the Steel Vault common stock will
cease to be quoted on the OTC Bulletin Board and will be
deregistered under the Exchange Act.
Restriction
on Resales of VeriChip Common Stock by Affiliates
The VeriChip common stock to be issued in the merger will be
registered under the Securities Act. These shares may be traded
freely and without restriction by those stockholders not deemed
to be “affiliates” of Steel Vault as that term is
defined under the Securities Act. An affiliate of a corporation,
as defined by the rules promulgated under the Securities Act, is
a person who directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common
control with, that corporation. If a Steel Vault affiliate
becomes an affiliate of VeriChip, any transfer must be permitted
by the resale provisions of Rule 144 promulgated under the
Securities Act or otherwise permitted under the Securities Act.
These restrictions are expected to apply to the executive
officers, directors and significant stockholders of Steel Vault.
Affiliates of Steel Vault have agreed to comply with these
restrictions.
Operations
Following the Merger
As a result of the merger, Steel Vault will become a
wholly-owned subsidiary of VeriChip. After completion of the
merger, Steel Vault will continue its operations as a
wholly-owned subsidiary of VeriChip. The stockholders of Steel
Vault will become stockholders of VeriChip, and their rights as
stockholders will be governed by VeriChip’s existing second
amended and restated certificate of incorporation,
VeriChip’s existing amended and restated bylaws and the
laws of the State of Delaware. See “Comparison of the
Rights of Stockholders of VeriChip and Steel Vault.”
Restated
Certificate of Incorporation and Bylaws of Steel Vault
Upon completion of the merger, the amended and restated
certificate of incorporation of Steel Vault as in effect
immediately prior to the effective time of the merger will be
amended and restated to be the same as the certificate of
incorporation of VeriChip Acquisition Corp., a wholly-owned
subsidiary of VeriChip, as in effect immediately prior to the
effective time of the merger. Additionally, the second amended
and restated bylaws of Steel Vault shall be amended and
restated, upon completion of the merger, to be identical to the
bylaws of VeriChip Acquisition Corp., as in effect immediately
prior to the effective time of the merger.
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THE
MERGER AGREEMENT
The following is a brief summary of the material provisions of
the merger agreement, as amended, a copy of which is attached as
Annex A-1 and Annex A-2, which agreement is hereby
incorporated by reference into this joint proxy
statement/prospectus. Stockholders of VeriChip and Steel Vault
are urged to read the merger agreement, as amended, in its
entirety for a more complete description of the merger. In the
event of any discrepancy between the terms of the merger
agreement, as amended, and the following summary, the merger
agreement, as amended, will control.
The
Merger
Following the approval of the merger proposal by the
stockholders of Steel Vault, the approval of the issuance
proposal by the stockholders of VeriChip, and the satisfaction
or waiver of the other conditions to the merger set forth in the
merger agreement, VeriChip Acquisition Corp., a wholly-owned
subsidiary of VeriChip, will merge with and into Steel Vault,
with Steel Vault continuing as the surviving corporation and as
a wholly-owned subsidiary of VeriChip.
The parties will cause the merger to become effective by filing
a certificate of merger with the Secretary of State of the State
of Delaware. The parties anticipate that the closing of the
merger will occur by December 31, 2009. In this summary,
the time when the merger becomes effective is referred to as the
effective time of the merger.
At the effective time of the merger, the directors and officers
of VeriChip Acquisition Corp. immediately prior to the effective
time of the merger will remain the directors of the company
surviving the merger.
Exchange
of Shares
Upon completion of the merger, each share of Steel Vault common
stock then outstanding at the effective time (including shares
subject to vesting or other restrictions), which is not owned or
controlled by Steel Vault or VeriChip, will be converted into
the right to receive 0.5 shares of VeriChip common stock.
No fractional shares of VeriChip common stock will be issued in
connection with the merger. Instead, VeriChip will make a cash
payment to each Steel Vault stockholder who would otherwise
receive a fractional share. Each share of Steel Vault common
stock and right to acquire Steel Vault common stock that is
owned or controlled by Steel Vault, will automatically be
canceled, retired and cease to exist without payment of any
consideration.
The total number of shares of VeriChip common stock issuable as
merger consideration is subject to adjustment should VeriChip
effect certain changes to its capitalization prior to the
effective time of the merger. Under such circumstances,
appropriate adjustments will be made to provide the holders of
Steel Vault common stock the same economic effect as
contemplated by the merger agreement prior to such event. In
addition, any applicable withholding taxes may be deducted from
the merger consideration.
Steel
Vault’s Stock Options and Other Awards
All options to purchase shares of Steel Vault common stock
outstanding at the effective time of the merger will remain
outstanding following the completion of the merger. Upon
completion of the merger, each of the then-outstanding stock
options to purchase shares of Steel Vault common stock will be
assumed by VeriChip. Upon the completion of the merger, all
references to Steel Vault in Steel Vault’s stock plans and
relevant agreements will be deemed to refer to VeriChip. Each
Steel Vault stock option assumed by VeriChip will be exercisable
upon the same terms and conditions as under the applicable Steel
Vault stock plan and relevant agreement except that each Steel
Vault stock option will represent the right to acquire the
number of shares of VeriChip common stock obtained by
multiplying (x) the number of shares of Steel Vault common
stock subject to the Steel Vault stock option by (y) the
exchange ratio of 0.5 (rounded upward to the nearest whole
share). The per share exercise price of each Steel Vault stock
option assumed by VeriChip will be obtained by dividing
(A) the per share exercise price of the Steel Vault stock
option by (B) the exchange ratio of 0.5 (rounded upward to
the nearest whole cent).
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Upon completion of the merger, each of the then-outstanding
warrants to purchase shares of Steel Vault common stock will be
converted into a warrant to purchase the number of whole shares
of VeriChip common stock obtained by multiplying (x) the
number of shares of Steel Vault common stock subject to such
Steel Vault warrant by (y) the exchange ratio of 0.5
(rounded upward to the nearest whole share). The per share
exercise price of each Steel Vault warrant assumed by VeriChip
will be obtained by dividing (A) the per share exercise
price of the Steel Vault warrant by (B) the exchange ratio
of 0.5 (rounded upward to the nearest whole cent). The terms and
conditions of the Steel Vault warrants will otherwise remain as
set forth in each respective Steel Vault warrant agreement.
In addition, each share of Steel Vault’s restricted common
stock outstanding immediately prior to the effective time of the
merger will be converted into 0.5 shares of VeriChip common
stock. No fractional shares of VeriChip common stock will be
issued in connection with the merger. Instead, VeriChip will
make a cash payment to each Steel Vault stockholder who would
otherwise receive a fractional share.
Procedures
for Exchanging Stock Certificates
At or prior to the effective time of the merger, VeriChip shall
deposit with the exchange agent certificates representing shares
of VeriChip common stock in such denominations as necessary for
the exchange of shares of Steel Vault common stock pursuant to
the merger agreement.
As soon as reasonably practicable after the effective time of
the merger but no later than fourteen (14) days after the
effective time, the exchange agent shall mail to all record
holders of Steel Vault common stock (1) a letter of
transmittal and (2) instructions on how to use the letter
of transmittal to surrender the holder’s shares of Steel
Vault common stock in exchange for the number of shares of
VeriChip common stock and, if applicable, the cash payment in
lieu of fractional shares of VeriChip common stock to which the
holder is entitled as merger consideration.
You should not
forward your stock certificates to the exchange agent without a
letter of transmittal, and you should not return your stock
certificates with the enclosed proxy.
Upon surrendering their Steel Vault common stock, the completed
and executed letter of transmittal and any other documents
reasonably required by the exchange agent, the holders of Steel
Vault common stock will be entitled to receive a stock
certificate representing that number of whole shares of VeriChip
common stock that such holder has the right to receive, as well
as any dividends or other distributions to which the holder is
entitled. After the effective time of the merger and until
properly surrendered to the exchange agent, outstanding Steel
Vault stock certificates will represent only the right to
receive, upon surrender, that number of whole shares of VeriChip
common stock and, if applicable, the cash payment in lieu of
fractional shares of VeriChip common stock issuable as merger
consideration, subject to any required withholding taxes.
Distributions
with Respect to Unexchanged Shares
Steel Vault stockholders are not entitled to receive any
dividends or other distributions on the VeriChip common stock
that is issuable as merger consideration with respect to their
shares of Steel Vault stock until the merger is completed and
they have properly surrendered their Steel Vault stock
certificates to the exchange agent. Upon such surrender, these
stockholders will be entitled to receive a certificate
representing shares of VeriChip common stock and, if applicable,
the cash payment in lieu of fractional shares of VeriChip common
stock that were issued to the holder as merger consideration, as
well as, where the record date occurs on or after the effective
time of the merger, the payment date occurs on or prior to the
date of surrender, and such dividend or distribution was not
previously paid, any dividends or other distributions, without
interest, payable with respect to such shares. However, where
the record date occurs on or after the effective time of the
merger, but the payment date is subsequent to surrender, these
stockholders will receive any dividends or other distributions
due them, without interest, at the appropriate payment date.
No
Fractional Shares
No fractional share of VeriChip common stock will be issued upon
the surrender of certificates formerly representing Steel Vault
common stock or otherwise in the merger. Instead, in lieu of a
fractional share interest in VeriChip common stock (after giving
effect to the exercise of any Steel Vault stock options or Steel
Vault
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warrants to be exercised in connection with the closing of the
merger), holders of Steel Vault common stock will receive cash
(without interest) in an amount equal to such fractional amount
multiplied by the average of the daily closing sales prices of a
share of VeriChip common stock as reported on the Nasdaq for the
five consecutive trading days immediately preceding the
effective time of the merger.
Representations
and Warranties
VeriChip, Steel Vault and VeriChip Acquisition Corp. each made
representations and warranties in the merger agreement to each
other regarding facts pertinent to the merger. With respect to
VeriChip, “subsidiaries” refers to VeriChip
Acquisition Corp., VeriGreen Energy Corporation and 6973531
Canada Inc. With respect to Steel Vault,
“subsidiaries” refers to National Credit Report.com,
LLC, IFTH NY Sub, Inc., and IFTH NJ Sub, Inc. These
representations and warranties are further described below.
The assertions embodied in those representations and warranties
were made solely for purposes of the merger agreement and may be
subject to important qualifications and limitations agreed to by
the parties in connection with negotiating its terms. Moreover,
some of those representations and warranties may not be accurate
or complete as of any particular date, because they are subject
to a contractual standard of materiality or material adverse
effect different than that generally applicable to public
disclosures to stockholders, or may have been used for the
purposes of allocating risk between the parties to the merger
agreement rather than establishing matters of fact. For the
foregoing reasons, you should not rely on the representations
and warranties contained in the merger agreement as statements
of factual information.
VeriChip, Steel Vault and VeriChip Acquisition Corp. each made
representations and warranties relating to, among other things:
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corporate organization, good standing and qualification to do
business of itself and its subsidiaries;
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corporate power and authority to enter into and perform its
obligations under, and enforceability of, the merger agreement;
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required regulatory consents, approvals, orders and filings;
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the absence of conflicts with, or defaults under, organizational
documents, other contracts and applicable laws and judgments;
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capital structure of itself and its subsidiaries;
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the accuracy and truthfulness of all required filings with the
SEC;
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the fair presentation of the consolidated financial condition,
results of operations, cash flows and stockholders’ equity
of itself and its subsidiaries within the financial statements
included in, or incorporated by reference into, all required
filings with the SEC;
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certain changes in its businesses and that of its subsidiaries
since June 30, 2009;
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material contracts;
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compliance with applicable laws;
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real and personal property;
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tax matters;
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litigation;
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compliance with the Employee Retirement Income Security Act of
1974, as amended, and other employee benefit matters;
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environmental matters;
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intellectual property matters;
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insurance matters;
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finder’s fees; and
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information supplied for inclusion in this joint proxy
statement/prospectus.
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Conduct
of Business Pending the Merger
Each of VeriChip, Steel Vault and VeriChip Acquisition Corp. has
agreed that, between the date of the merger agreement and the
effective time of the merger (or the date the merger agreement
is terminated), without the other party’s prior written
consent, it will not, and it will cause each of its subsidiaries
not to:
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conduct its businesses and the business of its subsidiaries
other than in the ordinary and usual course and consistent with
past practices;
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fail to use reasonable best efforts to preserve intact any of
their business organizations and assets;
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authorize for issuance, issue, grant, sell, deliver, dispose,
pledge or otherwise encumber any additional shares of its
capital stock or any rights relating to such shares, or permit
any additional shares of its capital stock to become subject to
new stock option grants or other stock-based rights; provided,
however, that Steel Vault may issue up to an additional
200,000 shares of Steel Vault common stock, and VeriChip
may issue up to an additional 100,000 shares of VeriChip
common stock;
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declare, pay or set aside for payment any dividends or other
distributions on any shares of its capital stock;
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enter into, modify, or renew employment, consulting, severance
or similar arrangements with any of its or its subsidiaries
directors, officers or independent contractors, or grant any
increase in employee compensation or benefits, other than as
required by law, to satisfy certain existing contracts or in the
ordinary course of business;
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enter into, establish, adopt or modify any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare arrangements, or any
trust agreements with respect to any of its or its
subsidiaries’ directors, officers, employees or independent
contractors;
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sell, transfer, mortgage, lease, encumber, or otherwise dispose
of or discontinue any material portion of its assets, businesses
or properties;
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acquire equity interests in, or assets of, other individuals,
business entities, unincorporated organizations or governments
in excess of $25,000 individually or $50,000 in the aggregate;
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amend its charter or bylaws or the charter or bylaws of any of
its subsidiaries;
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implement or adopt any change in accounting principles,
practices or methods, except as may be required by generally
accepted accounting principles in the United States of America;
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enter into, renew or terminate any material contract, or amend
in any material respect, or waive any material right under, any
existing material contracts, other than in the ordinary course
of business;
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settle any claims, actions, arbitrations, audits, hearings,
investigations or suits, except for proceedings that involve
solely money damages in an amount, individually and in the
aggregate, of not more than $10,000 and which could not
reasonably be expected to establish adverse precedent for
subsequent settlements;
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authorize or make any capital expenditures other than those
disclosed in annual budgets or in amounts not exceeding $10,000
in the aggregate, or expenditures made through entering into
capital leases;
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make or change any tax election, change any annual tax
accounting period, adopt or change any method of tax accounting,
file any amended tax return, enter into any closing agreement,
settle any tax claim or assessment, surrender or compromise any
right to claim a tax refund, or consent to any extension or
waiver of any applicable limitations period, other than as
required by law or in the ordinary course of business;
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incur any indebtedness for borrowed money;
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assume, guarantee, endorse or otherwise become responsible for
the obligations of others; or forgive or extinguish any
indebtedness to itself or its subsidiaries for borrowed money or
otherwise waive any rights under any agreement pursuant to which
such indebtedness was incurred;
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make any loans, advances or capital contributions to, or
investment in, any other person; and
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agree, commit to do, or adopt any resolutions of its board of
directors in support of any action precluded by the preceding
covenants.
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Non-Solicitation
Until the effective time of the merger or the termination of the
merger agreement, Steel Vault agrees that it will not, and it
will not permit its subsidiaries or the officers, directors,
employees, representatives, agents or affiliates of Steel Vault
or its subsidiaries, to take any of the following actions,
directly or indirectly:
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initiate, solicit, encourage or otherwise facilitate (including
by way of furnishing information or otherwise) any inquiries or
the making of any proposal or offer that constitutes, or may
reasonably be expected to lead to, an acquisition proposal, as
defined below;
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enter into, maintain or continue discussions, or negotiate with
any person or entity, in furtherance of such inquiries or to
obtain an acquisition proposal; or
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agree to, approve, recommend, or endorse any acquisition
proposal, or resolve, agree or publicly propose to take any such
action.
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Steel Vault must promptly notify VeriChip of any such inquiries
and proposals received by Steel Vault or any of its subsidiaries
or representatives relating to any of such matters.
However, if, prior to the approval of the merger by Steel
Vault’s stockholders, Steel Vault receives an unsolicited,
written, bona fide acquisition proposal that its board of
directors determines in good faith (after consultation with its
financial advisors and outside counsel) constitutes, or could
reasonably be expected to lead to, a superior proposal, as
defined below, Steel Vault may provide access or furnish
information with respect to it and its subsidiaries to, and may
enter into discussions or negotiations with, the person or
entity who has made (and not withdrawn) that acquisition
proposal, if:
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the acquisition proposal did not result from Steel Vault, its
subsidiaries or its representatives, or the representatives of
its subsidiaries, violating the restrictions relating to other
negotiations set forth above;
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prior to delivering or making available the non-public
information or entering into discussions with the person or
group making the acquisition proposal, Steel Vault receives from
the person or group a customary confidentiality
agreement; and
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subject to the right of Steel Vault to withhold information
where such disclosure would violate or prejudice the rights of
its or its subsidiaries’ clients, jeopardize the
attorney-client privilege of Steel Vault or its subsidiaries, or
contravene any law or binding agreement entered into prior to
the date of the merger agreement, Steel Vault promptly delivers
the non-public information to VeriChip, if not previously
provided, that it delivers or makes available to the person or
group that has submitted the acquisition proposal.
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Steel Vault shall, within one business day, notify VeriChip of
the receipt of any acquisition proposal and the material terms
and conditions thereof. Further, Steel Vault shall promptly keep
VeriChip advised on a substantially-current basis of any
developments relating to any such acquisition proposal.
In addition, Steel Vault shall not enter into any letter of
intent, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement, option agreement, joint
venture agreement, partnership agreement or other agreement
constituting or related to, or which is intended to or is
reasonably likely to lead to, any acquisition proposal.
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An “acquisition proposal” is any offer or proposal
regarding any of the following (other than the transactions
contemplated by the merger agreement):
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any merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets, or any significant equity interest of, Steel Vault
or any of its subsidiaries in a single transaction or series of
related transactions, which could reasonably be expected to
interfere with the completion of the merger; or
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any tender offer or exchange offer for any outstanding shares of
capital stock of Steel Vault or the filing of a registration
statement under the Securities Act in connection therewith.
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A “superior proposal” means a written offer made by a
third party that the Steel Vault board reasonably determines to
be bona fide and determines, in good faith and after
consultation with its financial advisors and outside counsel, to
be more favorable to holders of Steel Vault common stock, than
the merger (taking into account all financial, regulatory, legal
and other aspects of such offer and transaction, and any changes
to the terms of the merger agreement proposed by VeriChip in
response to such superior proposal or otherwise) and that, if
consummated, would result in such third party:
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acquiring, directly or indirectly, more than 50% of the voting
power of Steel Vault common stock (or, in the case of a direct
merger, the common stock of the resulting company); or
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all or substantially all of the consolidated assets of Steel
Vault and its subsidiaries for consideration consisting of cash
and/or
securities payable to holders of capital stock of Steel Vault.
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Board
Recommendations
The Steel Vault board of directors may withdraw or modify, in a
manner adverse to VeriChip or VeriChip Acquisition Corp., its
recommendation in favor of the merger proposal, or resolve,
agree to take any such action (any such action, or such
resolution or agreement to take such action, is referred to
herein as an “adverse recommendation change”), if:
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the Steel Vault board of directors receives an acquisition
proposal that the Steel Vault board of directors determines, in
good faith and after consultation with its outside counsel and
financial advisors, does constitute, or could reasonably be
expected to lead to, a superior proposal; or
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the Steel Vault board of directors determines, in good faith and
after consultation with its outside counsel, that its failure to
change, withhold, withdraw, amend or modify its recommendation
with respect to the merger would result in Steel Vault’s
board’s breach of its fiduciary duties to the Steel Vault
stockholders under applicable law;
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provided, in each case, that Steel Vault shall provide VeriChip
with no less than two business days’ notice of any expected
adverse recommendation change prior to any such change.
The VeriChip board of directors may fail to make, or may
withdraw or modify, its recommendation in favor of the proposal
to issue VeriChip common stock in connection with the merger and
to amend VeriChip’s second amended and restated certificate
of incorporation to change its name, or fail to seek the
requisite stockholder approval of such proposals, if it
determines, in good faith and after consultation with outside
counsel, that failure to so act would result in a breach by the
VeriChip board of directors of its fiduciary duties to
VeriChip’s stockholders under, applicable law, provided,
that VeriChip shall provide Steel Vault with no less than two
business days notice of such determination.
Director
and Officer Indemnification
From the effective time of the merger, and for a period of not
less than six years afterwards, VeriChip and the surviving
corporation shall indemnify and hold harmless each current (as
of the effective time) and former officer and director of Steel
Vault and its subsidiaries against all claims, losses,
liabilities, fines and reasonable fees, costs and expenses
incurred in connection with any proceeding arising out of or
pertaining to
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the fact that such officer or director is, or was at any time
prior to the effective time, a director or officer of Steel
Vault or its subsidiaries, pertaining to any matter existing or
occurring at or prior to the effective time, to the same extent
such directors and officers are indemnified or have the right to
advancement of expenses as of the date of the merger agreement
by Steel Vault, pursuant to the Steel Vault certificate of
incorporation, bylaws and indemnification agreements, if any, in
existence on the date of the merger agreement.
For a period of six years after the effective time of the
merger, the surviving corporation shall maintain in effect a
“tail policy” based on the current policies of
directors’ and officers’ liability insurance
maintained by Steel Vault with respect to claims arising from,
or related to, facts or events which occurred at or before the
effective time.
Steel
Vault Stock Options
At the effective time of the merger, VeriChip will assume all
the obligations of Steel Vault under the Steel Vault stock
option plans, each outstanding Steel Vault stock option and the
agreements evidencing the stock option grants. Within thirty
days after the effective time, VeriChip will file a registration
statement on
Form S-8
with respect to the shares of VeriChip common stock subject to
such stock options (other than options held by persons who are
not employees of Steel Vault at the effective time) resulting
from the conversion of Steel Vault stock options and will use
its reasonable best efforts to maintain the effectiveness of
such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses
contained therein) for so long as such stock options remain
outstanding.
Board of
Directors of VeriChip Following the Merger
Immediately following the effective time of the merger, the
board of directors of VeriChip will consist of five members with
four individuals designated by VeriChip and one individual
designated by Steel Vault. Because the VeriChip board of
directors currently consists of five individuals, it is
anticipated that one of the members of the then-current VeriChip
board of directors will resign from the VeriChip board of
directors
and/or
will
no longer continue to serve as a director.
Conditions
to Completion of the Merger
The obligations of VeriChip, Steel Vault and VeriChip
Acquisition Corp. to consummate the transactions contemplated by
the merger agreement are subject to the satisfaction or written
waiver by VeriChip and Steel Vault, at or prior to the
effective time of the merger, of each of the following
conditions:
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no governmental entity will have issued a temporary restraining
order, preliminary or permanent injunction or other order
preventing the merger;
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no governmental entity will have enacted or issued any law,
regulation or order that is in effect and has the effect of
making the merger illegal or otherwise prohibiting the closing;
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VeriChip’s registration statement, of which this joint
proxy statement/prospectus is a part, must be effective, no stop
order suspending its effectiveness may be in effect, and no
proceeding for that purpose shall have been initiated or
threatened in writing by the SEC;
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the shares of VeriChip common stock to be issued in the merger
must be approved for listing on the Nasdaq Capital Market,
subject to official notice of issuance;
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the merger agreement must be approved and adopted by the holders
of a majority of the outstanding shares of Steel Vault common
stock entitled to vote at the special meeting;
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the issuance of the shares of VeriChip common stock to be issued
in connection with the merger must be approved by the holders of
a majority of the total shares of VeriChip common stock cast at
the special and annual meeting;
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VeriChip and Steel Vault must receive a tax opinion
substantially to the effect that the transactions contemplated
by the merger agreement should qualify as a
“reorganization” within the meaning of Section 368(a)
of the Internal Revenue Code;
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all required consents and approvals must be obtained, unless the
failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material
adverse effect on VeriChip or Steel Vault or to materially
adversely affect the consummation of the merger;
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the representations and warranties of each party in the merger
agreement must be true and correct, subject to various
qualifications;
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the parties must have complied in all material respects with
their respective agreements and covenants in the merger
agreement;
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the parties must each receive a written fairness opinion from
their respective investment banking firms; and
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VeriChip must receive letters of resignation necessary to cause
the VeriChip board of directors to be constituted as provided in
the merger agreement, and Steel Vault must provide to VeriChip
the name of the individual designated by Steel Vault to serve on
the board of directors of VeriChip.
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Steel Vault’s obligations to consummate the transactions
contemplated by the merger agreement are subject to the
satisfaction or written waiver by Steel Vault, at or prior to
the effective time, of each of the following additional
conditions:
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the representations and warranties of VeriChip and VeriChip
Acquisition Corp. contained in the merger agreement that are
qualified by materiality or material adverse effect or any
similar standard or qualification, must be true and correct as
of the date of the merger agreement and as of the date of
effective time of the merger (except that those representations
and warranties which address matters only as of a particular
date shall remain true and correct only as of such date), and
those representations and warranties of VeriChip and VeriChip
Acquisition Co. that are not so qualified must be correct and
complete in all material respects as of the date of the merger
agreement and as of the date of effective time of the merger
(except that those representations and warranties which address
matters only as of a particular date shall remain true and
correct only as of such date);
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notwithstanding the first bullet point, the representations and
warranties of VeriChip and VeriChip Acquisition Corp. regarding
VeriChip’s capital stock (subject to de minimis deviations)
and the absence of any event, occurrence, development or state
of circumstances or facts which has had, or is reasonably likely
to have, a material adverse effect on VeriChip and any of its
subsidiaries since June 30, 2009, must be true and correct
as of the date of the merger agreement and as of the date of
effective time of the merger;
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Steel Vault must have received a certificate from a senior
executive officer of VeriChip certifying the accuracy of the
representations and warranties;
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VeriChip and VeriChip Acquisition Corp. must have complied in
all material respects with its respective agreements and
covenants in the merger agreement;
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Steel Vault must have received a written fairness opinion from
its investment banking firm; and
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VeriChip must have received letters of resignation necessary to
cause the VeriChip board of directors to be constituted as
provided in the merger agreement; provided, however, that Steel
Vault shall have provided to VeriChip the name of the individual
designated by Steel Vault.
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VeriChip’s and VeriChip Acquisition Corp.’s
obligations to consummate the transactions contemplated by the
merger agreement are subject to the satisfaction or written
waiver by VeriChip of each of the following additional
conditions:
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the representations and warranties of Steel Vault contained in
the merger agreement with qualifications and exceptions relating
to materiality or material adverse effect or any similar
standard or qualification,
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must be true and correct as of the date of the merger agreement
and as of the effective time of the merger (except that those
representations and warranties which address matters only as of
a particular date shall remain true and correct only as of such
date), and those representations and warranties of VeriChip and
VeriChip Acquisition Co. that are not so qualified must be
correct and complete in all material respects as of the date of
the merger agreement and as of the date of effective time of the
merger (except that those representations and warranties which
address matters only as of a particular date shall remain true
and correct only as of such date);
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notwithstanding the first bullet point, the representations and
warranties of Steel Vault regarding Steel Vault’s
capital stock (subject to de minimis deviations) and the absence
of any event, occurrence, development or state of circumstances
or facts which has had, or is reasonably likely to have, a
material adverse effect on Steel Vault and any of its
subsidiaries since June 30, 2009 must be true and correct
as of the date of the merger agreement and as of the effective
time of the merger;
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VeriChip must have received a certificate from a senior
executive officer of Steel Vault certifying the accuracy of the
representations and warranties;
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Steel Vault must have complied in all material respects with its
respective agreements and covenants in the merger agreement;
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VeriChip must have received a written fairness opinion from its
investment banking firm; and
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Steel Vault must cause that certain secured convertible
promissory note, dated March 20, 2009, given by Steel Vault
to Blue Moon Energy Partners LLC, to be amended on terms
reasonably acceptable to VeriChip, to eliminate the convertible
feature of such note.
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A “material adverse effect” means, with respect to
VeriChip, Steel Vault, or the surviving corporation,
respectively, any change, effect, event or occurrence that,
individually or in the aggregate, has a material adverse effect
on the financial position, results of operations, assets,
properties, business, or prospects of VeriChip and its
subsidiaries, taken as a whole, Steel Vault and its
subsidiaries, taken as a whole, or the surviving corporation and
its subsidiaries, taken as a whole, as the case may be; provided
that “material adverse effect” shall not be deemed to
include the effects of:
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any change in the trading prices of Steel Vault common stock or
VeriChip common stock between the date of the merger agreement
and the effective time of the merger;
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any changes in GAAP that affect generally entities such as
VeriChip or Steel Vault;
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financial, banking or securities markets in general (including
any disruption in such markets and any decline in the price of
any security or any market index);
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general business or economic conditions, or general changes or
developments, affecting the industries in which VeriChip or
Steel Vault operate or areas where VeriChip or Steel Vault do
business, directly or through its subsidiaries, except to the
extent that any such change has a disproportionate impact on
VeriChip or its subsidiaries or Steel Vault or its
subsidiaries; or
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the of the merger agreement or the consummation of the
transactions contemplated by the merger agreement, including
compliance with the covenants set forth in the merger agreement,
or any action taken or omitted to be taken by (x) Steel
Vault at the written request, or with the prior written consent,
of VeriChip or VeriChip Acquisition Corp., or (y) VeriChip
or VeriChip Acquisition Corp. at the written request, or with
the prior written consent, of Steel Vault.
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Termination
The merger agreement may be terminated, and the merger may be
abandoned at any time prior to the effective time of the merger,
whether before or after requisite approval by Steel Vault’s
stockholders and VeriChip’s stockholders:
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by the mutual consent of VeriChip and Steel Vault;
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by VeriChip or Steel Vault in the event of either: (1) a
breach by the other party of any representation or warranty
contained in the merger agreement, which breach cannot be or has
not been cured within 15 days after the giving of written
notice to the breaching party of such breach, or (2) a
breach by the other party of any of the covenants or agreements
in the merger agreement, which breach cannot be or has not been
cured within 15 days after the giving of written notice to
the breaching party of such breach and which breach, in each
case, is reasonably likely, individually or in the aggregate, to
have a material adverse effect on the breaching party or the
surviving corporation;
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at any time prior to the effective time of the merger, by
VeriChip or Steel Vault in the event that the merger is not
consummated by December 31, 2009, or such later date as
Steel Vault and VeriChip may mutually agree in writing, except
to the extent that the failure of the merger then to be
consummated arises out of, or results from, the knowing action
or inaction of the party seeking to terminate under the
circumstances set forth in this bullet point;
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by Steel Vault or VeriChip in the event that (1) the
approval of any governmental authority required for consummation
of the merger and the other transactions contemplated by the
merger agreement shall have been denied by final nonappealable
action of such governmental authority, or such governmental
authority shall have requested the permanent withdrawal of any
application therefor, provided, however, that the party seeking
to terminate the merger agreement pursuant to the circumstances
outlined in this bullet point shall have used commercially
reasonable efforts to prevent the entry of, and to remove, such
restraint, (2) the requisite stockholder approval is not
obtained at the Steel Vault special meeting or at any
adjournment or postponement thereof or (3) the requisite
stockholder approval is not obtained at the VeriChip special and
annual meeting or at any adjournment or postponement thereof;
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by Steel Vault prior to obtaining the requisite stockholder vote
in the event that Steel Vault receives and accepts a superior
proposal;
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by VeriChip in the event that an adverse recommendation change
by Steel Vault has occurred (other than an adverse
recommendation change by Steel Vault occurring as a result of a
VeriChip material adverse effect);
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by Steel Vault in the event that an adverse recommendation
change by VeriChip has occurred (other than an adverse
recommendation change by VeriChip occurring as a result of a
Steel Vault material adverse effect);
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by VeriChip in the event that a willful and material breach by
Steel Vault of its non-solicitation obligations under the merger
agreement has occurred and such breach leads to the making of a
superior proposal; and
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by Steel Vault in the event that VeriChip receives and accepts
an acquisition proposal with respect to VeriChip.
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Fees and
Expenses of the Merger
All fees and expenses incurred in connection with the merger
agreement and the transactions contemplated by the merger
agreement will be paid by the party incurring such expenses,
whether or not the merger is consummated; provided, however,
that VeriChip will pay (i) all fees and expenses, other
than attorneys’, accountants’, financial
advisors’ and consultants’ fees and expenses, which
will be paid by the party incurring such fees and expenses,
incurred in relation to the printing and filing with the SEC of
this joint proxy statement/prospectus (including any preliminary
materials related thereto) and this registration statement
(including financial statements and exhibits) and any amendments
or supplements thereto and (ii) the filing fee(s) for this
registration statement.
VeriChip has agreed to reimburse Steel Vault for all the
transaction fees and expenses incurred by Steel Vault, up to a
maximum of $200,000, if the merger agreement is terminated by
Steel Vault (i) because of a breach by VeriChip of any
representation or warranty or covenant or agreement in the
merger agreement, subject to certain cure periods, that is
reasonably likely, individually or in the aggregate, to have a
material
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adverse effect on VeriChip or the surviving corporation,
(ii) in the event that an adverse recommendation change by
VeriChip has occurred (other than an adverse recommendation
change by VeriChip occurring as a result of a Steel Vault
material adverse effect), or (iii) in the event that
VeriChip receives and accepts an acquisition proposal with
respect to VeriChip.
Steel Vault has agreed to reimburse VeriChip for all the
transaction fees and expenses incurred by VeriChip, up to a
maximum of $200,000, if the merger agreement is terminated by
(i) VeriChip because of a breach by Steel Vault of any
representation or warranty or covenant or agreement in the
merger agreement, subject to certain cure periods, that is
reasonably likely, individually or in the aggregate, to have a
material adverse effect on Steel Vault or the surviving
corporation, (ii) VeriChip in the event that an adverse
recommendation change has occurred (other than an adverse
recommendation change occurring as a result of a VeriChip
material adverse effect), (iii) VeriChip in the event that
a willful and material breach by Steel Vault of its
non-solicitation obligations under the merger agreement has
occurred and such breach leads to the making of a superior
proposal, or (iv) Steel Vault prior to obtaining the
requisite vote by Steel Vault’s stockholders in the event
that Steel Vault receives and accepts a superior proposal.
Amendment
and Waiver
Prior to the effective time of the merger, any provision of the
merger agreement may be (i) waived by the party benefited
by the provision, or (ii) amended or modified at any time
by written agreement among VeriChip, Steel Vault and VeriChip
Acquisition Corp., approved or authorized by their respective
boards of directors and executed in the same manner as the
merger agreement. However, after approval of the merger by Steel
Vault’s stockholders and VeriChip’s stockholders, no
amendment may be made that, under applicable law, requires
further approval of these stockholders, without obtaining such
required further approval.
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UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
REFLECTING THE MERGER
In accordance with the merger agreement, VeriChip plans to
acquire all of the outstanding common shares of Steel Vault at
an exchange ratio of 0.5 shares of VeriChip common stock
for every share of Steel Vault common stock outstanding. No
fractional shares of VeriChip common stock will be issued in
connection with the merger. Instead, VeriChip will make a cash
payment to each Steel Vault stockholder who would otherwise
receive a fractional share. All outstanding options and warrants
will be exchanged at the same ratio (one share of Steel Vault
common stock to 0.5 shares of VeriChip common stock). The impact
to the pro forma balances of cash and equity resulting from the
fractional shares has not been considered in the accompanying
unaudited pro forma condensed combined financial data. In
addition, the pro forma balances do not include adjustments
relating to the $10.0 million financing arrangement between
VeriChip and Optimus nor the potential dilutions resulting from
such transaction.
The following unaudited pro forma condensed combined financial
statements are based on the historical consolidated financial
statements of VeriChip after giving effect to VeriChip’s
acquisition of the shares of common stock currently held by the
stockholders of Steel Vault, using the acquisition method of
accounting and applying the assumptions and adjustments
described in the accompanying notes.
The unaudited pro forma condensed combined statements of
operations for the six months ended June 30, 2009 and the
year ended December 31, 2008 are presented as if the
acquisition had occurred on January 1, 2009 and 2008,
respectively. The unaudited pro forma condensed combined balance
sheet is presented as if the acquisition had occurred on
June 30, 2009. You should read this information in
conjunction with the:
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accompanying notes to the unaudited pro forma condensed combined
financial statements included in this joint proxy
statement/prospectus beginning on page 107;
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separate unaudited historical financial statements of VeriChip
as of and for the six month period ended June 30, 2009,
included in this joint proxy statement/prospectus beginning on
page FS-2,
and audited historical financial statements of VeriChip as of
and for the year ended December 31, 2008, included in this
joint proxy statement/prospectus beginning on
page FS-18; and
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separate unaudited historical financial statements of Steel
Vault as of and for the nine month period ended June 30,
2009, included in this joint proxy statement/prospectus
beginning on
page FS-46,
and audited historical financial statements of Steel Vault as of
and for the year ended September 30, 2008, included in this
joint proxy statement/prospectus beginning on
page FS-59.
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The historical financial information related to the results of
Steel Vault for the twelve months ended December 31, 2008
is represented on a calendar year basis, i.e. fiscal year
September 30, 2008 less the quarter ended December 31,
2007 plus the quarter ended December 31, 2008. The
historical financial information related to the results of Steel
Vault for the six months ended June 30, 2009 were derived
from the sum of the quarters ended March 31, 2009 and
June 30, 2009.
The pro forma information presented is for illustrative purposes
only and is not necessarily indicative of the financial position
or results of operations that would have been realized if the
merger had been completed on the dates indicated, nor is it
indicative of future operating results or financial position.
The pro forma adjustments are based upon available information
and certain assumptions that VeriChip believes are reasonable
and do not take into account anticipated operating efficiencies,
cost savings or restructuring costs resulting from the merger.
Pursuant to the acquisition method of accounting, the total
estimated purchase price has been preliminarily allocated to the
assets acquired and liabilities assumed based on an allocation
of their respective fair values at June 30, 2009. Any
differences between the fair value of the total consideration
issued and the fair value of the tangible and intangible assets
acquired and liabilities assumed will be recorded as goodwill.
Since these unaudited pro forma condensed combined financial
statements have been prepared based on preliminary estimates of
fair values attributable to the merger, the actual amounts
recorded for the merger may differ materially from the
information presented. VeriChip’s management has determined
the preliminary fair value of the intangible assets at the pro
forma condensed combined balance sheet date of June 30,
2009. These
102
allocations are subject to change pending further review of the
fair value of the assets acquired and liabilities assumed, as
well as the impact of potential restructuring activities and
actual transaction costs. Additionally, the fair value of the
tangible and intangible assets acquired and liabilities assumed
may be materially impacted by the results of Steel Vault’s
operations up to the closing date of the merger.
103
Unaudited
Pro Forma Condensed Combined Consolidated Balance
Sheet
(as of June 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VeriChip
|
|
|
Steel Vault
|
|
|
Proforma
|
|
|
Proforma
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,165
|
|
|
$
|
505
|
|
|
$
|
—
|
|
|
$
|
1,670
|
|
|
Restricted cash
|
|
|
4,434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,434
|
|
|
Prepaid expenses and other current assets
|
|
|
232
|
|
|
|
176
|
|
|
|
(4
|
)
(2)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
(3)
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
5,831
|
|
|
|
681
|
|
|
|
(17
|
)
|
|
|
6,495
|
|
|
Equipment, net of accumulated depreciation
|
|
|
30
|
|
|
|
95
|
|
|
|
—
|
|
|
|
125
|
|
|
Goodwill and other intangibles
|
|
|
|
|
|
|
538
|
|
|
|
5,410
|
(1)
|
|
|
5,948
|
|
|
Investment in Steel Vault
|
|
|
62
|
|
|
|
—
|
|
|
|
(62
|
)
(2)
|
|
|
—
|
|
|
Note receivable from Steel Vault
|
|
|
468
|
|
|
|
—
|
|
|
|
(468
|
)
(2)
|
|
|
—
|
|
|
Other assets
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,391
|
|
|
$
|
1,333
|
|
|
$
|
4,863
|
|
|
$
|
12,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
251
|
|
|
$
|
326
|
|
|
$
|
—
|
|
|
$
|
577
|
|
|
Accrued expenses and other current liabilities
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
(3)
|
|
|
|
|
|
|
|
|
948
|
|
|
|
483
|
|
|
|
300
|
(4)
|
|
|
1,718
|
|
|
Note payable to VeriChip Corporation, current portion
|
|
|
—
|
|
|
|
472
|
|
|
|
(472
|
)
(2)
|
|
|
—
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
111
|
|
|
|
—
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,199
|
|
|
|
1,392
|
|
|
|
(185
|
)
|
|
|
2,406
|
|
|
Senior Note
|
|
|
—
|
|
|
|
163
|
|
|
|
—
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,199
|
|
|
|
1,555
|
|
|
|
(185
|
)
|
|
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Authorized 5,000 shares of $.001 par
value; no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, Authorized 40,000 shares, of $.01 par
value; issued and outstanding 18,303 shares at
June 30, 2009
|
|
|
137
|
|
|
|
87
|
|
|
|
(87
|
)
(1)
|
|
|
137
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
2,020
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,130
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,268
|
)
(1)
|
|
|
|
|
|
|
|
|
44,996
|
|
|
|
7,268
|
|
|
|
|
|
|
|
50,146
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
7,577
|
(1)
|
|
|
|
|
|
|
|
|
(39,965
|
)
|
|
|
(7,577
|
)
|
|
|
(300
|
)
(4)
|
|
|
(40,265
|
)
|
|
Accumulated other comprehensive loss
|
|
|
24
|
|
|
|
—
|
|
|
|
(24
|
)
(2)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity (Deficit)
|
|
|
5,192
|
|
|
|
(222
|
)
|
|
|
5,048
|
(1)
|
|
|
10,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,391
|
|
|
$
|
1,333
|
|
|
$
|
4,863
|
|
|
$
|
12,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to pro forma financial data in footnote 2.
104
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Operations
(Year Ended December 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
Proforma
|
|
|
|
|
VeriChip
|
|
|
Steel Vault
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Total revenue
|
|
$
|
43
|
|
|
$
|
16
|
|
|
|
|
|
|
$
|
59
|
|
|
Total cost of products and services
|
|
|
275
|
|
|
|
7
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(232
|
)
|
|
|
9
|
|
|
|
|
|
|
|
(223
|
)
|
|
Selling, general and administrative
|
|
|
(19,775
|
)
|
|
|
(1,058
|
)
|
|
$
|
(1,500
|
)
(3)(4)
|
|
|
(22,333
|
)
|
|
Research and development
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
(712
|
)
|
|
Other income
|
|
|
7,997
|
|
|
|
12
|
|
|
|
|
|
|
|
8,009
|
|
|
Loss on sale of marketable equity securities
|
|
|
|
|
|
|
(430
|
)
|
|
|
|
|
|
|
(430
|
)
|
|
Interest and other expense
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(13,935
|
)
|
|
$
|
(1,467
|
)
|
|
$
|
(1,500
|
)
|
|
$
|
(16,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing
operations — basic and diluted
|
|
$
|
(1.31
|
)
|
|
|
(0.27
|
)
|
|
|
|
|
|
$
|
(1.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: Basic and
diluted
|
|
|
10,597
|
|
|
|
5,357
|
(7)
|
|
|
4,816
|
(6)
|
|
|
15,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to pro forma financial data in footnote 2.
105
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Operations
(Six-Months Ended June 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
Proforma
|
|
|
|
|
VeriChip
|
|
|
Steel Vault
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
Revenue
|
|
$
|
57
|
|
|
$
|
401
|
|
|
|
|
|
|
$
|
458
|
|
|
COGS
|
|
|
(19
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
38
|
|
|
|
174
|
|
|
|
|
|
|
|
212
|
|
|
Operating expenses
|
|
|
(2,304
|
)
|
|
|
(2,054
|
)
|
|
$
|
(750
|
)
(3)(5)
|
|
|
(5,108
|
)
|
|
Interest (expense) income, net
|
|
|
24
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
(13
|
)
|
|
Gain on sale of Xmark Corporation
|
|
|
4,384
|
|
|
|
—
|
|
|
|
|
|
|
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,142
|
|
|
$
|
(1,917
|
)
|
|
$
|
(750
|
)
|
|
$
|
(525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing
operations — basic
|
|
$
|
0.18
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing
operations — diluted
|
|
$
|
0.17
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: basic
|
|
|
12,240
|
|
|
|
8,556
|
(9)
|
|
|
4,816
|
(6)
|
|
|
17,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: diluted
|
|
|
12,563
|
|
|
|
8,556
|
(9)
|
|
|
4,493
|
(6)(8)
|
|
|
17,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to pro forma financial data in footnote 2.
106
|
|
|
|
1.
|
Basis of
Pro Forma Presentation
|
On September 4, 2009, VeriChip and Steel Vault entered into
a definitive merger agreement in a transaction to be accounted
for using the acquisition method of accounting with VeriChip as
the purchaser. Per the terms of the merger agreement, each share
of Steel Vault common stock then outstanding will be canceled
and automatically converted into the right to receive
0.5 shares of VeriChip common stock. Each outstanding stock
option and warrant to purchase shares of Steel Vault common
stock issued by Steel Vault will be converted into an option to
purchase that number of shares of VeriChip common stock
determined by multiplying the number of shares of Steel Vault
common stock subject to such Steel Vault stock option or warrant
by 0.5, at an exercise price per share of VeriChip common stock
equal to the exercise price per share of such Steel Vault stock
option or warrant divided by 0.5, rounded up to the nearest
whole cent. Any fractional shares will be rounded up to the
nearest whole number of shares. Warrants previously issued by
Steel Vault to VeriChip will be cancelled as part of the merger
transaction.
The total number of shares of VeriChip common stock issuable as
merger consideration is subject to adjustment if, after the date
of the merger agreement, but prior to the effective time of the
merger, the shares of issued and outstanding VeriChip common
stock increase, decrease or change into, or are exchanged for, a
different kind or number of securities, to provide the holders
of Steel Vault common stock the same economic effect as
contemplated by the merger agreement prior to such event. No
fractional shares of VeriChip common stock will be issued in
connection with the merger. Instead, VeriChip will make a cash
payment to each Steel Vault stockholder who would otherwise
receive a fractional share. The impact to the pro forma balances
of cash and equity resulting from the fractional shares has not
been considered in the accompanying unaudited pro forma
condensed combined financial data. In addition, the pro forma
balances do not include adjustments relating to the
$10.0 million financing arrangement between VeriChip and
Optimus nor the potential dilutions resulting from such
transaction. The total estimated purchase price of approximately
$4.7 million is comprised of an estimated 4.8 million
shares of VeriChip common stock, and the fair value of the
assumed outstanding Steel Vault stock options and warrants.
The unaudited pro forma condensed combined balance sheet is
presented to give effect to the merger as if the transaction had
been consummated on June 30, 2009. The unaudited pro forma
condensed combined statement of operations for the six months
ended June 30, 2009 and for the year ended
December 31, 2008 are presented as if the transaction had
been consummated on January 1, 2009 and 2008, respectively.
The unaudited pro forma condensed combined balance sheet
provides for the issuance of approximately 4.8 million
VeriChip common shares, based upon a fixed common stock exchange
ratio of 0.5 VeriChip common shares for each outstanding share
of Steel Vault common stock of June 30, 2009. The actual
number of VeriChip common shares to be issued will be determined
based on the actual number of shares of Steel Vault common stock
outstanding at the closing date of the merger. Under the
acquisition method of accounting, the fair value of the total
consideration was determined using VeriChip’s closing stock
price on September 3, 2009, the day before the merger
agreement was signed.
VeriChip will assume approximately 8.1 million options and
warrants of Steel Vault to purchase the equivalent of
approximately 4.1 million VeriChip common shares at a
weighted average exercise price of $0.61. The fair value of
options and warrants to be assumed was estimated using the Black
Scholes valuation model and a share price of $0.65 per share,
which represents the volume weighted average price of
VeriChip’s common stock beginning two trading days before
to two trading days after September 4, 2009, the date on
which the Merger Agreement was signed. The actual number of
Steel Vault options and warrants to be assumed will be
determined based on the actual number of Steel Vault options and
warrants outstanding as the closing date.
The note receivable from Steel Vault will no longer be required
to be repaid pursuant to the terms of the merger, thereby
reducing the liabilities of Steel Vault and increasing the
investment by VeriChip in Steel Vault.
107
The total estimated purchase price of the merger is as follows
(in thousands):
|
|
|
|
|
|
|
Fair value of VeriChip common stock to be issued
|
|
$
|
3,130
|
|
|
Estimated fair value of stock options and warrants assumed
|
|
|
2,020
|
|
|
Note receivable inclusive of interest contributed and investment
balance net of other comprehensive gain
|
|
|
510
|
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Less assets acquired
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(250
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)
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Total estimated purchase price
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$
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5,410
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Preliminary
Estimated Purchase Price Allocation
The preliminary allocation of the purchase price to Steel
Vault’s tangible and intangible assets acquired and
liabilities assumed was based on their estimated fair values as
of September 4, 2009. VeriChip has estimated the fair value
of tangible assets, goodwill and intangible assets, assumed.
Some of these estimates are subject to change. These estimates
are based on a preliminary valuation and are subject to further
review by VeriChip, which may result in material adjustments at
the closing date of the merger and thereafter during the
purchase price allocation period. Furthermore, the fair values
of the tangible and intangible assets acquired may be affected
and materially changed by the results of Steel Vault’s
operations up to the closing date of the merger.
The following pro forma adjustments are included in the
unaudited pro forma condensed combined balance sheet:
(1) Purchase price allocation to goodwill and other
intangible assets.
(2) Elimination of intercompany debt and intercompany
transactions.
(3) Includes estimated transaction costs related to the
merger of $0.3 million.
(4) Amortization of customer lists over its one year
estimated life.
(5) Amortization of customer lists over six month period.
(6) The pro forma number of shares used in per share
calculations reflects the weighted average of VeriChip common
shares for each period presented, adjusted to reflect the common
stock exchange ratio of 0.5 VeriChip common shares for each
outstanding share of Steel Vault common stock. The pro forma
number of shares used in per share calculations does not reflect
the dilutive VeriChip securities, or the Steel Vault securities
as assumed by VeriChip common shares for each period presented,
adjusted to reflect the common stock exchange ratio of 0.5
VeriChip common shares for each outstanding VeriChip share of
Steel Vault common stock, as it would be anti-dilutive to the
proforma condensed combined loss from continuing operations
and/or net loss.
(7) The pro forma number of shares in per share
calculations reflect the weighted average shares calculated from
January 1, 2008 to December 31, 2008.
(8) Reversal of VeriChip 323 dilutive shares as they would
be anti-dilutive.
(9) The pro forma number of shares in per share
calculations reflect the weighted average shares calculated from
January 1, 2009 to June 30, 2009.
(10) The proforma adjustments does not include the stock
based compensation charge of $0.1 million due to the
accelerated vesting of the Steel Vault options due to a change
of control.
108
DESCRIPTION
OF VERICHIP’S BUSINESS
Overview
VeriChip was formed as a Delaware corporation by Digital Angel,
in November 2001. In January 2002, VeriChip began its efforts to
create a market for radio frequency identification, or RFID,
systems that utilize its human implantable microchip. On
February 14, 2007, VeriChip completed its initial public
offering in which VeriChip sold 3,100,000 shares of its
common stock at $6.50 per share.
On July 18, 2008, VeriChip completed the sale of all of the
outstanding capital stock of Xmark Corporation, its then
wholly-owned Canadian subsidiary, or Xmark, which was
principally all of its operations, to Stanley Canada
Corporation, a wholly-owned subsidiary of The Stanley Works. The
sale transaction was closed for $47.9 million in cash,
which consisted of the $45 million purchase price plus a
balance sheet adjustment of $2.9 million. Under the terms
of the stock purchase agreement, $4.5 million of the
proceeds were held in escrow for a period of 12 months to
provide for indemnification obligations under the stock purchase
agreement, if any. As a result, VeriChip recorded a gain on the
sale of Xmark of $6.2 million, with $4.5 million of
that gain deferred until the escrow was settled. The Xmark
business included all of the operations of VeriChip’s
previously reported healthcare security and industrial segments.
The financial position, results of operations and cash flows of
Xmark have been reclassified as discontinued operations.
During the quarter ended June 30, 2009, VeriChip finalized
the process related to the indemnification obligations supported
by the $4.5 million escrow. On July 20, 2009, VeriChip
received $4.4 million of the previously escrowed funds,
which was net of a $115,000 payment to Stanley Canada as the
final settlement of the final balance sheet adjustment. As a
result, VeriChip recognized a $4.4 million previously
deferred gain in its statement of operations for the three and
six months ended June 30, 2009.
Following the completion of the sale of Xmark to Stanley Canada,
VeriChip retired all of its outstanding debt for a combined
payment of $13.5 million and settled all contractual
payments to Xmark’s and VeriChip’s officers and
management for $9.1 million. On August 28, 2008,
VeriChip paid a special dividend to stockholders’ of
$15.8 million.
VeriChip’s principal executive offices are located at 1690
South Congress Avenue, Suite 200, Delray Beach, Florida
33445. VeriChip’s telephone number is
(561) 805-8008.
VeriMed, VeriChip, and VeriTrace are VeriChip’s
trademarks. This joint proxy statement/prospectus contains
trademarks and trade names of other organizations and
corporations.
Overview
VeriChip has historically developed, marketed and sold radio
frequency identification, frequently referred to as RFID,
systems used for the identification of people in the healthcare
market. VeriChip is currently focused on the development of its
Health Link personal health record business, the development of
the virus triage detection system and the
in vivo
glucose-sensing RFID microchip, as well as the development of
other sensor applications, and is considering and will review
other strategic opportunities. VeriChip’s original
business, the VeriMed Health Link system, formerly known as the
VeriMed patient identification system, uses an implantable
passive RFID microchip that is used in patient identification
applications. Each implantable microchip contains a unique
verification number that is read when it is scanned by
VeriChip’s scanner. In October 2004, the U.S. Food and
Drug Administration, or FDA, cleared its VeriMed Health Link
system for use in medical applications in the United States. As
of September 25, 2009, VeriChip has generated nominal
revenue from sales of its Health Link system. The key components
of the Health Link system are a passive microchip, which is
approximately the size of a grain of rice, a fixed location or a
wireless handheld scanner used to read the
16-digit
identification number contained on the microchip, and a secure,
web-enabled database containing a patients’ personal health
record.
In September 2009, VeriChip was granted an exclusive license to
certain patents owned by its development partner, Receptors LLC,
or Receptors, including Patent No. 7,504,364 titled
“Methods of Making Arrays and Artificial Receptors”
and Patent No. 7,469,076 “Sensors Employing
Combinatorial Artificial
109
Receptors,” in the application of such patents to the
development of the virus triage detection system for the H1N1
virus. The virus triage detection system, based on
Receptors’ patented AFFINITY by DESIGN™ CARA™
platform, is intended to initially provide two levels of
identification. Once developed, utilizing a simple test tube or
strip device format that can be combined with an inexpensive
reader, it is expected that the first level will prep the sample
and identify the agent as a flu or non-flu virus, and the second
level will sub-type (e.g. H1N1) classify the flu virus and alert
the user to the presence of pandemic threat viruses. VeriChip
believes the influenza triage diagnostic system will be scalable
and will be able to be adapted to identify new strains of
influenza and other viruses as they evolve, giving the virus
triage detection system value for future testing applications in
healthcare.
On September 29, 2009, VeriChip entered into a definitive
agreement for an up to $10,000,000 investment arrangement with
Optimus Technology Capital Partners, LLC, or Optimus, as more
fully described in proposal 6. VeriChip expects to use
either cash on hand or a portion of the proceeds to fund its
development programs with Receptors to develop a virus triage
detection system for the H1N1 virus and an
in vivo
glucose-sensing RFID microchip, as more fully described in the
“Recent Developments” section of the
“
Management’s Discussion and Analysis of Financial
Condition and Results of Operations of Verichip
.”
VeriChip will use the remainder of any such funds for working
capital and general corporate purposes. Under the financing
arrangement, VeriChip may issue convertible preferred shares
from time to time in multiple tranches. The preferred stock will
accrue a 10% in kind dividend and provides an option for
VeriChip to prepay with a make-whole premium. The tranches will
be convertible into restricted common stock at the market price
on the date of each tranche. In conjunction with the financing,
R & R Consulting Partners, LLC, which is
controlled by Mr. Silverman, agreed to enter into one or
more stock loan agreements with Optimus to facilitate the
transaction.
Upon consummation of the merger, the new combined company will
be called PositiveID Corporation and will offer identification
tools and technologies for consumers and businesses. The
companies believe that the formation of PositiveID Corporation
represents the convergence of a pioneer in personal health
records, VeriChip, with a leader in the identity security space,
Steel Vault, which is focused on access and security of a
consumer’s critical data. The companies believe that
joining personal health records and identity security solutions
provides a solid foundation for organic growth and a strong,
flexible platform for future offers. Following the merger and in
execution of its combined PositiveID business plan, management
does not plan to allocate significant capital to the growth of
the implantable microchip business.
Industry
Overview
RFID
and the Healthcare Industry
VeriChip believes that RFID technology may be used to address
the need of emergency room personnel and other first responder
medical practitioners to identify uncommunicative patients and
rapidly access their personal health records, and VeriChip
believes that use of such technology has the potential to
improve patient care, enhance productivity and lower costs. The
IDTechEx report refers to a study performed by the
U.S. Institute of Medicine that estimated that preventable
medical errors in the United States cause between 44,000 and
98,000 deaths each year, due in part to mistaken patient
identification and lack of information on a patient’s
medical history, and results in losses, other than the loss of
human life, of $17 billion to $29 billion annually.
These losses include the expense of additional care needed
because of mistakes, disability, and lost productivity and
income. One factor that can contribute to the occurrence of
preventable medical errors is the inability to identify a
patient
and/or
access his or her health records. Recognizing the problem of
patient identification and access to medical records, the United
States government is currently attempting to address certain
inefficiencies in the healthcare system related to information
technology. In particular, the current administration has
developed a plan to move, in the next five years, toward broad
adoption of standards-based electronic health information
systems, including the computerization of the nation’s
health records.
110
VeriChip’s
Health Link System
VeriChip’s Health Link system is designed to rapidly and
accurately identify people who are unconscious, confused or
unable to communicate at the time of medical treatment, for
example, upon arrival at a hospital emergency room.
VeriChip’s Health Link system provides emergency room
physicians and staff who use its scanner, linking a patient to
the Health Link Registry to have access to patient pre-approved
information, including the patient’s name, primary care
physician, emergency contact information, advance directives
and, if the patient elects, other pertinent data, such as
personal health records. In addition, VeriChip believes that its
wireless handheld scanner could make the Health Link system an
important identification tool for EMTs and other emergency
personnel outside the hospital emergency room setting. The
components of VeriChip’s system include:
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a glass-encapsulated microchip-equipped transponder, antenna,
and capacitor;
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a fixed location, or a wireless handheld, scanner; and
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a secure, web-enabled personal health record containing
patient-approved information.
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Following the merger, PositiveID intends to market the Health
Link personal health record with multiple means of access, which
may or may not include use of the implantable microchip, the
VeriChip.
The microchip used in the Health Link system is a passive RFID
microchip, approximately the size of a grain of rice, which is
implanted under the skin in a patient’s upper right arm
under the supervision of a physician. The capsule is coated with
a polymer, BioBondTM to form adherence to human tissue, thereby
preventing migration in the body. Each microchip contains a
unique
16-digit
identification number. The identification number can be read by
one of VeriChip’s handheld scanners. When the scanner is
placed within a few inches of the microchip, a small amount of
radio frequency energy passes from the scanner, energizing the
dormant microchip, which then emits a radio frequency signal
transmitting the identification number. With that identification
number, emergency room personnel or EMTs can securely obtain
from VeriChip’s or a third party’s database the
patient’s pre-approved information, including the
patient’s name, primary care physician, emergency contact
information, advance directives and, if the patient elects,
other pertinent data, such as personal health records.
Patients using the Health Link system are responsible for
inputting all of his or her information into VeriChip’s
database, including personal health records, as physicians
offices are not yet typically involved in this
process — primarily because of liability concerns and
because they are not generally paid for this service.
An individual implanted with VeriChip’s microchip whose
information is included in its database may grant access to such
information to any of the following categories of persons, at
the sole discretion of the patient:
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public safety personnel, including local police, fire and rescue
workers;
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emergency medical personnel, including EMTs and paramedics;
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medical facilities, including hospitals, urgent care centers and
physician offices; and
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law enforcement personnel, including sheriff’s departments,
state police and the FBI.
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Unless a patient decides otherwise, such persons will have
read-only access to a patient’s information.
There are a number of risks associated with VeriChip’s
VeriMed business, including without limitation:
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uncertainty as to whether a market for the Health Link system
will develop and whether VeriChip will be able to generate more
than a nominal level of revenue from the sale of such systems;
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uncertainty as to the future availability of insurance
reimbursement for the microchip implant procedure from
government and private insurers; and
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possible third-party claims asserting that VeriChip holds no
rights for the use of the implantable microchip technology and
are violating the third party’s intellectual property
rights. If such a claim
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were successful, VeriChip could be enjoined from marketing this
technology and could be required to pay substantial damages.
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As of September 25, 2009, 616 people have received
VeriChip’s VeriMed microchip and have enrolled in the
VeriMed patient registry. VeriChip attributes the modest number
of people who have undergone the microchip implant procedure to
a number of factors:
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A lack of direct to consumer advertising to educate the patient
population to the benefits of the Health Link system.
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Many people who fit the profile for which the Health Link system
was designed may not be willing to have a microchip implanted in
their upper right arms.
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Physicians may be reluctant to discuss the implant procedure
with their patients until a greater number of hospital emergency
rooms have adopted the Health Link system as part of their
standard protocol.
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The media has from time to time reported, and may continue to
report, on the Health Link system in an unfavorable and, on
occasion, an inaccurate manner. For example, there have been
articles published asserting, despite at least one study to the
contrary, that the implanted microchip is not MRI compatible.
There have also been articles published asserting, despite
numerous studies to the contrary, that the implanted microchip
causes malignant tumor formation in animals.
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Privacy concerns may influence individuals to refrain from
undergoing the implant procedure or dissuade physicians from
recommending the Health Link system to their patients.
Misperceptions that a microchip-implanted person can be
“tracked” and that the microchip itself contains a
person’s basic information and personal health records may
contribute to such concerns.
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Misperceptions
and/or
negative publicity may prompt legislative or administrative
efforts by politicians or groups opposed to the development and
use of human-implantable RFID microchips. The Pennsylvania
legislature is considering a law addressing implantable chips
and consumer privacy concerns. The states of Wisconsin,
California, Oklahoma and North Dakota have adopted laws
prohibiting chip implantation without the recipient’s prior
consent. While VeriChip supports all pending and enacted
legislation that would preclude anything other than voluntary
implantation, legislative bodies or government agencies may
determine to go further, and their actions may have the effect,
directly or indirectly, of delaying, limiting or preventing the
use of human-implantable RFID microchips or the sale,
manufacture or use of RFID systems utilizing such microchips.
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The cost of the microchip implant procedure is not covered by
Medicare, Medicaid or private health insurance.
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No studies to assess the impact of the Health Link system on the
quality of emergency department care have been completed and
publicly released.
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In June 2006, VeriChip began a study with Horizon Blue Cross
Blue Shield of New Jersey, the largest health insurer in the
State of New Jersey (Horizon BCBSNJ), the Hackensack University
Medical Center Independent Physicians Association (IPA) and the
Hackensack University Medical Center, under which Hackensack
University Medical Center and its physicians have the right to
test the Health Link system over a period of approximately two
years. Together with BCBSNJ, VeriChip has enrolled in the study
30 members of Horizon BCBSNJ who were treated for an episode of
care by a Hackensack IPA physician between January 1, 2004
and December 31, 2006. Each participant in the program was
to be tested for a period of two years after receiving the
microchip implant. The objective of this clinical study was to
assess the impact of the Health Link system on emergency
department care provided to patients with specified chronic
medical conditions. This included an assessment of: the
insertion technique; patient data selection and input; staff
acceptance and use of the technology; frequency of database
access; the time involved for information gathering with current
methods compared to the Health Link System; the impact of the
Health Link system on clinical presentation and treatment; and
the functionality of the Health Link system in an application
environment.
112
In early 2007, VeriChip entered into a partnership with
Alzheimer’s Community Care, or ACC, of West Palm Beach,
Florida, in which VeriChip and ACC will conduct a study of the
effectiveness of the VeriMed Health Link System in managing the
records of Alzheimer’s patients and their caregivers. In
the two-year, 200 patient study, participating individuals
suffering from Alzheimer’s disease and other forms of
dementia, as well as their caregivers, would receive the VeriMed
implantable microchip to provide emergency department staff easy
access to those patients’ identification and medical
information. Alzheimer’s disease is one of several medical
conditions VeriChip identify as being ideally suited for the
benefits of the Health Link system since individuals with the
disease or other forms of dementia are often unable to give
necessary identifying information or critical medical history
upon being admitted to a hospital. ACC also believes it is
important for caregivers to obtain the implantable Health Link.
If a caregiver becomes ill, the Health Link database will inform
medical personnel that he or she is the caregiver for someone
unable to care for themselves. All participants in the study
were voluntary. The legally designated responsible party of an
Alzheimer’s patient unable to make medical decisions had to
give permission for the patient to participate.
Other
Applications
VeriChip has also developed another system that utilizes the
implantable microchip, its VeriTrace system.
VeriChip’s VeriTrace system was conceived of in the wake of
Hurricane Katrina, when VeriChip donated implantable microchips
to FEMA’s Department of Mortuary Services in Mississippi
and Louisiana to help with FEMA’s efforts to identify
corpses. VeriChip’s implantable microchips were used to
provide an end-to-end tagging solution for the accurate tracking
and identification of human remains and associated evidentiary
items. VeriChip began marketing of its VeriTrace system in 2006.
Sales,
Marketing and Distribution
VeriChip’s end-use customers have consisted of healthcare
facilities, such as hospitals and long-term care facilities,
healthcare professionals, such as physicians and individual
patients.
VeriChip has historically marketed its systems primarily by
attending trade shows and medical conferences and by advertising
in publications.
Until June 2007, VeriChip’s marketing efforts with respect
to its Health Link system had been to provide its scanners to
hospitals and third-party emergency room management companies at
no charge in order to build out the geographic footprint of the
healthcare facilities that were able to use VeriChip’s
Health Link system as part of their standard protocol. VeriChip
expected to continue this “seeding” process for the
foreseeable future as VeriChip endeavored to build out its
network across the United States and overseas. In addition,
VeriChip marketed its Health Link system to physicians, who
treated patients who fit the profile for which its Health Link
system was intended to benefit, in those geographic areas
surrounding hospitals that have adopted the Health Link system.
With respect to VeriChip Health Link system, VeriChip does not
believe any other company currently offers a human implantable
microchip-based patient identification system. Various
alternative patient identification solutions are currently
available, such as bracelets sold by MedicAlert, health
information wallet cards, biometric systems and key fobs that
store personal health records.
VeriChip is currently focused on its Health Link personal health
record business, the development of the virus triage detection
system and the
in vivo
glucose-sensing RFID microchip, as
well as the development of other sensor applications, and is
considering and will review other strategic opportunities.
Manufacturing;
Supply Arrangements
VeriChip has historically outsourced the manufacturing of all
the hardware components of its RFID systems to third-party
contractors. VeriChip has not had material difficulties
obtaining system components. VeriChip believes that if any of
its manufacturers or suppliers were to cease supplying us with
system components, VeriChip would be able to procure alternative
sources without material disruption to its business.
113
Digital Angel was its sole supplier of the implantable
microchips, which it obtained from Raytheon Microelectronics
España, a subsidiary of Raytheon Company, or RME, under the
terms of a separate supply agreement which was terminated on
November 12, 2008.
Environmental
Regulation
VeriChip must comply with local, state, federal, and
international environmental laws and regulations in the
countries in which VeriChip does business, including laws and
regulations governing the management and disposal of hazardous
substances and wastes. VeriChip’s operations and products
may be affected by future environmental laws and regulations,
but VeriChip cannot predict the effects of any such future laws
and regulations at this time.
Government
Regulation
Laws
and Regulations Pertaining to RFID Technologies
VeriChip’s active RFID systems, as well as its RFID systems
that use VeriChip’s implantable microchip, rely on
low-power, localized use of radio frequency spectrum to operate.
As a result, VeriChip must comply with U.S. Federal
Communications Commission, or FCC, and Industry Canada
regulations, as well as the laws and regulations of other
jurisdictions where VeriChip sells its products, governing the
design, testing, marketing, operation and sale of RFID devices.
Accordingly, all of VeriChip’s products and systems have a
paired FCC and Industry Canada equipment authorization.
U.S.
Federal Communications Commission Regulations
Under FCC regulations and Section 302 of the Communications
Act, RFID devices, including those VeriChip markets and sells,
must be authorized and comply with all applicable technical
standards and labeling requirements prior to being marketed in
the United States. The FCC’s rules prescribe technical,
operational and design requirements for devices that operate on
the electromagnetic spectrum at very low powers. The rules
ensure that such devices do not cause interference to licensed
spectrum services, mislead consumers regarding their operational
capabilities or produce emissions that are harmful to human
health. VeriChip’s RFID devices are intentional radiators,
as defined in the FCC’s rules. As such, its devices may not
cause harmful interference to licensed services and must accept
any interference received. VeriChip must construct all equipment
in accordance with good engineering design as well as
manufacturers’ practices.
Manufacturers of RFID devices must submit testing results
and/or
other
technical information demonstrating compliance with the
FCC’s rules in the form of an application for equipment
authorization. The FCC processes each application when it is in
a form acceptable for filing and, upon grant, issues an
equipment identification number. Each of VeriChip’s RFID
devices must bear a label which displays the equipment
authorization number, as well as specific language set forth in
the FCC’s rules. In addition, each device must include a
user manual cautioning users that changes or modifications not
expressly approved by the manufacturer could void the equipment
authorization. As a condition of each FCC equipment
authorization, VeriChip warrants that each of its devices marked
under the grant and bearing the grant identifier will conform to
all the technical and operational measurements submitted with
the application. RFID devices used
and/or
sold
in interstate commerce must meet these requirements or the
equipment authorization may be revoked, the devices may be
seized and a forfeiture may be assessed against the equipment
authorization grantee. The FCC requires all holders of equipment
authorizations to maintain a copy of each authorization together
with all supporting documentation and make these records
available for FCC inspection upon request. The FCC may also
conduct periodic sampling tests of equipment to ensure
compliance. VeriChip believes it is in substantial compliance
with all FCC requirements applicable to its products and systems.
Regulation
by the FDA
VeriChip’s VeriMed microchip is a medical device subject to
regulation by the FDA, as well as other federal and state
regulatory bodies in the United States and comparable
authorities in other countries. In October 2004, the Health Link
system received classification as a Class II medical device
by the FDA for
114
patient identification and health information purposes. The FDA
also permits VeriChip to market and sell the Health Link system
in the United States.
FDA Premarket Clearance and Approval Requirements. Generally
speaking, unless an exemption applies, each medical device
VeriChip wishes to distribute commercially in the United States
will require either prior clearance under Section 510(k) of
the Federal Food, Drug, and Cosmetic Act, or FFDCA, or a
premarket approval application, or PMA, from the FDA. Medical
devices are classified into one of three classes —
Class I, Class II or Class III —
depending on the degree of risk to the patient associated with
the medical device and the extent of control needed to ensure
safety and effectiveness. Devices deemed to pose lower risks are
placed in either Class I or II. The manufacturer of a
Class II device is typically required to submit to the FDA
a premarket notification requesting permission to commercially
distribute the device and demonstrating that the proposed device
is substantially equivalent to a previously cleared and legally
marketed 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not
yet called for the submission of a PMA. This process is known as
510(k) clearance. Devices deemed by the FDA to pose the greatest
risk, such as life-sustaining, life-supporting implantable
devices, or devices deemed not substantially equivalent to a
previously cleared 510(k) device, are generally placed in Class
III, requiring premarket approval.
In October 2004, VeriChip received classification of its VeriMed
system as a Class II device. In granting this
classification, the FDA created a new device category for
“implantable radiofrequency transponder systems for patient
identification and health information.” The FDA also
determined that devices that meet this description will be
exempt from 510(k) premarket clearance so long as they comply
with the FFDCA, its implementing regulations and the provisions
of an FDA guidance document issued by the FDA in December 2004,
entitled “Guidance for Industry and FDA Staff,
Class II Special Controls Guidance Document: Implantable
Radiofrequency Transponder System for Patient Identification and
Health Information,” that establishes special controls for
this type of device. The special controls, which are intended to
ensure that the device is safe and effective for its intended
use, include the following: biocompatibility testing,
information security procedures, performance standard
verification, software validation, electro-magnetic
compatibility and sterility testing. VeriChip believes that it
is in compliance with FFDCA, its implementing regulations and
the December 2004 guidance document. Similarly, a company that
wishes to market products that will compete with the VeriMed
system will not be required to submit a 510(k) premarket
clearance application to the FDA if they comply with the
requirements of the special controls guidance document as well
as a full spectrum of FDA regulations, described more fully
below.
In January, 2007, the FDA published a Draft Guidance entitled
“Radio-Frequency Wireless Technology in Medical
Devices.” This document includes the FDA’s current
recommendations regarding specific risks and limitations to be
considered when developing and implementing a Quality System for
medical devices using radio frequency wireless technology, as
well as additional information to be included in the labeling
for such devices. VeriChip believes its Quality System and
labeling for its VeriMed System meets the recommendations
outlined in the draft guidance.
Pervasive and
Continuing
Regulation.
After a medical device is placed
on the market, numerous regulatory requirements continue to
apply. These include:
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quality system regulations, or QSR, which require manufacturers,
including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion
of regulated products for uncleared, unapproved or off-label
uses;
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clearance or approval of product modifications that could
significantly affect safety or effectiveness or that would
constitute a major change in intended use;
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medical device reporting, or MDR, regulations, which require
that a manufacturer report to the FDA if the manufacturer’s
device may have caused or contributed to a death or serious
injury or malfunctioned
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in a way that would likely cause or contribute to a death or
serious injury if the malfunction were to recur; and
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post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device.
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Fraud
and Abuse
VeriChip is subject to various federal and state laws pertaining
to healthcare fraud and abuse, including anti-kickback laws and
false claims laws. Violations of these laws are punishable by
criminal
and/or
civil
sanctions, including, in some instances, imprisonment and
exclusion from participation in federal and state healthcare
programs, including Medicare, Medicaid and Veterans Affairs
health programs. VeriChip has never been challenged by a
government authority under any of these laws and believes that
its operations are in material compliance with such laws.
However, because of the far-reaching nature of these laws, there
can be no assurance that VeriChip would not be required to alter
one or more of its practices to be in compliance with these
laws. In addition, there can be no assurance that the occurrence
of one or more violations of these laws would not result in a
material adverse effect on VeriChip’s financial condition
and results of operations.
Anti-Kickback
Laws
VeriChip may directly or indirectly be subject to various
federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws. In particular, the federal
healthcare program Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for
or to induce either the referral of an individual, or the
furnishing, arranging for or recommending a good or service, for
which payment may be made in whole or part under federal
healthcare programs, such as the Medicare and Medicaid programs.
Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs.
Federal
False Claims Act
VeriChip may become subject to the Federal False Claims Act, or
FCA. The FCA imposes civil fines and penalties against anyone
who knowingly submits or causes to be submitted to a government
agency a false claim for payment. The FCA contains so-called
“whistle-blower” provisions that permit a private
individual to bring a claim, called a qui tam action, on behalf
of the government to recover payments made as a result of a
false claim. The statute provides that the whistle-blower may be
paid a portion of any funds recovered as a result of the
lawsuit. Even though the VeriMed system is not reimbursed by
federal healthcare programs, it is still possible that VeriChip
may be liable for violations of the FCA, for instance, if a
sales representative were to assist or instruct a physician to
bill a government program for microchip implantation by listing
on the claim form some other service that is reimbursable.
State
Laws and Regulations
Many states have enacted laws similar to the federal
Anti-Kickback Statute and FCA. The Deficit Reduction Act of 2005
contains provisions that give monetary incentives to states to
enact new state false claims acts. The state Attorneys General
are actively engaged in promoting the passage and enforcement of
these laws. While the Federal Anti-Kickback Statute and FCA
apply only to federal programs, many similar state laws apply
both to state funded and to commercial health care programs. In
addition to these laws, all states have passed various consumer
protection statutes. These statutes generally prohibit deceptive
and unfair marketing practices, including making untrue or
exaggerated claims regarding consumer products. There are
potentially a wide variety of other state laws, including state
privacy laws, to which VeriChip might be subject. VeriChip has
not conducted an exhaustive examination of these state laws.
Privacy
Laws and Regulations
VeriChip’s VeriMed business is subject to various federal
and state laws regulating the protection of consumer privacy.
VeriChip has never been challenged by a governmental authority
under any of these laws and believes that its operations are in
material compliance with such laws. However, because of the far-
116
reaching nature of these laws, there can be no assurance that
VeriChip would not be required to alter one or more of its
systems and data security procedures to be in compliance with
these laws. VeriChip’s failure to protect health
information received from customers could subject VeriChip to
liability and adverse publicity and could harm its business and
impair its ability to attract new customers.
U.S.
Federal Trade Commission Oversight
An increasing focus of the United States Federal Trade
Commission’s (FTC’s) consumer protection regulation is
the impact of technological change on protection of consumer
privacy. Under the FTC’s statutory authority to prosecute
unfair or deceptive acts and practices, the FTC vigorously
enforces promises a business makes about how personal
information is collected, used and secured. Since 1999, the FTC
has taken enforcement action against companies that do not abide
by their representations to consumers of electronic security and
privacy. More recently, the FTC has found that failure to take
reasonable and appropriate security measures to protect
sensitive personal information is an unfair practice violating
federal law. In the consent decree context, offenders are
routinely required to adopt very specific cybersecurity and
internal compliance mechanisms, as well as submit to twenty
years of independent compliance audits. Businesses that do not
adopt reasonable and appropriate data security controls have
been found liable for as much as $10 million in civil
penalties and $5 million in consumer redress.
The FTC continues to actively consider the potential impact of
RFID on consumer protection issues. In 2006, the FTC launched a
new initiative, “Protecting Consumers in the Next
Tech-ade” and convened public hearings on November 6-8,
2006 that brought together experts from the business, government
and technology sectors as well as consumer advocates, academics
and law enforcement officials to explore ways in which
convergence and the globalization of commerce impact consumer
protection. Panelists examined changes in marketing and
technology over the past decade and challenges facing consumers,
business and government. One of the panels, entitled “RFID
Technology in the Next Tech-ade,” focused on the role of
RFID in the healthcare and retail sectors.
State
Legislation
The Pennsylvania legislature is considering a law addressing
implantable chips and consumer privacy concerns. The states of
California, North Dakota, Wisconsin and Oklahoma have adopted
laws prohibiting chip implantation without the recipient’s
prior consent. A number of states also introduced legislation
focusing on the consumer privacy implications of RFID use in
government identification documents, prescription drug tracking,
retail sales, healthcare records and tracking of one individual
by another. The states of California, Michigan, Nevada, New
Hampshire, Texas, Vermont and Washington enacted laws preserving
consumer privacy relating to government identification
documents, RFID-enabled credit and ATM cards, and other RFID
documents. As of December 31, 2008, none of this
legislative activity restricts VeriChip’s current or
planned operations.
Many states have privacy laws relating specifically to the use
and disclosure of healthcare information. Federal healthcare
privacy laws may preempt state laws that are less restrictive or
offer fewer protections for healthcare information than the
federal law if it is impossible to comply with both sets of
laws. More restrictive or protective state laws still may apply
to VeriChip, and state laws will still apply to the extent that
they are not contrary to federal law. Therefore, VeriChip may be
required to comply with one or more of these multiple state
privacy laws. Statutory penalties for violation of these state
privacy laws varies widely. Violations also may subject us to
lawsuits for invasion of privacy claims.
The
European Union
In the European Union (EU), promotion of RFID technology is
viewed as a critical economic issue. It is established that
insofar as RFID is a technology involving collection, sharing
and storage of personally identifiable information, the mandates
of Directive 95/46/EC of the European Parliament and of the
Council of 24 October 1995 on the Protection of Individuals
With Regard to the Processing of Personal Data and On the Free
Movement of Such Data (“EU Data Directive”) applies.
All 25 EU member countries have implemented the EU data
directive. In addition, Directive 2002/58/EC of the European
Parliament and of the Council of 12 July 2002 concerning
the processing of personal data and the protection of privacy in
the electronic communications sector is also applicable. At
issue today is whether additional privacy protection laws beyond
117
those prescribed by the EU data directive and its
country-specific laws, as well as the electronic communications
directive, are needed for privacy issues raised by RFID
technology. On January 19, 2005, the EU’s Working
Party 29, charged with interpretation and expansion of EU data
protection law and policy, and adopted Working Document 105,
addressing data protection issues related to RFID technology.
That document reinforced the need to comply with the basic
principles of the EU data directive and related documents
whenever personal data is collected via RFID technology.
Guidance to RFID manufacturers was also provided regarding
responsibilities to design privacy compliant technology.
On May 5, 2009, the Commission of the European Communities
adopted a
Commission Recommendation on the Implementation of
Privacy and Data Protection Principles in Applications Supported
by Radio-Frequency Identification
(SEC(2009)585,
SEC(2009)586). This document provides recommendations regarding
the privacy, data protection and security problems related to
RFID uses, particularly in business-to-consumer environments.
The objective is to stimulate innovation through wider adoption
of RFID applications, facilitate interoperable RFID uses and
adopt similar privacy and security approaches in different EU
Member States. It is noted that biometric identification data or
health-related data are especially critical with regard to
information security and privacy, therefore requiring specific
attention. As of December 31, 2008, none of these
recommendations restricts VeriChip’s current operations.
Health
Insurance Portability and Accountability Act of
1996
VeriChip is not a health care provider, health plan or health
care clearinghouse. Therefore, prior to February 17, 2010,
the effective date of the federal Health Information Technology
for Economic and Clinical Health Act, or the HITECH Act,
VeriChip is not subject to the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. However, to the extent
required by HIPAA, VeriChip has entered into business associate
agreements with certain health care providers and health plans
relating to the privacy and security of protected health
information. VeriChip has implemented policies and procedures to
enable it to comply with these HIPAA business associate
agreements. When the HITECH Act takes effect, VeriChip will be
required by federal law to comply with those business associate
agreements, as well as certain privacy and security requirements
found in HIPAA and the HITECH Act as they relate to
VeriChip’s activities as a business associate. Failure to
comply with those laws could subject us to civil or criminal
penalties.
Employees
As of September 25, 2009, VeriChip had 12 employees,
all of whom are full-time. VeriChip considers its relationship
with its employees to be satisfactory and has not experienced
any interruptions of its operations as a result of labor
disagreements. None of VeriChip’s employees are represented
by labor unions or covered by collective bargaining agreements.
Properties
VeriChip’s corporate headquarters is located in Delray
Beach, Florida, where VeriChip occupies approximately
4,000 square feet of office space. VeriChip occupies the
space pursuant to a sublease Steel Vault, which expires on
June 30, 2010. VeriChip’s portion of the rent for the
entire twenty-one month term of the sublease is $78,750, which
was prepaid in one lump sum.
Legal
Proceedings
VeriChip is engaged in certain legal actions and management
believes that the ultimate outcome of these actions will not
have a material adverse effect on VeriChip’s operating
results, liquidity or financial position.
VeriChip is a party to various legal actions, as either
plaintiff or defendant, including the matters identified above,
arising in the ordinary course of business, none of which is
expected to have a material adverse effect on its business,
financial condition or results of operations. However,
litigation is inherently unpredictable, and the costs and other
effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and
investigations, claims or charges in any such matters, and
developments or assertions by or against VeriChip relating to it
or
118
to its intellectual property rights and intellectual property
licenses could have a material adverse effect on VeriChip’s
business, financial condition and operating results.
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
119
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VERICHIP
The following discussion and analysis of VeriChip’s
financial condition and results of operations should be read in
conjunction with the accompanying financial statements and
related notes related thereto. Certain statements made in this
joint proxy statement/prospectus may contain forward-looking
statements. For a description of risks and uncertainties
relating to such forward-looking statements, see the section
entitled “Cautionary Statement Concerning Forward-Looking
Statements” above.
VeriChip historically developed, marketed, and sold radio
frequency identification (frequently referred to as RFID)
systems used for the identification and protection of people in
the healthcare market. VeriChip’s VeriMed Health Link
system uses the human-implantable passive RFID microchip that is
used in patient identification applications, securely linking a
patient to their personal health record as maintained in
VeriChip’s proprietary database. Each implantable Health
Link microchip contains a unique verification number that is
read when it is scanned by VeriChip’s scanner. In October
2004, the U.S. Food and Drug Administration, or FDA,
cleared VeriChip’s VeriMed Health Link system for use in
medical applications in the United States.
On July 18, 2008, VeriChip completed the sale of all of the
outstanding capital stock of Xmark to Stanley for
$47.9 million in cash, which consisted of the
$45 million purchase price plus a balance sheet adjustment
of $2.9 million. The Xmark business included all of the
operations of VeriChip’s previously reported healthcare
security and industrial segments. The financial position,
results of operations and cash flows of Xmark for 2008 have been
reclassified as a discontinued operation.
Recent
Developments
On May 6, 2009, VeriChip and its development partner
Receptors LLC, or Receptors, announced plans to develop
surveillance and point-of-care sensor systems that will
efficiently detect and identify the presence of a particular
biological threat such as influenza virus, Methicillin-resistant
Staphylococcus aureus (MRSA) or other illnesses.
On May 12, 2009, VeriChip completed the development of a
new, smaller human-implantable RFID microchip measuring
approximately 8 millimeters by 1 millimeter.
On May 27, 2009, that the Nasdaq Hearings Panel granted
VeriChip’s request to remain listed on The Nasdaq Stock
Market and VeriChip’s request to transfer to The Nasdaq
Capital Market, effective May 29, 2009. On July 24,
2009, VeriChip received a letter from the Nasdaq advising that
VeriChip is in compliance with all applicable continued listing
standards. For more information, see “Risk
Factors — Industry and Business Related Risks Related
to VeriChip and Its Businesses.”
On June 4, 2009, VeriChip closed a debt financing
transaction with Steel Vault for $500,000 thousand pursuant to a
secured convertible promissory note. For more information, see
“The Merger — Description of Contracts and Other
Arrangements between VeriChip and Steel Vault —
Intercompany Financing.”
On September 21, 2009, VeriChip entered into a license agreement
with Receptors to obtain an exclusive license to use certain
intellectual property of Receptors for internal research,
internal development and quality control purposes and to make,
sell, offer to sell, import and export tangible products covered
by patents and patent applications, or the licensed products,
owned by Receptors, including Patent No. 7,504,364 titled
“Methods of Making Arrays and Artificial Receptors”
and Patent No. 7,469,076 “Sensors Employing Combinatorial
Artificial Receptors,” in their application to the
development of the virus triage detection system for the
detection and identification of the influenza virus, including,
but not limited to the H1N1 virus.
On September 21, 2009, in connection with the license agreement,
VeriChip and Receptors entered into a development/master
agreement pursuant to which VeriChip will engage the services of
Receptors to develop a sensing system for the detection and
identification of the influenza virus, including, but not
limited to the H1N1 virus. Under the development/master
agreement, Receptors will provide VeriChip with a
proof-of-principal report and demonstration of the sensing
system by January 31, 2010 (Phase I) and a prototype of the
sensing system built or the proof-of-principal report, including
influenza sub-type identification by or about
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September 30, 2010 (Phase II). VeriChip will issue 200,000
restricted shares of VeriChip common stock and $100,000 in cash
as payment under Phase I of the development/master agreement. If
VeriChip, at its sole discretion, decides to fund Phase II of
this development, it may be financially obligated to fund
approximately $600,000 for the cost of that development and
continuation of the exclusive license.
VeriChip must pay Receptors royalties of fifty percent (50%) of
the net sales of the licensed products used in the detection and
sub-type identification of the influenza virus employing
Receptors’ proprietary artificial receptor technology or
methods, synthetic competitor agent technology or methods, or
sensing system technology or methods, worldwide. VeriChip must
also pay Receptors fifty percent (50%) of any revenue received
from the sale of the licensed products, other than for sales
described in the immediately preceding sentence.
On September 29, 2009, VeriChip entered into a definitive
agreement for an up to $10,000,000 investment arrangement with
Optimus Technology Capital Partners, LLC, or Optimus. VeriChip
expects to use either cash on hand or a portion of the proceeds
to fund its development programs with Receptors to develop a
virus triage detection system for the H1N1 virus and an
in
vivo
glucose-sensing RFID microchip. VeriChip will use the
remainder of any such funds for working capital and general
corporate purposes. Under the financing arrangement, VeriChip
may issue convertible preferred shares from time to time in
multiple tranches. The preferred stock will accrue a 10% in kind
dividend and provides an option for VeriChip to prepay with a
make-whole premium. The tranches will be convertible into
restricted common stock at the market price on the date of each
tranche. In conjunction with the financing, R & R
Consulting Partners, LLC, which is controlled by Mr. Silverman,
agreed to enter into one or more stock loan agreements with
Optimus to facilitate the transaction.
Also on September 29, 2009, VeriChip and Receptors provided
further details of the development of a virus triage detection
system for the H1N1 virus. The virus triage detection system,
based on Receptors’ patented AFFINITY by DESIGN
tm
CARA
tm
platform, is intended to initially provide two levels of
identification. Once developed, utilizing a simple test tube or
strip device format that can be combined with an inexpensive
reader, it is expected that the first level will prep the sample
and identify the agent as a flu or non-flu virus, and the second
level will sub-type (e.g. H1N1) classify the flu virus and alert
the user to the presence of pandemic threat viruses. VeriChip
believes the influenza triage diagnostic system will be scalable
and will be able to rapidly adapted to identify new strains of
influenza and other viruses as they evolve, giving the virus
triage detection system value for future testing applications in
healthcare. The first phase of development of the virus triage
detection system, consisting of the sample prep and flu or
non-flu classification, is expected to be completed in four
months. The development of the second phase of the triage
detection system, which will have the ability to identify the
precise pathogen present, is expected to take approximately six
to eight months.
On September 30, 2009, VeriChip and Receptors announced that
VeriChip plans to fund its existing development partnership with
Receptors to launch Phase II development of an
in vivo
glucose-sensing RFID microchip. In Phase II of this program,
which is expected to be completed in the second quarter of 2010,
the critical binding environment and competitor agent components
of the glucose sensor will be optimized for system stability,
sensitivity and specificity. The goal of Phase II is to optimize
the sensing system for its glucose response in the presence of
blood and interstitial fluid matrix components and demonstrate
the integration of the components into a stable and reproducible
glucose sensor.
Also on September 30, 2009, VeriChip received a letter from
Nasdaq indicating that, since the closing bid price of
VeriChip’s common stock had been at $1.00 per share or
greater for at least ten consecutive business days, VeriChip had
regained compliance with the Nasdaq’s requirements for
continued listing.
VeriChip is currently focused on the development of its Health
Link personal health record business, and the development of the
virus triage detection system and the
in vivo
glucose-sensing RFID microchip, as well as the development of
other sensor applications, and is considering and will review
other strategic opportunities.
121
Results
of Operations
Through June 30, 2009, VeriChip has recorded nominal
revenue from sales of its VeriMed Health Link system.
During the six months ended June 30, 2009, VeriChip focused
its resources on the process of evaluating the timing and nature
of its future investments and expenditures related to its
VeriMed Health Link, VeriTrace and VeriGreen businesses. During
this time VeriChip has undertaken a cost reduction program to
maximize the amount of capital that it will have available to
pursue business opportunities in the healthcare and energy
sectors.
Three
Months Ended June 30, 2009 Compared to Three Months Ended
June 30, 2008
Revenue
Revenue for the three months ended June 30, 2009 and 2008
were $49,000 and $32,000, respectively, primarily from the sale
of VeriChip’s VeriTrace systems.
Selling,
General and Administrative Expense
Selling, general and administrative expense consists primarily
of compensation for employees in executive, sales, marketing and
operational functions, including finance and accounting, and
corporate development. Other significant costs include
depreciation and amortization, professional fees for accounting
and legal services, consulting fees and facilities costs.
Selling, general and administrative expense decreased
$2.6 million to $0.9 million for the three months
ended June 30, 2009 as compared to $3.5 million for
the three months ended June 30, 2008. The decrease was a
result of staff reductions and reduction in other overhead costs
most significantly in the areas of sales and marketing as
VeriChip continues to evaluate strategic growth opportunities.
During the three months ended June 30, 2009 and 2008,
VeriChip incurred stock-based compensation expense of
$0.3 million and $0.9 million, respectively.
Interest
Expense
Interest expense was nil and $0.5 million for the three
months ended June 30, 2009 and 2008, respectively. The
interest expense in 2008 was a result of loan agreements in 2008
which were retired upon the sale of Xmark.
Gain on
Sale
During the three months ended June 30, 2009 and 2008,
respectively, there was a gain on sale of $4.4 million and
nil. The gain in 2009 was a result of the recognition of
previously deferred gain from the sale of Xmark.
Six
Months Ended June 30, 2009 Compared to Six Months Ended
June 30, 2008
Revenue
Revenue for the six months ended June 30, 2009 and 2008
were $57,000 and $35,000, respectively, primarily from the sale
of VeriChip’s VeriTrace systems.
Selling,
General and Administrative Expense
Selling, general and administrative expense consists primarily
of compensation for employees in executive, sales, marketing and
operational functions, including finance and accounting, and
corporate development. Other significant costs include
depreciation and amortization, professional fees for accounting
and legal services, consulting fees and facilities costs.
Selling, general and administrative expense decreased
$4.4 million to $2.3 million for the six months ended
June 30, 2009 as compared to $6.7 million for the six
months ended June 30, 2008. The decrease was a result of
staff reductions and reduction in other overhead costs most
significantly in the areas of sales and marketing. During the
six months ended June 30, 2009, VeriChip incurred
$0.3 million related to legal settlements and
$0.2 million related to transactional costs related to the
evaluation of several strategic opportunities.
122
During the six months ended June 30, 2009 and 2008,
VeriChip incurred stock-based compensation expense of
$0.4 million and $1.8 million, respectively.
Interest
Expense
Interest expense was nil and $0.8 million for the six
months ended June 30, 2009 and 2008, respectively. The
interest expense in 2008 was a result of loan agreements in 2008
which were retired upon the sale of Xmark.
Gain on
Sale
During the six months ended June 30, 2009 and 2008,
respectively, there was a gain on sale of $4.4 million and
nil. The gain in 2009 was a result of the recognition of
previously deferred gain from the sale of Xmark.
Liquidity
and Capital Resources
As of June 30, 2009, cash totaled $1.2 million
compared to unrestricted cash of approximately $3.2 million
at December 31, 2008.
Cash
Flows Used in Operating Activities
Net cash used in operating activities totaled $1.6 million
and $3.8 million during the six months ended June 30,
2009 and 2008, respectively. For each of the periods presented,
cash was used primarily to fund operating losses, and payments
of accounts payable and accrued expenses, as well as cash used
to fund discontinued operations in 2008.
Cash
Flows from Investing Activities
Investing activities used cash of $504 thousand and $70 thousand
during the six months ended June 30, 2009 and 2008,
respectively. In the six months ended June 2009, cash was
primarily used to purchase a $0.5 million secured
convertible promissory note from Steel Vault. In the six months
ended June 30 2008, cash was used to purchase equipment,
partially offset by cash inflows related to discontinued
operations investing activity.
Cash
Flows from Financing Activities
Financing activities used cash of nil and provided cash of
$0.4 million during the six months ended June 30, 2009
and 2008, respectively. In the six months ended June 30,
2008, cash of $6.5 million was provided from net
borrowings, primarily from an $8.0 million financing,
offset by $1.5 million used to pay debt for its
discontinued operations. Cash of $5.6 million, net of
borrowings of $1.3 million, was paid to Digital Angel in
the six months ended June 30, 2008 to repay long term debt.
Financial
Condition
As of June 30, 2009, VeriChip had working capital of
approximately $4.6 million and an accumulated deficit of
approximately $39.9 million compared to a working capital
of approximately $2.4 million and an accumulated deficit of
approximately $42.1 million as of December 31, 2008.
The increase in working capital was primarily due to the release
of $4.4 million from the escrow agreement between VeriChip
and Stanley, stemming from VeriChip’s sale of Xmark, offset
by operating losses, described above.
VeriChip believes that with the cash VeriChip has on hand and
the restricted cash, it will have sufficient funds available to
cover its cash requirements through the next twelve months.
Impact of
Recently Issued Accounting Standards
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(“SFAS 160”). This statement amends ARB 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. In addition,
SFAS 160 changes the way the consolidated income statement
is presented by requiring consolidated net income to be reported
at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. This statement also
establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not
result in deconsolidation and requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated.
This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008 and earlier adoption is prohibited. SFAS
160 shall be applied prospectively as of the beginning of the
fiscal year in which this
123
statement is initially applied, except for the presentation and
disclosure requirement which shall be applied retrospectively
for all periods presented. The adoption of SFAS 160 had no
impact on VeriChip’s condensed financial position, results
of operations, cash flows or financial statement disclosures.
In December 2007, FASB issued SFAS No. 141R, Business
Combinations (“SFAS 141R”). SFAS 141R
replaces SFAS Statement No. 141 Business Combinations but
retains the fundamental requirements in FASB 141. This
statement defines the acquirer as the entity that obtains
control of one or more businesses in the business combination
and establishes the acquisition date as the date that the
acquirer achieves control. SFAS 141R also requires that an
acquirer recognized the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date.
In addition, this statement requires that the acquirer in a
business combination achieved in stages to recognize the
identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of
their fair values. SFAS 141R is applied prospectively to
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. An entity may not
apply the standard before that date. SFAS 141R will be
applied prospectively for acquisitions beginning in 2009 or
thereafter. VeriChip expensed $0.2 million of due diligence
costs relating to a potential acquisition target during the
period ended June 30, 2009.
In May 2008, FASB issued Statement 163, “Accounting for
Financial Guarantee Insurance Contracts”. This new standard
clarifies how FAS Statement No. 60,
Accounting and
Reporting by Insurance Enterprises
, applies to financial
guarantee insurance contracts issued by insurance enterprises,
including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about
financial guarantee insurance contracts. The statement is
effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of
SFAS 163 did not have any impact on VeriChip’s
consolidated financial position or results of operations.
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
“Interim Disclosures about Fair Value of Financial
Instruments”
(“FSP
FAS 107-1”)
and (“APB
28-1”).
FSP
FAS 107-1
amends FASB Statement No. 107,
“Disclosures about
Fair Value of Financial Instruments”
, to require
disclosures about fair value of financial instruments in interim
as well as in annual financial statements and amends APB Opinion
No. 28
“Interim Financial Reporting”,
to
require those disclosures in interim financial statements. FSP
FAS 107-1
and APB
28-1
were adopted by VeriChip on April 1, 2009. These staff
positions did not have a material impact on VeriChip’s
Condensed Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165
“Subsequent Events” (“SFAS 165”).
SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. SFAS 165 sets forth (1) the period after
the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
(2) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements and (3) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
SFAS 165 is effective for interim or annual financial
periods ending after June 15, 2009. The adoption of this
standard did not have a material impact on VeriChip’s
Condensed Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162”. The FASB
Accounting Standards Codification (“Codification”)
will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 is effective for interim and annual
periods ending after September 15, 2009. All existing
accounting standards are superseded as described in SFAS 168.
All other accounting literature not included in the Codification
is nonauthoritative. The adoption of this standard is not
expected to have a material impact on VeriChip’s Condensed
Consolidated Financial Statements.
124
MANAGEMENT
OF VERICHIP
Executive
Officers
VeriChip’s executive officers, their ages and positions, as
of September 25, 2009, are set forth below:
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Name
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Age
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Position
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Scott R. Silverman
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45
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Chief Executive Officer
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William J. Caragol
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42
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Acting Chief Financial Officer
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The following is a summary of the background and business
experience of VeriChip’s executive officers:
The summary of the background and business experience of Scott
R. Silverman is found in the section, “The Special and
Annual Meeting of VeriChip’s Stockholders,” above.
William J. Caragol has served as VeriChip’s acting chief
financial officer since January 2009 and previously served as
president since May 2007, its chief financial officer since
August 2006, its treasurer since December 2006, and its
secretary since March 2007. Mr. Caragol has served as Steel
Vault’s chief executive officer, president and a member of
its board of directors since December 3, 2008 and as acting
chief financial officer since October 24, 2008.
Mr. Caragol served as acting chief executive officer of
Steel Vault from October 24, 2008 until December 3,
2008 when he was appointed chief executive officer. From July
2005 to August 2006, he served as the chief financial officer of
Government Telecommunications, Inc. From December 2003 to June
2005, Mr. Caragol was the vice president of business
development and chief financial officer of Millivision
Technologies, a technology company focused on security
applications. He is a member of the American Institute of
Certified Public Accountants and graduated from the
Washington & Lee University with a bachelor of science
in Administration and Accounting.
COMPENSATION
COMMITTEE REPORT
The compensation committee of VeriChip’s Board of Directors
has submitted the following report for inclusion in this joint
proxy statement/prospectus.
The compensation committee has reviewed and discussed the
Compensation Discussion and Analysis contained in this joint
proxy statement/prospectus with management. Based on the
compensation committee’s review and discussions with
management with respect to the Compensation Discussion and
Analysis, VeriChip has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in
this joint proxy statement/prospectus for filing with the SEC.
The Compensation Committee
Jeffrey S. Cobb (Chair)
Barry M. Edelstein
Steven R. Foland
The compensation committee report above shall not be deemed
“soliciting material” or to be “filed” with
the SEC, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933 or
Securities Exchange Act of 1934, each as amended, except to the
extent that VeriChip specifically incorporates it by reference
into such filing.
Compensation
Discussion and Analysis
General
In July 2008, VeriChip sold all of the outstanding stock of its
wholly-owned subsidiary, Xmark, to Stanley Corporation Canada.
As a result of such transaction, VeriChip’s management team
was reduced to one member. However, for the first half of 2008,
VeriChip had an executive compensation program, which was
governed by its compensation committee, and was designed to
(i) attract and retain a senior management team that could
direct the achievement of its corporate goals and strategic
objectives, (ii) motivate the team to achieve profitability
and growth, (iii) maintain stability by retaining the key
executives in their leadership
125
capacity, and (iv) better align executive interests with
stockholder interests. VeriChip’s guiding philosophy was to
establish compensation plans or programs that rewarded its
senior management team for their role in achieving its operating
performance goals and milestones, while aligning the team
members’ interests with those of its
stockholders — and, in the process, encouraging the
team’s continued association with VeriChip. Therefore,
VeriChip endeavored to implement policies designed to link pay
with performance, which, in turn, helped to align the interests
of its executive officers with its stockholders. VeriChip’s
compensation philosophy also reflected the unique nature of its
business, which consisted of a mix of operating-company and
development-company features. VeriChip’s compensation
policies and practices were shaped accordingly, and, in many
ways, mirrored those of a
start-up
biotechnology company, with an emphasis on compensation
components that were contingent on achieving operational
milestones.
After selling its operating company, Xmark, on November 12,
2008, VeriChip purchased certain intellectual property from
Digital Angel that may complement and enhance its VeriMed Health
Link business. The compensation committee is looking forward to
establishing new compensation policies going forward.
Among other things, VeriChip’s compensation committee,
pursuant to the terms of its charter, is responsible for:
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establishing, reviewing and approving its overall executive
compensation philosophy and policies;
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reviewing and approving those corporate goals and objectives
that bear on the compensation of its chief executive officer;
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determining the appropriate compensation for all other executive
officers, with input from other members of senior management;
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evaluating performance target goals for senior executive
officers;
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reviewing and approving any annual or long-term cash bonus or
incentive plans;
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reviewing and approving executive employment agreements,
severance arrangements, and
change-in-control
agreements or provisions; and
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administering its equity-based compensation plans, including the
grant of stock options and other equity awards under such plans.
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VeriChip’s compensation committee has the authority, to the
extent it deems appropriate, to retain compensation consultants
to assist in the evaluation of executive compensation. In the
first quarter of 2008, VeriChip’s compensation committee
retained Towers, Perrin, Forster & Crosby, Inc., or
Towers Perrin, a compensation consulting firm, to provide
objective analysis, information and advice to the compensation
committee, including competitive market data relating to the
compensation of certain members of its senior management team,
in order to assist the compensation committee in its review of
the competitiveness of its current compensation arrangements.
Towers Perrin reports directly to the compensation committee,
and does no work for VeriChip except as expressly authorized by
the compensation committee. Towers Perrin was retained because
its compensation committee believes it is important to be
informed regarding the current practices of similarly-situated
companies (e.g., companies with comparable revenue size,
comparable industry/business descriptions, and comparable
performance and growth profiles). As part of its engagement,
Towers Perrin was asked to review the cash and equity
compensation practices of companies with similar revenues and
those of
start-up
biotechnology companies.
Throughout the year, the compensation committee periodically
reported to VeriChip’s Board of Directors on its actions
and recommendations, and met regularly in executive session. On
an annual basis, the compensation committee reviews its charter
and assesses its own performance, particularly with a view
towards the effectiveness of its executive compensation program
in obtaining desired results. Furthermore, VeriChip’s
nominating and governance committee is responsible for
monitoring the standing committees of its Board of Directors,
including the compensation committee, and for making
recommendations regarding any changes (e.g., creation or
elimination of committees).
126
VeriChip’s compensation arrangements with its executive
officers generally reflect the individual circumstances
surrounding the applicable executive officer’s hiring or
appointment. For example, Daniel A. Gunther, who became one of
its executive officers at the time of the acquisition of
Instantel during the first half of 2005, was a party to an
employment agreement with Instantel. Although VeriChip
subsequently entered into a new employment agreement with
Mr. Gunther, which was later amended, the material terms of
his agreement with VeriChip, such as base salary level, were
influenced by his former agreement with Instantel. Scott R.
Silverman served as VeriChip’s chief executive officer from
December 5, 2006 through July 18, 2008. When referring
to the latter period, VeriChip refers to Mr. Silverman as
“former chief executive officer.” The compensation
arrangements that were in place for Mr. Silverman during
his time as its former chief executive officer, who previously
served as the chief executive officer of Digital Angel, also
closely paralleled the terms of his former employment agreement
with Digital Angel.
VeriChip’s compensation committee retains discretion to
tailor its compensation program to address individual
circumstances, rather than simply aiming for a compensation
level that falls within a specific range of market data.
VeriChip’s compensation committee also retains discretion
to materially increase or decrease compensation. However,
certain of its executive officers, including Mr. Silverman
and the former chief executive officer and president of Xmark,
have (or had) employment agreements with VeriChip, as described
in more detail below. Employment agreements limit the amount of
discretion the compensation committee may exercise in terms of
adjusting or modifying compensation. For example, while serving
as its former chief executive officer, any reduction of
Mr. Silverman’s base salary or incentive compensation
could have been deemed a constructive termination under his
employment agreement.
The foregoing information is intended to provide context for the
discussion that follows. In addition, this Compensation
Discussion & Analysis should be read in conjunction
with the detailed tabular and narrative information regarding
executive compensation information in this joint proxy
statement/prospectus.
Principal
Components of Compensation of VeriChip’s Executive
Officers
The principal components of the compensation VeriChip has
historically paid to its executive officers has consisted of:
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base salary;
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signing or retention bonuses, paid in cash;
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cash incentive compensation under the terms of individual senior
management incentive compensation plans established for its
executive officers; and
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equity compensation, generally in the form of grants of stock
options or restricted shares.
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VeriChip’s chief executive officer has historically played
a significant role in the determination of the amounts of base
salary, signing or retention bonuses and other forms of cash and
equity-based compensation to be paid other members of senior
management. VeriChip expects that the compensation committee of
its Board of Directors will continue to solicit input from its
chief executive officer or president with respect to
compensation decisions affecting other members of its senior
management.
Allocation
of Compensation Among Principal Components
With respect to the mix of base salary, bonus, cash incentive
compensation and equity awards to be paid or awarded to
VeriChip’s executive officers, the compensation committee
generally believes that a greater percentage of the compensation
of the most senior members of its management should be
performance-based.
Base
Salary
VeriChip’s compensation committee believes that pay should
be directly and closely linked to corporate performance and
milestones. As a result, base salary typically constitutes less
than half of its executives’ total compensation packages.
127
VeriChip’s
Chief Executive Officer and Executive Chairman of the
Board
VeriChip appointed Scott R. Silverman as its chief executive
officer in early December 2006. In April 2006, VeriChip’s
Board of Directors, together with a member of the Board of
Directors of Digital Angel, initiated a search for a new chief
executive officer, mindful that the individual who was serving
as its chief executive officer at that time was approaching
retirement age. In connection with this search, an executive
search firm was initially consulted, but was not formally
retained. While the search firm advised as to the backgrounds of
several potential candidates, VeriChip’s Board recognized
that key qualities its new chief executive officer would need to
possess included a clear, in-depth understanding of the benefits
of its VeriMed Health Link business, and the skills, energy
level and zeal to lead its efforts to create a market for the
VeriMed Health Link business — a significant component
of VeriChip’s growth strategy. After considering the
backgrounds and qualifications of the candidates presented by
the search firm, VeriChip’s Board realized that
Mr. Silverman was the ideal candidate for the position
given his support, as Digital Angel’s then-chief executive
officer, of its efforts to create a market for the VeriMed
Health Link business.
When VeriChip’s Board broached the subject with
Mr. Silverman of his becoming its chief executive officer,
he indicated a willingness to accept the challenge and perceived
reduction in status, provided it did not entail a financial
sacrifice relative to his compensation arrangements as the chief
executive officer of Digital Angel. Based on information
provided to VeriChip’s Board by the search firm at the
outset of the search for a chief executive officer, its Board
had developed a sense of the compensation package — in
terms of base salary, bonus, additional at-risk incentive
compensation and equity interest — that would need to
be provided to a candidate for the position.
Mr. Silverman’s compensation arrangements with Digital
Angel were in line with the parameters identified in its
Board’s discussions with the search firm. Accordingly, the
two members of its compensation committee at that time other
than Mr. Silverman, one of whom then served as the chairman
of the compensation committees of VeriChip’s Board of
Directors and the Board of Directors of Digital Angel,
negotiated an employment agreement with Mr. Silverman that
closely tracked the material terms of his prior employment
agreement with Digital Angel. The two members of its
compensation committee at that time did not engage in an
examination of the compensation arrangements of chief executive
officers of peer companies, other than the consultation with the
search firm described above. However, they and the Board did
consider how the terms of Mr. Silverman’s employment
agreement compared with those of its prior chief executive
officer, determining that the difference in compensation was
justified by the greater than originally anticipated challenges
associated with VeriChip’s efforts to create a market for
its VeriMed Health Link business.
Mr. Silverman’s employment agreement with VeriChip
provided for a base salary of $420,000 for fiscal year 2007,
with the base salary being subject to an annual increase of no
less than 10% in each of fiscal year 2008 and fiscal year 2009.
On May 15, 2008, in connection with the Xmark Transaction,
VeriChip entered into a separation agreement with
Mr. Silverman, which was later amended. Under this
separation agreement, Mr. Silverman and VeriChip mutually
agreed that Mr. Silverman’s employment would be
terminated without cause upon the closing of the Xmark
Transaction (i.e., July 18, 2008), and that
Mr. Silverman’s employment agreement would be
terminated on the same day. VeriChip and Mr. Silverman also
agreed that he would resign from his position as VeriChip’s
Chairman of the Board upon the closing of the Xmark Transaction.
On November 12, 2008, in connection with the purchase by
R & R Consulting Partners, LLC (an entity that is
owned and controlled by Mr. Silverman) of 45.7% of the
outstanding shares of its common stock from Digital Angel,
VeriChip’s board of directors appointed Mr. Silverman
to again serve as chairman of the board. Absent a fundamental
change in the business, such as a major acquisition,
Mr. Silverman has agreed that he will not take cash salary
compensation through the end of 2009.
On December 31, 2008, VeriChip entered into a letter
agreement with Mr. Silverman effective December 1,
2008, which provides that Mr. Silverman will serve as
VeriChip’s executive chairman from December 1, 2008
through December 31, 2009 in exchange for 601,852
restricted shares of its common stock, which would not be issued
until VeriChip files a registration statement on
Form S-8
with the SEC reflecting its 2007 Stock Incentive Plan, as
amended and restated, or the Amended Plan. Mr. Silverman
was granted the
128
shares on February 20, 2009. The letter agreement also
terminates the separation agreement with the exception of
certain provisions, which is more fully discussed below under
the heading “Executive Compensation — Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table — Executive Employment
Arrangements — Scott R. Silverman.” On
August 27, 2009, Mr. Silverman was reappointed as
VeriChip’s chief executive officer.
VeriChip’s
Acting Chief Financial Officer
VeriChip hired William J. Caragol as its chief financial officer
in August 2006. VeriChip’s employment agreement with
Mr. Caragol provides for an annual base salary of $150,000.
On March 2, 2007, the compensation committee approved an
increase in Mr. Caragol’s base salary to $165,000.
Then, on May 4, 2007, in connection with its Board’s
decision to appoint Mr. Caragol to also serve as its
president and the expanded responsibilities associated
therewith, the compensation committee approved an increase in
Mr. Caragol’s base salary to $185,000. In 2008, the
compensation committee approved a further increase in
Mr. Caragol’s base salary to $203,500.
In connection with the Xmark Transaction, on May 15, 2008,
VeriChip entered into a letter agreement with Mr. Caragol,
which, among other things, affirmed that VeriChip desired to
retain Mr. Caragol as its president and chief financial
officer following the closing of the Xmark Transaction,
confirmed that Mr. Caragol’s base salary would remain
at $203,500 per year, and outlined the bonus compensation for
which Mr. Caragol would be eligible. On December 31,
2008, VeriChip entered into a letter agreement with
Mr. Caragol that terminated the May 15, 2008 letter
agreement (with the exception of the waiver/release provisions
of such letter), and provides that Mr. Caragol will serve
as its acting chief financial officer effective January 1,
2009 through July 31, 2009 in exchange for 518,519
restricted shares of VeriChip’s common stock, which would
not be issued until VeriChip filed a registration statement on
Form S-8
with the SEC reflecting VeriChip’s Amended Plan.
Mr. Caragol was granted the shares on February 20,
2009. On March 27, 2009, VeriChip and Mr. Caragol
amended and restated the letter agreement, which is now
effective until January 1, 2010. In July 2009,
Mr. Caragol received a one-time discretionary bonus in the
amount of $50,000 for his efforts relating to the release of the
funds that were escrowed in connection with the Xmark
Transaction.
The
Former Chief Executive Officer and President of Xmark
Corporation (and VeriChip’s Former President)
VeriChip appointed Daniel A. Gunther as its president, effective
June 10, 2005, concurrent with the completion of
VeriChip’s acquisition of Instantel. Mr. Gunther was
serving as the president and chief executive officer of
Instantel at the time of the acquisition. Under the terms of its
employment agreement with Mr. Gunther, effective
June 10, 2005, Mr. Gunther’s annual base salary
was CDN $210,000.
Mr. Gunther served in the capacity of president until
March 2, 2007, on which date VeriChip appointed
Mr. Gunther as the chief executive officer and president of
VeriChip Corporation, a Canadian company, and VeriChip Holdings
Inc., which companies have since been amalgamated and were known
as Xmark Corporation until being sold to Stanley Canada
Corporation in July of 2008. Concurrent with that appointment,
Mr. Gunther resigned the title and responsibilities as its
president, and Mr. Silverman assumed the additional title
and responsibilities of acting president. Furthermore, on
March 2, 2007, VeriChip amended the terms of
Mr. Gunther’s employment agreement, increasing his
annual base salary to CDN $250,000.
In connection with the Xmark Transaction, The Stanley Works
assumed Mr. Gunther’s employment agreement, as
amended. As a result, VeriChip’s employment of
Mr. Gunther terminated on July 18, 2008.
Bonus
Compensation
VeriChip has not historically paid any automatic or guaranteed
bonuses to its executive officers. However, VeriChip has from
time to time paid signing or retention bonuses in connection
with its initial hiring or appointment of an executive officer,
or a change in a person’s position and responsibilities
with VeriChip, as well as transaction bonuses. For example, at
the recommendation of its chief executive officer, and in
recognition of his outstanding performance, Mr. Caragol
received a discretionary bonus of $25,000 in March 2007.
129
Under Mr. Silverman’s separation agreement,
Mr. Silverman earned a bonus payment in the amount of
$1.2 million upon the closing of the Xmark Transaction,
payable in two installments. One installment was paid on
July 18, 2008 in the amount of $1,080,000, and the
remaining installment of $120,000 was paid in July of 2009 upon
the release of the funds that were escrowed in connection with
the Xmark Transaction. The $120,000 was expensed during the year
ended December 31, 2008.
Under Mr. Caragol’s letter agreement, Mr. Caragol
was eligible to receive a bonus of $50,000 if the total
distributed cash or equity value to VeriChip’s stockholders
following the Xmark Transaction was at least
$21.5 million — and, if the total distributed
cash or equity value exceeded $21.5 million, he was
eligible to receive an additional cash bonus equal to 4% of the
amount over $21.5 million, up to a maximum of $200,000 in
aggregate incentive compensation. On December 31, 2008,
VeriChip entered into a letter agreement, as amended and
restated on March 27, 2009, with Mr. Caragol that
terminated the May 15, 2008 letter agreement (with the
exception of the waiver/release provisions of such letter). In
July 2009, Mr. Caragol received a one-time discretionary
bonus in the amount of $50,000 for his efforts relating to the
release of the funds that were escrowed in connection with the
Xmark Transaction.
On February 11, 2008, VeriChip entered into a letter
agreement with Mr. Gunther, or the February 11, 2008
Letter Agreement, to guarantee a certain bonus/change-in-control
payment due to Mr. Gunther upon the successful completion
of the Xmark Transaction. On July 17, 2008, in order to
clarify the aggregate amount due to Mr. Gunther in
connection with the Xmark Transaction, under both the
February 11, 2008 Letter Agreement and the Executive
Management Change in Control Plan (as discussed more fully below
under “Compensation Discussion and Analysis —
Potential Payments Upon Termination or Control —
Executive Management Change in Control Plan”), VeriChip
entered into a letter agreement and release with
Mr. Gunther, under which Mr. Gunther received US
$815,000.
VeriChip’s Board considered bonuses paid by similarly
situated employers to similarly situated employees in making its
determination.
Compensation
under Individual Senior Management Incentive Compensation
Plans
As noted above, VeriChip’s compensation committee believes
that pay should be directly and closely linked to corporate
performance and milestones. For this reason, the largest
component of its executives’ total compensation packages
generally tends to be non-equity incentive compensation.
VeriChip believes that such compensation, in the form of
individual senior management incentive compensation plans,
incentivizes its senior management team to advance its corporate
performance and provides a platform for VeriChip to recognize an
individual team member’s contributions to its business
results. When its compensation committee established the
performance goals that determined the amounts payable under
these individual plans (as detailed below), it assessed the
executive’s leadership role and level of responsibility in
achieving certain business results. For fiscal 2008, VeriChip
had no incentive compensation plans in place.
Equity
Compensation
VeriChip’s compensation committee’s historical
practice has been to grant equity-based awards to attract,
retain, motivate and reward its employees, particularly its
executive officers, and to encourage their ownership of an
equity interest in VeriChip. Through December 31, 2008,
such grants have consisted either of stock options —
specifically non-qualified stock options, that is, options that
do not qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended — or
restricted shares of VeriChip’s common stock, which shares
are generally subject to forfeiture if the employment agreement
with the recipient of such restricted shares is terminated, by
reason of resignation or termination for cause, during the
two-year period or three-year period following the date of
grant. Historically, its compensation committee has granted
awards of stock options or restricted shares of VeriChip common
stock to its executive officers upon their appointment as
executive officers, with the grant award typically memorialized
in the applicable officer’s offer letter or employment
agreement, or an addendum to employment agreement.
Other than two grants made in January 2006 pursuant to the terms
of employment agreements with former executive officers, all
grants of options to VeriChip’s executive officers and
other employees, as well as
130
to its directors, have been granted with exercise prices equal
to or exceeding the fair value of the underlying shares of
common stock on the grant date, as determined by its
compensation committee. All equity-based awards have been
reflected in VeriChip’s consolidated financial statements,
based upon the applicable accounting guidance. Previously,
VeriChip accounted for equity compensation paid to its employees
and directors using the intrinsic value method under APB Opinion
No. 25 and FASB Financial Interpretation No. 44,
“
Accounting for Certain Transactions Involving Stock
Compensation — an Interpretation of APB Opinion
No. 25
.” Under the intrinsic value method, no
stock-based compensation was recognized in its consolidated
statements of operations for options granted to its directors,
employees, consultants and others because the exercise price of
such stock options equaled or exceeded the fair value of the
underlying stock on the dates of grant. Effective
January 1, 2006, VeriChip adopted FAS 123R using the
modified prospective transition method. Under this method,
stock-based compensation expense is recognized using the
fair-value based method for all awards granted on or after the
date of adoption of FAS 123R. FAS 123R requires
VeriChip to estimate and record an expense over the service
period of the stock-based award. In 2006, its compensation
committee, conscious of the less favorable accounting treatment
for stock options resulting from adoption of FAS 123R, took
a more deliberate approach to the granting of awards of stock
options.
Starting in 2007, VeriChip moved away from granting stock
options in favor of granting restricted shares of its common
stock. VeriChip’s compensation committee believes that
restricted stock grants offer advantages, such as a more
dependable retention value for VeriChip, as well as more
predictability of long-term rewards for its executive officers.
Restricted stock also provides the recipient with immediate
value, subject to vesting upon grant. In addition, VeriChip
believes that the accounting treatment of grants of restricted
stock more reliably reflects executive compensation than the
accounting treatment of stock options. In the case of restricted
stock grants, the expense VeriChip records over the vesting
period is equal to the market value of the stock at the time of
grant. In the case of stock option grants, the expense VeriChip
records over the vesting period is arrived at through the use of
a valuation model that is subject to management’s estimates
and judgments.
VeriChip structures cash incentive compensation so that it is
taxable to its executive officers at the time it becomes
available to them. VeriChip currently intends that any cash
compensation paid will be tax deductible for VeriChip. However,
with respect to equity-based awards, while any gain recognized
by its executive officers and other employees from non-qualified
stock options should be deductible, to the extent that in the
future VeriChip grants incentive stock options, any gain
recognized by the optionee related to such options will not be
deductible by VeriChip if there is no disqualifying disposition
by the optionee. In addition, its grant of shares of restricted
stock or restricted stock units that are not subject to
performance vesting provisions may not be fully deductible by
VeriChip at the time the grant is otherwise taxable to the
grantee.
VeriChip does not have any program, plan or practice that
requires VeriChip to grant equity-based awards on specified
dates, and VeriChip has not made grants of such awards that were
timed to precede or follow the release or withholding of
material non-public information. It is possible that VeriChip
will establish programs or policies regarding the timing of
equity-based awards in the future. Authority to make
equity-based awards to executive officers rests with its
compensation committee, which considers the recommendations of
its chief executive officer, president and other executive
officers. As a Nasdaq-listed company, VeriChip is subject to
Nasdaq listing standards that, in general, require stockholder
approval of equity-based plans.
Severance
and Change in Control Payments
VeriChip’s Board of Directors believes that companies
should provide reasonable severance benefits to employees,
recognizing that it may be difficult for them to find comparable
employment within a short period of time. VeriChip’s Board
also believes it prudent that VeriChip should disentangle itself
from employees whose employment terminates as soon as
practicable. VeriChip’s historical practice for
U.S. employees has been to make the termination of an
employee effective immediately upon the communication of the
termination rather than at the expiration of any required
advance notice period. In such situations, VeriChip has
continued to pay, on a post-termination basis, base salary
compensation to the terminated employee under his or her
employment agreement, if any, for the specified advance notice
period. For its former Canadian
131
employees, VeriChip typically made the termination effective at
the expiration of the required advance notice period as required
under Canadian law.
VeriChip’s employment agreement with Mr. Silverman,
which was terminated on July 18, 2008, contained
termination provisions that were more complex than that in place
for its other executive officers. The compensation due
Mr. Silverman in the event of the termination of his
employment agreement varied depending on the nature of the
termination and, depending on the type and timing of the
termination, provided for substantial compensation payments to
Mr. Silverman. Mr. Silverman’s employment
agreement also provided for substantial payments to him in the
event VeriChip underwent a change in control. VeriChip’s
Board of Directors believes that these termination and
change-in-control
provisions, which were substantially the same as the
corresponding provisions of Mr. Silverman’s prior
employment agreement with Digital Angel, were necessary and
appropriate to induce Mr. Silverman to accept the position
as its chief executive officer, as more fully discussed above.
On July 18, 2008, VeriChip did undergo a change in control.
For information regarding the termination and change in control
payments made to Mr. Silverman upon the consummation of the
Xmark Transaction and provisions currently in effect pursuant to
its letter agreement dated December 31, 2008, see
“Potential Payments Upon Termination or Change in
Control — Scott R. Silverman.”
On March 2, 2007, its compensation committee approved an
Executive Management Change in Control Plan, which governed the
payments due to Messrs. Gunther and Caragol in the event of
a change in control. On the same date, VeriChip amended its
employment agreement with Mr. Gunther to outline the
compensation due to Mr. Gunther in the event of his
termination by Xmark Corporation for any reason other than for
cause. VeriChip did undergo a change in control in connection
with the Xmark Transaction. For information regarding the
termination and change in control payments Mr. Gunther
received upon the consummation of the Xmark Transaction, see
“Potential Payments Upon Termination or Change in
Control — Daniel A. Gunther.”
On May 15, 2008, VeriChip entered into a letter agreement
with Mr. Caragol, which contained certain termination
provisions in the event VeriChip terminates that letter
agreement at any time. On December 31, 2008, VeriChip
entered into a letter agreement with Mr. Caragol that
terminated the May 15, 2008 letter agreement (with the
exception of the waiver/release provisions of such letter), and
provides that Mr. Caragol will serve as its acting chief
financial officer effective January 1, 2009 through
July 31, 2009 in exchange for 518,519 restricted shares of
VeriChip’s common stock. On March 27, 2009, VeriChip
and Mr. Caragol amended and restated the letter agreement,
which is now effective until January 1, 2010. For
information regarding the termination provisions of
Mr. Caragol’s letter agreement, see “Potential
Payments Upon Termination or Change in Control —
William J. Caragol.”
Other
Benefits
VeriChip believes establishing competitive benefit packages for
its employees is an important factor in attracting and retaining
highly-qualified personnel. Executive officers are eligible to
participate in all of its employee benefit plans, such as
medical, dental, vision, group life and accidental death and
dismemberment insurance, in each case on the same basis as other
employees. Mr. Silverman is provided with an individual
term life insurance policy. VeriChip does not currently provide
retirement benefits. VeriChip’s former officers and
employees in Canada had somewhat different employee benefit
plans than those VeriChip offer domestically, typically based on
certain legal requirements in Canada.
Perquisites
VeriChip’s Board of Directors annually reviews the
perquisites that members of senior management receive. With the
exception of the perquisites received by Mr. Silverman, the
cost to VeriChip of such perquisites is minimal. Under the terms
of Mr. Silverman’s employment agreement with VeriChip,
VeriChip was obligated to reimburse him for all reasonable
travel, entertainment and other expenses incurred by him in
connection with the performance of his duties and obligations
under the agreement. In addition, consistent with his former
employment agreement with Digital Angel, VeriChip was obligated
to pay to Mr. Silverman $45,000 per year during the
five-year term of his employment agreement, payable in two equal
installments of $22,500 on each of January 15 and July 15,
representing non-allocable expenses. Among the specific
132
perquisites that Mr. Silverman was receiving at the time of
his termination without cause in connection with the Xmark
Transaction were:
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•
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an automobile allowance for two automobiles and other automobile
expenses, including insurance, gasoline and maintenance costs;
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•
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tickets to sporting events used primarily for business
entertainment purposes; and
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•
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a membership at a private club.
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Pursuant to the terms of the letter agreement entered into with
Mr. Silverman on December 31, 2008, Mr. Silverman
is now entitled to the use of one car, leased by VeriChip, and
other automobile expenses, including insurance, gasoline and
maintenance costs.
VeriChip was also obligated to pay Mr. Caragol $10,000 per
year, payable in two equal installments of $5,000 on each of
January 15 and July 15, representing non-allocable
expenses. Effective January 1, 2009, these payments ceased
under the letter agreement VeriChip entered into with
Mr. Caragol on December 31, 2008, as amended and
restated on March 27, 2009.
Section 162(m)
of the Internal Revenue Code
Section 162(m) of the Internal Revenue Code generally does
not allow a deduction for annual compensation in excess of
$1,000,000 paid to VeriChip’s named executive officers.
This limitation on deductibility does not apply to certain
compensation, including compensation that is payable solely on
account of the attainment of one or more performance goals.
VeriChip’s policy is generally to preserve the federal
income tax deductibility of compensation, and VeriChip intends
generally to qualify eligible compensation for the
performance-based exception in order for compensation not to be
subject to the limitation on deductibility imposed by
Section 162(m) of the Internal Revenue Code; VeriChip may,
however, approve compensation that may not be deductible if
VeriChip determines that the compensation is in its best
interests as well as the best interests of its stockholders.
133
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The following table sets forth information regarding
compensation earned in or with respect to VeriChip’s fiscal
year 2006, 2007 and 2008 by:
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•
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each person who served as its chief executive officer in 2008;
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•
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each person who served as its chief financial officer in
2008; and
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•
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one other individual who served as an executive officer during
2008 but was not serving in such capacity at the end of 2008,
for whom disclosure is required under applicable rules of the
Securities and Exchange Commission.
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VeriChip refers to these officers collectively as its named
executive officers.
Summary
Compensation Table
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Non-Equity
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Stock
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Option
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Incentive Plan
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All Other
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Name and
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Compensation
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Total
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Principal Position
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Year
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($)
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($)
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($)
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($)
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($)(1)
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($)
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($)
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Scott R. Silverman(2)
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2008
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254,101
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(3)
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1,200,000
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2,351,339
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(4)
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—
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—
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5,497,592
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(5)
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9,303,032
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Chief Executive Officer
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2007
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420,000
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—
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2,097,899
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(4)
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—
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800,000
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104,980
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(6)
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3,422,879
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and Executive Chairman
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2006
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400,323
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(7)
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900,000
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(8)
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154,762
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(4)
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—
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—
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3,403,016
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(9)
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4,858,101
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of the Board of Directors
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William J. Caragol(10)
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2008
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216,206
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(11)
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—
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157,500
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(13)
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—
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—
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1,276,400
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(15)
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1,650,106
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Acting Chief Financial
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2007
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174,808
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(11)
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25,000
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(12)
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119,562
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(13)
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92,692
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(14)
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450,000
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15,251
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(16)
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877,313
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Officer
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2006
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51,923
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(11)
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—
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—
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62,034
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(14)
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75,000
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66,029
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254,986
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Daniel A. Gunther (17)
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2008
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134,311
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(18)
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—
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—
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—
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171,518
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815,500
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(20)
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1,121,329
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Former Chief Executive
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2007
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225,309
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(18)
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—
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119,562
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(19)
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—
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370,370
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(21)
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1,940
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(22)
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717,181
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Officer and President of
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2006
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188,354
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(18)
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—
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—
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—
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200,490
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(21)
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588
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389,432
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Xmark Corporation
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(1)
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The amounts shown in this column were paid under the terms of
its executive management incentive plan for fiscal year 2007,
which were entered into with each of VeriChip’s named
executive officers other than Daniel A. Gunther, for the
achievement of specified performance objectives.
Mr. Gunther’s senior management incentive compensation
plan for fiscal year 2007, which sets forth performance
objectives and related dollar amounts, contain the terms that
govern his receipt of incentive compensation for fiscal year
2007. For a description of the material terms of each of these
plans, see the discussion under “VeriChip’s 2007
Senior Management Incentive Compensation Plans and Comparable
Arrangements.”
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(2)
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Mr. Silverman became its chief executive officer as of
December 5, 2006. VeriChip terminated him without cause on
July 18, 2008, in connection with the Xmark Transaction. On
November 12, 2008, in connection with the purchase by
R & R Consulting Partners, LLC (an entity that is
owned and controlled by Mr. Silverman) of 45.7% of the
outstanding shares of VeriChip’s common stock from Digital
Angel, Mr. Silverman again became the chairman of its Board
of Directors. On December 31, 2008, VeriChip entered into a
letter agreement with Mr. Silverman effective
December 1, 2008, which provides that Mr. Silverman
will serve as VeriChip’s executive chairman from
December 1, 2008 through December 31, 2009. Effective
August 27, 2009, Mr. Silverman was reappointed as
VeriChip’s chief executive officer.
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(3)
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Amount represents 2008 salary paid to Mr. Silverman until
his termination on July 18, 2008.
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(4)
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Mr. Silverman received an award of 500,000 restricted
shares of VeriChip’s common stock in December 2006 in
connection with his appointment as its chief executive officer
and 50,000 restricted shares of its common stock in January
2008. These shares vested on July 18, 2008. The dollar
amount of this award reflected in the table represents the
amount recognized in 2006, 2007, and 2008 for financial
statement reporting purposes in accordance with FAS 123R
without reduction for assumed forfeitures. The grant date fair
value of the awards was $4,500,000 and $104,000 for the 500,000
and 50,000 shares, respectively, which amount has been
determined in accordance with FAS 123R based on an
estimated fair value
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134
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of its common stock of $9.00 and $1.04 per share on
December 31, 2006, as determined by VeriChip’s Board
of Directors and management. The grant date fair value of each
award was determined using the Black Scholes pricing model. The
value realized from this grant will ultimately be determined by
the price of its common stock when the restricted period ends,
which may be less than the value assigned at the time of the
grant. For more information regarding assumptions made in
determining the amount under the Black Scholes pricing model,
see Note 5 of its consolidated financial statements.
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(5)
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The amount shown includes (i) $300 in respect of group term
life insurance provided to Mr. Silverman; (ii) a
dividend of $1,162,500 paid to Mr. Silverman, which amount
was not factored into the grant date fair value required to be
reported for the stock award; (iii) $38,879 paid as
vacation accrued in connection with Mr. Silverman’s
termination; and (iv) $4,242,273 paid to Mr. Silverman
under a separation agreement. See “Compensation of Scott R.
Silverman” below for more information regarding the
$4,242,273 payment. The amount shown also includes perquisites
and other personal benefits aggregating $53,640, which were as
follows:
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Amount
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of
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Nature of Expense
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Expense
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Expense allowance
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$
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45,000
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Automobile allowance for two automobiles, maintenance and
gasoline expenses
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8,640
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Total
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$
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53,640
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(6)
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The amount shown includes (i) $300 in respect of group term
life insurance provided to Mr. Silverman and
(ii) amounts in respect of perquisites and other personal
benefits aggregating $104,680. The perquisites and other
personal benefits were as follows:
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Amount
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of
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Nature of Expense
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Expense
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Expense allowance
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$
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45,000
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Automobile allowance for two automobiles, maintenance and
gasoline expenses
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33,266
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* Other
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26,414
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Total
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$
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104,680
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*
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Tickets to sporting events primarily provided for business
entertainment purposes and related food and beverages, a club
membership, home security monitoring service, and medical
examinations.
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(7)
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Mr. Silverman’s salary for 2006 includes $377,799 paid
by Digital Angel to Mr. Silverman from January 1, 2006
through December 4, 2006, during which time he served as
the chief executive officer of Digital Angel. All such amounts
were paid or accrued by Digital Angel and do not affect
VeriChip’s financial statements.
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(8)
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In December 2006, Digital Angel’s Board of Directors
determined to fix the amount payable to Mr. Silverman under
the Digital Angel 2006 incentive and recognition policy in order
to resolve and clarify outstanding compensation issues under the
policy, given the wide range of potential payments under the
policy and the timing of VeriChip’s initial public offering
and how that would affect such range. Accordingly, Digital Angel
fixed Mr. Silverman’s bonus for 2006 at $900,000. The
amount is shown in the “Bonus” column instead of the
“Non-Equity Incentive Compensation Plan” column as the
amount paid was not determined solely by reference to the
performance objectives set forth in the policy. All such amounts
were paid or accrued by Digital Angel and do not affect
VeriChip’s financial statements.
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(9)
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The amount shown includes (i) $3.3 million owed to
Mr. Silverman under an agreement Digital Angel entered into
with Mr. Silverman dated December 5, 2006 in
connection with his agreeing to waive all of his rights under
his employment agreement with Digital Angel (the majority of
this amount was settled in the stock of Digital Angel, the value
of which may be less when realized), (ii) amounts in
respect of perquisites and other personal benefits aggregating
$102,716 provided by Digital Angel, and (iii) $300 in
respect of group term life insurance provided to
Mr. Silverman. See “Compensation of
Scott R. Silverman”
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135
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below for more information regarding the $3.3 million
payment. All such amounts were paid or accrued by Digital Angel
and do not affect VeriChip’s financial statements.
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(10)
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Mr. Caragol became its chief financial officer as of
August 21, 2006 and its president as of May 4, 2007.
Effective January 1, 2009, Mr. Caragol became
VeriChip’s acting chief financial officer.
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(11)
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Mr. Caragol’s annual base salary in 2006, as specified
in his offer letter with VeriChip, was $150,000. On
March 2, 2007, VeriChip’s compensation committee
approved an increase to Mr. Caragol’s base salary to
$165,000. Then, on May 4, 2007, in connection with its
Board’s decision to appoint Mr. Caragol to serve as
its president, VeriChip’s compensation committee approved
an increase in Mr. Caragol’s base salary to $185,000.
In 2008, its compensation committee approved a further increase
in Mr. Caragol’s base salary to $203,500. Included in
2008 was vacation paid in connection with the letter agreement
dated December 31, 2008 which terminated the May 15,
2008 letter agreement.
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(12)
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On March 2, 2007, VeriChip’s compensation committee
approved a discretionary bonus to Mr. Caragol in the amount
of $25,000.
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(13)
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On March 2, 2007, Mr. Caragol and Mr. Gunther
each received a restricted stock award of 50,000 restricted
shares of VeriChip’s common stock. On April 28, 2008,
Mr. Gunther voluntarily entered into a termination
agreement with VeriChip to terminate his restricted stock award
of 50,000 restricted shares of its common stock.
Mr. Caragol’s award vested on July 18, 2008. The
dollar amount of each award reflected in the table represents
the amount recognized in 2008 and 2007 for financial statement
reporting purposes in accordance with FAS 123R without
reduction for assumed forfeitures. The grant date fair value of
each award, determined using the Black Scholes pricing model, is
reflected in the Grants of Plan-Based Awards table below. For
information regarding assumptions made in determining the amount
under the Black Scholes pricing model, see Note 5 of its
consolidated financial statements.
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(14)
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In connection with Mr. Caragol’s appointment as its
chief financial officer, on August 14, 2006, the
compensation committee of VeriChip’s Board of Directors
authorized the grant to Mr. Caragol of options exercisable
for 50,000 shares of its common stock. The options were
scheduled to vest equally over a three-year period. The dollar
amount of this award reflected in the table represents the
amount recognized in 2006 and 2007 for financial statement
reporting purposes in accordance with FAS 123R, without
reduction for assumed forfeitures, determined by reference to
that portion of the vesting period that occurred in 2006 and
2007 based on the grant date fair value of the award. The grant
date fair value of the award was $278,581, which was determined
using the Black Scholes pricing model. For information regarding
assumptions made in determining the amount under the Black
Scholes pricing model, see Note 5 of VeriChip’s
consolidated financial statements for the year ended
December 31, 2008, included in VeriChip’s Annual
Report on
Form 10-K.
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(15)
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The amount represents payments made to Mr. Caragol
(i) related to a change in control payment received in
connection with the Xmark Transaction in the amount of
$1,141,400; and (ii) a dividend payment in the amount of
$135,000, which amount was not factored into the grant date fair
value, as VeriChip had no plans, nor did it expect, to issue
dividend distributions at that time.
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(16)
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The amount represents an expense allowance received by
Mr. Caragol for 2007 in the amount of $10,000 and tickets
to sporting events primarily provided for business entertainment
purposes and related food and beverages.
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(17)
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Mr. Gunther served as its president from June 10, 2005
through March 2, 2007. On March 2, 2007,
Mr. Gunther resigned his duties as its president and
assumed the title and responsibilities of chief executive
officer and president of VeriChip Canada and VHI, which
companies were amalgamated and are now known as Xmark
Corporation. In connection with the Xmark Transaction, The
Stanley Works assumed Mr. Gunther’s employment
agreement, as amended. As a result, VeriChip’s employment
of Mr. Gunther terminated on July 18, 2008.
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(18)
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Mr. Gunther’s annual base salary was paid in Canadian
dollars. The 2006 base salary reported has been converted to
U.S. dollars using the average exchange rate for 2006 of 1.136
Canadian dollars for each U.S. dollar. The 2007 base salary
reported has been converted to U.S. dollars using the average
exchange rate for 2007 of 1.08 Canadian dollars for each U.S.
dollar. The 2008 base salary reported has been converted to U.S.
dollars using the average exchange rate for 2008 of 1.01 for
each U.S. dollar.
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136
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(19)
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The amount reported in the table has been converted to U.S.
dollars using the average exchange rate for 2006, 2007 and 2008
of 1.136, 1.08 and 1.01, respectively, Canadian dollars for each
U.S. dollar.
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(20)
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Represents amount paid to Mr. Gunther in satisfaction of
any amounts due to Mr. Gunther under both the
February 11, 2008 Letter Agreement and the Executive
Management Change in Control Plan in connection with the Xmark
Transaction, as well as the cost of group term life insurance
VeriChip maintained on behalf of Mr. Gunther.
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(21)
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The amount reported in the table has been converted to U.S.
dollars using the average exchange rate for 2006, 2007 and 2008
of 1.136, 1.08 and 1.01, respectively, Canadian dollars for each
U.S. dollar.
|
|
|
|
(22)
|
|
This amount represents the cost of group term life insurance
VeriChip maintained on behalf of Mr. Gunther and home
internet service.
|
2008
Grants of Plan-Based Awards
Set forth in the table below is information regarding stock
awards granted by the compensation committee of VeriChip’s
Board of Directors to its named executive officers in 2008,
reflected on an individual grant basis.
These represent all of the grants of awards by VeriChip to its
named executive officers under any plan during or with respect
to 2008.
2008
Grants of Plan-Based Awards
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|
|
|
|
|
|
All Other
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
|
Shares of
|
|
Securities
|
|
Base Price of
|
|
Fair Value of
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|
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|
|
|
Stock or
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|
Underlying
|
|
Option
|
|
Stock and
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|
|
|
|
|
Units
|
|
Options
|
|
Awards
|
|
Option
|
|
Name
|
|
Grant Date
|
|
(#)
|
|
(#)
|
|
($/Sh)
|
|
Awards(1)
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|
Scott R. Silverman
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|
|
1/24/2008
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|
|
50,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
104,000
|
|
|
William J. Caragol
|
|
|
1/24/2008
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|
|
|
50,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
104,000
|
|
|
Daniel A. Gunther
|
|
|
1/24/2008
|
|
|
|
50,000
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
104,000
|
|
|
|
|
|
|
(1)
|
|
The grant date fair value of the equity award was determined
under the Black Scholes pricing model in accordance with
FAS 123R. For information regarding assumptions made in
determining the amount under the Black Scholes pricing model,
see Note 5 to VeriChip’s consolidated financial
statements for the year ended December 31, 2008, included
in this joint proxy statement/prospectus.
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|
|
|
(2)
|
|
The restricted stock vested on July 18, 2008 upon the
closing of the Xmark Transaction.
|
|
|
|
(3)
|
|
On April 28, 2008, Mr. Gunther voluntarily entered
into a termination agreement with VeriChip to terminate his
restricted stock award of 50,000 restricted shares of
VeriChip’s common stock.
|
Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
Executive
Employment Arrangements
Scott R.
Silverman
Scott R. Silverman was appointed as its chief executive officer
effective December 5, 2006 and entered into an employment
and non-compete agreement with VeriChip dated December 5,
2006. The employment agreement provided for an initial base
salary of $420,000 per year, with the base salary being subject
to an annual increase of no less than 10% in each of the second
and third years of the term of the agreement. The term of the
agreement was five years from the effective date. However, the
agreement was terminated on July 18, 2008 when VeriChip
terminated Mr. Silverman without cause in connection with
the Xmark Transaction. Under his employment agreement,
Mr. Silverman was entitled to all benefits for which
VeriChip’s salaried employees are generally eligible under
either compensation or employee benefit plans and programs, on
the same basis as its similarly situated executive employees.
During his employment, Mr. Silverman
137
participated in VeriChip’s then 401(k) plan and
Company-paid health insurance. He was reimbursed for reasonable
business expenses and was provided the use of automobiles leased
by VeriChip. In addition, annual dues relating to
Mr. Silverman’s membership at a private club were paid
for by VeriChip. The membership dues at the private club were
approximately $3,198 per year. He also received a Company-paid
$2,000,000 executive term life policy, under which VeriChip was
the beneficiary of $1,750,000. In addition, VeriChip was
obligated to pay to Mr. Silverman $45,000 per year during
the term of the agreement, payable in two equal installments of
$22,500 on or before January 15 and July 15, representing
non-allocable expenses that were deemed to be additional
compensation to Mr. Silverman.
The employment agreement specified that Mr. Silverman was
eligible to receive incentive bonus compensation for each
calendar year during the term of the agreement in an amount to
be reasonably determined by its Board of Directors.
VeriChip’s Board had to consider bonuses paid by similarly
situated employers to similarly situated employees in making its
determination. On April 2, 2007, its compensation committee
approved an executive management incentive compensation plan for
fiscal year 2007 for Mr. Silverman. Under the plan,
Mr. Silverman was able to earn up to $1,550,000 and earned
$800,000. The employment agreement contemplated similar plans
for each year of its term.
Under the employment agreement, Mr. Silverman received
500,000 shares of restricted common stock. The shares were
subject to substantial risk of forfeiture in the event that
Mr. Silverman resigned or VeriChip terminated his
employment for cause on or before December 31, 2008. Since
VeriChip terminated Mr. Silverman without cause in
connection with the Xmark Transaction, this forfeiture
restriction lifted on July 18, 2008.
Under the separation agreement between Mr. Silverman and
VeriChip, dated May 15, 2008, Mr. Silverman was
prohibited, for a period of two years from the closing of the
Xmark Transaction (in other words, through July 18, 2010),
from competing with VeriChip or any of its affiliates by
directly or indirectly engaging in its business within the
radio-frequency identification technology market space or by
engaging in any business comparable to VeriChip’s or to
that of its affiliates at any location at which VeriChip or its
affiliates conduct business or provide any services. However, if
(1) VeriChip’s VeriMed Health Link business was not
sold or transferred to a third party, or
(2) VeriChip’s VeriMed Health Link business was sold
or transferred to Mr. Silverman or one of his affiliates,
Mr. Silverman would not be subject to the portion of this
restriction that applies to its VeriMed Health Link business;
but, in either such event, he would remain subject to all
portions of the restriction that do not apply to its VeriMed
Health Link business. The separation agreement also included a
provision relating to non-disclosure of proprietary information.
Under Mr. Silverman’s separation agreement,
Mr. Silverman earned a bonus payment in the amount of
$1.2 million upon the closing of the Xmark Transaction,
payable in two installments. One installment was paid on
July 18, 2008 in the amount of $1,080,000, and the
remaining installment of $120,000 was paid in July of 2009 upon
the release of the funds that were escrowed in connection with
the Xmark Transaction. The $120,000 was expensed during the year
ended December 31, 2008.
On December 31, 2008, VeriChip and Mr. Silverman
entered into a letter agreement pursuant to which, effective
December 1, 2008 through December 31, 2009, he serves
as its executive chairman, unless the term is amended or the
letter agreement is terminated. Mr. Silverman would receive
601,852 shares on the later to occur of
(i) stockholder approval of its Amended and Restated 2007
Stock Incentive Plan (the “Amended Plan”) or
(ii) the filing of the Form
S-8,
as
amended, to reflect the Amended Plan (hereinafter, the
“Grant Date”). Mr. Silverman was granted the
shares on February 20, 2009. If Mr. Silverman remains
involved in VeriChip’s day-to-day management (as determined
by its board of directors), the shares will vest upon the
earlier to occur of (i) January 1, 2010 or (ii) a
Change in Control. The shares are subject to forfeiture in the
event that Mr. Silverman fails to remain involved in its
day-to-day management (as determined by VeriChip’s board of
directors) until the earlier to occur of
(i) January 1, 2010 or (ii) a Change in Control.
In the event of a Change in Control during 2009, if
Mr. Silverman (i) becomes or remains a director of the
acquiring company, or in the case of a merger, the surviving
entity, and (ii) does not voluntarily resign as a director
for 12 months from the closing of the Change in Control
transaction, Mr. Silverman will receive
138
$25,000 per month for a period of not less than 12 months
from the closing of the Change in Control transaction.
The term Change in Control is defined below under the heading,
“Potential Payments Upon Termination or Change in
Control — Scott R. Silverman”.
Mr. Silverman is entitled to the use of one car through
December 31, 2009 and will no longer be entitled to receive
any form of bonus or incentive compensation for services
rendered to VeriChip during fiscal years ended December 31,
2008 and 2009. The letter agreement also provides for the
termination of the separation agreement, dated May 15,
2008, as amended, between VeriChip and Mr. Silverman,
provided that sections I.B.(regarding the transaction bonus
payment for the Xmark Transaction), I.E. (regarding discharge of
VeriChip’s obligations to Mr. Silverman), II.B.
(regarding cooperation by Mr. Silverman in connection with
business matters) and II.C. (regarding Mr. Silverman’s
waiver and release of certain rights, claims and actions) of the
separation agreement will survive.
For a more detailed description of the termination and change in
control provisions of this letter agreement, see “Potential
Payments Upon Termination or Change in Control — Scott
R. Silverman” below.
William
J. Caragol
William J. Caragol was appointed as VeriChip’s chief
financial officer effective August 21, 2006 and entered
into an offer letter with VeriChip dated August 2, 2006.
The offer letter provides for an initial base salary of $150,000
per year and other benefits generally available for similarly
situated employees, such as participation in VeriChip’s
401(k) plan and Company-paid health insurance. In addition,
pursuant to the offer letter, certain of the moving and related
expenses associated with the relocation of Mr. Caragol and
his family from Northern Virginia to Florida were paid or
reimbursed by VeriChip. On March 2, 2007, the compensation
committee approved an increase in Mr. Caragol’s base
salary to $165,000. Then, on May 4, 2007, in connection
with its Board’s decision to appoint Mr. Caragol to
serve as its president, the compensation committee approved an
increase in Mr. Caragol’s base salary to $185,000. In
2008, the compensation committee approved a further increase in
Mr. Caragol’s base salary to $203,500.
The offer letter includes provisions relating to ownership of
proprietary information, disclosure and ownership of inventions
and non-solicitation of customers. Mr. Caragol has agreed
that, while VeriChip’s employee and for the one-year period
following the end of his employment, he will not, directly or
indirectly, attempt to solicit or in any other way disturb or
service any person, firm or corporation that has been a
customer, employee or vendor of VeriChip’s, or that of its
current or future affiliates, at any time within one year prior
to the end of his employment. On April 2, 2007, its
compensation committee approved an executive management
incentive compensation plan for fiscal year 2007 for
Mr. Caragol. Under the plan, Mr. Caragol was able to
earn up to $875,000 and earned $450,000.
In connection with the Xmark Transaction, on May 15, 2008,
VeriChip entered into a letter agreement with Mr. Caragol,
which affirmed that VeriChip desired to retain Mr. Caragol
as its president and chief financial officer following the
closing of the Xmark Transaction, confirmed that
Mr. Caragol’s base salary would remain at $203,500 per
year, and outlined the bonus compensation for which
Mr. Caragol would be eligible.
On December 31, 2008, VeriChip and Mr. Caragol entered
into a letter agreement pursuant to which, effective
January 1, 2009, Mr. Caragol serves as VeriChip’s
acting chief financial officer. The letter agreement had a term
ending on July 31, 2009. Mr. Caragol ceased receiving
salary and health benefits on January 1, 2009. On
March 27, 2009, VeriChip and Mr. Caragol amended and
restated the letter agreement, which has a term ending
January 1, 2010. In July 2009, Mr. Caragol received a
one-time discretionary bonus in the amount of $50,000 for his
efforts relating to the release of the funds that were escrowed
in connection with the Xmark Transaction.
Compensation due to Mr. Caragol under letter agreement
dated December 31, 2008 was in the form of shares of
restricted common stock in the amount of 518,519. The grant of
the shares would take place on the Grant Date. Mr. Caragol
was granted the shares on February 20, 2009. The shares
vested according to the following schedule: (i) 20% would
vest on the Grant Date; (ii) 40% would vest on
April 1, 2009; and (iii) 40% would vest on
July 31, 2009. However, in the event of a Change in Control
and if Mr. Caragol is terminated
139
without cause (as defined below), the shares will immediately
vest. The shares are subject to forfeiture in the event
Mr. Caragol is terminated for cause, which is defined as
(i) Mr. Caragol’s conviction of a felony;
(ii) Mr. Caragol’s being prevented from providing
services to VeriChip under the letter agreement as a result of
Mr. Caragol’s violation of any law, regulation
and/or
rule;
or (iii) Mr. Caragol’s non-performance or
non-observance in any material respect of any requirement with
respect to Mr. Caragol’s obligations under the letter
agreement.
The March 27, 2009 letter agreement amended and restated
the December 31, 2008 letter agreement as follows:
|
|
|
|
|
|
•
|
The March 27, 2009 letter agreement is effective from
December 31, 2008 until January 1, 2010, an extension
from the December 31, 2008 letter agreement, which was
effective through July 31, 2009;
|
|
|
|
|
•
|
The 518,519 shares of restricted stock issued to
Mr. Caragol pursuant to the December 31, 2008 letter
agreement will be forfeited before vesting in the event
Mr. Caragol fails to remain involved in the day-to-day
management of VeriChip until the earlier to occur of
January 1, 2010 or a Change in Control of VeriChip; and
|
|
|
|
|
•
|
Unless forfeited before vesting, 80% of the restricted stock
will vest on January 1, 2010.
|
The term Change in Control is defined below under the heading,
“Potential Payments Upon Termination or Change in
Control — William J. Caragol”.
The March 27, 2009 letter agreement also provides for the
termination of all compensation-related plans currently in place
between Mr. Caragol and VeriChip, including the letter
agreement, dated May 15, 2008, between Mr. Caragol and
VeriChip, provided that the waiver/release provisions of such
letter will survive.
For a description of the termination and change in control
provisions of Mr. Caragol’s letter agreement, see
“Potential Payments Upon Termination or Change in
Control — William J. Caragol” below.
Daniel A.
Gunther
Daniel A. Gunther was appointed as VeriChip’s president
effective June 10, 2005. Mr. Gunther entered into an
employment agreement with VeriChip dated August 11, 2005,
with an effective date of June 10, 2005, which provided for
an initial base salary of CDN $210,000 per year and other
benefits generally available for similarly situated employees,
such as company-paid health insurance. On March 2, 2007,
the employment agreement was amended to increase
Mr. Gunther’s annual salary to CDN $250,000 as a
result of his appointment as president and chief executive
officer of the Canadian subsidiaries.
The employment agreement included provisions relating to
ownership of proprietary information, disclosure and ownership
of inventions and non-solicitation of customers. In the last
regard, Mr. Gunther agreed that, while its employee and for
the one-year period following the end of his employment, he
would not, directly or indirectly, attempt to solicit or in any
other way disturb or service any person, firm or corporation
that has been a customer, employee or vendor of VeriChip, or
that of its current or future affiliates, at any time within one
year prior to the end of his employment by VeriChip.
In connection with the Xmark Transaction, The Stanley Works
assumed Mr. Gunther’s employment agreement, as
amended. As a result, its employment of Mr. Gunther
terminated on July 18, 2008.
140
Outstanding
Equity Awards as Of December 31, 2008
The following table provides information as of December 31,
2008 regarding unexercised stock options outstanding held by
Messrs. Caragol and Gunther. Mr. Silverman did not
have any equity awards outstanding as of December 31, 2008.
Outstanding
Equity Awards as Of December 31, 2008
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|
Stock Awards
|
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|
|
|
|
|
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|
|
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|
|
Equity
|
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|
|
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|
Equity
|
|
Incentive
|
|
|
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|
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|
Incentive
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Awards:
|
|
|
|
Option Awards
|
|
|
|
|
|
Awards:
|
|
Market
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Number
|
|
or Payout
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
of
|
|
Value of
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
Number
|
|
|
|
Unearned
|
|
Unearned
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
of Shares
|
|
Market
|
|
Shares,
|
|
Shares,
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
or Units
|
|
Value of
|
|
Units or
|
|
Units or
|
|
|
|
Securities
|
|
Number of
|
|
Securities
|
|
|
|
|
|
of Stock
|
|
Shares or
|
|
Other
|
|
Other
|
|
|
|
Underlying
|
|
Securities
|
|
Underlying
|
|
|
|
|
|
That
|
|
Units of
|
|
Rights
|
|
Rights
|
|
|
|
Unexercised
|
|
Underlying
|
|
Unexercised
|
|
Option
|
|
|
|
Have
|
|
Stock That
|
|
That
|
|
That
|
|
|
|
Options
|
|
Unexercised
|
|
Unearned
|
|
Exercise
|
|
Option
|
|
Not
|
|
Have Not
|
|
Have Not
|
|
Have Not
|
|
|
|
(#)
|
|
Options (#)
|
|
Options
|
|
Price
|
|
Expiration
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Name
|
|
Exercisable(1)
|
|
Unexercisable
|
|
(#)
|
|
($)(2)
|
|
Date
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
|
|
Daniel A. Gunther
|
|
|
55,556
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7.425
|
|
|
|
8/11/2013
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
William J. Caragol
|
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
9.990
|
|
|
|
8/21/2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
On July 18, 2008, all stock option awards and restricted
stock awards that had previously been granted under
VeriChip’s 2002 Flexible Stock Plan, its 2005 Flexible
Stock Plan, and its 2007 Stock Incentive Plan vested upon the
closing of Xmark Transaction.
|
|
|
|
(2)
|
|
The exercise price of VeriChip stock options reflected in the
table represents the estimated fair market value of
VeriChip’s common stock on the date of grant, as determined
by VeriChip’s management and Board of Directors.
|
2008
Option Exercises and Stock Vested
The following table provides information on stock options
exercised and restricted stock vested during its last completed
fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
|
|
|
Acquired on
|
|
Value Realized
|
|
Acquired on
|
|
Value Realized
|
|
|
|
Exercise
|
|
on Exercise
|
|
Vesting
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
($)(1)
|
|
(#)
|
|
($)(2)
|
|
|
|
Scott R. Silverman
|
|
|
—
|
|
|
|
—
|
|
|
|
550,000
|
|
|
$
|
924,000
|
|
|
|
|
|
211,111
|
|
|
$
|
311,389
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
100,000
|
|
|
$
|
57,500
|
|
|
|
—
|
|
|
|
—
|
|
|
William J. Caragol
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
$
|
168,000
|
|
|
Daniel A. Gunther
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
Represents the aggregate dollar amount realized by determining
the difference between the market price of the underlying
securities at exercise and the exercise price of the options.
|
|
|
|
(2)
|
|
Represents the aggregate dollar amount realized upon vesting by
multiplying the number of shares of stock by the market value of
the underlying shares on the vesting date of July 18, 2008,
or $1.68.
|
Pension
Benefits
None of VeriChip’s named executive officers are covered by
a pension plan or other similar benefit plan that provides for
payments or other benefits at, following, or in connection with
retirement.
141
Nonqualified
Deferred Compensation
None of VeriChip’s named executive officers are covered by
a defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified.
Potential
Payments Upon Termination or Change in Control
Scott R.
Silverman
Mr. Silverman was terminated without cause on July 18,
2008, the day on which the Xmark Transaction closed. Under the
separation agreement between Mr. Silverman and VeriChip,
dated May 15, 2008, VeriChip paid him a separation payment
in the amount of approximately $3.2 million and incentive
compensation in the amount of approximately $1.0 million,
less all deductions and withholdings, in full and final
satisfaction of the amounts due to Mr. Silverman pursuant
to the terms of his employment agreement.
On December 31, 2008, VeriChip and Mr. Silverman
entered into a letter agreement pursuant to which, effective
December 1, 2008 through December 31, 2009, he serves
as its executive chairman, unless the term is amended or the
letter agreement is terminated. Pursuant to the letter
agreement, if a Change in Control (as defined below) had been
effective as of December 31, 2008, Mr. Silverman would
have received no cash benefit and his 601,852 restricted shares
of its common stock would have vested assuming the restricted
shares had been issued. In the event Mr. Silverman’s
employment with VeriChip was terminated (with or without cause)
as of December 31, 2008, he would not be entitled to any
cash payment and if the 601,852 restricted shares of its common
stock were not yet vested, they would be forfeited.
If a Change in Control occurs during 2009, and if
Mr. Silverman (i) becomes or remains a director of the
acquiring company, or in the case of a merger, the surviving
entity, and (ii) does not voluntarily resign as a director
for 12 months from the closing of the Change in Control
transaction, Mr. Silverman will receive $25,000 per month
for a period of not less than 12 months from the closing of
the Change in Control transaction, for a total of $300,000. In
addition, upon the Change in Control, the 601,852 restricted
shares of VeriChip’s common stock Mr. Silverman is
eligible to receive in connection with the execution of the
letter agreement will vest provided that Mr. Silverman is
involved in the day-to-day management of VeriChip and assuming
the restricted shares will be issued. In the event
Mr. Silverman’s employment with VeriChip is terminated
(with or without cause) in 2009, he would not be entitled to any
cash payment and if the 601,852 restricted shares of its common
stock were not yet vested, they would be forfeited.
Change in Control means the happening of any of the following:
(i) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is
that any “person” as such term is used in
Section 13(d) and 14(d) of the Exchange Act (other than any
trustee or other fiduciary holding securities under any employee
benefit plan of VeriChip’s, or any company owned, directly
or indirectly, by its stockholders in substantially the same
proportions as their ownership of its stock), is or becomes the
“beneficial owner” (as defined in
Rule 13d-3
under the Exchange Act), directly or indirectly, of
VeriChip’s securities representing more than 50% of the
combined voting power of VeriChip’s then outstanding
securities entitled generally to vote in the election of the
Board (other than the occurrence of any contingency);
(ii) VeriChip’s stockholders approve a merger or
consolidation of VeriChip with any other corporation or entity,
which is consummated, other than a merger or consolidation which
would result in its voting securities outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of
its voting securities or such surviving entity outstanding
immediately after such merger or consolidation; or
(iii) the effective date of a complete liquidation of
VeriChip or the consummation of an agreement for the sale or
disposition by VeriChip of all or substantially all of
VeriChip’s assets, which in both cases are approved by its
stockholders as may be required by law.
William
J. Caragol
On December 31, 2008, VeriChip and Mr. Caragol entered
into a letter agreement pursuant to which, effective
January 1, 2009, Mr. Caragol serves as its acting
chief financial officer. The letter agreement had a
142
term ending on July 31, 2009. Mr. Caragol ceased
receiving salary and health benefits on January 1, 2009. On
March 27, 2009, VeriChip and Mr. Caragol amended and
restated the letter agreement, which has a term ending
January 1, 2010.
Pursuant to the December 31, 2008 letter agreement, if a
Change in Control had become effective on December 31, 2008
and if Mr. Caragol had been terminated without cause on
December 31, 2008, the 518,519 restricted shares of
VeriChip’s common stock would have vested immediately,
assuming the restricted stock had been issued. If
Mr. Caragol had been terminated for cause on
December 31, 2008, the shares would have been forfeited. No
other payments would be due under the letter agreement to
Mr. Caragol in the event of a Change in Control or
termination (with or without cause).
Pursuant to the March 27, 2009 letter agreement, if a
Change in Control had become effective on December 31,
2008, Mr. Caragol would have received no cash benefit and
his 518,519 shares of VeriChip’s common stock would
have vested assuming the restricted shares had been issued. In
the event Mr. Caragol’s employment with VeriChip was
terminated (with or without cause) as of December 31, 2008,
he would not be entitled to any cash payment and if the 518,519
restricted shares of its common stock were not yet vested, they
would be forfeited. No other payments would be due under the
letter agreement to Mr. Caragol in the event of a Change in
Control or termination (with or without cause).
The term “Change in Control” has the same meaning as
provided above under the description of
Mr. Silverman’s potential termination and Change in
Control payments. The term “cause” is defined above
under the heading, “Narrative Disclosure to Summary
Compensation Table and Grants of Plan-Based Awards
Table — Executive Employment Arrangements —
William J. Caragol.”
Daniel A.
Gunther
In connection with the Xmark Transaction, The Stanley Works
assumed Mr. Gunther’s employment agreement, as
amended. As a result, VeriChip’s employment of
Mr. Gunther terminated on July 18, 2008. Alongside the
termination of his employment and in accordance with the letter
agreement and release between Mr. Gunther and VeriChip,
dated July 17, 2008, VeriChip paid Mr. Gunther
US$815,000 in full and final satisfaction of any and all amounts
due to Mr. Gunther under both the February 11, 2008
Letter Agreement and the Executive Management Change in Control
Plan.
Director
Compensation
The following table provides compensation information for
persons serving as members of VeriChip’s Board of Directors
during 2008.
2008 Director
Compensation
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Change in
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Pension Value
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Fees
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and
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Earned
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Non-Equity
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Nonqualified
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or Paid
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Stock
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Option
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Incentive Plan
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Deferred
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All Other
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in Cash
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Awards
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Awards
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Compensation
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Compensation
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Compensation
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Total
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Name
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($)
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($)(1)
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($)(1)
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($)
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Earnings
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($)
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($)
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Jeffrey S. Cobb(2)
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60,000
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208,000
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50,676
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135,000
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110,676
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Barry M. Edelstein(3)
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65,000
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208,000
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20,883
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135,000
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85,883
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Steven R. Foland(4)
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57,500
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121,500
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—
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67,500
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57,500
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Paul C. Green(5)
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61,000
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208,000
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153,297
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135,000
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214,297
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Joseph J. Grillo(6)
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—
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—
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—
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Michael E. Krawitz(7)
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7,500
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—
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145,000
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152,500
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Daniel E. Penni(8)
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5,000
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55,187
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60,187
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Constance K. Weaver(9)
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5,000
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55,187
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60,187
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(1)
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The dollar amount of this award reflected in the table
represents the amount recognized in 2008 for financial statement
reporting purposes in accordance with FAS 123R. For
information regarding assumptions made in determining the amount
under the Black Scholes pricing model, see Note 5 of its
consolidated
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financial statements for the year ended December 31, 2008,
included in this joint proxy statement/prospectus.
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(2)
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As of December 31, 2008, Mr. Cobb held options to
purchase 25,000 shares of its common stock. Mr. Cobb
was awarded 100,000 shares of restricted stock on
January 24, 2008, which vested on July 18, 2008. On
August 28, 2008, Mr. Cobb received a dividend of
$135,000.
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(3)
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As of December 31, 2008, Mr. Edelstein held options to
purchase 25,000 shares of VeriChip’s common stock.
Mr. Edelstein was awarded 100,000 shares of restricted
stock on January 24, 2008, which vested on July 18,
2008. On August 28, 2008, Mr. Edelstein received a
dividend of $135,000.
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(4)
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As of December 31, 2008, Mr. Foland held no options to
purchase shares of VeriChip’s common stock. Mr. Foland
was awarded 50,000 shares of restricted stock on
February 21, 2008, which vested on July 18, 2008. On
August 28, 2008, Mr. Foland received a dividend of
$67,500.
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(5)
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As of December 31, 2008, Mr. Green held options to
purchase 69,444 shares of VeriChip’s common stock. On
November 13, 2008, Mr. Green resigned from its board
of directors. Mr. Green was awarded 100,000 shares of
restricted stock on January 24, 2008, which vested on
July 18, 2008. On August 28, 2008, Mr. Green
received a dividend of $135,000.
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(6)
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As of December 31, 2008, Mr. Grillo held no options to
purchase shares of VeriChip’s common stock. Mr. Grillo
resigned from its board of directors effective July 18,
2008.
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(7)
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As of December 31, 2008, Mr. Krawitz held no options
to purchase shares of VeriChip’s common stock. From January
to October 2008, Mr. Krawitz received $70,000 in consulting
fees. On August 28, 2008, Mr. Krawitz received a
dividend of $75,000.
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(8)
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As of December 31, 2008, Mr. Penni held options to
purchase 25,000 shares of VeriChip’s common stock. On
January 11, 2008, Mr. Penni resigned from its board of
directors.
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(9)
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As of December 31, 2008, Ms. Weaver held options to
purchase 69,444 shares of VeriChip’s common stock. On
January 11, 2008, Ms. Weaver resigned from its board
of directors.
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VeriChip’s Board of Directors approved that each of its
non-employee directors would receive cash compensation for his
or her service as a director, effective upon it becoming a
public company in February 2007, as follows:
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a quarterly fee of $5,000; and
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an additional quarterly fee of $1,000 to the chairperson of
VeriChip’s audit committee.
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On February 21, 2008, VeriChip’s Board of Directors
increased non-employee director compensation from $5,000 to
$7,500 per quarter. A non-employee director serving as chairman
of a committee will receive an additional $2,500 per quarter.
VeriChip’s non-employee directors will also continue to be
reimbursed for out-of-pocket expenses incurred in attending
Board and board committee meetings. In 2009, directors may elect
to receive their fees in the form of restricted stock.
On December 31, 2008, VeriChip’s board of directors
approved a grant of 100,000 shares of restricted stock to
each of Messrs. Cobb, Edelstein, Foland and Krawitz when
VeriChip filed a
Form S-8
registering the Amended Plan. The restricted stock was granted
on February 20, 2009 and vests on the earlier to occur of
January 1, 2010 or a Change in Control (as defined in the
Amended Plan).
Information
about Corporate Governance, the Board of Directors and
Committees
Board
Composition
VeriChip’s Board of Directors currently consists of five
members: Scott R. Silverman, Jeffrey S. Cobb, Barry M.
Edelstein, Steven R. Foland and Michael E. Krawitz.
VeriChip’s Board of Directors determined that three of its
five directors are independent under the standards of the Nasdaq
Capital Market. In addition, both Daniel E. Penni, who served on
its Board of Directors from June 2004 until January 2008, and
Constance K. Weaver, who served on its Board of Directors from
February 2005 until January 2008, had been determined
independent under the standards of the Nasdaq Capital Market
during their respective terms of service.
144
Immediately following the effective time of the merger, the
board of directors of VeriChip will consist of five members with
four individuals designated by VeriChip and one individual
designated by Steel Vault. Because the VeriChip board of
directors currently consists of five individuals, it is
anticipated that one of the members of the then-current VeriChip
board of directors will resign from the VeriChip board of
directors
and/or
will
no longer continue to serve as a director.
Committees
and Meetings of the Board
The Board of Directors held 17 meetings during 2008 and acted by
unanimous written consent in lieu of a meeting 3 times. During
2008, all directors attended 75% or more of the meetings of the
Board of Directors and committees to which they were assigned.
VeriChip encourages each member of its Board of Directors to
attend VeriChip’s Annual Meeting of Stockholders. At
VeriChip’s 2008 Annual Meeting of Stockholders,
Scott R. Silverman was the only director present.
VeriChip’s Board of Directors has the authority to appoint
board committees to perform certain management and
administrative functions. VeriChip’s Board of Directors
currently has an audit committee, a compensation committee, and
a nominating and governance committee. The members of each
committee are appointed annually by the Board of Directors.
Audit
Committee
VeriChip’s audit committee currently consists of Steven R.
Foland, Jeffrey S. Cobb and Barry M. Edelstein. Mr. Foland
chairs the audit committee. VeriChip’s Board of Directors
has determined that each of the members of its audit committee
is “independent,” as defined under, and required by,
the federal securities laws and the rules of the SEC, including
Rule 10A-3(b)(i)
under the Securities and Exchange Act of 1934, as amended, or
the Exchange Act, as well as the listing standards of the Nasdaq
Capital Market. VeriChip’s Board of Directors has
determined that Mr. Foland qualifies as an “audit
committee financial expert” under applicable federal
securities laws and regulations, and has the “financial
sophistication” required under the listing standards of the
Nasdaq Capital Market. During 2008, its audit committee held 7
meetings and acted by unanimous written consent in lieu of a
meeting 1 time. A copy of the current audit committee charter is
available on VeriChip’s website at
www.verichipcorp.com
.
The audit committee assists VeriChip’s Board of Directors
in its oversight of:
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its accounting, financial reporting processes, audits and the
integrity of its financial statements;
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its independent auditor’s qualifications, independence and
performance;
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its compliance with legal and regulatory requirements;
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its internal accounting and financial controls; and
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its audited financial statements and reports, and the discussion
of the statements and reports with management, including any
significant adjustments, management judgments and estimates, new
accounting polices and disagreements with management.
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The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining VeriChip’s independent
auditors and for overseeing their work. All audit and non-audit
services to be provided to VeriChip by its independent auditors
must be approved in advance by its audit committee, other than
de minimis non-audit services that may instead be approved in
accordance with applicable rules of the SEC.
Compensation
Committee
VeriChip’s compensation committee currently consists of
Jeffrey S. Cobb, Steven R. Foland and Barry M. Edelstein.
Mr. Cobb chairs the compensation committee. VeriChip’s
Board of Directors has determined that each of the members of
VeriChip’s compensation committee is
“independent,” as defined under, and required by, the
rules of the Nasdaq Capital Market. During 2008, its
compensation committee held 13 meetings and
145
acted by unanimous written consent in lieu of a meeting 4 times.
A copy of the current compensation committee charter is
available on its website at
www.verichipcorp.com
.
VeriChip’s compensation committee assists its Board of
Directors in the discharge of its responsibilities relating to
compensation of its executive officers. Specific
responsibilities of its compensation committee include:
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reviewing and recommending to its Board approval of the
compensation, benefits, corporate goals and objectives of its
chief executive officer and its other executive officers;
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evaluating the performance of its executive officers; and
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administering its employee benefit plans and making
recommendations to its Board of Directors regarding these
matters.
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The compensation committee has the authority to delegate any of
its responsibilities to one or more subcommittees as the
committee may from time to time deem appropriate and may ask
members of management, employees, outside counsel, or others
whose advice and counsel are relevant to the issues then being
considered by the compensation committee to attend any meetings
and to provide such pertinent information as the compensation
committee may request. VeriChip’s chief executive officer
has historically played a significant role in the determination
of compensation, and attended 1 meeting of the compensation
committee during 2008. VeriChip expects that the compensation
committee will continue to solicit input from its chief
executive officer or president with respect to compensation
decisions affecting other members of its senior management.
Nominating
and Governance Committee
VeriChip’s nominating and governance committee currently
consists of Barry M. Edelstein and Jeffrey S. Cobb.
Mr. Edelstein chairs the nominating and governance
committee. VeriChip’s Board of Directors has determined
that each of the members of its nominating and governance
committee is “independent,” as defined under, and
required by, the rules of the Nasdaq Capital Market. During
2008, the nominating and governance committee held 3 meetings
and acted by unanimous written consent in lieu of a meeting 1
time. A copy of the current nominating and governance committee
charter is available on its website at
www.verichipcorp.com
.
The primary responsibilities of VeriChip’s nominating and
governance committee include:
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identifying, evaluating and recommending nominees to its Board
of Directors and its committees;
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evaluating the performance of its Board of Directors and of
individual directors;
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ensuring that VeriChip and its employees maintain the highest
standards of compliance with both external and internal rules,
regulations and good practices; and
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reviewing developments in corporate governance practices,
evaluating the adequacy of its corporate governance practices
and reporting and making recommendations to its Board of
Directors concerning corporate governance matters.
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Stockholder
Nominations for Directors
The nominating and governance committee considers possible
candidates for directors from many sources, including from
stockholders. If a stockholder wishes to recommend a nominee for
director, written notice should be sent to the Corporate
Secretary in accordance with the instructions set forth earlier
in this joint proxy statement/prospectus under “The Special
and Annual Meeting of VeriChip Stockholders —
Stockholder Proposals for 2010 Annual Meeting.” Each
written notice must set forth as to each person whom the
stockholder proposes to nominate: (A) the name, age,
business address and residence address of the person,
(B) the principal occupation or employment of the person,
(C) the class or series and number of shares of
VeriChip’s capital stock that are owned beneficially or of
record by the person and (D) any other information relating
to the person that would be required to be disclosed in a proxy
statement or other filings required to
146
be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Exchange Act of
1934 and the rules and regulations promulgated thereunder.
As to the stockholder giving the notice: (A) the name and
record address of such stockholder and the name and address of
the beneficial owner, if any, on whose behalf the nomination is
made, (B) the class or series and number of shares of
VeriChip’s capital stock that are owned beneficially and of
record by such stockholder and the beneficial owner, if any, on
whose behalf the nomination is made, (C) a description of
all arrangements or understandings relating to the nomination to
be made by such stockholder among such stockholder, the
beneficial owner, if any, on whose behalf the nomination is
made, each proposed nominee and any other person or persons
(including their names), (D) a representation that such
stockholder intends to appear in person or by proxy at the
Annual Meeting to nominate the persons named in its notice and
(E) any other information relating to such stockholder and
the beneficial owner, if any, on whose behalf the nomination is
made that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be
accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve as a director if elected.
Qualifications
of Candidates and Process for Identifying Candidates for
Election to the Board of Directors
The nominating and governance committee evaluates the
suitability of potential candidates nominated by stockholders in
the same manner as other candidates recommended to the
nominating and corporate governance committee, based on certain
criteria for selecting new directors. Such criteria includes the
possession of such knowledge, experience, skills, expertise and
diversity so as to enhance the Board of Directors’ ability
to manage and direct VeriChip’s affairs, including, when
applicable, to enhance the ability of the committees of the
Board of Directors to fulfill their duties and to satisfy and
independence requirements imposed by applicable law, regulation,
or stock exchange listing requirement. After the nominating and
corporate governance committee evaluates the suitability of
potential candidates, it recommends the director nominees for
election to the Board of Directors.
Compensation
Committee Interlocks and Insider Participation
VeriChip’s compensation committee currently consists of
Jeffrey S. Cobb, Steven R. Foland and Barry M. Edelstein. During
2008, Daniel E. Penni served on the compensation committee. No
member of the compensation committee simultaneously served both
as a member of the compensation committee and as an officer or
employee of VeriChip’s during 2008. None of its executive
officers serves as a member of the Board of Directors or the
compensation committee, or committee performing an equivalent
function, of any other entity that has one or more of its
executive officers serving as a member of its Board of Directors
or compensation committee.
Code of
Business Conduct and Ethics
VeriChip’s Board of Directors has approved and VeriChip has
adopted a Code of Business Conduct and Ethics, or the Code of
Conduct, which applies to all of its directors, officers and
employees. VeriChip’s Board of Directors has also approved
and VeriChip has adopted a Code of Ethics for Senior Financial
Officers, which applies to its chief executive officer and chief
financial officer. The Code of Conduct and the Code for Senior
Financial Officer are available at its website at
www.verichipcorp.com
or upon written request to VeriChip
Corporation, Attention: Secretary, 1690 South Congress Avenue,
Suite 200, Delray Beach, Florida 33445. The audit committee
of VeriChip’s Board of Directors is responsible for
overseeing the Code of Conduct and the Code for Senior Financial
Officers. VeriChip’s audit committee must approve any
waivers of the Code of Conduct for directors and executive
officers and any waivers of the Code for Senior Financial
Officers.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that its
officers and directors and persons who own more than 10% of
VeriChip’s common stock file reports of ownership and
changes in ownership with the SEC and
147
furnish VeriChip with copies of all such reports. VeriChip
believes, based on its stock transfer records and written
representations from certain reporting persons, that all reports
required under Section 16(a) were timely filed during 2008
except for one Form 4 filed by Austin W. Marxe and David M.
Greenhouse to report one disposition of shares of VeriChip
common stock.
AUDIT
COMMITTEE REPORT
The audit committee monitors VeriChip’s accounting and
financial reporting process to assist its Board of Directors.
Management has primary responsibility for its financial
statements, financial reporting processes and internal control
over financial reporting. The independent auditors are
responsible for performing an independent audit of its
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States) and evaluating the effectiveness of internal
controls and issuing a report thereon. The audit
committee’s responsibility is to select the independent
auditors and monitor and oversee VeriChip’s accounting and
financial reporting processes, including its internal controls
over financial reporting, and the audits of its financial
statements.
The audit committee regularly met and held discussions with
management and the independent auditors. In the discussions
related to VeriChip’s consolidated financial statements for
fiscal year 2008, management represented to the audit committee
that such consolidated financial statements were prepared in
accordance with U.S. generally accepted accounting
principles. The audit committee reviewed and discussed with
management and the independent auditors the audited consolidated
financial statements for fiscal year 2008.
In fulfilling its responsibilities, the audit committee
discussed with the independent auditors the matters that are
required to be discussed by Statement on Auditing Standards
No. 61, as amended, as adopted by the Public Company
Accounting Oversight Board (“PCAOB”) in
Rule 3200T. In addition, the audit committee received from
the independent auditors the written disclosures and letter
required by applicable requirements of the PCAOB regarding the
independent accountant’s communications with the audit
committee concerning independence, and has discussed with the
independent accountant the independent accountant’s
independence. In connection with this discussion, the audit
committee also considered whether the provision of services by
the independent auditors not related to the audit of
VeriChip’s financial statements for fiscal year 2008 is
compatible with maintaining the independent auditors’
independence. The audit committee’s policy is that all
services rendered by VeriChip’s independent auditor are
either specifically approved or are pre-approved and are
monitored both as to spending level and work content to maintain
the appropriate objectivity and independence of the independent
auditor. The audit committee’s policy provides that the
audit committee has the ultimate authority to approve all audit
engagement fees and terms and that the audit committee shall
review, evaluate and approve the annual engagement proposal of
the independent auditor.
Based upon the audit committee’s discussions with
management and the independent auditors and the audit
committee’s review of the representations of management and
the report and letter of the independent auditors provided to
the audit committee, the audit committee recommended to the
Board of Directors that the audited consolidated financial
statements for the year ended December 31, 2008 be included
in VeriChip’s Annual Report on
Form 10-K,
for filing with the SEC.
The Audit Committee
Steven R. Foland
Jeffrey S. Cobb
Barry M. Edelstein
The audit committee
report
above shall not be deemed
“soliciting material” or to be “filed” with
the SEC, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933 or
Securities Exchange Act of 1934, each as amended, except to the
extent that VeriChip specifically incorporate it by reference
into such filing.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Since the beginning of VeriChip’s fiscal year 2006, there
has not been, and there is not currently proposed any
transaction or series of similar transactions in which the
amount involved exceeded or will exceed the lesser of $120,000
or one percent of the average of VeriChip’s total assets at
year end for the last two completed fiscal years and in which
any related person, including any director, executive officer,
holder of more than 5% of VeriChip’s capital stock during
such period, or entities affiliated with them, had a material
interest, other than as described in the transactions set forth
below.
Common
Ownership
VeriChip shares a common ownership, or control group, with Steel
Vault. On August 1, 2008, Digital Angel sold
2,570,000 shares of Steel Vault’s common stock to Blue
Moon, in exchange for $400,000. The shares represented 49.9% of
Steel Vault’s outstanding common stock at that time and all
of the shares that Digital Angel owned. Mr. Silverman,
VeriChip’s chief executive officer and executive chairman
of the board and Steel Vault’s chairman of the board, is a
manager and controls a member of Blue Moon (i.e., R &
R). Mr. Caragol, VeriChip’s acting chief financial
officer and Steel Vault’s chief executive officer,
president, acting chief financial officer and director, is also
a manager and member of Blue Moon. On November 12, 2008,
R & R, a holding company owned and controlled by
Mr. Silverman, acquired 5,355,556 shares of VeriChip
common stock in exchange for $750,000. As of September 25,
2009, R & R and Mr. Silverman owned, on a
combined basis, approximately 49.4% of VeriChip’s
outstanding common stock. As of September 25, 2009,
Mr. Silverman beneficially owned, directly or indirectly,
approximately 53.7% of Steel Vault’s outstanding common
stock, including 2,570,000 shares that are directly owned
by Blue Moon.
Transaction
between Blue Moon and Steel Vault
On March 20, 2009, Steel Vault closed a debt financing
transaction with Blue Moon for $190,000 pursuant to a secured
convertible promissory note. The note is payable on demand after
March 20, 2011, accrues interest at five percent per year
compounded monthly and is secured by substantially all of
Steel Vault’s assets pursuant to a security agreement
between Steel Vault and Blue Moon, which security interest is
subordinate to the security interest granted to VeriChip (see
below). The note can be prepaid at any time without penalty.
Under the note, Blue Moon has the right, at any time, in its
sole discretion to convert the entire unpaid principal amount
and accrued and unpaid interest on the note into that number of
shares of Steel Vault’s common stock at a price of $0.44
per share. Steel Vault may convert the note into its common
stock anytime after a change in control of Steel Vault or if the
average of the high and low trading prices of Steel Vault’s
common stock as quoted on the OTC Bulletin Board is greater
than 120% of the conversion price ($0.44 per share) over 20
consecutive trading days. However, as a condition of
VeriChip’s obligation to consummate the transactions
contemplated by the merger agreement, Steel Vault must cause the
note to be amended on terms reasonably acceptable to VeriChip to
eliminate the convertible feature of such note.
The financing transaction also includes a warrant, which carries
piggy back registration rights, given to Blue Moon to purchase
108,000 common shares of Steel Vault at a price of $0.44 per
share.
Director
and Officer Roles and Relationships with Steel Vault and Its
Other Affiliates
Several of VeriChip’s current and former directors and
executive officers have served and, in certain cases, continue
to serve as directors and officers of Steel Vault. By virtue of
the relationships described below, certain of VeriChip’s
current and former directors and executive officers may face
situations in which there are actual or apparent conflicts of
interest that could interfere, or appear to interfere, with
their ability to act in a manner that is in VeriChip’s best
business interests.
At the board level:
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Two of VeriChip’s five directors — Scott R.
Silverman and Michael E. Krawitz — currently serve on
the five-member board of directors of Steel Vault.
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Mr. Silverman serves as the chief executive officer and
executive chairman of VeriChip’s board of directors and as
the chairman of the board of directors of Steel Vault.
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Mr. Silverman is a manager of Blue Moon, which company
holds 2,570,000 shares of Steel Vault common stock.
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Mr. Silverman owns and controls R & R, which
holds 5,355,556 shares of VeriChip common stock and owns a
50% interest in Blue Moon.
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Jeffrey S. Cobb and Barry M. Edelstein, both of whom are members
of VeriChip’s board of directors, each own a 16.67%
interest in Blue Moon.
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Mr. Caragol, the acting chief financial officer of
VeriChip, and the chief executive officer, president and acting
chief financial officer of Steel Vault, owns a 16.67% interest
in Blue Moon.
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Mr. Krawitz, a member of VeriChip’s board, serves as
the chair of the audit committee and as a member of the
compensation committee and the nominating and governance
committee of Steel Vault.
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Mr. Cobb, a member of VeriChip’s board of directors,
served as a member of Steel Vault’s board of directors
until his resignation from the Steel Vault board of directors on
July 22, 2008.
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Kevin H. McLaughlin, a member of Steel Vault’s board of
directors, resigned as VeriChip’s chief executive officer
and as a member of VeriChip’s board of directors effective
December 2, 2006.
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At the officer level:
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Mr. Silverman, who served as VeriChip’s acting
president from March 2007 through May 4, 2007, chief
executive officer from December 5, 2006 through
July 18, 2008 and previously from April 2003 through June
2004, currently serves as the chief executive officer and
executive chairman of VeriChip and the chairman of Steel Vault.
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Mr. Caragol has served as acting chief financial officer of
VeriChip since January 1, 2009, and previously served as
president of VeriChip since May 2007, chief financial officer
since August 2006, treasurer since December 2006, and secretary
since March 2007. Mr. Caragol has served as
Steel Vault’s chief executive officer, president and a
member of its board of directors since December 3, 2008 and
as acting chief financial officer since October 24, 2008.
Mr. Caragol served as acting chief executive officer of
Steel Vault from October 24, 2008 until December 3,
2008, when he was appointed chief executive officer.
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In their various capacities with VeriChip’s former parent
company, Digital Angel, which was also formerly the parent
company of Steel Vault, Messrs. Silverman, Edelstein,
McLaughlin and Krawitz were granted stock option awards to
purchase shares of common stock of Steel Vault.
Messrs. Cobb and Caragol also hold stock option awards to
purchase shares of common stock of Steel Vault. In their various
capacities with Digital Angel, Messrs. Silverman,
McLaughlin and Krawitz were granted stock options to purchase
shares of common stock of VeriChip.
Transactions
with Steel Vault
Related
Party Financing
On June 4, 2009, VeriChip closed a debt financing
transaction with Steel Vault for $500,000 pursuant to a secured
convertible promissory note. The two-year note is collectible on
demand on or after June 4, 2010, accrues interest at a rate
of twelve percent and is secured by substantially all of Steel
Vault’s assets, including the assets of NCRC and the
security interest held by VeriChip on the assets is senior to
any other security interest on the assets pursuant to a
subordination and intercreditor agreement between VeriChip and
Blue Moon. The note can be prepaid at any time without penalty
and matures on June 4, 2011. The unpaid principal and
accrued and unpaid interest under the note can be converted at
any time into common stock of Steel Vault at a price of $0.30
per share. The principal is convertible into
1,666,667 shares of Steel Vault common stock.
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The financing transaction included a common stock purchase
warrant sold to VeriChip to purchase 333,334 common shares of
Steel Vault at a price of $0.30 per share, which is referred to
as the VeriChip Warrant. The VeriChip Warrant is currently
exercisable and is void after June 4, 2014. The note and
VeriChip Warrant were issued to VeriChip pursuant to a
convertible note and warrant subscription agreement, dated
June 4, 2009, between VeriChip and Steel Vault, which
provides that Steel Vault will file a registration statement for
the public resale of the shares underlying the note and VeriChip
Warrant upon notice that VeriChip elects to convert all or part
of the note into common stock of Steel Vault.
The financing transaction also included a guaranty of collection
given by Mr. Caragol for the benefit of Steel Vault, for
which Mr. Caragol received a common stock purchase warrant
from Steel Vault to purchase 500,000 common shares of Steel
Vault at a price of $0.30 per share.
Upon consummation of the merger, VeriChip shall forgive the
principal and interest due under the note and the VeriChip
Warrant will be cancelled.
Sublease
On October 8, 2008, Steel Vault entered into a sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida, consisting of approximately
7,911 feet of office space, which space VeriChip shares
with Steel Vault. The rent for the entire twenty-one-month term
of the sublease is $158,000, which Steel Vault paid in one lump
sum upon execution of the sublease. VeriChip reimbursed Steel
Vault for one-half of the sublease payment, representing
VeriChip’s share of the total cost of the sublease. In
addition, in order to account for certain shared services and
resources, VeriChip and Steel Vault operate under a shared
services agreement, in connection with which Steel Vault
currently pays VeriChip $6,500 a month. During the six and three
months ended June 30, 2009, VeriChip recorded $45,000 and
$21,000, respectively, for shared services fees from Steel
Vault. VeriChip did not record any payments for shared services
fees from Steel Vault for the six and three months ended
June 30, 2008.
Director
and Officer Roles and Relationships with Digital Angel and Its
Other Affiliates
Several of VeriChip’s current and former directors and
executive officers have served as directors and officers of
Digital Angel, which held 45.7% of VeriChip’s stock at the
time it sold such stock to R & R Consulting Partners,
LLC (an entity owned and controlled by Mr. Silverman) on
November 12, 2008, and its other affiliates. By virtue of
the relationships described below, certain of VeriChip’s
current and former directors and executive officers may face
situations in which there are actual or apparent conflicts of
interest that could interfere, or appear to interfere, with
their ability to act in a manner that is in VeriChip’s best
business interests.
At the board level:
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VeriChip’s chief executive officer and executive chairman,
Scott R. Silverman, served on the board of directors of Digital
Angel from March 2002 until July 2007, and, from March 2003
until the end of his term of service, in the capacity of
chairman.
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Mr. Silverman served on the board of directors of Destron
Fearing from July 2003 until December 2007 and, from February
2004 until the end of his term of service, in the capacity of
chairman.
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Mr. Silverman, VeriChip’s chief executive officer and
executive chairman, serves as chairman of the board of directors
of Steel Vault, in which Digital Angel held a 49.9% ownership
interest until August 1, 2008.
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Mr. Edelstein, one of VeriChip’s directors, served as
a member of the Digital Angel board of directors from December
2007 until January 2008. He also served as interim chief
executive officer and president of Destron Fearing from August
2007 through December 2007, as well as a member of the board of
directors of Destron Fearing from June 2005 until January 2008.
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Mr. Cobb, who serves as a member of VeriChip’s
compensation, audit, and nominating and governance committees,
served as a member of the compensation, audit, and nominating
committees of Steel Vault until his resignation from the Steel
Vault board of directors in July 2008.
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Mr. Krawitz, one of VeriChip’s directors, served as
the chief executive officer and president of Digital Angel from
September 2006 to December 2007. Prior to that, during his time
at Digital Angel, he served as assistant vice president and
general counsel beginning in April 1999, and was appointed vice
president and assistant secretary in December 1999, senior vice
president in December 2000, secretary in March 2003, executive
vice president in April 2003 and chief privacy officer in
November 2004. In addition, Mr. Krawitz provided legal
services to VeriChip on a consulting basis in 2008 and received
approximately $70,000 in fees.
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Joseph J. Grillo, who served as chairman of VeriChip’s
board of directors from July 2008 until November 2008, has
served as chief executive officer, president and chairman of the
board of directors of Digital Angel since January 2008.
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Daniel E. Penni, who served on VeriChip’s board of
directors from June 2004 until January 2008, has served on
Digital Angel’s board of directors since March 1995.
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Constance K. Weaver, who served on VeriChip’s board of
directors from February 2005 until January 2008, has served on
Digital Angel’s board of directors since July 1998.
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At the officer level:
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Mr. Silverman — who served as VeriChip’s
acting president from March 2007 through May 2007 and chief
executive officer from December 2006 through July 2008, and
previously from April 2003 through June 2004, and currently
serves as VeriChip’s chief executive officer and executive
chairman — served as president of Digital Angel from
March 2002 to March 2003, acting president of Digital Angel from
April 2005 to December 2006, and chief executive officer of
Digital Angel from March 2003 to December 2006.
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In their various capacities with Digital Angel
Messrs. Silverman, Edelstein, McLaughlin and Krawitz were
granted stock option awards to purchase shares of common stock
of Steel Vault. In their various capacities with Digital Angel,
Messrs. Silverman, McLaughlin and Krawitz were granted
stock options to purchase shares of common stock of VeriChip.
Transactions
with Digital Angel
Transition
Services Agreement
During the years ended December 31, 2005, 2004 and 2003,
Digital Angel provided certain general and administrative
services to VeriChip, including accounting, finance, payroll and
legal services, telephone, rent and other miscellaneous items.
The costs of these services were determined based on
VeriChip’s use of such services. On December 27, 2005,
VeriChip entered into a transition services agreement with
Digital Angel, under which Digital Angel agreed to continue to
provide VeriChip with certain administrative transition
services, including payroll, legal, finance, accounting,
information technology, tax services, and services related to
VeriChip’s initial public offering. As compensation for
these services, VeriChip agreed to pay Digital Angel
approximately $62,000 per month for fixed costs allocable to
these services, among other reimbursable expenses. On
December 21, 2006, VeriChip and Digital Angel entered into
an amended and restated transition services agreement, which
became effective on February 14, 2007, the date of
completion of VeriChip’s initial public offering.
The services provided by Digital Angel under the amended and
restated transition services agreement were the same as those
provided under the initial agreement. In connection with the
December 21, 2006 amendment, the estimated monthly charge
for the fixed costs allocable to these services was increased to
approximately $72,000 per month, primarily as a result of an
increased allocation for office space. Effective April 1,
2007, the estimated monthly charge for the fixed costs allocable
to these services was reduced to
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$40,000 per month, primarily as a result of a reduction in
allocable accounting fees and accounting and legal services.
Effective January 1, 2008, the monthly cost was further
reduced to $10,000 per month.
The terms of the transition services agreement and the amendment
and restatement of the agreement were negotiated between certain
of Digital Angel’s executive officers and certain of
VeriChip’s executive officers. These executive officers
were independent of one another, and the terms of the agreement
were based upon historical amounts incurred by Digital Angel for
payment of such services to third parties. However, these costs
may not necessarily be indicative of the costs which would be
incurred by VeriChip as an independent stand alone entity.
The cost of these services to VeriChip was $0.5 million,
$0.8 million and $0.5 million in the years ended
December 31, 2007, 2006 and 2005, respectively. The cost of
these services to VeriChip during 2008 was $0.1 million.
On August 20, 2008, Digital Angel and VeriChip agreed to
terminate the amended and restated transition services
agreement, with such termination being effective as of
September 30, 2008.
Loan
Agreement with Digital Angel
Until VeriChip’s initial public offering, VeriChip financed
a significant portion of its operations and investing activities
primarily through funds that Digital Angel provided. On
December 27, 2005, VeriChip and Digital Angel entered into
a loan agreement to memorialize the terms of existing advances
to VeriChip and provide the terms under which Digital Angel
would lend additional funds to VeriChip. This loan is referred
to as the Digital Angel Loan. Through October 5, 2006, the
Digital Angel Loan to VeriChip bore interest at the prevailing
prime rate of interest as published by The Wall Street Journal.
On October 6, 2006, VeriChip entered into an amendment to
the Digital Angel Loan documents, which increased the principal
amount available thereunder to $13.0 million, and VeriChip
borrowed an additional $2.0 million under the agreement to
make the second purchase price payment with respect to
VeriChip’s acquisition of a wholly-owned subsidiary. In
connection with that amendment, the interest rate was also
changed to a fixed rate of 12% per annum. That amendment further
provided that the Digital Angel Loan matured on July 1,
2008, but could be extended at Digital Angel’s sole option
through December 27, 2010.
On January 19, 2007, February 8, 2007,
February 13, 2007 and February 29, 2008, VeriChip
entered into further amendments to the Digital Angel Loan
documents, which increased the maximum principal amount of
indebtedness that VeriChip could incur to $14.5 million. On
February 9, 2007, the effective date of VeriChip’s
initial public offering, the Digital Angel Loan ceased to be a
revolving line of credit, and, in connection therewith, VeriChip
lost its ability to incur additional indebtedness under the
Digital Angel Loan documents. The interest continued to accrue
on the outstanding indebtedness at a rate of 12% per annum.
Under the terms of the Digital Angel Loan documents, as amended,
VeriChip was required to repay Digital Angel $3.5 million
of principal and accrued interest upon the consummation of
VeriChip’s initial offering. Accordingly, VeriChip paid
Digital Angel $3.5 million on February 14, 2007.
VeriChip was not obligated to repay an additional amount of the
indebtedness until January 1, 2008. Effective with the
payment of the $3.5 million, all interest which had accrued
on the Digital Angel Loan as of the last day of each month,
commencing with the month in which such payment was made, was be
added to the principal amount. A final balloon payment equal to
the outstanding principal amount then due under the loan, plus
all accrued and unpaid interest, was to be due on
February 1, 2010.
On December 20, 2007, VeriChip entered into a letter
agreement with Digital Angel, or the December 2007 Letter
Agreement, which was amended on February 29, 2008, whereby
VeriChip was required to pay $0.5 million to Digital Angel
by December 21, 2007. In addition, VeriChip could prepay
the outstanding principal amount before October 30, 2008 by
providing Digital Angel with $10 million, plus (i) any
accrued and unpaid interest between October 1, 2007 and the
date of such prepayment, less (ii) the $0.5 million
payment and any other principal payments made to reduce the
outstanding principal amount between the date of the December
2007 Letter Agreement and the date of such prepayment. VeriChip
was also required to register for resale all shares of
VeriChip’s common stock that Digital Angel owned with the
SEC and all applicable states within 120 days following the
prepayment of outstanding principal amount. If prepayment of
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the outstanding principal amount was not made by 5:00 p.m.
on October 30, 2008, the December 2007 Letter Agreement
would expire.
On July 18, 2008, VeriChip used a portion of the proceeds
of the Xmark Transaction to satisfy all of VeriChip’s
outstanding obligations under the Digital Angel Loan.
Valens
Financing
On February 29, 2008, VeriChip obtained financing in the
form of a $8.0 million secured term note, or the Valens
Note, with Valens Offshore SPV II, Corp., or the Lender. The
Lender is an affiliate of Kallina Corporation and Laurus Master
Fund, Ltd., which are Digital Angel’s lenders. The Valens
Note accrued interest at a rate of 12% per annum and had a
maturity date of March 31, 2009. The terms of the Valens
Note allowed for optional redemption by paying 100% of the
principal amount, plus any amounts then owing under the Valens
Note, plus $120,000, if such amounts were paid prior to the
six-month anniversary of February 29, 2008, or $240,000, if
such amounts were paid on or after the six-month anniversary of
February 29, 2008. Pursuant to the corresponding securities
purchase agreement, VeriChip issued to the Lender
120,000 shares of VeriChip’s common stock.
On July 18, 2008, VeriChip used a portion of the proceeds
of the Xmark Transaction to repay all of VeriChip’s
outstanding obligations under the Valens Note.
February
2008 Letter Agreement with Digital Angel
VeriChip used part of the proceeds of the financing with the
Lender to prepay $5.3 million of debt owed to Digital Angel
pursuant to the Digital Angel Loan. In connection with the
financing transaction with the Lender, VeriChip entered into a
letter agreement with Digital Angel, dated February 29,
2008, under which VeriChip agreed, among other things,
(i) to prepay the $5.3 million to Digital Angel,
(ii) to amend the Digital Angel Loan documents to reduce
the grace period from thirty days to five business days,
(iii) to include a cross-default provision, under which an
event of default under the Valens Note, if not cured within the
greater of the applicable cure period or ten days after the
occurrence thereof, would be an event of default under the
Digital Angel Loan, and (iv) to amend the December 2007
Letter Agreement. As a result of the $5.3 million payment,
VeriChip was not required to make any further debt service
payments to Digital Angel until September 1, 2009.
As consideration for providing financing to VeriChip, which in
turn enabled VeriChip to make the $5.3 million prepayment
to Digital Angel, Digital Angel issued to the Lender
230,000 shares of Digital Angel common stock. On
July 18, 2008, VeriChip used a portion of the proceeds of
the Xmark Transaction to repay all of VeriChip’s
outstanding obligations under the Digital Angel Loan.
Tax
Allocation Agreement with Digital Angel
From VeriChip’s inception and through February 14,
2007, the date of completion of VeriChip’s initial public
offering, VeriChip was included in Digital Angel’s federal
consolidated income tax group, and VeriChip’s federal
income tax liability, if any, was included in Digital
Angel’s consolidated federal income tax liability.
Effective February 14, 2007, VeriChip is no longer part of
Digital Angel’s consolidated income tax group under
applicable provisions of the Internal Revenue Code of 1986, as
amended, and regulations thereunder, and will file separate tax
returns.
VeriChip and Digital Angel entered into a tax allocation
agreement providing for each of the parties’ obligations
concerning various tax liabilities. Under the agreement,
effective February 14, 2007, VeriChip is generally liable
for, and will indemnify Digital Angel if necessary, with respect
to federal income taxes and any state taxes measured by net
income, and any interest or penalties thereon or additions to
such tax, that are either (i) imposed on or incurred by
VeriChip for any taxable period ending prior to
February 14, 2007 or (ii) equitably apportioned to
VeriChip by Digital Angel for all tax periods beginning before
and ending on or after February 14, 2007. VeriChip is also
liable for any other taxes (and any interest or penalties
thereon or additions to such taxes) attributable to VeriChip or
VeriChip’s subsidiaries for any period. Likewise,
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Digital Angel will remain responsible for all prior period
taxes attributable to the other members of the consolidated
group and will indemnify VeriChip with respect to such
liabilities.
Each member of a consolidated group for U.S. federal income
tax purposes is jointly and severally liable for the federal
income tax liability of each other member of the consolidated
group. Accordingly, although the tax allocation agreement has
allocated tax liabilities between Digital Angel and VeriChip,
for any period in which VeriChip was included in Digital
Angel’s consolidated group, VeriChip could be liable in the
event that any federal tax liability was incurred, but not
discharged, by any other member of the group. Digital Angel will
indemnify VeriChip for such liability, to the extent that such
liability is not attributable to VeriChip, as described above.
Certain states may require that VeriChip be included in a
unitary or other combined tax return with Digital Angel after
February 14, 2007. If that occurs, Digital Angel will file
such returns, and Digital Angel’s share of the actual tax
liability will be allocated to VeriChip in a manner consistent
with the methodology historically followed by Digital Angel and
VeriChip.
The tax allocation agreement was terminated on November 12,
2008, in connection with VeriChip’s purchase of certain
intellectual property from Digital Angel. For additional
information regarding this purchase, see “Asset Purchase
Agreement with Digital Angel” below.
Supply
and Development Agreement
VeriChip and Digital Angel executed a supply and development
agreement dated March 4, 2002, as amended and restated on
December 27, 2005 and as amended on May 9, 2007, or
the supply and development agreement. Under this agreement,
Digital Angel is VeriChip’s sole supplier of
human-implantable microchips. VeriChip’s purchases of
product under the supply and development agreement were
approximately $0.1 million, $0.4 million and
$0.7 million for the years ended December 31, 2007,
2006 and 2005, respectively. The amount due to Digital Angel
from VeriChip as of December 31, 2007 under the supply and
development agreement was nil.
Under the terms of the May 9, 2007 amendment, the term of
the supply and development agreement was extended from March
2013 to March 2014. Also, under the May 9, 2007 amendment,
the annual minimum purchase requirements were each extended one
year, and, accordingly, there was no minimum purchase
requirement in 2007. Rather, the approximately $0.9 million
(net of 2006 purchases) originally required to be purchased in
2007 were required to be purchased in 2008. VeriChip’s
purchases of product under the supply and development agreement
were approximately nil, $0.4 million, $0.7 million for
years ended December 31, 2007, 2006 and 2005 respectively.
Under the supply and development agreement, as long as VeriChip
met its minimum purchase requirements, the agreement would
automatically renew annually under its terms until the
expiration of the last of the patents covering any of the
supplied products. The supply and development agreement also
provided that it could be terminated prior to its stated term
under specified events, including as a result of a bankruptcy
event of either party or an uncured default. In addition, if
VeriChip did not take delivery and pay for a minimum number of
microchips as specified in the supply and development agreement,
Digital Angel could sell the microchips to third parties.
Further, the supply and development agreement provided that
Digital Angel shall, at VeriChip’s option, furnish and
operate a computer database to provide data collection, storage
and related services for VeriChip’s customers for a fee, as
provided. The terms of the predecessor supply and development
agreement and the amended and restated supply and development
agreement were negotiated by the executive officers of the
respective companies and approved by the independent members of
each company’s board of directors.
Digital Angel relies solely on a production agreement with RME,
a subsidiary of Raytheon Company, for the manufacture of its
human-implantable microchip products. The subsidiary utilizes
Digital Angel’s equipment in the production of the
microchips. On April 28, 2006, Digital Angel entered into a
new production agreement with RME related to the manufacture and
distribution of glass-encapsulated syringe-implantable
transponders, including the human-implantable microchip products
sold by VeriChip. This new agreement expires on June 30,
2010. The technology underlying these systems is covered, in
part, by U.S. Patent No. 5,211,129,
“Syringe-Implantable Identification Transponders.” In
1994, Destron/IDI, Inc., a
155
predecessor company to Digital Angel, granted a co-exclusive
license under this patent, other than for certain specified
fields of use related to Digital Angel’s Animal
Applications segment, which were retained by the predecessor
company, to Hughes Aircraft Company, or Hughes, and its then
wholly-owned subsidiary, Hughes Identification Devices, Inc., or
HID. The specified fields of use retained by the predecessor
company do not include human identification or security
applications. The rights licensed to Hughes and HID were freely
assignable, and VeriChip does not know which party or parties
currently have these rights or whether these rights have been
assigned, conveyed or transferred to any third party.
In October 2007, Digital Angel and the successor to HID executed
a cross-license, which includes Digital Angel obtaining a
royalty-free, non-exclusive license to HID’s rights to the
implantable human applications of the ‘129 patent, to which
it purports certain ownership rights. Digital Angel has, in
turn, sublicensed those rights to VeriChip.
The supply and development agreement was terminated on
November 12, 2008, in connection with VeriChip’s
purchase of certain intellectual property from Digital Angel,
except that product warranties continue to apply to products
sold to VeriChip under that agreement subject to certain
limitations, and the indemnification provisions survive through
March 4, 2013 for claims associated with the products
purchased under that agreement. For additional information
regarding this purchase, see “Asset Purchase Agreement with
Digital Angel” below.
May 2008
Letter Agreement with Digital Angel
In connection with the Xmark Transaction, on May 15, 2008,
VeriChip and Digital Angel entered into a letter agreement.
Under this letter agreement, the stock purchase agreement
underlying the Xmark Transaction and the transactions
contemplated thereby do not constitute an event of default under
the Digital Angel Loan.
This letter agreement allowed Digital Angel to designate, from
and after the date of the closing of the Xmark Transaction or
upon a breach of the letter agreement, up to three
(3) members of VeriChip’s board of directors, all of
whom had to be independent, with the exception of Joseph J.
Grillo, Digital Angel’s president and chief executive
officer. Accordingly, upon the closing of the Xmark Transaction,
Digital Angel designated Mr. Grillo to join VeriChip’s
board of directors as the chairman. The letter agreement also
provided that VeriChip pay to Digital Angel, upon the closing of
the Xmark Transaction, (i) $250,000 as consideration for
the execution of the guarantee between Digital Angel and The
Stanley Works, and (ii) up to $250,000 for Digital
Angel’s actual expenses, incurred or reasonably expected to
be incurred by Digital Angel in connection with the Xmark
Transaction. These amounts were expensed and included in
determining the gain on sale of Xmark for the year ended
December 31, 2008.
In addition, the letter agreement provided, among other things,
that (i) VeriChip would limit all bonus and other special
payments to those scheduled as of May 15, 2008, with any
changes or new payments to be pre-approved by Digital Angel,
(ii) Mr. Silverman would enter into a separation
agreement with VeriChip, and (iii) Digital Angel would have
access to VeriChip’s financial information.
On July 18, 2008, VeriChip a used a portion of the proceeds
of the Xmark Transaction to pay $5.3 million in order to
satisfy all outstanding monetary obligations under this letter
agreement. On November 12, 2008, this letter agreement was
terminated in connection with VeriChip’s purchase of
certain intellectual property from Digital Angel, except for
certain provisions relating to indemnification in connection
with the stock purchase agreement with The Stanley Works. For
additional information regarding this purchase, see “Asset
Purchase Agreement with Digital Angel” below.
Asset
Purchase Agreement with Digital Angel
On November 12, 2008, VeriChip entered into an asset
purchase agreement with Digital Angel and Destron Fearing, a
wholly-owned subsidiary of Digital Angel. The terms of the asset
purchase agreement included the sale to VeriChip of patents
related to an embedded bio-sensor system for use in humans, and
the assignment of any rights of Digital Angel and Destron
Fearing under a development agreement associated with the
development of an implantable glucose sensing microchip.
VeriChip also received covenants from Digital
156
Angel and Destron Fearing that will permit the use of
intellectual property of Digital Angel and Destron Fearing
related to VeriChip’s VeriMed Health Link business without
payment of ongoing royalties, as well as inventory and a limited
period of technology support by Digital Angel and Destron
Fearing. VeriChip paid Digital Angel and Destron Fearing
$500,000 at the closing of the asset purchase agreement.
Also, pursuant to the asset purchase agreement, on
November 12, 2008, Mr. Grillo resigned as a director
of VeriChip.
Purchase
Order with Digital Angel
On November 14, 2008, VeriChip purchased from Digital Angel
the remaining inventory owned by Digital Angel related to
VeriChip’s VeriMed Health Link business for approximately
$162,000.
Trademark
Assignment Agreement
Historically, certain of the trademarks and service marks used
in VeriChip’s business were licensed from Digital Angel on
a royalty-free basis, pursuant to a trademark license agreement
between VeriChip and Digital Angel, dated August 5, 2005.
On December 21, 2006, VeriChip entered into a trademark
assignment agreement with Digital Angel pursuant to which
Digital Angel assigned VeriChip all of its rights, title and
interest to these trademarks and service marks, both registered
and unregistered, and applications for trademark and service
mark registrations filed with the United States Trademark Office
and foreign trademark applications. In consideration for such
assignment, VeriChip paid Digital Angel $10. In addition, under
the trademark assignment agreement, Digital Angel agreed to make
no further use of these marks or any mark confusingly similar
thereto, anywhere in the world, except as may be expressly
authorized by VeriChip in writing, and further agreed to not
challenge VeriChip’s use or ownership, or the validity, of
the marks.
Review,
Approval or Ratification of Transactions with Related
Parties
VeriChip’s audit committee’s charter requires review
and discussion of any transactions or courses of dealing with
parties related to VeriChip that are significant in size or
involve terms or other aspects that differ from those that would
be negotiated with independent parties. VeriChip’s
nominating and governance committee’s charter requires
review of any proposed related party transactions, conflicts of
interest and any other transactions for which independent review
is necessary or desirable to achieve the highest standards of
corporate governance. It is also VeriChip’s unwritten
policy, which policy is not otherwise evidenced, for any related
party transaction that involves more than a de minimis
obligation, expense or payment, to obtain approval by
VeriChip’s board of directors prior to VeriChip entering
into any such transaction. In conformity with VeriChip’s
various policies on related party transactions, each of the
above transactions discussed in this “Certain Relationships
and Related Transactions” section has been reviewed and
approved by VeriChip’s board of directors.
Director
Independence
Subject to certain exceptions, under the listing standards of
the Nasdaq Capital Market, within one year of the effectiveness
of a registration statement filed with the SEC in connection
with a public offering of securities, a listed company’s
board of directors must consist of a majority of independent
directors. VeriChip’s board of directors has determined
that each of VeriChip’s current directors besides Scott R.
Silverman and Michael E. Krawitz, or three of five directors, is
independent under such standards. For transactions,
relationships or arrangements that were considered by the
VeriChip board of directors in determining whether each director
was independent, please see “Certain Relationships and
Related Transactions — Director and Officer Roles and
Relationships with Steel Vault and Its Other Affiliates”
and “Certain Relationships and Related
Transactions — Director and Officer Roles and
Relationships with Digital Angel and Its Other Affiliates”
above.
157
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF VERICHIP
The following table sets forth certain information known to
VeriChip regarding beneficial ownership of shares of
VeriChip’s common stock as of September 25, 2009 by:
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•
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each of its directors;
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•
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each of its named executive officers;
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•
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all of its executive officers and directors as a group; and
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•
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each person, or group of affiliated persons, known to VeriChip
to be the beneficial owner of more than 5% of its outstanding
shares of common stock.
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Beneficial ownership is determined in accordance with the rules
and regulations of the SEC and includes voting and investment
power with respect to the securities. In computing the number of
shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently
exercisable or exercisable within 60 days of
September 25, 2009 are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing
the percentage ownership of any other person. To VeriChip’s
knowledge, except as indicated in the footnotes to this table
and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power
with respect to all shares of its common stock shown opposite
such person’s name. The percentage of beneficial ownership
is based on 13,810,628 shares of its common stock
outstanding as of September 25, 2009. Unless otherwise
noted below, the address of the persons and entities listed in
the table is
c/o VeriChip
Corporation, 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445.
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Number of Shares
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Percent of
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Beneficially
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Outstanding
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Name and Address of Beneficial Owner
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Owned (#)
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Shares (%)
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Five percent stockholders:
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Scott R.
Silverman
(1)
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6,823,519
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49.4
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%
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R & R Consulting Partners,
LLC
(1)
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5,355,556
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38.8
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%
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Named Executive Officers and Directors:
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Scott R.
Silverman
(1)
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6,823,519
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49.4
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%
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William J.
Caragol
(2)
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571,519
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4.1
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%
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Jeffrey S.
Cobb
(3)
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225,000
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1.6
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%
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Barry M.
Edelstein
(4)
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250,000
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1.8
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%
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Steven R.
Foland
(5)
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180,600
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1.3
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%
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Daniel A.
Gunther
(6)
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55,556
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*%
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Michael E.
Krawitz
(7)
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100,000
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*%
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Executive Officers and Directors as a group
(6 persons)
(8)
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8,150,638
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58.6
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%
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*
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Less than 1%
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(1)
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5,355,556 shares of VeriChip’s common stock are owned
by R & R Consulting Partners, LLC. Mr. Silverman
is the managing member of R & R Consulting Partners,
LLC. The parties share voting and investment control over the
5,355,556 shares of its common stock. The number reflected
in the table also includes 1,467,963 shares of its common
stock, which Mr. Silverman holds in his personal capacity.
Mr. Silverman lacks investment power over
601,852 shares, which are restricted and vest on
January 1, 2010.
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(2)
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Includes 106,704 shares of VeriChip’s common stock and
50,000 shares of its common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of September 25, 2009. Also
includes 414,815 shares of restricted common stock, which
vest on January 1, 2010, over which Mr. Caragol lacks
investment power.
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(3)
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Includes 100,000 shares of VeriChip’s common stock and
25,000 shares of its common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of September 25,
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158
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2009. Also includes 100,000 shares of restricted common
stock, which vest on January 1, 2010, over which
Mr. Cobb lacks investment power.
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(4)
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Includes 100,000 shares of VeriChip’s common stock and
25,000 shares of its common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of September 25, 2009. Also
includes 125,000 shares of restricted common stock, which
vest on January 1, 2010, over which Mr. Edelstein
lacks investment power.
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(5)
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Includes 55,600 shares of VeriChip’s common stock and
125,000 shares of restricted common stock that vest on
January 1, 2010, over which Mr. Foland lacks
investment power.
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(6)
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Includes 55,556 shares of VeriChip’s common stock
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009.
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(7)
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Consists of shares of restricted stock that vest on
January 1, 2010, over which Mr. Krawitz lacks
investment power.
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(8)
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Includes shares of VeriChip’s common stock beneficially
owned by current executive officers and directors and shares
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009, in each case as set forth in the
footnotes to this table.
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All stock option awards and restricted stock awards that had
previously been granted under VeriChip’s 2002 Flexible
Stock Plan, VeriChip 2005 Flexible Stock Plan, and VeriChip 2007
Stock Incentive Plan vested upon the closing of the sale of
VeriChip’s wholly-owned subsidiary, Xmark. Since no stock
option awards or restricted stock awards have been granted to
its named executive officers or directors since that closing,
all such stock option awards are currently exercisable, and all
restrictions applicable to such restricted stock awards have
lapsed.
159
DESCRIPTION
OF STEEL VAULT’S BUSINESS
Steel Vault is Delaware corporation incorporated in September
1987. Prior to December 31, 2007, it was a full service
provider of Information Technology (IT) solutions. Steel Vault
delivered complete lifecycle IT solutions for its customers.
Effective December 31, 2007, as approved by its
stockholders at a special meeting held December 27, 2007,
Steel Vault closed the transactions contemplated by the Asset
Purchase and Sale Agreement, dated November 13, 2007, or
Sale Agreement, between Steel Vault and Corporate Technologies
LLC pursuant to which Steel Vault sold all of its operating
assets (the business known as InfoTech USA, Inc. or InfoTech).
Under the terms of the Sale Agreement, Steel Vault ceased its
operations and, pursuant to an interim services agreement and an
administrative services agreement entered into in connection
with the Sale Agreement, Corporate Technologies agreed to assist
Steel Vault in the collection of the outstanding accounts
receivable and in the sale of the remaining inventory. Steel
Vault retained its cash at the time of the closing of the Sale
Agreement, the cash received from the collection of accounts
receivable and the sale of inventory, and the proceeds from the
sale and planned to utilize these funds to seek to acquire an
operating business unrelated to the business sold to Corporate
Technologies.
In connection with the sale of Steel Vault’s assets to
Corporate Technologies, Steel Vault’s stockholders also
approved an amendment pursuant to which Steel Vault changed its
name from InfoTech USA, Inc. to IFTH Acquisition Corp., on
December 31, 2007. Additionally, pursuant to the Sale
Agreement, Steel Vault’s wholly-owned subsidiaries changed
their names from InfoTech USA, Inc. to IFTH NJ Sub, Inc. and
from Information Technology Services, Inc. to IFTH NY Sub, Inc.
After the sale of substantially all of Steel Vault’s
operating assets on December 31, 2007 to Corporate
Technologies, it did not engage in any operations and did not
engage in any business activity. Other than paying its
outstanding liabilities, liquidating its remaining inventory and
collecting its outstanding receivables, Steel Vault’s
primary purpose was to locate and acquire an attractive
operating business. On December 5, 2008, Steel Vault
purchased all of the outstanding membership interests in
National Credit Report.com, LLC, a Florida limited liability
company, or NCRC, and NCRC became Steel Vault’s
wholly-owned subsidiary. As a result, Steel Vault offers
consumers a variety of identity security products and services
primarily on a subscription basis. These services help consumers
protect themselves against identity theft or fraud and
understand and monitor their credit profiles and other personal
information, which include credit reports, credit monitoring and
credit scores.
Since February 4, 2004, NCRC has principally marketed and
sold credit reports, credit monitoring, credit scores and other
products conventionally allied to these products to the consumer
market.
On March 16, 2009, Steel Vault’s stockholders approved
an amendment to change its name from IFTH Acquisition Corp. to
Steel Vault.
Consumer
Products and Services
Steel Vault offers consumers their credit reports and automated
monitoring of their credit files at one, or all three, of the
major credit reporting repositories, Experian Group Limited,
Equifax Inc. and TransUnion, LLC. In addition, products and
services that Steel Vault currently offers or plans to offer in
2009 include: credit scores and credit score analysis tools,
credit education, identity theft recovery services, and identity
theft cost reimbursement.
The three credit reporting repositories have agreements with
three credit reporting resellers, allowing them to in turn
supply companies, like NCRC, that resell their products and
services, separately or bundled, with other services to
consumers. NCRC has a one-year agreement expiring in October
2009, with one of the resellers, Equidata, Inc.
Going forward, Steel Vault’s products and services will be
offered to consumers principally on a monthly subscription
basis. Subscription fees are generally billed directly to the
subscriber’s credit card. The prices to subscribers of
various configurations of our monitoring products and services
will range generally from $14.95
160
to $19.95 per month. As a means of allowing customers to become
familiar with Steel Vault’s services, it sometimes offers
free trial periods.
A substantial number of Steel Vault’s subscribers cancel
their subscriptions each year. Because there is a marketing and
search cost to acquire a new subscriber and produce initial
fulfillment materials, subscribers typically must be retained
for a number of months to cover these costs. Not all subscribers
are retained for a sufficient period of time to achieve positive
cash flow returns on these costs.
Steel
Vault’s Marketing
Steel Vault markets its products and services primarily through
its own direct sales organization over the internet, directly to
consumers. Steel Vault will also market its products and
services through indirect channels, including marketing alliance
partners, joint ventures and other resellers. Steel Vault mainly
uses the internet to market and sell its products, however, it
has used in the past, or will contemplate future use of, direct
mail, outbound telemarketing, inbound telemarketing, inbound
customer service and account activation calls,
e-mail,
mass
media and the internet.
Competition
The markets for the products Steel Vault provides are highly
competitive. A number of divisions or subsidiaries of large,
well-capitalized firms with strong brand names operate in the
industry. Steel Vault competes with these firms to provide its
services to its consumers, and these companies are also either
directly or indirectly the suppliers of the data that is the
core of Steel Vault’s product and service offerings. Steel
Vault believes that its principal competitors are the three main
consumer credit reporting companies and the three credit data
resellers that they license, either directly or through
affiliated company websites. These companies include Experian
Group Limited, Equifax Inc., TransUnion, LLC, Intersections,
Inc., First Advantage Credco and Equidata, Inc., all of which
offer a range of consumer credit reporting products that are
similar to products it offers. In addition, there are a large
number of other smaller competitors who offer competing products
in specialized areas such as fraud prevention, data vendors,
providers of automated data processing services, and software
companies offering credit modeling or analytical tools. Steel
Vault’s competitive focus will be value-added
differentiation of the variety of identity security products and
services that it offers.
Government
Regulation
Steel Vault markets its consumer products and services through a
variety of marketing channels, including direct mail, outbound
telemarketing, inbound telemarketing, inbound customer service
and account activation calls, email, mass media and the
internet. These channels are subject to both federal and state
laws and regulations. Federal and state laws and regulations may
limit Steel Vault’s ability to market to new subscribers or
offer additional services to existing subscribers.
Telemarketing of Steel Vault’s services is subject to
federal and state telemarketing regulation. Federal statutes and
regulations adopted by the Federal Trade Commission and Federal
Communications Commission impose various restrictions on the
conduct of telemarketing. The Federal Trade Commission also has
enacted the national Do Not Call Registry, which enables
consumers to elect to prohibit telemarketers from calling them.
Steel Vault may not be able to reach potential subscribers
because they are placed on the national Do Not Call Registry.
Many states have adopted, and others are considering adopting,
statutes or regulations that specifically affect telemarketing
activities. Although Steel Vault does not control the
telemarketing firms that it engages to market its programs, in
some cases it is responsible for compliance with these federal
and state laws and regulations. In addition, the Federal Trade
Commission and virtually all state attorneys general have
authority to prevent marketing activities that constitute unfair
or deceptive acts or practices.
Federal laws govern email communications. Some of these laws may
affect Steel Vault’s use of email to market to or
communicate with subscribers or potential subscribers.
161
Intellectual
Property
Steel Vault relies on a combination of registered domain names,
trade secrets (including know-how), and third-party vendor
agreements to establish and protect proprietary rights in its
products.
Employees
As of September 25, 2009, Steel Vault had
14 employees, all of whom are full-time. Steel Vault
utilizes 6 consultants. Steel Vault considers its
relationship with its employees to be satisfactory and has not
experienced any interruptions of its operations as a result of
labor disagreements. None of Steel Vault’s employees are
represented by labor unions or covered by collective bargaining
agreements.
Properties
Steel Vault’s corporate headquarters is located in Delray
Beach, Florida where it occupies approximately 7,911 feet
of office space pursuant to a Sublease, dated October 8,
2008, entered into with Digital Angel, Steel Vault’s former
majority stockholder, under a sublease through June 2010. The
rent for the entire twenty-one month term of the Sublease is
$157,500, which was paid in one lump sum upon execution of the
Sublease. Steel Vault subleases half of the space to VeriChip,
which reimbursed Steel Vault for one-half of the Sublease
payment, representing VeriChip’s share of the total cost of
the Sublease. Steel Vault also leases approximately
1,000 square feet of office space in Boca Raton, Florida,
which Steel Vault uses for customer service and support.
Legal
Proceedings
There are currently no material pending legal proceedings, other
than routine litigation incidental to the business, to which
Steel Vault is a party or of which any of its property is the
subject.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
162
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STEEL VAULT
The following discussion and analysis of Steel Vault’s
financial condition and results of operations should be read in
conjunction with the accompanying financial statements and
related notes related thereto. Certain statements made in this
joint proxy statement/prospectus may contain forward-looking
statements. For a description of risks and uncertainties
relating to such forward-looking statements, see the section
entitled “Cautionary Statement Concerning Forward-Looking
Statements” above.
Business
Description
Steel Vault is a Delaware corporation incorporated in 1987. With
the purchase of NCRC, Steel Vault offers consumers a variety of
identity security products and services primarily on a
subscription basis. These services help consumers protect
themselves against identity theft or fraud and understand and
monitor their credit profiles and other personal information,
which include credit reports, credit monitoring and credit
scores.
Recent
Developments
On June 4, 2009, Steel Vault issued a $500,000 promissory
note, convertible into common stock at any time at a price of
$0.30 per share, to VeriChip. The proceeds are being used to
support our continued subscriber growth and working capital
needs. For more information on the transaction, see
Note 6 — Financing Agreements to Steel
Vault’s condensed consolidated financial statements
included elsewhere in this joint proxy statement/prospectus.
Currently, Scott R. Silverman, Steel Vault’s chairman of
the board, is the executive chairman and chief executive officer
of VeriChip and controls VeriChip, Mr. Caragol, Steel
Vault’s chief executive officer, president and acting chief
financial officer, is the acting chief financial officer of
VeriChip, and Michael E. Krawitz, a director of Steel Vault is
also a director of VeriChip.
Results
of Operations
On December 5, 2008, Steel Vault purchased all of the
outstanding membership interests in NCRC, which company became
Steel Vault’s wholly-owned subsidiary. In February 2009,
Steel Vault launched its first marketing campaigns related to
the National Credit Report products and services. Prior to that
time, its marketing campaigns for customer acquisition had been
minimal.
Three
Months Ended June 30, 2009 Compared to Three Months Ended
June 30, 2008
(in
thousands unless otherwise noted)
Revenue
In the three months ended June 30, 2009, Steel Vault
recorded $343 of revenue from subscription sales of its identity
security products and services. This revenue is generated from
active subscribers. As of June 30, 2009, Steel Vault had
15,565 active subscribers. Active subscribers pay between $14.95
and $19.95 per month for its services.
Cost of
Revenue
In the three months ended June 30, 2009, Steel Vault
recorded $149 as cost of revenue from subscriber acquisition and
fulfillment costs. These costs include Steel Vault’s costs
of delivering its services and products to its subscribers under
data service agreements with credit reporting aggregators.
Sales and
Marketing Expenses
For the three months ended June 30, 2009, Steel Vault
recorded $681 in sales and marketing expenses, which consisted
of commissions paid for subscriber acquisition, website
development and sales and marketing salaries.
163
General
and Administrative Expenses
General and administrative expenses from continuing operations
for the quarter ended June 30, 2009 increased $529, or
518.2%, to $631 from $102 for the same quarter last year. The
increase was primarily due to a substantial increase in
commercial operations subsequent to the acquisition of NCRC and
the launch of commercial operations in February 2007.
Nine
Months Ended June 30, 2009 Compared to Nine Months Ended
June 30, 2008
(in
thousands unless otherwise noted)
Revenue
In the nine months ended June 30, 2009, Steel Vault
recorded $418 of revenue from subscription sales of its identity
security products and services. This revenue is generated from
active subscribers. As of June 30, 2009, Steel Vault had
15,565 active subscribers. Active subscribers pay between $14.95
and $19.95 per month for Steel Vault’s services.
Cost of
Revenue
In the nine months ended June 30, 2009, Steel Vault
recorded $234 as cost of revenue from subscriber acquisition and
fulfillment costs. These costs include Steel Vault’s costs
of delivering its services and products to its subscribers under
data service agreements with credit reporting aggregator.
Sales and
Marketing Expenses
For the nine months ended June 30, 2009, Steel Vault
recorded $901 in sales and marketing expenses, which consisted
of commissions paid for subscriber acquisition, website
development and sales and marketing salaries.
General
and Administrative Expenses
General and administrative expenses from continuing operations
for the nine months ended June 30, 2009 increased $1,164,
or 202.8%, to $1,738 from $574 for the same period last year.
Stock based compensation expense in the nine months ended
June 30, 2009 was $524 compared to $134 in the nine months
ended June 30, 2008. The increase was primarily due to a
substantial increase in commercial operations subsequent to the
acquisition of NCRC and stock-based compensation.
Liquidity
and Capital Resources
(in
thousands unless otherwise noted)
Cash used in operating activities during the nine months ended
June 30, 2009 and 2008 was $1,353 and $163, respectively.
The cash used in the nine months ended June 30, 2009 and
2008 was primarily to fund operating losses.
Cash used in investing activities was $132 for the nine months
ended June 30, 2009, compared to cash provided by investing
activities of $887 for the nine months ended June 30, 2008.
Cash used in investing activities for the nine months ended
June 30, 2009 was a result of acquisition costs for the
NCRC purchase of $61, net of the cash provided by the
acquisition of $15, and purchases of software and equipment.
Cash provided by investing activities in the nine months ended
June 30, 2008 was from the proceeds from the sale of
InfoTech under the Sale Agreement.
Cash provided by financing activities was $734 for the nine
months ended June 30, 2009, of which $690 was the result of
the proceeds from the Blue Moon and VeriChip debt financing.
Steel Vault has $505 of cash at June 30, 2009. In line with
its strategy to grow its customer and subscriber base, Steel
Vault plans to review opportunities for new sources of capital,
both debt and equity, which would be used to grow its subscriber
base by investing in sales and marketing initiatives to acquire
new
164
customers. Management believes that with cash on hand, operating
cash inflows, and through additional debt or equity financing,
that it will be able to continue to finance Steel Vault’s
growth initiatives.
Steel Vault has experienced losses from operations of $2,491 and
negative operating cash flows of $1,353 for the nine months
ended June 30, 2009. Its ability to continue as a going
concern is dependent upon, among other things, the achievement
of future profitable operations and the ability to generate
sufficient cash from operations, equity
and/or
debt
financing and other funding sources to meet its obligations over
the next twelve months. The balance of cash and cash equivalents
as of June 30, 2009 may not be sufficient to meet
Steel Vault’s anticipated cash requirements through 2009,
based on its present plan of operation. As a result, Steel Vault
may seek to raise additional capital during fiscal 2009. Delays
in the timing of raising such capital may require Steel Vault to
delay, scale back or eliminate some or all of its operations
while it raises capital. No assurance can be given that
additional financing will be available on acceptable terms or at
all. Under these circumstances, Steel Vault may be unable to
continue as a going concern. These condensed financial
statements should be read in conjunction with Steel Vault’s
audited financial statements for the year ended
September 30, 2008 included in this joint proxy
statement/prospectus beginning on
page FS-59.
The accompanying condensed consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of the carrying amount of recorded assets or the
amount and classification of liabilities that might result
should Steel Vault be unable to continue as a going concern.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS 141(R)”). In SFAS 141(R), the FASB
retained the fundamental requirements of Statement No. 141
to account for all business combinations using the acquisition
method (formerly the purchase method) and for an acquiring
entity to be identified in all business combinations. However,
SFAS 141(R) requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and
financial effect of the business combination. SFAS 141(R)
is effective for annual periods beginning on or after
December 15, 2008. Steel Vault is currently evaluating
whether the adoption of SFAS 141(R) will have a material
impact on its financial statements.
In June 2008, the FASB ratified EITF Issue
No. 07-5,
“Determining Whether an Instrument (or an Embedded Feature)
Is Indexed to an Entity’s Own Stock.”
EITF 07-5
provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and
settlement provisions. It also clarifies on the impact of
foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation.
EITF 07-5
is effective for fiscal years beginning after December 15,
2008. Steel Vault is currently assessing the impact of
EITF 07-5
on its consolidated financial position and results of operations.
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
“Interim Disclosures about Fair Value of Financial
Instruments” (“FSP
FAS 107-1”)
and (“APB
28-1”).
FSP
FAS 107-1
amends FASB Statement No. 107, “Disclosures about Fair
Value of Financial Instruments”, to require disclosures
about fair value of financial instruments in interim as well as
in annual financial statements and amends APB Opinion
No. 28 “Interim Financial Reporting”, to require
those disclosures in interim financial statements. FSP
FAS 107-1
and APB
28-1
were adopted by Steel Vault on April 1, 2009. These staff
positions did not have a material impact on Steel Vault’s
Condensed Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165
“Subsequent Events” (“SFAS 165”).
SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. SFAS 165 sets forth (1) the period after
the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
(2) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial
165
statements and (3) the disclosures that an entity should
make about events or transactions that occurred after the
balance sheet date. SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009. The
adoption of this standard did not have a material impact on
Steel Vault’s Condensed Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162”. The FASB
Accounting Standards Codification (“Codification”)
will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 is effective for interim and annual
periods ending after September 15, 2009. All existing
accounting standards are superseded as described in SFAS 168.
All other accounting literature not included in the Codification
is nonauthoritative. The adoption of this standard is not
expected to have a material impact on Steel Vault’s
Condensed Consolidated Financial Statements.
No other recently issued accounting pronouncements that became
effective during the nine months ended June 30, 2009, or
that will become effective in a subsequent period, have had or
are expected to have a material impact on Steel Vault’s
consolidated financial statements.
166
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF STEEL VAULT
The following table sets forth certain information known to
Steel Vault regarding beneficial ownership of shares of its
common stock as of September 25, 2009 by:
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•
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each of its directors;
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•
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each of its named executive officers;
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•
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all of its executive officers and directors as a group; and
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•
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each person, each person, or group of affiliated persons, known
to Steel Vault to be the beneficial owner of more than 5% of its
outstanding shares of common stock.
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Beneficial ownership is determined in accordance with the rules
and regulations of the SEC and includes voting and investment
power with respect to the securities. In computing the number of
shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently
exercisable or exercisable within 60 days of
September 25, 2009 are deemed outstanding person. The
percentage of beneficial ownership is based on
9,874,971 shares of Steel Vault’s common stock
outstanding as of September 25, 2009. Unless otherwise
noted below, the address of the persons and entities listed in
the table is
c/o Steel
Vault Corporation, 1690 South Congress Avenue, Suite 200,
Delray Beach, Florida 33445.
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Number of Shares
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Percent of
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Beneficially
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Outstanding
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Owned(1)
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Shares
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Name and Address of Beneficial Owner
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(#)
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(%)
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Five percent stockholders:
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Scott R.
Silverman
(2)
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7,205,135
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53.7
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%
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VeriChip
Corporation
(2)
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2,000,001
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16.8
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%
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William J.
Caragol
(3)
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4,655,134
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42.5
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%
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Blue Moon Energy Partners,
LLC
(2)
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3,155,134
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30.2
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%
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Jared
Shaw
(4)
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1,322,975
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13.0
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%
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Andrew
Larkin
(5)
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1,112,975
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10.6
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%
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Kevin H.
McLaughlin
(6)
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625,000
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6.1
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%
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Michael E.
Krawitz
(7)
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650,000
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6.2
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%
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Named Executive Officers and Directors:
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Charles E.
Baker, III
(8)
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300,000
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3.0
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%
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William J.
Caragol
(3)
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4,655,134
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42.5
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%
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Michael J.
Feder
(9)
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—
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—
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Michael E.
Krawitz
(7)
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650,000
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6.2
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%
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Jonathan F.
McKeage
(10)
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120,000
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1.2
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%
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Kevin H.
McLaughlin
(6)
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625,000
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6.1
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%
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J. Robert
Patterson
(11)
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300,000
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3.0
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%
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Scott R.
Silverman
(2)
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7,205,135
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53.7
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%
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Executive Officer and Directors as a group
(5 persons)
(12)
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10,280,135
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68.6
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%
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(1)
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In determining the number and percentage of shares beneficially
owned by each person, shares that may be acquired by such person
pursuant to options exercisable within 60 days after
September 25, 2009, are deemed outstanding for purposes of
determining the total number of outstanding shares for such
person, but are not deemed outstanding for such purposes with
respect to all other stockholders.
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167
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(2)
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Includes (i) 3,155,134 shares held directly by Blue
Moon Energy Partners LLC of which Mr. Silverman is a
manager and controls a member of Blue Moon, R & R
Consulting Partners, LLC, (ii) 2,000,001 shares held
by VeriChip of which Mr. Silverman is a controlling
stockholder and executive chairman of the board and
(iii) 950,000 shares of Steel Vault common stock
issuable upon the exercise of stock options that are exercisable
within sixty days of the date hereof.
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(3)
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Includes 3,155,134 shares held directly by Blue Moon Energy
Partners LLC of which Mr. Caragol is a manager and member.
On June 4, 2009, Mr. Caragol was issued a common stock
purchase warrant exercisable for 500,000 shares of Steel
Vault common stock, with an exercise price of $0.30 per share,
in connection with the debt finance transaction between Steel
Vault and VeriChip, dated June 4, 2009, in consideration
for the guaranty of collection, dated June 4, 2009 that
Mr. Caragol executed in favor of VeriChip.
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(4)
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Includes 321,949 shares of Steel Vault common stock
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009, over which Mr. Shaw has sole
voting and dispositive power, and 1,001,026 shares of Steel
Vault common stock.
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(5)
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Includes 661,949 shares of Steel Vault common stock
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009, over which Mr. Larkin has sole
voting and dispositive power, and 451,026 shares of Steel
Vault common stock.
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(6)
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Includes 425,000 shares of Steel Vault common stock
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009, over which Mr. McLaughlin has sole
voting and dispositive power, and 200,000 shares of
restricted Steel Vault common stock, which vest on
January 1, 2010 and over which Mr. McLaughlin lacks
dispositive power.
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(7)
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Includes 650,000 shares of Steel Vault common stock
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of
September 25, 2009.
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(8)
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Consists of shares of restricted Steel Vault common stock, which
vests on January 1, 2010, over which Mr. Baker lacks
dispositive power.
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(9)
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Mr. Feder, Steel Vault’s former acting interim chief
financial officer, ceased being a named executive officer on
October 24, 2008.
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(10)
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Mr. McKeage, Steel Vault’s former chief executive
officer, ceased being a named executive officer on July 2,
2008. The information included in the table is based solely on
the Form 4 filed with the SEC on January 24, 2008 by
Mr. McKeage.
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(11)
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Mr. Patterson, Steel Vault’s former vice president,
chief financial officer and treasurer, ceased being a named
executive officer on March 21, 2008, and ceased being a
director on July 22, 2008. Includes 300,000 shares of
Steel Vault common stock issuable upon the exercise of stock
options that are currently exercisable or exercisable within
60 days of September 25, 2009.
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(12)
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All securities represent shares of Steel Vault common stock and
shares of Steel Vault common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable
within 60 days of September 25, 2009 by Steel
Vault’s current directors and executive officer.
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168
DESCRIPTION
OF VERICHIP’S CAPITAL STOCK
As of September 25, 2009, VeriChip’s authorized
capital stock consisted of 40,000,000 shares of common
stock, $0.01 par value per share, and 5,000,000 shares
of preferred stock, $0.001 par value per share.
The following is a summary of the material terms of
VeriChip’s common stock and preferred stock. This summary
does not purport to describe all the terms of the common stock
and preferred stock, and such description is subject to, and
qualified by reference to, VeriChip’s second amended and
restated certificate of incorporation and its amended and
restated by-laws, all of which have been filed with the SEC, and
by applicable law.
Common
Stock
As of September 25, 2009, there were 13,810,628 shares
of VeriChip common stock outstanding and held of record by
approximately 20 stockholders. The holders of VeriChip common
stock are entitled to one vote for each share held of record on
all matters properly submitted to a vote of the holders of
common stock. Subject to preferences that may be applicable to
any then-outstanding preferred stock, holders of VeriChip common
stock are entitled to receive ratably such dividends and other
distributions as may be declared by its board of directors, out
of assets or funds legally available therefor. In the event of a
liquidation, dissolution or winding up of VeriChip, holders of
its common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation
preference of any then-outstanding preferred stock.
Holders of VeriChip common stock have no preemptive rights and
no right to convert their common stock into any other
securities. There are no redemption or sinking-fund provisions
applicable to VeriChip common stock. All outstanding shares of
VeriChip common stock are, and all shares of VeriChip common
stock issuable upon conversion of the preferred stock, when and
if issued, will be, fully paid and nonassessable.
Preferred
Stock
VeriChip’s board of directors has the authority, without
further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series,
and to fix the designations, powers, preferences and relative,
participating, optional and other special rights, if any, of
each such class or series and the qualifications, limitations
and restrictions thereof, including dividend rights, conversion
rights, voting rights, sinking-fund provisions, terms of
redemption, liquidation preferences, preemption rights, and the
number of shares constituting any series or the designation of
such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of VeriChip common stock and
could have the effect of delaying, deferring or preventing a
change in control of VeriChip.
On September 29, 2009, VeriChip filed a certificate of
designations of preferences, rights and limitations of
Series A Preferred Stock with the Secretary of State of the
State of Delaware and the number of shares so designated is
2,000, par value $0.001 per share, which shall not be subject to
increase without any consent of the holders of the Series A
Preferred Stock. The Series A Preferred Stock ranks, with
respect to rights upon liquidation,
winding-up
or dissolution, senior to VeriChip common stock and any other
classes of stock or series of VeriChip preferred stock and
junior to VeriChip’s existing and future indebtedness.
Holders of Series A Preferred Stock will have no voting
rights and no preemptive rights. There are no sinking-fund
provisions applicable to Series A Preferred Stock.
Holders of VeriChip Series A Preferred Stock will have the
right to convert their preferred stock into shares of VeriChip
common stock, on or after the six-month anniversary of the
issuance date of their Series A Preferred Stock, at a
conversion price equal to the closing bid price on the trading
day immediately preceding the notice date by VeriChip or the
holder. If VeriChip or the holder exercises this conversion
option with respect to any Series A Preferred Stock,
VeriChip will issue to the holder the number of shares of
VeriChip common stock equal to (x) $10,000 per share of
Series A Preferred Stock multiplied by (y) the number
of shares of Series A Preferred Stock subject to the
notice, divided by (z) the conversion price with respect to
such shares. If VeriChip exercises the conversion prior to the
fourth anniversary of the issuance of such shares, then in
addition to the conversion shares, VeriChip must pay to the
holder additional shares with respect to
169
such converted shares: (i) 35% of the conversion shares if
converted after the six-month anniversary of the issuance date,
but prior to the first anniversary of the issuance date,
(ii) 27% of the converted shares if converted on or after
the first anniversary, but prior to the second anniversary of
the issuance date, (iii) 18% of the converted shares if
converted on or after the second anniversary, but prior to the
third anniversary of the issuance date, and (iv) 9% of the
converted shares if converted on or after the third anniversary,
but prior to the fourth anniversary of the issuance date.
If VeriChip at any time on or after the date of issuance of any
Series A Preferred Stock subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of common stock into a greater
number of shares, the conversion price in effect immediately
prior to such subdivision will be proportionately reduced and
the number of conversion shares will be proportionately
increased. If VeriChip at any time on or after such issuance
date combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of common stock
into a smaller number of shares, the conversion price in effect
immediately prior to such combination will be proportionately
increased and the number of conversion shares will be
proportionately decreased. In addition to any adjustments
described in this paragraph, if at any time VeriChip grants,
issues or sells any options, convertible securities or rights to
purchase stock, warrants, securities or other property pro rata
to the record holders of any class of shares of common stock,
then the holder of Series A Preferred Stock will be
entitled to acquire, upon the terms applicable to such purchase
rights, the aggregate purchase rights which the holder could
have acquired if the holder had held the number of shares of
common stock acquirable upon conversion of all Series A
Preferred Stock held by the holder immediately before the date
on which a record is taken for the grant, issuance or sale of
such purchase rights, or, if no such record is taken, the date
as of which the record holders of shares of common stock are to
be determined for the grant, issue or sale of such purchase
rights.
If VeriChip fails to timely authorize the credit of the
Series A Preferred Stock holder’s balance account for
such number of conversion shares to which the Series A
Preferred Stock holder is entitled pursuant to a conversion
notice, then, in addition to all other remedies available to the
Series A Preferred Stock holder, VeriChip must, subject to
the availability of lawful funds therefor, pay in cash to the
Series A Preferred Stock holder on each day that the
issuance of such conversion shares is not timely effected an
amount equal to 1.5% of the product of (A) the sum of the
number of conversion shares not issued to such holder on a
timely basis and to which such holder is entitled and
(B) the closing bid price of the shares of common stock on
the trading day immediately preceding the last possible date
which VeriChip could have issued such conversion shares to the
Series A Preferred Stock holder without violating any other
restrictions on the issuance of conversion shares to the holder.
In addition, if after VeriChip’s receipt of the applicable
conversion delivery documents, VeriChip fails to timely
authorize the credit of the Series A Preferred Stock
holder’s balance account for the number of conversion
shares to which such holder is entitled upon such holder’s
exercise, and such holder purchases shares of common stock to
deliver in satisfaction of a sale by the the Series A
Preferred Stock holder of conversion shares issuable upon such
exercise that such holder anticipated receiving from VeriChip,
then VeriChip shall, within one trading day after such
holder’s request, either (i) pay cash, subject to the
availability of lawful funds therefor, to such holder in an
amount equal to the the Series A Preferred Stock
holder’s total purchase price for the shares of common
stock so purchased, at which point VeriChip’s obligation to
credit such holder’s balance account for the number of
conversion shares to which such holder is entitled upon such
holder’s exercise and to issue such conversion shares shall
terminate, or (ii) promptly honor its obligation to credit
such holder’s balance account for the number of conversion
shares to which such holder is entitled upon the Series A
Preferred Stock holder’s exercise and pay cash, subject to
the availability of lawful funds therefor, to the holder in an
amount equal to the excess (if any) of the total purchase price
for the common stock so purchased over the product of
(A) such number of shares of common stock sold by such
holder in satisfaction of its obligations, times (B) the
closing bid price on the date of exercise.
At no time may VeriChip or the Series A Preferred Stock
holder deliver a conversion notice if the number of conversion
shares to be received pursuant to such conversion notice,
aggregated with all other shares of common stock then
beneficially (or deemed beneficially) owned by such holder,
would result in the Series A Preferred Stock holder owning,
on the date of delivery of the conversion notice, more than
9.99% of all common stock outstanding as determined in
accordance with Section 13(d) of the Exchange Act and the
rules
170
and regulations promulgated thereunder. In addition, as of any
date, the aggregate number of shares of common stock into which
the Series A Preferred Stock are convertible within
61 days, together with all other shares of common stock
then beneficially (or deemed beneficially) owned (as determined
pursuant to
Rule 13d-3
under the Exchange Act) by the Series A Preferred Stock
holder and its affiliates (as such term is defined in
Rule 12b-2
under the Exchange Act), shall not exceed 9.99% of the total
outstanding shares of common stock as of such date.
Holders of VeriChip Series A Preferred Stock, commencing on
the first anniversary of the date of issuance of any such shares
of preferred stock, will be entitled to receive dividends on
each outstanding share of Series A Preferred Stock, which
shall accrue in shares of Series A Preferred Stock at a
rate equal to 10% per annum. Accrued dividends will be payable
annually on the anniversary of the issuance date. No dividend
will be payable with respect to shares of Series A
Preferred Stock that are redeemed for cash or converted into
shares of VeriChip common stock prior to the first anniversary
of the issuance date with respect to such shares.
Upon any liquidation, dissolution or winding up of VeriChip,
after payment or provision for payment of VeriChip’s debts
and other liabilities, before any distribution or payment is
made to the holders of any other class or series of stock, the
holders of Series A Preferred Stock will first be entitled
to be paid out of VeriChip’s assets available for
distribution to its stockholders an amount with respect to the
Series A liquidation value (i.e., $10,000 per share of
Series A Preferred Stock), after which any remaining
VeriChip assets will be distributed among the holders of the
other class or series of VeriChip stock in accordance with
VeriChip’s certificates of designations and certificate of
incorporation.
VeriChip may redeem, for cash, any or all of the Series A
Preferred Stock at any time at the redemption price per share
equal to $10,000 per share of Series A Preferred Stock,
plus any accrued but unpaid dividends with respect to such
shares. If VeriChip exercises this redemption option with
respect to any Series A Preferred Stock prior to the fourth
anniversary of the issuance of such preferred stock, then in
addition to the redemption price, VeriChip must pay to the
holder a make-whole price per share equal to the following with
respect to such redeemed Series A Preferred Stock:
(i) 35% of the Series A liquidation value if redeemed
prior to the first anniversary of the issuance date,
(ii) 27% of the Series A liquidation value if redeemed
on or after the first anniversary, but prior to the second
anniversary of the issuance date, (iii) 18% of the
Series A liquidation value if redeemed on or after the
second anniversary, but prior to the third anniversary of the
issuance date, and (iv) 9% of the Series A liquidation
value if redeemed on or after the third anniversary but prior to
the fourth anniversary of the issuance date.
Board of
Directors
VeriChip’s board of directors is not classified.
Anti-Takeover
Provisions
Certain provisions of the VeriChip second amended and restated
certificate of incorporation and amended and restated by-laws
could make the acquisition of VeriChip by means of a tender
offer, or the acquisition of control of VeriChip by means of a
proxy contest or otherwise, more difficult. These provisions,
summarized below, are intended to discourage certain types of
coercive takeover practices and inadequate takeover bids, and
are designed to encourage persons seeking to acquire control of
VeriChip to negotiate with the VeriChip board of directors.
VeriChip believes that the benefits of increased protection
against an unfriendly or unsolicited proposal to acquire or
restructure VeriChip outweigh the disadvantages of discouraging
such proposals. Among other things, negotiation of such
proposals could result in an improvement of their terms.
Provisions in the VeriChip second amended and restated
certificate of incorporation and amended and restated
by-laws.
The VeriChip second amended and restated
certificate of incorporation and amended and restated by-laws
provide other mechanisms that may help to delay, defer or
prevent a change in control. For example, the VeriChip second
amended and restated certificate of incorporation does not
provide for cumulative voting in the election of directors.
Cumulative voting provides for a stockholder to vote a portion
or all of its shares for one or more candidates for seats on the
board of directors. Without cumulative voting, a
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minority stockholder will not be able to gain as many seats on
VeriChip’s board of directors based on the number of shares
of VeriChip stock that such stockholder holds as it would if
cumulative voting were permitted. The elimination of cumulative
voting makes it more difficult for a minority stockholder to
gain a seat on VeriChip’s board of directors to influence
the board’s decision regarding a takeover.
Under the VeriChip second amended and restated certificate of
incorporation, 5,000,000 shares of preferred stock remain
undesignated. The authorization of undesignated preferred stock
makes it possible for the board of directors, without
stockholder approval, to issue preferred stock with voting or
other rights or preferences that could impede the success of any
attempt to obtain control of VeriChip.
The VeriChip amended and restated by-laws contain advance-notice
procedures that apply to stockholder proposals and the
nomination of candidates for election as directors by
stockholders, other than nominations made pursuant to the notice
given by VeriChip with respect to such meetings or nominations
made by or at the direction of the board of directors.
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management
of VeriChip.
Transfer
Agent and Registrar
The transfer agent and registrar for VeriChip’s common
stock is Registrar and Transfer Company, located at 10 Commerce
Drive, Cranford, New Jersey 07016, and its telephone number is
800-368-5948.
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COMPARISON
OF THE RIGHTS OF STOCKHOLDERS OF
VERICHIP AND STEEL VAULT
Steel Vault and VeriChip are each organized under the laws of
the State of Delaware and subject to the DGCL. Any differences,
therefore, in the rights of holders of capital stock in Steel
Vault and VeriChip arise primarily from differences in their
respective certificates of incorporation and by-laws. Upon
completion of the merger, holders of Steel Vault common stock
will become holders of VeriChip common stock, and their rights
will be governed by Delaware law, VeriChip’s second amended
and restated certificate of incorporation, as amended, and
VeriChip’s amended and restated by-laws.
The following discussion summarizes the material differences
between the rights of Steel Vault stockholders and VeriChip
stockholders, as described in the applicable provisions of their
respective certificates of incorporation and by-laws. This
section does not include a complete description of all the
differences between the rights of these stockholders or the
specific rights of these stockholders. All Steel Vault
stockholders and VeriChip stockholders are urged to read
carefully the relevant provisions of Delaware law, as well as
Steel Vault’s amended and restated certificate of
incorporation, as amended, Steel Vault’s second amended and
restated by-laws, VeriChip’s second amended and restated
certificate of incorporation, and VeriChip’s amended and
restated by-laws.
Capital
Stock
Capitalization
VeriChip
:
The aggregate number of shares of all classes of stock that
VeriChip has the authority to issue is 45,000,000 shares,
of which 5,000,000 shares are preferred stock having a par
value of $0.001 per share, and 40,000,000 shares are common
stock having a par value of $0.01 per share.
Steel
Vault
:
The total number of shares of capital stock that Steel Vault has
the authority to issue is 85,000,000 shares, consisting of
80,000,000 shares of common stock having a par value of
$0.01 per share, and 5,000,000 shares of preferred stock
having no par value per share.
Preferred
Stock
VeriChip
and Steel
Vault
:
Subject to the laws of the State of Delaware, the board of
directors of each of VeriChip and Steel Vault has the authority
to issue preferred stock, from time to time, in one or more
series, and to set the relative rights and preferences of the
shares of each series.
Voting
Rights
VeriChip
:
Under the provisions of VeriChip’s second amended and
restated certificate of incorporation, subject to the voting
rights of any holders of preferred stock, holders of common
stock are entitled to one vote for each share of common stock
held of record on each matter properly submitted to the holders
of common stock.
Steel
Vault
:
Under the provisions of Steel Vault’s amended and restated
certificate of incorporation, as amended, and subject to the
voting rights of any holders of preferred stock, holders of
common stock exclusively possess all voting power for the
election of directors and for all other purposes, with each such
holder being entitled to one vote for each share of common stock
held of record on each matter properly submitted to the holders
of common stock.
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Preemptive
Rights
VeriChip
and Steel
Vault
:
No Steel Vault or VeriChip stockholder has preemptive or
preferential rights, other than such right, if any, as the board
of directors of Steel Vault or VeriChip, as applicable in its
discretion may from time to time determine, and at such prices
as the board of directors of Steel Vault or VeriChip, as
applicable, may from time to time fix.
Dividends
VeriChip
and Steel
Vault
:
Subject to the prior rights of the preferred stock of VeriChip
and Steel Vault, holders of VeriChip and Steel Vault common
stock may receive dividends.
Meetings
and Voting
Fixing
of Record Date
VeriChip
:
The board of directors may fix in advance a record date for the
determination of the stockholders entitled to notice of, and to
vote at, any meeting of stockholders or any adjournment thereof,
which record date shall not precede the date upon which the
board of directors adopts a resolution fixing the record date,
and which record date shall not be more than 60 days, or
less than 10 days, before the date of the meeting. If the
board of directors does not set a record date for the
determination of stockholders entitled to notice of, or to vote
at, any stockholders meeting, the record date shall be at the
close of business on the business day next preceding the day on
which notice is given, or, if notice is waived, at the close of
business on the business day next preceding the day on which the
meeting is held. A determination of stockholders of record
entitled to notice of, or to vote at, a stockholders meeting
will apply to any adjournment of the meeting, but the board of
directors may fix a new record date for the adjourned meeting.
Steel
Vault
:
The board of directors may fix in advance a record date for the
determination of the stockholders entitled to notice of any
meeting of stockholders or any adjournment thereof, which record
date shall not precede the date upon which the board of
directors adopts a resolution fixing the record date, and which
record date shall not be more than 60 days, or less than
10 days, before the date of the meeting. If the board of
directors fixes a record date for notice of any stockholders
meeting, such date shall also be the record date for determining
stockholders entitled to vote at such meeting, unless the board
of directors determines, at the time it fixes such record date,
that a later date (on or before the date of the stockholders
meeting) shall be the date for making such determination. If no
record date is fixed by the board of directors, the record date
for the determination of stockholders entitled to notice of, or
to vote at, a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of,
or to vote at, a stockholders meeting will apply to any
adjournment of the meeting. However, the board of directors may
fix a new record date for determination of stockholders entitled
to vote at the adjourned meeting, and in such case shall also
fix as the record date for stockholders entitled to notice of
the adjourned meeting the same or an earlier date as that fixed
for determination of stockholders entitled to vote at the
adjourned meeting.
Special
Stockholder Meetings
VeriChip
:
Unless otherwise required by law or the terms of any one or more
series of preferred stock, only the chairman of the board, the
chief executive officer, the president, or the board of
directors (pursuant to a
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resolution adopted by a majority of the whole board of
directors) may call a special meeting of stockholders. The
stockholders may not call a special meeting of stockholders.
Steel
Vault
:
Subject to the rights of any stockholders with preference over
the common stock as to dividends or upon liquidation,
dissolution or
winding-up,
special meetings of stockholders may be called only by a
majority of the board of directors or by the holders of a
majority of the outstanding shares of common stock.
Stockholder
Action by Written Consent
VeriChip
:
Unless otherwise required by the terms of any class or series of
preferred stock, any action required or permitted to be taken at
any annual or special meeting of stockholders may be taken only
upon the vote of stockholders at a duly-noticed and duly-called
annual or special meeting, and may not be taken by written
consent of stockholders without a meeting.
Steel
Vault
:
Any action required or permitted to be taken by the stockholders
must be effected at a duly-called annual or special meeting of
stockholders, and may not be effected by written consent of such
holders stockholders without a meeting.
Cumulative
Voting
VeriChip
and Steel
Vault
:
VeriChip and Steel Vault stockholders do not have any right to
cumulative voting.
Advance
Notice of Nominations and Stockholder Proposals
VeriChip
:
For nominations of directors to be properly brought before an
annual or special meeting or for other business to be properly
brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to
the secretary.
To be timely, a stockholder’s notice for nominations of
directors (to be brought before either an annual meeting or a
special meeting called for the purpose of electing directors)
must be received by the secretary at the principal executive
offices of VeriChip (i) in the case of an annual meeting,
not later than the close of business on the 90th day, nor
earlier than the opening of business on the 120th day,
before the anniversary date of the immediately preceding annual
meeting of stockholders; provided, however, that if the annual
meeting is called for a date that is not within 45 days
before or after such anniversary date, notice by the stockholder
to be timely must be so received not earlier than the opening of
business on the 120th day before the meeting and not later
than the later of (x) the close of business on the
90th day before the meeting or (y) the close of
business on the 10th day following the day on which public
announcement of the date of the annual meeting was first made by
VeriChip; and (ii) in the case of a special meeting of
stockholders called for the purpose of electing directors, not
later than the close of business on the 10th day following
the day on which public announcement of the date of the special
meeting is first made by VeriChip.
To be timely, a stockholder’s notice for business other
than nominations (to be brought before an annual meeting) must
be received by the secretary at the principal executive offices
of VeriChip not later than the close of business on the
90th day, or earlier than the opening of business on the
120th day, before the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however,
that, if the annual meeting is called for a date that is not
within 45 days before or after such anniversary date,
notice by the stockholder to be timely must be so received not
earlier than the opening of business on the 120th day
before the meeting and not later than the later of (x) the
close of business on the 90th day before the meeting
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or (y) the close of business on the 10th day following
the day on which public announcement of the date of the annual
meeting is first made by VeriChip.
Steel
Vault
:
For nominations of directors or other business to be properly
brought before any meeting of stockholders by a stockholder, the
stockholder must have given timely notice thereof in writing to
the secretary.
To be timely, a stockholder’s notice for nominations of
directors (to be brought before an annual meeting) must be
received by the secretary not less than 60 days, or more
than 90 days, prior to the first anniversary of the
preceding year’s annual meeting of stockholders; provided,
however, that if the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely
must be so received no earlier than the 90th day prior to
such annual meeting and not later than the close of business on
the later of (x) the 60th day before the meeting or
(y) the 10th day following the day on which notice of
the date of the annual meeting of stockholders was mailed or
public disclosure thereof was made by Steel Vault, whichever
occurs first. To be timely, a stockholder’s notice for
nominations of directors (to be brought before a special
meeting) must be received by the secretary not earlier than the
90th day prior to such special meeting and not later than
the close of business on the later of (x) the 60th day
prior to such meeting or (y) the 10th day following
the day on which notice of the date of the special meeting was
mailed or public disclosure thereof was made by Steel Vault,
whichever comes first.
To be timely, a stockholder’s notice for business other
than nominations (to be brought before an annual meeting) must
be received by the secretary not later than 60 days, or
more than 90 days, prior to the first anniversary of the
preceding year’s annual meeting of stockholders; provided,
however, that, if the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from
such anniversary, notice by the stockholder to be timely must be
so received not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the
later of (x) the 60th day prior to such annual meeting
or (y) the 10th day following the date on which notice
of the date of the annual meeting was mailed or public
disclosure thereof was made, whichever comes first. To be
timely, a stockholder’s notice for business other than
nominations (to be brought before a special meeting) must be
received by the secretary not less than 10 days immediately
following the giving of notice of such special meeting.
Board of
Directors
Number;
Election and Term
VeriChip
:
The number of directors, other than those who may be elected by
the holders of one or more series of preferred stock voting
separately by class or series, shall be fixed from time to time
exclusively by the board of directors pursuant to a resolution
adopted by a majority of the whole board of directors.
Steel
Vault
:
The number of directors shall be determined from time to time by
resolution adopted by affirmative vote of a majority of the
entire board of directors, but will not be less than three. The
board of directors must be divided into three classes
(designated Class I, Class II and Class III), as
nearly equal in number as possible. At each annual meeting of
stockholders, successors to the class of directors whose terms
expire at that annual meeting shall be elected for three-year
terms. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director.
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Vacancy
and Removal of Directors
VeriChip
:
Newly created directorships resulting from an increase in the
number of directors and any director vacancies resulting from
death, resignation, retirement, disqualification, removal or
other cause may be filled only by a majority vote of the
directors then in office, even if less than a quorum, or by a
sole remaining director (and not by stockholders). Any director
so chosen shall hold office for the remainder of the term to
which the new directorship was added or in which the vacancy
occurred and until his or her successor has been elected and
qualified, subject, however, to such director’s earlier
death, resignation, retirement, disqualification or removal.
Any or all of the directors may be removed from office only for
cause and only by the affirmative vote of the holders of a
majority of the outstanding shares of VeriChip capital stock
then entitled to vote generally in the election of directors,
voting together as a single class; provided, however, except as
otherwise required by law, if the holders of one or more series
of preferred stock have the right (voting separately by class or
series) to elect one or more directors, the filling of vacancies
and the removal from office of such directorships, among other
things, will be governed by the terms of such series of
preferred stock.
Steel
Vault
:
Unless otherwise required by law, newly created directorships
resulting from an increase in the number of directors and any
director vacancies resulting from death, resignation,
retirement, disqualification, removal or other cause will be
filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same
remaining term as that of his or her predecessor.
Any or all of the directors may be removed from office only for
cause and only by the affirmative vote of not less than
two-thirds
(
2
/
3
)
of the votes entitled to be cast by the holders of all of the
then-outstanding shares of Steel Vault capital stock then
entitled to vote generally in the election of directors, voting
together as one class; provided, however, that if a proposal to
remove a director is made by or on behalf of an interested
person or a director who is not independent, then such removal
shall also require the affirmative vote of not less than a
majority of the votes entitled to be cast by the holders of all
of the then-outstanding shares of Steel Vault capital stock then
entitled to vote generally in the election of directors, voting
together as one class, but excluding the shares beneficially
owned by such interested person.
Amendments
Certificate
of Incorporation
VeriChip
and Steel
Vault
:
An amendment to either VeriChip’s second amended and
restated certificate of incorporation or to Steel Vault’s
amended and restated certificate of incorporation, as amended,
requires approval by the applicable board of directors and by
the holders of a majority of the applicable outstanding stock.
Any proposed amendment to the certificate of incorporation that
would increase or decrease the authorized shares of a class of
stock, increase or decrease the par value of the shares of a
class of stock, or alter or change the powers, preferences or
special rights of the shares of a class of stock (so as to
affect them adversely) requires approval of the holders of a
majority of the outstanding shares of the affected class, voting
as a separate class, in addition to the approval of a majority
of the shares entitled to vote on that proposed amendment. If
any proposed amendment would alter or change the powers,
preferences or special rights of any series of a class of stock
so as to affect them adversely, but does not affect the entire
class, then only the shares of the series affected by the
proposed amendment is considered a separate class for purposes
of the immediately preceding sentence.
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By-laws
VeriChip
:
The board of directors, by the affirmative vote of a majority of
the directors, may adopt, amend, alter or repeal the by-laws. In
addition, subject to applicable law, the
stockholders — by the affirmative vote of the holders
of at least two-thirds
(
2
/
3
)
of the voting power of all outstanding shares of VeriChip
capital stock then entitled to vote generally in the election of
directors, voting together as a single class — may
adopt, amend, alter or repeal any by-law.
Steel
Vault
:
The board of directors, by the affirmative vote of a majority of
the directors, may make, alter, amend or repeal the by-laws. In
addition, subject to applicable law, the holders of voting stock
may make, alter, amend or repeal the by-laws; provided, however,
that any proposal by or on behalf of an interested person or a
director who is not independent to make, alter, amend or repeal
the by-laws shall require approval by the affirmative vote of
not less than two-thirds
(
2
/
3
)
of the votes entitled to be cast by holders of all
then-outstanding voting stock, voting together as one class,
excluding voting stock beneficially owned by such interested
person, unless either (a) such action has been approved by
a majority of the board of directors prior to such interested
person first becoming an interested person or (b) prior to
such interested person first becoming an interested person, a
majority of the board of directors has approved such interested
person becoming an interested person and, subsequently a
majority of the independent directors has approved such action.
Indemnification
General
VeriChip
:
VeriChip will indemnify and hold harmless, to the fullest extent
authorized or permitted by applicable law, each person (other
than a party plaintiff in a proceeding that was not authorized
by the board of directors) who is, or is threatened to be made,
a party to, or is otherwise involved in, any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, because he or she is
or was a director or officer of VeriChip or, while a director or
officer of VeriChip, is or was serving at the request of
VeriChip as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee
or agent, or in any other capacity while serving as a director,
officer, employee or agent, against all expense, liability and
loss (including, without limitation, attorneys’ fees,
judgments, fines, ERISA excise taxes and penalties and amounts
paid in settlement) reasonably incurred or suffered by such
person in connection with such action, suit or proceeding. This
right to indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification and advancement of
expenses is a contractual right and includes the right to be
paid by VeriChip the expenses incurred in defending or otherwise
participating in any such proceeding in advance of its final
disposition to the fullest extent authorized by the DGCL.
Steel
Vault
:
Steel Vault will, to the fullest extent permitted by the
provisions of the DGCL, indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action
by or in the right of Steel Vault) because he or she is or was a
director or officer of the Steel Vault, or is or was serving at
the request of Steel Vault as a director or officer of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such
action, suit or proceeding and any
178
appeal therefrom, provided he or she acted in good faith and in
a manner he or she reasonably believed to be in or not opposed
to the best interests of Steel Vault, and with respect to any
criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. Unless ordered by a
court, Steel Vault will indemnify only as authorized in the
specific case upon a determination that indemnification of the
director or officer is proper in the circumstances because he or
she has met the applicable standard of conduct. This
determination will be made (1) by the board of directors by
a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such
a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel
in a written opinion, or (3) by the stockholders. The right
to indemnification shall continue as to a person who has ceased
to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person. To the extent that a director or officer of Steel Vault
has been successful on the merits or otherwise in a defense of
any such action or claim, he or she will be indemnified against
expenses (including attorneys’ fees) actually and
reasonably incurred by him or her in connection therewith.
Insurance
VeriChip
:
VeriChip may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of
VeriChip, or who is or was serving at the request of VeriChip as
a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or
other enterprise, against any expense, liability or loss
incurred by such person in any such capacity or arising out of
his or her status as such, whether or not VeriChip would have
the power to indemnify such person against such liability under
Delaware law.
Steel
Vault
:
The board of directors of Steel Vault may, in its discretion,
authorize Steel Vault to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee
or agent of Steel Vault, or is or was serving at the request of
Steel Vault as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liabilities asserted against him or
incurred by him in any such capacity, or arising out of his or
her status as such, whether or not Steel Vault would have the
power to indemnify him or her against such liability.
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MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Subject to the limitations and qualifications set forth in this
section, the discussion in this section represents the opinion
of Holland & Knight LLP, or H&K, counsel to
VeriChip as to the material United States federal income tax
consequences of the merger generally applicable to Steel Vault
stockholders who hold their shares of Steel Vault common stock
as capital assets at the effective time of the merger and who
exchange their shares for shares of VeriChip common stock in the
merger. H&K has delivered these opinions, dated as of
September 18, 2009, to VeriChip and Steel Vault,
respectively. The discussion set forth below does not address
all United States federal income tax considerations that may be
relevant to Steel Vault stockholders in light of their
particular circumstances, and does not apply to the treatment of
stock options or warrants in the merger or the treatment of
Steel Vault stockholders that are subject to special rules under
U.S. federal income tax laws, such as:
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foreign persons;
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financial institutions, insurance companies, mutual funds,
dealers in securities or foreign currencies, tax-exempt
organizations and stockholders subject to the alternative
minimum tax;
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stockholders who hold Steel Vault common stock as part of a
hedge, straddle, constructive sale or conversion transaction, or
other risk-reduction arrangement;
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stockholders who acquired their Steel Vault common stock through
stock option or stock purchase programs or otherwise as
compensation; and
|
|
|
|
|
•
|
stockholders whose functional currency is not the
U.S. dollar.
|
In addition, this discussion does not consider the tax treatment
of Steel Vault stockholders who hold their Steel Vault shares
through a partnership or other pass-through entity, and it does
not address the tax consequences of the merger under foreign,
state or local tax laws or U.S. federal estate tax laws.
Steel Vault stockholders are urged to consult their own tax
advisors regarding the tax consequences of the merger to them
based on their own circumstances, including the application and
effect of U.S. federal, state, local and foreign tax laws.
The following discussion is based on interpretations of the
Internal Revenue Code, applicable Treasury Regulations, judicial
decisions and administrative rulings and practice, all as of the
date of this joint proxy statement/prospectus, and all of which
are subject to change. Any such change could affect the accuracy
of the statements and conclusions set forth in this discussion
and the tax consequences of the merger to VeriChip, Steel Vault
and/or
their
respective stockholders. The following discussion is not binding
on the Internal Revenue Service or a court, and neither one is
precluded from asserting a contrary position.
Neither VeriChip nor Steel Vault has requested, nor will either
request, a ruling from the Internal Revenue Service with regard
to any of the tax consequences of the merger. Steel Vault has
received an opinion from H&K that the merger will
constitute a “reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code. VeriChip has
received an opinion from H&K that the merger will
constitute a “reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code. The opinion is
based upon the assumption that the merger will take place in the
manner described in the merger agreement, and also assumes the
truth and accuracy of certain factual representations made by
VeriChip and Steel Vault to H&K that are customarily given
in transactions of this kind.
Qualification as a “reorganization” means that,
subject to the limitations and qualifications set forth in this
discussion, the following U.S. federal income tax
consequences will result from the merger:
|
|
|
|
|
|
•
|
A Steel Vault stockholder will not recognize gain or loss on the
exchange of Steel Vault common stock for VeriChip common stock
pursuant to the merger, except with respect to cash received in
lieu of fractional shares (as discussed below) or except as
otherwise discussed below;
|
180
|
|
|
|
|
|
•
|
The total initial tax basis of any VeriChip stock received by a
Steel Vault stockholder in the merger (including any fractional
shares deemed received and exchanged for cash) will be equal to
the total tax basis of the Steel Vault common stock exchanged
therefor; and
|
|
|
|
|
|
|
•
|
The holding period of the VeriChip common stock received by a
Steel Vault stockholder in the merger will include the holding
period of the Steel Vault common stock surrendered therefor.
|
Even if the merger did qualify as a reorganization, the receipt
of VeriChip common stock could be a taxable transaction if the
Internal Revenue Service were to successfully assert that such
stock was being issued in whole or in part in exchange for
consideration other than Steel Vault stock. In addition,
opinions of counsel are not binding on the Internal Revenue
Service or the courts. As a result, neither VeriChip nor Steel
Vault can assure you that the conclusions contained in this
discussion will not be challenged by the Internal Revenue
Service or sustained by a court if challenged. If the Internal
Revenue Service were to assert successfully that the merger is
not a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, then each Steel Vault stockholder
would be required to recognize gain or loss equal to the
difference between (i) the fair market value of the
VeriChip common stock received in the exchange and (ii) the
stockholder’s tax basis in the Steel Vault stock
surrendered therefor. In such event, a Steel Vault
stockholder’s total initial tax basis in the VeriChip
common stock received would be equal to its fair market value at
the effective time of the merger, and the stockholder’s
holding period for the VeriChip common stock received would
begin on the day after the merger. The gain or loss recognized
would be long-term capital gain or loss if the Steel Vault
stockholder’s holding period for the Steel Vault common
stock was more than one year.
Cash in Lieu of Fractional Shares.
A
holder of Steel Vault common stock who receives cash in lieu of
a fractional share of VeriChip common stock generally will be
treated as having received such fractional share in the merger
and then as having received cash in exchange for such fractional
share. Gain or loss generally will be recognized based on the
difference between the amount of cash received in lieu of the
fractional share and the tax basis allocated to such fractional
share of VeriChip common stock. Such gain or loss generally will
be long-term capital gain or loss if, as of the effective date
of the merger, the holding period in the Steel Vault common
stock exchanged is greater than one year.
Backup
Withholding of U.S. Federal Income Tax
A non-corporate holder of Steel Vault shares may be subject to
backup withholding, unless the stockholder (i) provides a
correct taxpayer identification number (which, for an individual
stockholder, generally is the stockholder’s social security
number) and certifies that he, she or it is not subject to
backup withholding on the substitute
W-9
that is
included as part of the transmittal letter or
(ii) otherwise is exempt from backup withholding. Backup
withholding will not apply to a Steel Vault stockholder who
completes and signs the substitute
Form W-9
that is included as part of the transmittal letter, or who
otherwise proves to VeriChip and its exchange agent that it is
exempt from backup withholding. A Steel Vault stockholder who
does not provide a correct taxpayer identification number may be
subject to penalties imposed by the Internal Revenue Service.
Backup withholding is not an additional tax and may be claimed
as a credit against a Steel Vault stockholder’s federal
income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
Reporting
and Record Keeping
A Steel Vault stockholder is required to retain records of the
transaction. At a minimum, the information retained must
include: (i) the amount of, and the stockholder’s tax
basis in, the Steel Vault common stock surrendered, and
(ii) the fair market value, as of the time of the effective
date of the merger, of the VeriChip common stock received in the
exchange therefor.
In addition, a significant holder of Steel Vault common stock
must attach, to the stockholder’s federal income tax return
for the year of the merger, a statement meeting the requirements
of Treasury Reg. § 1.368-3(b). For this purpose, a
significant holder is any person who, immediately before the
merger, held: (i) at least 5% (by vote or value) of Steel
Vault’s outstanding stock, if the stock held by such
stockholder is publicly
181
traded; or (ii) at least 1% (by vote or value) of Steel
Vault’s outstanding stock, if the stock held by such
stockholder is not publicly traded.
The preceding discussion does not purport to be a complete
analysis of all potential tax consequences of the merger that
may be relevant to a particular Steel Vault stockholder. Holders
of Steel Vault common stock are urged to consult their own tax
advisors regarding the specific tax consequences to them of the
merger, including the applicability and effect of foreign,
state, local and other tax laws.
VALIDITY
OF COMMON STOCK
The validity of the shares of VeriChip common stock offered in
connection with the merger will be passed upon by
Holland & Knight LLP, One East Broward Boulevard,
Suite 1300, Fort Lauderdale, Florida 33301.
Holland & Knight LLP will render an opinion that the
description of the U.S. federal income tax consequences
described under the caption “The Merger —
Material United States Federal Income Tax Consequences” is
accurate in all material respects.
EXPERTS
The financial statements of VeriChip at December 31, 2008
and 2007 and for each of the years in the two year period ended
December 31, 2008, included in this joint proxy
statement/prospectus have been audited by Eisner LLP,
independent registered public accounting firm as stated in their
report appearing herein and is included in reliance on the
report of such firm given upon the authority of said firm as
experts in auditing and accounting.
The financial statements of Steel Vault at September 30,
2008 and for the year ended September 30, 2008, included in
this joint proxy statement/prospectus have been audited by
Eisner LLP, independent registered public accounting firm as
stated in their report appearing herein and is included in
reliance on the report of such firm given upon the authority of
said firm as experts in auditing and accounting.
The financial statements of Steel Vault at September 30,
2007 and for the years ended September 30, 2007 and 2006,
included in this joint proxy statement/prospectus have been
audited by J.H. Cohn LLP, independent registered public
accounting firm as stated in their report appearing herein and
is included in reliance on the report of such firm given upon
the authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
Each of VeriChip and Steel Vault files reports, proxy statements
and other information with the SEC. You may read and copy any of
this information at the SEC’s public reference room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. The SEC
also maintains an internet website that contains reports, proxy
statements and other information regarding issuers, including
VeriChip and Steel Vault, who file electronically with the SEC.
The address of that site is
http://www.sec.gov.
The information contained on the SEC’s website is expressly
not incorporated by reference in this joint proxy
statement/prospectus. You can obtain any of the materials that
VeriChip or Steel Vault files with the SEC from the SEC, through
the SEC’s website at the address described above, or from
VeriChip or Steel Vault, as applicable, by requesting them in
writing or by telephone at the following addresses:
VeriChip
Corproation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8008
Attention: Investor Relations
182
Steel Vault
Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8000
Attention: Investor Relations
These documents are available from VeriChip or Steel Vault, as
applicable, without charge, excluding any exhibits to the
documents, unless the exhibit is specifically listed as an
exhibit to the registration statement of which this joint proxy
statement/prospectus forms a part. Copies of materials related
to VeriChip may also be inspected at the offices of the Nasdaq
Stock Market, Inc., One Liberty Plaza, 50th Floor, New
York, New York 10006. Stockholders may also consult
VeriChip’s and Steel Vault’s websites for more
information concerning the merger described in this joint proxy
statement/prospectus. Information included in VeriChip’s
and Steel Vault’s websites is not incorporated by reference
in this joint proxy statement/prospectus.
IN ORDER FOR YOU TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS
BEFORE THE VERICHIP SPECIAL AND ANNUAL MEETING OR THE STEEL
VAULT SPECIAL MEETING, VERICHIP OR STEEL VAULT SHOULD RECEIVE
YOUR REQUEST NO LATER THAN NOVEMBER 3, 2009.
VeriChip has filed a registration statement under the Securities
Act with the SEC with respect to VeriChip’s common stock to
be issued to Steel Vault stockholders in the merger. This joint
proxy statement/prospectus constitutes the prospectus of
VeriChip filed as part of the registration statement. You may
inspect and copy the registration statement at the address
listed above.
You should rely only on information contained in this joint
proxy statement/prospectus or any supplement we provide to you.
Neither VeriChip nor Steel Vault has authorized any other person
to provide you with different information. If anyone provides
you with different or inconsistent information, you should not
rely on it. VeriChip is not making an offer to sell the VeriChip
common stock in any jurisdiction where the offer or sale is not
permitted.
You should not assume that the information appearing in this
joint proxy statement/prospectus or any supplement is accurate
as of any date other than the date on the front of the
documents. VeriChip’s and Steel Vault’s business,
financial condition, results of operations and other information
may have changed since that date.
183
INDEX TO
VERICHIP CORPORATION’S FINANCIAL STATEMENTS
The following financial statements and related notes have
been excerpted from VeriChip’s Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
February 12, 2009, and VeriChip’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, filed with the SEC on
August 13, 2009. Unless the context otherwise requires,
references to “we,” “us,” “our,”
the “Company” and “VeriChip” within this
section refer to VeriChip Corporation and its consolidated
subsidiaries.
|
|
|
|
|
|
|
UNAUDITED FINANCIAL STATEMENTS:
|
|
|
|
|
|
|
|
|
FS-2
|
|
|
|
|
|
FS-3
|
|
|
|
|
|
FS-4
|
|
|
|
|
|
FS-5
|
|
|
|
|
|
FS-6
|
|
|
AUDITED FINANCIAL STATEMENTS:
|
|
|
|
|
|
|
|
|
FS-18
|
|
|
|
|
|
FS-19
|
|
|
|
|
|
FS-20
|
|
|
|
|
|
FS-21
|
|
|
|
|
|
FS-22
|
|
|
|
|
|
FS-23
|
|
FS-1
|
|
|
|
Item 1.
|
Financial
Statements.
|
VERICHIP
CORPORATION
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(In thousands, except par value)
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,165
|
|
|
$
|
3,229
|
|
|
Restricted Cash
|
|
|
4,434
|
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
|
232
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
5,831
|
|
|
|
3,504
|
|
|
Equipment, net of accumulated depreciation
|
|
|
30
|
|
|
|
39
|
|
|
Restricted cash
|
|
|
—
|
|
|
|
4,543
|
|
|
Investment in Steel Vault — Warrant
|
|
|
62
|
|
|
|
—
|
|
|
Note Receivable from Steel Vault
|
|
|
468
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,391
|
|
|
$
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
251
|
|
|
$
|
72
|
|
|
Accrued expenses and other current liabilities
|
|
|
948
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,199
|
|
|
|
1,166
|
|
|
Deferred gain
|
|
|
—
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
1,199
|
|
|
$
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
|
Preferred stock, Authorized 5,000 shares of $.001 par
value; no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, Authorized 40,000 shares of $.01 par
value; issued and outstanding 13,760 and 11,730 shares at
June 30, 2009 and December 31, 2008, respectively
|
|
|
137
|
|
|
|
117
|
|
|
Additional paid-in capital
|
|
|
44,996
|
|
|
|
44,410
|
|
|
Accumulated deficit
|
|
|
(39,965
|
)
|
|
|
(42,107
|
)
|
|
Other Comprehensive Income
|
|
|
24
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
5,192
|
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,391
|
|
|
$
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
FS-2
VERICHIP
CORPORATION
Condensed
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Revenue
|
|
$
|
49
|
|
|
$
|
32
|
|
|
$
|
57
|
|
|
$
|
35
|
|
|
Cost of goods sold
|
|
|
19
|
|
|
|
61
|
|
|
|
19
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
30
|
|
|
|
(29
|
)
|
|
|
38
|
|
|
|
(26
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
935
|
|
|
|
3,497
|
|
|
|
2,304
|
|
|
|
6,746
|
|
|
Research and development
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
935
|
|
|
|
3,547
|
|
|
|
2,304
|
|
|
|
6,958
|
|
|
Operating loss
|
|
|
(905
|
)
|
|
|
(3,576
|
)
|
|
|
(2,266
|
)
|
|
|
(6,984
|
)
|
|
Interest and other income
|
|
|
11
|
|
|
|
(835
|
)
|
|
|
24
|
|
|
|
(980
|
)
|
|
Gain on sale of Xmark Corporation
|
|
|
4,385
|
|
|
|
—
|
|
|
|
4,384
|
|
|
|
—
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(478
|
)
|
|
|
—
|
|
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
4,396
|
|
|
|
(1,313
|
)
|
|
|
4,408
|
|
|
|
(1,819
|
)
|
|
Income (loss) from continuing operations
|
|
|
3,491
|
|
|
|
(4,889
|
)
|
|
|
2,142
|
|
|
|
(8,803
|
)
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
1,682
|
|
|
|
—
|
|
|
|
2,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,491
|
|
|
$
|
(3,207
|
)
|
|
$
|
2,142
|
|
|
$
|
(6,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.50
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.90
|
)
|
|
Net income per common share from discontinued operations
|
|
|
—
|
|
|
|
0.17
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
0.28
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
12,436
|
|
|
|
9,803
|
|
|
|
12,240
|
|
|
|
9,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.50
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.90
|
)
|
|
Net income per common share from discontinued operations
|
|
|
—
|
|
|
|
0.17
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
0.27
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
12,894
|
|
|
|
9,803
|
|
|
|
12,563
|
|
|
|
9,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,491
|
|
|
$
|
—
|
|
|
$
|
2,142
|
|
|
$
|
—
|
|
|
Other Comprehensive Income
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,515
|
|
|
$
|
—
|
|
|
$
|
2,166
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
FS-3
VERICHIP
CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
(In thousands)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance December 31, 2008
|
|
|
11,730
|
|
|
$
|
117
|
|
|
$
|
44,410
|
|
|
$
|
(42,107
|
)
|
|
$
|
—
|
|
|
$
|
2,420
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,142
|
|
|
|
—
|
|
|
|
2,142
|
|
|
Unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
24
|
|
|
Stock based compensation
|
|
|
1,520
|
|
|
|
15
|
|
|
|
341
|
|
|
|
—
|
|
|
|
—
|
|
|
|
356
|
|
|
Issuance of shares for settlement of litigation expense
|
|
|
510
|
|
|
|
5
|
|
|
|
245
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2009
|
|
|
13,760
|
|
|
$
|
137
|
|
|
$
|
44,996
|
|
|
$
|
(39,965
|
)
|
|
$
|
24
|
|
|
$
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
FS-4
VERICHIP
CORPORATION
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,142
|
|
|
$
|
(6,050
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15
|
|
|
|
35
|
|
|
Stock based compensation
|
|
|
356
|
|
|
|
1,754
|
|
|
Accrued interest
|
|
|
—
|
|
|
|
505
|
|
|
Gain on sale of Xmark Corporation
|
|
|
(4,385
|
)
|
|
|
—
|
|
|
Asset impairment
|
|
|
—
|
|
|
|
44
|
|
|
Allowance for inventory excess
|
|
|
—
|
|
|
|
53
|
|
|
Issuance of shares for settlement of litigation expense
|
|
|
250
|
|
|
|
—
|
|
|
Non cash interest income
|
|
|
(11
|
)
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
—
|
|
|
|
32
|
|
|
Increase in inventories
|
|
|
—
|
|
|
|
(11
|
)
|
|
Decrease in prepaid expenses and other current assets
|
|
|
44
|
|
|
|
384
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
91
|
|
|
|
131
|
|
|
Net cash used in discontinued operations
|
|
|
(60
|
)
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,560
|
)
|
|
|
(3,835
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
Proceeds from sale of equipment
|
|
|
5
|
|
|
|
—
|
|
|
Investment in note receivable
|
|
|
(500
|
)
|
|
|
—
|
|
|
Net cash used in discontinued operations
|
|
|
—
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(504
|
)
|
|
|
(70
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Debt financing
|
|
|
—
|
|
|
|
8,000
|
|
|
Deferred financing costs
|
|
|
—
|
|
|
|
(495
|
)
|
|
Principal payments to stockholder on long term debt
|
|
|
—
|
|
|
|
(5,600
|
)
|
|
Issuance of common shares
|
|
|
—
|
|
|
|
48
|
|
|
Stock issuance costs
|
|
|
—
|
|
|
|
(9
|
)
|
|
Net cash used in discontinued operations
|
|
|
—
|
|
|
|
(1,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
—
|
|
|
|
429
|
|
|
Net decrease in cash
|
|
|
(2,064
|
)
|
|
|
(3,476
|
)
|
|
Cash, beginning of period
|
|
|
3,229
|
|
|
|
7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
1,165
|
|
|
$
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
FS-5
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial Statements
|
|
|
|
1.
|
Business
and Basis of Presentation
|
VeriChip Corporation (the “Company,” “us,”
“we,” or “our”) is a Delaware corporation
formed in November 2001. The Company commenced operations in
January 2002. On February 14, 2007, the Company completed
an initial public offering of its common stock, selling
3,100,000 shares of its common stock at a price of $6.50
per share.
On July 18, 2008, the Company completed the sale of all of
the outstanding capital stock of Xmark Corporation, its
wholly-owned Canadian subsidiary (“Xmark”), to Stanley
Canada Corporation (“Stanley”) for $47.9 million
in cash, which consisted of the $45 million purchase price
plus a balance sheet adjustment of $2.9 million. Under the
terms of the stock purchase agreement, $4.5 million of the
proceeds were held in escrow for a period of 12 months to
provide for indemnification obligations under the stock purchase
agreement, if any. As a result, the Company recorded a gain on
the sale of Xmark of $6.2 million, with $4.5 million
of that gain deferred until the escrow was settled. The Xmark
business included all of the operations of our previously
reported healthcare security and industrial segments. The
financial position, results of operations and cash flows of
Xmark for 2008 have been reclassified as a discontinued
operation.
During the quarter ended June 30, 2009 the Company
finalized the process related to the indemnification obligations
supported by the $4.5 million escrow. On July 20, 2009
the Company received $4.4 million of the previously
escrowed funds, which was net of a $115 thousand payment to
Stanley as the final settlement of the final balance sheet
adjustment. As a result, the Company recognized a
$4.4 million previously deferred gain in its statement of
operations for the three and six months ended June 30, 2009.
Following the completion of the sale of Xmark to Stanley, the
Company retired all of its outstanding debt for a combined
payment of $13.5 million and settled all contractual
payments to officers and management of the Company and Xmark for
$9.1 million. In addition, the Company issued a special
dividend of $15.8 million on August 28, 2008.
The Company has historically developed, marketed, and sold radio
frequency identification (frequently referred to as RFID)
systems used for the identification and protection of people in
the healthcare market. The Company’s VeriMed Health Link
system uses the human-implantable passive RFID microchip that is
used in patient identification applications, securely linking a
patient to their personal health record as maintained in the
Company’s proprietary database. Each implantable Health
Link microchip contains a unique verification number that is
read when it is scanned by the Company’s scanner. In
October 2004, the U.S. Food and Drug Administration, or
FDA, cleared the Company’s VeriMed Health Link system for
use in medical applications in the United States.
The accompanying unaudited condensed consolidated financial
statements of the Company and its subsidiaries as of
June 30, 2009 and December 31, 2008 (the
December 31, 2008, financial information included in this
report has been extracted from the Company’s audited
financial statements included in its Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2008), and for
the three and six months ended June 30, 2009 and 2008
have been prepared in accordance with United States
(“U.S.”) generally accepted accounting principles
(“GAAP”) for interim financial information and with
the instructions to
Form 10-Q
and Article 10 of
Regulation S-X
under the Securities Exchange Act of 1934. Accordingly, they do
not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of the
Company’s management, all adjustments (including normal
recurring adjustments) considered necessary to present fairly
the unaudited condensed consolidated financial statements have
been made. Certain items in the June 30, 2008 periods have
been reclassified for comparative purposes.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could
differ from those estimates. Included in these estimates are
assumptions
FS-6
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
about allowances for excess inventory, bad debt reserves, lives
of long lived assets, lives of intangible assets, assumptions
used in Black-Scholes valuation models, estimates of the fair
value of acquired assets and assumed liabilities, the
determination of whether any impairment is to be recognized on
goodwill or intangibles, among others.
The unaudited condensed consolidated statements of operations
for the three and six months ended June 30, 2009 and 2008
are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in
conjunction with the consolidated financial statements and
related notes thereto included in the Company’s Annual
Report on
Form 10-K
for the year ended December 31, 2008.
Fair
Value of Financial Instruments
The carrying values of financial instruments including cash and
accounts payable approximate fair value due to the relatively
short term nature of these instruments.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements.” SFAS 157 defines fair value and
establishes a framework for measuring fair value in accordance
with U.S. GAAP. The statement also expands the disclosures
related to the fair value measurements used to value assets and
liabilities. SFAS 157 was effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company adopted SFAS 157 on
January 1, 2008. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. This standard is now the
single source in U.S. GAAP for the definition of fair
value, except for the fair value of leased property as defined
in SFAS 13. SFAS 157 establishes a fair value
hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from
independent sources (observable inputs), (2) assumptions
that are other than quoted prices which are either directly or
indirectly observable for the asset or liability through
correlation with market data and (3) an entity’s own
assumptions about market participant assumptions developed based
on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of
three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3).
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
|
|
•
|
Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities.
|
|
|
|
|
•
|
Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the
asset or liability (e.g., interest rates); and inputs that are
derived principally from or corroborated by observable market
data by correlation or other means.
|
|
|
|
|
•
|
Inputs that are both significant to the fair value measurement
and unobservable.
|
The Company’s investment in the common stock purchase
warrant to purchase 333 thousand common shares of Steel Vault
Corporation (“Steel Vault”), as further discussed in
Note 4, are classified as Level 2 under SFAS 157
hierarchy. The warrant investment in the Company is valued
monthly using a black-scholes model with observable market
inputs.
Investments are classified within Level 3 of the fair value
hierarchy because they trade infrequently (or not at all) and
therefore have little or no readily available pricing.
Unobservable inputs are used to measure fair value to the extent
that observable inputs are not available. The note receivable is
classified within Level 3 of the fair value hierarchy.
FS-7
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
Valuations for Level 3 investments are adjusted when
changes to inputs and assumptions are corroborated by evidence
such as transactions in similar instruments, convertible
offerings in the equity or debt, and changes in financial ratios
or cash flows of the borrower and the guarantor’s financial
ability to repay the obligation in the event of a default. The
note receivable is guaranteed by the Company’s acting chief
financial officer who is the chief executive officer of Steel
Vault, the borrower.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity
and/or
non-transferability and such adjustments are generally based on
available market information. In the absence of such evidence,
management’s best estimate is used.
The values assigned to investments and any unrealized gains or
losses reported are based on available information and do not
necessarily represent amounts that might be realized if a ready
market existed and such difference could be material.
Furthermore the ultimate realization of such amounts depends on
future events and circumstances and therefore valuation
estimates may differ from the value realized upon disposition of
individual positions.
The following table sets forth information about the level
within the fair value hierarchy at which the Company’s
investments are measured at June 30, 2009 (expressed in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
Hierarchy
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
$
|
64
|
|
|
|
2
|
|
|
Note receivable
|
|
$
|
468
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes changes in fair value of the
Company’s Level 3 assets for the six months ended
June 30, 2009. The information reflects gains and losses
for the period for assets categorized as Level 3 as of
June 30, 2009 (expressed in thousands):
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
Note Receivable
|
|
|
|
|
Balance — December 31, 2008
|
|
$
|
—
|
|
|
Unrealized gains — (representing accretion of debt
discount)
|
|
$
|
2
|
|
|
Purchases
|
|
$
|
466
|
|
|
|
|
|
|
|
|
Balance — June 30, 2009
|
|
$
|
468
|
|
|
|
|
|
|
|
|
Change in unrealized gains
|
|
$
|
2
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
“Interim Disclosures about Fair Value of Financial
Instruments”
(“FSP
FAS 107-1”)
and (“APB
28-1”).
FSP
FAS 107-1
amends FASB Statement No. 107,
“Disclosures about
Fair Value of Financial Instruments”
, to require
disclosures about fair value of financial instruments in interim
as well as in annual financial statements and amends APB Opinion
No. 28
“Interim Financial Reporting”,
to
require those disclosures in interim financial statements. FSP
FAS 107-1
and APB
28-1
were adopted by the Company on April 1, 2009. These staff
positions did not have a material impact on our Condensed
Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165
“Subsequent Events” (“SFAS 165”).
SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. SFAS 165 sets forth (1) the period after
the
FS-8
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
(2) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements and (3) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
SFAS 165 was effective for the Company’s interim
financial periods ending June 30, 2009. The adoption of
this standard did not have a material impact on our Condensed
Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162”. The FASB
Accounting Standards Codification (“Codification”)
will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 is effective for interim and annual
periods ending after September 15, 2009. All existing
accounting standards are superseded as described in
SFAS 168. All other accounting literature not included in
the Codification is nonauthoritative. The adoption of this
standard is not expected to have a material impact on our
Condensed Consolidated Financial Statements.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted Financial
Accounting Standards Board (“FASB”)
SFAS No. 123 (revised 2004),
Share Based Payment,
or FAS 123R using the modified prospective transition
method. Under this method, stock-based compensation expense is
recognized using the fair-value based method for all awards
granted on or after the date of adoption. Compensation expense
for new awards granted after January 1, 2006 is recognized
over the requisite service period based on the grant-date fair
value of those options. Prior to adoption, the Company used the
intrinsic value method under Accounting Principles Board 25, and
related interpretations and provided the disclosure-only
provisions of FAS 123. Under the intrinsic value method, no
stock-based compensation had been recognized in our consolidated
statement of operations for options granted to the
Company’s employees and directors because the exercise
price of such stock options equaled or exceeded the fair market
value of the underlying stock on the dates of grant.
The Company recorded compensation expense, related to stock
options, of approximately $0.3 million and
$0.4 million for the three and six months ended
June 30, 2009, respectively, and approximately
$0.9 million and $1.8 million for the three and six
months ended June 30, 2008, respectively.
In December 2008, the Company issued approximately 518 thousand
shares of its restricted common stock to Mr. Caragol, its
acting chief financial officer in lieu of salary. The shares
vest according to the following schedule: (i) 20% vested on
the grant date, and (ii) 80% shall vest on January 1,
2010. In the event of a change in control and if
Mr. Caragol is terminated without cause, the shares will
immediately vest. The shares are subject to forfeiture in the
event Mr. Caragol is terminated for cause. Compensation
expense of approximately $22 thousand and $168 thousand was
recorded in the three and six months ended June 30, 2009,
respectively, for these shares.
In December 2008, the Company issued approximately 602 thousand
shares of its restricted common stock to Mr. Silverman, its
executive chairman in lieu of salary. If Mr. Silverman
remains involved in the day-to-day management of the Company,
the shares will vest upon the earlier to occur of:
(i) January 1, 2010, or (ii) a change in control
of the Company. The shares are subject to forfeiture in the
event that Mr. Silverman fails to remain involved in the
day-to-day management of the Company. Compensation expense of
approximately $55 thousand and $110 thousand was recorded in the
three and six months ended June 30, 2009, respectively, for
these shares.
FS-9
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
In December 2008, the Company issued 400 thousand shares of its
restricted common stock to members of the board of directors,
which vest on January 1, 2010. The Company determined the
value of the stock to be approximately $100 thousand based on
the value of its common stock on the dates of grant. The value
of the outstanding restricted stock is being amortized as
compensation expense over the vesting period. Compensation
expense of approximately $37 thousand and $73 thousand was
recorded in the three and six months ended June 30,
2009, respectively, for these shares.
In January and December 2008, the Company issued 25 thousand and
170 thousand options, respectively, to a director, employees and
consultants, which vest on January 18, 2011 and
December 31, 2011, respectively. The Company determined the
value of the option to be approximately $43 thousand based on
the value of its common stock on the dates of grant. The value
of the outstanding options is being amortized as compensation
expense over the vesting period. Compensation expense of
approximately $2 thousand and $4 thousand was recorded in the
three and six months ended June 30, 2009, respectively, for
these options.
Stock-based compensation expense is reflected in the condensed
consolidated statement of operations in selling, general and
administrative expense.
The Company’s computation of expected life was determined
based on the simplified method. The interest rate was based on
the U.S. Treasury Yield curve in effect at the time of
grant. The Company’s computation of expected volatility is
based on the historical volatility of the Company’s
comparable companies’ average historical volatility.
|
|
|
|
2.
|
Principles
of Consolidation
|
The financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company
transactions and balances had been eliminated in consolidation.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Raw materials
|
|
$
|
161
|
|
|
$
|
161
|
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
|
Finished goods
|
|
|
52
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
213
|
|
|
Allowance for excess and obsolescence
|
|
|
(213
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
On June 4, 2009, the Company invested $500 thousand in
Steel Vault pursuant to a secured convertible promissory note
(the “Note”). The two year Note is collectible on
demand on or after June 4, 2010, accrues at a rate of
twelve percent and is secured by substantially all of Steel
Vault’s assets, including the assets of National Credit
Report.com, LLC, a wholly-owned subsidiary of Steel Vault. The
security interest held by the Company on the assets is senior to
any other security interest on the assets pursuant to a
Subordination and Intercreditor Agreement between the Company
and Blue Moon Energy Partners LLC, a Florida limited liability
company (“Blue Moon”). The Note can be prepaid at any
time without penalty and matures on June 4, 2011. The
unpaid principal and accrued and unpaid interest under the Note
can be converted at any time into common stock of Steel Vault at
a price of $0.30 per share.
FS-10
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The investment included a common stock purchase warrant given to
VeriChip to purchase 333 thousand common shares of the Company
at a price of $0.30 per share. The fair market value at issuance
was $34. Interest receivable as of June 30, 2009 was $2.
The Company valued each component of the investment as of the
investment period and allocated the $500 thousand investment
proportionately to the Note and common stock purchase warrant
based on their respective fair values on June 4, 2009.
The financing transaction also included a guaranty of collection
given by William J. Caragol for the benefit of the Company. See
Note 9 — Related Party Transactions.
Stock
Option Plans
In April 2002, the Company’s board of directors approved
the VeriChip Corporation 2002 Flexible Stock Plan, or the
VeriChip 2002 Plan. Under the VeriChip 2002 Plan, the number of
shares for which options, SARs or performance shares, may be
granted is approximately 2.0 million. As of June 30,
2009, approximately 1.7 million options and restricted
shares, net of forfeitures, have been granted to directors,
officers and employees under the VeriChip 2002 Plan and
0.3 million of the options or shares granted were
outstanding as of June 30, 2009, all of which are fully
vested. As of June 30, 2009, no SARs have been granted and
0.3 million shares may still be granted under the VeriChip
2002 Plan.
On April 27, 2005, the board of directors of Digital Angel
Corporation (“Digital Angel”), the Company’s
former majority stockholder, approved the VeriChip Corporation
2005 Flexible Stock Plan, or the VeriChip 2005 Plan. Under the
VeriChip 2005 Plan, the number of shares for which options, SARs
or performance shares may be granted is approximately
0.3 million. As of June 30, 2009, approximately
0.3 million options have been granted under the VeriChip
2005 Plan and 0.2 million of the options were outstanding.
Approximately 0.2 million of the options are fully vested
and expire up to nine years from the vesting date. As of
June 30, 2009, no SARs have been granted and
832 shares may still be granted under the VeriChip 2005
Plan.
On June 17, 2007, the Company adopted the VeriChip 2007
Stock Incentive Plan, or the VeriChip 2007 Plan. Under the
VeriChip 2007 Plan, the number of shares for which options, SARs
or performance shares could be granted was 1.0 million. On
December 16, 2008, the Company’s stockholders approved
an amendment to the VeriChip 2007 Plan to include an additional
2.0 million shares that may be granted. As of June 30,
2009, approximately 2.4 million options and shares have
been granted. As of June 30, 2009, no SARs have been
granted and 0.6 million shares may still be granted under
the VeriChip 2007 Plan.
In addition, as of June 30, 2009, options exercisable for
approximately 0.3 million shares of the Company’s
common stock have been granted outside of the Company’s
plans. These options were granted at exercise prices ranging
from $0.23 to $8.55 per share, are fully vested and are
exercisable for a period of up to seven years.
In the six months ended June 30, 2009, no options were
granted. In the six months ended June 30, 2008, 25 thousand
options and 0.7 million shares were granted.
FS-11
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
A summary of option activity under the Company’s option
plans as of June 30, 2009, and changes during the six
months then ended is presented below (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
Exercise Price
|
|
|
|
Options
|
|
per Share
|
|
|
|
Outstanding on January 1, 2009
|
|
|
1,225
|
|
|
$
|
4.52
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
221
|
|
|
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on June 30, 2009
|
|
|
1,004
|
|
|
|
5.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on June 30, 2009(1)
|
|
|
834
|
|
|
|
6.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available on June 30, 2009 for options and common
shares that may be granted
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The intrinsic value of a stock option is the amount by which the
fair value of the underlying stock exceeds the exercise price of
the option. Based upon the Company’s closing price on the
NASDAQ, the fair value of the underlying stock was $0.46 at
June 30, 2009. As of June 30, 2009, the aggregate
intrinsic value of all options outstanding was $21 thousand.
|
The following table summarizes information about stock options
at June 30, 2009 (in thousands, except weighted-average
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Price per
|
|
|
|
|
|
Price per
|
|
|
Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
|
|
$0.0000 to $2.0250
|
|
|
226
|
|
|
|
8.2
|
|
|
$
|
0.55
|
|
|
|
56
|
|
|
$
|
1.10
|
|
|
$4.0501 to $6.0750
|
|
|
348
|
|
|
|
7.1
|
|
|
|
5.59
|
|
|
|
348
|
|
|
|
5.59
|
|
|
$6.0751 to $8.1000
|
|
|
318
|
|
|
|
4.3
|
|
|
|
7.08
|
|
|
|
318
|
|
|
|
7.08
|
|
|
$8.1001 to $10.1250
|
|
|
106
|
|
|
|
5.5
|
|
|
|
9.24
|
|
|
|
106
|
|
|
|
9.24
|
|
|
$18.2251 to $20.2500
|
|
|
6
|
|
|
|
3.5
|
|
|
|
20.25
|
|
|
|
6
|
|
|
|
20.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
6.3
|
|
|
$
|
5.39
|
|
|
|
834
|
|
|
$
|
6.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes model, which the Company used to determine
compensation expense, required the Company to make several key
judgments including:
|
|
|
|
|
|
•
|
the value of the Company’s common stock;
|
|
|
|
|
•
|
the expected life of issued stock options;
|
|
|
|
|
•
|
the expected volatility of the Company’s stock price;
|
|
|
|
|
•
|
the expected dividend yield to be realized over the life of the
stock option; and
|
|
|
|
|
•
|
the risk-free interest rate over the expected life of the stock
options.
|
The Company prepared these estimates based upon its historical
experience, the stock price volatility of comparable
publicly-traded companies and its best estimation of future
conditions.
FS-12
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
A reconciliation of the numerator and denominator of basic and
diluted loss per common share is provided as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
3,491
|
|
|
|
(4,889
|
)
|
|
|
2,142
|
|
|
|
(8,803
|
)
|
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
1,682
|
|
|
|
—
|
|
|
|
2,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,491
|
|
|
$
|
(3,207
|
)
|
|
$
|
2,142
|
|
|
$
|
(6,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic
|
|
|
12,436
|
|
|
|
9,803
|
|
|
|
12,240
|
|
|
|
9,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing
operations — basic
|
|
$
|
0.28
|
|
|
$
|
(0.50
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.90
|
)
|
|
Net income per common share from discontinued
operations — basic
|
|
|
—
|
|
|
|
0.17
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.28
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted
|
|
|
12,894
|
|
|
|
9,803
|
|
|
|
12,563
|
|
|
|
9,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing
operations — diluted
|
|
$
|
0.27
|
|
|
$
|
(0.50
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.90
|
)
|
|
Net income per common share from discontinued
operations — diluted
|
|
|
—
|
|
|
|
0.17
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following stock options and restricted stock outstanding as
of June 30, 2009 and 2008 were not included in the
computation of dilutive loss per share because the net effect
would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
1,815
|
|
|
|
—
|
|
|
|
1,815
|
|
|
Restricted common stock
|
|
|
—
|
|
|
|
1,297
|
|
|
|
—
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
3,112
|
|
|
|
—
|
|
|
|
3,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from the diluted earnings (loss) per share
calculation because the exercise prices were greater than the
average market price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options(1)
|
|
|
809
|
|
|
|
—
|
|
|
|
809
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
These options represent the number outstanding at the end of the
respective period. At the point that the exercise price is less
than the average market price, these options have the potential
to be dilutive and application of the treasury method would
reduce this amount.
|
FS-13
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
The Company had an effective tax rate of nil for the three and
six months ended June 30, 2009 and 2008. However, it has
not recorded a tax benefit for the resulting U.S. net
operating loss carryforwards, as the Company has determined that
a valuation allowance against its net U.S. deferred
tax assets was appropriate based primarily on its historical
operating results.
During the three and six months ended June 30, 2009, the
Company recognized a gain of $4.4 million from the sale of
Xmark in 2008. This gain resulted in taxable income in 2008,
which resulted in the Company utilizing a portion of its net
operating loss carryforward through the release of the valuation
allowance against those tax attributes.
FASB Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes,
(“FIN 48”) was issued to
clarify the requirements of Statement of Financial Accounting
Standards No. 109,
Accounting for Income Taxes
,
relating to the recognition of income tax benefits.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when the benefits’ realization is
uncertain. The first step is to determine whether the benefit is
to be recognized, and the second step is to determine the amount
to be recognized:
|
|
|
|
|
|
•
|
income tax benefits should be recognized when, based on the
technical merits of a tax position, the entity believes that if
a dispute arose with the taxing authority and were taken to a
court of last resort, it is more likely than not (i.e., a
probability of greater than 50 percent) that the tax
position would be sustained as filed; and
|
|
|
|
|
•
|
if a position is determined to be more likely than not of being
sustained, the reporting enterprise should recognize the largest
amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with the
taxing authority.
|
The implementation of FIN 48 did not result in any
adjustment to the Company’s beginning tax positions. The
Company continues to fully recognize its tax benefits, which are
offset by a valuation allowance to the extent that it is more
likely than not that the deferred tax assets will not be
realized.
The Company recognizes any interest accrued related to
unrecognized tax benefits or exposures in interest expense and
penalties in operating expenses. During the three and six months
ended June 30, 2009 and 2008, there was no such interest or
penalty.
The Company is engaged in certain legal actions and management
believes that the ultimate outcome of these actions will not
have a material adverse effect on the Company’s operating
results, liquidity or financial position.
The Company is a party to various legal actions, as either
plaintiff or defendant, including the matters identified above,
arising in the ordinary course of business, none of which is
expected to have a material adverse effect on its business,
financial condition or results of operations. However,
litigation is inherently unpredictable, and the costs and other
effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and
investigations, claims or charges in any such matters, and
developments or assertions by or against the Company relating to
it or to its intellectual property rights and intellectual
property licenses could have a material adverse effect on the
Company’s business, financial condition and operating
results.
FS-14
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
|
|
|
|
9.
|
Related
Party Transactions
|
Agreements
with Steel Vault
The Company shares a common ownership, or control group, with
Steel Vault Corporation (“Steel Vault”), a public
company formerly known as IFTH Acquisition Corp. R & R
Consulting Partners, LLC, a holding company owned and controlled
by Scott R. Silverman, and Mr. Silverman currently own on a
combined basis, approximately 50% of the Company’s
outstanding common stock. As of July 31, 2009,
Mr. Silverman owned, directly or indirectly, approximately
59% of Steel Vault’s outstanding common stock, including
2,570,000 shares that are directly owned by Blue Moon.
Mr. Silverman, the Company’s executive chairman of the
board, is a manager and controls a member of Blue Moon (i.e.,
R & R Consulting Partners, LLC). William J. Caragol,
the Company’s acting chief financial officer and acting
treasurer, is also a manager and member of Blue Moon and is the
Chief Executive Officer of Steel Vault.
On October 8, 2008, Steel Vault entered into a sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida, consisting approximately 7,911 feet
of office space, which space the Company shares with Steel
Vault. The rent for the entire twenty-one-month term of the
sublease is $158,000, which Steel Vault paid in one lump sum
upon execution of the sublease. The Company reimbursed Steel
Vault for one-half of the sublease payment, representing the
Company’s share of the total cost of the sublease. In
addition, in order to account for certain shared services and
resources, the Company and Steel Vault operate under a shared
services agreement, in connection with which Steel Vault
currently pays the Company $6,500 a month. During the six and
three months ended June 30, 2009, the Company recorded
$45,000 and $21,000, respectively, for shared services fees from
Steel Vault. The Company did not record any payments for shared
services fees from Steel Vault for the six and three months
ended June 30, 2008.
As discussed in Note 4 above, on June 4, 2009, the
Company closed a debt financing transaction with Steel Vault for
$500 thousand pursuant to a secured convertible promissory note
(the “Note”). The two year Note is collectible on
demand on or after June 4, 2010, accrues at a rate of
twelve percent and is secured by substantially all of Steel
Vault’s assets, including the assets of National Credit
Report.com, LLC, a wholly-owned subsidiary of Steel Vault. The
Note can be prepaid at any time without penalty and matures on
June 4, 2011. The unpaid principal and accrued and unpaid
interest under the Note can be converted at any time into common
stock of Steel Vault at a price of $0.30 per share.
The financing transaction included a common stock purchase
warrant sold to VeriChip to purchase 333 thousand common
shares of Steel Vault at a price of $0.30 per share. The fair
market value of the warrants at issuance was $34 thousand.
Interest accrued as of June 30, 2009 was $2.
The financing transaction also included a guaranty of collection
given by William J. Caragol, the Company’s acting chief
financial officer, for the benefit of the Company, for which
Mr. Caragol received a common stock purchase warrant from
Steel Vault to purchase 500 thousand common shares of Steel
Vault at a price of $0.30 per share. The fair market value at
issuance was $45 thousand.
|
|
|
|
10.
|
Events
Occurring After Reporting Date
|
The Company has evaluated events and transactions that occurred
between July 1, 2009 and August 13, 2009, which is the
date the financial statements were issued and through
October 2, 2009 (date of reissue) for possible disclosure
or recognition in the financial statements. The Company has
determined that there were no such events or transactions that
warrant disclosure or recognition in the financial statements
except as disclosed.
On September 21, 2009, VeriChip entered into a license
agreement with Receptors to obtain an exclusive license to use
certain intellectual property of Receptors for internal
research, internal development and quality control purposes and
to make, sell, offer to sell, import and export tangible
products covered by patents and
FS-15
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
patent applications, or the licensed products, owned by
Receptors in their application to the development of the virus
triage detection system for the detection and identification of
the influenza virus, including, but not limited to the H1N1
virus.
On September 21, 2009, in connection with the license
agreement, VeriChip and Receptors entered into a
development/master agreement pursuant to which VeriChip will
engage the services of Receptors to develop a sensing system for
the detection and identification of the influenza virus,
including, but not limited to the H1N1 virus. Under the
development/master agreement, Receptors will provide VeriChip
with a proof-of-principal report and demonstration of the
sensing system by January 31, 2010 (Phase I) and a
prototype of the sensing system built or the proof-of-principal
report, including influenza sub-type identification by or about
September 30, 2010 (Phase II). VeriChip will issue 200,000
restricted shares of VeriChip common stock and $100,000 in cash
as payment under Phase I of the development/master agreement. On
September 30, 2009, VeriChip decided to
fund Phase II of this development and may be
financially obligated to fund approximately $600,000 for the
cost of that development and continuation of the exclusive
license.
VeriChip must pay Receptors royalties of fifty percent (50%) of
the net sales of the licensed products used in the detection and
sub-type identification of the influenza virus employing
Receptors’ proprietary artificial receptor technology or
methods, synthetic competitor agent technology or methods, or
sensing system technology or methods, worldwide. VeriChip must
also pay Receptors fifty percent (50%) of any revenue received
from the sale of the licensed products, other than for sales
described in the immediately preceding sentence.
On September 29, 2009, VeriChip entered into a definitive
agreement for a $10,000,000 convertible preferred stock
investment arrangement with Optimus Technology Capital Partners,
LLC, or Optimus. VeriChip may issue convertible preferred shares
from time to time in multiple tranches. The preferred stock will
accrue a 10% in kind dividend and provides an option for
VeriChip to prepay with a make-whole premium. The tranches will
be convertible into restricted common stock at the market price
on the date of each tranche. In conjunction with the financing,
R & R Consulting Partners, LLC, which is controlled by
Mr. Silverman, agreed to enter into one or more stock loan
agreements with Optimus to facilitate the transaction.
Pursuant to the certificate of designations of preferences,
rights and limitations of Series A Preferred Stock, or the
certificate of designations, that was filed with the Delaware
Secretary of State on September 29, 2009, for the
Series A Preferred Stock, one or more shares of the
Series A Preferred Stock may be converted into shares of
VeriChip common stock, on or after the six-month anniversary of
the issuance date, at a conversion price equal to the closing
bid price on the trading day immediately preceding the notice
date, or the conversion price, by VeriChip or Optimus. If
VeriChip or Optimus exercises this conversion option with
respect to any Series A Preferred Stock, VeriChip will
issue to Optimus the number of shares of VeriChip common stock
equal to (x) $10,000 per share of Series A Preferred
Stock multiplied by (y) the number of shares of
Series A Preferred Stock subject to the notice, divided by
(z) the conversion price with respect to such shares. If
VeriChip exercises the conversion prior to the fourth
anniversary of the issuance of such shares, then, in addition to
the conversion shares, VeriChip must pay to the holder
additional shares with respect to such converted shares:
(i) 35% of the conversion shares if converted after the
six-month anniversary of the issuance date, but prior to the
first anniversary of the issuance date, (ii) 27% of the
converted shares if converted on or after the first anniversary,
but prior to the second anniversary of the issuance date,
(iii) 18% of the converted shares if converted on or after
the second anniversary date, but prior to the third anniversary
of the issuance date, and (iv) 9% of the converted shares
if converted on or after the third anniversary, but prior to the
fourth anniversary of the issuance date.
In the event the closing bid price of VeriChip common stock
during any one or more of the nine trading days following the
delivery of a notice falls below 75% of the closing bid price on
the trading day prior to the notice date and Optimus determines
not to complete the tranche closing, then VeriChip may, at its
option,
FS-16
VERICHIP
CORPORATION
Notes to
Unaudited Condensed Consolidated Financial
Statements — (Continued)
proceed to issue some or all of the applicable shares, provided
that the conversion price for the preferred stock that is issued
shall reset at the lowest closing bid price for such nine
trading day period.
Pursuant to the certificate of designations, VeriChip may
redeem, for cash, any or all of the Series A Preferred
Stock at any time at the redemption price per share equal to
$10,000 per share of Series A Preferred Stock, or the
Series A liquidation value, plus any accrued but unpaid
dividends with respect to such shares of preferred stock. If
VeriChip exercises this redemption option with respect to any
shares of Series A Preferred Stock prior to the fourth
anniversary of the issuance of such preferred stock, then in
addition to the Series A liquidation value plus any accrued
but unpaid dividends, VeriChip must pay to Optimus a make-whole
price per share equal to the following with respect to such
redeemed Series A Preferred Stock: (i) 35% of the
Series A liquidation value if redeemed prior to the first
anniversary of the issuance date, (ii) 27% of the
Series A liquidation value if redeemed on or after the
first anniversary but prior to the second anniversary of the
issuance date, (iii) 18% of the Series A liquidation
value if redeemed on or after the second anniversary but prior
to the third anniversary of the issuance date, and (iv) 9%
of the Series A liquidation value if redeemed on or after
the third anniversary but prior to the fourth anniversary of the
issuance date. In addition, redemption of the Series A
Preferred Stock by VeriChip, to the extent such preferred stock
shall not have been converted into shares of VeriChip common
stock, shall be mandatory in the event that VeriChip does not
receive stockholder approval for the transactions described in
the purchase agreement on or before March 31, 2010.
The Series A Preferred Stock ranks, with respect to rights
upon liquidation,
winding-up
or dissolution, senior to VeriChip’s common stock and any
other classes of stock or series of preferred stock of VeriChip
and junior to existing and future indebtedness of VeriChip.
Holders of Series A Preferred Stock will receive dividends
on each outstanding share of Series A Preferred Stock,
commencing on the first anniversary of the date of issuance of
any such shares of such preferred stock, which will accrue in
shares of Series A Preferred Stock at a rate equal to 10%
per annum from the date of issuance, except for shares of
Series A Preferred Stock that are redeemed for cash or
converted into shares of common stock prior to the first
anniversary of the issuance date with respect to such shares of
Series A Preferred Stock.
To facilitate the transactions contemplated by the purchase
agreement, R & R Consulting Partners, LLC, or
R & R, a company controlled by Scott R. Silverman,
VeriChip’s chief executive officer and executive chairman
of the board, will loan shares of common stock to Optimus equal
to 135% of the aggregate purchase price for each tranche
pursuant to stock loan agreements between R & R and
Optimus. R & R is being paid $100,000 plus 2% interest
for entering into the stock loan arrangement. The aggregate
amount of shares loaned under any and all stock loan agreements,
together with all other shares sold by or on behalf of VeriChip
pursuant to General Instruction I.B.6. to
Form S-3,
can not exceed one-third of the aggregate market value of the
voting and non-voting common equity held by non-affiliates of
VeriChip in any 12 month period. R & R may demand
return of some or all of the borrowed shares (or an equal number
of freely tradable shares of VeriChip common stock) at any time
on or after the six-month anniversary date such borrowed shares
were loaned to Optimus, but no such demand may be made if there
are any shares of Series A Preferred Stock then
outstanding. If a permitted return demand is made, Optimus shall
return the borrowed shares within three trading days after such
demand (or an equal number of freely tradable shares of VeriChip
common stock). Optimus may return the borrowed Shares to
R & R, in whole or in part, at any time or from time
to time, without penalty or premium.
FS-17
Board of Directors and Stockholders
VeriChip Corporation
We have audited the accompanying consolidated balance sheets of
VeriChip Corporation and subsidiaries (the “Company”)
as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity
and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements 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 and
schedule are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over
financial reporting. Our audits include 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 financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of VeriChip Corporation and subsidiaries as
of December 31, 2008 and 2007, and the consolidated results
of their operations and their consolidated cash flows for the
years then ended, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 12 to the consolidated financial
statements, the Company sold Xmark Corporation in 2008 and
classified it as discontinued operations for the years ended
December 31, 2008 and 2007.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board (“FASB”) Interpretation No. 48,
“
Accounting for Uncertainty in Income Taxes —
an interpretation of FASB No. 109
,” effective
January 1, 2007.
Eisner LLP
New York, New York
February 11, 2009
FS-18
VERICHIP
CORPORATION
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands, except par
|
|
|
|
|
value)
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,229
|
|
|
$
|
7,221
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
47
|
|
|
Inventories, net of allowance
|
|
|
—
|
|
|
|
95
|
|
|
Prepaid expenses and other current assets
|
|
|
275
|
|
|
|
953
|
|
|
Current assets from discontinued operations
|
|
|
—
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,504
|
|
|
|
16,518
|
|
|
Equipment, net of accumulated depreciation
|
|
|
39
|
|
|
|
112
|
|
|
Restricted cash
|
|
|
4,543
|
|
|
|
—
|
|
|
Other assets from discontinued operations
|
|
|
—
|
|
|
|
33,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,086
|
|
|
$
|
49,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72
|
|
|
$
|
338
|
|
|
Accrued expenses and other current liabilities
|
|
|
634
|
|
|
|
632
|
|
|
Note payable to stockholder, current portion
|
|
|
—
|
|
|
|
2,167
|
|
|
Current liabilities from discontinued operations
|
|
|
460
|
|
|
|
6,708
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,166
|
|
|
|
9,845
|
|
|
Note payable to stockholder, less current portion
|
|
|
—
|
|
|
|
10,753
|
|
|
Deferred gain
|
|
|
4,500
|
|
|
|
—
|
|
|
Other liabilities of discontinued operations
|
|
|
—
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,666
|
|
|
|
24,407
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
|
Preferred stock, Authorized 5,000 shares of $.001 par
value; no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, Authorized 40,000 shares, of $.01 par
value; issued and outstanding 11,730 and 10,144 shares at
December 31, 2008 and 2007, respectively
|
|
|
117
|
|
|
|
101
|
|
|
Additional paid-in capital
|
|
|
44,410
|
|
|
|
54,486
|
|
|
Accumulated deficit
|
|
|
(42,107
|
)
|
|
|
(28,959
|
)
|
|
Accumulated other comprehensive loss — foreign
currency translation
|
|
|
—
|
|
|
|
(37
|
)
|
|
Total Stockholders’ Equity
|
|
|
2,420
|
|
|
|
25,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,086
|
|
|
$
|
49,998
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
FS-19
VERICHIP
CORPORATION
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Revenue
|
|
|
43
|
|
|
|
76
|
|
|
Cost of sales
|
|
|
275
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(232
|
)
|
|
|
(285
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
19,775
|
|
|
|
13,184
|
|
|
Research and development
|
|
|
712
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,487
|
|
|
|
13,290
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(20,719
|
)
|
|
|
(13,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
|
|
|
6,174
|
|
|
|
—
|
|
|
Gain on settlement of debt
|
|
|
1,823
|
|
|
|
—
|
|
|
Interest income and other (expense), net
|
|
|
(334
|
)
|
|
|
281
|
|
|
Interest expense
|
|
|
(879
|
)
|
|
|
(1,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
6,784
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,935
|
)
|
|
|
(14,967
|
)
|
|
Income from discontinued operations (net of tax expense
(benefit) of $233 and $(1,056))
|
|
|
787
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,148
|
)
|
|
$
|
(11,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations —
basic and diluted
|
|
$
|
(1.31
|
)
|
|
$
|
(1.71
|
)
|
|
Net income per common share from discontinued
operations — basic and diluted
|
|
|
0.07
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$
|
(1.24
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding — basic
and diluted
|
|
|
10,597
|
|
|
|
8,756
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
FS-20
VERICHIP
CORPORATION
Consolidated
Statement of Stockholders’ Equity
For the
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholder’s
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance December 31, 2006
|
|
|
6,056
|
|
|
$
|
61
|
|
|
$
|
39,371
|
|
|
$
|
(17,049
|
)
|
|
$
|
(37
|
)
|
|
$
|
22,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,910
|
)
|
|
|
—
|
|
|
|
(11,910
|
)
|
|
Issuance of shares in public offering, net of costs of $8,033
|
|
|
3,100
|
|
|
|
31
|
|
|
|
12,076
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,107
|
|
|
Issuance of restricted stock
|
|
|
100
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrant exercise
|
|
|
395
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of shares from option exercises
|
|
|
536
|
|
|
|
5
|
|
|
|
370
|
|
|
|
—
|
|
|
|
—
|
|
|
|
375
|
|
|
Stock issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
Stock based compensation
|
|
|
138
|
|
|
|
1
|
|
|
|
3,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,446
|
|
|
Repurchase of shares
|
|
|
(181
|
)
|
|
|
(2
|
)
|
|
|
(760
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
10,144
|
|
|
|
101
|
|
|
|
54,486
|
|
|
|
(28,959
|
)
|
|
|
(37
|
)
|
|
|
25,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,148
|
)
|
|
|
—
|
|
|
|
(13,148
|
)
|
|
Stock based compensation
|
|
|
622
|
|
|
|
6
|
|
|
|
5,026
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,032
|
|
|
Issuance of shares to lender
|
|
|
120
|
|
|
|
2
|
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
Issuance of shares from option exercises
|
|
|
844
|
|
|
|
8
|
|
|
|
434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
442
|
|
|
Dividend to stockholders
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,836
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,836
|
)
|
|
Sale of Xmark Corporation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
11,730
|
|
|
$
|
117
|
|
|
$
|
44,410
|
|
|
$
|
(42,107
|
)
|
|
$
|
—
|
|
|
$
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
FS-21
VERICHIP
CORPORATION
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,148
|
)
|
|
$
|
(11,910
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
52
|
|
|
|
73
|
|
|
Stock based compensation
|
|
|
5,032
|
|
|
|
3,446
|
|
|
Bad debt expense
|
|
|
14
|
|
|
|
—
|
|
|
Impairment of PP&E
|
|
|
44
|
|
|
|
—
|
|
|
Non cash interest income
|
|
|
(43
|
)
|
|
|
—
|
|
|
Gain on settlement of debt
|
|
|
(1,823
|
)
|
|
|
—
|
|
|
Gain on sale of Xmark Corporation
|
|
|
(6,174
|
)
|
|
|
—
|
|
|
Accrued interest
|
|
|
—
|
|
|
|
1,491
|
|
|
Allowance for inventory excess
|
|
|
213
|
|
|
|
258
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
32
|
|
|
|
(39
|
)
|
|
Decrease (increase) in inventories
|
|
|
(117
|
)
|
|
|
155
|
|
|
Increase (decrease) in prepaid expenses and other current assets
|
|
|
344
|
|
|
|
(832
|
)
|
|
Increase in accounts payable and accrued expenses
|
|
|
(225
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(15,799
|
)
|
|
|
(7,674
|
)
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(2,887
|
)
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(18,686
|
)
|
|
|
(7,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Xmark Corporation
|
|
|
43,363
|
|
|
|
—
|
|
|
Payments for equipment and other assets
|
|
|
(22
|
)
|
|
|
(59
|
)
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(114
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
43,227
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Short-term borrowing
|
|
|
8,000
|
|
|
|
—
|
|
|
Repayment of short-term borrowing
|
|
|
(8,000
|
)
|
|
|
—
|
|
|
Financing costs
|
|
|
(701
|
)
|
|
|
—
|
|
|
Principal payments to former stockholder
|
|
|
(10,423
|
)
|
|
|
(3,500
|
)
|
|
Guarantee fee paid to former stockholder
|
|
|
(500
|
)
|
|
|
—
|
|
|
Borrowings from stockholder
|
|
|
—
|
|
|
|
1,293
|
|
|
Initial public offering costs
|
|
|
—
|
|
|
|
(2,879
|
)
|
|
Issuance of common shares from the exercise of stock options
|
|
|
442
|
|
|
|
363
|
|
|
Proceeds from initial public offering, net of underwriter fees
|
|
|
—
|
|
|
|
18,336
|
|
|
Payment of dividend
|
|
|
(15,836
|
)
|
|
|
—
|
|
|
Share repurchase
|
|
|
—
|
|
|
|
(762
|
)
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(1,515
|
)
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(28,533
|
)
|
|
|
13,513
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(3,992
|
)
|
|
|
6,225
|
|
|
Cash, beginning of year
|
|
|
7,221
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
3,229
|
|
|
$
|
7,221
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
FS-22
VERICHIP
CORPORATION
Notes to
Consolidated Financial Statements
(tabulated
amounts in thousands of dollars, except per share
amounts)
VeriChip Corporation is a Delaware corporation formed in
November 2001. The Company commenced operations in January 2002.
On February 14, 2007, the Company completed an initial
public offering of its common stock, selling
3,100,000 shares of its common stock at a price of $6.50
per share.
On July 18, 2008, the Company completed the sale of all of
the outstanding capital stock of Xmark Corporation, its
wholly-owned Canadian subsidiary (“Xmark”), to Stanley
Canada Corporation for $47.9 million in cash, which
consisted of the $45 million purchase price plus a balance
sheet adjustment of $2.9 million. Under the terms of the
stock purchase agreement, $4.5 million of the proceeds will
be held in escrow for a period of 12 months to provide for
indemnification obligations under the stock purchase agreement,
if any. As a result, the Company recorded a gain on the sale of
Xmark of $6.2 million, with $4.5 million of that gain
deferred until the escrow is settled. The Xmark business
includes all of the operations of our previously reported
healthcare security and industrial segments. The financial
position, results of operations and cash flows of Xmark for 2007
have been reclassified as a discontinued operation.
Following the completion of the sale of Xmark to Stanley Canada,
the Company retired all of its outstanding debt for a combined
payment of $13.5 million and settled all contractual
payments to officers and management of the Company and Xmark for
$9.1 million. In addition, the Company issued a special
dividend of $15.8 million on August 28, 2008.
The Company has historically developed, marketed, and sold radio
frequency identification (frequently referred to as RFID)
systems used for the identification and protection of people in
the healthcare market. The Company’s VeriMed Health Link
system uses the implantable microchip, a human-implantable
passive RFID microchip that is used in patient identification
applications, securely linking a patient to their personal
health record as maintained in the Company’s proprietary
database. Each implantable Health Link microchip contains a
unique verification number that is read when it is scanned by
the Company’s scanner. In October 2004, the U.S. Food
and Drug Administration, or FDA, cleared the Company’s
VeriMed Health Link system for use in medical applications in
the United States.
Prior to November 12, 2008, the Company obtained the
implantable microchip from a wholly-owned subsidiary of Digital
Angel Corporation, the Company’s former stockholder, under
the terms of an amended and restated supply agreement. The
supply agreement is discussed in Note 11, “Related
Party Transactions.”
On November 12, 2008, the Company entered into an Asset
Purchase Agreement (“APA”) with Digital Angel and
Destron Fearing Corporation, a wholly-owned subsidiary of
Digital Angel, which collectively are referred to as,
“Digital Angel”. The terms of the APA included the
sale to the Company of patents related to an embedded bio-sensor
system for use in humans, and the assignment of any rights of
Digital Angel under a development agreement associated with the
development of an implantable glucose sensing microchip. The
Company also received covenants from Digital Angel and Destron
Fearing that will permit the use of intellectual property of
Digital Angel related to the Company’s VeriMed Health Link
business without payment of ongoing royalties, as well as
inventory and a limited period of technology support by Digital
Angel. The Company paid Digital Angel $500,000 at the closing of
the APA, which was recorded on the financials as research and
development expense.
Also pursuant to the APA, on November 12, 2008, the parties
terminated the May 2008 Agreement, except for certain provision
relating to indemnification in connection with the stock
purchase agreement with The Stanley Works. Additionally, the
Supply Agreement was terminated, except that product warranties
continue to apply to products sold to the Company under that
agreement subject to certain limitations, and the
indemnification provisions survive through March 4, 2013
for claims associated with the products purchased under the
Supply Agreement (for more information on the May 2008 Agreement
and the Supply Agreement, see Note 11 “Related Party
Transactions”).
FS-23
On November 12, 2008, Digital Angel sold the
5.4 million shares of the Company’s common stock it
owned to R & R Consulting Partners, LLC, an entity
owned and controlled by Scott R. Silverman, the Company’s
chairman and former chief executive officer, in a private
transaction. As a result of the transaction, R & R
Consulting Partners, LLC and Mr. Silverman now own 53% of
the Company’s outstanding common stock, and
Mr. Silverman was re-appointed as chairman of the
Company’s board effective November 12, 2008.
On November 14, 2008, the Company purchased from Digital
Angel the remaining inventory owned by Digital Angel related to
VeriMed Health Link business for $161 thousand, which was fully
written off as of December 31, 2008.
On November 12, 2008, the Company announced its intention
to continue to explore potential strategic transactions with
third parties, while continuing to operate our VeriMed Health
Link business.
The Company is currently focused on its options, including the
possible development of the glucose sensing microchip and is
considering and will review other strategic opportunities.
As discussed in Note 11 to our Consolidated Financial
Statements, the supply agreement with Digital Angel was
terminated on November 12, 2008.
Accounting
Policies
Principles
of Consolidation
The financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company
transactions and balances had been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America, requires management to make certain estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are
based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from
actual results. Included in these estimates are assumptions
about allowances for excess inventory and obsolescence, lives of
long- lived assets, lives of intangible asset, assumptions used
in Black-Scholes valuation models, estimates of the fair value
of acquired assets and assumed liabilities and the determination
of whether any impairment is to be recognized on intangibles,
among others.
Concentration
of Credit Risk
The Company maintained its cash in one financial institution
during the years ended December 31, 2008 and 2007. Balances
were insured up to Federal Deposit Insurance Corporation
(“FDIC”) limits of $250,000 per institution. Cash
exceeded the federally insured limits.
The Company’s trade receivables are potentially subject to
credit risk. The Company extends credit to its customers based
upon an evaluation of the customers’ financial condition
and credit history. The Company generally does not require
collateral.
Trade
Account Receivable
Trade account receivable consist primarily of receivables from
implantable microchip kits and scanners sales. The Company
records a provision for doubtful receivables to allow for any
amounts which may be unrecoverable and is based upon an analysis
of the Company’s prior collection experience, customer
creditworthiness, and current economic trends.
Inventories
Inventories consist of raw materials, work in process, and
finished goods. Inventory is valued at the lower of cost,
determined by the
first-in,
first-out method, or market. The Company monitors and analyzes
inventory
FS-24
for potential obsolescence and slow-moving items based upon the
aging of the inventory and the inventory turns by product.
Inventory items designated as slow moving are reduced to net
realizable value. Inventory items designated as obsolete are
written off. The allowance for inventory excess and obsolescence
was approximately $0.2 million and $0.6 million as of
December 31, 2008 and 2007, respectively.
Equipment
Equipment is carried at cost less accumulated depreciation,
computed using the straight-line method over the estimated
useful lives. Leasehold improvements are depreciated over the
life of the lease, software is depreciated over 2 years,
and equipment is depreciated over periods ranging from 3 to
5 years. Repairs and maintenance, which do not extend the
useful life of the asset, are charged to expense as incurred.
Gains and losses on sales and retirements are reflected in the
consolidated statements of operations.
Intangible
Assets
The Company follows Statement of Financial Accounting Standards,
No. 142,,
Goodwill and Intangible Assets
,
(“SFAS 142”). Goodwill represents the excess of
purchase price over the fair values assigned to the net assets
acquired in business combinations. Goodwill is allocated to
reporting units as of the acquisition date for the purpose of
goodwill impairment testing. The Company’s reporting units
are those businesses for which discrete financial information is
available and upon which segment management makes operating
decisions. Goodwill of a reporting unit is tested for impairment
at least once a year, or between testing dates if an impairment
condition or event is determined to have occurred.
The Company has other intangible assets consisting of patented
and non-patented technologies. These intangible assets are
amortized over their expected economic lives. The lives are
determined based upon the expected use of the asset, the
estimated average life of the replacement parts of the reporting
units products, the stability of the industry, expected changes
in and replacement value of distribution networks and other
factors deemed appropriate.
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets,
the Company
continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated useful lives of
its definite-lives intangible assets may warrant revision or
that the remaining balance of such assets may not be
recoverable. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the asset in
measuring whether the asset is recoverable. There was no
impairment recorded on definite-lived intangible assets and
other long-lived assets during 2008 and 2007.
Revenue
Recognition
The Company follows the revenue recognition guidance in Staff
Accounting Bulletin (“SAB”), 101, and SAB 104.
The Company’s revenue recognition policy is as follows:
The Company’s VeriMed Health Link patient identification
system includes the implantable microchip, scanners, insertion
kits and patient registration forms. These items can be sold
directly and through distributors with a limited warranty
period. The Company also generally indemnifies its distributors
against third party claims of intellectual property
infringement. In conjunction with the implantation of a
microchip, the patient completes a registration form enrolling
the patient in the VeriMed Health Link Patient Registry.
Product
Revenue
Revenue from the sale of the implantable microchip kits and
scanners are recorded at gross amounts. Until the amount of
returns can be reasonably estimated, the Company does not
recognize revenue until after the products are shipped to
customers and title has transferred, provided that a purchase
order has been received or a contract has been executed, the
price is fixed or determinable, there are no uncertainties
regarding customer acceptance, the period of time in which the
distributor or physician has to return the product has elapsed
and collection of the sales proceeds is reasonably assured. Once
the level of returns can be reasonably estimated, revenue (net
of expected returns) will be recognized at the time of shipment
and the
FS-25
passage of title, assuming there are no uncertainties regarding
customer acceptance. If uncertainties regarding customer
acceptance exist, revenue will not be recognized until such
uncertainties are resolved. The Company has one distribution
arrangement that provides for sales on a consignment basis. The
Company intends to recognize revenue from consignment sales to
this distributor after receipt of notification from the
distributor of product sales to the distributor’s
customers, provided that a purchase order has been received or a
contract has been executed with the distributor, the sales price
is fixed or determinable, the period of time the distributor has
to return the product as provided in its distributor agreement
has elapsed and collectability is reasonably assured.
Management believes the product sales are multiple deliverables
that can be divided into separate units of accounting under the
guidance provided in
EITF 00-21
and
SOP 97-2.
The sale of scanners, one of the deliverables, is considered a
separate product sale and, thus, is considered a separate unit
of accounting. However, the software included in this product is
not considered a separate product sale. The software is bundled
with the scanner, which allows the number on the implantable
microchip to be read. This software is not sold separately, the
scanner has no value without it, there are no post contract
support agreements or after sale services, upgrades,
customization or training services. Management believes that the
scanner and software are not separate deliverables as defined in
EITF 00-21
because they have no value to the customer on a stand-alone
basis, there is no objective and reliable evidence of fair value
of undelivered elements since they are never delivered
independently and the arrangement does not include a general
right of return. The implantable microchip and insertion kits
are another deliverable, however, they are accounted for as a
separate unit of accounting because they have value to customers
on a stand-alone basis. The microchips, which are a component of
the insertion kits, are sold separately from the scanners and
have independent usefulness.
Management also believes that
SOP 97-2
is not relevant for these same reasons.
Services
Revenue
The services for maintaining subscriber information on a
database maintained by the Company are sold as a stand-alone
contract and treated according to the terms of the contractual
arrangements then in effect. Revenue from this service will
generally be recognized over the term of the subscription period
or the terms of the contractual arrangements then in effect.
With respect to the sales of products whose functionality is
dependent on services (e.g., database records maintenance), the
revenue recognition policy will follow the underlying
contractual arrangements, subject to the aforementioned revenue
recognition criteria and determining whether there is
vendor-specific objective evidence.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted Financial
Accounting Standards Board (“FASB”)
SFAS No. 123 (revised 2004),
Share Based Payment
(“FAS 123R”), using the modified prospective
transition method. Under this method, stock-based compensation
expense is recognized using the fair-value based method for all
awards granted on or after the date of adoption. Compensation
expense for new awards granted after January 1, 2006, is
recognized over the requisite service period based on the
grant-date fair value of those options. Prior to adoption, the
Company used the intrinsic value method under Accounting
Principles Board (“APB”) 25, and related
interpretations and provided the disclosure-only provisions of
FAS 123R. Under the intrinsic value method, no stock-based
compensation had been recognized in the Company’s
Consolidated Statement of Operations for options granted to the
Company’s employees and directors because the exercise
price of such stock options equaled or exceeded the fair market
value of the underlying stock on the dates of grant.
FAS 123R requires forfeitures to be estimated at the time
of grant and requires the estimates to be revised, if necessary,
in subsequent periods if actual forfeitures differ from those
estimates. In the Company’s pro forma information required
under FAS 123 for the periods prior to January 1,
2006, the Company accounted for forfeitures as they occurred.
FS-26
During 2008 and 2007, compensation expense of $21,000 and
$0.4 million, respectively, was recorded from
0.2 million and 0.4 million options granted to
employees in 2008 and 2007, respectively.
In December 2006, the Company issued 0.5 million shares of
its restricted common stock to Mr. Silverman, its then
chairman and chief executive officer, who has since been
reappointed as chairman, which shares were subject to forfeiture
in the event that Mr. Silverman terminated his employment
or the Company terminated his employment for cause on or before
December 31, 2008. As a result of a separation agreement
entered into between the Company and Mr. Silverman, dated
May 15, 2008 (the “Silverman Separation
Agreement”), Mr. Silverman’s restricted stock
vested on the closing of the sale of Xmark. The Company
determined the value of the stock to be $4.5 million based
on the estimated value of its common stock on the date of grant.
The value of the restricted stock was being amortized as
compensation expense over the vesting period. As a result of the
sale of Xmark on July 18, 2008, a charge of
$2.2 million was recorded for the remaining unvested cost
of these restricted shares. The Company recorded compensation
expense of approximately $2.3 million and $2.1 million
in 2008 and 2007, respectively, associated with the restricted
stock.
In March 2007, the Company issued 0.1 million shares of its
restricted common stock to two officers, which shares will vest
on March 2, 2009. The Company determined the value of the
stock to be $0.6 million based on the value of its common
stock of $5.75 per share on the date of grant. The value of the
restricted stock is being amortized as compensation expense over
the vesting period. The Company recorded compensation expense of
approximately $0.2 million and $0.2 million in 2008
and 2007, respectively, associated with this restricted stock.
In August 2007, the Company entered into a consulting agreement
with an individual who was the former chief executive officer of
Digital Angel, with respect to identifying, contacting and
introducing strategic partners to the Company, identifying
potential merger
and/or
acquisition opportunities for the Company and participating with
the Company in its efforts to develop certain products related
to an implantable glucose bio-sensor microchip. Under the
consulting agreement, the Company issued 107,000 common shares,
which resulted in an equity based compensation charge of
$0.6 million in 2007.
In October 2007, the Company issued 29,000 shares of its
common stock to various parties for services performed, which
resulted in an equity based compensation charge of
$0.1 million in 2007.
In January, February, and May 2008, the Company issued
0.7 million shares of its restricted common stock to
certain employees and members of the Board of Directors. One
grant of 50,000 shares of restricted stock was terminated
on April 28, 2008 and the remaining balance of the
restricted stock fully vested upon the closing of the Xmark
transaction. The Company determined the value of the stock to be
$1.4 million based on the value of its common stock on the
dates of grant. The value of the outstanding restricted stock
was amortized as compensation expense over the vesting period.
As a result of the sale of Xmark on July 18, 2008, the
remaining unvested cost of these restricted shares was recorded
in July 2008. The Company recorded compensation expense of
approximately $1.4 million in 2008 associated with this
restricted stock.
On December 31, 2008, the Company authorized the grant of
0.5 million shares of its restricted common stock to
Mr. Caragol, its acting chief financial officer under a
letter agreement. The shares will vest according to the
following schedule: (i) 20% shall vest on the Grant Date,
(ii) 40% shall vest on April 1, 2009, and
(iii) 40% shall vest on July 31, 2009. However, in the
event of a change in control and if Mr. Caragol is
terminated without cause, the shares will immediately vest. The
shares are subject to forfeiture in the event Mr. Caragol
is terminated for cause. No compensation expense was recorded in
2008 for these shares.
On December 31, 2008, the Company authorized the grant of
0.6 million shares of its restricted common stock to
Mr. Silverman, its executive chairman under a letter
agreement. If Mr. Silverman remains involved in the
day-to-day management of the Company, the shares will vest upon
the earlier to occur of: (i) January 1, 2010, or
(ii) a change in control of the Company. The shares are
subject to forfeiture in the event that Mr. Silverman fails
to remain involved in the day-to-day management of the Company.
Compensation expense of $22,000 was recorded in 2008 for these
shares.
FS-27
As a result of the sale of Xmark on July 18, 2008, the
vesting of the options and restricted shares was accelerated.
Therefore, compensation expense for the remaining unvested
balance of $3.2 million was recorded in July 2008.
Stock-based compensation expenses are reflected in the
Consolidated Statement of Operations under selling, general and
administrative expenses.
The Company’s computation of expected life is determined
based on the simplified method as the Company does not have
sufficient historical exercise data to provide a reasonable
basis upon which the estimate the expected term due to the
limited period of time its equity shares have been publicly
traded. The interest rate is based on the U.S. Treasury
Yield curve in effect at the time of grant. Prior to its initial
public offering, the Company’s computation of expected
volatility was based on the historical volatility of Digital
Angel’s common stock. Effective February 9, 2007, the
Company’s computation of expected volatility is based on
the historical volatility of comparable companies’ average
historical volatility.
Income
Taxes
The Company accounts for income taxes under the asset and
liability approach for the financial accounting and reporting of
income taxes. Deferred taxes are recorded based upon the tax
impact of items affecting financial reporting and tax filings in
different periods. A valuation allowance is provided against net
deferred tax assets when the Company determines realization is
not currently judged to be more likely than not. Income taxes
are more fully discussed in Note 11 to the Consolidated
Financial Statements.
Effective January 1, 2007, the Company adopted the
provisions of the Financial Accounting Standards Board
(“FASB”) Interpretation , No. 48, Accounting for
Uncertainty in Income Taxes
(“FIN 48”)— an interpretation of FASB
Statement No. 109. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted
for in accordance with SFAS No. 109, Accounting for
Income Taxes. The first step is to evaluate the tax position for
recognition purposes by determining if the weight of available
evidence that indicates it is more likely than not that the
position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement.
The Company considers many factors when evaluating and
estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate
actual outcomes. The impact of FIN 48 on the Company’s
financial position is discussed in Note 11 —
Income Taxes. Accordingly, the Company reports a liability for
unrecognized tax benefits resulting from the uncertain tax
positions taken or expected to be taken on a tax return and
recognizes interest and penalties, if any, related to uncertain
tax positions as an income tax expense. In connection with the
adoption of FIN 48, the Company has elected an accounting
policy to classify interest and penalties related to
unrecognized tax benefits as interest expense.
Loss Per
Common Share and Common Share Equivalent
Basic and diluted loss per common share is computed by dividing
the loss by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share is
computed by giving effect to all potentially dilutive common
shares that were outstanding during the period. Dilutive common
shares consist of incremental shares issuable upon exercise of
stock options and warrants to the extent that the average fair
value of the Company’s common stock for each period is
greater than the exercise price of the potential common shares,
options and warrants, except where there is a loss attributable
to the common stockholder. As of December 31, 2008 and
December 31, 2007, stock options and warrants exercisable
for approximately 1.3 million and 2.0 million common
shares, respectively, were outstanding. In addition, nil and
0.6 million shares of restricted stock were outstanding as
of December 31, 2008 and December 31, 2007,
respectively.
Impact of
Recently Issued Accounting Standards
In February 2008, the FASB issued Staff Position
No. FAS 157-1
(“FSP
FAS 157-1”),
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair
FS-28
Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13
and Staff Position
No. FAS 157-2
(“FSP
FAS 157-2”),
Effective Date of FASB Statement No. 157
. FSP
FAS 157-1
excludes Statement of Financial Accounting Standards No. 13
(“SFAS 13”),
Accounting for Leases
, as
well as other accounting pronouncements that address fair value
measurements on lease classification or measurement under
SFAS 13 from the scope of SFAS 157. FSP
FAS 157-2
delays the effective date of SFAS 157 for all nonrecurring
fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15,
2008. Both FSP
FAS 157-1
and FSP
FAS 157-2
are effective upon an entity’s initial adoption of
SFAS 157, which is the Company’s first quarter of
fiscal year 2008. The adoption of FSP
SFAS 157-1
did not have a material impact to the Company’s
consolidated results of operations and financial position.
In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(“FAS 161”). FAS 161 requires
enhanced disclosures about an entity’s derivative and
hedging activities and thereby improves the transparency of
financial reporting. Entities are required to provide enhanced
disclosures about: (1) how and why an entity uses
derivative instruments, (2) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, and its related interpretations, and
(3) how derivative instruments and related hedged items
affect an entity’s financial position, financial
performance and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, however, early
application is encouraged. Comparative disclosures for earlier
periods at initial adoption is encouraged, but not required. The
Company does not expect the adoption of FAS 161 to have a
material impact to the Company’s consolidated results of
operations and financial position.
In May 2008, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position No. APB
14-a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement)
(“FSP APB
14-a”).
Under the new rules for convertible debt instruments that may be
settled entirely or partially in cash upon conversion, an entity
should separately account for the liability and equity
components of the instrument in a manner that reflects the
issuer’s economic interest cost. FSP APB
14-a
will be
effective for fiscal years beginning after December 15,
2008, and for interim periods within those fiscal years, with
retrospective application required. For instruments subject to
the scope of FSP APB
14-a,
higher
interest expense will result through the accretion of the
discounted carrying value of the convertible debt instruments to
their face amount over their term. Prior period interest expense
will also be higher than previously reported due to
retrospective application. Early adoption is not permitted. The
adoption of FSP APB
14-a
is not
expected to have any impact on the Company’s consolidated
financial statements.
In May 2008, FASB issued Statement 163, “Accounting for
Financial Guarantee Insurance Contracts”. This new standard
clarifies how FAS Statement No. 60,
Accounting and
Reporting by Insurance Enterprises
, applies to financial
guarantee insurance contracts issued by insurance enterprises,
including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about
financial guarantee insurance contracts. The Statement is
effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company does not
expect the adoption of SFAS 163 to have any impact on its
consolidated financial position or results of operations.
On October 10, 2008, the FASB issued FSP
FAS 157-3,
“Determining the Fair Value of a Financial Asset in a
Market That Is Not Active.” The FSP was effective upon
issuance, including periods for which financial statements have
not been issued. The FSP clarified the application of
SFAS 157 in an inactive market and provided an illustrative
example to demonstrate how the fair value of a financial asset
is determined when the market for that financial asset is
inactive. The adoption of this FSP did not have a material
impact on the Company’s consolidated financial position and
the results of operations.
In February 2007, FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
including an amendment of FAS 115, or FAS 159.
This statement provides companies with an option to report
selected financial assets and liabilities at fair value. This
statement is effective for fiscal years beginning after
November 15, 2007 with early adoption permitted. The
Company adopted SFAS No. 159
FS-29
during the first quarter of 2008. The adoption did not have a
material impact to the Company’s consolidated results of
operations and financial position.
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(“FASB 160”). This statement amends ARB 51, which
establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. In addition,
FASB 160 changes the way the consolidated income statement is
presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent
and the non-controlling interest. This statement also
establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not
result in deconsolidation and requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated.
This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008, and earlier adoption is prohibited. FASB
160 shall be applied prospectively as of the beginning of the
fiscal year in which this statement is initially applied, except
for the presentation and disclosure requirement, which shall be
applied retrospectively for all periods presented. We have not
yet determined the impact that this requirement may have on our
condensed consolidated financial position, results of
operations, cash flows or financial statement disclosures.
In December 2007, FASB issued SFAS No. 141R, Business
Combinations (“FASB 141R”). FASB 141R replaces FASB
Statement No. 141 Business Combinations but retains the
fundamental requirements in FASB 141. This statement defines the
acquirer as the entity that obtains control of one or more
businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control.
FASB 141R also requires that an acquirer recognized the assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree at the acquisition date, measured at
their fair values as of that date. In addition, this statement
requires that the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as
well as the non-controlling interest in the acquiree, at the
full amounts of their fair values. FASB 141R is applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period, beginning on or after December 15, 2008. An entity
may not apply the standard before that date. We have not yet
determined the impact that this requirement may have on our
condensed consolidated financial position, results of
operations, cash flows or financial statement disclosures.
In December 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property
(“EITF 07-1”).
The EITF concluded that a collaborative arrangement is one in
which the participants are actively involved and are exposed to
significant risks and rewards that depend on the ultimate
commercial success of the endeavor. Revenues and costs incurred
by third parties in connection with collaborative arrangements
would be presented gross or net based on the criteria in EITF
Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent
, and other accounting literature. Payments to or from
collaborators would be evaluated and presented based on the
nature of the arrangement and its terms, the nature of the
entity’s business, and whether those payments are within
the scope of other accounting literature. The nature and purpose
of collaborative arrangements are to be disclosed along with the
accounting policies and the classification and amounts of
significant financial statement amounts related to the
arrangements. Activities in the arrangement conducted in a
separate legal entity should be accounted for under other
accounting literature; however, required disclosure under
EITF 07-1
applies to the entire collaborative agreement. This issue is
effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the
effective date. The Company is currently evaluating the impact
that this pronouncement may have on its consolidated financial
position and results of operations.
Research
and Development
Research and development costs are expensed as incurred and
consist of development work associated with the Company’s
existing and potential products. The Company’s research and
development expenses relate
FS-30
primarily to payroll costs for engineering personnel, costs
associated with various projects, including testing, developing
prototypes and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Raw materials
|
|
$
|
161
|
|
|
$
|
—
|
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
|
Finished goods
|
|
|
52
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
808
|
|
|
Allowance for excess and obsolescence
|
|
|
(213
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Equipment
|
|
$
|
292
|
|
|
$
|
308
|
|
|
Hardware
|
|
|
76
|
|
|
|
75
|
|
|
Software
|
|
|
57
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
447
|
|
|
Less accumulated depreciation
|
|
|
(386
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense charged against income amounted to
approximately $52,000 and $73,000 million for the years
ended December 31, 2008 and 2007, respectively.
|
|
|
|
4
|
Financing
Agreements and Liquidity
|
On February 29, 2008, the Company entered into an
$8.0 million debt financing (the “Agreement”)
with Valens Offshore SPV II, Corp. (the “Lender”).
Under the terms of the Agreement, the Lender extended financing
to the Company in the form of an $8.0 million secured term
note (the “Note”). The Note accrued interest at a rate
of 12% per annum, and had a maturity date of March 31,
2009. The terms of the Note allowed for optional redemption by
paying 100% of the principal amount plus $120,000, if such
amounts were paid prior to the six month anniversary of
February 29, 2008, or $240,000, if such amounts were paid
on or after the six month anniversary of February 29, 2008.
Pursuant to the Agreement, the Company issued to the Lender
120,000 shares of its common stock. The cost of this
issuance was $0.3 million, which was to be amortized over
the period of the Note. As a result of the repayment of this
debt on July 18, 2008, the unamortized cost of
$0.5 million of this issuance was expensed in July 2008.
See Note 11, “Related Party Transactions” to our
condensed consolidated financial statements for more information.
On February 14, 2007, the Company completed an initial
public offering of its common stock. In connection with its
initial public offering, the Company sold 3,100,000 shares
of its common stock at a price of $6.50 per share.
On September 20, 2007, the Company’s board of
directors approved a stock repurchase program authorizing the
purchase of $1.5 million of its common stock through the
end of 2007. In 2007, 181,000 shares were repurchased at a
cost of approximately $0.8 million and in 2008 there were
no repurchases.
FS-31
Stock
Option Plans
In April 2002, the Company’s Board of Directors approved
the VeriChip Corporation 2002 Flexible Stock Plan (the
“VeriChip 2002 Plan”). Under the VeriChip 2002 Plan,
the number of shares for which options, SARs or performance
shares may be granted is approximately 2.0 million. As of
December 31, 2007, approximately 1.9 million options
and restricted shares, net of forfeitures, have been granted to
directors, officers and employees under the VeriChip 2002 Plan,
and 1.4 million of the options or shares granted were
outstanding as of December 31, 2007. Approximately
1.2 million options are fully vested and do not expire
until nine years from the vesting date and 0.2 million
options vest ratably over three years. As of December 31,
2008, no SARs have been granted and 22,000 shares may still
be granted under the VeriChip 2002 Plan.
On April 27, 2005, Digital Angel’s board of directors
approved the VeriChip Corporation 2005 Flexible Stock Plan (the
“VeriChip 2005 Plan”). Under the VeriChip 2005 Plan,
the number of shares for which options, SARs or performance
shares may be granted is approximately 0.3 million. As of
December 31, 2007, approximately 0.3 million options
have been granted under the VeriChip 2005 Plan. All of the
options are fully vested and do not expire until nine years from
the vesting date. As of December 31, 2008, no SARs have
been granted and 832 shares may still be granted under the
VeriChip 2005 Plan.
On June 17, 2007, the Company adopted the VeriChip 2007
Stock Incentive Plan, or the VeriChip 2007 Plan, which was
amended and restated on December 16, 2008. Under the
VeriChip 2007 Plan, the number of shares for which options,
restricted shares, SARs or performance shares may be granted is
3.0 million. As of December 31, 2008, approximately
1.0 million options and shares have been granted under the
VeriChip 2007 Plan. As of December 31, 2008, no SARs have
been granted and 2.0 million shares may be granted under
the VeriChip 2007 Plan.
In addition, as of December 31, 2008, options exercisable
for approximately 0.4 million shares of the Company’s
common stock have been granted outside of the Company’s
plans, and 0.3 million of the options or shares granted
were outstanding as of December 31, 2008. These options
were granted at exercise prices ranging from $0.23 to $8.55 per
share, are fully vested and are exercisable for a period of up
to seven years.
In the year ended December 31, 2008, 0.2 million
options were granted under the 2007 Plan. In the year ended
December 31, 2007, 0.2 million, 0.3 million, and
0.2 million options and shares have been granted under the
VeriChip 2002 Plan, the VeriChip 2005 Plan, and the VeriChip
2007 Plan, respectively.
A summary of stock options for 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
|
|
Outstanding on January 1
|
|
|
1,963
|
|
|
$
|
3.26
|
|
|
|
2,099
|
|
|
$
|
2.10
|
|
|
Granted(1)
|
|
|
195
|
|
|
|
0.58
|
|
|
|
417
|
|
|
|
5.88
|
|
|
Exercised
|
|
|
(844
|
)
|
|
|
0.54
|
|
|
|
(536
|
)
|
|
|
0.70
|
|
|
Cancelled and forfeited
|
|
|
(87
|
)
|
|
|
5.88
|
|
|
|
(17
|
)
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31
|
|
|
1,225
|
|
|
|
4.52
|
|
|
|
1,963
|
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on December 31(2)
|
|
|
1,055
|
|
|
|
5.24
|
|
|
|
1,530
|
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available on December 31 for options that may be granted
|
|
|
2,022,832
|
|
|
|
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The total compensation expense associated with the options
granted in 2008 and 2007 was approximately $21,000 and
$0.3 million, respectively. As of December 31, 2008
and 2007, the remaining amount of the compensation expense to be
recorded over the remaining vesting period of the options was
approximately $31,000 and $0.9 million, respectively.
|
FS-32
|
|
|
|
|
(2)
|
|
The intrinsic value of a stock option is the amount by which the
fair value of the underlying stock exceeds the exercise price of
the option. The fair value of the Company’s common stock
was estimated to be $0.37 and $2.25 at December 31, 2008
and 2007, respectively, based upon its closing price on the
NASDAQ. As of December 31, 2008 and 2007, the intrinsic
value for all options outstanding was approximately $34,000 and
$0.6 million, respectively.
|
The following table summarizes information about stock options
at December 31, 2008 (in thousands, except weighted-average
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
Exercise Prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
$0.0000 to $1.9900
|
|
|
438
|
|
|
|
5.3
|
|
|
$
|
0.39
|
|
|
|
268
|
|
|
$
|
0.41
|
|
|
$4.9500 to $5.7500
|
|
|
348
|
|
|
|
7.6
|
|
|
|
5.59
|
|
|
|
348
|
|
|
|
5.59
|
|
|
$6.9300 to $7.6500
|
|
|
328
|
|
|
|
4.9
|
|
|
|
7.09
|
|
|
|
328
|
|
|
|
7.09
|
|
|
$8.5500 to $10.0000
|
|
|
105
|
|
|
|
6.0
|
|
|
|
9.24
|
|
|
|
105
|
|
|
|
9.24
|
|
|
$10.001to $20.2500
|
|
|
6
|
|
|
|
4.0
|
|
|
|
20.25
|
|
|
|
6
|
|
|
|
20.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
5.9
|
|
|
$
|
4.52
|
|
|
|
1,055
|
|
|
$
|
5.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
1,225
|
|
|
|
5.9
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average per share fair value of grants made in 2008
and 2007 for the Company’s incentive plans were $0.22 and
$3.13, respectively.
There are inherent uncertainties in making estimates about
forecasts of future operating results and identifying comparable
companies and transactions that may be indicative of the fair
value of the Company’s securities. The Company believes
that the estimates of the fair value of its common stock at each
option grant date were reasonable under the circumstances.
The Black-Scholes model, which the Company used to determine
compensation expense, required the Company to make several key
judgments including:
|
|
|
|
|
|
•
|
the estimated value of the Company’s common stock;
|
|
|
|
|
•
|
the expected life of issued stock options;
|
|
|
|
|
•
|
the expected volatility of the Company’s stock price;
|
|
|
|
|
•
|
the expected dividend yield to be realized over the life of the
stock option; and
|
|
|
|
|
•
|
the risk-free interest rate over the expected life of the stock
options.
|
The Company prepared these estimates based upon its historical
experience, the stock price volatility of comparable
publicly-traded companies, including Digital Angel, and its best
estimation of future conditions.
The fair values of the options granted were estimated on the
grant date using the Black-Scholes valuation model based on the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
Expected stock price volatility
|
|
|
35
|
%
|
|
|
50
|
%
|
|
Risk-free interest rate
|
|
|
1.79-3.44
|
%
|
|
|
4.51
|
%
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
FS-33
|
|
|
|
6
|
Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Salaries and benefits(1)
|
|
$
|
14,567
|
|
|
$
|
8,166
|
|
|
Depreciation and amortization
|
|
|
52
|
|
|
|
73
|
|
|
Legal and accounting
|
|
|
2,226
|
|
|
|
1,517
|
|
|
Sales and marketing
|
|
|
1,424
|
|
|
|
1,699
|
|
|
Travel and entertainment
|
|
|
280
|
|
|
|
619
|
|
|
Insurance
|
|
|
217
|
|
|
|
119
|
|
|
Consulting
|
|
|
255
|
|
|
|
156
|
|
|
Other
|
|
|
754
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,775
|
|
|
$
|
13,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in salaries and benefits is $5.0 million and
$3.4 million of equity compensation expense for the years
2008 and 2007, respectively, associated with stock compensation
(includes stock options and restricted stock). See Note 1
to the Consolidated Financial Statements.
|
The Company’s income taxes as presented are calculated on a
separate tax return basis, although until the Company’s
initial public offering on February 9, 2007, the
Company’s U.S. operations were included in Digital
Angel’s consolidated federal income tax return. The Company
accounts for income taxes under the asset and liability
approach. Deferred taxes are recorded based upon the tax impact
of items affecting financial reporting and tax filings in
different periods. A valuation allowance is provided against net
deferred tax assets where the Company determines realization is
not currently judged to be more likely than not.
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Liabilities and reserves
|
|
$
|
228
|
|
|
$
|
70
|
|
|
Stock-based compensation
|
|
|
4,162
|
|
|
|
2,644
|
|
|
Property and equipment
|
|
|
12
|
|
|
|
516
|
|
|
Net operating loss carryforwards
|
|
|
11,361
|
|
|
|
9,142
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
15,764
|
|
|
|
12,372
|
|
|
Valuation allowance
|
|
|
(15,764
|
)
|
|
|
(12,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance for U.S. deferred tax assets
increased by approximately $3.4 million and
$5.0 million in 2008 and 2007, respectively, due mainly to
the generation of U.S. net operating losses. The valuation
allowance at December 31, 2008 and 2007, has primarily been
provided for in U.S. net deferred tax assets that exceeded
the level of existing U.S. deferred tax liabilities.
Loss before provision for income taxes consists of domestic
operations.
FS-34
The provision or (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Canada
|
|
|
233
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
|
233
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Canada
|
|
|
—
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
—
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233
|
|
|
$
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax provision or (benefit) is included in the financial
statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Continuing operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Discontinued operations
|
|
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
The difference between the effective rate reflected in the
provision for income taxes on loss before taxes from continuing
operations and the amounts determined by applying the applicable
statutory U.S. tax rate are analyzed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
%
|
|
%
|
|
|
|
Statutory tax benefit
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
State income taxes, net of federal benefits
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
Tax basis difference in stock of subsidiary
|
|
|
(12
|
)
|
|
|
—
|
|
|
Change in deferred tax asset valuation allowance
|
|
|
52
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
On February 14, 2007, the Company completed an initial
public offering of its common stock, which reduced Digital
Angel’s ownership to less than 80%. Therefore, in 2007, the
Company was required to file a separate federal income tax
return. On December 31, 2008, the Company had
U.S. federal net operating loss carryforwards of
approximately $28.4 million for income tax purposes that
expire in various amounts through 2028. The net operating losses
were allocated in accordance with Treasury Regulation
§ 1.1502-21T(b)(2)(iv), at the point that the Company
ceased to be a part of the consolidated tax return of Digital
Angel.
Based upon the change of ownership rules under IRC
Section 382 in December 2007, the Company experienced a
change of ownership exceeding the 50% limitation threshold
imposed by IRC Section 382. The Company experienced a
subsequent change in ownership during November 2008. As a result
the Company’s future utilization of its net operating loss
carryforwards may be significantly limited as to the amount of
use in any particular year.
FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”) was issued to clarify the
requirements of SFAS No. 109, Accounting for Income
Taxes, relating to the recognition of income tax benefits.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when the
FS-35
benefits’ realization is uncertain. The first step is to
determine whether the benefit is to be recognized. The second
step is to determine the amount to be recognized. The two-step
approach is outlined below:
|
|
|
|
|
|
•
|
Income tax benefits should be recognized when, based on the
technical merits of a tax position, the company believes that if
a dispute arose with the taxing authority and were taken to a
court of last resort, it is more likely than not (i.e., a
probability of greater than 50 percent) that the tax
position would be sustained as filed; and
|
|
|
|
|
•
|
If a position is determined to be more likely than not of being
sustained, the reporting company should recognize the largest
amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with the
taxing authority.
|
The Company adopted FIN 48 on January 1, 2007, and
there was no impact upon adoption or during the year ended
December 31, 2008.
The following stock options and warrants were outstanding as of
December 31, 2008 and 2007, and were not included in the
computation of dilutive loss per share because the net effect
would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Stock options
|
|
|
1,225
|
|
|
|
1,963
|
|
|
Warrants
|
|
|
—
|
|
|
|
33
|
|
|
Restricted common stock
|
|
|
—
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
2,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
Unasserted
Claim — Potential Intellectual Property
Conflict
|
The Company obtains the implantable microchip from a
wholly-owned subsidiary of Digital Angel, under the terms of an
amended and restated supply agreement. The supply agreement is
discussed in Note 11 to the Consolidated Financial
Statements. Digital Angel obtained the implantable microchip, a
component of the VeriMed microchip, from a subsidiary of
Raytheon Company, under a separate supply agreement. The
technology underlying these systems is covered, in part, by
U.S. Patent No. 5,211,129 “Syringe-Implantable
Identification Transponders.” In 1994, Destron/IDI, Inc., a
predecessor company to Digital Angel, granted a co-exclusive
license under this patent, other than for certain specified
fields of use retained by the predecessor company, Hughes
Aircraft Company (“Hughes”), and its then wholly-owned
subsidiary, Hughes Identification Devices, Inc.
(“HID”). The specified fields of use retained by
Hughes and HID do not include human identification or security
applications. The rights licensed to Hughes and HID were freely
assignable, and the Company does not know which party or parties
currently has these rights or whether these rights have been
assigned, conveyed or transferred to any third party. Digital
Angel sources the implantable microchip indirectly from a
subsidiary of Raytheon Company, with which Hughes, then known as
HE Holdings, Inc. was merged with in 1997. However, the Company
has no documentation that establishes its right to use the
patented technology for human identification or security
applications. Through December 31, 2008, no intellectual
property claims against the Company have been asserted.
Either of the two companies to whom Digital Angel granted
licenses, any of their respective successors in interest, or any
party to whom any of the foregoing parties may have assigned
their rights under the 1994 license agreement may commence a
claim against the Company asserting that the Company is
violating their rights. If such a claim is successful, sales of
the Company’s implantable microchip could be enjoined and
the Company could be required to cease its efforts to create a
market for its implantable microchip until the patent expired in
April 2008. In addition, the Company could be required to pay
damages, which may be substantial.
If the Company or Digital Angel was denied use of the patented
technology in applications involving the identification of human
beings, the Company would not have been able to purchase or sell
any of its products
FS-36
that incorporate the implantable microchip before the patent
expired. The Company may be required to pay royalties and other
damages to third parties on products it has already purchased.
The Company has been publicly marketing and selling the
implantable microchip for human identification and security
applications for approximately five years. Through
December 31, 2008, there are no pending or threatened
intellectual property claims challenging the Company’s
marketing or selling activities. In October 2007, Digital Angel
and the successor to one of Digital Angel’s two licensees
executed a cross-license which includes Digital Angel obtaining
a royalty free non-exclusive license to it’s rights to the
implantable human applications of the 5,211,129 patent. Digital
Angel has, in turn, conveyed those rights to the Company.
Under the circumstances, the accompanying financial statements
make no provision with respect to the unasserted claim described
above.
|
|
|
|
10
|
Commitments
and Contingencies
|
Employment
Contract
Effective December 5, 2006, the Company and
Mr. Silverman entered into the VeriChip Corporation
Employment and Non-Compete Agreement (the “VeriChip
Employment Agreement”). The VeriChip Employment Agreement
terminates five years from the effective date. The VeriChip
Employment agreement provides for an annual base salary of
$420,000 with minimum annual increases for the first two years
of 10% of the base salary and a discretionary annual increase
thereafter. Mr. Silverman is also entitled to a
discretionary annual bonus and other fringe benefits. In
addition, the VeriChip Employment Agreement provides for the
grant of 500,000 shares of restricted stock of the Company.
The Company is required to register the shares as soon as
practicable. The stock is restricted and is accordingly subject
to substantial risk of forfeiture in the event that
Mr. Silverman terminates his employment or the Company
terminates his employment for cause on or before
December 31, 2008. If Mr. Silverman’s employment
is terminated prior to the expiration of the term of the
VeriChip Employment Agreement, certain significant payments
become due to Mr. Silverman. The amount of such significant
payments depends on the nature of the termination. In addition,
the VeriChip Employment Agreement contains a change of control
provision that provides for the payment of five times the then
current base salary and five times the average bonus paid to
Mr. Silverman for the three full calendar years immediately
prior to the change of control, or the number of years that were
completed commencing on the effective date of the agreement and
ending on the date of the change of control if less than three
calendar years. Any outstanding stock options held by
Mr. Silverman as of the date of his termination or a change
of control become vested and exercisable as of such date, and
remain exercisable during the remaining life of the option. All
severance and change of control payments made in connection with
the VeriChip Employment Agreement must be paid in cash, except
for termination due to Mr. Silverman’s total
disability, death, a constructive termination, or termination
without cause, which may be paid in shares of the Company’s
common stock, subject to necessary approvals, or in cash, at
Mr. Silverman’s option.
In connection with the Xmark transaction, on May 15, 2008,
the Company entered into the Silverman Separation Agreement,
which provided that upon the closing of the Xmark transaction,
Mr. Silverman’s employment would be terminated, as
would the Employment and Non-Compete Agreement dated
December 5, 2006, between the Company and
Mr. Silverman.
In connection with the Silverman Separation Agreement,
Mr. Silverman received a payment in the amount of
approximately $4.3 million from the Company in full and
final satisfaction of the amounts due to him pursuant to the
terms of the VeriChip Employment Agreement. Mr. Silverman
also received a bonus payment for the completion of the Xmark
transaction in the amount of $1.2 million.
On December 31, 2008, the Company and Mr. Silverman
entered into a letter agreement, pursuant to which
Mr. Silverman will serve as the Company’s chairman
from December 1, 2008 through December 31, 2009,
unless the term is amended or the letter agreement is
terminated. The terms and conditions were agreed on
December 26, 2008, which is the accounting grant date. The
letter agreement also provides for the termination of certain
provisions of the separation agreement, dated May 15, 2008,
as amended, between the Company and Mr. Silverman. Under
the letter agreement, Mr. Silverman is due to receive
601,852 shares of
FS-37
our common stock, which will not be issued until we file a
registration statement on
Form S-8
with the SEC reflecting our Amended Plan. The shares will vest
upon the earlier to occur of (i) January 1, 2010 or
(ii) a Change in Control (as defined in the Amended Plan).
The shares are subject to forfeiture in the event that
Mr. Silverman fails to remain involved in the day-to-day
management of the Company (as determined by our board of
directors) until the earlier to occur of
(i) January 1, 2010 or (ii) a Change in Control
(as defined in the Amended Plan).
On December 31, 2008, the Company and Mr. Caragol,
entered into a letter agreement pursuant to which, effective
January 1, 2009, Mr. Caragol serves as the
Company’s acting chief financial officer. Unless the term
is amended or the letter agreement is terminated, the letter
agreement is in effect until July 31, 2009. Compensation
due to Mr. Caragol under the letter agreement is in the
form of shares of restricted common stock in the amount of
518,519, which will not be issued until we file a registration
statement on
Form S-8
with the SEC reflecting our Amended Plan (the “Grant
Date”). The shares will vest according to the following
schedule: (i) 20% shall vest on the Grant Date;
(ii) 40% shall vest on April 1, 2009; and
(iii) 40% shall vest on July 31, 2009.
Mr. Caragol will serve as our acting chief financial
officer effective January 1, 2009 through July 31,
2009 in exchange for 518,519 restricted shares of our common
stock. The compensation expense will be recognized over the
requisite service period.
Legal
proceedings
The Company is engaged in certain legal actions in the ordinary
course of business and we believe that the ultimate outcome of
these actions will not have a material adverse effect on our
operating results, liquidity or financial position. The Company
has accrued an estimate of the probable costs for the resolution
of these claims, and as of December 31, 2008, the Company
has recorded a $0.2 million reserve with respect to such
claims. This estimate has been developed in consultation with
outside counsel handling our defense in these matters and is
based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies.
Metro
Risk
On January 10, 2005, the Company commenced an action in the
Circuit Court for Palm Beach County, Florida, against Metro Risk
Management Group, LLC, or Metro Risk. In this suit, the Company
has claimed that Metro Risk breached the parties’ three
international distribution agreements by failing to meet
required minimum purchase obligations and by repudiating the
agreements. On July 1, 2005, Metro Risk asserted a
counterclaim against the Company for breach of contract and
fraud in the inducement. Specifically, in its claim for breach
of contract, Metro Risk alleged that the Company breached the
exclusivity provision of the parties’ three international
distribution agreements by later signing a different
distribution agreement with a large distributor of medical
supplies. Metro Risk alleged that the distribution agreement
with this other distributor included the same areas covered in
the Company’s three international distribution agreements
with Metro Risk. Moreover, regarding its claim for fraud in the
inducement, Metro Risk alleged that the Company fraudulently
induced Metro Risk into signing the three international
distribution agreements by promising millions of dollars in
profits, only later to sign another distribution agreement with
a competitor for the same countries. By virtue of its
counterclaim, Metro Risk seeks reliance damages in the amount of
$155,000, which allegedly represents the amount of money
advanced by Metro Risk for the project, lost profits, and
attorneys’ fees.
On July 23, 2008, the court granted a motion for summary
judgment filed by the Company on Metro Risk’s counterclaim,
and thus denied Metro Risk’s counterclaim. Metro Risk may
appeal the decision. The Court has also previously granted
summary judgment on the issue of Metro Risk’s liability for
breaching the three international distribution agreements.
Therefore, at present, the remaining issue in the lawsuit is the
Company’s damages resulting from Metro Risk’s breach
of the three international distribution agreements. The parties
have taken minimal discovery at the present time. Metro Risk has
propounded no discovery on the Company, and the Company has
propounded a request for production and a request for admissions
on Metro Risk. The parties have not taken any depositions. Given
the potential for an appeal, counsel is currently unable to
assess the ultimate outcome.
FS-38
Stock
Option Plans
The Company has received demand letters from attorneys for
several former employees
and/or
consultants of the Company and Digital Angel, asserting claims
related to stock options to acquire approximately 455 thousand
shares of the Company’s common stock that management
believes that such employees
and/or
consultants had forfeited when they ceased their employment or
relationship with the Company
and/or
Digital Angel. The Company believes that all of these potential
claims are without merit and intends to vigorously defend them
in the event the claims are asserted or litigated.
On July 8, 2008, a lawsuit was filed against the Company
and Digital Angel by one of the above-referenced former
employees, Jerome C. Artigliere, a former executive of the
Company and Digital Angel. The lawsuit was filed in the Circuit
Court of the 15th Judicial Circuit in Palm Beach County,
Florida, and alleges that Mr. Artigliere holds options to
acquire 950,000 shares of common stock of the Company at an
exercise price of $0.05 per share and that he has been denied
the right to exercise those options. The complaint alleges
causes of action for breach of contract against the Company and
Digital Angel, seeks declaratory judgments clarifying
Mr. Artigliere’s alleged contractual rights, and
sought an injunction enjoining the vote of the stockholders at
special meeting of Company shareholders that took place on
July 17, 2008, on the sale of Xmark. On September 12,
2008, Mr. Artigliere amended his complaint to add a claim
for unpaid wages against the Company and Digital Angel and to
add related claims against several former officers and directors
of the Company and Digital Angel. The Company believes that
Mr. Artigliere’s claim for 950,000 Company stock
options is factually incorrect and, at best, he would be
entitled to only 211,111 Company stock options due to the
Company’s
2-for-3
reverse stock split that occurred in December of 2005 and the
1-for-3
reverse stock split that occurred in December of 2006. The
Company believes the amended complaint includes multiple
inaccuracies, is without merit and intends to defend the
lawsuit. On October 7, 2008, the Company and its
co-defendants filed a motion to dismiss seven of the nine counts
asserted in the amended complaint. By agreement, the motion to
dismiss was temporarily taken off the court’s calendar.
The Company is a party to various legal actions, as either
plaintiff or defendant, including the matter identified above,
arising in the ordinary course of business, none of which is
expected to have a material adverse effect on our business,
financial condition or results of operations. However,
litigation is inherently unpredictable, and the costs and other
effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and
investigations, claims or charges in any such matters, and
developments or assertions by or against us relating to us or to
our intellectual property rights and intellectual property
licenses could have a material adverse effect on our business,
financial condition and operating results.
|
|
|
|
11
|
Related
Party Transactions
|
Agreements
with IFTH
We are under common control with IFTH. R & R
Consulting Partners, LLC, an entity owned and controlled by
Scott R. Silverman, and Mr. Silverman currently own 53% of
our outstanding common stock. As of February 11, 2009,
R & R Consulting Partners, LLC and Mr. Silverman
owned 46.8% of IFTH’s outstanding common stock, including
the 2,570,000 shares that are directly owned by Blue Moon.
Mr. Silverman, our executive chairman of the board, is a
manager and controls a member of Blue Moon (i.e., R &
R Consulting Partners, LLC). William J. Caragol, our acting
chief financial officer, acting treasurer and secretary, is a
manager and member of Blue Moon.
On October 8, 2008, IFTH entered into a sublease with
Digital Angel for its corporate headquarters located in Delray
Beach, Florida, consisting approximately 7,911 feet of
office space, which space we share with IFTH. The rent for the
entire twenty-one-month term of the sublease is $158,000, which
was paid in one lump sum upon execution of the sublease. We
reimbursed IFTH for one-half of the sublease payment,
representing our share of the total cost of the sublease. In
addition, in order to account for certain shared services and
resources, we and IFTH operate under a shared services
agreement, in connection with which IFTH pays us $8,000 a month.
FS-39
Payments
to Michael Krawitz
From January to October 2008, prior to his service on our board
of directors, we paid Mr. Krawitz $70,000 in consulting
fees for legal services provided to the Company.
Transition
Services Agreement
On December 27, 2005, the Company entered into a transition
services agreement with Digital Angel under which Digital Angel
agreed to provide the Company with certain administrative
transition services, including payroll, legal, finance,
accounting, information technology, tax services, and services
related to this offering. As compensation for these services,
the Company agreed to pay Digital Angel; (i) approximately
$62,000 per month for fixed costs allocable to these services,
(ii) Digital Angel’s reasonable out-of-pocket direct
expenses incurred in connection with providing these services
that are not included in the agreement as a monthly fixed cost,
(iii) Digital Angel’s expenses incurred in connection
with services provided to the Company in connection with the
initial public offering of the Company’s common stock, and
(iv) any charges by third party service providers that may
or may not be incurred as part of the offering and that are
attributable to transition services provided to or for the
Company.
On December 21, 2006, the Company and Digital Angel entered
into an amended and restated transition services agreement,
which became effective on February 14, 2007, the date of
completion of the Company’s initial public offering of the
Company’s common stock. Prior to that time, the initial
transition services agreement remained in effect. The term of
the amended and restated agreement will continue until such time
as the Company requests Digital Angel to cease performing
transition services, provided that Digital Angel is not
obligated to continue to provide the transition services for
more than twenty-four months following the effective date.
Except for any request by the Company for Digital Angel to cease
the performance of such transition services, subject to certain
notice provisions, the agreement may not be terminated by either
party except in the event of a material default in Digital
Angel’s delivery of the transition services or in the
Company’s payment for those services. The services provided
by Digital Angel under the amended and restated transition
services agreement are the same as those provided under the
initial agreement. The estimated monthly charge for the fixed
costs allocable to these services was increased, in early 2007,
to approximately $72,000 per month, primarily as the result of
an increased allocation for office space. In April 2007,
the monthly charge was reduced to $40,000, primarily as the
result of reductions in shared personnel costs. Effective
January 1, 2008, the monthly cost was further reduced to
$10,000 per month.
The terms of the transition services agreement and the amendment
and restatement of the agreement were negotiated between certain
of the Company’s executive officers and certain executive
officers of Digital Angel. The Company’s and Digital
Angel’s executive officers were independent of one another
and the terms of the agreement were based upon historical
amounts incurred by Digital Angel for payment of such services
to third parties. Accordingly, the Company believes that it
negotiated the best terms and conditions under the
circumstances, however, these costs are not necessarily
indicative of the costs which would be incurred by the Company
as an independent stand- alone entity.
Management believes that the fees charged for these services are
reasonable and consistent with what the expenses would have been
on a stand-alone basis. The aggregate costs of these services to
the Company were $0.1 million and $0.4 million in 2008
and 2007, respectively.
On August 20, 2008, the transition services agreement was
terminated, effective as of September 30, 2008, with the
Company making a final payment of $45,000 to Digital Angel, with
no further obligation by either party.
Loan
Agreement with Digital Angel
Prior to the date of our initial public offering, which was
consummated on February 14, 2007, we financed a significant
portion of our operations and investing activities primarily
through funds that Digital Angel provided.
FS-40
Through October 5, 2006, our loan with Digital Angel bore
interest at the prevailing prime rate of interest as published
by
The Wall Street Journal
, which as of
September 30, 2006 was 8.25% per annum. On October 6,
2006, we entered into an amendment to the loan agreement which
increased the principal amount available thereunder to
$13.0 million and we borrowed an additional
$2.0 million under the agreement to make the second
purchase price payment for our acquisition of Instantel Inc. In
connection with that amendment, the interest rate was also
changed to a fixed rate of 12% per annum. That amendment further
provided that the loan matured on July 1, 2008, but could
be extended at the option of Digital Angel through
December 27, 2010.
On January 19, 2007, February 8, 2007 and
February 13, 2007, we entered into further amendments to
the loan documents, which increased the maximum principal amount
of indebtedness to $14.5 million. A portion of this
increase was used to cover approximately $0.7 million of
intercompany advances made to us by Digital Angel during the
first week of January 2007. Upon the consummation of our initial
public offering in February 2007, the loan ceased to be a
revolving line of credit, and we have no ability to incur
additional indebtedness under the loan documents. The interest
accrued on the outstanding indebtedness at a rate of 12% per
annum. On February 14, 2007, the closing date of our
initial public offering, we were indebted to Digital Angel in
the amount of $15.1 million, including $1.0 million of
accrued interest and, in accordance with the terms of the loan
agreement as most recently amended on February 13, 2007, we
used $3.5 million of the net proceeds of our initial public
offering to repay a portion of our indebtedness to Digital
Angel. Effective with the payment of the $3.5 million, all
interest which accrued on the loan as of the last day of each
month, commencing with February 2007, was added to the principal
amount. A final balloon payment equal to the outstanding
principal amount then due under the loan plus all accrued and
unpaid interest was due and payable on February 1, 2010.
The loan with Digital Angel was subordinated to our obligations
under our credit agreement with the Lender and was
collateralized by security interests in all of our property and
assets, except as otherwise encumbered by the rights of the
Lender.
In connection with the financing, the Company entered into a
letter agreement with Digital Angel, dated February 29,
2008, under which the Company agreed, among other things, to
prepay $5.3 million to Digital Angel, and to amend that
certain letter agreement between the Company and Digital Angel
dated as of December 20, 2007 (the “December 2007
Letter Agreement”). The December 2007 Letter Agreement
provides that the Company will have until October 30, 2008
to prepay in full the entire outstanding principal amount to
Digital Angel by paying to Digital Angel $10 million, less
the $500,000 paid pursuant to the December 2007 Letter
Agreement, less the $5.3 million paid in connection with
this financing, less other principal payments made to reduce the
outstanding principal amount between the date of the December
2007 Letter Agreement and the date of such prepayment, plus any
accrued and unpaid interest between October 1, 2007, and
the date of such prepayment. As a result of the
$5.3 million payment, the Company was not required to make
any further debt service payments to Digital Angel until
September 1, 2009. The remaining outstanding principal
after the $5.8 million paid (including the application of
the $0.5 million paid pursuant to the December 2007 Letter
Agreement), was $7.3 million.
On July 18, 2008, the Company paid $4.8 million to
Digital Angel to satisfy the Company’s obligations under
the loan agreement. As a result of this payment in July 2008,
the Company recognized a $2.5 million gain on settlement of
debt for the year ended December 31, 2008 and Digital Angel
released all security interests it had in the assets of the
Company.
An interest expense was incurred under the loan for
$0.5 million in 2008 and $1.1 million in 2007.
Supply
Agreement
The Company executed a supply and development agreement dated
March 4, 2002 with Digital Angel covering the manufacture
and supply of its implantable microchip.
FS-41
On December 27, 2005, the Company entered into an amended
and restated supply and development agreement with Digital
Angel, which was further amended on May 9, 2007. Under this
agreement, Digital Angel was the Company’s sole supplier of
human implantable microchips.
On November 12, 2008, the Company entered into an Asset
Purchase Agreement (“APA”) with Digital Angel. The
terms of the APA included the sale to the Company of patents
related to an embedded bio-sensor system for use in humans, and
the assignment of any rights of Digital Angel under a
development agreement associated with the development of an
implantable glucose sensing microchip. The Company also received
covenants from Digital Angel and Destron Fearing that will
permit the use of intellectual property of Digital Angel related
to the Company’s VeriMed Health Link business without
payment of ongoing royalties, as well as inventory and a limited
period of technology support by Digital Angel. The Company paid
Digital Angel $500,000 at the closing of the APA, which was
recorded to research and development expense. Pursuant to the
APA, the supply agreement discussed above was terminated.
Letter
Agreement with Digital Angel
On May 15, 2008, the Company entered into a Letter
Agreement (the “May 2008 Agreement”) with Digital
Angel under which the Company agreed, in exchange for Digital
Angel’s consent to a voting agreement and guarantee
agreement with The Stanley Works, to pay $250,000 as a fee for
Digital Angel’s guarantee of certain obligations under the
Stock Purchase Agreement and $250,000 for reimbursement of
transactional costs incurred by Digital Angel in connection with
the Xmark transaction. These costs were accounted for as
transactional costs which were netted against the gain on the
sale of Xmark in the year ended December 31, 2008.
The May 2008 Agreement with Digital Angel was terminated on
November 12, 2008.
Pledge
Agreement of Digital Angel
On August 24, 2006, Digital Angel pledged 65% of its
ownership in the Company’s common stock to its lender under
the terms of a note and pledge agreement. The note is due in
February 2010. This note replaced a previous note issued by
Digital Angel, which was due in June 2007. On August 31,
2007 and October 2, 2008, Digital Angel pledged 80% and
100%, respectively, of its ownership in the Company’s
common stock to its lender under the terms two separate notes
entered into with its lender. Each note is due in February 2010.
As a result of Digital Angel’s sale of all of its shares of
the Company to R & R Consulting Partners, LLC, on
November 12, 2008, Digital Angel’s lender released the
shares of the Company owned by Digital Angel from the pledge
agreements between Digital Angel and its lender.
|
|
|
|
12
|
Discontinued
Operations
|
On July 18, 2008, pursuant to the terms of the stock
purchase agreement between the Company and The Stanley Works,
the Company completed the sale of all of the outstanding capital
stock of Xmark to Stanley Canada for approximately
$47.9 million in cash, which consists of the
$45 million purchase price plus a balance sheet adjustment
of approximately $2.9 million. Under the terms of the stock
purchase agreement, $4.5 million of the proceeds will be
held in escrow for a period of 12 months to provide for
indemnification obligations under the stock purchase agreement,
if any.
As a result of the sale of Xmark, the financial condition,
results of operations and cash flows of Xmark have been reported
as discontinued operations in our financial statements and prior
period information has been reclassified accordingly.
FS-42
The condensed results of operations of the Company’s
discontinued operations for the years ended December 31,
2008 (which include the operations of Xmark through
July 18, 2008) and December 31, 2007, were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenue
|
|
$
|
20,002
|
|
|
$
|
32,030
|
|
|
Cost of sales
|
|
|
8,289
|
|
|
|
14,599
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,713
|
|
|
|
17,431
|
|
|
Selling, general and administrative expenses
|
|
|
9,093
|
|
|
|
10,329
|
|
|
Research and development expenses
|
|
|
2,277
|
|
|
|
4,573
|
|
|
Other (income) expense
|
|
|
(650
|
)
|
|
|
502
|
|
|
Interest (income) expense
|
|
|
(27
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,020
|
|
|
|
2,002
|
|
|
Provision for (benefit from) income taxes
|
|
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
787
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
The condensed balance sheets of the Company’s discontinued
operations as of December 31, 2008 and 2007 were comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
5,391
|
|
|
Deferred tax asset
|
|
|
—
|
|
|
|
216
|
|
|
Inventory
|
|
|
—
|
|
|
|
2,247
|
|
|
Other current assets
|
|
|
—
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
—
|
|
|
|
8,202
|
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
840
|
|
|
Intangibles, net
|
|
|
—
|
|
|
|
16,752
|
|
|
Goodwill
|
|
|
—
|
|
|
|
15,776
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
41,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
—
|
|
|
$
|
1,515
|
|
|
Accounts payable
|
|
|
—
|
|
|
|
1,517
|
|
|
Accrued expenses and other current liabilities
|
|
|
227
|
|
|
|
3,120
|
|
|
Income taxes payable
|
|
|
233
|
|
|
|
300
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
460
|
|
|
|
6,708
|
|
|
Deferred taxes
|
|
|
—
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
460
|
|
|
$
|
10,517
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (liabilities) assets from discontinued operations
|
|
$
|
(460
|
)
|
|
$
|
31,053
|
|
|
|
|
|
|
|
|
|
|
|
FS-43
|
|
|
|
13
|
Supplementary
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest paid
|
|
|
285
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
285
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
In the years ended December 31, 2008 and 2007, the Company
had the following non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Offering costs
|
|
$
|
—
|
|
|
$
|
440
|
|
|
Debt financing costs
|
|
|
331
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
331
|
|
|
$
|
440
|
|
|
|
|
|
|
|
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FS-44
INDEX TO
STEEL VAULT CORPORATION’S FINANCIAL STATEMENTS
The following financial statements and related notes have
been excerpted from Steel Vault’s Annual Report on
Form 10-K
for the year ended September 30, 2008, filed with the SEC
on December 24, 2008, and Steel Vault’s Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2009, filed with the SEC on
August 5, 2009. Unless the context otherwise requires,
references to “we,” “us,” “our,”
the “Company” and “Steel Vault” within this
section refer to Steel Vault Corporation and its consolidated
subsidiaries.
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|
|
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UNAUDITED FINANCIAL STATEMENTS:
|
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|
|
|
|
|
FS-46
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FS-47
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FS-48
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FS-49
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FS-50
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AUDITED FINANCIAL STATEMENTS:
|
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|
|
|
|
|
|
|
FS-59
|
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|
|
|
FS-60
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|
|
FS-61
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FS-62
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FS-63
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FS-64
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FS-65
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FS-45
Steel
Vault Corporation and Subsidiaries
Condensed
Consolidated Balance Sheets
|
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June 30,
|
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|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
par value)
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
505
|
|
|
$
|
1,256
|
|
|
Marketable equity securities, available for sale
|
|
|
—
|
|
|
|
35
|
|
|
Other current assets
|
|
|
176
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
681
|
|
|
|
1,301
|
|
|
Fixed assets, net
|
|
|
95
|
|
|
|
—
|
|
|
Goodwill
|
|
|
538
|
|
|
|
—
|
|
|
Other assets
|
|
|
19
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,333
|
|
|
$
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL
DEFICIENCY)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
326
|
|
|
$
|
2
|
|
|
Convertible note payable, net of discount
|
|
|
472
|
|
|
|
—
|
|
|
Deferred revenue
|
|
|
111
|
|
|
|
—
|
|
|
Accrued expenses and other liabilities
|
|
|
483
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,392
|
|
|
|
102
|
|
|
Convertible note payable, net of discount
|
|
|
163
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,555
|
|
|
|
102
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (capital deficiency):
|
|
|
|
|
|
|
|
|
|
Preferred shares:
|
|
|
|
|
|
|
|
|
|
Authorized 5,000 shares, no par value; none issued
|
|
|
—
|
|
|
|
—
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
Authorized 80,000 shares, $.01 par value; 8,696 and
6,007 shares issued; 8,696 and 5,146 shares outstanding
|
|
|
87
|
|
|
|
60
|
|
|
Additional paid-in capital
|
|
|
7,268
|
|
|
|
7,143
|
|
|
Accumulated deficit
|
|
|
(7,577
|
)
|
|
|
(5,086
|
)
|
|
Treasury stock, nil and 861 shares, at cost
|
|
|
—
|
|
|
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (capital deficiency)
|
|
|
(222
|
)
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (capital
deficiency)
|
|
$
|
1,333
|
|
|
$
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to condensed consolidated financial
statements.
FS-46
Steel
Vault Corporation and Subsidiaries
Condensed
Consolidated Statements of Operations
|
|
|
|
|
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|
|
|
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|
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For the Three Months
|
|
|
For the Nine Months
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Revenue
|
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
418
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
149
|
|
|
|
—
|
|
|
|
234
|
|
|
|
—
|
|
|
Sales and marketing
|
|
|
681
|
|
|
|
—
|
|
|
|
901
|
|
|
|
—
|
|
|
General and administrative
|
|
|
631
|
|
|
|
102
|
|
|
|
1,738
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,461
|
|
|
|
102
|
|
|
|
2,873
|
|
|
|
574
|
|
|
Operating loss
|
|
|
(1,118
|
)
|
|
|
(102
|
)
|
|
|
(2,455
|
)
|
|
|
(574
|
)
|
|
Interest and other (expense) income
|
|
|
(10
|
)
|
|
|
3
|
|
|
|
(36
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,128
|
)
|
|
|
(99
|
)
|
|
|
(2,491
|
)
|
|
|
(564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(274
|
)
|
|
Gain on sale of discontinued operation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,128
|
)
|
|
$
|
(99
|
)
|
|
$
|
(2,491
|
)
|
|
$
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations —
basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.11
|
)
|
|
Net income per common share from discontinued
operations — basic and diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,256
|
|
|
|
5,146
|
|
|
|
7,625
|
|
|
|
5,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,128
|
)
|
|
$
|
(99
|
)
|
|
$
|
(2,491
|
)
|
|
$
|
(211
|
)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available for sale securities
|
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,128
|
)
|
|
$
|
(53
|
)
|
|
$
|
(2,491
|
)
|
|
$
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to condensed consolidated financial
statements.
FS-47
Steel
Vault Corporation and Subsidiaries
Condensed
Consolidated Statement of Stockholders’ Equity (Capital
Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Stockholders’
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
Equity
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Treasury Stock
|
|
|
(Capital Deficiency)
|
|
|
|
|
(In thousands)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance — October 1, 2008
|
|
|
6,007
|
|
|
$
|
60
|
|
|
$
|
7,143
|
|
|
$
|
(5,086
|
)
|
|
$
|
(918
|
)
|
|
$
|
1,199
|
|
|
Share-based compensation
|
|
|
2,300
|
|
|
|
23
|
|
|
|
501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
524
|
|
|
Shares and options issued for purchase of NCRC
|
|
|
1,000
|
|
|
|
10
|
|
|
|
384
|
|
|
|
—
|
|
|
|
—
|
|
|
|
394
|
|
|
Option exercise
|
|
|
250
|
|
|
|
2
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
Retirement of treasury stock
|
|
|
(861
|
)
|
|
|
(8
|
)
|
|
|
(910
|
)
|
|
|
—
|
|
|
|
918
|
|
|
|
—
|
|
|
Issuance of common stock warrants in connection with debt
financings
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,491
|
)
|
|
|
—
|
|
|
|
(2,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — June 30, 2009
|
|
|
8,696
|
|
|
$
|
87
|
|
|
$
|
7,268
|
|
|
$
|
(7,577
|
)
|
|
$
|
—
|
|
|
$
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to condensed consolidated financial
statements.
FS-48
Steel
Vault Corporation and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,491
|
)
|
|
$
|
(564
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
524
|
|
|
|
134
|
|
|
Depreciation
|
|
|
5
|
|
|
|
—
|
|
|
Loss on marketable securities
|
|
|
24
|
|
|
|
—
|
|
|
Amortization of debt discount
|
|
|
14
|
|
|
|
—
|
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
(269
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1
|
|
|
|
1,404
|
|
|
Inventories
|
|
|
—
|
|
|
|
106
|
|
|
Other current assets
|
|
|
(111
|
)
|
|
|
—
|
|
|
Other assets
|
|
|
—
|
|
|
|
6
|
|
|
Accounts payable and accrued expenses and other liabilities
|
|
|
681
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,353
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Acquisition costs, net of cash acquired
|
|
|
(61
|
)
|
|
|
—
|
|
|
Purchase of fixed assets and software
|
|
|
(82
|
)
|
|
|
—
|
|
|
Proceeds from sale of marketable securities
|
|
|
11
|
|
|
|
—
|
|
|
Proceeds from sale of discontinued operations
|
|
|
—
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(132
|
)
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of convertible notes
|
|
|
690
|
|
|
|
—
|
|
|
Proceeds from option exercise
|
|
|
44
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
734
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(751
|
)
|
|
|
719
|
|
|
Cash and cash equivalents — beginning of period
|
|
|
1,256
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of period
|
|
$
|
505
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash:
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
$
|
918
|
|
|
$
|
—
|
|
|
Issuance of warrant in connection with debt financing
|
|
$
|
108
|
|
|
$
|
—
|
|
|
Contributed intercompany debt
|
|
$
|
—
|
|
|
$
|
94
|
|
|
Issuance of common stock and options for acquisition of NCR
|
|
$
|
394
|
|
|
$
|
—
|
|
See the accompanying notes to condensed consolidated financial
statements.
FS-49
Steel
Vault Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in
thousands, except per share data)
(unaudited)
On December 5, 2008, Steel Vault Corporation (the
“Company”), formerly known as IFTH Acquisition Corp.,
completed an acquisition of National Credit Report.com, LLC, a
Florida limited liability company (“NCRC”), pursuant
to a securities purchase agreement, dated as of December 5,
2008 (the “Purchase Agreement”). The Purchase
Agreement provided for the Company’s purchase of all of the
issued and outstanding membership interests in NCRC from the
sellers of NCRC, in return for 1,000 shares of the
Company’s common stock, par value $0.01 per share. In
conjunction with the transaction, the Company issued 3,000 stock
options to the sellers of NCRC. The stock options vested
immediately, have a life of 10 years and have a strike
price of $0.18.
In conjunction with the acquisition of NCRC, the Company
launched its business plan to offer consumers a variety of
identity security products and services primarily on a
subscription basis. These services help consumers protect
themselves against identity theft or fraud and to understand and
monitor their credit profiles and other personal information,
which include credit reports, credit monitoring and credit
scores.
The Company is a Delaware corporation incorporated in September
1987. Prior to December 31, 2007, the Company was a full
service provider of information technology (IT) solutions,
delivering complete lifecycle IT solutions for its customers.
Effective December 31, 2007, as approved by the
Company’s stockholders at a special meeting held
December 27, 2007, the Company closed the transactions
contemplated by the asset purchase and sale agreement, dated
November 13, 2007 (the “Sale Agreement”), between
the Company and Corporate Technologies LLC (“Corporate
Technologies”), pursuant to which the Company sold all of
its operating assets (the business known as “InfoTech USA,
Inc.” or “InfoTech”) and ceased its operations.
Prior to March 17, 2009, the Company’s name was IFTH
Acquisition Corp.
On August 1, 2008, Digital Angel Corporation (“Digital
Angel”) sold 2,570 shares of the Company’s common
stock to Blue Moon Energy Partners LLC (“Blue Moon”).
The shares represented 49.9% of the Company’s outstanding
common stock at that time. See Note 7 — Related
Party Transactions.
On March 20, 2009, the Company closed a convertible debt
financing transaction with Blue Moon for $190 pursuant to a
secured convertible promissory note, which is payable on demand
after March 20, 2011. See Note 6 — Financing
Agreements.
On June 4, 2009, the Company closed a two-year convertible
debt financing transaction with VeriChip Corporation, a Delaware
corporation (“VeriChip”), for $500 pursuant to a
secured convertible promissory note, which is payable on demand
after June 4, 2010. See Note 6 — Financing
Agreements.
The accompanying unaudited condensed consolidated financial
statements of the Company and its subsidiaries as of
June 30, 2009 and September 30, 2008 (the
September 30, 2008 financial information included in this
Quarterly Report on
Form 10-Q
has been extracted from the Company’s audited financial
statements included in its Annual Report on
Form 10-K
for the year ended September 30, 2008), and for the three
and nine months ended June 30, 2009 and 2008 have been
prepared in accordance with United States generally accepted
accounting principles (“U.S. GAAP”) for interim
financial information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Accordingly, they do not include all
of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of the
Company’s management, all adjustments (including normal
recurring adjustments) considered necessary to present fairly
the unaudited condensed consolidated financial statements have
been made. As a result of the Company’s sale of InfoTech,
results of operations and cash flows presented in the
June 30, 2008 period have been presented as discontinued
operations for comparative purposes.
FS-50
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of sales and expenses during the reporting period. Actual
results could differ from those estimates. Included in these
estimates are assumptions used in Black-Scholes valuation
models, estimates of the fair value of acquired assets and
assumed liabilities, among others.
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as a
going concern, which contemplates continuity of operations,
realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has experienced losses
from operations of $2,491 and negative operating cash flows of
$1,353 for the nine months ended June 30, 2009. Its ability
to continue as a going concern is dependent upon, among other
things, the achievement of future profitable operations and the
ability to generate sufficient cash from operations, equity
and/or
debt
financing and other funding sources to meet its obligations over
the next twelve months. The balance of cash and cash equivalents
as of June 30, 2009 may not be sufficient to meet its
anticipated cash requirements through 2009, based on its present
plan of operation. As a result, the Company may seek to raise
additional capital during fiscal 2009. Delays in the timing of
raising such capital may require it to delay, scale back or
eliminate some or all of its operations while it raises capital.
No assurance can be given that additional financing will be
available on acceptable terms or at all. Under these
circumstances the Company may be unable to continue as a going
concern. These condensed financial statements should be read in
conjunction with the Company’s audited financial statements
for the year ended September 30, 2008 included in its
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
December 24, 2008. The accompanying condensed consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of the carrying amount of
recorded assets or the amount and classification of liabilities
that might result should it be unable to continue as a going
concern.
The unaudited condensed consolidated statements of operations
for the three and nine months ended June 30, 2009 and 2008
are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in
conjunction with the consolidated financial statements and
related notes thereto included in the Company’s Annual
Report on
Form 10-K
for the year ended September 30, 2008.
Accounting
Policies
Revenue
Recognition
Revenue from the sale of a credit report is recognized when the
credit report is delivered to the customer. Revenue from the
sale of a subscription for credit monitoring services is
recognized ratably over each subscriber’s subscription
period. In certain circumstances, the Company sells a bundled
offer whereby a customer receives a credit report and
monitoring. In such circumstances, the Company allocates a
portion of the associated revenue to the credit report with the
balance recognized ratably over the subscription period.
Subscriber
Acquisition Costs
Subscriber acquisition costs represent marketing expenses
related to the acquisition of subscribers. Subscriber
acquisition costs are expensed in the period incurred. For the
three and nine months ended June 30, 2009, subscriber
acquisition costs were $583 and $705, respectively.
Fair
Value of Financial Instruments
The carrying values of financial instruments including cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value due to the relatively short maturity of
these instruments.
FS-51
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements.” SFAS 157 defines fair value and
establishes a framework for measuring fair value in accordance
with U.S. GAAP. The statement also expands the disclosures
related to the fair value measurements used to value assets and
liabilities. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company adopted SFAS 157 on
October 1, 2008. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. This standard is now the
single source in U.S. GAAP for the definition of fair
value, except for the fair value of leased property as defined
in SFAS 13. SFAS 157 establishes a fair value
hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from
independent sources (observable inputs), (2) assumptions
that are other than quoted prices which are either directly or
indirectly observable for the asset or liability through
correlation with market data and (3) an entity’s own
assumptions about market participant assumptions developed based
on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of
three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3).
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
|
|
•
|
Level 1 — Unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
|
|
|
|
|
•
|
Level 2 — Inputs other than quoted prices
included within Level 1 that are observable for the asset
or liability, either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices
that are observable for the asset or liability (e.g., interest
rates); and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
|
|
|
|
|
•
|
Level 3 — Inputs that are both significant to the
fair value measurement and unobservable.
|
On April 13, 2009, the Company sold its remaining
Level 1 investments (marketable equity securities,
available-for-sale) of approximately $8 for which quoted prices
in active markets were used to value the underlying securities.
As a result, as of June 30, 2009, the Company had no
Level 1 investments. The Company has included a $24 loss on
sale of securities in interest and other expense on the
Condensed Consolidated Statements of Operations for the nine
months ended June 30, 2009.
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
“Interim Disclosures about Fair Value of Financial
Instruments”
(“FSP
FAS 107-1”)
and (“APB
28-1”).
FSP
FAS 107-1
amends FASB Statement No. 107,
“Disclosures about
Fair Value of Financial Instruments”
, to require
disclosures about fair value of financial instruments in interim
as well as in annual financial statements and amends APB Opinion
No. 28
“Interim Financial Reporting”,
to
require those disclosures in interim financial statements. FSP
FAS 107-1
and APB
28-1
were adopted by the Company on April 1, 2009. These staff
positions did not have a material impact on our Condensed
Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165
“Subsequent Events” (“SFAS 165”).
SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. SFAS 165 sets forth (1) the period after
the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
(2) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements and (3) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
SFAS 165 is effective for interim or annual financial
periods ending after June 15,
FS-52
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
2009. The adoption of this standard did not have a material
impact on our Condensed Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162”. The FASB
Accounting Standards Codification (“Codification”)
will be the single source of authoritative nongovernmental
U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 is effective for interim and annual
periods ending after September 15, 2009. All existing
accounting standards are superseded as described in
SFAS 168. All other accounting literature not included in
the Codification is nonauthoritative. The adoption of this
standard is not expected to have a material impact on our
Condensed Consolidated Financial Statements.
|
|
|
|
2.
|
Principles
of Consolidation
|
The financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
|
|
|
|
3.
|
Net
Income (Loss) Per Common Share
|
The Company presents basic net income (loss) per common share
and, if appropriate, diluted net income per common share.
At June 30, 2009 and 2008, the Company had options and
warrants outstanding for the purchase of shares of common stock
upon exercise as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Outstanding stock options
|
|
|
7,935
|
|
|
|
3,975
|
|
|
Warrants (exercisable at an average price of $0.38 per share)
|
|
|
1,241
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
9,176
|
|
|
|
4,275
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the net loss for the three and nine months ended
June 30, 2009 and 2008, no potentially dilutive shares were
calculated because the effect would be anti-dilutive.
On December 5, 2008, the Company completed the acquisition
of NCRC. The Purchase Agreement provided for the Company’s
purchase of all of the issued and outstanding membership
interests in NCRC from the sellers of NCRC, in return for
1,000 shares of the Company’s common stock, par value
$0.01 per share, valued at $130. In conjunction with the
transaction, the Company issued 3,000 stock options with a fair
value of $264 to the sellers of NCRC in consideration of their
continued involvement with the operations of NCRC. The Black
Scholes assumption used to value the NCRC options are the same
as those described in Note 5 — Stock-Based
Compensation. The options vested immediately and have a strike
price of $0.18. Included in the purchase price was approximately
$76 in acquisition costs. The total cost of the acquisition was
$470.
FS-53
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
The total purchase price of the business acquired was allocated
as follows:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
15
|
|
|
Accounts receivable
|
|
|
|
|
|
|
4
|
|
|
Equipment
|
|
|
|
|
|
|
17
|
|
|
Other assets
|
|
|
|
|
|
|
27
|
|
|
Goodwill
|
|
|
|
|
|
|
538
|
|
|
Current liabilities
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
|
The results of NCRC have been included in the condensed
consolidated statements of operations since the date of
acquisition. Unaudited pro forma results of operations for the
nine months ended June 30, 2009 are included below. Such
pro forma information assumes that the NCRC acquisition occurred
as of October 1, 2008, and revenue is presented in
accordance with the Company’s accounting policies. This
summary is not necessarily indicative of what the Company’s
results of operations would have been had the Company and NCRC
been combined entities during such period, nor does it purport
to represent results of operations for any future periods.
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
Net operating revenue
|
|
$
|
462
|
|
|
Net loss from continuing operations attributable to common
shareholder
|
|
$
|
(2,538
|
)
|
|
Net loss from continuing operations per common share —
basic and diluted
|
|
$
|
(0.33
|
)
|
|
|
|
|
5.
|
Stock-Based
Compensation
|
A summary of option activity (does not include common stock and
restricted stock) under the Company’s stock option plans as
of June 30, 2009 and changes during the nine month period
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Intrinsic Value
|
|
|
|
|
Outstanding October 1, 2008
|
|
|
5,570
|
|
|
$
|
0.35
|
|
|
|
4.5
|
|
|
|
|
|
|
Granted
|
|
|
2,743
|
|
|
|
0.18
|
|
|
|
9.4
|
|
|
|
|
|
|
Exercised
|
|
|
(250
|
)
|
|
|
0.18
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(625
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
7,438
|
|
|
$
|
0.29
|
|
|
|
5.6
|
|
|
$
|
223
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009
|
|
|
5,953
|
|
|
$
|
0.31
|
|
|
|
4.8
|
|
|
$
|
160
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The intrinsic value of a stock option is the amount by which the
fair value of the underlying stock exceeds the exercise price of
the option. The market value of the Company’s stock was
$0.25 at June 30, 2009 based upon its closing price on the
OTC Bulletin Board.
|
During the three and nine months ended June 30, 2009, 200
and 250 options, respectively, were exercised. There were no
options exercised in the three and nine months ended
June 30, 2008. Accordingly, the aggregate
FS-54
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
intrinsic value of options exercised during the three and nine
months ended June 30, 2009 and 2008 was $43 and nil,
respectively.
In July 2008, the Company granted options exercisable for
approximately 1,595 shares of common stock to employees and
consultants of the Company. The Company recorded compensation
expense of $42 and $194 in the three and nine months ended
June 30, 2009, respectively, associated with these options
based on an estimate of the fair value on each date of grant and
using the Black-Scholes valuation model. The Company is required
to re-measure the compensation expense associated with the 445
consultant options at the end of each reporting period until the
options are vested.
In October 2008, the Company granted 1,000 restricted shares of
common stock under the 2001 Flexible Stock Plan to its chief
executive officer in lieu of salary through 2009, all of which
were fully vested by December 31, 2008. The shares issued
were recorded as compensation expense in the period of vesting.
In addition, in October 2008, in lieu of salary through 2009,
the Company granted 1,000 shares of common stock under the
2001 Flexible Stock Plan to its chairman of the board, all of
which were fully vested by December 31, 2008. Compensation
expense of nil and $270 was recorded in connection with these
two stock grants in the three and nine months ended
June 30, 2009, respectively.
In December 2008, the Company granted 3,000 stock options to the
sellers of NCRC, 2,503 of which were issued under the 2001
Flexible Stock Plan and 497 of which were issued outside of the
2001 Flexible Stock Plan. The options were valued based on an
estimate of the fair value on each date of grant and using the
Black-Scholes valuation model. The value of the options was
included in the purchase price of the acquisition as discussed
in Note 4 — Acquisition.
In December 2008, the Company granted options exercisable for
240 shares of common stock to consultants and employees of
the Company. The Company recorded compensation expense of $4 and
$21 in the three and nine months ended June 30, 2009,
respectively, associated with these options based on an estimate
of the fair value on each date of grant and using the
Black-Scholes valuation model. The Company must re-measure the
compensation expense associated with the consultant options at
the end of each reporting period until the options are vested.
In December 2008, the Company granted 200 shares of
restricted stock to two new members of its board of directors.
Such restricted shares were issued from the Company’s 2001
Flexible Stock Plan and vest on January 1, 2010. The shares
issued were recorded as compensation expense in the period of
vesting. The Company recorded compensation expense of $14 and
$29 for the three and nine months ended June 30, 2009,
respectively, associated with these restricted stock.
On March 31, 2009, the Company granted 100 shares of
restricted stock to Charles Baker, a director, in conjunction
with his agreement to serve as the chairman of the
Company’s technology committee. Such restricted shares were
issued from the Company’s 2001 Flexible Stock Plan and vest
on March 31, 2010. The Company recorded compensation
expense of $10 for the three and nine months ended June 30,
2009 associated with these restricted stock.
The fair value of each option granted is estimated using the
Black-Scholes options pricing model. The assumptions used for
the three months ended December 31, 2008 were 5 to
6 years for the expected option lives, 1.63% to 3.4% risk
free rate, 85% to 95% expected volatility and 0% expected
dividend yield. The weighted average fair value of options
granted during the nine months ended June 30, 2009 was
$0.18.
In January 2001, the Company issued a warrant to purchase
300 shares of common stock to a former employee at an
exercise price of $0.58 per share. The warrant expires on
December 31, 2010.
On March 20, 2009, in connection with the debt financing
transaction with Blue Moon, the Company granted a common stock
purchase warrant to purchase 108 shares of common stock at
a price of $0.44 per share, which warrant is currently
exercisable. The warrant was valued based on an estimate of the
fair value
FS-55
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
on the date of grant and using the Black-Scholes valuation
model. The value of the warrant was a discount to the debt and
will be amortized to interest expense over the life of the
financing. Amortized discount charged to interest expense was $4
for the three and nine months ended June 30, 2009.
On June 4, 2009, in connection with the debt financing
transaction with VeriChip, the Company granted a common stock
purchase warrant to purchase 333 shares of common stock at
price of $0.30 per share, which warrant is currently
exercisable. The financing transaction also included a guaranty
of collection given by William J. Caragol for the benefit of
VeriChip, for which Mr. Caragol received a common stock
purchase warrant from the Company to purchase 500 common shares
of the Company at a price of $0.30 per share, which warrant is
currently exercisable. The warrants were valued based on an
estimate of the fair value on the date of grant and using the
Black-Scholes valuation model. The value of the warrant issued
to VeriChip was a discount to the debt and will be amortized
using the effective interest method. The value of the warrant
issued to Mr. Caragol was considered debt issuance costs
and will be amortized using the effective interest method.
Amortized discount and issuance costs charged to interest
expense was $3 for the three and nine months ended June 30,
2009.
Blue
Moon
On March 20, 2009, the Company closed a debt financing
transaction with Blue Moon for $190 pursuant to a secured
convertible promissory note (the “Note”). The Note is
payable on demand after March 20, 2011, accrues interest at
five percent per year compounded monthly and is secured by
substantially all of the Company’s assets pursuant to a
security agreement between the Company and Blue Moon, which
security interest is subordinate to the security interest
granted to VeriChip Corporation (see below). The Note can be
prepaid at any time without penalty.
Blue Moon shall have the right, at any time, in its sole
discretion to convert the entire unpaid principal amount and
accrued and unpaid interest thereon into that number of shares
of the Company’s stock at a price of $0.44 per share. The
Company may convert the Note into common stock of the Company
anytime after a change in control of the Company or if the
average of the high and low trading prices of the Company’s
common stock as quoted on the OTC Bulletin Board (or any
other applicable trading exchange) is greater than 120% of the
conversion price ($0.44 per share) over 20 consecutive trading
days.
The financing transaction also includes a warrant, which carries
piggy back registration rights, given to Blue Moon to purchase
108 common shares of the Company at a price of $0.44 per share.
The fair market value at issuance was $32. Interest accrued as
of June 30, 2009 was $7.
VeriChip
On June 4, 2009, the Company closed a debt financing
transaction with VeriChip for $500 pursuant to a secured
convertible promissory note (the “VeriChip Note”). The
two year VeriChip Note is payable on demand on or after
June 4, 2010, accrues at a rate of twelve percent and is
secured by substantially all of the Company’s assets
pursuant to a security agreement between the Company and
VeriChip. The unpaid principal and accrued and unpaid interest
under the VeriChip Note can be converted at any time into common
stock at a price of $0.30 per share. The VeriChip Note can be
prepaid at any time without penalty.
The financing transaction includes a common stock purchase
warrant given to VeriChip to purchase 333 common shares of the
Company at a price of $0.30 per share. The fair market value at
issuance was $30.
The financing transaction also includes a guaranty of collection
given by William J. Caragol for the benefit of VeriChip, for
which Mr. Caragol received a common stock purchase warrant
from the Company to
FS-56
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
purchase 500 common shares of the Company at a price of $0.30
per share. The fair market value at issuance was $45. Interest
accrued as of June 30, 2009 was $7 (inclusive of amortized
discount and costs).
|
|
|
|
7.
|
Related
Party Transactions
|
On August 1, 2008, Digital Angel sold 2,570 shares of
the Company’s common stock to Blue Moon. The shares
represented 49.9% of the Company’s outstanding common stock
at that time and all of the shares owned by Digital Angel.
On October 8, 2008, the Company entered into a sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida, consisting of approximately
7,911 feet of office space, which space is shared with
VeriChip. The rent for the entire twenty-one-month term of the
sublease is $158, which was paid in one lump sum upon execution
of the sublease. VeriChip reimbursed the Company for one-half of
the sublease payment, representing its share of the total cost
of the sublease. In addition, to account for certain shared
services and resources, the Company and VeriChip operate under a
shared services arrangement, in connection with which the
Company pays $6.5 a month to VeriChip.
On March 20, 2009, the Company closed a debt financing
transaction with Blue Moon for $190 pursuant to a secured
convertible promissory note. See Note 6 —
Financing Agreements, for more information on the transaction.
As of June 30, 2009, Blue Moon owned 29.6% of the
Company’s outstanding common stock. Currently, Scott R.
Silverman, the Company’s chairman of the board, is a
manager of Blue Moon and controls a member of Blue Moon, and
William J. Caragol, the Company’s chief executive officer,
president and acting chief financial officer, is a manager and
member of Blue Moon.
On March 31, 2009, the Company granted 100 shares of
restricted stock to Charles Baker, a director, in conjunction
with his agreement to serve as the chairman of the
Company’s technology committee. Such restricted shares were
issued from the Company’s 2001 Flexible Stock Plan and vest
on March 31, 2010.
On June 4, 2009, the Company closed a debt financing
transaction with VeriChip for $500 pursuant to a secured
convertible promissory note, which is payable on demand after
June 4, 2011. See Note 6 — Financing
Agreements, for more information on the transaction. Currently,
Scott R. Silverman, the Company’s chairman of the board, is
the executive chairman of VeriChip and controls VeriChip,
Mr. Caragol, the Company’s chief executive officer,
president and acting chief financial officer, is the acting
chief financial officer of VeriChip, and Michael E. Krawitz, a
director of the Company is also a director of VeriChip.
The Company had an effective tax rate of nil for the three and
nine months ended June 30, 2009 and 2008. The Company
incurred consolidated losses before taxes for the three and nine
months ended June 30, 2009 and 2008. However, the Company
has not recorded a tax benefit for the resulting U.S. net
operating loss carryforwards, as we have determined that a full
valuation allowance against its net deferred tax assets was
appropriate based primarily on the Company’s historical
operating results.
Based upon the change of ownership rules under IRC
Section 382, if in the future the Company issues common
stock or additional equity instruments convertible into shares
of the Company’s common stock, which result in the
Company’s ownership change exceeding the 50% limitation
threshold imposed by that section, all of the Company’s net
operating loss carryforwards may be significantly limited as to
the amount of use in any particular year.
Effective January 1, 2007, the Company adopted FIN 48.
The implementation of FIN 48 did not result in any
adjustment to the Company’s beginning tax positions. The
Company continues to fully recognize its tax benefits, which are
appropriately offset by a full valuation allowance to the extent
that it is more likely than not that the deferred tax assets
will not be realized.
FS-57
Steel
Vault Corporation and Subsidiaries
Notes to
Condensed Consolidated Financial
Statements — (Continued)
The Company recognizes any interest accrued related to
unrecognized tax benefits or exposures in interest expense and
penalties in operating expenses. During the nine months ended
June 30, 2009 and 2008, there was no such interest or
penalty.
The Company is no longer subject to U.S. Federal or State
income examinations for fiscal years before 2002.
During 2009, the Company’s board of directors authorized
the retirement and cancellation of up to $918 of the
Company’s common stock acquired in previous periods. The
Company retired and cancelled 113 and 861 shares of common
stock held in treasury for the three and nine months ended
June 30, 2009, respectively.
|
|
|
|
10.
|
Events
Occurring After Reporting Date
|
The Company has evaluated events and transactions that occurred
between June 30, 2009 and August 5, 2009, which is the
date the financial statements were issued for possible
disclosure and recognition in the financial statements. The
Company has determined that there were no such events or
transactions that warrant disclosure and recognition in the
financial statements.
FS-58
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
IFTH Acquisition Corp.
Delray Beach, Florida
We have audited the accompanying consolidated balance sheet of
IFTH Acquisition Corp. and Subsidiaries (the
“Company”) as of September 30, 2008, and the
related consolidated statements of operations,
stockholders’ equity and cash flows and the financial
statement schedule — Valuation and Qualifying Accounts
for the year then ended. These consolidated financial statements
and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
schedule are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over
financial reporting. Our audit include 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of IFTH Acquisition Corp. and Subsidiaries as of
September 30, 2008, and the consolidated results of their
operations and their consolidated cash flows for the year ended
September 30, 2008, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the financial statement schedule referred to above,
when considered in relation to the financial statements taken as
a whole, presents fairly, in all material respects, the
information stated therein.
We also audited the adjustments described in Note 8 that
was applied to retrospectively reclassify the September 30,
2007 and 2006 consolidated financial statements for the
discontinued operations of the Company. In our opinion, such
adjustments are appropriate and have been properly applied. We
were not engaged to audit, review or apply any procedures to the
September 30, 2007 and 2006 consolidated financial
statements of the Company other than with respect to the
adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the September 30, 2007 and
2006 consolidated financial statements take as a whole.
/s/ Eisner LLP
New York, NY
December 22, 2008
FS-59
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
IFTH Acquisition Corp.
Delray Beach, Florida
We have audited the accompanying consolidated balance sheet of
IFTH Acquisition Corp. and Subsidiaries as of September 30,
2007, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years ended
September 30, 2007 and 2006, prior to the adjustment
described in Note 8 that was applied to reclassify the
financial statements for the discontinued operations of the
Company. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 IFTH Acquisition Corp. and Subsidiaries as of
September 30, 2007, and their results of operations and
cash flows for the years ended September 30, 2007 and 2006,
in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in fiscal year 2006.
Our audits referred to above included the information in
Schedule II, which presents fairly, in all material
respects, the information required to be set forth therein when
read in conjunction with the consolidated financial statements.
/s/ J. H. Cohn LLP
Roseland, New Jersey
December 21, 2007
FS-60
IFTH
ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands, except par value)
|
|
|
|
|
ASSETS
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,256
|
|
|
$
|
405
|
|
|
Accounts receivable (net of allowance for doubtful accounts of
$78)
|
|
|
—
|
|
|
|
1,477
|
|
|
Inventories
|
|
|
—
|
|
|
|
106
|
|
|
Marketable equity securities, available for sale
|
|
|
35
|
|
|
|
418
|
|
|
Other current assets
|
|
|
10
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,301
|
|
|
|
2,466
|
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
89
|
|
|
Other assets
|
|
|
—
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,301
|
|
|
$
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Line of credit — Wells Fargo
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Amounts due to Digital Angel
|
|
|
—
|
|
|
|
105
|
|
|
Accounts payable
|
|
|
2
|
|
|
|
550
|
|
|
Accrued expenses and other liabilities
|
|
|
100
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
102
|
|
|
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preferred shares:
|
|
|
|
|
|
|
|
|
|
Authorized 5,000, no par value; none issued
|
|
|
—
|
|
|
|
—
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
Authorized 80,000 shares of $.01 par value; 6,007 and
5,907 shares issued; 5,146 and 5,046 shares outstanding
|
|
|
60
|
|
|
|
59
|
|
|
Additional paid-in capital
|
|
|
7,143
|
|
|
|
6,854
|
|
|
Accumulated deficit
|
|
|
(5,086
|
)
|
|
|
(4,408
|
)
|
|
Accumulated other comprehensive loss
|
|
|
—
|
|
|
|
(228
|
)
|
|
Treasury stock (861 shares, carried at cost)
|
|
|
(918
|
)
|
|
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
1,199
|
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
1,301
|
|
|
$
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
FS-61
IFTH
ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except
|
|
|
|
|
per share data)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
$
|
(678
|
)
|
|
$
|
(692
|
)
|
|
$
|
(931
|
)
|
|
Loss on marketable equity securities
|
|
|
(430
|
)
|
|
|
(23
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
13
|
|
|
|
120
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,095
|
)
|
|
|
(595
|
)
|
|
|
(769
|
)
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
( 274
|
)
|
|
|
(23
|
)
|
|
|
(1,373
|
)
|
|
Gain on sale of discontinued operations
|
|
|
691
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
417
|
|
|
|
(23
|
)
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(678
|
)
|
|
$
|
(618
|
)
|
|
$
|
(2,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations loss per common share — basic and
diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.16
|
)
|
|
Discontinued operations income (loss) per common share —
basic and diluted
|
|
$
|
0.08
|
|
|
$
|
—
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
5,114
|
|
|
|
5,014
|
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(678
|
)
|
|
$
|
(618
|
)
|
|
$
|
(2,142
|
)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) on marketable securities available for sale
and reversal
|
|
|
228
|
|
|
|
(228
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(450
|
)
|
|
$
|
(846
|
)
|
|
$
|
(2,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
FS-62
IFTH
ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For The
Years Ended September 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders’
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance — September 30, 2005
|
|
|
5,757
|
|
|
$
|
58
|
|
|
$
|
6,653
|
|
|
$
|
(1,648
|
)
|
|
$
|
—
|
|
|
$
|
(918
|
)
|
|
$
|
4,145
|
|
|
Issuance of common stock
|
|
|
50
|
|
|
|
—
|
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,142
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — September 30, 2006
|
|
|
5,807
|
|
|
|
58
|
|
|
|
6,805
|
|
|
|
(3,790
|
)
|
|
|
—
|
|
|
|
(918
|
)
|
|
|
2,155
|
|
|
Issuance of common stock
|
|
|
100
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
Unrealized loss on marketable equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(228
|
)
|
|
|
—
|
|
|
|
(228
|
)
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(618
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — September 30, 2007
|
|
|
5,907
|
|
|
|
59
|
|
|
|
6,854
|
|
|
|
(4,408
|
)
|
|
|
(228
|
)
|
|
|
(918
|
)
|
|
|
1,359
|
|
|
Issuance of common stock
|
|
|
100
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
196
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
196
|
|
|
Contributed intercompany debt
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
Reversal of unrealized loss on marketable equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
228
|
|
|
|
—
|
|
|
|
228
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(678
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — September 30, 2008
|
|
|
6,007
|
|
|
$
|
60
|
|
|
$
|
7,143
|
|
|
$
|
(5,086
|
)
|
|
$
|
—
|
|
|
$
|
(918
|
)
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
FS-63
IFTH
ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Years Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(678
|
)
|
|
$
|
(618
|
)
|
|
$
|
(2,142
|
)
|
|
Adjustments to reconcile net loss to net cash (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) from discontinued operations
|
|
|
(417
|
)
|
|
|
23
|
|
|
|
1,373
|
|
|
Share-based compensation
|
|
|
196
|
|
|
|
50
|
|
|
|
136
|
|
|
Asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
924
|
|
|
Loss on marketable securities, available for sale
|
|
|
430
|
|
|
|
23
|
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
1,407
|
|
|
|
894
|
|
|
|
105
|
|
|
Decrease (increase) in inventories
|
|
|
106
|
|
|
|
38
|
|
|
|
(4
|
)
|
|
(Increase) decrease in other current assets and miscellaneous
receivables
|
|
|
(4
|
)
|
|
|
91
|
|
|
|
86
|
|
|
Decrease in other assets
|
|
|
5
|
|
|
|
6
|
|
|
|
90
|
|
|
(Decrease) increase in accounts payable, accrued expenses and
other liabilities
|
|
|
(987
|
)
|
|
|
(787
|
)
|
|
|
107
|
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(269
|
)
|
|
|
4
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(211
|
)
|
|
|
(276
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
180
|
|
|
|
331
|
|
|
|
—
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(36
|
)
|
|
Net cash provided by discontinued operations
|
|
|
887
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,067
|
|
|
|
328
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (payments) borrowings on Wells Fargo line of credit
|
|
|
(2
|
)
|
|
|
(11
|
)
|
|
|
3
|
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
—
|
|
|
|
16
|
|
|
Net (payments) borrowings from stockholder
|
|
|
(3
|
)
|
|
|
(8
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(5
|
)
|
|
|
(19
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
851
|
|
|
|
33
|
|
|
|
(654
|
)
|
|
Cash and cash equivalents — beginning of year
|
|
|
405
|
|
|
|
372
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of year
|
|
$
|
1,256
|
|
|
$
|
405
|
|
|
$
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
10
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
221
|
|
|
$
|
223
|
|
|
Non cash investing and financing information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities received in exchange for loan to Digital
Angel
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
Contributed intercompany debt
|
|
$
|
94
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See the accompanying notes to consolidated financial statements.
FS-64
IFTH
ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
|
|
|
|
Note 1 —
|
Summary
Of Significant Accounting Policies
|
Business
Organization And Basis Of Presentation
IFTH Acquisition Corp. (the “Company” or
“IFTH”) was incorporated on September 30, 1987 as
a Delaware corporation. The Company has two subsidiaries: IFTH
NY Sub, Inc., a New York Corporation since 1980, and IFTH NJ
Sub, Inc., a New Jersey corporation since 1983.
Effective December 31, 2007, as approved by the
stockholders of IFTH at a special meeting held December 27,
2007, the Company closed the transactions contemplated by the
Asset Purchase and Sale Agreement, dated November 13, 2007
(the “Sale Agreement”) between IFTH and Corporate
Technologies LLC (“Corporate Technologies”), selling
substantially all of the Company’s operating assets
excluding accounts receivable and inventory (“Operating
Assets”).
Under the terms of the Sale Agreement, the Company ceased its
operations and, pursuant to an interim services agreement and an
administrative services agreement entered into in connection
with the Sale Agreement, Corporate Technologies agreed to assist
the Company in the collection of the outstanding accounts
receivable and in the sale of the remaining inventory. The
Company retained its cash at the time of the closing of the Sale
Agreement, the cash received from the collection of accounts
receivable and the sale of inventory, and the proceeds from the
sale and plans to utilize these funds to seek to acquire an
operating business unrelated to the business sold to Corporate
Technologies.
In connection with the sale of the Company’s assets to
Corporate Technologies, the Company’s stockholders also
approved an amendment pursuant to which it changed its name from
InfoTech USA, Inc. to IFTH Acquisition Corp. on
December 31, 2007. Additionally, pursuant to the Sale
Agreement, the Company’s wholly owned subsidiaries changed
their names from InfoTech USA, Inc. to “IFTH NJ Sub,
Inc.” and from Information Technology Services, Inc. to
“IFTH NY Sub, Inc.”
After the completion of the sale, the Company did not engage in
any business activity other than paying its outstanding
liabilities, liquidating its remaining inventory and collecting
its outstanding receivables. Management’s primary purpose
at that time was to locate and acquire an attractive operating
business seeking to become publicly traded.
On August 1, 2008, Digital Angel Corporation (formerly
Applied Digital) (“Digital Angel”) sold
2,570 shares of the Company’s common stock to Blue
Moon Energy Partners LLC (“Blue Moon”). The shares
represented 49.9% of the Company’s outstanding common stock
at that time.
On December 5, 2008, the Company acquired 100% of the
ownership interests of National Credit Report.com, LLC, a
Florida limited liability company (“NCRC”), a business
engaged in the identity security market providing credit
monitoring and reporting products and services. See Note 13
for more information.
Basis
Of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in
consolidation.
Revenue
Recognition
The Company’s acquired subsidiary revenue from the sale of
a single credit report is recognized when the credit report is
delivered to the customer. Revenue from the sale of annual
subscriptions for credit monitoring and credit protection is
recognized ratably over each subscriber’s annual
subscription period. The Company also offers credit monitoring
and credit protection on a month-to month basis. In certain
circumstances, the Company sells a bundled offer whereby a
customer receives a single credit report and monitoring. In such
FS-65
circumstances, the Company allocates based on vendor specific
objective evidence the associated revenue to the credit report
and to the subscription, which the Company recognizes such
subscription portion over the related period.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (“GAAP”) in
the United States (“U.S.”) requires management to make
certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Although these estimates are based on the knowledge of current
events and actions we may undertake in the future, they may
ultimately differ from actual results. Included in these
estimates are assumptions about allowances for inventory
obsolescence, bad debt reserves, lives of long lived assets,
lives of intangible assets, assumptions used in Black-Scholes
valuation models, estimates of the fair value of acquired assets
and assumed liabilities, the determination of whether any
impairment is to be recognized on goodwill or intangibles, among
others.
Investment
in Marketable Equity Securities
Investments in marketable equity securities classified as
“available for sale” are recorded at fair value based
on quoted market prices and unrealized gains and losses are
reported as accumulated other comprehensive income (loss) as a
separate component within stockholders’ equity. The cost of
securities sold is based on the first in first out method.
All of the Company’s available for sale investments are
subject to a periodic review pursuant to Emerging Issues Task
Force
No. 03-1.
Investments are considered to be impaired when a decline in fair
value is judged to be other-than-temporary. Marketable
securities are evaluated for impairment if the decline in fair
value below cost basis is significant and/or has lasted for an
extended period of time. Factors indicative of an
other-than-temporary decline include recurring operating losses,
credit defaults and subsequent rounds of financings at an amount
below the cost basis of the investment. When a decline in value
is deemed to be other-than-temporary, the Company recognizes an
impairment loss in the current period’s operating results
to the extent of the decline.
Property
and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Expenditures for maintenance and
repairs are charged against operations as incurred. Upon
retirement or sale, any assets disposed of are removed from the
accounts and any resulting gain or loss is reflected in the
results of operations. Capitalized values of property under
leases are amortized over the life of the lease or the estimated
life of the asset, whichever is less.
Depreciation and amortization are computed using straight-line
and accelerated methods over the following estimated useful
lives:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Life
|
|
|
|
Computer equipment
|
|
|
5 years
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
|
Leasehold improvements
|
|
|
5 years
|
|
Impairment losses on long-lived assets, such as equipment and
improvements, are recognized when events or changes in
circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their
carrying value and, accordingly, all or a portion of such
carrying value may not be recoverable. Impairment losses are
then measured by comparing the fair value of assets to their
carrying amounts.
FS-66
Income
Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes,”
(“SFAS 109”) which requires the use of the
liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are measured using
enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The
income tax provision or credit is the tax payable or refundable
for the period plus or minus the change during the period in
deferred tax assets and liabilities.
FASB Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes,
(“FIN 48”) was issued to
clarify the requirements of Statement of Financial Accounting
Standards No. 109,
Accounting for Income Taxes
,
relating to the recognition of income tax benefits.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when the benefits’ realization is
uncertain. The first step is to determine whether the benefit is
to be recognized, and the second step is to determine the amount
to be recognized:
|
|
|
|
|
|
•
|
income tax benefits should be recognized when, based on the
technical merits of a tax position, the entity believes that if
a dispute arose with the taxing authority and were taken to a
court of last resort, it is more likely than not (i.e., a
probability of greater than 50 percent) that the tax
position would be sustained as filed; and
|
|
|
|
|
•
|
if a position is determined to be more likely than not of being
sustained, the reporting enterprise should recognize the largest
amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with the
taxing authority.
|
Effective October 1, 2007, the Company adopted FIN 48.
The implementation of FIN 48 did not result in any
adjustment to the Company’s beginning tax positions. The
Company continues to fully recognize its tax benefits which are
offset by a valuation allowance to the extent that it is more
likely than not that the deferred tax assets will not be
realized.
The Company is subject to the provisions of FIN 48 as of
October 1, 2007, and has analyzed filing positions in all
of the federal, state, and foreign jurisdictions where it is
required to file income tax returns, as well as all open tax
years in these jurisdictions. As a result of adoption, we have
recorded no tax liability and have no unrecognized tax benefits
as of the date of adoption.
The Company files consolidated tax returns in the United States
Federal jurisdiction and in New Jersey. The Company is no longer
subject to US Federal or state income tax examinations for
fiscal years before 2002.
Net
Income (Loss) Per Common Share
The Company presents “basic” income (loss) per common
share and, if applicable, “diluted” income per common
share, pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, “Earnings per
Share” (“SFAS 128”). Basic income (loss) per
common share is calculated by dividing net income or loss by the
weighted average number of common shares outstanding during each
period. The calculation of diluted income per common share is
similar to that of basic income per common share, except that
the denominator is increased to include the number of additional
common shares that would have been outstanding if all
potentially dilutive common shares, such as those issuable upon
the exercise of stock options and warrants, were issued during
the period. Since the Company had net losses in 2008, 2007 and
2006, the assumed effects of the exercise of employee stock
options for the purchase of 5,570, 3,975, and 3,975 common
shares and 300 warrants outstanding at September 30, 2008,
2007 and 2006, respectively, would have been anti-dilutive and,
accordingly, dilutive per share amounts are not presented.
FS-67
Cash
And Cash Equivalents
The Company considers all liquid instruments with a maturity of
three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are maintained in bank
accounts in amounts which, at times, may exceed federally
insured limit. Management believes that the Company is not
exposed to any significant risk of loss of financial assets due
to the failure of these financial institutions.
Fair
Value Of Financial Instruments
The carrying values of financial instruments including cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value due to the relatively short maturity of
these instruments.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements.” SFAS 157 defines fair value and
establishes a framework for measuring fair value in accordance
with GAAP. The statement also expands the disclosures related to
the fair value measurements used to value assets and
liabilities. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. This standard is now the
single source in generally accepted accounting principles for
the definition of fair value, except for the fair value of
leased property as defined in SFAS 13. SFAS 157
establishes a fair value hierarchy that distinguishes between
(1) market participant assumptions developed based on
market data obtained from independent sources (observable
inputs), (2) assumptions that are other than quoted prices
which are either directly or indirectly observable for the asset
or liability through correlation with market data and
(3) an entity’s own assumptions about market
participant assumptions developed based on the best information
available in the circumstances (unobservable inputs). The fair
value hierarchy consists of three broad levels, which gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
|
|
•
|
Level 1 — Unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
|
|
|
|
|
•
|
Level 2 — Inputs other than quoted prices
included within Level 1 that are observable for the asset
or liability, either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices
that are observable for the asset or liability (e.g., interest
rates); and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
|
|
|
|
|
•
|
Level 3 — Inputs that are both significant to the
fair value measurement and unobservable.
|
At September 30, 2008, the Company had Level 1
investments of approximately $35 for which quoted prices in
active markets were used to value the underlying securities.
Stock-based
compensation
The Company accounts for equity-based compensation based on
Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payments” (“SFAS 123(R)”).
SFAS 123(R) requires that the fair value of such equity
instruments be measured based on the fair value of the
instruments on the date they are granted and that an estimate of
the portion of the fair value that will vest be recognized in
the financial statements as an expense over the period during
which the employees are required to provide services in exchange
for the equity instruments.
The Company adopted SFAS 123(R) effective October 1,
2005 and has selected the Black-Scholes method of valuation for
share-based compensation. The Company has elected the modified
prospective application transition method which requires that
the provisions of SFAS 123(R) be applied going forward from
the date of adoption to new share-based payments, and to all
unvested stock options outstanding at the
FS-68
beginning of the first quarter of adoption of SFAS 123(R).
The Company recognized $290 of compensation expense in 2008 from
1,595 stock options granted in 2008, restricted stock grants,
and modification of existing stock options. The Company did not
grant any stock options during 2007 or 2006 and all outstanding
options were fully vested as of September 30, 2005.
However, in January 2006, the Company modified certain existing
stock option agreements and granted restricted stock.
Accordingly, there was $50 and $136 of compensation expense
recognized in 2007 and 2006, respectively, as a result of the
adoption of SFAS 123(R). To calculate the excess tax
benefits available as of the date of adoption for use in
offsetting future tax shortfalls, the Company followed the
alternative transition method discussed in Financial Accounting
Standards Board Staff Position No. 123(R) — 3.
A summary of options outstanding under the Company’s stock
option plans as of September 30, 2008 and changes during
the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
(In years)
|
|
|
|
|
Outstanding at October 1, 2007
|
|
|
3,975
|
|
|
$
|
0.38
|
|
|
|
2.4
|
|
|
|
|
|
|
Granted
|
|
|
1,595
|
|
|
|
0.21
|
|
|
|
9.8
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
5,570
|
|
|
$
|
0.33
|
|
|
|
4.5
|
|
|
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008
|
|
|
4,125
|
|
|
$
|
0.37
|
|
|
|
2.7
|
|
|
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The intrinsic value of a stock option is the amount by which the
fair value of the underlying stock exceeds the exercise price of
the option. The fair value of the Company’s stock was $0.21
per share at September 30, 2008 based upon its closing
price on the OTCBB.
|
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for determining
the fair value of options granted in 2008 (there were no grants
in 2007 and 2006):
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Risk-free interest rates
|
|
|
3.4
|
%
|
|
Expected option lives
|
|
|
5.5 years
|
|
|
Expected volatilities
|
|
|
85
|
%
|
|
Expected dividend yields
|
|
|
0
|
%
|
The Black-Scholes value for the options granted during the year
ended September 30, 2008 was $0.15.
No options were exercised during 2008 and 2007. The total
intrinsic value of options exercised during 2006 was $16.
In January 2006, the Company granted its chairman of the board
and its chief executive officer 100 shares of its
restricted stock each. This stock fully vested in January 2008.
The Company determined the fair value of the stock to be $100
based on the closing price of its stock on the date of grant.
The fair value of the restricted stock was recognized as
compensation expense over the vesting period. Compensation
expense was recorded in connection with the restricted stock
during 2008, 2007 and 2006 in the amount of $13, $50 and $37,
respectively.
In addition, during July 2008, the Company granted options
exercisable for approximately 645 shares of common stock to
consultants and non-employees of the Company. In accordance with
FAS 123(R), the Company recorded compensation expense of
$18 associated with these options based on an estimate of the
fair value on each date of grant and using the Black-Scholes
valuation model. The Company will be required to re-measure the
compensation expense associated with these options at the end of
each reporting period until
FS-69
the options are vested. This re-measurement at
September 30, 2008, did not result in additional
compensation expense for the year ended September 30, 2008.
The remaining fair value of the invested grants were $68 at
September 30, 2008.
Recent
Accounting Pronouncements:
On December 4, 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations” which replaces
SFAS 141 but retains the fundamental concept of purchase
method of accounting in a business combination and improves
reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more
complete, comparable, and relevant information for investors and
other users of financial statements. To achieve this goal, the
new standard requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities
assumed in the transaction and any noncontrolling interest at
the acquisition date measured at their fair value as of that
date. This statement requires measuring a noncontrolling
interest in the acquiree at fair value which will result in
recognizing the goodwill attributable to the noncontrolling
interest in addition to that attributable to the acquirer. This
statement also requires the recognition of assets acquired and
liabilities assumed arising from contractual contingencies as of
the acquisition date, measured at their acquisition fair values.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. The Company is currently
evaluating the impact of SFAS No. 141(R) on its
financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159
(“SFAS 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities,” providing
companies with an option to report selected financial assets and
liabilities at fair value. The Standard’s objective is to
reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related
assets and liabilities differently. Generally accepted
accounting principles have required different measurement
attributes for different assets and liabilities that can create
artificial volatility in earnings. SFAS 159 helps to
mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair
value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159
also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. The Standard requires companies to provide
additional information that will help investors and other users
of financial statements to more easily understand the effect of
the Company’s choice to use fair value on its earnings. It
also requires entities to display the fair value of those assets
and liabilities for which they have chosen to use fair value on
the face of the balance sheet. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company
does not expect the adoption of SFAS No. 159 to have a
significant effect on its financial position or results of
operations.
On December 4, 2007, the FASB issued
SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, an amendment of ARB
No. 51, which will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary by requiring all entities to
report noncontrolling (minority) interests in subsidiaries in
the same way as equity in the consolidated financial statements.
In addition, SFAS No. 160 eliminates the diversity
that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated
as equity transactions. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
does not expect the adoption of SFAS No. 160 to have a
significant effect on its financial position or results of
operations.
In February 2008, the FASB issued Staff Position
No. FAS 157-1
(“FSP
FAS 157-1”),
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13 and Staff Position
No. FAS 157-2
(“FSP
FAS 157-2”),
Effective Date of FASB Statement No. 157. FSP
FAS 157-1
excludes Statement of Financial Accounting Standards No. 13
(“SFAS 13”), Accounting for Leases, as well as
other accounting pronouncements that address fair value
measurements on lease classification or measurement under
SFAS 13 from the scope of SFAS 157. FSP
FAS 157-2
delays the effective date of SFAS 157 for all nonrecurring
fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years
FS-70
beginning after November 15, 2008. Both FSP
FAS 157-1
and FSP
FAS 157-2
are effective upon an entity’s initial adoption of
SFAS 157, which is our first quarter of fiscal year 2009.
The Company does not expect the adoption of FSP
SFAS 157-1
to have a material impact to our consolidated results of
operations and financial position.
In March 2008, FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities” (“SFAS 161”). FAS 161
requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of
financial reporting. Entities are required to provide enhanced
disclosures about; (1) how and why an entity uses
derivative instruments, (2) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and its related interpretations, and
(3) how derivative instruments and related hedged items
affect an entity’s financial position, financial
performance and cash flows. SFAS 161 is effective for
financial statement issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. Comparative disclosures for earlier periods at
initial adoption is encouraged but not required. The Company
does not expect the adoption of FAS 161 to have a material
impact to our consolidated results of operations and financial
position.
EITF 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock” provides guidance in
assessing whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock for
purposes of determining whether the appropriate accounting
treatment falls under the scope of SFAS 133,
“Accounting For Derivative Instruments and Hedging
Activities”
and/or
EITF 00-19,
“Accounting For Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock”.
EITF 07-05
is effective as of the beginning of our 2010 fiscal year. The
Company is evaluating the impact of
EITF 07-5
on our consolidated financial position and results of operations.
|
|
|
|
Note 2 —
|
Marketable
Securities
|
As explained in Note 12 below, on May 15, 2007, the
Company entered into a Satisfaction of Loan Agreement with
Digital Angel whereby the Company received 704 shares of
its common stock with a fair value of $1,000 in payment of a
loan due to the Company in that amount. At September 30,
2007, the Company had classified the shares as available for
sale marketable equity securities and in accordance with
SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities,” is recording unrealized
changes in their fair value as part of its comprehensive income.
During the year ended September 30, 2008, the Company sold
361 shares and realized a loss of $331 and during the year
ended September 30, 2007, the Company sold 249 shares
and realized a loss of $23. The remaining shares had a cost of
$134 and a market value of $35 at September 30, 2008 and a
cost of $646 and a market value of $418 at September 30,
2007. Accordingly, the Company has included its $99 decline in
fair value as other then temporary and reported the impairment
in loss on marketable equity securities on the Consolidated
Statement of Operations as of September 30, 2008.
|
|
|
|
Note 3 —
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Computer equipment
|
|
$
|
—
|
|
|
$
|
339
|
|
|
Furniture and fixtures
|
|
|
—
|
|
|
|
76
|
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
478
|
|
|
Less accumulated depreciation and amortization
|
|
|
—
|
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
—
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill consisted of the unamortized excess of cost over fair
value of tangible and identifiable intangible assets net of
liabilities of the Company at the date of acquisition. The
Company applied APB
FS-71
No. 16, “Business Combinations,” and used the
purchase method of accounting for this acquisition in 2001.
Goodwill was fully written off at September 30, 2006 as
shown below:
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
Original balance
|
|
$
|
2,339
|
|
|
Less accumulated amortization
|
|
|
(185
|
)
|
|
Less impairment charges
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
—
|
|
|
|
|
|
|
|
Effective October 1, 2001, the Company adopted
SFAS 142. Under SFAS 142, goodwill amortization ceased
upon the adoption of the standard. SFAS 142 also required
an initial goodwill impairment assessment in the year of
adoption and annual impairment tests thereafter. As of
September 30, 2006, following the valuation analysis it was
determined that due to the Company’s historical losses,
including the loss incurred in fiscal year ended
September 30, 2006, the overall volatility of the IT
industry and the Company’s projected marginal profitability
in the future, the goodwill was fully impaired, resulting in a
carrying value of $0 as of the end of fiscal year 2006.
Accordingly no valuation analysis was performed at
September 30, 2008. Valuation analysis testing for goodwill
impairment as of September 30, 2006 resulted in a charge
for goodwill impairment of $924.
|
|
|
|
Note 5 —
|
Financing
Arrangements
|
The Company’s financing agreement with Wells Fargo Business
Credit, Inc. (“Wells Fargo”), entered into on
June 30, 2004, provided financing up to $4,000 with
interest at Wells Fargo’s prime rate plus 3%. The Company
also had a wholesale financing agreement with IBM Credit in
effect as of September 30, 2007 that provided for inventory
financing up to $600 and was secured by a letter of credit in
the amount of $600.
As of September 30, 2008 and 2007, the Company had a
borrowing base of approximately nil and $386, respectively, and
availability under the credit facility as of September 30,
2008 and 2007 of approximately nil and $384, respectively.
Borrowings under the Wells Fargo line of credit amounted to nil
and $2 at September 30, 2008 and 2007, respectively.
Borrowings under the IBM Credit financing arrangement amounted
to nil and $273 at September 30, 2008 and 2007,
respectively, and were included in either accounts payable or
accrued expenses and other liabilities.
On May 19, 2005, the Company entered into an arrangement,
which was amended September 28, 2007, with one of its
primary suppliers, Ingram Micro Inc. (“Ingram”),
pursuant to which Ingram provided the Company with a credit line
of up to $250. Payments for purchases under this credit line
were due and payable within 30 days from the date of
invoice. Amounts not repaid within 10 days past due bore
interest at
1
1
/
2
%
per month. The credit line was secured by a security interest in
substantially all of the Company’s equipment, inventory and
accounts receivable. Advances under the credit line were
subordinate and junior in right of payment to borrowings under
the Company’s credit facility with Wells Fargo. The Company
had nil and $97 outstanding with Ingram as of September 30,
2008 and 2007, respectively, and the borrowings were included in
either accounts payable or accrued expenses and other
liabilities.
The Company repaid all of the Company’s loans, and all of
the Company’s financial arrangements with Wells Fargo, IBM
Credit and Ingram were terminated upon completion of the sale of
the operating assets to Corporate Technologies.
FS-72
The reconciliation of the effective tax rate with the statutory
Federal income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
%
|
|
|
|
Statutory rate
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
Non-deductible permanent difference
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
Non-deductible goodwill write-off
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
Increase in deferred tax valuation allowance
|
|
|
38
|
|
|
|
31
|
|
|
|
22
|
|
|
State income taxes, net of Federal benefits
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
Other
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company’s deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Asset reserves / other
|
|
$
|
50
|
|
|
$
|
44
|
|
|
Property and equipment
|
|
|
—
|
|
|
|
22
|
|
|
Stock options
|
|
|
73
|
|
|
|
11
|
|
|
Net operating loss carryforwards
|
|
|
3,005
|
|
|
|
2,799
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
3,127
|
|
|
|
2,876
|
|
|
Valuation allowance
|
|
|
(3,127
|
)
|
|
|
(2,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the Company has net operating loss
carryforwards of approximately $7,286, inclusive of the gain on
the sale of the business operations which will expire in varying
amounts through 2026. Utilization of the Company’s net
operating losses may be subject to a substantial annual
limitation due to ownership change limitations provided by the
Internal Revenue Code and similar state provisions. Realization
of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain.
A portion of the Company’s net operating loss carryforwards
arose prior to a change of control during December 2000 and the
change of control in 2008. As a result, these net operating loss
carryforwards are subject to the annual limitations. Therefore,
management believes the Company is not more likely than not to
realize the tax benefits associated with the net operating loss
carryforwards that arose prior to the change of control and
therefore has fully reserved the net operating losses.
As of September 30, 2008 and 2007, the valuation allowance
was $3,127 and $2,876, respectively. The valuation allowance
increased by $251, $193 and $472 in 2008, 2007 and 2006,
respectively.
|
|
|
|
Note 7 —
|
Stockholders’
Equity
|
Stock
Option Plans
In February 1998, a stock option plan (the “1998
Plan”) was approved by the stockholders. The 1998 Plan was
amended in January 2000. Under the revised plan,
1,000 shares of common stock are reserved for issuance upon
the exercise of options designated as either incentive stock
options or non-qualified stock options. The 1998 Plan terminated
in February 2008. Options granted under the 1998 Plan will
expire not
FS-73
more than ten years from the date of grant. Options granted
under the plan generally have a vesting period of four years. At
September 30, 2008, the 1998 Plan terminated with no
options outstanding.
In January 2001, 650 stock options were granted to a director
and consultant under a special option plan. As of
September 30, 2008, they were fully vested and expire
10 years from date of grant.
In March 2001, the stockholders approved the 2001 Flexible Stock
Plan (the “2001 Plan”). Under the 2001 Plan, the
number of shares which may be issued or sold, or for which
options, Stock Appreciation Rights (“SARs”) or
Performance Shares may be granted to certain directors, officers
and employees of the Company is 2,500 per year, plus an annual
increase, effective as of the first day of each calendar year,
commencing with 2002, equal to 25% of the number of outstanding
shares as of the first day of such calendar year, but in no
event more than 10,000 shares in the aggregate. A total of
10,000 and 9,844 shares were subject to grants outstanding
under the 2001 Plan at September 30, 2008 and 2007,
respectively. The 4,920 options and 200 restricted stock
outstanding as of September 30, 2008 were granted with
various vesting schedules and as of September 30, 2008,
3,675 were fully vested. The options are exercisable over a
period ranging from eight to ten years from the date of grant.
In March 2008, the Company extended of the expiration date of
the 925 stock options held by its members of the board. During
2008, compensation expense of $121 was recorded in connection
with the options.
A summary of stock option activity related to the Company’s
stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Outstanding on October 1
|
|
|
3,975
|
|
|
$
|
.38
|
|
|
|
3,975
|
|
|
$
|
.38
|
|
|
|
4,105
|
|
|
$
|
.38
|
|
|
Granted
|
|
|
1,595
|
|
|
|
.21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(50
|
)
|
|
|
(.34
|
)
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
(.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on September 30
|
|
|
5,570
|
|
|
|
.33
|
|
|
|
3,975
|
|
|
|
.38
|
|
|
|
3,975
|
|
|
|
.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on September 30
|
|
|
4,125
|
|
|
$
|
.37
|
|
|
|
3,975
|
|
|
$
|
.38
|
|
|
|
3,975
|
|
|
$
|
.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
On December 17, 1998, the Company adopted the 1999 Employee
Stock Purchase Plan (the “1999 Plan”) whereby
200 shares of common stock were reserved for issuance to
eligible employees. A participant may have up to 10% of their
earnings withheld during a period of approximately six months
commencing on the first trading day on or after April 1 and
terminating on the last trading day ending the following
September 30, or commencing on the first trading day on or
after October 1 and terminating on the last trading day ending
the following March 31. The purchase price shall be an
amount equal to 85% of the fair market value of a share of
common stock on the enrollment date, or on the exercise date,
whichever is lower. There were no purchases under the 1999 Plan
during 2008, 2007 and 2006.
Warrants
As of September 30, 2008, 2007 and 2006, the Company had
300 warrants outstanding at an exercise price of $0.58 per
share. The warrants expire on December 31, 2010.
FS-74
|
|
|
|
Note 8 —
|
Discontinued
Operations
|
In December 2007, we entered into the Sale Agreement with
Corporate Technologies. As a result of the sale, the
Company’s operating results related to its IT solutions
business are now classified as discontinued operations for all
periods presented in this Annual Report and are comprised as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Revenue
|
|
$
|
1,931
|
|
|
$
|
11,898
|
|
|
$
|
16,010
|
|
|
Cost of sales
|
|
|
1,565
|
|
|
|
9,423
|
|
|
|
13,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
366
|
|
|
|
2,475
|
|
|
|
2,677
|
|
|
Selling, general and administrative expenses
|
|
|
602
|
|
|
|
2,269
|
|
|
|
2,902
|
|
|
Asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
|
Interest and other (expense) income
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Interest expense
|
|
|
(38
|
)
|
|
|
(229
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(274
|
)
|
|
|
(23
|
)
|
|
|
(1,373
|
)
|
|
Gain on sale of discontinued operations
|
|
|
691
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
417
|
|
|
$
|
(23
|
)
|
|
$
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations per common share —
basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.28
|
)
|
|
Weighted average number of common shares outstanding —
basic and diluted
|
|
|
5,114
|
|
|
|
5,014
|
|
|
|
4,919
|
|
Under the terms of the agreement, $800 was received in cash and
$200 of the proceeds were held in escrow for a period of three
months following the closing pending the reduction in real
property rental expenses. As we were able to reduce the monetary
amounts of the operating lease commitments that were assumed by
the buyer, incremental amounts of the $200 held in escrow were
to be paid to us. As of September 30, 2008, $67 was paid as
full settlement of the escrow. As result, after deducting the
operating assets and expenses related to the sale of $176, the
Company recorded a gain on the sale of approximately $691.
The Company had a 401(k) Savings Plan (the “Plan”) for
the benefit of all eligible employees. An employee would become
a participant after the completion of three months of service
and the attainment of 20 years of age.
Participants could elect to contribute from their compensation
any amount up to the maximum deferral allowed by the Internal
Revenue Code. Employer contributions were a discretionary
percentage match. The Company could make optional contributions
for any Plan year at its discretion.
During 2008, 2007 and 2006, there were no Company contributions
to the Plan.
|
|
|
|
Note 10 —
|
Commitments
And Contingencies
|
Legal
Proceedings
The Company was not party to any material legal proceedings or
claims as of September 30, 2008. Accordingly, management
does not anticipate any material adverse impact on the
Company’s financial position, results of operations or cash
flows as a result of legal proceedings or claims.
|
|
|
|
Note 11 —
|
Related
Party Transactions
|
Until August 1, 2008, Digital Angel owned 49.9% of the
Company’s common stock and incurred certain expenses on
behalf of the Company. In 2008, 2007 and 2006, these costs
included accounting fees, various
FS-75
business insurance coverages and miscellaneous business
expenses. Additionally in 2007 and 2006, these costs included
the salary, payroll taxes and benefits of personnel assigned to
the Company in those years. The Company reimbursed $85, $213 and
$287 of these costs to Digital Angel in 2008, 2007 and 2006,
respectively.
For the fiscal years ended September 30, 2008 and 2007, the
Company charged Digital Angel $nil and $24, respectively, for
services rendered by the Company’s chief financial officer
at Digital Angel’s then-wholly-owned subsidiary, Computer
Equity Corporation.
At September 30, 2007 the amount due to Digital Angel was
$105. This amount arose out of inter-company expenses. On
June 27, 2003, the Company loaned $1,000 to Digital Angel
pursuant to the terms of a Commercial Loan Agreement and Term
Note. Under the terms of the loan, interest, which accrued at an
annual rate of 16%, was due and payable on a monthly basis
beginning July 31, 2003. Interest income paid or accrued on
the loan to the Digital Angel amounted to $0, $120, and $162 in
2008, 2007 and 2006, respectively.
On May 15, 2007, the Company entered into a Satisfaction of
Loan Agreement (“Agreement”) with Digital Angel with
respect to the Commercial Loan Agreement. Under the Agreement,
Digital Angel issued to the Company 833 shares (the
“Shares”) of its common stock, having an aggregate
fair value of approximately $1,000 as explained below. On
June 11, 2007, the registration statement covering the
Shares was declared effective by the Securities and Exchange
Commission (“SEC”) (the “Effective Date”)
and on June 22, 2007 the shares became freely tradeable. In
accordance with the Agreement, once the registration statement
covering the Shares was declared effective by the SEC and the
Shares became freely tradeable by the Company, Digital Angel was
in full satisfaction of all principal, interest and other
amounts owed to the Company under the loan documents.
Additionally, in accordance with the Agreement, on the Effective
Date, the exact number of shares to be delivered to the Company
was determined to be 704, which was calculated by dividing the
outstanding principal amount of the note of $1,000 by the
average daily closing prices for a share of Digital Angel’s
common stock on each trading day occurring during the ten
trading day period ending on and including the trading day
immediately preceding the Effective Date of the Registration
Statement of $1.421.
On January 20, 2006, Jonathan McKeage was appointed the
Company’s chief executive officer, president and director.
From 2004 until that time, Mr. McKeage was vice president
of business development of Digital Angel, as well as of Destron
Fearing Corp., Digital Angel’s now-wholly-owned subsidiary.
Following the sale of the Company’s operating assets, which
became effective on December 31, 2007, Mr. McKeage
remained the Company’s president and director and became
vice president of corporate development for Digital Angel, as
well as of VeriChip, Digital Angel’s then-majority-owned
subsidiary. Effective January 1, 2008, the Company began to
reimburse VeriChip in the amount of $7,000 per month for
Mr. McKeage’s services related to finding a suitable
acquisition target for the Company, which agreement ended in May
2008. VeriChip is a company that is controlled by Scott
Silverman, the Company’s chairman of the board.
On October 8, 2008, the Company entered into a sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida consisting of approximately
7,911 feet of office space, which space is shared with
VeriChip. The rent for the entire twenty-one month term of the
sublease is $158, which was paid in one lump sum upon execution
of the sublease. VeriChip reimbursed the Company for one-half of
the Sublease payment, representing their share of the total cost
of the sublease.
As of December 18, 2008, Blue Moon Energy owned 31.5% of
our outstanding common stock. Currently, Scott R. Silverman, our
chairman of the board, is a manager of Blue Moon and controls a
member of Blue Moon and William J. Caragol, our chief
executive officer, president and acting chief financial officer,
is a manager and member of Blue Moon. In lieu of salary through
2009, on October 24, 2008 when Mr. Caragol was
appointed acting chief executive officer and acting chief
financial officer, he received one million shares of our common
stock, half of which was restricted until he became an officer
on December 3, 2008. The shares issued will be compensation
expenses in the period earned. In addition, in October 2008, in
lieu of compensation through 2009, we granted one million shares
of stock to Mr. Silverman, half of which was restricted and
vested upon the completion of the acquisition of NCRC in
December 2008.
FS-76
|
|
|
|
Note 12 —
|
Summarized
Quarterly Data (Unaudited)
|
The following table sets forth the unaudited summarized
operating data for each of the quarters in the period ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Full
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(202
|
)
|
|
$
|
(263
|
)
|
|
$
|
(99
|
)
|
|
$
|
(531
|
)
|
|
$
|
(1,095
|
)
|
|
Income from discontinued operations
|
|
|
279
|
|
|
|
75
|
|
|
|
—
|
|
|
|
63
|
|
|
|
417
|
|
|
Net income (loss)
|
|
|
77
|
|
|
|
(188
|
)
|
|
|
(99
|
)
|
|
|
(468
|
)
|
|
|
(678
|
)
|
|
Net income (loss) per common share — basic and diluted
|
|
|
0.02
|
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
(0.09
|
)
|
|
|
(0.13
|
)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(193
|
)
|
|
$
|
(190
|
)
|
|
$
|
(207
|
)
|
|
$
|
(5
|
)
|
|
$
|
(595
|
)
|
|
Income from discontinued operations
|
|
|
229
|
|
|
|
(44
|
)
|
|
|
43
|
|
|
|
(251
|
)
|
|
|
(23
|
)
|
|
Net income (loss)
|
|
|
36
|
|
|
|
(234
|
)
|
|
|
(164
|
)
|
|
|
(256
|
)
|
|
|
(618
|
)
|
|
Net income (loss) per common share — basic and diluted
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
(0.05
|
)
|
|
|
(0.12
|
)
|
Net income (loss) per share is calculated independently for each
of the quarters presented. Therefore, the sum of the quarterly
amounts of net income (loss) per common share will not
necessarily equal the total for the year.
|
|
|
|
Note 13 —
|
Subsequent
Events
|
On October 8, 2008, the Company entered into a Sublease
with Digital Angel for its corporate headquarters located in
Delray Beach, Florida consisting of approximately
7,911 feet of office space, which space is shared with
VeriChip. The rent for the entire twenty-one month term of the
Sublease is $158, which was paid in one lump sum upon execution
of the Sublease. VeriChip reimbursed the Company for one-half of
the Sublease payment, representing their share of the total cost
of the Sublease.
On December 5, 2008, the Company completed an acquisition
of NCRC, pursuant to a securities purchase agreement by and
among the Company, NCRC, and the sellers named therein (referred
to as the “Purchase Agreement”).
The Purchase Agreement provided for the Company’s purchase
of all of the issued and outstanding membership interests in
NCRC from the sellers of NCRC, in return for 1.0 million
shares of the Company’s common stock, par value $0.01 per
share. In conjunction with the transaction, the Company issued
3.0 million stock options to the sellers of NCRC in
consideration of their continued involvement with the operations
of NCRC. We incurred normal acquisition-related costs of
approximately $130 in connection with the transactions
contemplated under the Purchase Agreement.
All of the options were granted at a strike price of $0.18 per
share and were fully vested as of the date of grant. The common
shares issued at market value and stock options granted at fair
value as determined by Black-Scholes model were valued at $475,
as of the date of the acquisition. The accounting treatment of
the acquisition of NCRC by the Company was viewed to be a
purchase transaction. The total purchase price of $605
(including transition costs) in excess of NCRC’s book value
will be allocated to acquired intangibles and goodwill. The
purchase price has been preliminarily allocated to the tangible
assets acquired and intangible assets, primarily goodwill.
FS-77
Annex A-1
AGREEMENT
AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of
September 4, 2009 (the “
Agreement
”), by
and among Steel Vault Corporation, a Delaware corporation (the
“
Company
”), VeriChip Corporation, a Delaware
corporation (“
Acquiror
”) and VeriChip
Acquisition Corp., a Delaware corporation
(“
MergerCo
”).
RECITALS
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of
the State of Delaware (the “
DGCL
”), Acquiror
and the Company will enter into a business combination
transaction pursuant to which MergerCo will merge with and into
the Company (the “
Merger
”) and whereby each
share of common stock, par value $0.01 per share, of the
Company (the “
Company Common Stock
”) issued and
outstanding immediately prior to the Effective Time will be
converted into the right to receive .5 shares of common
stock, par value $0.01 per share of Acquiror, subject to
adjustment as hereafter provided (the “
Acquiror Common
Stock
”);
WHEREAS, MergerCo is a wholly-owned subsidiary of Acquiror and
was formed solely for purposes of accomplishing the Merger;
WHEREAS, as of the date hereof, Scott R. Silverman, Chairman of
the Board of Directors of the Company (the “
Company
Board
”) and Chairman of the Board of Directors of
Acquiror (the “
Acquiror Board
”) beneficially
owns
and/or
controls, as calculated in accordance with
Rule 13d-3(d)(1)(i)
of the Exchange Act, approximately 55% of the issued and
outstanding Company Common Stock and approximately 49% of the
issued and outstanding Acquiror Common Stock;
WHEREAS, the Company Board has established a special committee
composed of independent and disinterested members of the Company
Board (the “
Company Special Committee
”) to
review and evaluate the terms and conditions, and determine the
advisability, of a possible business combination with Acquiror;
WHEREAS, the Company Special Committee has negotiated the terms
and conditions of this Agreement on behalf of the Company and
has (i) determined that the Merger is advisable, fair to,
and in the best interests of, the Company and its stockholders,
and (ii) recommended the approval of this Agreement by the
Company Board;
WHEREAS, the Company Board has, based upon the recommendation of
the Company Special Committee, (i) determined that the
Merger is advisable, fair to, and in the best interests of, the
Company and its stockholders, (ii) approved and adopted
this Agreement and declared its advisability and approved the
Merger and the other transactions contemplated by this
Agreement, and (iii) recommended the approval and adoption
of this Agreement by the stockholders of the Company;
WHEREAS, the Acquiror Board has established a special committee
composed of independent and disinterested members of the
Acquiror Board (the ‘‘
Acquiror Special
Committee
”) to review and evaluate the terms and
conditions, and determine the advisability, of a possible
business combination with the Company;
WHEREAS, the Acquiror Special Committee has negotiated the terms
and conditions of this Agreement on behalf of Acquiror and has
(i) determined that the Merger is advisable, fair to, and
in the best interests of, Acquiror and its stockholders, and
(ii) recommended the approval of this Agreement by the
Acquiror Board;
WHEREAS, the Acquiror Board has, based upon the recommendation
of the Acquiror Special Committee, (i) determined that the
Merger is advisable, fair to, and in the best interests of,
Acquiror and its stockholders, (ii) approved and adopted
this Agreement and declared its advisability and approved the
Merger and the other transactions contemplated by this
Agreement, and (iii) recommended that the stockholders
approve the issuance of Acquiror Common Stock in connection with
the Merger;
A-1-1
WHEREAS, for federal income tax purposes, the Merger is intended
to qualify as a reorganization under the provisions of
Section 368(a) of the United States Internal Revenue Code
of 1986, as amended (the “
Code
”); and
WHEREAS, Acquiror, MergerCo and the Company desire to make
certain representations, warranties, covenants and agreements in
connection with the Merger and also to prescribe various
conditions to the Merger.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained in this
Agreement, the parties agree as follows:
ARTICLE 1.
CERTAIN
DEFINITIONS; INTERPRETATION
Section
1.1.
Certain
Definitions
.
The following terms are used in
this Agreement with the meanings set forth below:
“Acquiror”
has the meaning assigned in the
preamble to this Agreement.
“Acquiror Acquisition Proposal”
means an offer
or proposal regarding any of the following (other than the
transactions contemplated by this Agreement): (i) any
merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets or any significant equity interest of, the Acquiror
or any of its Subsidiaries, in a single transaction or series of
related transactions which could reasonably be expected to
interfere with the completion of the Merger; or (ii) any
tender offer or exchange offer for any outstanding shares of
capital stock of the Acquiror or any of its Subsidiaries or the
filing of a registration statement under the Securities Act in
connection therewith.
“Acquiror Adverse Recommendation Change”
has
the meaning assigned in Section 5.5(b).
“Acquiror Benefit Plans”
has the meaning
assigned in Section 4.3(n)(1).
“Acquiror Board”
has the meaning assigned in
the Recitals to this Agreement.
“Acquiror Certificate”
means the Certificate of
Incorporation of the Acquiror, as amended.
“Acquiror Common Stock”
has the meaning
assigned in the Recitals of this Agreement.
“Acquiror Disclosure Schedule”
has the meaning
assigned in Section 4.1.
“Acquiror ERISA Affiliate”
has the meaning
assigned in Section 4.3(n)(6).
“Acquiror Financial Statements”
has the meaning
assigned in Section 4.3(g)(2).
“Acquiror License Agreements”
has the meaning
assigned in Section 4.3(p)(1).
“Acquiror Material Contracts”
has the meaning
assigned in Section 4.2(i)(1).
“Acquiror Preferred Stock”
has the meaning
assigned in Section 4.3(e).
“Acquiror Reports”
has the meaning assigned in
Section 4.3(k).
“Acquiror SEC Documents”
has the meaning
assigned in Section 4.3(g)(1).
“Acquiror Special Committee”
has the meaning
assigned in the Recitals of this Agreement.
“Acquiror Stock”
has the meaning assigned in
Section 4.3(e).
“Acquiror Stock Options”
has the meaning
assigned in Section 4.3(e).
“Acquiror Stockholders Meeting”
has the meaning
assigned in Section 5.5(a).
“Acquisition Proposal”
has the meaning assigned
in Section 5.3(b).
A-1-2
“Adverse Recommendation Change”
has the meaning
assigned in Section 5.3(d).
“Affiliate”
means, with respect to any
specified person, any other person, directly or indirectly
controlling, controlled by or under common control with such
specified person. For purposes of this definition,
“control” when used in connection with any specified
person means the power to direct the management or policies of
such person, directly or indirectly, whether through the
ownership of voting securities, by Contract or otherwise; and
the terms “controlling” and “controlled”
have correlative meanings to the foregoing.
“Agreement”
means this Agreement, as amended or
modified from time to time in accordance with Section 8.2.
“Business Day”
means any day on which the
principal offices of the SEC in Washington, D.C. are open
to accept filings or, in the case of determining a date when any
payment is due, any day on which banks are not required or
authorized by law to close in New York, New York.
“Certificate of Merger”
has the meaning
assigned in Section 2.2.
“Closing”
has the meaning assigned in
Section 2.2.
“Closing Date”
has the meaning assigned in
Section 2.2.
“Code”
has the meaning assigned in the Recitals
to this Agreement.
“Common Stock Exchange Ratio”
has the meaning
assigned in Section 3.1(c).
“Company”
has the meaning assigned in the
preamble to this Agreement.
“Company Affiliate”
has the meaning assigned in
Section 5.12(a).
“Company Benefit Plans”
has the meaning
assigned in Section 4.2(o)(1).
“Company Board”
has the meaning assigned in the
Recitals to this Agreement.
“Company Bylaws”
means the Second Amended and
Restated By-laws of the Company.
“Company Certificate”
means the Certificate of
Incorporation of the Company, as amended.
“Company Common Stock”
has the meaning assigned
in the Recitals of this Agreement.
“Company Disclosure Schedule”
has the meaning
assigned in Section 4.1.
“Company ERISA Affiliate”
has the meaning
assigned in Section 4.2(o)(6).
“Company Financial Statements”
has the meaning
assigned in Section 4.2(g)(2).
“Company License Agreements”
has the meaning
assigned in Section 4.2(q)(1).
“Company Material Contract”
has the meaning
assigned in Section 4.2(i)(1).
“Company Preferred Stock”
has the meaning
assigned in Section 4.2(e).
“Company Reports”
has the meaning assigned in
Section 4.2(j)(6).
“Company Restricted Stock”
has the meaning
assigned in Section 3.1(c).
“Company Restricted Stock Award”
has the
meaning assigned in Section 3.1(c).
“Company SEC Documents”
has the meaning
assigned in Section 4.2(g)(1).
“Company Special Committee”
has the meaning
assigned in the Recitals to this Agreement.
“Company Stock”
means, collectively, the
Company Common Stock and the Company Preferred Stock.
“Company Stockholders Meeting”
has the meaning
assigned in Section 5.4(a).
“Company Stock Option”
has the meaning assigned
in Section 3.3(a).
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“Company Stock Plan”
means the Company’s
1998 Incentive Stock Option Plan, as amended, the Company’s
1999 Employee Stock Purchase Plan, the Company’s 2001
Flexible Stock Plan, as amended, the Company’s 2009 Stock
Incentive Plan.
“Company Warrant”
has the meaning assigned in
Section 3.3(b).
“Contract”
means, with respect to any person,
any agreement, indenture, undertaking, debt instrument,
contract, contractual obligation, lease or other commitment to
which such person or any of its Subsidiaries is a party or by
which any of them is bound or to which any of their properties
is subject.
“Converted Company Stock Warrant”
has the
meaning assigned in Section 3.3(b).
“Copyrights”
has the meaning assigned in
Section 4.2(q)(1).
“Costs”
has the meaning assigned in
Section 5.19(a).
“Current Policy”
has the meaning assigned in
Section 5.19(e).
“DGCL”
has the meaning assigned in the Recitals
of this Agreement.
“Effective Date”
means the date on which the
Effective Time occurs.
“Effective Time”
has the meaning assigned in
Section 2.2.
“Environmental Laws”
means any federal, state,
municipal or local law which regulates, governs, relates to or
otherwise imposes liability or standards of conduct concerning
discharges, emissions, releases or threatened releases of any
pollutants, contaminants or hazardous or toxic wastes,
substances or materials, whether as liquids, solids or gases,
into ambient air, surface water, ground water, land or into the
environment, or otherwise relating to noise, odors, mold and
other fungi, petroleum, asbestos, lead based paint, employee
health and safety, including occupational safety laws or which
regulates, governs, relates to the manufacture, processing,
generation, distribution, use, treatment, storage, disposal,
cleanup, transport or handling of pollutants, contaminants, or
hazardous or toxic wastes, substances or materials, including
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Resource
Conservation and Recovery Act of 1976, as amended, the Toxic
Substances Control Act of 1976, as amended, the Federal Water
Pollution Control Act Amendments of 1972, the Clean Water Act of
1977, as amended, any so-called “Superfund” or
“Superlien” Law (including those already referenced in
this definition) and any other law of any Governmental Authority
having a similar subject matter.
“ERISA”
means the Employee Retirement Income
Security Act of 1974, as amended.
“Exchange Act”
means the Securities Exchange
Act of 1934, as amended, and the rules and regulations
thereunder.
“Exchange Agent”
has the meaning assigned in
Section 3.4(a).
“Exchange Fund”
has the meaning assigned in
Section 3.4(a).
“GAAP”
means United States generally accepted
accounting principles at the time in effect.
“Governmental Authority”
means any court,
administrative agency or commission, self-regulatory
organization or other foreign, federal, state or local
governmental authority or instrumentality.
“Hazardous Substances”
means any material or
substance which (i) constitutes a hazardous substance,
toxic substance or pollutant (as such terms are defined by or
pursuant to any Environmental Law) or (ii) is regulated or
controlled as a hazardous substance, toxic substance, pollutant
or other regulated or controlled material, substance or matter
pursuant to any Environmental Law, or (iii) has been
determined to have deleterious effects on human health.
“HSR Act”
means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
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“Indemnified Parties”
has the meaning assigned
in Section 5.19(a).
“Intellectual Property”
has the meaning
assigned in Section 4.2(q)(1).
“IRS”
means the Internal Revenue Service.
“Joint Proxy Statement/Prospectus”
has the
meaning assigned in Section 5.6(a).
“Knowledge”
means, (i) with respect to the
Company, the actual knowledge after reasonable inquiry of Scott
R. Silverman or William J. Caragol, and, (ii) with respect
to Acquiror, the actual knowledge after reasonable inquiry of
Scott R. Silverman or William J. Caragol.
“Liens”
means any charge, mortgage, pledge,
security interest, restriction, claim, lien, or encumbrance.
“Material Adverse Effect”
means with respect to
Acquiror, the Company, or the Surviving Corporation,
respectively, any change, effect, event or occurrence that,
individually or in the aggregate, has a material adverse effect
on the financial position, results of operations, assets,
properties, business, or prospects of Acquiror and its
Subsidiaries, taken as a whole, the Company and its
Subsidiaries, taken as a whole, or the Surviving Corporation and
its subsidiaries, taken as a whole, as the case may be; provided
that “Material Adverse Effect” shall not be deemed to
include the effects of (i) any changes in GAAP that affect
generally entities such as the Company or the Acquiror,
(ii) general business or economic conditions or from
general changes or developments affecting the industries in
which the Company or the Acquiror operate in areas where the
Company or the Acquiror does business directly or through its
Subsidiaries, except to the extent that any such change has a
disproportionate impact on the Company or its Subsidiaries or
Acquiror or its Subsidiaries, (iii) financial, banking or
securities markets in general (including any disruption thereof
and any decline in the price of any security or any market
index), (iv) any change in the trading price of the Company
Common Stock or Acquiror Common Stock between the date hereof
and the Effective Time, or (v) the announcement of this
Agreement or the consummation of the transactions contemplated
hereby, including compliance with the covenants set forth
herein, or any action taken or omitted to be taken by
(x) the Company at the written request or with the prior
written consent of Acquiror or MergerCo or (y) Acquiror or
MergerCo at the written request or with the prior written
consent of the Company.
“Merger”
has the meaning assigned in the
Recitals of this Agreement.
“MergerCo”
has the meaning assigned in the
preamble to this Agreement.
“Merger Communication”
has the meaning assigned
in Section 8.13.
“Merger Consideration”
has the meaning assigned
in Section 3.1(c).
“NASDAQ”
means the NASDAQ Stock Market, LLC.
“Patents”
has the meaning assigned in
Section 4.2(q)(1).
“Permitted Liens”
means (a) statutory
Liens for current Taxes or other governmental charges not yet
due and payable or the amount or validity of which is being
contested in good faith by appropriate Proceedings,
(b) Liens arising under workers’ compensation,
unemployment insurance, social security, retirement and similar
legislation, (c) other statutory liens securing payments
not yet due including builder, mechanic, warehousemen,
materialmen, contractor, landlord, workmen, repairmen, and
carrier Liens, (d) purchase money Liens and Liens securing
rental payments under capital lease arrangements entered into in
the ordinary course of business or necessary to meet production
or other requirements for the fulfillment of customer contracts
or orders, and (e) mortgages, or deeds of trust, security
interests or other encumbrances on title related to indebtedness
reflected on the consolidated financial statements of the
Company or Acquiror.
“Person”
means and includes an individual,
bank, partnership, joint venture, limited liability company,
corporation, trust, unincorporated organization and government
or any department or agency thereof.
“Proceeding”
means any claim, action,
arbitration, audit, contest, hearing, investigation, litigation
or suit (whether civil, criminal, administrative, investigative
or informal) commenced, brought, conducted, or heard by or
before or otherwise involving, any court, administrative agency,
other Governmental Authority or arbitrator.
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“Recommendation”
has the meaning assigned in
Section 5.4(b).
“Registration Statement”
has the meaning
assigned in Section 5.6(a).
“Representatives”
has the meaning assigned in
Section 5.3(a).
“Requisite Stockholder Vote”
means in the case
of the Company, the affirmative vote of holders of shares of a
majority of the outstanding shares of Company Common Stock
entitled to vote at the Company Stockholders Meeting, and in the
case of Acquiror, the affirmative vote of the holders of a
majority of the total shares of Acquiror Common Stock cast at
the Acquiror Stockholders Meeting.
“Rights”
means, with respect to any person,
securities or obligations convertible into or exercisable or
exchangeable for, or giving any person any right to subscribe
for, redeem or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument
the value of which is determined in whole or in part by
reference to the market price or value of, shares of capital
stock of such person.
“SEC”
means the U.S. Securities and
Exchange Commission.
“Securities Act”
means the Securities Act of
1933, as amended, and the rules and regulations thereunder.
“Securities Laws”
means, collectively, the
Securities Act, the Exchange Act, the Investment Advisors Act of
1940, the Investment Company Act of 1940, and any state
securities and “blue sky” laws.
“Share”
has the meaning assigned in
Section 3.1(c).
“Software”
has the meaning assigned in
Section 4.2(q)(1).
“Subsidiary”
means (1) when referring to
subsidiaries of Acquiror: those subsidiaries set forth in
Section 4.3(f) of the Acquiror Disclosure Schedule; and
(2) when referring to subsidiaries of the Company: those
subsidiaries set forth in Section 4.2(f) of the Company
Disclosure Schedule.
“Substitute Option”
has the meaning assigned in
Section 3.3(a).
“Superior Proposal”
has the meaning assigned in
Section 5.3(c).
“Surviving Corporation”
has the meaning
assigned in Section 2.1.
“Tax Opinion”
has the meaning assigned in
Section 6.1(f).
“Taxes”
shall mean (i) all taxes, charges,
fees, duties (including customs duties), levies or other
assessments, including income, gross receipts, net proceeds, ad
valorem, turnover, real and personal property (tangible and
intangible), sales, use, franchise, excise, value added, stamp,
leasing, lease, user, transfer, fuel, excess profits,
occupational, interest equalization, windfall profits,
severance, license, payroll, environmental, capital stock,
disability, employee’s income withholding, other
withholding, unemployment and Social Security taxes, which are
imposed by any Governmental Authority, and such term shall
include any interest, penalties or additions to tax attributable
thereto, and (ii) any liability of the Company, Acquiror,
MergerCo or any Subsidiary for the payment of amounts determined
by reference to amounts described in clause (i) as a result
of being a member of an affiliated, consolidated, combined or
unitary group.
“Tax Returns”
means, collectively, all returns,
declarations, reports, estimates, information returns and
statements required to be filed under federal, state, local or
any foreign tax laws.
“Trademarks”
has the meaning assigned in
Section 4.2(q)(1).
“Trade Secrets”
has the meaning assigned in
Section 4.2(q)(1).
“WARN” has the meaning assigned in
Section 4.2(n)(3).
Section
1.2.
Interpretation
.
When
a reference is made in this Agreement to Recitals, Sections,
Annexes or Schedules, such reference shall be to a Recital or
Section of, or Annex or Schedule to, this Agreement unless
otherwise indicated. The headings contained in this Agreement
are for reference purposes only and are not part of this
Agreement. Whenever the words “include,”
“includes” or “including” are used in this
Agreement, they shall be deemed followed by the words
“without limitation.” No rule against the
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draftsperson shall be applied in connection with the
interpretation or enforcement of this Agreement. Whenever this
Agreement shall require a party to take an action, such
requirement shall be deemed to constitute an undertaking by such
party to cause its Subsidiaries also to take such action.
ARTICLE 2.
THE MERGER
Section
2.1.
The
Merger
.
Upon the terms and subject to the
conditions hereof, at the Effective Time and in accordance with
the provisions of this Agreement and the DGCL, MergerCo shall be
merged with and into the Company, whereupon the separate
corporate existence of MergerCo shall cease, and the Company
shall continue as the surviving corporation (the
“
Surviving Corporation
”). From and after the
Effective Time, the Surviving Corporation shall possess all the
rights, privileges, immunities, powers and franchises, of a
public as well as a private nature, of the Company and MergerCo,
and be subject to all the liabilities, obligations and duties of
the Company and MergerCo, all as more fully described in the
DGCL.
Section
2.2.
Closing;
Effective Time
.
Unless this Agreement has
been terminated pursuant to ARTICLE 7 and subject to the
satisfaction or, when permissible, waiver of the conditions set
forth in ARTICLE 6, the closing of the Merger (the
“
Closing
”) shall take place at the offices of
Holland & Knight LLP in Fort Lauderdale, Florida,
as soon as practicable but in no event later than
3:00 p.m. EST time on the fourth Business Day after
the date on which each of the conditions set forth in
ARTICLE 6 has been satisfied or waived or at such other
place, at such other time or on such other date as MergerCo and
the Company may mutually agree. The date on which the Closing
actually occurs is hereinafter referred to as the
“
Closing Date
.” At the Closing, MergerCo and
the Company shall cause a certificate of merger for the Merger
(the “
Certificate of Merger
”) to be executed
and filed with the Secretary of State of the State of Delaware
in the form required by and executed in accordance with the
applicable provisions of the DGCL. The Merger shall become
effective as of the date and time of such filing or such other
time after such filings as the parties hereto shall agree to in
the Certificate of Merger (the “
Effective
Time
”).
Section
2.3.
Certificate
of Incorporation
.
At the Effective Time, the
Company Certificate shall be amended and restated to be the same
as the Certificate of Incorporation of MergerCo, as in effect
immediately prior to the Effective Time until thereafter amended
as provided by the DGCL and such certificate of incorporation.
Section
2.4.
Bylaws
.
At
the Effective Time, the Company Bylaws shall be amended and
restated to be identical to the bylaws of MergerCo, as in effect
immediately prior to the Effective Time until thereafter amended
in accordance with the terms thereof, the certificate of
incorporation of the Surviving Corporation and the DGCL.
Section
2.5.
Directors
and Officers
.
The directors and officers of
MergerCo immediately prior to the Effective Time shall become,
from and after the Effective Time, the directors and officers of
the Surviving Corporation, until their respective successors are
duly elected or appointed, or until such person’s earlier
death, resignation or removal.
Section
2.6.
Further
Assurances
.
At and after the Effective Time,
the officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of
the Company or MergerCo, any deeds, bills of sale, assignments
or assurances and to take and do, in the name and on behalf of
the Company or MergerCo, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and
under any of the rights, properties or assets acquired or to be
acquired by the Surviving Corporation as a result of, or in
connection with, the Merger.
Section
2.7.
Effect
of the Merger
.
From and after the Effective
Time, the effect of the Merger shall be as provided in the
applicable provisions of the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the
Effective Time, all the properties, rights, privileges, powers
and franchises of the Company and MergerCo shall vest in the
Surviving Corporation, and all debts, liabilities, obligations,
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restrictions and duties of each of the Company and MergerCo
shall, by operation of law, become the debts, liabilities,
obligations, restrictions and duties of the Surviving
Corporation.
Section
2.8.
Acquiror
Name Change
.
At the Effective Time, Acquiror
shall file an amendment to its Certificate of Incorporation to
change the name of Acquiror to “PositiveID
Corporation.”
ARTICLE 3.
CONVERSION
OF SHARES
Section
3.1.
Effect
on Capital Stock
.
At the Effective Time, by
virtue of the Merger and without any action on the part of the
Company, Acquiror, MergerCo or the holders of any of the
following securities:
(a)
Capital Stock of
MergerCo
.
Each share of common stock, par
value $0.01 per share, of MergerCo issued and outstanding
immediately prior to the Effective Time shall be canceled and
shall be converted automatically into one share of common stock
of the Surviving Corporation. Such share will constitute the
only outstanding share of capital stock of the Surviving
Corporation.
(b)
Treasury Stock and Acquiror Owned
Stock
.
Each share of Company Common Stock or
Right to acquire Company Common Stock that is owned or
controlled by the Company or Acquiror shall automatically be
canceled, retired and shall cease to exist without payment of
any consideration thereof and without any conversion thereof.
(c)
Conversion of Company Common
Stock
.
Each issued and outstanding share of
Company Common Stock (including Shares subject to vesting or
other restrictions (the “
Company Restricted
Stock
”)) (each, a “
Share
”) shall be
converted into and represent the right to receive, and will be
exchangeable for, .5 shares (the “
Common Stock
Exchange Ratio
”) of validly issued, fully paid and
nonassessable shares of Acquiror Common Stock, subject to
adjustment pursuant to Section 3.2 (the “
Merger
Consideration
”).
(d)
Appraisal Rights
.
The parties
hereto agree that, in accordance with Section 262 of the
DGCL, in connection with the Merger no appraisal rights will be
available to holders of shares of the Company Common Stock.
Section
3.2.
Adjustment
of Merger Consideration
.
If, after the date
of this Agreement, but prior to the Effective Time, the shares
of Acquiror Common Stock issued and outstanding shall, through a
reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar
change in the capitalization of Acquiror (regardless of the
method of effectuation of any of the foregoing, including by way
of a merger or otherwise), increase or decrease in number or be
changed into or exchanged for a different kind or number of
securities, then the applicable Merger Consideration shall be
appropriately adjusted to provide the holders of Company Common
Stock the same economic effect as contemplated by this Agreement
prior to such event.
Section
3.3.
Treatment
of Options and Warrants
.
(a)
Options
.
All options to
purchase shares of Company Common Stock (each, a
“
Company Stock Option
”) outstanding, whether or
not exercisable and whether or not vested, at the Effective
Time, issued under any Company Stock Plan and any other plan or
agreement pursuant to which Company Stock Options have been
issued, in each case as such may have been amended, supplemented
or modified, shall remain outstanding following the Effective
Time. At the Effective Time, the Company Stock Options shall, by
virtue of the Merger and without any further action on the part
of the Company or the holder thereof, be assumed by Acquiror in
such manner that Acquiror (i) is a corporation
“assuming a stock option in a transaction to which
Section 424(a) applies” within the meaning of
Section 424 of the Code and the regulations thereunder or
(ii) to the extent that Section 424 of the Code does
not apply to any such Company Stock Options, would be such a
corporation were Section 424 of the Code applicable to such
Company Stock Options. From and after the Effective Time, all
references to the Company in the Company Stock Option Plans and
the applicable stock option agreements issued thereunder shall
be deemed to refer to Acquiror, which shall have assumed the
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Company Stock Option Plans as of the Effective Time by virtue of
this Agreement and without any further action. Each Company
Stock Option assumed by Acquiror (each, a “
Substitute
Option
”) shall be exercisable upon the same terms and
conditions as under the applicable Company Stock Option Plan and
the applicable option agreement issued thereunder, except that
(A) each such Substitute Option shall be exercisable for,
and represent the right to acquire, that whole number of shares
of Acquiror Common Stock (rounded upward to the nearest whole
share) equal to the number of shares of Company Common Stock
subject to such Company Stock Option multiplied by the Common
Stock Exchange Ratio; and (B) the option price per share of
Acquiror Common Stock shall be an amount equal to the option
price per share of Company Common Stock subject to such Company
Stock Option in effect immediately prior to the Effective Time
divided by the Common Stock Exchange Ratio (the option price per
share, as so determined, being rounded upward to the nearest
whole cent). Such Substitute Option shall otherwise be subject
to the same terms and conditions as such Company Stock Option.
(b)
Warrants
.
Except as set forth
on Schedule 3.3(b), each of the then outstanding warrants,
if any, to purchase shares of Company Common Stock (each, a
“
Company Warrant
”) will, by virtue of the
Merger, and without any further action on the part of any holder
thereof, be converted into a warrant (a “
Converted
Company Warrant
”) to purchase that number of shares of
Acquiror Common Stock determined by multiplying the number of
shares of Company Common Stock subject to such Company Warrant
at the Effective Time by the Common Stock Exchange Ratio, at an
exercise price per share of Acquiror Common Stock equal to the
exercise price per share of such Company Warrant immediately
prior to the Effective Time divided by the Common Stock Exchange
Ratio, rounded up to the nearest whole cent. If the foregoing
calculation results in a Converted Company Warrant being
exercisable for a fraction of a share of Acquiror Common Stock,
then the number of shares of Acquiror Common Stock subject to
such warrant will be rounded up to the nearest whole number of
shares. The terms and conditions of each Converted Company
Warrant will otherwise remain as set forth in the Company
Warrant converted into such Converted Company Warrant.
Notwithstanding anything herein to the contrary, the adjustment
provided for in this Section 3.3(b) with respect to all
warrants will be and is intended to be effected in a manner that
is consistent with Section 424(a) of the Code and, to the
extent applicable, Q&A-18(d) of Notice
2005-1.
Section
3.4.
Payment
for Company Stock
.
(a)
Exchange Agent
.
Not less than
three (3) Business Days prior to the Closing Date, Acquiror
shall designate a bank or trust company reasonably acceptable to
the Company to act as exchange agent in connection with the
Merger (the “
Exchange Agent
”) for the purpose
of exchanging certificates that immediately prior to the
Effective Time represented shares of Company Common Stock for
the applicable Merger Consideration. At or prior to the
Effective Time, Acquiror shall deposit with the Exchange Agent,
for the benefit of the holders of Company Common Stock,
certificates or, at Acquiror’s option, evidence of shares
in book-entry form, representing shares of Acquiror Common Stock
in such denominations as the Exchange Agent may reasonably
specify. Such certificates (or evidence of book-entry form, as
the case may be) for shares of Acquiror Common Stock so
deposited, together with any dividends or distributions with
respect thereto, are hereinafter referred to as the
‘‘
Exchange Fund
.”
(b)
Exchange
.
(1) As soon as reasonably practicable after the Effective
Time but no later than fourteen (14) days thereafter, the
Surviving Corporation shall cause to be mailed to each record
holder, as of the Effective Time, of shares of Company Common
Stock, (i) a letter of transmittal (which shall be in
customary form and shall specify that delivery shall be
effected, and risk of loss and title to the certificates shall
pass, only upon proper delivery of the certificates to the
Exchange Agent) and (ii) instructions for use of the letter
of transmittal in effecting the surrender of the certificates
for payment of the applicable Merger Consideration therefor.
(2) In effecting the payment and delivery of the applicable
Merger Consideration in respect of Shares entitled to the
applicable Merger Consideration pursuant to Section 3.1,
upon the surrender of such Shares, the Exchange Agent shall
deliver the number of whole shares of Acquiror Common Stock
represented by such holder’s properly surrendered
certificates that such Shares are entitled to receive as Merger
Consideration in accordance with this ARTICLE 3. Upon such
delivery, such Shares so surrendered shall forthwith be canceled.
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(3) If Acquiror Common Stock is to be remitted to a Person
other than that in which the certificate for Shares surrendered
for exchange is registered, it shall be a condition of such
delivery: (a) that the certificate so surrendered shall be
properly endorsed, with signature guaranteed or otherwise in
proper form for transfer, and (b) the Person requesting
such delivery shall pay to the Exchange Agent any transfer or
other taxes required by reason of the delivery to a Person,
other than that of the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the
Exchange Agent that such Tax has been paid or is not applicable.
(4) Until surrendered in accordance with the provisions of
this Section 3.4, each certificate shall, after the
Effective Time, represent for all purposes only the right to
receive upon such surrender, the applicable Merger Consideration
applicable thereto, without any interest thereon, subject to any
required withholding Taxes, the delivery of which shall be
deemed to be the satisfaction in full of all rights pertaining
to the shares of Company Common Stock exchanged in the Merger.
(5) The stock transfer books of the Company shall be closed
immediately upon the Effective Time and there shall be no
further registration of transfers of shares of Company Common
Stock thereafter on the records of the Company. On or after the
Effective Time, any certificates presented to the Exchange Agent
or the Surviving Corporation for any reason shall be cancelled
and exchanged into the applicable Merger Consideration with
respect to the shares of Company Common Stock formerly
represented thereby.
(c)
No Issuance of Fractional
Shares
.
No certificate or scrip representing
fractional Acquiror Common Stock shall be issued upon the
surrender of certificates formerly representing Company Common
Stock or otherwise in the Merger, and in lieu thereof, any
fractional Acquiror Common Stock shall be rounded up to the
nearest whole share of Acquiror Common Stock; provided that,
prior to applying the preceding sentence with respect to any
holder of Company Common Stock, all Company Common Stock held by
such holder shall be aggregated, taking into account all
certificates formerly representing Company Common Stock
delivered by such holder and the aggregate number of Company
Common Stock represented thereby, and after giving effect to the
exercise of any Company Stock Options or Company Warrants to be
exercised by such holder in connection with the Closing.
(d)
Lost Certificates
.
If any
certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such
certificate to be lost, stolen or destroyed and, if required by
Acquiror, the posting by such Person of a bond in such
reasonable amount as Acquiror may direct as indemnity against
any claim that may be made against it with respect to such
certificate, the Exchange Agent will deliver in exchange for
such lost, stolen or destroyed certificate the applicable Merger
Consideration with respect to the Shares formerly represented
thereby, pursuant to this Agreement.
(e)
Distributions With Respect to Unexchanged
Shares
.
No dividends or other distributions
with respect to shares of Acquiror Common Stock issuable with
respect to the shares of Company Common Stock shall be paid to
the holder of any unsurrendered certificates until those
certificates are surrendered as provided in this ARTICLE 3.
Upon surrender, there shall be issued
and/or
paid
to the holder of the shares of Acquiror Common Stock issued in
exchange therefor, without interest, (i) at the time of
surrender, the dividends or other distributions payable with
respect to those shares of Acquiror Common Stock with a record
date on or after the date of the Effective Time and a payment
date on or prior to the date of this surrender and not
previously paid and (ii) at the appropriate payment date,
the dividends or other distributions payable with respect to
those shares of Acquiror Common Stock with a record date on or
after the date of the Effective Time but with a payment date
subsequent to surrender.
(f)
Termination of Exchange
Fund
.
Any portion of the Exchange Fund which
remains undistributed to the stockholders of the Company for
eighteen months after the Effective Time shall be delivered to
Acquiror, upon demand, and any holders of Shares prior to the
Merger who have not theretofore complied with ARTICLE 3
shall thereafter look only to Acquiror for payment and delivery
of the Merger Consideration, for unexchanged Shares to which
such holders may be entitled.
(g)
No Liability
.
None of
Acquiror, MergerCo, the Surviving Corporation or the Exchange
Agent shall be liable to any Person in respect of any portion of
the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
A-1-10
(h)
Withholding
.
Acquiror and the
Exchange Agent shall be entitled to deduct and withhold from the
Merger Consideration otherwise payable pursuant to this
Agreement to any holder of Shares such amounts as it is required
to deduct and withhold with respect to the making of such
payment under the Code and the rules and regulations promulgated
thereunder, or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by Acquiror or the
Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock in respect of which such
deduction and withholding was made by Acquiror or the Exchange
Agent.
ARTICLE 4.
REPRESENTATIONS
AND WARRANTIES OF
THE COMPANY,
ACQUIROR AND MERGERCO
Section
4.1.
Disclosure
Schedules
.
On or prior to the date hereof,
the Company has delivered to Acquiror a schedule setting forth,
among other things, items the disclosure of which is necessary
or appropriate either: (i) in response to an express
informational requirement contained in or requested by a
provision hereof, or (ii) as an exception to one or more
representations or warranties contained in Section 4.2 or
to one or more of its covenants contained in ARTICLE 5 (the
“
Company Disclosure Schedule
”). On or prior to
the date hereof, Acquiror has delivered to the Company, a
schedule setting forth, among other things, items the disclosure
of which is necessary or appropriate either: (i) in
response to an express informational requirement contained in or
requested by a provision hereof, or (ii) as an exception to
one or more representations or warranties contained in
Section 4.3 or to one or more of its covenants contained in
ARTICLE 5 (the “
Acquiror Disclosure
Schedule
”). The inclusion of an item in either the
Company Disclosure Schedule or the Acquiror Disclosure Schedule
as an exception to a representation or warranty or covenant
shall not be deemed an admission by a party that such item (or
any undisclosed item or information of comparable or greater
significance) represents a material exception or fact, event or
circumstance with respect to the Company, Acquiror or MergerCo,
respectively.
Section
4.2.
Representations
and Warranties of the Company
.
Except as set
forth in the Company Disclosure Schedule or as set forth in the
Company SEC Documents, the Company hereby represents and
warrants to Acquiror and MergerCo as follows:
(a)
Organization, Standing and
Authority
.
The Company is a corporation, duly
organized, validly existing and in good standing under the laws
of the State of Delaware, and is duly qualified or licensed to
do business and is in good standing in all jurisdictions where
its ownership or leasing of property or assets or the conduct of
its business requires it to be so qualified or licensed, except
for those jurisdictions in which failure to do so has not, or
could not reasonably be expected to have a Material Adverse
Effect.
(b)
Corporate Power
.
The Company
and each of its Subsidiaries has all requisite corporate power
and authority to own, lease and operate their respective
properties and to carry on their respective businesses as they
are now being owned, leased, operated and conducted.
(c)
Corporate Authority
.
(1) The Company has the requisite corporate power and
authority necessary to authorize the execution and delivery of,
and performance of its obligations under, this Agreement and,
subject to receipt of the Requisite Stockholder Vote to approve
this Agreement, to consummate the transactions contemplated by
this Agreement. The execution, delivery and performance by the
Company of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by
the Company Board. This Agreement has been duly and validly
executed and delivered by the Company and is a valid and legally
binding obligation of the Company, enforceable in accordance
with its terms, subject only to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability related to or affecting creditors’
rights and to general principles of equity.
A-1-11
(2) The Company Special Committee has (i) determined
that the Merger is advisable, fair to and in the best interests
of the Company and its stockholders, and (ii) recommended
that the Company Board approve this Agreement.
(3) The Company Board, based on the recommendation of the
Company Special Committee, has (i) determined that the
Merger is advisable, fair to and in the best interests of the
Company and its stockholders, (ii) approved and adopted
this Agreement and declared its advisability and approved the
Merger and the other transactions contemplated by this
Agreement, and (iii) recommended that the stockholders of
the Company approve and adopt this Agreement.
(d)
Regulatory Filings; Consents; No Defaults
.
(1) No consents, approvals, orders or authorizations of, or
filings, registrations, declarations or qualifications with, any
Governmental Authority are required to be made or obtained by
the Company in connection with the execution, delivery or
performance by the Company of this Agreement, or to consummate
the Merger, except for: (A) those required under the HSR
Act, if any; (B) the filing and declaration of
effectiveness of the Registration Statement and the Joint Proxy
Statement/Prospectus and compliance with the Exchange Act or
Securities Act; and (C) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business. As of
the date hereof, the Company has no Knowledge of any reason why
the approvals of all Governmental Authorities necessary to
permit consummation of the transactions contemplated by this
Agreement will not be received.
(2) Subject to the Requisite Stockholder Vote of the
Company, no consent by or approval or authorization of or notice
to any other Person (other than a Governmental Authority) is
required, whether under any license or other Contract or
otherwise.
(3) Subject to the Requisite Stockholder Vote of the
Company, the receipt of the approvals and consents referred to
in Section 4.2(d)(1) and Section 4.2(d)(2), the
expiration of applicable waiting periods and the making of
required filings under Securities Laws, the execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(A) constitute a breach or violation of, or a default
under, or give rise to any Lien, any acceleration of remedies,
any right of termination (with or without the giving of notice,
passage of time or both) or any put or call right under, any
law, rule or regulation or any judgment, decree, order,
governmental or nongovernmental permit or license, or Contract
of the Company or of any of its Subsidiaries or to which the
Company or any of its Subsidiaries or its or their properties is
subject or bound, (B) constitute a breach or violation of,
or a default under, the Company Certificate or the Company
Bylaws or similar governing documents of any of its
Subsidiaries, or (C) require any consent or approval under
any such law, rule, regulation, judgment, decree, order,
governmental or nongovernmental permit or license or Contract,
except, in the case of clauses (A), (B) and (C), for
any such conflict, violation, breach, default, loss, right,
consent or approval or other occurrence which would not, or
would not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect.
(e)
Company Stock
.
The authorized
capital stock of the Company consists of:
(i) 80,000,000 shares of Company Common Stock, and
(ii) 5,000,000 shares of preferred stock
(“
Company Preferred Stock
”). As of
September 4, 2009, (a) 9,596,398 shares of
Company Common Stock were issued and outstanding, (b) no
shares of Company Preferred Stock were issued and outstanding,
(c) 8,300,000 shares of Company Common Stock were
reserved for issuance upon the exercise of options issued or
issuable under the Company Stock Plans,
(d) 1,146,573 shares of Company Common Stock were
reserved for issuance under stock options granted outside of the
Company Stock Plans, (e) 1,241,334 shares of Company
Common Stock were reserved for issuance under Company Warrants,
(f) 2,098,485 shares of Company Common Stock were
reserved for issuance under the terms of convertible promissory
notes, and (g) no shares of Company Common Stock were held
in treasury. All of the outstanding shares of capital stock of
the Company and each Subsidiary (i) have been duly
authorized, validly issued, and are fully paid and
nonassessable, (ii) are, and when issued were, free of
preemptive or similar rights and (iii) are owned (legally
and beneficially) free and clear of any and all Liens,
encumbrances, equities, and restrictions on transferability
(other than those imposed by the Securities Act and the state
securities or “Blue Sky” Laws) or voting. As of the
date hereof, other than the Company
A-1-12
Stock Options and the Company Warrants, there are no shares of
Company Common Stock authorized and reserved for issuance, the
Company does not have any Rights issued or outstanding with
respect to Company Stock, and the Company does not have any
commitment to authorize, issue or sell any Company Stock or
Rights, except pursuant to this Agreement. Section 4.2(e)
of the Company Disclosure Schedule sets forth a list of the
holders of outstanding Company Stock Options and Company
Warrants, the date that each such Company Stock Option or
Company Warrant was granted, the number of shares of Company
Common Stock subject to each such Company Stock Option or
Company Warrant, the vesting schedule and expiration date of
each such Company Stock Option or Company Warrant and the price
at which each such Company Stock Option or Company Warrant may
be exercised. Except as set forth in Section 4.2(e) of the
Company Disclosure Schedule, no options, warrants or other
rights to purchase from the Company or any Subsidiary,
agreements or other obligations of the Company or any Subsidiary
to issue or other rights to convert any obligation into, or
exchange any securities for, shares of capital stock of or
ownership interests in the Company or any Subsidiary are
outstanding; and, there is no agreement, understanding or
arrangement among the Company or any Subsidiary and each of
their respective stockholders or members or any other Person
relating to the ownership or disposition of any capital stock of
the Company or any Subsidiary or the election of directors or
managers of the Company or any Subsidiary or the governance of
the Company’s or any Subsidiary’s affairs, and such
agreements, understandings and arrangements, if any, will not be
breached or violated as a result of the execution and delivery
of, or the consummation of the transactions contemplated by this
Agreement.
(f)
Subsidiaries
.
Set forth in
Section 4.2(f) of the Company Disclosure Schedule is a list
of all of the Company’s direct and indirect subsidiaries,
including the states or countries in which such subsidiaries are
organized, and if any of such subsidiaries is not wholly-owned
by the Company or one of its subsidiaries, the percentage owned
by the Company or any such subsidiary and the names and
percentage ownership by any other Person. No equity securities
of any of the Company’s subsidiaries are or may become
required to be issued, transferred or otherwise disposed of
(other than to the Company or a wholly-owned subsidiary of the
Company) by reason of any Rights with respect thereto. There are
no Contracts by which any of the Company’s Subsidiaries is
or may be bound to sell or otherwise issue any shares of its
capital stock, and there are no Contracts relating to the rights
or obligations of the Company to vote or to dispose of such
shares. All of the shares of capital stock of each of the
Company’s Subsidiaries are fully paid and nonassessable and
subject to no subscriptive or preemptive rights or Rights and
are owned by the Company or a Company Subsidiary free and clear
of any Liens.
(g)
SEC Documents, Financial Statements
.
(1) Since August 1, 2008, the Company has filed all
reports, registrations, and statements it was required to file
with the SEC under the Securities Act, or under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
including, but not limited to the Company’s Annual Reports
on
Form 10-K,
Forms 10-Q,
Form 8-K,
registration statements, definitive proxy statements, and
information statements (collectively, the “
Company SEC
Documents
”). The Company has provided or made available
via EDGAR to Acquiror copies of the Company SEC Documents, each
in the form (including exhibits and any amendments thereto)
filed with the SEC (or, if not so filed, in the form used or
circulated). As of their respective dates (and without giving
effect to any amendments or modifications filed after the date
of this Agreement) each of the Company SEC Documents, including
the Company Financial Statements, exhibits and schedules
thereto, filed or circulated prior to the date hereof complied
(and each of the Company SEC Documents filed prior to the Merger
will comply) as to form with applicable Securities Laws and did
not (or in the case of reports, statements, or circulars filed
after the date of this Agreement, will not) contain any untrue
statement of a material fact or omit to state a material fact
required to be stated or incorporated by reference therein or
necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
(2) Each of the Company’s consolidated statements of
financial condition or balance sheets included in or
incorporated by reference into the Company SEC Documents,
including the related notes and schedules, fairly presented (or,
in the case of Company SEC Documents filed after the date of
this Agreement, will fairly present) the consolidated financial
condition of the Company and its Subsidiaries as of the date of
such statement of financial condition or balance sheet and each
of the consolidated statements of income, cash
A-1-13
flows and changes in stockholders’ equity included in or
incorporated by reference into Company SEC Documents, including
any related notes and schedules (collectively, the foregoing
financial statements and related notes and schedules are
referred to as the “
Company Financial
Statements
”), fairly presented (or, in the case of
Company SEC Documents filed after the date of this Agreement and
prior to the Merger, will fairly present) the consolidated
results of operations, cash flows and stockholders’ equity,
as the case may be, of the Company and its Subsidiaries for the
periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments), in each case
in accordance with GAAP consistently applied during the periods
involved (except as may be noted therein and except that such
unaudited statements include no notes).
(3) Except as set forth in Section 4.2(g) of the
Company Disclosure Schedule or on the Company Financial
Statements, none of the Company or any of its Subsidiaries has
any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise) whether or not required to be
recorded or reflected by GAAP to be set forth on a consolidated
balance sheet of the Company and its consolidated subsidiaries
or in the notes thereto, other than liabilities or obligations
incurred in the ordinary course of business consistent with past
practice since the date of the most recent Company Financial
Statements included in the Company SEC Documents.
(h)
Absence of Certain
Changes
.
Except as set forth in
Section 4.2(h) of the Company Disclosure Schedule, since
June 30, 2009, the business of the Company and its
Subsidiaries has been conducted in the ordinary course,
consistent with past practice, and there has not been:
(1) any event, occurrence, development or state of
circumstances or facts which has had or is reasonably likely to
have a Material Adverse Effect on the Company and any of its
Subsidiaries;
(2) any material event, occurrence, development or state of
circumstances;
(3) any damage, destruction or loss to any assets or
properties (whether or not covered by insurance) of the Company
or any of its Subsidiaries;
(4) any obligation or any Contract entered into which
either (i) required a payment by any party in excess of, or
a series of payments which in the aggregate exceed, $25,000 or
provides for the delivery of goods or performance of services,
or any combination thereof, having a value in excess of $25,000
or (ii) has a term, or requires the performance of any
obligations by the Company or any Subsidiary over a period, in
excess of six months;
(5) any sales, transfers, conveyances, assignments or other
dispositions of any assets or properties of the Company or any
of its Subsidiaries, except sales of inventory in the ordinary
course of business;
(6) any waiver, release or cancellation of any claims
against third parties or debts owing to the Company or any of
its Subsidiaries, or any rights which have any value;
(7) any transaction with an Affiliate of any stockholder or
any member of the Company or any of its Subsidiaries;
(8) any authorization for issuance, sale, delivery or
agreement or commitment to issue, sell or deliver (whether
through the issuance or granting of options, warrants,
convertible or exchangeable securities, commitments,
subscriptions, rights to purchase or otherwise) any membership
interests, shares of its capital stock or any other securities;
(9) any amendment of any term of any outstanding security
of the Company or any of its Subsidiaries or to the Company or
any of its Subsidiaries’ certificate of incorporation or
bylaws (or similar governing documents);
(10) any (A) incurrence, assumption or guarantee by
the Company or any of its Subsidiaries of any indebtedness for
borrowed money, or (B) assumption, guarantee, endorsement
or otherwise by the Company of any obligations of any other
Person, in each case, other than in the ordinary course of
business consistent with past practices;
A-1-14
(11) any creation or assumption by the Company or any of
its Subsidiaries of any Lien on any asset other than in the
ordinary course of business consistent with past practices,
other than a Permitted Lien;
(12) any capital expenditures authorized or made which
individually or in the aggregate are in excess of $25,000;
(13) any declaration or payment of any dividend or other
distribution (whether in cash, stock or property or any
combination thereof) in respect of the Company’s or any of
its Subsidiaries capital stock or membership interests, or
redemption or acquisition of any securities of the Company or
any of its Subsidiaries;
(14) any making of any loans, advances or capital
contributions to, or investments in, any other Person;
(15) any making of any Tax election or any settlement or
compromise of any federal, state, local or foreign Tax
liability, or waiver or extension of the statute of limitations
in respect of any such Taxes;
(16) any change in any accounting policies or practices by
the Company or any of its Subsidiaries except as required by
GAAP; or
(17) any (A) employment, deferred compensation,
severance, retirement or other similar agreement entered into
with any director, officer, consultant, partner or employee of
the Company or any of its Subsidiaries (or any amendment to any
such existing agreement), (B) grant or agreement to grant
any severance or termination pay to any director, officer,
consultant, partner or employee of the Company or any of its
Subsidiaries, or (C) change in compensation or other
benefits payable to any director, officer, consultant, partner
or employee of the Company or any of its Subsidiaries, except,
in each case, in the ordinary course of business, or as required
by Contract or applicable law with respect to employees of the
Company or any of its Subsidiaries.
(i)
Contracts
.
(1) Except for this Agreement and except for Contracts
filed in unredacted form as exhibits to the Company SEC
Documents, none of the Company or its Subsidiaries is a party to
or bound by any Contract: (i) that would be required to be
filed by the Company as a “material contract” pursuant
to Item 601(b)(10) of
Regulation S-K
under the Securities Act; (ii) containing covenants binding
upon the Company or its Subsidiaries that restrict the ability
of the Company or any of its Subsidiaries (or which, following
the consummation of the Merger, would materially restrict the
ability of the Surviving Corporation or its Affiliates) to
compete in any business or geographic area; or (iii) that
would prevent, materially delay or materially impede the
Company’s ability to consummate the Merger or the other
transactions contemplated by this Agreement. Each such Contract
described in clauses (i) through (iii) is referred to
herein as a “
Company Material Contract
”.
(2) Each of the Company Material Contracts is valid and
binding on the Company or its Subsidiaries, as the case may be,
and, to the Company’s Knowledge, each other party thereto
and is in full force and effect, except for such failures to be
valid and binding or to be in full force and effect as would
not, or would not reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect. There is no
default under any Company Material Contract by the Company or
its Subsidiaries and no event has occurred that with the lapse
of time or the giving of notice or both would constitute a
default thereunder by the Company or its Subsidiaries, in each
case except as would not, or would not reasonably be expected
to, individually or in the aggregate, have a Material Adverse
Effect.
(j)
Compliance with Laws
.
Each of
the Company and its Subsidiaries:
(1) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable to the conduct of its businesses or to the employees
conducting such businesses;
(2) has all material permits, licenses, authorizations,
orders and approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities that are
required in order to
A-1-15
permit them to own or lease their properties and to conduct
their businesses as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in
full force and effect and are current and, to the Company’s
Knowledge, no suspension or cancellation of any of them is
threatened or is reasonably likely and all such filings,
applications and registrations are current;
(3) has received, since August 1, 2008, no written
notification or communication (or, to the Knowledge of the
Company, any other communication) from any Governmental
Authority (A) asserting non-compliance with any of the
statutes, regulations, rules or ordinances of such Governmental
Authority, (B) threatening any material penalty or to
revoke any license, franchise, permit, or governmental
authorization, (C) requiring any of them (including any of
the Company’s or its Subsidiaries’ directors or
controlling persons) to enter into a cease and desist order,
agreement, or memorandum of understanding (or requiring the
board of directors thereof to adopt any resolution or policy),
or (D) restricting or disqualifying their activities;
(4) to the Company’s Knowledge, is not aware of any
pending or threatened investigation, review or disciplinary
Proceedings by any Governmental Authority against the Company,
any of its Subsidiaries or any officer, director or employee
thereof;
(5) in the conduct of its business with respect to employee
benefit plans subject to Title I of ERISA, has not
(A) breached any applicable fiduciary duty under
Part 4 of Title I of ERISA which would subject it to
material liability under Sections 405 or 409 of ERISA or
(B) engaged in a “prohibited transaction” within
the meaning of Section 406 of ERISA or Section 4975(c)
of the Code which would subject it to material liability or
Taxes under Sections 409 or 502(i) of ERISA or
Section 4975(a) of the Code;
(6) since August 1, 2008, has timely filed all
material reports, registrations and statements, together with
any amendments required to be made with respect thereto, that
were required to be filed under any applicable law, regulation
or rule, with any applicable Governmental Authority (the
“
Company Reports
”). As of their respective
dates, the Company Reports complied with the applicable
statutes, rules, regulations and orders enforced or promulgated
by the regulatory authority with which they were filed.
(k)
Properties
.
Except as may be
reflected in the Company’s Financial Statements dated
before the date hereof, the Company and its Subsidiaries have
good and marketable title, free and clear of all Liens (other
than Permitted Liens) to all of the material properties and
assets, tangible or intangible, reflected in such Company
Financial Statements as being owned by the Company and its
Subsidiaries as of the dates thereof. To the Company’s
Knowledge, all buildings and all the material fixtures,
equipment, and other property and assets held under leases or
subleases by any of the Company and its Subsidiaries are held
under valid leases or subleases, enforceable in accordance with
their respective terms (except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors’ rights generally and to
general principles of equity). Set forth in Section 4.2(k)
of the Company Disclosure Schedule is a list of any and all real
estate owned or leased by it or a Company Subsidiary as of the
date hereof.
(l)
Taxes
.
(1) Except as set forth in Section 4.2(l) of the
Company Disclosure Schedule, the Company and each of its
Subsidiaries have timely filed in a complete and correct manner
all Tax Returns that they were required to file, other than any
Tax Returns the failure to complete correctly or to file would
not, individually or in the aggregate, have a Material Adverse
Effect. The Company and each of its Subsidiaries have paid all
Taxes due, other than Taxes adequate reserves for which have
been made in the Company Financial Statements and Taxes the
failure to pay would not, individually or in the aggregate, have
a Material Adverse Effect.
(2) There are no claims or assessments pending against the
Company or any of its Subsidiaries for any alleged deficiency in
any Tax, and neither the Company nor any of its Subsidiaries has
been notified in writing of any proposed Tax claims or
assessments against the Company or any of its Subsidiaries
(other than, in each case, claims or assessments for which
adequate reserves in the Company Financial Statements have been
established and claims or assessments which would not,
individually or in the aggregate, have a Material Adverse
Effect).
A-1-16
(3) There are no Liens on any of the assets or properties
of the Company or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax,
except for statutory liens for current Taxes not yet due and
payable (and except for Liens which would not, individually or
in the aggregate, have a Material Adverse Effect).
(4) Neither the Company nor any of its Subsidiaries
(x) is bound by any Tax allocation or Tax sharing agreement
with a Person other than Acquiror which applies to
U.S. federal or state income Taxes, or (y) has any
liabilities under any Tax allocation or Tax sharing agreement
(except for any liabilities which would not, individually or in
the aggregate, have a Material Adverse Effect).
(m)
Litigation
.
(1) There are no Proceedings pending or, to the
Company’s Knowledge, threatened, against or affecting the
Company or any Subsidiary or any of their respective officers,
directors, managers, employees, agents, members, or stockholders
thereof in their capacity as such, or any of the properties or
businesses of the Company or any Subsidiary, and neither the
Company nor any Subsidiary is aware of any facts or
circumstances which may give rise to any of the foregoing.
(2) There are no claims, actions, suits, proceedings or
investigations pending or, to the Company’s Knowledge,
threatened, by or against the Company or any Subsidiary with
respect to this Agreement, or in connection with the
transactions contemplated hereby or thereby, and neither the
Company nor any Subsidiary has any reason to believe there is a
valid basis for any such claim, action, suit, proceeding, or
investigation.
(n)
Employees; Labor Matters
.
(1) Each of the Company and its Subsidiaries is in
compliance in all material respects with all currently
applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours,
including any such laws respecting employment discrimination,
harassment, disability rights or benefits, equal opportunity,
plant closure issues, affirmative action, workers’
compensation, employee benefits, severance payments, labor
relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment
insurance and related matters. None of the Company or any of its
Subsidiaries is engaged in any unfair labor practice and there
is no unfair labor practice complaint pending or threatened
against the Company or any of its Subsidiaries before the
National Labor Relations Board. There are no charges or
complaints against the Company or any of its Subsidiaries
pending or, to the Company’s Knowledge, threatened in
writing alleging sexual or other harassment, or other
discrimination or improper employment practices, by the Company,
any of its Subsidiaries or by any of their employees, agents or
representatives.
(2) Neither the Company nor any of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement,
Contract or other agreement or understanding with any labor
union or organization, nor has it agreed to recognize any union
or other collective bargaining unit, nor has any union or other
collective bargaining unit been certified, or is seeking
certification, as representing any of the employees of the
Company or any of its Subsidiaries.
(3) The Company and its Subsidiaries are and have been in
substantial compliance with all notice and other requirements
under the Worker Adjustment and Retaining Notification
(“
WARN
”) or similar state statute. None of the
employees of the Company or its Subsidiaries have suffered an
“employment loss” (as defined in WARN) during the
90-day
period prior to the execution of this Agreement.
(o)
Employee Benefit Plans
.
(1) Set forth in Section 4.2(o) of the Company
Disclosure Schedule is a complete list of each employee or
director benefit plan, arrangement or agreement, whether or not
written, including without limitation any employee welfare
benefit plan within the meaning of Section 3(1) of ERISA,
any employee pension benefit plan within the meaning of
Section 3(2) of ERISA (whether or not such plan is subject
to ERISA) and any bonus, incentive, deferred compensation,
vacation, stock purchase, stock option, severance, employment,
change of control or material fringe benefit plan, program or
agreement that is sponsored, maintained or contributed to by the
Company or any of its Subsidiaries, or with respect to which the
Company has or
A-1-17
reasonably could incur any liability, for the benefit of current
or former employees or directors or their beneficiaries (the
“
Company Benefit Plans
”).
(2) The Company has heretofore made available to Acquiror
(A) true and complete copies of each of the Company Benefit
Plans (or written explanations of any unwritten Company Benefit
Plans) as in effect on the date hereof and amendments thereto,
including summary plan descriptions; (B) the three most
recent Annual Reports (Form 5500 Series) and accompanying
schedules, if any; and (C) the most recent determination or
opinion letter from the IRS (if applicable) for such Company
Benefit Plan.
(3) With respect to each Company Benefit Plan, the Company
and its Subsidiaries have complied, and are now in compliance,
in all material respects with all provisions of ERISA, the Code
and all laws and regulations applicable to such Company Benefit
Plans and each Company Benefit Plan has been administered in all
material respects in accordance with its terms. The IRS has
issued a favorable determination or opinion letter with respect
to each Company Benefit Plan that is intended to be a
“qualified plan” within the meaning of
Section 401(a) of the Code that has not been revoked, and,
to the Company’s Knowledge, no circumstances exist and no
events have occurred that could reasonably be expected to
adversely affect the qualified status of any such plan or the
related trust (except for changes in applicable law for which
the remedial amendment period has not yet expired). No Company
Benefit Plan is intended to meet the requirements of Code
Section 501(c)(9).
(4) All contributions required to be made by the Company to
any Company Benefit Plan by applicable law or regulation or by
any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies
funding any Plan, for any period through the date hereof have
been timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof, have been
reflected on the Company Financial Statements. Each Company
Benefit Plan, if any, that is an employee welfare benefit plan
under Section 3(1) of ERISA is either (A) funded
through an insurance company Contract and is not a “welfare
benefit fund” within the meaning of Section 419 of the
Code or (B) unfunded.
(5) There is no pending or, to the Company’s
Knowledge, threatened Proceedings relating to the Company
Benefit Plans. Neither the Company nor any of its Subsidiaries
has engaged in a transaction with respect to any Company Benefit
Plan that would subject the Company or any of its Subsidiaries
to a material tax or penalty imposed by either Section 4975
of the Code or Section 502(i) of ERISA.
(6) No Company Benefit Plan is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the
Code, and neither the Company nor any of its Subsidiaries has
contributed or been obligated to contribute to a
“multiemployer plan” (as defined in Section 3(37)
of ERISA) or a plan that has two or more contributing, but
unrelated, sponsors and that is subject to Title IV of
ERISA at any time on or after December 31, 1994. No
liability under Subtitle C or D of Title IV of ERISA has
been or is reasonably expected to be incurred by the Company or
any of its Subsidiaries with respect to any ongoing, frozen or
terminated “single-employer plan,” within the meaning
of Section 4001 of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which
is considered one employer with the Company under
Section 4001 of ERISA or Section 414 of the Code (a
“
Company ERISA Affiliate
”). No notice of a
“reportable event,” within the meaning of
Section 4043 of ERISA, for which the
30-day
reporting requirement has not been waived has been required to
be filed for any Company Benefit Plan or, to the Company’s
Knowledge, by any Company ERISA Affiliate. Neither the Company
nor any of its Subsidiaries or Company ERISA Affiliates has
provided, or is required to provide, security to any Company
Benefit Plan or any single-employer plan of a Company ERISA
Affiliate.
(7) Neither the Company nor any of its Subsidiaries has any
obligation for retiree health, life or other welfare benefits,
except for benefits and coverage required by applicable law,
including, without limitation, Section 4980B of the Code
and Part 6 of Title I of ERISA. There are no
restrictions on the rights of the Company or any of its
Subsidiaries to amend or terminate any such plan (other than
reasonable and customary advance notice and consent requirements
and administrative expenses) without incurring any liability
thereunder.
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(8) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby
(either standing alone or in conjunction with any other event)
will (A) except as to the Persons listed in
Section 4.2(o) of the Company Disclosure Schedule, result
in any payment (including severance, unemployment compensation,
“excess parachute” (within the meaning of
Section 4999 of the Code), forgiveness of indebtedness or
otherwise) becoming due to any director or any employee of the
Company or any of its Subsidiaries under any Company Benefit
Plan, (B) increase any benefits otherwise payable under any
Company Benefit Plan, (C) result in any acceleration of the
time of payment or vesting of any such benefit, or
(D) affect in any way the ability to amend, terminate,
merge or administer any Company Benefit Plan.
(9) The Company does not maintain a Company Benefit Plan or
other arrangement that is subject to Section 409A of the
Code, and each Company Benefit Plan that is a nonqualified
deferred compensation plan subject to Section 409A of the
Code has been operated and administered in good faith compliance
with Section 409A of the Code since January 1, 2005.
(10) The Company has not granted any awards intended to
constitute performance-based compensation not subject to the
deduction limit under Section 162(m) of the Code.
(p)
Environmental Matters
.
The
Company and its Subsidiaries have complied in all respects with
applicable Environmental Laws; no property (including buildings
and any other structures) currently owned or operated by the
Company or any of its Subsidiaries or in which the Company or
any of its Subsidiaries (whether as fiduciary or otherwise) has
a Lien, is being or, to the Company’s Knowledge, has been
contaminated with, or has had any release of, any Hazardous
Substance in such form or substance so as to create any
liability for the Company or any of its Subsidiaries; the
Company and any of its Subsidiaries are not subject to liability
for any Hazardous Substance disposal or contamination on any
other third-party property; within the last six years, the
Company and any of its Subsidiaries have not received any
written notice, demand letter, claim or request for information
alleging any violation of, or liability of the Company or any of
its Subsidiaries under, any Environmental Law; the Company and
any of its Subsidiaries are not subject to any written order,
decree, injunction or other agreement with any Governmental
Authority or any third party relating to any Environmental Law;
the Company and any of its Subsidiaries are not aware of or do
not have any Knowledge of any facts that could lead to liability
for handling or disposal of Hazardous Substances involving the
Company or any of its Subsidiaries, any currently owned or
operated property (whether as fiduciary or otherwise), or any
reasonably likely liability related to any Lien held by the
Company or any of its Subsidiaries; and the Company and any of
its Subsidiaries have made available to Acquiror copies of all
environmental reports, studies, sampling data, correspondence,
filings and other environmental information in its possession or
reasonably available to it relating to the Company or any of its
Subsidiaries or any currently or formerly owned or operated
property or any property in which the Company or any of its
Subsidiaries (whether as fiduciary or otherwise) has held a Lien.
(q)
Intellectual Property
.
(1) The Company and its Subsidiaries have a valid right to
use all trademarks, service marks, trade names, Internet domain
names, designs, logos, slogans, trade dress, trade names,
corporate names and other source identifiers, and rights or
general intangibles of like nature (collectively,
“
Trademarks
”); Software (as defined below);
technology, trade secrets and other confidential information,
know-how, proprietary processes, formulae, formulations,
algorithms, databases, models, and methodologies (collectively,
“
Trade Secrets
”) used in the Company’s and
each Subsidiary’s business as currently conducted, except
where the failure to do so would not constitute a Material
Adverse Effect. The Company or its Subsidiaries either
(i) own or have the valid right to use all patents, patent
applications and invention registrations of any kind
(“
Patents
”), Trademarks, and registered and
unregistered copyrights, and registrations and applications
thereof (“
Copyrights
”) necessary for the
conduct of the Company’s and each of its Subsidiaries’
businesses as currently conducted, except where the failure to
do so would not constitute a Material Adverse Effect,
and/or
(ii) are validly licensed or authorized under third-party
Patents, Trademarks, Trade Secrets and Copyrights necessary for
the same. As used in this Agreement, the term
“
Intellectual Property
” means Patents,
Copyrights, Trademarks, applications, applications for
registration and registrations for any of the foregoing, and
Trade
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Secrets; the term “
Company License Agreements
”
means any agreements granting any right to use or practice any
rights under any Intellectual Property (except for such
agreements for Software already installed by the manufacturer
before purchase on computers purchased by the Company or its
Subsidiaries, shrink-wrap or click-wrap software or other
off-the-shelf
products that are generally available for less than $10,000),
and any written settlements relating to any Intellectual
Property, to which the Company or any of its Subsidiaries is a
party or otherwise bound; and the term
“
Software
” means any and all computer programs,
including any and all software implementations of algorithms,
models and methodologies, whether in source code or object code.
(2) Section 4.2(q)(2) of the Company Disclosure
Schedule sets forth, for the Intellectual Property owned and
maintained by the Company and its Subsidiaries, a complete and
accurate list of all U.S. and foreign (1) Patents and
patent applications; (2) issued and pending Trademark
registrations (including Internet domain name registrations for
domains on which any Company or any Subsidiary website is
located) and applications, and unregistered Trademarks;
(3) copyright registrations and applications, and material
unregistered Copyrights, and (4) material Trade Secrets,
indicating for each item of registered Intellectual Property and
for each application to register Intellectual Property, the
person or entity in whose name the registration is held, the
applicable jurisdiction, registration number (or application
number), date issued (or date filed) and current status.
Section 4.2(q)(2) of the Company Disclosure Schedule sets
forth a complete and accurate list of all third party Software
that is incorporated in any Software sold, licensed, leased or
otherwise distributed by or used in the course of rendering
services offered by the Company or any of its Subsidiaries,
indicating for each the title and owner/licensor of the Software.
(3) All Intellectual Property owned by the Company and its
Subsidiaries is free and clear of all Liens.
(4) The Patents, Trademarks, Copyrights and Trade Secrets
listed in Section 4.2(q)(2) of the Company Disclosure
Schedule are owned by the Company or a Subsidiary and are valid
and enforceable, in full force and effect, and to the extent
such Intellectual Property is the subject of a registration or
application (as described in Section 4.2(q)(2)), such
Intellectual Property is subsisting and has not been canceled,
expired, or abandoned. All necessary registration, maintenance
and renewal fees currently due have been paid for the purposes
of maintaining such Intellectual Property owned by the Company
or any of its Subsidiaries. There is no pending or, to the
Company’s Knowledge, threatened opposition, interference or
cancellation Proceeding before any court or registration
authority in any jurisdiction against any of the items listed in
Section 4.2(q)(2) of the Company Disclosure Schedule, or,
to the Company’s Knowledge, against any Intellectual
Property licensed to the Company or its Subsidiaries.
(5) To the Company’s Knowledge, the conduct of the
Company’s and its Subsidiaries’ business as currently
conducted, (including, without limitation, its activities,
products, and services), does not infringe upon any Intellectual
Property rights owned or controlled by any third party (either
directly or indirectly such as through contributory infringement
or inducement to infringe). Section 4.2(q)(5) of the
Company Disclosure Schedule lists all U.S. and foreign Patents
concerning which: (i) the Company has obtained or requested
written opinion of counsel; or (ii) the Company has
received (y) written allegation or notice of infringement,
or (z) a license offer outside the ordinary course of
business. There are no claims or suits pending or, to the
Company’s Knowledge, threatened against the Company or any
of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has received any notice of a third party claim or
suit against the Company or any of its Subsidiaries
(1) alleging that its past or present activities, products,
services or the conduct of its businesses infringes or has
infringed upon, violates, misappropriates, or constitutes the
unauthorized use of the Intellectual Property rights of any
third party or (2) challenging the ownership, use, validity
or enforceability of any Intellectual Property.
(6) There are no settlements, forbearances to sue,
consents, judgments, or orders or similar obligations to which
the Company or any of its Subsidiaries is bound which
(1) restrict the Company’s or its Subsidiaries’
rights to use, transfer, license or enforce any Intellectual
Property, (2) restrict the Company’s or its
Subsidiaries’ business in order to accommodate a third
party’s Intellectual Property, or (3) permit third
parties to use, or grant any third party any right with respect
to any Intellectual Property owned by the Company or any of its
Subsidiaries. The Company and its Subsidiaries have not licensed
or sublicensed their rights in any Intellectual Property other
than pursuant to the Company License Agreements, and no
royalties, honoraria or
A-1-20
other fees are payable by the Company or its Subsidiaries for
the use of or right to use any Intellectual Property licensed to
the Company or its Subsidiaries, except pursuant to the Company
License Agreements. The Company License Agreements are valid and
binding obligations of all parties thereto, enforceable in
accordance with their terms subject only to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors’ rights and to general principles of equity.
Except as would not, individually or in the aggregate, have a
Material Adverse Effect, each of the Company and its
Subsidiaries is in compliance with, and has not breached any
term of any such Company License Agreement and, to the
Company’s Knowledge, all other parties to such Company
License Agreements Contracts are in compliance with, and have
not breached any term thereof. To the Company’s Knowledge,
there exists no event or condition which will result in a
violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default by the Company or any
other party under any such Company License Agreement.
(7) To the Company’s Knowledge, no Trade Secret of the
Company or its Subsidiaries has been disclosed or authorized to
be disclosed to any third party other than pursuant to a
non-disclosure agreement that protects the Company and the
applicable Subsidiary’s proprietary interests in and to
such Trade Secrets. Neither the Company nor, to the
Company’s Knowledge, any other party to any non-disclosure
agreement relating to the Company’s Trade Secrets is in
breach or default thereof. The Company and its Subsidiaries have
taken commercially reasonable steps to protect their material
Trade Secrets, and any Trade Secrets provided to the Company or
any Subsidiary by a third party as a Trade Secret. The Company
and its Subsidiaries have taken commercially reasonable steps to
maintain and protect the material Company owned Intellectual
Property currently used in the business. Without limiting the
foregoing, each of the Company and its Subsidiaries has taken
commercially reasonable steps to require current or former
employees, consultants and contractors of the Company or any
Subsidiary that have created any material Company owned
Intellectual Property to assign to the Company or its
Subsidiaries all of their right, title and interest in such
Intellectual Property, and to the Company’s Knowledge, no
party to any such agreement is in breach thereof.
(8) To the Company’s Knowledge, no third party is
misappropriating, infringing, diluting, or violating any
Intellectual Property owned by the Company or any of its
Subsidiaries. Within the past five (5) years, no claims
alleging any infringement, misappropriation or violation of any
Intellectual Property owned by the Company or any of its
Subsidiaries have been brought, asserted or threatened against
any third party by the Company or any of its Subsidiaries.
(9) The consummation of the transactions contemplated
hereby will not result in the loss or impairment of the
Company’s or any of its Subsidiaries’ right to own or
use any of the Intellectual Property, and will not require the
consent of any Governmental Authority or third party in respect
of any such Intellectual Property. The consummation of any of
the transactions contemplated under this Agreement will neither
violate nor by their terms result in the material breach,
material modification, cancellation, termination, suspension of,
or acceleration of any payments with respect to any Company
License Agreements. To the Company’s Knowledge, following
the Closing Date, the Surviving Corporation shall be permitted
to exercise all of the Company’s and its Subsidiaries’
rights under such Company License Agreements to the same extent
the Company and its Subsidiaries would have been able to had the
transactions not occurred and without the payment of any
additional amounts or consideration other than ongoing fees,
royalties or payments which the Company or any of its
Subsidiaries would otherwise be required to pay.
(10) Section 4.2(q)(10) of the Company Disclosure
Schedule lists all Software sold, licensed, leased or otherwise
distributed by or used in the services offered by the Company or
any of its Subsidiaries to any third party, and identifies which
Software is sold, licensed, leased, or otherwise distributed, or
used, as the case may be. With respect to the Software set forth
in Section 4.2(q)(10) of the Company Disclosure Schedule
which the Company or any of its Subsidiaries purports to own,
such Software was either developed (1) by employees of the
Company or any of its Subsidiaries within the scope of their
employment; or (2) by independent contractors who have
unconditionally assigned all of their rights in such Software
and all copyrights in such Software to the Company or any of its
Subsidiaries pursuant to written agreements.
A-1-21
(11) The Company and each of its Subsidiaries have all
requisite licenses to use any shrink-wrap or click-wrap
software, other
off-the-shelf
products, or any other Software used by any of them in
connection with their business, such licenses are valid, and
neither the Company nor any Subsidiary is using any such
products or Software where all requisite consideration has not
been paid for the use thereof. To the Company’s Knowledge,
neither the Company nor any of its Subsidiaries is in violation
of any applicable law or any Contract or other agreement,
arrangement or understanding regarding or in connection with
such products or Software, and neither the Company nor any of
its Subsidiaries has any payment obligations or other actual or
potential liabilities related to or in connection with such
products or Software.
(r)
Insurance
.
Section 4.2(r)
of the Company Disclosure Schedule sets forth a true, accurate
and complete list of all policies of fire, liability,
workmen’s compensation, environmental, title and other
forms of insurance owned, held by or applicable to the Company
or any Subsidiary (and their respective businesses and assets),
and the Company has delivered to Acquiror a true, accurate and
complete copy of all such policies, including all
occurrence-based policies applicable to the Company or any
Subsidiary (and their respective businesses and assets) for all
periods prior to the date hereof. All such policies are in full
force and effect, all premiums with respect thereto covering all
periods up to and including the date hereof have been paid, and
no notice of cancellation or termination has been received with
respect to any such policy. Such policies are sufficient for
compliance with (i) all requirements of law and
(ii) all Contracts to which the Company or any Subsidiary
is a party, and are to the Company’s Knowledge valid,
outstanding and enforceable policies. Such insurance policies
provide types and amounts of insurance customarily obtained by
businesses similar to the business of the Company and the
Subsidiaries. Except as set forth in Section 4.2(r) of the
Company Disclosure Schedule, neither the Company nor any
Subsidiary has been refused any insurance with respect to its
assets or operations, and its coverage has not been limited by
any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance, during the
last three years. Section 4.2(r) of the Company Disclosure
Schedule sets forth a true, accurate and complete list of all
claims that have been made by the Company or any Subsidiary
within the past three years under its insurance policies.
(s)
Brokers
.
No action has been
taken by the Company or any Subsidiary that would give rise to
any valid claim against any party hereto for a brokerage
commission, finder’s fee or other like payment with respect
to the transactions contemplated by this Agreement.
(t)
Tax Treatment
.
As of the date
hereof, the Company has no reason to believe that the Merger
will not qualify as a “reorganization” within the
meaning of Section 368(a) of the Code.
(u)
No Illegal Payments, Etc
.
None
of the Company or any of its Subsidiaries, nor any of their
directors, officers, employees or agents, has (a) directly
or indirectly given or agreed to give any illegal gift,
contribution, payment or similar benefit to any supplier,
customer, governmental official or employee or other Person who
was, is or may be in a position to help or hinder the Company or
any of its Subsidiaries (or assist in connection with any actual
or proposed transaction) or made or agreed to make any illegal
contribution, or reimbursed any illegal political gift or
contribution made by any other Person, to any candidate for
federal, state, local or foreign public office (i) which
subjects any of the Company and its Subsidiaries to any damage
or penalty in any civil, criminal or governmental Proceeding or
(ii) the non-continuation of which, in the case of
(i) and (ii), has had or might have, individually or in the
aggregate, a Material Adverse Effect or (b) established or
maintained any unrecorded fund or asset or made any false
entries on any books or records for any purpose.
(v)
Condition and Sufficiency of
Assets
.
Except as set forth in
Section 4.2(v) of the Company Disclosure Schedule, all of
the tangible assets and properties of the Company, whether real
or personal, owned or leased, have been well maintained and are
in good operating condition and repair (with the exception of
normal wear and tear), and are free from defects other than such
minor defects as do not interfere with the intended use thereof
in the conduct of normal operations or adversely affect the
resale value thereof. Immediately after the Closing, the Company
and the Subsidiaries shall own or have a valid right to use all
the assets, properties, rights, know-how, key personnel,
processes and ability which are required for or currently used
in connection with the operation of their respective businesses
as they are presently conducted.
A-1-22
(w)
Joint Proxy Statement/Prospectus and Registration
Statement
.
None of the information supplied
or to be supplied by the Company in writing specifically for
inclusion in or incorporation by reference into, and which is
included in or incorporated by reference into, (i) the
Registration Statement or any amendment or supplement thereto
will, at the respective times such documents are filed, and, in
the case of the Registration Statement or any amendment or
supplement thereto, when the same becomes effective, at the time
of the Company Stockholders Meeting, the Acquiror Stockholders
Meeting or at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein
not misleading, or (ii) the Joint Proxy
Statement/Prospectus or any other documents filed or to be filed
with the SEC or any other Governmental Authority in connection
with the transactions contemplated hereby, will, at the
respective times such documents are filed and, in the case of
the Joint Proxy Statement/Prospectus or any amendment or
supplement thereto, at the time of mailing to stockholders of
the Company and Acquiror and at the times of the Company
Stockholders Meeting and Acquiror Stockholders Meeting, be false
or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading or necessary to correct any statement made
in any earlier communication. For this purpose, any such
information included in or incorporated by reference into any
such document relating to the Company will be deemed to have
been so supplied in writing specifically for inclusion or
incorporation therein if such document was available for review
by the Company or its counsel a reasonable time before such
document was filed (but the foregoing will not be the exclusive
manner in which it may be established that such information was
so supplied). The Joint Proxy Statement will comply as to form
in all material respects with the applicable requirements of the
Exchange Act and the rules and regulations promulgated
thereunder.
Section
4.3.
Representations
and Warranties of Acquiror and
MergerCo
.
Except as set forth in the Acquiror
Disclosure Schedule or Acquiror SEC Documents, each of Acquiror
and MergerCo, as the case may be, hereby represents and warrants
to the Company as follows:
(a)
Organization, Standing and
Authority
.
Each of Acquiror and MergerCo is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is duly
qualified or licensed to do business and is in good standing in
all jurisdictions where ownership or leasing of property or
assets or the conduct of business requires either to be so
qualified or licensed, except for those jurisdictions in which
failure to do so has not, or could not reasonably be expected to
have a Material Adverse Effect.
(b)
Corporate Power
.
Acquiror and
each of its Subsidiaries has all requisite corporate power and
authority to own, lease and operate their respective properties
and to carry on their respective businesses as they are now
being owned, leased, operated and conducted.
(c)
Corporate Authority.
(1) Each of Acquiror and MergerCo has the requisite
corporate power and authority necessary to authorize the
execution and delivery of, and performance of its obligations
under, this Agreement and, subject to receipt of the Requisite
Stockholder Vote, to consummate the transactions contemplated by
this Agreement. The execution, delivery and performance by
Acquiror and MergerCo of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized
by the Acquiror Board. This Agreement has been duly executed and
delivered by Acquiror and MergerCo and is a valid and legally
binding obligation of each of Acquiror and MergerCo, enforceable
in accordance with its terms, subject only to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability related to or affecting
creditors’ rights and to general principles of equity.
(2) The Acquiror Special Committee has (i) determined
that the Merger is advisable, fair to, and in the best interests
of, Acquiror and its stockholders, and (ii) recommended the
approval of this Agreement by the Acquiror Board;
(3) The Acquiror Board has (i) determined that the
Merger is advisable, fair to, and in the best interests of,
Acquiror and its stockholders, (ii) approved and adopted
this Agreement, the Merger and the other transactions
contemplated by this Agreement, (iii) approved the making
of an amendment to the Acquiror
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Certificate in order to change the name of Acquiror, and
(iv) recommended that the stockholders approve the issuance
of Acquiror Common Stock in connection with the Merger.
(d)
Regulatory Filings; Consents; No Defaults
.
(1) No consents, approvals, orders or authorizations of, or
filings, registrations, declarations or qualifications with, any
Governmental Authority are required to be made or obtained by
Acquiror in connection with the execution, delivery or
performance by Acquiror and MergerCo of this Agreement, or to
consummate the Merger, except for: (A) those required under
the HSR Act, if any; (B) the filing and declaration of
effectiveness of the Registration Statement and the Joint Proxy
Statement/Prospectus and compliance with the Exchange or
Securities Act; (C) approval of the listing on the NASDAQ
of the shares of Acquiror Common Stock to be issued as Merger
Consideration; and (D) the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business. As of
the date hereof, Acquiror has no Knowledge of any reason why the
approvals of all Governmental Authorities necessary to permit
consummation of the transactions contemplated by this Agreement
will not be received.
(2) Subject to the Requisite Stockholder Vote of Acquiror,
no consent by or approval or authorization of or notice to any
other Person (other than a Governmental Authority) is required,
whether under any material license or other material Contract or
otherwise.
(3) Subject to the Requisite Stockholder Vote of Acquiror,
the receipt of the approvals and consents referred to in
Section 4.3(d)(1) and Section 4.3(d)(2), the
expiration of applicable waiting periods and the making of all
required filings under Securities Laws, the execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(A) constitute a breach or violation of, or a default
under, or give rise to any Lien, any acceleration of remedies,
any right of termination (with or without the giving of notice,
passage of time or both) or any put or call right under, any
law, rule or regulation or any judgment, decree, order,
governmental or nongovernmental permit or license, or Contract
of Acquiror or of any of its Subsidiaries or to which Acquiror
or any of its Subsidiaries or its or their properties is subject
or bound, (B) constitute a breach or violation of, or a
default under, the certificate of incorporation or bylaws (or
similar governing documents) of Acquiror or of any of its
Subsidiaries, or (C) require any consent or approval under
any such law, rule, regulation, judgment, decree, order,
governmental or nongovernmental permit or license or Contract,
except, in the case of clauses (A), (B) and (C), for
any such conflict, violation, breach, default, loss, right,
consent or approval or other occurrence which would not, or
would not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect.
(e)
Acquiror Stock.
The authorized
capital stock of Acquiror consists of 45,000,000 shares of
capital stock, of which 40,000,000 shares are designated as
Acquiror Common Stock, and 5,000,000 shares of preferred
stock, $0.001 par value per share (the “
Acquiror
Preferred Stock
” and together with the Acquiror Common
Stock, the “
Acquiror Stock
”). As of
September 4, 2009, (a) 13,810,628 shares of
Acquiror Common Stock were issued and outstanding, (b) no
shares of Acquiror Preferred Stock were issued and outstanding,
(c) 1,477,853 shares of Acquiror Common Stock were
reserved for issuance upon the exercise of options issued or
issuable under Acquiror’s 2007 Stock Incentive Plan, 2005
Flexible Stock Plan, and 2002 Flexible Stock Plan, and
313,122 shares of Acquiror Common Stock reserved for
issuance of stock options granted outside of the Acquiror Stock
Plans (the “
Acquiror Stock Options
”),
(d) no warrants to purchase shares of Acquiror Common Stock
are outstanding, and (e) no shares of Acquiror Common Stock
were held in treasury. The outstanding shares of Acquiror Common
Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no
preemptive or anti-dilution rights (and were not issued in
violation of any subscriptive or preemptive rights). As of the
date hereof, other than the Acquiror Stock Options, there are no
shares of Acquiror Common Stock authorized and reserved for
issuance, Acquiror does not have any Rights issued or
outstanding with respect to Acquiror Stock, and Acquiror does
not have any commitment to authorize, issue or sell any Acquiror
Stock or Rights as a result of this Agreement or otherwise,
except pursuant to this Agreement. Section 4.3(e) of the
Acquiror Disclosure Schedule sets forth a list of the holders of
outstanding Acquiror Stock Options and Acquiror restricted stock
grants, the date that each such Acquiror Stock Option or
Acquiror restricted stock grant was granted, the number of
shares of
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Acquiror Common Stock subject to each such Acquiror Stock Option
or Acquiror restricted stock grant, the vesting schedule of each
such Acquiror Stock Option or Acquiror restricted stock grant
and the price at which each such Acquiror Stock Option may be
exercised. Except as set forth in Section 4.3(e) of the
Acquiror Disclosure Schedule, no options, warrants or other
rights to purchase from Acquiror or any Subsidiary, agreements
or other obligations of Acquiror or any Subsidiary to issue or
other rights to convert any obligation into, or exchange any
securities for, shares of capital stock of or ownership
interests in Acquiror or any Subsidiary are outstanding; and,
there is no agreement, understanding or arrangement among
Acquiror or any Subsidiary and each of their respective
stockholders or members or any other Person relating to the
ownership or disposition of any capital stock of Acquiror or any
Subsidiary or the election of directors of Acquiror or any
Subsidiary or the governance of Acquiror’s or any
Subsidiary’s affairs, and such agreements, understandings
and arrangements, if any, will not be breached or violated as a
result of the execution and delivery of, or the consummation of
the transactions contemplated by this Agreement.
(f)
Subsidiaries.
Set forth in
Section 4.3(f) of the Acquiror Disclosure Schedule is a
list of all its direct and indirect subsidiaries, including the
states in which such subsidiaries are organized and the
percentage owned by Acquiror or any such subsidiary and the
names and percentage ownership by any other Person. No equity
securities of any of Acquiror’s subsidiaries are or may
become required to be issued, transferred or otherwise disposed
of (other than to Acquiror or a wholly-owned subsidiary of
Acquiror) by reason of any Rights with respect thereto. There
are no Contracts by which any of Acquiror’s Subsidiaries is
or may be bound to sell or otherwise issue any shares of its
capital stock, and there are no Contracts relating to the rights
or obligations of Acquiror to vote or to dispose of such shares.
All of the shares of capital stock of each of Acquiror’s
subsidiaries are fully paid and nonassessable and subject to no
subscriptive or preemptive rights or Rights and are owned by
Acquiror or an Acquiror Subsidiary free and clear of any Liens.
(g)
SEC Documents; Financial Statements.
(1) Since August 1, 2008, Acquiror and its
Subsidiaries have filed all reports, registrations, and
statements they were required to file with the SEC under the
Securities Act, or under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act, including, but not limited to
Acquiror’s Annual Reports on
Form 10-K,
Forms 10-Q,
Form 8-K,
registration statements, definitive proxy statements, and
information statements (collectively, the “
Acquiror SEC
Documents
”). Acquiror has provided or made available
via EDGAR to the Company copies of the Acquiror SEC Documents,
each in the form (including exhibits and any amendments thereto)
filed with the SEC (or, if not so filed, in the form used or
circulated). As of their respective dates (and without giving
effect to any amendments or modifications filed after the date
of this Agreement) each of the Acquiror SEC Documents, including
the Acquiror Financial Statements, exhibits, and schedules
thereto, filed or circulated prior to the date hereof complied
(and each of the Acquiror SEC Documents filed prior to the
Merger will materially comply) as to form with applicable
Securities Laws and did not (or, in the case of reports,
statements, or circulars filed after the date of this Agreement,
will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make
the statements made therein, in light of the circumstances under
which they were made, not misleading.
(2) Each of Acquiror’s and Acquiror’s
Subsidiaries’ consolidated and separate financial
statements or balance sheets included in or incorporated by
reference into the Acquiror SEC Documents, including the related
notes and schedules, fairly presented (or, in the case of
Acquiror SEC Documents filed after the date of this Agreement,
will fairly present) the consolidated and separate financial
condition of Acquiror and its Subsidiaries as of the date of
such statement of financial condition or balance sheet and each
of the consolidated and separate statements of income, cash
flows and changes in stockholders’ equity included in or
incorporated by reference into the Acquiror SEC Documents,
including any related notes and schedules (collectively, the
foregoing financial statements and related notes and schedules
are referred to as the “
Acquiror Financial
Statements
”), fairly presented (or, in the case of
Acquiror SEC Documents filed after the date of this Agreement
and prior to the Merger, will fairly present) the separate and
consolidated results of operations, cash flows and
stockholders’ equity, as the case may be, of Acquiror and
its Subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to normal year-end audit
adjustments),
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in each case in accordance with GAAP consistently applied during
the periods involved (except as may be noted therein and except
that such unaudited statements include no notes).
(3) Except as disclosed in the Acquiror Financial
Statements or as set forth in Section 4.3(g) of the
Acquiror Disclosure Schedule, none of Acquiror or any of its
Subsidiaries has any liability or obligation of any nature
(whether accrued, absolute, contingent or otherwise) whether or
not required to be recorded or reflected by GAAP to be set forth
on a consolidated balance sheet of Acquiror and its consolidated
subsidiaries or in the notes thereto, other than liabilities or
obligations incurred in the ordinary course of business
consistent with past practice since the date of the most recent
Acquiror Financial Statements included in the Acquiror SEC
Documents.
(h)
Absence of Certain
Changes
.
Since June 30, 2009, the
business of Acquiror and its Subsidiaries has been conducted in
the ordinary course, consistent with past practice, and there
has not been:
(1) any event, occurrence, development or state of
circumstances or facts which has had or is reasonably likely to
have a Material Adverse Effect on Acquiror and any of its
Subsidiaries;
(2) any material event, occurrence, development or state of
circumstances;
(3) any damage, destruction or loss to any assets or
properties (whether or not covered by insurance) of Acquiror or
any of its Subsidiaries;
(4) any obligation or any Contract entered into which
either (i) required a payment by any party in excess of, or
a series of payments which in the aggregate exceed, $25,000 or
provides for the delivery of goods or performance of services,
or any combination thereof, having a value in excess of $25,000
or (ii) has a term, or requires the performance of any
obligations by Acquiror or any Subsidiary over a period, in
excess of six months;
(5) any sales, transfers, conveyances, assignments or other
dispositions of any assets or properties of Acquiror or any of
its Subsidiaries, except sales of inventory in the ordinary
course of business;
(6) any waiver, release or cancellation of any claims
against third parties or debts owing to Acquiror or any of its
Subsidiaries, or any rights which have any value;
(7) any transaction with an Affiliate of any stockholder or
any member of Acquiror or any of its Subsidiaries;
(8) any authorization for issuance, sale, delivery or
agreement or commitment to issue, sell or deliver (whether
through the issuance or granting of options, warrants,
convertible or exchangeable securities, commitments,
subscriptions, rights to purchase or otherwise) any membership
interests, shares of its capital stock or any other securities;
(9) any amendment of any term of any outstanding security
of Acquiror or any of its Subsidiaries or to Acquiror’s or
any of its Subsidiaries’ certificate of incorporation or
bylaws (or similar governing documents);
(10) any (A) incurrence, assumption or guarantee by
Acquiror or any of its Subsidiaries of any indebtedness for
borrowed money, or (B) assumption, guarantee, endorsement
or otherwise by Acquiror of any obligations of any other Person,
in each case, other than in the ordinary course of business
consistent with past practices;
(11) any creation or assumption by Acquiror or any of its
Subsidiaries of any Lien on any asset other than in the ordinary
course of business consistent with past practices, other than a
Permitted Lien;
(12) any capital expenditures authorized or made which
individually or in the aggregate are in excess of $25,000;
(13) any declaration or payment of any dividend or other
distribution (whether in cash, stock or property or any
combination thereof) in respect of Acquiror’s or any of its
Subsidiaries capital stock or
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membership interests, or redemption or acquisition of any
securities of Acquiror or any of its Subsidiaries;
(14) any making of any loans, advances or capital
contributions to, or investments in, any other Person;
(15) any making of any Tax election or any settlement or
compromise of any federal, state, local or foreign Tax
liability, or waiver or extension of the statute of limitations
in respect of any such Taxes;
(16) any change in any accounting policies or practices by
Acquiror or any of its Subsidiaries except as required by
GAAP; or
(17) any (A) employment, deferred compensation,
severance, retirement or other similar agreement entered into
with any director, officer, consultant, partner or employee of
Acquiror or any of its Subsidiaries (or any amendment to any
such existing agreement), (B) grant or agreement to grant
any severance or termination pay to any director, officer,
consultant, partner or employee of Acquiror or any of its
Subsidiaries, or (C) change in compensation or other
benefits payable to any director, officer, consultant, partner
or employee of Acquiror or any of its Subsidiaries, except, in
each case, in the ordinary course of business, or as required by
Contract or applicable law with respect to employees of Acquiror
or any of its Subsidiaries.
(i)
Contracts.
(1) Except for this Agreement and except for Contracts
filed in unredacted form as exhibits to the Acquiror SEC
Documents, none of Acquiror or its Subsidiaries is a party to or
bound by any Contract: (i) that would be required to be
filed by Acquiror as a “material contract” pursuant to
Item 601(b)(10) of
Regulation S-K
under the Securities Act; (ii) containing covenants binding
upon Acquiror or its Subsidiaries that restrict the ability of
the Company or any of its Subsidiaries (or which, following the
consummation of the Merger, would materially restrict the
ability of the Surviving Corporation or its Affiliates) to
compete in any business or geographic area; or (iii) that
would prevent, materially delay or materially impede
Acquiror’s ability to consummate the Merger or the other
transactions contemplated by this Agreement. Each such Contract
described in clauses (i) through (iii) is referred to
herein as a ‘‘
Acquiror Material Contract
”.
(2) Each of the Acquiror Material Contracts is valid and
binding on Acquiror or its Subsidiaries, as the case may be,
and, to the Acquiror’s Knowledge, each other party thereto
and is in full force and effect, except for such failures to be
valid and binding or to be in full force and effect as would
not, or would not reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect. There is no
default under any Acquiror Material Contract by Acquiror or its
Subsidiaries and no event has occurred that with the lapse of
time or the giving of notice or both would constitute a default
thereunder by Acquiror or its Subsidiaries, in each case except
as would not, or would not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect.
(j)
Litigation.
(1) Except as set forth in Section 4.3(j) of the
Acquiror Disclosure Schedule, there are no Proceedings pending
or, to the Acquiror’s Knowledge, threatened, against or
affecting Acquiror or any Subsidiary or any of their respective
officers, directors, managers, employees, agents, members or
stockholders thereof in their capacity as such, or any of the
properties or businesses of Acquiror or any Subsidiary, and
neither Acquiror nor any Subsidiary is aware of any facts or
circumstances which may give rise to any of the foregoing.
(2) There are no claims, actions, suits, proceedings or
investigations pending or, to the Acquiror’s Knowledge,
threatened, by or against Acquiror or any Subsidiary with
respect to this Agreement, or in connection with the
transactions contemplated hereby or thereby, and neither
Acquiror nor any Subsidiary has any reason to believe there is a
valid basis for any such claim, action, suit, proceeding, or
investigation.
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(k)
Compliance with Laws.
Each of
Acquiror and its Subsidiaries:
(1) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable to the conduct of its businesses or to the employees
conducting such businesses;
(2) has all material permits, licenses, authorizations,
orders and approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities that are
required in order to permit them to own or lease their
properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and
are current and, to Acquiror’s Knowledge, no suspension or
cancellation of any of them is threatened or is reasonably
likely and all such filings, applications and registrations are
current;
(3) has received, since August 1, 2008, no written
notification or communication (or, to the Knowledge of Acquiror,
any other communication) from any Governmental Authority
(A) asserting non-compliance with any of the statutes,
regulations, rules or ordinances of such Governmental Authority,
(B) threatening any material penalty or to revoke any
license, franchise, permit, or governmental authorization,
(C) requiring any of them (including any of Acquiror’s
or its Subsidiaries’ directors or controlling persons) to
enter into a cease and desist order, agreement, or memorandum of
understanding (or requiring the board of directors thereof to
adopt any resolution or policy), or (D) restricting or
disqualifying their activities;
(4) to the Acquiror’s Knowledge, is not aware of any
pending or threatened investigation, review or disciplinary
Proceedings by any Governmental Authority against Acquiror, any
of its Subsidiaries or any officer, director or employee thereof;
(5) in the conduct of its business with respect to employee
benefit plans subject to Title I of ERISA, has not
(A) breached any applicable fiduciary duty under
Part 4 of Title I of ERISA which would subject it to
material liability under Sections 405 or 409 of ERISA or
(B) engaged in a “prohibited transaction” within
the meaning of Section 406 of ERISA or Section 4975(c)
of the Code which would subject it to material liability or
Taxes under Sections 409 or 502(i) of ERISA or
Section 4975(a) of the Code;
(6) since August 1, 2008, has timely filed all
material reports, registrations and statements, together with
any amendments required to be made with respect thereto, that
were required to be filed under any applicable law, regulation
or rule, with any applicable Governmental Authority (the
“
Acquiror Reports
”). As of their respective
dates, the Acquiror Reports complied with the applicable
statutes, rules, regulations and orders enforced or promulgated
by the regulatory authority with which they were filed.
(l)
Properties.
Except as may be
reflected in the Acquiror Financial Statements dated before the
date hereof, Acquiror and its Subsidiaries have good and
marketable title, free and clear of all Liens (other than
Permitted Liens) to all of the material properties and assets,
tangible or intangible, reflected in such Acquiror Financial
Statements as being owned by Acquiror and its Subsidiaries as of
the dates thereof. To Acquiror’s Knowledge, all buildings
and all the material fixtures, equipment, and other property and
assets held under leases or subleases by any of Acquiror and its
Subsidiaries are held under valid leases or subleases,
enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors’ rights generally and to general principles of
equity). Set forth in Section 4.3(l) of the Acquiror
Disclosure Schedule is a list of any and all real estate owned
or leased by Acquiror or any Subsidiary as of the date hereof.
(m)
Employees; Labor Matters.
(1) Each of Acquiror and its Subsidiaries is in compliance
in all material respects with all currently applicable laws
respecting employment and employment practices, terms and
conditions of employment and wages and hours, including any such
laws respecting employment discrimination, harassment,
disability rights or benefits, equal opportunity, plant closure
issues, affirmative action, workers’ compensation, employee
benefits, severance payments, labor relations, employee leave
issues, wage and hour standards, occupational safety and health
requirements and unemployment insurance and related matters.
None of Acquiror or any of
A-1-28
its Subsidiaries is engaged in any unfair labor practice and
there is no unfair labor practice complaint pending or
threatened against Acquiror or any of its Subsidiaries before
the National Labor Relations Board. There are no charges or
complaints against Acquiror or any of its Subsidiaries pending
or, to the Acquiror’s Knowledge, threatened in writing
alleging sexual or other harassment, or other discrimination or
improper employment practices, by Acquiror, any of its
Subsidiaries or by any of their employees, agents or
representatives.
(2) Neither Acquiror nor any of its Subsidiaries is a party
to, or is bound by, any collective bargaining agreement,
Contract or other agreement or understanding with any labor
union or organization, nor has it agreed to recognize any union
or other collective bargaining unit, nor has any union or other
collective bargaining unit been certified, or is seeking
certification, as representing any of the employees of Acquiror
or any of its Subsidiaries.
(3) Acquiror and its Subsidiaries are and have been in
substantial compliance with all notice and other requirements
under WARN and similar state statutes. No employee of Acquiror
or its Subsidiaries has suffered an “employment loss”
(as defined in WARN and similar state statutes) during the
90-day
period prior to the execution of this Agreement.
(n)
Employee Benefit Plans.
(1) Set forth in Section 4.3(n) of the Acquiror
Disclosure Schedule is a complete list of each employee or
director benefit plan, arrangement or agreement, whether or not
written, including without limitation any employee welfare
benefit plan within the meaning of Section 3.1 of ERISA,
any employee pension benefit plan within the meaning of
Section 3.2 of ERISA (whether or not such plan is subject
to ERISA) and any bonus, incentive, deferred compensation,
vacation, stock purchase, stock option, severance, employment,
change of control or material fringe benefit plan, program or
agreement that is sponsored, maintained or contributed to by
Acquiror or any of its Subsidiaries, or with respect to which
Acquiror has or reasonably could incur any liability, for the
benefit of current or former employees or directors or their
beneficiaries (the “
Acquiror Benefit Plans
”).
(2) Acquiror has heretofore made available to the Company
(A) true and complete copies of each of the Acquiror
Benefit Plans (or written explanations of any unwritten Acquiror
Benefit Plans) as in effect on the date hereof and amendments
thereto, including summary plan descriptions; (B) the three
most recent Annual Reports (Form 5500 Series) and
accompanying schedules, if any; and (C) the most recent
determination or opinion letter from the IRS (if applicable) for
such Acquiror Benefit Plan.
(3) With respect to each Acquiror Benefit Plan, Acquiror
and its Subsidiaries have complied, and are now in compliance,
in all material respects with all provisions of ERISA, the Code
and all laws and regulations applicable to such Acquiror Benefit
Plans and each Acquiror Benefit Plan has been administered in
all material respects in accordance with its terms. The IRS has
issued a favorable determination or opinion letter with respect
to each Acquiror Benefit Plan that is intended to be a
“qualified plan” within the meaning of
Section 401(a) of the Code that has not been revoked, and,
to the Acquiror’s Knowledge, no circumstances exist and no
events have occurred that could reasonably be expected to
adversely affect the qualified status of any such plan or the
related trust (except for changes in applicable law for which
the remedial amendment period has not yet expired). No Acquiror
Benefit Plan is intended to meet the requirements of Code
Section 501(c)(9).
(4) All contributions required to be made by Acquiror to
any Acquiror Benefit Plan by applicable law or regulation or by
any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies
funding any Plan, for any period through the date hereof have
been timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof, have been
reflected on the Acquiror Financial Statements. Each Acquiror
Benefit Plan, if any, that is an employee welfare benefit plan
under Section 3(1) of ERISA is either (A) funded
through an insurance company Contract and is not a “welfare
benefit fund” within the meaning of Section 419 of the
Code or (B) unfunded.
(5) There is no pending or, to the Acquiror’s
Knowledge, threatened Proceedings relating to the Acquiror
Benefit Plans. Neither Acquiror nor any of its Subsidiaries has
engaged in a transaction with respect to any
A-1-29
Acquiror Benefit Plan that would subject Acquiror or any of its
Subsidiaries to a material Tax or penalty imposed by either
Section 4975 of the Code or Section 502(i) of ERISA.
(6) No Acquiror Benefit Plan is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the
Code, and neither Acquiror nor any of its Subsidiaries has
contributed or been obligated to contribute to a
“multiemployer plan” (as defined in Section 3(37)
of ERISA) or a plan that has two or more contributing, but
unrelated, sponsors and that is subject to Title IV of
ERISA at any time on or after December 31, 1994. No
liability under Subtitle C or D of Title IV of ERISA has
been or is reasonably expected to be incurred by Acquiror or any
of its Subsidiaries with respect to any ongoing, frozen or
terminated “single-employer plan,” within the meaning
of Section 4001 of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which
is considered one employer with Acquiror under Section 4001
of ERISA or Section 414 of the Code (an “
Acquiror
ERISA Affiliate
”). No notice of a “reportable
event,” within the meaning of Section 4043 of ERISA,
for which the
30-day
reporting requirement has not been waived has been required to
be filed for any Acquiror Benefit Plan or, to the
Acquiror’s Knowledge, by any Acquiror ERISA Affiliate.
Neither Acquiror nor any of its Subsidiaries or Acquiror ERISA
Affiliates has provided, or is required to provide, security to
any Benefit Plan or any single-employer plan of an Acquiror
ERISA Affiliate.
(7) Neither Acquiror nor any of its Subsidiaries has any
obligation for retiree health, life or other welfare benefits,
except for benefits and coverage required by applicable law,
including, without limitation, Section 4980B of the Code
and Part 6 of Title I of ERISA. There are no
restrictions on the rights of Acquiror or any of its
Subsidiaries to amend or terminate any such plan (other than
reasonable and customary advance notice and consent requirements
and administrative expenses) without incurring any material
liability thereunder.
(8) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby
(either standing alone or in conjunction with any other event)
will (A) result in any payment (including severance,
unemployment compensation, “excess parachute” (within
the meaning of Section 4999 of the Code), forgiveness of
indebtedness or otherwise) becoming due to any director or any
employee of Acquiror or any of its Subsidiaries under any
Acquiror Benefit Plan, (B) increase any benefits otherwise
payable under any Acquiror Benefit Plan, (C) result in any
acceleration of the time of payment or vesting of any such
benefit, or (D) affect in any way the ability to amend,
terminate, merge or administer any Acquiror Benefit Plan.
(9) Acquiror does not maintain an Acquiror Benefit Plan or
other arrangement that is subject to Section 409A of the
Code, and each Acquiror Benefit Plan that is a nonqualified
deferred compensation plan subject to Section 409A of the
Code has been operated and administered in good faith compliance
with Section 409A of the Code since January 1, 2005.
(10) Acquiror has not granted any awards intended to
constitute performance-based compensation not subject to the
deduction limit under Section 162(m) of the Code.
(o)
Environmental
Matters.
Acquiror and its Subsidiaries have
complied in all respects with applicable Environmental Laws; no
property (including buildings and any other structures)
currently owned or operated by Acquiror or any of its
Subsidiaries or in which Acquiror or any of its Subsidiaries
(whether as fiduciary or otherwise) has a Lien, is being or, to
Acquiror’s Knowledge, has been contaminated with, or has
had any release of, any Hazardous Substance in such form or
substance so as to create any liability for Acquiror or any of
its Subsidiaries; Acquiror and its Subsidiaries are not subject
to liability for any Hazardous Substance disposal or
contamination on any other third-party property; within the last
six years Acquiror and its Subsidiaries have not received any
written notice, demand letter, claim or request for information
alleging any violation of, or liability of Acquiror or any of
its Subsidiaries under, any Environmental Law; Acquiror and its
Subsidiaries are not subject to any written order, decree,
injunction or other agreement with any Governmental Authority or
any third party relating to any Environmental Law; Acquiror and
its Subsidiaries are not aware of or do not have any Knowledge
of any facts that could lead to liability for handling or
disposal of Hazardous Substances involving Acquiror or any of
its Subsidiaries, any currently owned or operated property
(whether as fiduciary or otherwise), or any reasonably likely
liability related to any Lien held by Acquiror or any of its
Subsidiaries; and Acquiror and its Subsidiaries have made
available to the Company copies of all
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environmental reports, studies, sampling data, correspondence,
filings and other environmental information in its possession or
reasonably available to it relating to Acquiror or any currently
or formerly owned or operated property or any property in which
Acquiror or any of its Subsidiaries (whether as fiduciary or
otherwise) has held a Lien.
(p)
Intellectual Property.
(1) Acquiror and its Subsidiaries have a valid right to use
all Trademarks; Software; Trade Secrets (each as defined in
Section 4.2(q) above) used in Acquiror’s and each
Subsidiary’s business as currently conducted, except where
the failure to do so would not constitute a Material Adverse
Effect. Acquiror or its Subsidiaries either (i) own or have
the valid right to use all Patents, Trademarks, and Copyrights
necessary for the conduct of Acquiror’s and each of its
Subsidiaries’ businesses as currently conducted, except
where the failure to do so would not constitute a Material
Adverse Effect,
and/or
(ii) are validly licensed or authorized under third-party
Patents, Trademarks, Trade Secrets, and Copyrights necessary for
the same. As used in this Agreement, the term “
Acquiror
License Agreements
” means any agreements granting any
right to use or practice any rights under any Intellectual
Property (except for such agreements for Software already
installed by the manufacturer before purchase on computers
purchased by Acquiror, shrink-wrap or click-wrap software or
other
off-the-shelf
products that are generally available for less than $10,000),
and any written settlements relating to any Intellectual
Property, to which Acquiror or any of its Subsidiaries is a
party or otherwise bound.
(2) Section 4.3(p)(2) of the Acquiror Disclosure
Schedule sets forth, for the Intellectual Property owned and
maintained by Acquiror and its Subsidiaries, a complete and
accurate list of all U.S. and foreign (1) Patents and
patent applications; (2) issued and pending Trademark
registrations (including Internet domain name registrations for
any domain on which any Acquiror or Subsidiary website is
located) and applications and material unregistered Trademarks;
and (3) copyright registrations and applications, and
material unregistered Copyrights, and (4) material Trade
Secrets, indicating for each item of registered Intellectual
Property and for each application to register Intellectual
Property, the person or entity in whose name the registration is
held, the applicable jurisdiction, registration number (or
application number), date issued (or date filed) and current
status. Section 4.3(p)(2) of the Acquiror Disclosure
Schedule sets forth a complete and accurate list of all third
party Software that is incorporated in any Software sold,
licensed, leased or otherwise distributed by or used in the
course of rendering services offered by Acquiror or any of its
Subsidiaries, indicating for each the title and owner/licensor
of the Software.
(3) All Intellectual Property owned by Acquiror and its
Subsidiaries is free and clear of all Liens.
(4) The Patents, Trademarks, Copyrights and Trade Secrets
owned by Acquiror or any of its Subsidiaries set forth in
Section 4.3(p)(2) of the Acquiror Disclosure Schedule are
valid and enforceable, in full force and effect, and to the
extent such Intellectual Property is the subject of a
registration or application (as described in
Section 4.3(p)(2)), such Intellectual Property is
subsisting and has not been canceled, expired, or abandoned. All
necessary registration, maintenance and renewal fees currently
due have been paid for the purposes of maintaining such
Intellectual Property owned by the Acquiror or any of its
Subsidiaries. There is no pending or, to the Acquiror’s
Knowledge, threatened opposition, interference or cancellation
Proceeding before any court or registration authority in any
jurisdiction against any of the items listed in
Section 4.3(p)(2) of the Acquiror Disclosure Schedule, or,
to the Acquiror’s Knowledge, against any Intellectual
Property licensed to Acquiror or its Subsidiaries.
(5) To Acquiror’s Knowledge, the conduct of
Acquiror’s and its Subsidiaries’ business as currently
conducted (including, without limitation, its activities,
products and services) does not infringe upon any Intellectual
Property rights owned or controlled by any third party (either
directly or indirectly such as through contributory infringement
or inducement to infringe). Section 4.3(p)(5) of the
Acquiror Disclosure Schedule lists all U.S. and foreign patents
concerning which: (i) Acquiror has obtained or requested
written opinion of counsel; or (ii) Acquiror has received
(y) written allegation or notice of infringement or
(z) a license offer outside the ordinary course of
business. There are no claims or suits pending or, to the
Acquiror’s Knowledge, threatened against Acquiror or any of
its Subsidiaries, and neither Acquiror nor any of its
Subsidiaries has received any notice of a third party claim or
suit against Acquiror or any of its Subsidiaries
(1) alleging that its past or present activities, products,
services or the conduct of its businesses infringes or has
infringed upon,
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violates, misappropriates or constitutes the unauthorized use of
the Intellectual Property rights of any third party or
(2) challenging the ownership, use, validity or
enforceability of any Intellectual Property.
(6) There are no settlements, forbearances to sue,
consents, judgments, or orders or similar obligations to which
Acquiror or any of its Subsidiaries are bound which
(1) restrict Acquiror’s or its Subsidiaries’
rights to use, transfer, license or enforce any Intellectual
Property, (2) restrict Acquiror’s or its
Subsidiaries’ business in order to accommodate a third
party’s Intellectual Property or (3) permit third
parties to use, or grant any third party any right with respect
to any Intellectual Property owned by Acquiror or any of its
Subsidiaries. Acquiror and its Subsidiaries have not licensed or
sublicensed their rights in any Intellectual Property other than
pursuant to the Acquiror License Agreements, and no royalties,
honoraria or other fees are payable by Acquiror or its
Subsidiaries for the use of or right to use any Intellectual
Property licensed to Acquiror or its Subsidiaries, except
pursuant to the Acquiror License Agreements. The Acquiror
License Agreements are valid and binding obligations of all
parties thereto, enforceable in accordance with their terms
subject only to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors’ rights
and to general principles of equity. Except as would not,
individually or in the aggregate, have a Material Adverse
Effect, each of the Acquiror and its Subsidiaries is in
compliance with, and has not breached any term of any such
Acquiror License Agreement and, to the Acquiror’s
Knowledge, all other parties to such Acquiror License Agreements
Contracts are in compliance with, and have not breached any term
thereof. To Acquiror’s Knowledge, there exists no event or
condition which will result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both)
a default by Acquiror or any other party under any such Acquiror
License Agreement.
(7) To Acquiror’s Knowledge, no Trade Secret of
Acquiror or its Subsidiaries has been disclosed or authorized to
be disclosed to any third party other than pursuant to a
non-disclosure agreement that protects Acquiror and the
applicable Subsidiary’s proprietary interests in and to
such Trade Secrets. Neither Acquiror nor, to the Acquiror’s
Knowledge, any other party to any non-disclosure agreement
relating to Acquiror’s Trade Secrets is in breach or
default thereof. The Company and its Subsidiaries have taken
commercially reasonable steps to protect their material Trade
Secrets, and any Trade Secrets provided to the Company or any
Subsidiary by a third party as a Trade Secret. Acquiror and its
Subsidiaries have taken commercially reasonable steps to
maintain and protect the material Acquiror owned Intellectual
Property currently used in the business. Without limiting the
foregoing, each of Acquiror and its Subsidiaries has taken
commercially reasonable steps to require current or former
employees, consultants and contractors of Acquiror or any
Subsidiary that have created any material Acquiror owned
Intellectual Property to assign to Acquiror or its Subsidiaries
all of their right, title and interest in such Intellectual
Property, and to Acquiror’s Knowledge, no party to any such
agreement is in breach thereof.
(8) To Acquiror’s Knowledge, no third party is
misappropriating, infringing, diluting, or violating any
Intellectual Property owned by Acquiror or any of its
Subsidiaries. Except as set forth in Section 4.3(p)(8) of
the Acquiror Disclosure Schedule, within the past five years, no
claims alleging any infringement, misappropriation or violation
of any Intellectual Property owned by the Acquiror or any of its
Subsidiaries have been brought, asserted or threatened against
any third party by Acquiror or any of its Subsidiaries.
(9) The consummation of the transactions contemplated
hereby will not result in the loss or impairment of
Acquiror’s or any of its Subsidiaries’ right to own or
use any of the Intellectual Property, and will not require the
consent of any Governmental Authority or third party in respect
of any such Intellectual Property. The consummation of any of
the transactions contemplated under this Agreement will neither
violate nor by their terms result in the material breach,
material modification, cancellation, termination, suspension of,
or acceleration of any payments with respect to any material
Acquiror License Agreements.
(10) Section 4.3(p)(10) of the Acquiror Disclosure
Schedule lists all Software sold, licensed, leased or otherwise
distributed by or used in the services offered by Acquiror or
any of its Subsidiaries to any third party, and identifies which
Software is sold, licensed, leased, or otherwise distributed, or
used, as the case may be. With respect to the Software set forth
in Schedule 4.3(p)(10) which Acquiror or any of its
Subsidiaries purports to own, such Software was either developed
(1) by employees of Acquiror or any of its Subsidiaries
within the scope of their employment; or (2) by independent
contractors who have unconditionally assigned all
A-1-32
of their rights in such Software and all copyrights in the
Software to Acquiror or any of its Subsidiaries pursuant to
written agreements.
(11) Acquiror and each of its Subsidiaries has all
requisite licenses to use any shrink-wrap or click-wrap
software, other
off-the-shelf
products, or any other Software used by any of them in
connection with their business, such licenses are valid, and
neither Acquiror nor any Subsidiary is using any such products
or Software where all requisite consideration has not been paid
for the use thereof. To Acquiror’s Knowledge, neither
Acquiror nor any of its Subsidiaries is in violation of any
applicable law or any Contract or other agreement, arrangement
or understanding regarding or in connection with such products
or Software, and neither Acquiror nor any of its Subsidiaries
has any payment obligations or other actual or potential
liabilities related to or in connection with such products or
Software.
(q)
Insurance
.
Section 4.3(q)
of the Acquiror Disclosure Schedule sets forth a true, accurate
and complete list of all policies of fire, liability,
workmen’s compensation, title and other forms of insurance
owned, held by or applicable to Acquiror or any Subsidiary (and
their respective businesses and assets), and Acquiror has
delivered to the Company a true, accurate and complete copy of
all such policies, including all occurrence-based policies
applicable to Acquiror or any Subsidiary (and their respective
businesses and assets) for all periods prior to the date hereof.
All such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including
the date hereof have been paid, and no notice of cancellation or
termination has been received with respect to any such policy.
Such policies are sufficient for compliance with (i) all
requirements of law and (ii) all Contracts to which
Acquiror or any Subsidiary is a party, and are, to
Acquiror’s Knowledge, valid, outstanding and enforceable
policies. Such insurance policies provide types and amounts of
insurance customarily obtained by businesses similar to the
business of Acquiror and the Subsidiaries. Except as set forth
in Section 4.3(q) of Acquiror Disclosure Schedule, neither
Acquiror nor any Subsidiary has been refused any insurance with
respect to its assets or operations, and its coverage has not
been limited by any insurance carrier to which it has applied
for any such insurance or with which it has carried insurance,
during the last three years. Section 4.3(q) of Acquiror
Disclosure Schedule sets forth a true, accurate and complete
list of all claims that have been made by Acquiror or any
Subsidiary within the past three years under its insurance
policies.
(r)
Brokers
.
No action has been
taken by Acquiror or any Subsidiary that would give rise to any
valid claim against any party hereto for a brokerage commission,
finder’s fee or other like payment with respect to the
transactions contemplated by this Agreement.
(s)
Tax Treatment
.
As of the date
hereof, Acquiror has no reason to believe that the Merger will
not qualify as a “reorganization” within the meaning
of Section 368(a) of the Code.
(t)
Activities of
MergerCo
.
MergerCo is a direct, wholly-owned
subsidiary of Acquiror, and MergerCo does not have any
Subsidiaries or investments of any kind in any entity. MergerCo
was incorporated on August 25, 2009 on behalf of Acquiror
solely for purposes of accomplishing the Merger, has not engaged
in any other business activity, has no liabilities and has
conducted its operations only as contemplated hereby.
(u)
Validity of Acquiror Common
Stock
.
The Shares of Acquiror Common Stock to
be issued to the holders of Company Common Stock as part of the
Merger Consideration will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not in
violation of any preemptive rights.
(v)
No Illegal Payments, Etc
.
None
of Acquiror or any of its Subsidiaries, nor any of their
directors, officers, employees or agents, has (a) directly
or indirectly given or agreed to give any illegal gift,
contribution, payment or similar benefit to any supplier,
customer, governmental official or employee or other Person who
was, is or may be in a position to help or hinder Acquiror or
any of its Subsidiaries (or assist in connection with any actual
or proposed transaction) or made or agreed to make any illegal
contribution, or reimbursed any illegal political gift or
contribution made by any other Person, to any candidate for
federal, state, local or foreign public office (i) which
subjects any of Acquiror and its Subsidiaries to any damage or
penalty in any civil, criminal or governmental Proceeding or
(ii) the non-continuation of which, in the case of
(i) and (ii), has had or might have, individually or in the
aggregate, a Material Adverse Effect on Acquiror or
A-1-33
(b) established or maintained any unrecorded fund or asset
or made any false entries on any books or records for any
purpose.
(w)
Taxes.
(1) Acquiror and each of its Subsidiaries have timely filed
in a complete and correct manner all Tax Returns that they were
required to file, other than any Tax Returns the failure to
complete correctly or to file would not, individually or in the
aggregate, have a Material Adverse Effect. Acquiror and each of
its Subsidiaries have paid all Taxes due, other than Taxes
adequate reserves for which have been made in the Acquiror
Financial Statements and Taxes the failure to pay would not,
individually or in the aggregate, have a Material Adverse Effect.
(2) There are no claims or assessments pending against
Acquiror or any of its Subsidiaries for any alleged deficiency
in any Tax, and neither the Company nor any of its Subsidiaries
has been notified in writing of any proposed Tax claims or
assessments against Acquiror or any of its Subsidiaries (other
than, in each case, claims or assessments for which adequate
reserves in the Acquiror Financial Statements have been
established and claims or assessments which would not,
individually or in the aggregate, have a Material Adverse
Effect).
(3) There are no Liens on any of the assets or properties
of Acquiror or any of its Subsidiaries that arose in connection
with any failure (or alleged failure) to pay any Tax, except for
statutory liens for current Taxes not yet due and payable (and
except for Liens which would not, individually or in the
aggregate, have a Material Adverse Effect).
(4) Neither Acquiror nor any of its Subsidiaries
(x) is bound by any Tax allocation or Tax sharing agreement
with a Person other than Acquiror which applies to
U.S. federal or state income Taxes, or (y) has any
liabilities under any Tax allocation or Tax sharing agreement
(except for any liabilities which would not, individually or in
the aggregate, have a Material Adverse Effect).
(x)
Joint Proxy Statement/Prospectus and Registration
Statement
.
None of the information supplied
or to be supplied by Acquiror or MergerCo in writing
specifically for inclusion in or incorporation by reference
into, and which is included in or incorporated by reference
into, (i) the Registration Statement or any amendment or
supplement thereto will, at the respective times such documents
are filed, and, in the case of the Registration Statement or any
amendment or supplement thereto, when the same becomes
effective, at the time of the Company Stockholders Meeting, the
Acquiror Stockholders Meeting or at the Effective Time, contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) the Joint
Proxy Statement/Prospectus or any other documents filed or to be
filed with the SEC or any other Governmental Authority in
connection with the transactions contemplated hereby, will, at
the respective times such documents are filed and, in the case
of the Joint Proxy Statement/Prospectus or any amendment or
supplement thereto, at the time of mailing to stockholders of
the Company and Acquiror and at the times of the Company
Stockholders Meeting and Acquiror Stockholders Meeting, be false
or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading or necessary to correct any statement made
in any earlier communication. For this purpose, any such
information included in or incorporated by reference into any
such document relating to Acquiror or MergerCo will be deemed to
have been so supplied in writing specifically for inclusion or
incorporation therein if such document was available for review
by Acquiror or its counsel a reasonable time before such
document was filed (but the foregoing will not be the exclusive
manner in which it may be established that such information was
so supplied). The Registration Statement and the Joint Proxy
Statement/Prospectus will comply as to form in all material
respects with the applicable requirements of the Securities Act,
the Exchange Act and the rules and regulations promulgated
thereunder.
A-1-34
ARTICLE 5.
COVENANTS
Section 5.1.
Forbearances
of the Company
.
From the date hereof until
the Effective Time, except as expressly contemplated by this
Agreement or the Company’s Disclosure Schedule, without the
prior written consent of Acquiror, the Company will not, and
will cause each of its Subsidiaries not to:
(a)
Ordinary Course
.
Conduct the
business of the Company or any of its Subsidiaries other than in
the ordinary and usual course and consistent with past practices.
(b)
Status Quo
.
Except in
connection with actions and expenses necessary to fulfill the
conditions set forth in ARTICLE 6, or, to the extent
consistent therewith, fail to use reasonable best efforts to
preserve intact any of their business organizations and assets
and maintain their rights, franchises and existing relations
with clients, customers, distributors, representatives,
independent contractors, suppliers, employees and business
associates; or engage in any new lines of business.
(c)
Capital Stock
.
Other than
pursuant to the exercise of Rights set forth in the Company
Disclosure Schedule and outstanding on the date hereof
(1) authorize for issuance, issue, grant, sell, deliver,
dispose, pledge or otherwise encumber any additional shares of
its capital stock or any Rights, (2) enter into any
Contract with respect to the foregoing, or (3) permit any
additional shares of Company Stock to become subject to new
grants of employee or director stock options, other Rights or
similar stock-based employee rights; provided; however, that
Company shall have the right to issue up to an additional
200,000 shares of Company Common Stock.
(d)
Dividends, Etc
.
(1) Make,
declare, pay or set aside for payment any dividend on or in
respect of, or declare or make any distribution on, any shares
of its capital stock, or (2) directly or indirectly adjust,
split, combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock, other than as required
by the Company Stock Plans upon exercise of Rights set forth in
the Company Disclosure Schedule and outstanding on the date
hereof.
(e)
Compensation; Employment Agreements;
Etc
.
Enter into, amend, modify or renew any
Contract regarding employment, consulting, severance or similar
arrangements with any directors, officers of, or independent
contractors with respect to, the Company or its Subsidiaries, or
grant any salary, wage or other increase in compensation or
increase in any employee benefit (including incentive or bonus
payments), except (1) for changes that are required by
applicable law, (2) to satisfy Contracts set forth in the
Company Disclosure Schedule and existing on the date hereof or
(3) for salary, wage or other compensation changes in the
ordinary and usual course and consistent with past practice.
(f)
Benefit Plans
.
Enter into,
establish, adopt, amend or modify any pension, retirement, stock
option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare Contract, plan, program
or arrangement, or any trust agreement (or similar arrangement)
related thereto, in respect of any directors, officers,
employees of, or independent contractors with respect to, the
Company or its Subsidiaries, including taking any action that
accelerates the vesting or exercisability of stock options,
restricted stock or other compensation or benefits payable
thereunder, except, in each such case, (1) as may be
required by applicable law or (2) expressly required by the
terms of Contracts set forth in the Company Disclosure Schedule
or Company SEC Documents and as such Contracts are in effect as
of the date hereof.
(g)
Dispositions
.
The
Company’s entering into any and all agreements related
thereto, sell, transfer, mortgage, lease, encumber or otherwise
dispose of or discontinue any material portion of its assets,
business or properties.
(h)
Acquisitions
.
Acquire or offer
to acquire any other Person or the assets of any Person, in each
case involving payments or receipt of consideration in excess of
$25,000 individually or $50,000 in the aggregate.
A-1-35
(i)
Governing Documents
.
Amend or
make any change to the Company Certificate or the Company Bylaws
or the governing instrument or document (as the case may be) of
any Subsidiary.
(j)
Accounting Methods
.
Implement
or adopt any change in accounting principles, practices or
methods, other than as may be required by GAAP.
(k)
Contracts
.
Except in the
ordinary course of business consistent with past practice, enter
into, renew or terminate any Contract or amend or modify in any
material respect, or waive any material right under, any of its
existing Contracts.
(l)
Claims
.
Settle any Proceeding,
except for any Proceeding involving solely money damages in an
amount, individually and in the aggregate for all such
settlements, not more than $10,000 and which could not
reasonably be expected to establish an adverse precedent or
basis for subsequent settlements.
(m)
Capital
Expenditures
.
Authorize or make any capital
expenditures, other than (1) annual budgeted amounts
previously disclosed to Acquiror, (2) in the ordinary and
usual course of business consistent with past practice in
amounts not exceeding $10,000 in the aggregate, or
(3) expenditures made through the entering into capital
leases.
(n)
Tax Matters
.
Make or change
any Tax election, change any annual tax accounting period, adopt
or change any method of Tax accounting, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim
or assessment, surrender or compromise any right to claim a Tax
refund or consent to any extension or waiver of the limitations
period applicable to any Tax claim or assessment, other than any
of the foregoing actions that are required by law or are
(i) not, alone or in the aggregate, material and
(ii) taken in the ordinary and usual course of business,
consistent with past practice.
(o)
Indebtedness
.
(A) Incur
any indebtedness for borrowed money, (B) assume, guarantee,
endorse or otherwise as an accommodation become responsible for
the obligations of any other Person, or (C) forgive or
extinguish any indebtedness to the Company or any of its
Subsidiaries for borrowed money or otherwise waive any rights
under any instrument or arrangement pursuant to which such
indebtedness was incurred.
(p)
Loans, etc
.
Make any loans,
advances or capital contributions to, or investments in, any
other Person.
(q)
Commitments
.
Agree or commit
to do, or adopt any resolutions of its board of directors in
support of, anything that would be precluded by clauses (a)
through (p).
Section 5.2.
Forbearances
of Acquiror
.
From the date hereof until the
Effective Time, except as expressly contemplated by this
Agreement or Acquiror’s Disclosure Schedule, without the
prior written consent of the Company, Acquiror will not, and
will cause each of its Subsidiaries not to:
(a)
Ordinary Course
.
Conduct the
business of Acquiror or any of its Subsidiaries other than in
the ordinary and usual course and consistent with past practices.
(b)
Status Quo
.
Except in
connection with actions and expenses necessary to fulfill the
conditions set forth in ARTICLE 6, or, to the extent
consistent therewith, fail to use reasonable best efforts to
preserve intact any of their business organizations and assets
and maintain their rights, franchises and existing relations
with clients, customers, distributors, representatives,
independent contractors, suppliers, employees and business
associates; or engage in any new lines of business.
(c)
Capital Stock
.
Other than
pursuant to the exercise of Rights set forth in the Acquiror
Disclosure Schedule and outstanding on the date hereof,
(1) authorize for issuance, issue, grant, sell, deliver,
dispose, pledge or otherwise encumber any additional shares of
Acquiror Stock or any Rights, (2) enter into any Contract
with respect to the foregoing, or (3) permit any additional
shares of Acquiror Stock to become subject to new grants of
employee or director stock options, other Rights or similar
stock-based employee rights; provided; however, that Acquiror
shall have the right to issue up to an additional
100,000 shares of Acquiror Common Stock.
A-1-36
(d)
Dividends, Etc
.
(1) Make,
declare, pay or set aside for payment any dividend on or in
respect of, or declare or make any distribution on, any shares
of its capital stock, or (2) directly or indirectly adjust,
split, combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock, other than as required
by the Acquiror Stock Plans upon exercise of Rights set forth in
the Acquiror Disclosure Schedule and outstanding on the date
hereof.
(e)
Compensation; Employment Agreements;
Etc
.
Enter into, amend, modify or renew any
Contract regarding employment, consulting, severance or similar
arrangements with any director, officer, or independent
contractor of Acquiror or its Subsidiaries, or grant any salary,
wage or other increase in compensation or increase in any
employee benefit (including incentive or bonus payments), except
(1) for changes that are required by applicable law,
(2) to satisfy Contracts set forth in the Acquiror
Disclosure Schedule and existing on the date hereof or
(3) for salary, wage or other compensation changes in the
ordinary and usual course and consistent with past practice.
(f)
Benefit Plans
.
Enter into,
establish, adopt, amend or modify any pension, retirement, stock
option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare Contract, plan, program
or arrangement, or any trust agreement (or similar arrangement)
related thereto, in respect of any directors, officers,
employees of, or independent contractors with respect to,
Acquiror or its Subsidiaries, including taking any action that
accelerates the vesting or exercisability of stock options,
restricted stock or other compensation or benefits payable
thereunder, except, in each such case, (1) as may be
required by applicable law or (2) expressly required by the
terms of Contracts set forth in the Acquiror Disclosure Schedule
or Acquiror SEC Documents and as such Contracts are in effect as
of the date hereof.
(g)
Dispositions
.
Acquiror’s
entering into any and all agreements related thereto, sell,
transfer, mortgage, lease, encumber or otherwise dispose of or
discontinue any material portion of its assets, business or
properties.
(h)
Acquisitions
.
Acquire or offer
to acquire any other Person or the assets of any Person, in each
case involving payments or receipt of consideration in excess of
$25,000 individually or $50,000 in the aggregate.
(i)
Governing Documents
.
Amend or
make any change to the Acquiror Certificate or bylaws or the
governing instrument or document (as the case may be) of any
Subsidiary.
(j)
Accounting Methods
.
Implement
or adopt any change in accounting principles, practices or
methods, other than as may be required by GAAP.
(k)
Contracts
.
Except in the
ordinary course of business consistent with past practice, enter
into, renew or terminate any Contract or amend or modify in any
material respect, or waive any material right under, any of its
existing Contracts.
(l)
Claims
.
Settle any Proceeding,
except for any Proceeding involving solely money damages in an
amount, individually and in the aggregate for all such
settlements, not more than $10,000 and which could not
reasonably be expected to establish an adverse precedent or
basis for subsequent settlements.
(m)
Capital
Expenditures
.
Authorize or make any capital
expenditures, other than (1) annual budgeted amounts
previously disclosed to the Company (2) in the ordinary and
usual course of business consistent with past practice in
amounts not exceeding $10,000 in the aggregate or
(3) expenditures made through the entering into capital
leases.
(n)
Tax Matters
.
Make or change
any Tax election, change any annual Tax accounting period, adopt
or change any method of Tax accounting, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim
or assessment, surrender or compromise any right to claim a Tax
refund or consent to any extension or waiver of the limitations
period applicable to any Tax claim or assessment, other than any
of the foregoing actions that are required by law or are
(i) not, alone or in the aggregate, material and
(ii) taken in the ordinary and usual course of business,
consistent with past practice.
A-1-37
(o)
Indebtedness
.
(A) Incur
any indebtedness for borrowed money, (B) assume, guarantee,
endorse or otherwise as an accommodation become responsible for
the obligations of any other Person, or (C) forgive or
extinguish any indebtedness to Acquiror or any of its
Subsidiaries for borrowed money or otherwise waive any rights
under any instrument or arrangement pursuant to which such
indebtedness was incurred.
(p)
Loans, etc
.
Make any loans,
advances or capital contributions to, or investments in, any
other Person.
(q)
Commitments
.
Agree or commit
to do, or adopt any resolutions of its board of directors in
support of, anything that would be precluded by clauses (a)
through (p).
Section 5.3.
No
Solicitation
.
(a) From the date of this Agreement until the Effective
Time or the termination of this Agreement pursuant to its terms,
the Company agrees that it will not and will not permit any of
its Subsidiaries, or any of its or their officers, directors,
employees, representatives, agents, or Affiliates, including,
without limitation, any investment banker, attorney or
accountant retained by the Company or any of its Subsidiaries
(collectively, ‘‘
Representatives
”) to,
directly or indirectly, (i) initiate, solicit, encourage or
otherwise facilitate (including by way of furnishing information
or otherwise), any inquiries or the making of any proposal or
offer that constitutes, or may reasonably be expected to lead to
an Acquisition Proposal (as defined below), or (ii) enter
into or maintain or continue discussions or negotiate with any
Person in furtherance of such inquiries or to obtain an
Acquisition Proposal, or (iii) agree to, approve,
recommend, or endorse any Acquisition Proposal, or resolve,
agree or publicly propose to take any such action and the
Company shall promptly notify Acquiror of any such inquiries and
proposals received by the Company or any of its Subsidiaries or
Representatives, relating to any of such matters,
provided
,
however
, that at any time prior to the
Company Requisite Stockholder Vote, the Company Board may, in
response to a written Acquisition Proposal that the Company
Board determines, in good faith, after consultation with outside
counsel and financial advisors, constitutes, or could reasonably
be expected to lead to, a Superior Proposal (as defined below),
and which Acquisition Proposal did not result from a breach of
this Section 5.3(a), (x) provide access or furnish
information with respect to the Company and its Subsidiaries to
the Person making such Acquisition Proposal (and its
representatives) pursuant to a customary confidentiality
agreement and (y) engage in discussions or negotiations
with the Person making such Acquisition Proposal (and its
representatives) regarding such Acquisition Proposal;
provided further
,
however
, that, subject to the
right of the Company to withhold information where such
disclosure would violate or prejudice the rights of its or its
Subsidiaries’ clients, jeopardize the attorney-client
privilege of the Company or its Subsidiaries or contravene any
law or binding agreement entered into prior to the date of this
Agreement, the Company shall promptly provide to Acquiror any
non-public information that is provided to the Person making
such Acquisition Proposal or its representatives which was not
previously provided to Acquiror. The Company shall also, within
one Business Day, notify Acquiror of the receipt of any
Acquisition Proposal and the material terms and conditions
thereof. Further, the Company shall promptly keep Acquiror
advised on a substantially current basis of any developments
relating to any such Acquisition Proposal.
(b) For purposes of this Agreement, “
Acquisition
Proposal
” means an offer or proposal regarding any of
the following (other than the transactions contemplated by this
Agreement) including the Company or its Subsidiaries:
(i) any merger, reorganization, consolidation, share
exchange, recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets or any significant equity interest of, the Company or
any of its Subsidiaries, in a single transaction or series of
related transactions which could reasonably be expected to
interfere with the completion of the Merger; or (ii) any
tender offer or exchange offer for any outstanding shares of
capital stock of the Company or the filing of a registration
statement under the Securities Act in connection therewith.
(c) For purposes of this Agreement, the term
“
Superior Proposal
” means any written offer
made by a third party that the Company Board reasonably
determines to be bona fide for a transaction that if
consummated, would result in such third party acquiring,
directly or indirectly, more than 50% of the voting
A-1-38
power of the Company Common Stock (or, in the case of a direct
merger, the common stock of the resulting company) or all or
substantially all the consolidated assets of the Company and its
Subsidiaries for consideration consisting of cash
and/or
securities payable to holders of capital stock of the Company
that the Company Board determines in good faith, after
consultation with its financial advisors and outside counsel, to
be more favorable to holders of Company Common Stock than the
Merger, taking into account all financial, regulatory, legal and
other aspects of such offer and transaction and any changes to
the terms of this Agreement proposed by Acquiror in response to
such Superior Proposal or otherwise.
(d) The Company Board shall not (i) withdraw or modify
in a manner adverse to Acquiror or MergerCo the Recommendation
(as defined below) or resolve or agree to take any such action
(any such action or any such resolution or agreement to take
such action being referred to herein as an “
Adverse
Recommendation Change
”), unless at any time prior to
obtaining the Company Requisite Stockholder Vote, (A) the
Company Board receives an Acquisition Proposal that the Company
Board determines, in good faith and after consultation with its
outside counsel and financial advisors, does constitute, or
could reasonably be expected to lead to, a Superior Proposal or
(B) other than in connection with an Acquisition Proposal,
if the Company Board determines in good faith after consultation
with outside counsel that failure to take such action would
result in a breach by the Company Board of its fiduciary duties
to the Company’s stockholders under applicable law;
provided
, in each case, that the Company shall provide
Acquiror with no less than two Business Days notice of any
expected Adverse Recommendation Change prior to any such change
or (ii) cause or permit the Company to enter into any
letter of intent, memorandum of understanding, agreement in
principle, acquisition agreement, merger agreement, option
agreement, joint venture agreement, partnership agreement or
other agreement constituting or related to, or which is intended
to or is reasonably likely to lead to, any Acquisition Proposal
(other than a confidentiality agreement entered into in
accordance with Section 5.3(a)).
Section 5.4.
Company
Stockholders Meeting
.
The Company, acting
through the Company Board or the Company Special Committee, will
as promptly as practicable following the date of this Agreement
and in consultation with Acquiror and MergerCo:
(a) duly call, give notice of, convene and hold a meeting
of its stockholders for the purpose of considering and approving
this Agreement and the transactions contemplated hereby (the
“
Company Stockholders Meeting
”), and
(b) (1) include in the Joint Proxy
Statement/Prospectus (as defined in Section 5.6) the
recommendation of the Company Board that the stockholders of the
Company vote in favor of the approval and adoption of this
Agreement and the transactions contemplated hereby (the
“
Recommendation
”), and (2) use its
commercially reasonable efforts to obtain the Requisite
Stockholder Vote; provided, however, that the Company Board may
fail to make or may withdraw or modify such recommendation or
fail to seek the Requisite Stockholder Vote if prior to
obtaining the Company Requisite Stockholder Vote, (A) the
Company Board receives an Acquisition Proposal that the Company
Board determines, in good faith and after consultation with its
outside counsel and financial advisors, does constitute, or
could reasonably be expected to lead to, a Superior Proposal or
(B) other than in connection with an Acquisition Proposal,
if the Company Board determines in good faith after consultation
with outside counsel that failure to take such action would
result in a breach by the Company Board of its fiduciary duties
to the Company’s stockholders under applicable law;
provided
, in each case, that the Company shall have
provided Acquiror with no less than two Business Days notice of
such determination.
Section 5.5.
Acquiror
Stockholders Meeting
.
Acquiror, acting
through the Acquiror Board or the Acquiror Special Committee,
will as promptly as practicable following the date of this
Agreement and in consultation with Company:
(a) duly call, give notice of, convene and hold a meeting
of its stockholders for the purpose of considering and approving
the issuance of Acquiror Common Stock in connection with the
Merger (the “
Acquiror Stockholders
Meeting
”), and
A-1-39
(b) (1) include in the Joint Proxy
Statement/Prospectus the recommendation of the Acquiror Board
that the stockholders of Acquiror vote in favor of the proposals
regarding (x) the issuance of Acquiror Common Stock in
connection with the Merger and (y) the amendment to the
Acquiror Certificate to change the name of Acquiror, and
(2) use its commercially reasonable efforts to obtain the
necessary approval of the issuance of Acquiror Common Stock in
connection with the Merger and of such amendment of the Acquiror
Certificate, provided however, that the Acquiror Board may fail
to make or may withdraw or modify such recommendation (any such
action or any such resolution or agreement to take such action
being referred to herein as an “
Acquiror Adverse
Recommendation Change
”), or fail to seek such approval
if the Acquiror Board determines in good faith after
consultation with outside counsel that failure to so act would
result in a breach by the Acquiror Board of its fiduciary duties
to Acquiror’s stockholders under applicable law;
provided
, in each case, that the Acquiror shall have
provided Company with no less than two Business Days notice of
such determination.
Section 5.6.
Registration
Statement and Other SEC Filings
.
(a) As soon as reasonably practicable after the execution
of this Agreement, (i) the Company and Acquiror will
prepare and file with the SEC a preliminary joint proxy
statement relating to the Company Stockholders Meeting and the
Acquiror Stockholders Meeting and (ii) Acquiror will
prepare and file with the SEC a Registration Statement on
Form S-4
(the “
Registration Statement
”) in connection
with the registration under the Securities Act of the Acquiror
Common Stock issuable in the Merger (including Acquiror Common
Stock issuable upon exercise of outstanding Company Options and
outstanding Company Warrants). The joint proxy statement
furnished to the Company’s stockholders in connection with
the Company Special Meeting and the joint proxy statement
furnished to Acquiror’s stockholders in connection with the
Acquiror Special Meeting will be included as part of the
prospectus (the “
Joint Proxy
Statement/Prospectus
”) forming a part of the
Registration Statement. Acquiror, MergerCo and the Company will
cooperate and consult with each other, their respective counsel
and accountants, in the preparation of the Joint Proxy
Statement/Prospectus and Registration Statement, and provided
that all parties have cooperated as required above, Acquiror and
the Company agree to file the Joint Proxy Statement/Prospectus
and Registration Statement with the SEC as promptly as
practicable. Without limiting the generality of the foregoing,
the Company will furnish to Acquiror the information relating to
it required by the Exchange Act and the rules and regulations
promulgated thereunder to be set forth in the Joint Proxy
Statement/Prospectus and Registration Statement. Acquiror shall
not file the Joint Proxy Statement/Prospectus and Registration
Statement, or any amendment or supplement thereto, without
providing the Company a reasonable opportunity to review and
comment thereon which shall be no less than two
(2) Business Days prior to filing.
(b) Each party shall use its commercially reasonable
efforts to resolve, and Acquiror agrees to consult and cooperate
with the Company in resolving, all SEC comments with respect to
the Joint Proxy Statement/Prospectus and Registration Statement
as promptly as practicable after receipt thereof and to cause
the Joint Proxy Statement/Prospectus in definitive form to be
mailed to the Company’s stockholders and Acquiror’s
stockholders as soon as practicable after all SEC staff comments
have been resolved. Acquiror agrees to consult with the Company
prior to responding to SEC comments with respect to the Joint
Proxy Statement/Prospectus and the Registration Statement, and
agrees to cooperate with the Company in formulating such
responses. Each of Acquiror, MergerCo and the Company agrees to
correct any information provided by it for use in the Joint
Proxy Statement/Prospectus and the Registration Statement which
shall have become false or misleading. Each party shall as soon
as reasonably practicable (i) notify the other parties of
the receipt of any comments from the SEC with respect to the
Joint Proxy Statement/Prospectus and the Registration Statement
and any request by the SEC for any amendment to the Joint Proxy
Statement/Prospectus or the Registration Statement or for
additional information and (ii) provide each other party
with copies of all correspondence between a party and its
employees and other authorized representatives, on the one hand,
and the SEC, on the other hand, with respect to the Joint Proxy
Statement/Prospectus or the Registration Statement and
(iii) notify the other parties of any event which occurs
that should be described in an amendment or supplement to the
Joint Proxy Statement/Prospectus or the Registration Statement.
Acquiror will advise the Company, within one (1) Business
Day after Acquiror receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or
the
A-1-40
suspension of the qualification of Acquiror Common Stock for
offering or sale in any jurisdiction, of the initiation or
threat of any Proceeding for any such purpose, or of any request
by the SEC for the amendment or supplement of the Registration
Statement or for additional information.
(c) The Company shall use its commercially reasonable
efforts to cause to be delivered to Acquiror a letter and
consent relating to the financial statements of the Company
included in the Registration Statement from Eisner LLP, the
Company’s independent registered public accounting firm,
dated a date within two Business Days before the date on which
the Registration Statement shall become effective and addressed
to Acquiror, in form and substance reasonably satisfactory to
Acquiror and customary in scope and substance for letters and
consents delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
(d) Acquiror shall use its commercially reasonable efforts
to cause to be delivered to the Company a letter and consent
relating to the financial statements of Acquiror included in the
Registration Statement from Eisner LLP, Acquiror’s
independent registered public accounting firm, dated a date
within two Business Days before the date on which the
Registration Statement shall become effective and addressed to
the Company, in form and substance reasonably satisfactory to
the Company and customary in scope and substance for letters and
consents delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
(e) Acquiror agrees to use its reasonable best efforts to
obtain all necessary state securities law or “Blue
Sky” permits and approvals required to carry out the
transactions contemplated by this Agreement.
Section 5.7.
Stock
Listing
.
Acquiror shall use its reasonable
best efforts to cause the shares of Acquiror Common Stock to be
issued in the Merger and shares reserved for issuance to be
approved for listing on the NASDAQ, as promptly as practicable,
and in any event before the Effective Date.
Section 5.8.
Access
to Information; Confidentiality
.
(a) The Company and its Subsidiaries, on one hand, and
Acquiror and its Subsidiaries on the other, shall upon
reasonable prior notice and subject to applicable laws relating
to the exchange of information, afford the other party and its
officers, employees, counsel, accountants, consultants and other
authorized representatives, such access during normal business
hours throughout the period prior to the Effective Time to the
books, records (including, without limitation, Tax Returns and
work papers of independent auditors), properties, personnel and
to such other information as the other party may reasonably
request, and, during such period, it shall furnish promptly to
such other party (1) a copy of each material report,
schedule and other document filed by it pursuant to the
requirements of Securities Laws, and (2) all other
information concerning the business, properties, personnel and
affairs of it as the other may reasonably request. No
investigation pursuant to this Section 5.8 shall affect or
otherwise obviate or diminish any representations or warranties
of any party or conditions to the obligations of any party.
(b) The parties hereto acknowledge that Acquiror and the
Company have previously executed that certain Mutual
Nondisclosure and Confidentiality Agreement, effective
August 19, 2009, which shall continue in full force and
effect in accordance with its terms.
Section 5.9.
Commercially
Reasonable Efforts
.
(a) Subject to the terms and conditions of this Agreement
and applicable law, each of the Company and Acquiror agrees to
use its commercially reasonable efforts in good faith to take,
or cause to be taken (including causing any of its Subsidiaries
to take), all actions, and to do, or cause to be done, all
things necessary, proper or desirable, or advisable under
applicable laws and regulations or otherwise, so as to permit
consummation and make effective the Merger as promptly as
reasonably practicable and otherwise to enable consummation of
the transactions contemplated hereby, including such actions or
things as any other party hereto may reasonably request in order
to cause any of the conditions to such other party’s
obligations to consummate such transactions specified in
ARTICLE 6 to be fully satisfied.
(b) Without limiting the generality of Section 5.9(a),
the parties will, and will cause their respective officers and
subsidiaries to, and will use commercially reasonable efforts to
cause their respective Affiliates,
A-1-41
directors, employees, agents, attorneys, accountants and
representatives to, consult and fully cooperate with and provide
assistance to each other in (i) obtaining all necessary
consents, approvals, waivers, licenses, permits, authorizations,
registrations, qualifications, or other permission or action by,
and giving all necessary notices to and making all necessary
filings with and applications and submissions to any Person;
(ii) lifting any permanent or preliminary injunction or
restraining order or other similar order issued or entered by
any court or Governmental Authority; (iii) taking such
actions as may reasonably be required under applicable federal
securities laws in connection with the issuance of the Acquiror
Common Stock to be covered by the Registration Statement; and
(iv) in general, consummating and making effective the
transactions contemplated hereby;
provided
,
however
, that in order to obtain any consent, approval,
waiver, license, permit, authorization, registration,
qualification, or other permission or action or the lifting of
any injunction referred to in clause (i) or (ii) of
this sentence, no party will be required to pay any
consideration (other than filing fees for any governmental
filings or listing fees for any stock exchange), to divest
itself of any of, or otherwise rearrange the composition of, its
assets or to agree to any of the foregoing or to any conditions
or requirements that are materially adverse to its interests or
materially burdensome.
Section 5.10.
Regulatory
Applications
.
(a) Acquiror and the Company and their respective
Subsidiaries shall cooperate and use their respective reasonable
best efforts to prepare all documentation, to effect all filings
and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities
necessary to consummate the transactions contemplated by this
Agreement as promptly as reasonably practicable. Each of
Acquiror and the Company shall have the right to review in
advance, and to the extent practicable each will consult with
the other (subject in each case to applicable laws relating to
the exchange of information) with respect to, all material
written information submitted to any third party or Governmental
Authority in connection with the transactions contemplated by
this Agreement. In exercising the foregoing right, each of
Acquiror and the Company agrees to act reasonably and as
promptly as practicable. Each of Acquiror and the Company agrees
that it will consult with the other party hereto with respect to
the obtaining of all material permits, consents, approvals and
authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions
contemplated by this Agreement and each party will keep the
other party apprised of the status of material matters relating
to completion of the transactions contemplated hereby.
(b) Each of Acquiror and the Company agrees, upon request,
to furnish the other party with all information concerning
itself, its Subsidiaries, directors, officers and stockholders
and such other matters as may be reasonably necessary or
advisable in connection with any filing, notice or application
made by or on behalf of such other party or any of its
Subsidiaries to any third party or Governmental Authority.
Section 5.11.
Notification
of Certain Matters
.
Between the date hereof
and the Effective Time, each party will give prompt notice in
writing to the other parties of: (i) any information that
indicates that any of its representations or warranties
contained herein was not true and correct in any material
respect as of the date hereof or will be untrue and incorrect in
any material respect at and as of the Effective Time (except for
changes permitted or contemplated by this Agreement),
(ii) the occurrence or non-occurrence of any event which
will result, or is reasonably likely to result, in the failure
of any condition set forth in ARTICLE 6, any covenant or
agreement contained in this Agreement to be complied with or
satisfied, (iii) any failure of a party to satisfy any
condition or comply with, in any material respect, any covenant
or agreement to be satisfied or complied with by it hereunder,
and (iv) any notice or other communication from any third
party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by
this Agreement or that such transactions otherwise may violate
the rights of or confer remedies upon such third party;
provided
,
however
, that the delivery of any notice
pursuant to this Section 5.11 will not limit or otherwise
affect the remedies available hereunder to the party receiving
such notice.
Section 5.12.
Affiliate
Agreements
.
(a) Not later than the
15
th
day
prior to the mailing of the Joint Proxy Statement/Prospectus,
the Company shall deliver to Acquiror a schedule of each Person
that, to the Company’s Knowledge, is reasonably likely to
become, at the Effective Time, an “Affiliate” of the
Acquiror (each, a “
Company Affiliate
”) as that
term is used in Rule 144 under the Securities Act.
A-1-42
(b) The Company shall use its reasonable best efforts to
cause each Person who may be deemed to be a Company Affiliate to
execute and deliver to Acquiror, on or before the date of
mailing of the Joint Proxy Statement/Prospectus, an agreement in
substantially the form attached hereto as
Annex A
.
Section 5.13.
Section 16
Matters
.
Assuming that the Company delivers
to Acquiror the Section 16 Information (as defined below)
in a timely and accurate manner before the Effective Time,
Acquiror’s Board, or a committee of “non-employee
directors” thereof (as such term is defined for purposes of
Rule 16b-3(d)
under the Exchange Act), shall reasonably promptly thereafter
and in any event before the Effective Time adopt a resolution
providing that the receipt by the Company Insiders (as defined
below) of Acquiror Common Stock in exchange for shares of
Company Common Stock, and of Company Stock Options or Company
Warrants to purchase shares of Acquiror Common Stock upon
conversion of Company Stock Options and Company Warrants, in
each case pursuant to the transactions contemplated hereby and
to the extent such securities are listed in the Section 16
Information, are intended to be exempt from liability pursuant
to Section 16(b) under the Exchange Act, such that any such
receipt shall be so exempt. For the purpose of this
Section 5.13, “
Company Insiders
” means
those officers and directors of the Company who may become an
officer or director of Acquiror and who are listed in the
Section 16 Information, and “
Section 16
Information
” means information regarding the Company
Insiders, including the number of shares of Company Common Stock
held or to be held by a Company Insider expected to be exchanged
for Acquiror Common Stock in the Merger, and the number and
description of the Company Stock Options and Company Warrants
held by a Company Insider and expected to be converted into
options or warrants to purchase shares of Acquiror Common Stock
in connection with the Merger.
Section 5.14.
Plan
of Reorganization
.
(a) This Agreement is intended to constitute a “plan
of reorganization” within the meaning of
section 1.368-2(g)
of the income tax regulations promulgated under the Code. From
and after the date of this Agreement and until the Effective
Time, each party hereto shall use its commercially reasonable
efforts to cause the Merger to qualify, and will not take any
action, cause any action to be taken, fail to take any action or
cause any action to fail to be taken which action or failure to
act could prevent the Merger from qualifying, as a
“reorganization” within the meaning of
Section 368(a) of the Code. Following the Effective Time,
neither the Surviving Corporation, Acquiror nor any of their
Affiliates shall knowingly take any action, cause any action to
be taken, fail to take any action or cause any action to fail to
be taken, which action or failure to act could cause the Merger
to fail to qualify as a “reorganization” within the
meaning of Section 368(a) of the Code.
(b) As of the date hereof, neither Acquiror nor the Company
knows of any reason (i) why it would not be able to deliver
to counsel to Acquiror, at the date of the legal opinion
required by Section 6.1(f), certificates substantially in
compliance with IRS published advance ruling guidelines, with
customary exceptions and modifications thereto, to enable such
firm to deliver such opinion, and Acquiror and the Company
hereby agree to deliver such certificates effective as of the
date of such opinion or (ii) why counsel to Acquiror would
not be able to deliver the opinion required by
Section 6.1(f). Acquiror and the Company will deliver such
certificates to counsel to the Acquiror and will cooperate with
such counsel in all reasonable respects.
Section 5.15.
Consents
of Accountants
.
Acquiror and the Company will
each use reasonable best efforts to cause to be delivered to
each other consents from their respective independent registered
public accounting firm, dated the date on which the Registration
Statement shall become effective, in form reasonably
satisfactory to the recipient and customary in scope and
substance for consents delivered by independent registered
public accounting firms in connection with registration
statements on
Form S-4
under the Securities Act.
Section 5.16.
Appointment
of Directors of Acquiror
.
Acquiror shall take
such action as may be required so that immediately after the
Effective Time Acquiror Board shall consist of four
(4) individuals designated by Acquiror and one
(1) individual designated by the Company. No less than
three (3) Business Days prior to the Effective Date,
Acquiror and the Company shall inform the other in writing of
the Persons to be so designated.
A-1-43
Section 5.17.
State
Takeover Laws
.
If any “fair price,”
“business combination” or “control share
acquisition” statute or other similar statute or regulation
is or may become applicable to the Merger, Acquiror or the
Company, as applicable, shall take such actions as are necessary
so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of
any such statute or regulation on the Merger.
Section 5.18.
Certificate
of Amendment
.
At the Effective Time, Acquiror
will file with the Secretary of State of the State of Delaware a
certificate of amendment to the Acquiror Certificate reflecting
the amendment changing the name of Acquiror and approved by
Acquiror’s stockholders at the Acquiror Stockholders
Meeting.
Section 5.19.
Directors’
and Officers’ Indemnification
.
(a) From and after the Effective Time, Acquiror and the
Surviving Corporation shall indemnify and hold harmless each
current (as of the Effective Time) and former officer and
director of the Company and its Subsidiaries (when acting in
such capacity) (the “
Indemnified Parties
”),
against all claims, losses, liabilities, damages, judgments,
inquiries, fines and reasonable fees, costs and expenses,
including attorneys’ fees and disbursements (collectively,
“
Costs
”), incurred in connection with any
Proceeding arising out of or pertaining to the fact that the
Indemnified Party is or was at any time prior to the Effective
Time a director or officer of the Company or its Subsidiaries,
pertaining to any matter existing or occurring at or prior to
the Effective Time and whether asserted or claimed prior to, at
or after the Effective Time, to the same extent such Persons are
indemnified or have the right to advancement of expenses as of
the date hereof by the Company pursuant to the Company
Certificate, the Company Bylaws and indemnification agreements,
if any, in existence on the date hereof.
(b) The parties agree that all rights to indemnification,
including provisions relating to advances of expenses, existing
in favor of the Indemnified Parties as provided in
Section 5.19(a), will survive the Merger and will continue
in full force and effect for a period of not less than six years
from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim asserted, made or
commenced within such period will continue until the final
disposition of such claim.
(c) The provisions of this Section 5.19 are intended
to be for the benefit of, and shall be enforceable by, each of
the Indemnified Parties and their respective heirs and legal
representatives. The indemnification provided for herein shall
not be deemed exclusive of any other rights to which an
Indemnified Party is entitled, whether pursuant to law, contract
or otherwise.
(d) In the event that either Acquiror or the Surviving
Corporation or their respective successors or assigns
(i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or
conveys all or a majority of its properties and assets to any
Person, then, and in each such case, proper provision shall be
made so that the successors and assigns of Acquiror or the
Surviving Corporation, as the case may be, shall succeed to the
obligations set forth in this Section 5.19.
(e) As of the Effective Time, the Surviving Corporation
shall have purchased, and shall maintain, a tail policy to the
current policy of directors’ and officers’ liability
insurance maintained on the date hereof by the Company (the
“
Current Policy
”) which tail policy shall be
effective for a period from the Effective Time through and
including the date six years after the Effective Time with
respect to claims arising from facts or events that existed or
occurred prior to or at the Effective Time, and which tail
policy shall contain substantially the same coverage and amount
as, and contain terms and conditions no less advantageous, in
the aggregate, than the coverage currently provided by the
Current Policy.
Section 5.20.
Company
Stock Options
.
(a) At the Effective Time, Acquiror shall assume all the
obligations of the Company under the Company Stock Plans, each
outstanding Company Stock Option and the agreements evidencing
the grants thereof. As soon as practicable after the Effective
Time, Acquiror shall deliver to the holders of Company Stock
Options appropriate notices setting forth such holders’
rights pursuant to the respective Company Stock Plans, and the
A-1-44
agreements evidencing the grants of such Company Stock Options
shall continue in effect on the same terms and conditions
(subject to the adjustments required by Section 3.3(a)
hereof).
(b) Within thirty (30) days after the Effective Time,
Acquiror shall file a registration statement on
Form S-8
(or any successor or other appropriate form) with respect to the
shares of Acquiror Common Stock subject to such stock options
(other than options held by persons who are not employees of the
Company at the Effective Time) resulting from the conversion of
Company Stock Options and shall use its reasonable best efforts
to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as
such stock options remain outstanding.
ARTICLE 6.
CONDITIONS
TO CONSUMMATION OF THE MERGER
Section 6.1.
Conditions
to Obligations of Each Party
.
The respective
obligations of each of the parties hereto to consummate the
transactions contemplated by this Agreement shall be subject to
the fulfillment or written waiver by Acquiror and the Company at
or prior to the Effective Time of the following conditions:
(a)
No Restraints
.
No temporary
restraining order, preliminary or permanent injunction or other
order preventing the consummation of the transactions
contemplated hereby, or permitting such consummation only
subject to any condition or restriction that has or would have a
Material Adverse Effect shall have been issued since the date of
this Agreement by any U.S. federal or state court of
competent jurisdiction and shall remain in effect; and no
U.S. federal or state law, statute, rule, regulation or
decree that would prohibit or make the consummation of the
Merger illegal shall have been enacted or adopted since the date
of this Agreement and shall remain in effect.
(b)
Registration Statement
.
The
Registration Statement (as amended or supplemented) shall have
been declared effective in accordance with the provisions of the
Securities Act; and no stop order suspending the effectiveness
of the Registration Statement shall have been issued by the SEC,
and no Proceeding shall have been initiated or threatened in
writing by the SEC for the purpose of seeking or obtaining such
a stop order.
(c)
Listing
.
The Acquiror Common
Stock to be issued pursuant to this Agreement shall have been
approved for listing on the NASDAQ, subject to official notice
of issuance.
(d)
Acquiror Stockholder
Approval
.
Acquiror shall have obtained the
Requisite Stockholder Vote at the Acquiror Stockholders Meeting.
(e)
Company Stockholder
Approval
.
The Company shall have obtained the
Requisite Stockholder Vote at the Company Stockholders Meeting.
(f)
Tax Opinion
.
The Company and
Acquiror shall have received an opinion (the “
Tax
Opinion
”) of Holland & Knight, LLP, counsel
to Acquiror, or another nationally recognized law firm, dated
the Effective Date, substantially to the effect that, based upon
the facts and assumptions stated therein for United States
federal income tax purposes, the transactions contemplated by
this Agreement should qualify as a “reorganization”
within the meaning of Section 368(a) of the Code. In
rendering such opinion, Holland & Knight, LLP or such
other alternate firm may require and rely upon (and may
incorporate by reference) representations and covenants made in
certificates provided by the parties hereto and upon such other
documents and data as Holland & Knight, LLP or such
other alternate firm deems appropriate as a basis for such
opinion.
(g)
Third Party Consents
.
All
consents and approvals of all Persons required in connection
with the execution, delivery and performance of this Agreement
and consummation of the Merger shall have been obtained and
shall be in full force and effect, unless the failure to obtain
any such consent or approval is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on
Acquiror or the Company or to materially adversely affect the
consummation of the Merger.
A-1-45
Section 6.2.
Conditions
to Obligation of the Company
.
The obligation
of the Company to consummate the transactions contemplated by
this Agreement is also subject to the fulfillment or written
waiver by the Company at or prior to the Effective Time of each
of the following conditions:
(a)
Representations and Warranties
.
(1) All representations and warranties of Acquiror and
MergerCo contained in this Agreement that are qualified by
materiality or a Material Adverse Effect or words of similar
effect shall be correct and complete in all respects as of the
date hereof and as of the Effective Time, as though made on and
as of the Effective Time (or, if they relate to a specific date,
as if made on such specific date), and those representations and
warranties of Acquiror and MergerCo contained in this Agreement
that are not so qualified must be correct and complete in all
material respects as of the date hereof and as of the Effective
Time, as though made on and as of the Effective Time (or, if
they relate to a specific date, as if made on such specific
date).
(2) Notwithstanding Section 6.2(a)(1), the
representations and warranties set forth in Section 4.3(e)
(subject to de minimis deviations) and Section 4.3(h)(1)
shall be true and correct in all respects as of the date hereof
and as of the Effective Time, as though made on and as of the
Effective Time.
(3) The Company shall have received a certificate, dated
the Effective Date, signed on behalf of Acquiror and MergerCo by
a senior executive officer to such effect.
(b)
Performance of Obligations of Acquiror and
MergerCo
.
Acquiror and MergerCo shall have
performed in all material respects all covenants required to be
performed by it under this Agreement at or prior to the
Effective Time, and the Company shall have received
certificates, dated the Effective Date, signed on behalf of
Acquiror and MergerCo, respectively, by a senior executive
officer to such effect.
(c)
Board Matters
.
Acquiror shall
have taken all requisite action and shall have obtained letters
of resignation necessary, effective as of the Effective Time, to
cause the Acquiror Board to be constituted as set forth in
Section 5.16; provided, however, that the Company shall
have timely provided to Acquiror the names of the
Company-designated individuals as provided for in
Section 5.16.
(d)
Opinion of Financial
Advisor
.
The Company Board shall have
received a written opinion from Hyde Park Capital Partners, LLC
(or another investment banking firm reasonably acceptable to
Acquiror) to the effect that the issuance of the Merger
Consideration pursuant to the terms of this Agreement is fair
from a financial point of view to the stockholders of the
Company.
Section 6.3.
Conditions
to Obligation of Acquiror and MergerCo
.
The
obligation of Acquiror and MergerCo to consummate the Merger is
also subject to the fulfillment or written waiver by Acquiror at
or prior to the Effective Time of each of the following
conditions:
(a)
Representations and Warranties
.
(1) All representations and warranties of the Company
contained in this Agreement that are qualified by materiality or
a Material Adverse Effect or words of similar effect shall be
correct and complete in all respects as of the date hereof and
as of the Effective Time, as though made on and as of the
Effective Time (or, if they relate to a specific date, as if
made on such specific date), and those representations and
warranties of the Company contained in this Agreement that are
not so qualified must be correct and complete in all material
respects as of the date hereof and as of the Effective Time, as
though made on and as of the Effective Time (or, if they relate
to a specific date, as if made on such specific date).
(2) Notwithstanding Section 6.3(a)(1), the
representations and warranties set forth in Section 4.2(e)
(subject to de minimis deviations) and Section 4.2(h)(1)
shall be true and correct in all respects as of the date hereof
and as of the Effective Time, as though made on and as of the
Effective Time.
(3) Acquiror shall have received a certificate, dated the
Effective Date, signed on behalf of the Company by a senior
executive officer to such effect.
A-1-46
(b)
Performance of Obligations of the
Company
.
The Company shall have performed in
all material respects all covenants required to be performed by
it under this Agreement at or prior to the Effective Time, and
Acquiror shall have received, prior to the Effective Time, a
certificate, dated the Effective Date, signed on behalf of the
Company by a senior executive officer to such effect.
(c)
Opinion of Financial
Advisor
.
The Acquiror Board shall have
received a written opinion from Ladenburg Thalmann &
Co. Inc. (or another investment banking firm reasonably
acceptable to Acquiror) to the effect that the issuance of the
Merger Consideration pursuant to the terms of this Agreement is
fair from a financial point of view to the stockholders of
Acquiror.
(d)
Amendment of Note
.
The Company
shall cause that certain secured convertible promissory note,
dated March 20, 2009, given by the Company to Blue Moon
Energy Partners LLC, to be amended on terms reasonably
acceptable to Acquiror, to eliminate the convertible feature of
such note.
ARTICLE 7.
TERMINATION
Section 7.1.
Termination
.
This
Agreement may be terminated, and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after
approval thereof by stockholders of the Company or Acquiror:
(a) by the mutual consent of Acquiror and the Company
authorized by their respective Boards of Directors;
(b) by Acquiror or the Company in the event of either:
(1) a breach by the other party of any representation or
warranty contained herein, which breach cannot be or has not
been cured within 15 days after the giving of written
notice to the breaching party of such breach, or (2) a
breach by the other party of any of the covenants or agreements
contained herein, which breach cannot be or has not been cured
within 15 days after the giving of written notice to the
breaching party of such breach and which breach, in each case,
is reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on the breaching party or the
Surviving Corporation;
(c) At any time prior to the Effective Time, by Acquiror or
the Company in the event that the Merger is not consummated by
December 31, 2009 or such later date as the Company and
Acquiror may mutually agree in writing, except to the extent
that the failure of the Merger then to be consummated arises out
of or results from the knowing action or inaction of the party
seeking to terminate pursuant to this Section 7.1(c);
(d) By the Company or Acquiror in the event (1) the
approval of any Governmental Authority required for consummation
of the Merger and the other transactions contemplated by this
Agreement shall have been denied by final nonappealable action
of such Governmental Authority, or such Governmental Authority
shall have requested the permanent withdrawal of any application
therefor, provided, however, that the party seeking to terminate
this Agreement pursuant to this Section 7.1(d) shall have
used commercially reasonable efforts to prevent the entry of and
to remove such restraint, (2) the stockholder approval
required by Section 6.1(d) herein is not obtained at the
Company Stockholders Meeting or at any adjournment or
postponement thereof, or (3) the stockholder approval
required by Section 6.1(d) herein is not obtained at the
Acquiror Stockholders Meeting or at any adjournment or
postponement thereof;
(e) By the Company prior to obtaining the Requisite
Stockholder Vote in the event that the Company receives and
accepts a Superior Proposal;
(f) By Acquiror in the event that an Adverse Recommendation
Change has occurred (other than an Adverse Recommendation Change
occurring as a result of an Acquiror Material Adverse Effect);
A-1-47
(g) By the Company in the event that an Acquiror Adverse
Recommendation Change has occurred (other than an Acquiror
Adverse Recommendation Change occurring as a result of a Company
Material Adverse Effect);
(h) By Acquiror in the event that a willful and material
breach of Section 5.3 has occurred and such breach leads to
the making of a Superior Proposal; and
(i) By the Company in the event that Acquiror receives and
accepts an Acquiror Acquisition Proposal.
Any party desiring to terminate this Agreement shall give
written notice of such termination and the reasons therefor to
the other party.
Section 7.2.
Expenses
on Termination
.
(a) In the event that this Agreement is terminated by
Acquiror pursuant to Section 7.1(b), Section 7.1(f) or
Section 7.1(h) or by the Company pursuant to
Section 7.1(e), then the Company shall reimburse in their
entirety, up to a maximum of $200,000, the fees and expenses of
Acquiror (including attorneys’ fees and expenses) incurred
in connection with this Agreement and the transactions
contemplated herein.
(b) In the event that this Agreement is terminated by the
Company pursuant to Section 7.1(b), Section 7.1(g) or
Section 7.1(i), then Acquiror shall reimburse in their
entirety, up to a maximum of $200,000, the fees and expenses of
the Company (including attorneys’ fees and expenses)
incurred in connection with this Agreement and the transactions
contemplated herein.
(c) The amounts paid pursuant to Section 7.2(a) or
(b) shall constitute for the party receiving the fee such
party’s sole and exclusive remedy for such termination
(other than as provided in Section 7.3 below) and such
amount paid shall constitute liquidated damages in respect of,
the termination of this Agreement regardless of the
circumstances giving rise to such termination.
Section 7.3.
Effect
of Termination and Abandonment
.
In the event
of any termination of this Agreement pursuant to
Section 7.1, this Agreement (other than as set forth in
Section 8.1 below) immediately will become void and there
will be no liability or obligation on the part of any party or
their respective Affiliates, stockholders, directors, officers,
agents or representatives;
provided
, that no such
termination will relieve any party of any liability or damages
resulting from any willful or intentional breach of any of its
representations, warranties, covenants or agreements contained
in this Agreement.
ARTICLE 8.
MISCELLANEOUS
Section 8.1.
Survival
.
No
representations, warranties, agreements and covenants contained
in this Agreement shall survive the Effective Time or
termination of this Agreement if this Agreement is terminated
prior to the Effective Time; provided, however, that (a) to
the extent the agreements of the parties contained herein by
their terms apply after the Effective Time, such agreements
shall survive the Effective Time and (b) if this Agreement
is terminated prior to the Effective Time, the agreements of the
parties contained in Section 5.8(b) and Section 7.2
and ARTICLE 8 shall survive such termination.
Section 8.2.
Waiver;
Amendment
.
Prior to the Effective Time, any
provision of this Agreement may be: (1) waived by the party
benefited by the provision, or (2) amended or modified at
any time, by an agreement in writing between the parties hereto
approved or authorized by their respective Boards of Directors
and executed in the same manner as this Agreement, except that,
after approval of the Merger by the stockholders of the Company
or Acquiror, no amendment may be made which under applicable law
requires further approval of such stockholders without obtaining
such required further approval.
Section 8.3.
Counterparts
.
This
Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different
parties hereto in separate counterparts, each of
A-1-48
which when executed shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
Section 8.4.
Governing
Law
.
This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida,
regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
Section 8.5.
Expenses
.
Each
party hereto will bear all expenses incurred by it in connection
with this Agreement and the transactions contemplated hereby,
whether or not the Merger is consummated, except that Acquiror
shall bear the following: (i) all fees and expenses, other
than attorneys’, accountants’, financial
advisers’ and consultants’ fees and expenses which
shall be paid by the party incurring same, incurred in relation
to the printing and filing with the SEC of the Joint Proxy
Statement/Prospectus, including preliminary materials related
thereto and the Registration Statement, including financial
statements and exhibits, and any amendments and supplements
thereto, and (ii) the filing fees for the Registration
Statement.
Section 8.6.
Notices
.
All
notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given: (1) on the
date of delivery, if personally delivered, (2) on the first
Business Day following the date of dispatch, if delivered by a
nationally recognized
next-day
courier service, or (3) on the third Business Day following
the date of mailing, if mailed by registered or certified mail
(return receipt requested), in each case to such party at its
address set forth below or such other address as such party may
specify by notice to the parties hereto.
If to the Company, to:
Steel Vault Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: William J. Caragol
and a copy to the Company Special Committee:
c/o Steel
Vault Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: Charles Baker and Kevin McLaughlin
and a copy to:
Fowler White Boggs P.A.
1200 East Las Olas Blvd., Suite 400
Fort Lauderdale, Florida 33301
Attention: Arnold M. Zipper, Attorney for the Company Special
Committee
If to Acquiror or MergerCo, to:
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: Allison Tomek
and a copy to Acquiror Special Committee:
c/o VeriChip
Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: Barry Edelstein and Steven Foland
A-1-49
and a copy to:
Holland & Knight LLP
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attention: Tammy Knight
Section 8.7.
Entire
Understanding, No Third Party
Beneficiaries
.
This Agreement (together with
the Disclosure Schedules and the Mutual Nondisclosure and
Confidentiality Agreement dated August 19,
2009) represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby
and thereby supersedes any and all other oral or written
agreements heretofore made. Except for Section 5.19,
insofar as such Section expressly provides certain rights to the
Persons named therein, nothing in this Agreement, expressed or
implied, is intended to confer upon any Person, other than the
parties hereto or their respective successors and permitted
assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
Section 8.8.
Assignment
.
Neither
this Agreement nor any of the rights or obligations hereunder
may be assigned by any party without the prior written consent
of the other parties hereto. Subject to the foregoing, this
Agreement shall be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
assigns.
Section 8.9.
Severability
.
If
any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any
party.
Section 8.10.
Waiver
of Jury Trial
.
EACH OF THE PARTIES TO THIS
AGREEMENT IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
Section 8.11.
Enforcement
.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent willful or
intentional breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in the
U.S. District Court for the Southern District of Florida or
any Florida State court, in each case, located in Palm Beach
County, Florida, this being in addition to any other remedy to
which they are entitled at law or in equity.
Section 8.12.
Jurisdiction
.
Each
of the parties hereto (a) consents to submit itself to the
personal jurisdiction of the U.S. District Court for the
Southern District of Florida or any Florida State court, in each
case, located in Palm Beach County, Florida and not in any other
State or Federal court in the U.S. or any court in any
other country in the event any dispute arises out of this
Agreement or the Merger, (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court, and
(c) agrees that it will not bring any action arising out of
or relating to this Agreement or the Merger in any court other
than the U.S. District Court for the Southern District of
Florida or any Florida State court, in each case, located in
Palm Beach County, Florida and not in any other State or Federal
court in the U.S. or any court in any other country.
Section 8.13.
Public
Announcement
.
(a) On the date this Agreement is executed, Acquiror and
the Company shall issue and jointly approve a joint press
release with respect to the execution hereof and the
transactions contemplated hereby. Except as may be required by
applicable law or any listing agreement with or rule of any
regulatory body, national securities exchange or association,
Acquiror and the Company shall consult with each other before
issuing any press release, making any other public statement or
scheduling any press conference or conference call with
investors or analysts with respect to this Agreement or the
transactions contemplated by this Agreement.
A-1-50
(b) Before any Merger Communication (as defined below) of
Acquiror, the Company or any of their respective
“participants” (as defined in Rule 165 of the
Securities Act (“Rule 165”) or Item 4 of
Schedule 14A of the Exchange Act) is (i) disseminated
to any investor, analyst, member of the media, employee, client,
customer or other third party or otherwise made accessible on
the website of Acquiror, the Company or any such participant, as
applicable (whether in written, video or oral form via webcast,
hyperlink or otherwise), or (ii) utilized by any executive
officer, key employee or advisor of Acquiror, the Company or any
such participant, as applicable, as a script in discussions or
meetings with any third parties, Acquiror or the Company, as the
case may be, shall (or shall cause any such participant to)
cooperate in good faith with respect to any such Merger
Communication for purposes of, among other things, determining
whether that communication (x) is required to be filed
under Rules 165 and 425 of the Exchange Act or
(y) constitutes “soliciting material” that is
required to be filed by
Rule 14a-6(b)
or
Rule 14a-12(b)
of the Exchange Act, as applicable. Acquiror, MergerCo or the
Company, as applicable, shall (or shall cause any such
participant to) give reasonable and good faith consideration to
any comments made by the other such party or parties and their
counsel on any such Merger Communication. For purposes of the
foregoing, the term “
Merger Communication
”
shall mean, with respect to any Person, any document or other
written communication prepared by or on behalf of that Person,
or any document or other material or information posted or made
accessible on the website of that Person (whether in written,
video or oral form via webcast, hyperlink or otherwise), that is
related to any of the transactions contemplated by this
Agreement and, if reviewed by a relevant stockholder, could
reasonably be deemed to constitute either (x) an offer to
sell such stock or a solicitation of any offer to buy the
Acquiror Common Stock or (y) a “solicitation” of
“proxies” (in each case, as defined in
Rule 14a-1
of the Exchange Act) in favor of the Merger.
A-1-51
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed as of the day and year first above
written.
STEEL VAULT CORPORATION
|
|
|
|
|
|
By:
|
/s/ William
J. Caragol
|
Name: William J. Caragol
|
|
|
|
|
|
Its:
|
Chief Executive Officer, President and
|
Acting Chief Financial Officer
VERICHIP CORPORATION
Name: Allison Tomek
VERICHIP ACQUISITION CORP.
Name: Allison Tomek
(Signature
Page to Agreement and Plan of Reorganization)
A-1-52
Annex A-2
AMENDMENT
#1
TO
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT #1 TO AGREEMENT AND PLAN OF REORGANIZATION
(this “Amendment”) dated as of October 1, 2009 is
entered into by and among Steel Vault Corporation, a Delaware
corporation (“Company”), VeriChip Corporation, a
Delaware corporation (“Acquiror”) and VeriChip
Acquisition Corp., a Delaware corporation (“MergerCo”).
WHEREAS, Acquiror, Company and MergerCo entered into that
certain Agreement and Plan of Reorganization dated
September 4, 2009 (the “Agreement”) in connection
with the potential combination of the Company and Acquiror;
WHEREAS, the Company Special Committee and the Acquiror Special
Committee recommended to the Company Board and the Acquiror
Board, respectively, that the merger consideration be changed to
reflect cash payment in lieu of fractional shares of Acquiror
Common Stock, rather than rounding up to the nearest whole
number of shares, as originally contemplated under the
Agreement, and the Company Board and the Acquiror Board have
each determined that a modification to the Agreement in this
regard is appropriate; and
WHEREAS, the definitions of certain capitalized terms used
herein shall be as set forth in the Agreement except as revised
herein.
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1.
Modifications to the Agreement.
The
below-indicated sections of the Agreement are modified as
follows.
(a) Section 3.4(a) of the Agreement is hereby amended
by deleting the existing language in its entirety and inserting
the following therefore:
Exchange Agent.
Not less than three (3) Business
Days prior to the Closing Date, Acquiror shall designate a bank
or trust company reasonably acceptable to the Company to act as
exchange agent in connection with the Merger (the
“
Exchange Agent
”) for the purpose of exchanging
certificates that immediately prior to the Effective Time
represented shares of Company Common Stock for the applicable
Merger Consideration. At or prior to the Effective Time,
Acquiror shall deposit with the Exchange Agent, for the benefit
of the holders of Company Common Stock, certificates or, at
Acquiror’s option, evidence of shares in book-entry form,
representing shares of Acquiror Common Stock in such
denominations as the Exchange Agent may reasonably specify, and
cash sufficient to make payments in lieu of fractional shares
pursuant to Section 3.4(c). All such certificates (or
evidence of book-entry form, as the case may be) for shares of
Acquiror Common Stock so deposited, together with any dividends
or distributions with respect thereto, and cash deposited with
the Exchange Agent is hereinafter referred to as the
“
Exchange Fund.
”
(b) Section 3.4(b)(2) of the Agreement is hereby
amended by deleting the existing language in its entirety and
inserting the following therefore:
In effecting the payment and delivery of the applicable Merger
Consideration in respect of Shares entitled to the applicable
Merger Consideration pursuant to Section 3.1, upon the
surrender of such Shares, the Exchange Agent shall deliver the
number of whole shares of Acquiror Common Stock, as well as cash
sufficient to make payments in lieu of any fractional shares of
Acquiror Common Stock pursuant to Section 3.4(c), that are
represented by such holder’s properly surrendered
certificates and which such holder is entitled to receive as
Merger Consideration in accordance with this Article 3.
Upon such delivery, such Shares so surrendered shall forthwith
be canceled.
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(c) Section 3.4(b)(5) of the Agreement is hereby
amended by deleting the existing language in its entirety and
inserting the following therefore:
The stock transfer books of the Company shall be closed
immediately upon the Effective Time and there shall be no
further registration of transfers of shares of Company Common
Stock thereafter on the records of the Company. On or after the
Effective Time, any certificates presented to the Exchange Agent
or the Surviving Corporation for any reason shall be cancelled
and exchanged into the applicable Merger Consideration and, if
applicable, cash payment in lieu of fractional shares of
Acquiror Common Stock pursuant to Section 3.4(c), with
respect to the shares of Company Common Stock formerly
represented thereby.
(d) Section 3.4(c) of the Agreement is hereby amended
by deleting the existing language in its entirety and inserting
the following therefore:
No Issuance of Fractional Shares.
No certificate or scrip
representing fractional Acquiror Common Stock shall be issued
upon the surrender of certificates formerly representing Company
Common Stock or otherwise in the Merger. Notwithstanding any
other provision of this Agreement, each holder of shares of
Company Common Stock that are converted pursuant to the Merger
who would otherwise have been entitled to receive a fraction of
a share of Acquiror Common Stock (after taking into account all
certificates formerly representing Company Common Stock
delivered by such holder and the aggregate number of Company
Common Stock represented thereby, and after giving effect to the
exercise of any Company Stock Options or Company Warrants to be
exercised by such holder in connection with the Closing) shall
receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional amount multiplied by the average of the
daily closing sales prices of a share of Acquiror Common Stock
as reported on the NASDAQ for the five consecutive trading days
immediately preceding the Effective Time. The parties
acknowledge that payment of cash in lieu of issuing fractional
shares is solely for the purpose of avoiding the expense and
inconvenience to Acquiror of issuing fractional shares and does
not represent separately bargained-for consideration.
(e) Section 3.4(d) of the Agreement is hereby amended
by deleting the existing language in its entirety and inserting
the following therefore:
Lost Certificates.
If any certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such certificate to be lost,
stolen or destroyed and, if required by Acquiror, the posting by
such Person of a bond in such reasonable amount as Acquiror may
direct as indemnity against any claim that may be made against
it with respect to such certificate, the Exchange Agent will
deliver in exchange for such lost, stolen or destroyed
certificate the applicable Merger Consideration and, if
applicable, cash payment in lieu of fractional shares of
Acquiror Common Stock pursuant to Section 3.4(c), with
respect to the Shares formerly represented thereby, pursuant to
this Agreement.
2.
Conflict.
In the event of any conflict between
the terms of the Agreement and the terms of this Amendment, the
terms of this Amendment shall prevail. Otherwise, except as
specifically set forth in this Amendment, all the terms and
conditions of the Agreement are hereby ratified and affirmed.
3.
Entire Agreement.
This Amendment and the
Agreement (together with the corresponding Disclosure Schedules)
represent the entire agreement among the parties relating to the
subject matter hereof and thereof, and supersede and cancel any
and all prior oral or written agreements among them, relating to
the subject matter hereof and thereof and may not be amended or
modified except by a written agreement signed by each party
hereto.
4.
Counterparts.
This Amendment may be executed in
several counterparts, and all counterparts so executed shall
constitute one agreement, binding on the parties hereto,
notwithstanding that such parties are not signatory to the same
counterpart.
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Annex B
September 3,
2009
The Special Committee of the
Board of Directors
VeriChip Corporation
1690 South Congress Avenue
Suite 200
Delray Beach, FL 33445
Gentlemen:
We have been advised that VeriChip Corporation
(“VeriChip”) intends to enter into an Agreement and
Plan of Reorganization (the “Agreement”), between
VeriChip, VeriChip Acquisition Corp. (“MergerCo”), a
wholly-owned subsidiary of VeriChip, and Steel Vault Corporation
(“Steel Vault”). Capitalized terms used herein, but
not defined herein, shall have the meanings ascribed to them in
the Agreement and other ancillary documents to be entered into
in connection with the Agreement (collectively, the “Merger
Documents”).
Pursuant to the Merger Documents, MergerCo will merge with and
into Steel Vault (the “Merger”) and whereby each share
of common stock, par value $0.01 per share, of Steel Vault (the
“Steel Vault Common Stock”) issued and outstanding
immediately prior to the Effective Time will be converted into
the right to receive 0.5 shares (the “Exchange
Ratio”) of common stock, par value $0.01 per share of
VeriChip (the “VeriChip Common Stock”), subject to
adjustment.
Ladenburg has been advised that VeriChip’s Executive
Chairman of the Board of Directors and Chief Executive Officer,
Scott R. Silverman, is also Steel Vault’s Chairman of the
Board of Directors and that VeriChip’s Acting Chief
Financial Officer, William J. Caragol, is also Steel
Vault’s Chief Executive Officer, President and Acting Chief
Financial Officer.
Ladenburg has also been advised that Mr. Caragol and Steel
Vault will enter into a Waiver (the “Waiver
Agreement”) whereby Mr. Caragol will waive any and all
rights he may have to a Change of Control Payment in connection
with the Merger and releases Steel Vault from any and all
obligations to make such Change of Control Payment upon
consumption of the Merger.
In addition, Ladenburg has been further advised that
Messrs. Silverman and Caragol, R&R Consulting Partners
LLC (“R&R”), Blue Moon Energy Partners LLC
(“Blue Moon”) and their respective affiliates in
aggregate own a majority of the issued and outstanding VeriChip
Common Stock and Steel Vault Common Stock, and, in addition,
hold certain securities convertible into VeriChip Common Stock
and Steel Vault Common Stock. The stockholders of VeriChip other
than Messrs. Silverman, and Caragol, R&R, Blue Moon
and each of their respective affiliates, are hereinafter
referred to as the “Unaffiliated Stockholders”.
Ladenburg
Thalmann & Co. Inc.
4400
Biscayne Boulevard,
14
TH
Floor
Miami, FL 33137
Phone
305.572.4200 •
Fax 305.572.4220
MEMBER NYSE, NYSE Amex, FINRA, SIPC
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The Special
Committee of the Board of Directors
VeriChip Corporation
September 3, 2009
Page 2 of 4
Finally, Ladenburg has been also advised that in March 2009,
Blue Moon loaned Steel Vault $190,000 pursuant to a two-year
secured convertible promissory note (the “Blue Moon
Promissory Note”) and that in June 2009, VeriChip loaned
Steel Vault $500,000 pursuant to a two-year, secured convertible
promissory note (the “VeriChip Promissory Note”).
Ladenburg was advised that the Blue Moon Promissory Note will be
amended to eliminate the conversion feature of such note and
that the VeriChip Promissory Note will be forgiven and warrants
to purchase Steel Vault Common Stock issued to VeriChip in
connection with the VeriChip Promissory Note will be canceled.
The terms and conditions of the Merger and the other actions
contemplated are more specifically set forth in the Merger
Documents.
Ladenburg is a full service investment bank providing investment
banking, brokerage, equity research, institutional sales and
trading, and asset management services. In the ordinary course
of business, Ladenburg, certain of our affiliates, as well as
investment funds in which we or our affiliates may have
financial interests, may acquire, hold or sell long or short
positions, or trade or otherwise effect transactions in debt,
equity, and other securities and financial instruments
(including bank loans and other obligations) of, or investments
in, VeriChip or Steel Vault, any other party that may be
involved in the Merger
and/or
their
respective affiliates.
We have been retained to render an opinion as to whether, on the
date of such opinion the Exchange Ratio to be paid by VeriChip
in the Merger is fair, from a financial point of view, to the
Unaffiliated Stockholders of VeriChip.
Our opinion does not address any other term or aspect of the
Merger or the Merger Documents, including, but not limited to,
the fairness of the Merger to, or any consideration therewith
by, any other stockholders, creditors or other constituencies
nor as to the fairness of the amount or nature of the
compensation to any officers, directors or employees of any
parties to the Merger, or class of such persons, relative to the
Exchange Ratio to be received by the Unaffiliated Stockholders,
or otherwise. We do not express any opinion as to the underlying
valuation or future performance of VeriChip or Steel Vault, or
the price at which VeriChip’s or Steel Vault’s
securities might trade at any time in the future.
We have not been requested to opine as to, and our opinion does
not address, the relative merits of the Merger as compared to
any alternative business strategy that might exist for VeriChip,
the decision of whether VeriChip should complete the Merger, and
other alternatives to the Merger that might exist for VeriChip.
The financial and other terms of the Merger were determined
pursuant to negotiations between VeriChip, Steel Vault and each
of their respective advisors, and not pursuant to any
recommendation from us.
In arriving at our opinion, we took into account an assessment
of general economic, market and financial conditions as well as
our experience in connection with similar transactions and
securities valuations generally and, among other things:
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Reviewed a draft of the Agreement dated as of September 3,
2009 and a draft of the Waiver Agreement dated September 1,
2009.
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Reviewed publicly available financial information and other data
with respect to VeriChip that we deemed relevant, including the
Annual Report on
Form 10-K
for the year ended December 31, 2008, the Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2009, and the Current Report
on
Form 8-K
filed August 31, 2009.
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Reviewed non-public information and other data with respect to
VeriChip.
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Reviewed publicly available financial information and other data
with respect to Steel Vault that we deemed relevant, including
the Annual Report on
Form 10-K
for the year ended September 30. 2008,
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B-2
The Special
Committee of the Board of Directors
VeriChip Corporation
September 3, 2009
Page 3 of 4
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the Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, and the Definitive
Proxy Statement on Schedule 14A filed February 9,
2009, as amended.
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Reviewed non-public information and other data with respect to
Steel Vault, including, financial projections for the periods
through December 31, 2012 (the “Projections”),
and other internal financial information and management reports.
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Reviewed and analyzed the Merger’s pro forma impact on
VeriChip’s outstanding securities and stockholders
ownership.
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Considered the historical financial results and present
financial condition of VeriChip and Steel Vault.
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Reviewed and compared the trading of, and the trading market
for, each of the VeriChip Common Stock and the Steel Vault
Common Stock, and two general market indices.
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Reviewed the exchange ratio implied by the respective stock
prices of the VeriChip Common Stock and the Steel Vault Common
Stock over various periods.
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Reviewed and prepared a sum of the parts analysis of
VeriChip’s assets.
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Reviewed and analyzed Steel Vault’s projected unlevered
free cash flows derived from the Projections 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 Steel Vault.
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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 Steel Vault.
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Reviewed and discussed with VeriChip’s and Steel
Vault’s management certain financial and operating
information furnished by them, including financial analyses and
the Projections with respect to VeriChip’s and Steel
Vault’s business and operations.
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Performed such other analyses and examinations as were deemed
appropriate.
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In arriving at our opinion, with your consent, we have relied
upon and assumed, without assuming any responsibility for
independent verification, the accuracy and completeness of all
of the financial and other information that was supplied or
otherwise made available to us and we have further relied upon
the assurances of VeriChip’s and Steel Vault’s
management that they were not aware of any facts or
circumstances that would make any such information inaccurate or
misleading. With respect to the financial information and the
Projections reviewed, we assumed that such information was
reasonably prepared on a basis reflecting the best currently
available estimates and judgments, and that such information
provides a reasonable basis upon which we could make our
analysis and form an opinion. We have not evaluated the solvency
or fair value of VeriChip or Steel Vault, including without
limitation any actuarial analyses, under any applicable foreign,
state or federal laws relating to bankruptcy, insolvency or
similar matters. We have not physically inspected
VeriChip’s or Steel Vault’s properties and facilities
and have not made or obtained any evaluations or appraisals of
VeriChip’s or Steel Vault’s assets and liabilities
(including any contingent, derivative or off-balance-sheet
assets and liabilities). We have not attempted to confirm
whether VeriChip or Steel Vault have good title to their
respective assets.
We assumed that the Merger will be consummated in a manner that
complies in all respects with applicable foreign, federal, state
and local laws, rules and regulations. We have assumed, with
your consent, that the final executed form of the Merger
Documents do not differ in any material respect from the drafts
we have reviewed and that the Merger will be consummated on the
terms set forth in the Merger Documents, without further
amendments thereto, and without waiver by VeriChip of conditions
to any of its obligations
B-3
The Special
Committee of the Board of Directors
VeriChip Corporation
September 3, 2009
Page 4 of 4
thereunder or in the alternative that any such amendments or
waivers thereto will not be detrimental to VeriChip or its
stockholders in any material respect. We also have assumed, with
your consent, that obtaining the necessary regulatory or third
party approvals and consents for the Merger will not have an
adverse effect on VeriChip or the Merger. We have also assumed
that the representations and warranties of the parties thereto
contained in the Merger Documents are true and correct and that
each such party will perform all of the covenants and agreements
to be performed by it under the Merger Documents. At your
direction, we have not been asked to, nor do we, offer any
opinion as to the contractual terms of the Merger Documents, the
prospect that the conditions set forth in the Merger Documents
will be satisfied. We have further assumed, with your consent,
that for U.S. federal tax income purposes the Merger shall
qualify as a plan of reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as
amended.
Our analysis and opinion are necessarily based upon market,
economic and other conditions, as they exist on, and could be
evaluated as of, September 3, 2009. Accordingly, although
subsequent developments may affect our opinion, we do not assume
any obligation to update, review or reaffirm our opinion to you
or any other person.
Our opinion is for the use and benefit of the Special Committee
of the Board of Directors of VeriChip in connection with its
consideration of the Merger. Our opinion may not be used by any
other person, including the stockholders, noteholders, lenders
or creditors of VeriChip or for any other purpose without our
prior written consent. Our opinion is not intended to and does
not constitute an opinion or recommendation to any of
VeriChip’s stockholders as to how such stockholder should
vote or act with respect to the Merger, should a vote of such
stockholders be required, or any matter relating thereto. Our
opinion should not be construed as creating any fiduciary duty
on our part to any party to the Merger Documents or any other
person.
In connection with our services, and pursuant to that certain
Fairness Opinion Agreement between Ladenburg and the Special
Committee of the Board of Directors of VeriChip dated
August 19, 2009 (the “Ladenburg Engagement
Agreement”), we have received a retainer and are entitled
to receive the balance of our fee, which is not contingent upon
the completion of the Merger, when we notify VeriChip that we
are prepared to deliver our opinion. Also, pursuant to the
Ladenburg Engagement Agreement, VeriChip has agreed to indemnify
us for certain liabilities that may arise out of the rendering
of this opinion. Ladenburg has not previously provided, nor are
there any pending agreements to provide, any other services to
VeriChip.
Under our policies and procedures, a fairness committee did not
approve or issue this opinion and was not required to do so.
Based upon and subject to the foregoing, it is our opinion that,
as of the date of this letter, the Exchange Ratio to be paid by
VeriChip in the Merger is fair, from a financial point of view,
to the Unaffiliated Stockholders of VeriChip.
Very truly yours,
/s/ Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc.
B-4
Annex C
September 4,
2009
Special Committee of the Board of Directors
Steel Vault Corporation
1690 South Congress Avenue
Suite 200
Delray Beach, FL 33445
Members of the Special Committee of the Board:
You have asked us our opinion as to the fairness, from a
financial point of view, to the holders of the common stock, par
value $0.01 per share (“Steel Vault Common Stock”), of
Steel Vault Corporation (“Steel Vault” or “the
Company”), of the Consideration (as defined below) to be
received by such holders pursuant to the terms of the draft
Agreement and Plan of Reorganization, dated as of
August 31, 2009 (the “Agreement”), by and among
Steel Vault, VeriChip Corporation (“VeriChip” or
“Acquiror”) and VeriChip Acquisition Corporation
(“MergerCo”). The Agreement provides for, among other
things, the merger of MergerCo with and into Steel Vault (the
“Merger”) pursuant to which (a) each outstanding
share of Steel Vault Common Stock will be converted into the
right to receive one half (.5) share of VeriChip Common Stock,
(b) the outstanding balance of Steel Vault’s
convertible note payable to VeriChip will be forgiven, and
(c) the remaining liabilities of Steel Vault will
effectively be assumed by VeriChip, although the Company may
survive the merger and in such case the liabilities would still
technically exist at the Company as a wholly owned subsidiary of
Verichip (the “Consideration”).
In arriving at our opinion, we have:
1. reviewed the Agreement;
2. reviewed certain publicly available business and
financial information relating to Steel Vault and VeriChip;
3. reviewed certain other information relating to Steel
Vault provided to or discussed with us by the Company, including
(i) financial forecasts relating to the Company and
(ii) certain industry and business information thereto
prepared by the management of the Company;
4. discussed the past and present operations and financial
condition and the prospects of the Company with senior
executives of Steel Vault;
5. reviewed certain information regarding the amount and
timing of potential cost efficiencies gained through the Merger;
6. reviewed and compared the historical stock pricing and
trading history for the shares of both Steel Vault and Verichip,
and in the case of Steel Vault compared that data with similar
data for other publicly held companies in businesses we deemed
relevant in evaluating Steel Vault;
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Special
Committee of the Board of Directors
Steel Vault Corporation
September 4, 2009
Page 2
7. considered, to the extent publicly available, the
financial terms of certain other merger or acquisition
transactions, which we deemed to be relevant, which have been
effected or announced;
8. considered such other information, financial studies,
analyses and investigations and financial, economic and market
criteria which we deemed relevant.
In connection with our review, we have not independently
verified any of the foregoing information and we have assumed
and relied upon such information being complete and accurate in
all material respects. With respect to the financial forecasts
for Steel Vault that we have used in our analyses, the
management of Steel Vault has advised us, and we have assumed,
with your consent, that such forecasts have been reasonably
prepared on bases reflecting the best currently available
estimates and judgments of the management of Steel Vault as to
the future financial performance of the Company both before and
after giving effect to certain industry and business information
referred to above. We also have assumed, with your consent,
that, in the course of obtaining any regulatory or third party
consents, approvals or agreements in connection with the Merger,
no delay, limitation, restriction or condition will be imposed
that would have an adverse effect on Steel Vault or the Merger
and that the Merger will be consummated in accordance with the
terms of the draft Agreement without waiver, modification or
amendment of any material term, condition or agreement thereof.
In addition, we have not been requested to make, and have not
made, an independent appraisal of the assets or liabilities
(contingent or otherwise) of Steel Vault, nor have we been
furnished with any such evaluations or appraisals.
Our opinion addresses only the fairness, from a financial point
of view and as of the date hereof, to the holders of Steel Vault
Common Stock of the Consideration to be received in the Merger
and does not address any other aspect or implication of the
Merger or any other agreement, arrangement or understanding
entered into in connection with the Merger or otherwise or the
fairness of the amount or nature of, or any other aspect
relating to, any compensation to any officers, directors or
employees of any party to the Merger, or class of such persons,
relative to the Consideration or otherwise. The issuance of this
opinion was approved by our authorized internal committee.
Our opinion is necessarily based upon information made available
to us as of the date hereof and financial, economic, market and
other conditions as they exist and can be evaluated on the date
hereof. These conditions have been and remain subject to
extraordinary levels of volatility and uncertainty and we
express no view as to the impact of such volatility and
uncertainty on Steel Vault or the Merger. We were not requested
to and did not solicit any expressions of interest from any
other parties with respect to the sale of the Company or
transfer of assets or liabilities of Steel Vault or any
alternative transaction. We did not participate in the
negotiations with respect to the terms of the Merger.
Consequently, we have assumed that such terms are the most
beneficial terms from Steel Vault’s perspective that could
under the circumstances be negotiated among the parties to the
Merger, and no opinion is expressed as to whether any
alternative transaction might produce consideration for Steel
Vault in an amount in excess of that contemplated in the Merger.
Our opinion does not address the relative merits of the Merger
as compared to alternative transactions or strategies that might
be available to Steel Vault, nor does it address the underlying
business decision of the Company to proceed with the Merger.
We have acted as investment banker to Steel Vault in connection
only with the fairness opinion from which we will receive a fee
upon the rendering of our opinion. In addition, Steel Vault has
agreed to indemnify us for certain liabilities and other items
arising out of or related to our engagement. We may in the
future provide financial advice and services, to Steel Vault,
VeriChip and their respective affiliates for which
C-2
Special
Committee of the Board of Directors
Steel Vault Corporation
September 4, 2009
Page 3
we would expect to receive compensation. We have no previous
business agreements or relationships with either Steel Vault or
VeriChip.
In arriving at this opinion, we did not attribute any particular
weight to any analysis or factor considered, but rather made the
qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, we believe that our
analysis must be considered as a whole and that selecting
portions of the analyses, without considering all analyses,
would create an incomplete view of the process underlying this
opinion.
It is understood that this letter is for the information of the
Special Committee of the Board of Directors of Steel Vault in
connection with its evaluation of the Merger and does not
constitute advice or a recommendation to any shareholder as to
how such shareholder should vote or act on any matter relating
to the proposed Merger. Furthermore, this letter should not be
construed as creating any fiduciary duty on the part of Hyde
Park Capital Advisors, LLC to any such party. This opinion is
not to be quoted or referred to, in whole or in part, without
our prior written consent, which will not be unreasonably
withheld.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Consideration to be received in the
Merger by the holders of Steel Vault Common Stock is fair, from
a financial point of view, to such holders.
Very truly yours,
/s/ Hyde Park Capital Advisors, LLC
Hyde Park Capital Advisors, LLC
C-3
ANNEX D
CERTIFICATE
OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
VERICHIP CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the
“Corporation”) is VeriChip Corporation.
2. The Certificate of Incorporation of the Corporation is
hereby amended by changing the Article numbered “I” so
that, as amended, said Article shall be and read as follows:
ARTICLE I
NAME
The name of the corporation is PositiveID Corporation.
3. The Certificate of Incorporation of the Corporation is
hereby amended by changing the first paragraph of the Article
numbered “IV” so that, as amended, said paragraph of
said Article shall be and read as follows:
ARTICLE IV
CAPITALIZATION
The total number of shares of all classes of capital stock which
the Corporation is authorized to issue is
75,000,000 shares, consisting of 70,000,000 shares of
common stock, par value $0.01 per share (the “
Common
Stock
”) and 5,000,000 shares of preferred
stock, par value $0.001 per shares (the “
Preferred
Stock
”).
4. Pursuant to a resolution of its Board of Directors, a
meeting of stockholders of the Corporation was duly called and
held, on •, 2009 upon notice in
accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the
amendments.
5. The foregoing amendments were duly adopted in accordance
with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
NOW, THEREFORE, the Corporation has caused this Certificate to
be signed
this • day
of •, 2009.
Name: William J. Caragol
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Title:
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Acting Chief Financial Officer
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D-1
ANNEX E
VERICHIP
CORPORATION
2009 STOCK INCENTIVE PLAN
1.
Purposes of the Plan.
The purposes of
this Stock Incentive Plan are to attract and retain the best
available personnel for positions of substantial responsibility,
to provide additional incentive to Employees and Consultants,
and to promote the long-term success of the Company’s
business and to link participants’ directly to stockholder
interests through increased stock ownership. Awards granted
under the Plan may be Incentive Stock Options, Nonqualified
Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, Performance Units, Performance Shares, Cash Awards and
Other Stock Based Awards.
2.
Definitions.
As used herein, the
following definitions shall apply:
(a)
“Administrator”
means the Board or any
Committee or Officer as shall be administering the Plan, in
accordance with Section 4 of the Plan.
(b)
“Affiliate”
means a Parent, a
Subsidiary, an entity that is not a Parent or Subsidiary but
which has a direct or indirect ownership interest in the Company
or in which the Company has a direct or indirect ownership
interest, an entity that is a customer or supplier of the
Company, an entity that renders services to the Company, or an
entity that has an ownership or business affiliation with any
entity previously described in this Section 2(b).
(c)
“Applicable Law”
means the legal
requirements relating to the administration of the Plan under
applicable federal, state, local and foreign corporate, tax and
securities laws, and the rules and requirements of any stock
exchange or quotation system on which the Common Stock is listed
or quoted.
(d)
“Award”
means an Option, Stock
Appreciation Right, Restricted Stock Award, Performance Unit or
Performance Share, Cash Award or Other Stock Based Award granted
under the Plan.
(e)
“Award Agreement”
means the agreement,
notice
and/or
terms
or conditions by which an Award is evidenced, documented in such
form (including by electronic communication) as may be approved
by the Administrator.
(f)
“Board”
means the Board of Directors
of the Company.
(g)
“Cash Award”
means an award payable in
the form of cash.
(h)
“Change in Control”
means the
happening of any of the following:
(i) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is
that any “person” as such term is used in
Section 13(d) and 14(d) of the Exchange Act (other than any
trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or
indirectly, by the shareholders of the Company in substantially
the same proportions as their ownership of stock of the
Company), is or becomes the “beneficial owner” (as
defined in
Rule 13d-3
under the Exchange Act), directly or indirectly, of securities
of the Company representing more than 50% of the combined voting
power of the Company’s then outstanding securities entitled
generally to vote in the election of the Board (other than the
occurrence of any contingency);
(ii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or
entity, which is consummated, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after
such merger or consolidation; or
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(iii) the effective date of a complete liquidation of the
Company or the consummation of an agreement for the sale or
disposition by the Company of all or substantially all of the
Company’s assets, which in both cases are approved by the
stockholders of the Company as may be required by law.
(i)
“Code”
means the Internal Revenue Code
of 1986, as amended.
(j)
“Committee”
means a committee
appointed by the Board in accordance with Section 4 of the
Plan.
(k)
“Compensation Committee”
means the
Compensation Committee of the Board.
(l)
“Common Stock”
means the common stock,
$.01 par value, of the Company.
(m)
“Company”
means VeriChip Corporation.
(n)
“Consultant”
means any person,
including an advisor, engaged by the Company or an Affiliate and
who is compensated for such services, including without
limitation non-Employee Directors. In addition, as used herein,
“consulting relationship” shall be deemed to include
service by a non-Employee Director as such.
(o)
“Continuous Status as an Employee or
Consultant”
means that the employment or consulting
relationship is not interrupted or terminated by the Company or
Affiliate, as applicable. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of
(i) any leave of absence approved in writing by the Board,
an Officer, or a person designated in writing by the Board or an
Officer as authorized to approve a leave of absence, including
sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options,
any such leave may not exceed 90 days, unless reemployment
upon the expiration of such leave is guaranteed by contract
(including certain Company policies) or statute, or
(ii) transfers between locations of the Company or between
the Company, a Parent, a Subsidiary or successor of the Company;
or (iii) a change in the status of the Grantee from
Employee to Consultant or from Consultant to Employee.
(p)
“Covered Stock”
means the Common Stock
subject to an Award.
(q)
“Date of Grant”
means the date on
which the Administrator makes the determination granting the
Award, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to
each Grantee within a reasonable time after the Date of Grant.
(r)
“Date of Termination”
means the date
on which a Grantee’s Continuous Status as an Employee or
Consultant terminates.
(s)
“Director”
means a member of the Board
or a member of the Board of Directors of a Parent or Subsidiary.
(t)
“Disability”
means total and permanent
disability as defined in Section 22(e)(3) of the Code.
(u)
“Employee”
means any person, including
Officers and Directors, employed by the Company or any
Affiliate. Neither service as a Director nor payment of a
director’s fee by the Company shall be sufficient to
constitute “employment” by the Company.
(v)
“Exchange Act”
means the Securities
Exchange Act of 1934, as amended.
(w)
“Fair Market Value”
means the value of
a share of Common Stock. If the Common Stock is actively traded
on any national securities exchange, including, but not limited
to, the NASDAQ Stock Market or the New York Stock Exchange, Fair
Market Value shall mean the closing price at which sales of
Common Stock shall have been sold on the date of determination,
as reported by any such exchange selected by the Administrator
on which the shares of Common Stock are then traded. If the
shares of Common Stock are not actively traded on any such
exchange, Fair Market Value shall mean the arithmetic mean of
the bid and asked prices for the shares of Common Stock on the
most recent trading date within a reasonable period prior to the
determination date as reported by such exchange. If there are no
bid and asked prices within a reasonable period or if the shares
of Common Stock are not traded on any exchange as of the
determination date, Fair Market Value shall mean the fair market
value of a share of Common Stock as determined by the
Administrator taking into account such facts and circumstances
deemed to be material by the Administrator to
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the value of the Common Stock in the hands of the Grantee;
provided that, for purposes of granting awards other than
Incentive Stock Options, Fair Market Value of a share of Common
Stock may be determined by the Administrator by reference to the
average market value determined over a period certain or as of
specified dates, to a tender offer price for the shares of
Common Stock (if settlement of an award is triggered by such an
event) or to any other reasonable measure of fair market value
and provided further that, for purposes of granting Incentive
Stock Options, Fair Market Value of a share of Common Stock
shall be determined in accordance with the valuation principles
described in the regulations promulgated under Code
Section 422.
(x)
“Grantee”
means an individual who has
been granted an Award.
(y)
“Incentive Stock Option”
means an
Option intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(z)
“Nonqualified Stock Option”
means an
Option not intended to qualify as an Incentive Stock Option.
(aa)
“Officer”
means a person who is an
officer of the Company within the meaning of Section 16 of
the Exchange Act and the rules and regulations promulgated
thereunder.
(bb)
“Option”
means a stock option granted
under the Plan.
(cc)
“Other Stock Based Award”
means an
award that is valued in whole or in part by reference to, or is
otherwise based on, Common Stock.
(dd)
“Parent”
means a corporation, whether
now or hereafter existing, in an unbroken chain of corporations
ending with the Company if each of the corporations other than
the Company holds at least 50 percent of the voting shares
of one of the other corporations in such chain.
(ee)
“Performance Based Compensation”
means compensation which meets the requirements of
Section 162(m)(4)(C) of the Code.
(ff)
“Performance Based Restricted Stock”
means an Award of Restricted Stock which meets the requirements
of Section 162(m)(4)(C) of the Code, as described in
Section 8(b) of the Plan.
(gg)
“Performance Period”
means the time
period during which the performance goals established by the
Administrator with respect to a Performance Unit or Performance
Share, pursuant to Section 9 of the Plan, must be met.
(hh)
“Performance Share”
has the meaning
set forth in Section 9 of the Plan.
(ii)
“Performance Unit”
has the meaning
set forth in Section 9 of the Plan.
(jj)
“Plan”
means this VeriChip
Corporation 2009 Stock Incentive Plan, as amended and restated.
(kk)
“Restricted Stock Award”
means Shares
that are awarded to a Grantee pursuant to Section 8 of the
Plan.
(ll)
“Rule 16b-3”
means
Rule 16b-3
promulgated under the Exchange Act or any successor to
Rule 16b-3,
as in effect when discretion is being exercised with respect to
the Plan.
(mm)
“Share”
means a share of the Common
Stock, as adjusted in accordance with Section 13 of the
Plan.
(nn)
“Stock Appreciation Right”
or
“
SAR”
means the right to receive an amount
equal to the appreciation, if any, in the Fair Market Value of a
Share from the date of the grant of the right to the date of its
payment, as set forth in Section 7 of the Plan.
(oo)
“Subsidiary”
means a corporation,
domestic or foreign, of which not less than 50 percent of
the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3.
Stock Subject to the Plan.
Subject to
the provisions of Section 13 of the Plan and except as
otherwise provided in this Section 3, the maximum aggregate
number of Shares that may be subject to Awards under the
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Plan since the Plan became effective is 5,000,000 Shares,
of which 5,000,000 can be issued as Incentive Stock Options. The
Shares may be authorized, but unissued, or reacquired Common
Stock. If an Award expires or becomes unexercisable without
having been exercised in full the remaining Shares that were
subject to the Award shall become available for future Awards
under the Plan (unless the Plan has terminated). With respect to
Options and Stock Appreciation Rights, if the payment upon
exercise of an Option or SAR is in the form of Shares, the
Shares subject to the Option or SAR shall be counted against the
available Shares as one Share for every Share subject to the
Option or SAR, regardless of the number of Shares used to settle
the SAR upon exercise.
4.
Administration of the Plan.
(a)
Procedure
.
(i)
Multiple Administrative Bodies.
The
Plan may be administered by different bodies with respect to
different groups of Employees and Consultants, provided however,
that the administrative authority set forth in items (vii),
(viii), (ix), (xii), (xiii), (xiv), (xv), and (xvi) of
Section 4(b) below shall be exercised only by the
Compensation Committee. Except as provided below, the Plan shall
be administered by (A) the Board or (B) a committee
designated by the Board and constituted to satisfy Applicable
Law.
(ii)
Rule 16b-3.
To
the extent the Board or the Compensation Committee considers it
desirable for transactions relating to Awards to be eligible to
qualify for an exemption under
Rule 16b-3,
the transactions contemplated under the Plan shall be structured
to satisfy the requirements for exemption under
Rule 16b-3.
(iii)
Section 162(m) of the Code.
To
the extent the Board or the Compensation Committee considers it
desirable for compensation delivered pursuant to Awards to be
eligible to qualify for an exemption from the limit on tax
deductibility of compensation under Section 162(m) of the
Code, the transactions contemplated under the Plan shall be
structured to satisfy the requirements for exemption under
Section 162(m) of the Code.
(iv)
Authorization of Officers to Grant
Options.
In accordance with Applicable Law, the
Board may, by a resolution adopted by the Board, authorize one
or more Officers to designate Officers and Employees (excluding
the Officer so authorized) to be Grantees of Options and
determine the number of Options to be granted to such Officers
and Employees; provided, however, that the resolution adopted by
the Board so authorizing such Officer or Officers shall specify
the total number and the terms (including the exercise price,
which may include a formula by which such price may be
determined) of Options such Officer or Officers may so grant.
(b)
Powers of the Administrator.
Subject
to the provisions of the Plan, and in the case of a Committee or
an Officer, subject to the specific duties delegated by the
Board to such Committee or Officer, the Administrator shall have
the authority, in its sole and absolute discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(w) of the Plan;
(ii) to select the Grantees to whom Awards will be granted
under the Plan;
(iii) to determine whether, when, to what extent and in
what types and amounts Awards are granted under the Plan;
(iv) to determine the number of shares of Common Stock to
be covered by each Award granted under the Plan;
(v) to determine the forms of Award Agreements, which need
not be the same for each grant or for each Grantee, and which
may be delivered electronically, for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Award granted
under the Plan. Such terms and conditions, which need not be the
same for each grant or for each Grantee, include, but are not
limited to, the exercise price, the time or times when Options
and SARs may be exercised (which may be based on performance
criteria), the extent to which vesting is suspended during a
leave of absence, any vesting acceleration or waiver of
forfeiture restrictions, and any restriction
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or limitation regarding any Award or the shares of Common Stock
relating thereto, based in each case on such factors as the
Administrator shall determine;
(vii) to construe and interpret the terms of the Plan and
Awards;
(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including, without limiting
the generality of the foregoing, rules and regulations relating
to the operation and administration of the Plan to accommodate
the specific requirements of local and foreign laws and
procedures;
(ix) to modify or amend each Award (subject to
Section 15 of the Plan). However, the Administrator may not
modify or amend any outstanding Option or SAR to reduce the
exercise price of such Option or SAR, as applicable, below the
exercise price as of the Date of Grant of such Option or SAR. In
addition, no Option or SAR may be granted in exchange for, or in
connection with, the cancellation or surrender of an Option or
SAR or other Award having a lower exercise price;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Award
previously granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Awards;
(xii) to make such adjustments or modifications to Awards
granted to Grantees who are Employees of foreign Subsidiaries as
are advisable to fulfill the purposes of the Plan or to comply
with Applicable Law;
(xiii) to delegate its duties and responsibilities under
the Plan with respect to
sub-plans
applicable to foreign Subsidiaries, except its duties and
responsibilities with respect to Employees who are also Officers
or Directors subject to Section 16(b) of the Exchange Act;
(xiv) to provide any notice or other communication required
or permitted by the Plan in either written or electronic form;
(xv) to correct any defect or supply any omission, or
reconcile any inconsistency in the Plan, or in any Award
Agreement, in the manner and to the extent it shall deem
necessary or expedient to make the Plan fully effective; and
(xvi) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c)
Effect of Administrator’s
Decision.
The Administrator’s decisions,
determinations and interpretations shall be final and binding on
all Grantees and any other holders of Awards.
5.
Eligibility and General Conditions of Awards.
(a)
Eligibility.
Awards other than
Incentive Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to
Employees. If otherwise eligible, an Employee or Consultant who
has been granted an Award may be granted additional Awards.
(b)
Maximum Term.
Subject to the
following provision, the term during which an Award may be
outstanding shall not extend more than ten years after the Date
of Grant, and shall be subject to earlier termination as
specified elsewhere in the Plan or Award Agreement.
(c)
Award Agreement.
To the extent not
set forth in the Plan, the terms and conditions of each Award,
which need not be the same for each grant or for each Grantee,
shall be set forth in an Award Agreement. The Administrator, in
its sole and absolute discretion, may require as a condition to
any Award Agreement’s effectiveness that the Award
Agreement be executed by the Grantee, including by electronic
signature or other electronic indication of acceptance, and that
the Grantee agree to such further terms and conditions as
specified in the Award Agreement. Except as otherwise provided
in an Agreement, all capitalized terms used in the Agreement
shall have the same meaning as in the Plan, and the Agreement
shall be subject to all of the terms of the Plan.
(d)
Termination of Employment or Consulting
Relationship.
In the event that a Grantee’s
Continuous Status as an Employee or Consultant terminates (other
than upon the Grantee’s Retirement (defined below),
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death, Disability, or Termination by Employer Not for Cause
(defined below)), then, unless otherwise provided by the Award
Agreement, and subject to Section 13 of the Plan:
(i) the Grantee may exercise his or her unexercised Option
or SAR, but only within such period of time as is determined by
the Administrator, and only to the extent that the Grantee was
entitled to exercise it at the Date of Termination (but in no
event later than the expiration of the term of such Option or
SAR as set forth in the Award Agreement). In the case of an
Incentive Stock Option, the Administrator shall determine such
period of time (in no event to exceed three months from the Date
of Termination) when the Option is granted. If, at the Date of
Termination, the Grantee is not entitled to exercise his or her
entire Option or SAR, the Shares covered by the unexercisable
portion of the Option or SAR shall revert to the Plan. If, after
the Date of Termination, the Grantee does not exercise his or
her Option or SAR within the time specified by the
Administrator, the Option or SAR shall terminate, and the Shares
covered by such Option or SAR shall revert to the Plan;
(ii) the Grantee’s Restricted Stock Awards, to the
extent forfeitable immediately before the Date of Termination,
shall thereupon automatically be forfeited;
(iii) the Grantee’s Restricted Stock Awards that were
not forfeitable immediately before the Date of Termination shall
promptly be settled by delivery to the Grantee of a number of
unrestricted Shares equal to the aggregate number of the
Grantee’s vested Restricted Stock Awards; and
(iv) any Performance Shares or Performance Units with
respect to which the Performance Period has not ended as of the
Date of Termination shall terminate immediately upon the Date of
Termination.
(e)
Disability of Grantee.
In the event
that a Grantee’s Continuous Status as an Employee or
Consultant terminates as a result of the Grantee’s
Disability, then, unless otherwise provided by the Award
Agreement, such termination shall have no effect on the
Grantee’s outstanding Awards. The Grantee’s Awards
shall continue to vest and remain outstanding and exercisable
until they expire by their terms. In the case of an Incentive
Stock Option, any option not exercised within 12 months of
the date of termination of the Grantee’s Continuous Status
as an Employee or Consultant due to Disability will be treated
as a Nonqualified Stock Option.
(f)
Death of Grantee.
In the event of the
death of a Grantee, then, unless otherwise provided by the Award
Agreement, such termination shall have no effect on
Grantee’s outstanding Awards. The Grantee’s Awards
shall continue to vest and remain outstanding and exercisable
until they expire by their terms. In the case of an Incentive
Stock Option, any option not exercised within 12 months of
the date of termination of Grantee’s Continuous Status as
an Employee or Consultant due to death will be treated as a
Nonqualified Stock Option.
(g)
Retirement of Grantee.
Except as
otherwise provided in Section 5(g)(i) below, in the event
that a Grantee’s Continuous Status as an Employee or
Consultant terminates after the Grantee’s attainment of
age 65 (hereinafter, “Retirement”), then, unless
otherwise provided by the Award Agreement, such termination
shall have no effect on Grantee’s outstanding Awards. The
Grantee’s Awards shall continue to vest and remain
outstanding and exercisable until they expire by their terms. In
the case of an Incentive Stock Option, any option not exercised
within 3 months of the termination of Grantee’s
Continuous Status as an Employee or Consultant due to Retirement
will be treated as a Nonqualified Stock Option.
(h)
Termination by Employer Not for
Cause.
In the event that a Grantee’s
Continuous Status as an Employee or Consultant is terminated by
the Employer without Cause (hereinafter, “Termination by
Employer Not for Cause”), then, unless otherwise provided
by the Award Agreement, such termination shall have no effect on
Grantee’s outstanding Awards. Grantee’s Awards shall
continue to vest and remain outstanding and exercisable until
they expire by their terms. In the case of an Incentive Stock
Option, any option not exercised within 3 months of the
date of will be treated as a Nonqualified Stock Option. In the
case of a Grantee who is a Director, the Grantee’s service
as a Director shall be deemed to have been terminated without
Cause if the Participant ceases to serve in such a position
solely due to the failure to be reelected or reappointed, as the
case may be, and such failure is not a result of an act or
omission which would constitute Cause.
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(i)
Termination for
Cause.
Notwithstanding anything herein to the
contrary, if a Grantee is an Employee of the Company and is
“Terminated for Cause”, as defined herein below, or
violates any of the terms of their employment after they have
become vested in any of their rights herein, the Grantee’s
full interest in such rights shall terminate on the date of such
termination of employment and all rights thereunder shall cease.
Whether a Participant’s employment is Terminated for Cause
shall be determined by the Board. Cause shall mean gross
negligence, willful misconduct, flagrant or repeated violations
of the Company’s policies, rules or ethics, a material
breach by the Grantee of any employment agreement between the
Grantee and the Company, intoxication, substance abuse, sexual
or other unlawful harassment, disclosure of confidential or
proprietary information, engaging in a business competitive with
the Company, or dishonest, illegal or immoral conduct.
(j)
Nontransferability of Awards
.
(i) Except as provided in Section 5(j)(iii) below,
each Award, and each right under any Award, shall be exercisable
only by the Grantee during the Grantee’s lifetime, or, if
permissible under Applicable Law, by the Grantee’s guardian
or legal representative.
(ii) Except as provided in Section 5(j)(iii) below, no
Award (prior to the time, if applicable, Shares are issued in
respect of such Award), and no right under any Award, may be
assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by a Grantee otherwise than by will or
by the laws of descent and distribution (or in the case of
Restricted Stock Awards, to the Company) and any such purported
assignment, alienation, pledge, attachment, sale, transfer or
encumbrance shall be void and unenforceable against the Company
or any Subsidiary; provided, that the designation of a
beneficiary shall not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance.
(iii) To the extent and in the manner permitted by
Applicable Law, and to the extent and in the manner permitted by
the Administrator, and subject to such terms and conditions as
may be prescribed by the Administrator, a Grantee may transfer
an Award to:
(A) a child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law,
father-in-law,
son-in-law,
daughter-in-law,
brother-in-law,
or
sister-in-law
of the Grantee (including adoptive relationships);
(B) any person sharing the employee’s household (other
than a tenant or employee);
(C) a trust in which persons described in (A) and
(B) have more than 50 percent of the beneficial
interest;
(D) a foundation in which persons described in (A) or
(B) or the Grantee control the management of assets; or
(E) any other entity in which the persons described in
(A) or (B) or the Grantee own more than
50 percent of the voting interests;
provided such transfer is not for value. The following shall not
be considered transfers for value: a transfer under a domestic
relations order in settlement of marital property rights, and a
transfer to an entity in which more than 50 percent of the
voting interests are owned by persons described in
(A) above or the Grantee, in exchange for an interest in
such entity.
6.
Stock Options.
(a)
Limitations
.
(i) Each Option shall be designated in the Award Agreement
as either an Incentive Stock Option or a Nonqualified Stock
Option. Any Option designated as an Incentive Stock Option:
(A) shall not have an aggregate Fair Market Value
(determined for each Incentive Stock Option at the Date of
Grant) of Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Grantee during any
calendar year (under the Plan and any other employee stock
option plan of the Company or any Parent or Subsidiary
(“Other Plans”)), determined in accordance with the
provisions of Section 422 of the Code, that exceeds
$100,000 (the “$100,000 Limit”);
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(B) shall, if the aggregate Fair Market Value of Shares
(determined on the Date of Grant) with respect to the portion of
such grant that is exercisable for the first time during any
calendar year (“Current Grant”) and all Incentive
Stock Options previously granted under the Plan and any Other
Plans that are exercisable for the first time during a calendar
year (“Prior Grants”) would exceed the $100,000 Limit,
be exercisable as follows:
(1) The portion of the Current Grant that would, when added
to any Prior Grants, be exercisable with respect to Shares that
would have an aggregate Fair Market Value (determined as of the
respective Date of Grant for such Options) in excess of the
$100,000 Limit shall, notwithstanding the terms of the Current
Grant, be exercisable for the first time by the Grantee in the
first subsequent calendar year or years in which it could be
exercisable for the first time by the Grantee when added to all
Prior Grants without exceeding the $100,000 Limit; and
(2) If, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the
preceding provisions of this Section 6(a)(i)(B) during any
calendar year commencing with the calendar year in which it is
first exercisable through and including the last calendar year
in which it may by its terms be exercised, such portion of the
Current Grant shall not be an Incentive Stock Option, but shall
be exercisable as a separate Option at such date or dates as are
provided in the Current Grant.
(ii) No Employee shall be granted, in any fiscal year of
the Company, Options to purchase more than 1,500,000 Shares. The
limitation described in this Section 6(a)(ii) shall be
adjusted proportionately in connection with any change in the
Company’s capitalization as described in Section 13 of
the Plan. If an Option is canceled in the same fiscal year of
the Company in which it was granted (other than in connection
with a transaction described in Section 13 of the Plan),
the canceled Option will be counted against the limitation
described in this Section 6(a)(ii).
(b)
Term of Option.
The term of each
Option shall be stated in the Award Agreement; provided,
however, that the term shall be 10 years from the date of
grant or such shorter term as may be provided in the Award
Agreement. Moreover, in the case of an Incentive Stock Option
granted to a Grantee who, at the time the Incentive Stock Option
is granted, owns stock representing more than 10 percent of
the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option
shall be five years from the date of grant or such shorter term
as may be provided in the Award Agreement.
(c)
Option Exercise Price and Consideration
.
(i)
Exercise Price.
The per share
exercise price for the Shares to be issued pursuant to exercise
of an Option shall be determined by the Administrator and,
except as otherwise provided in this Section 6(c)(i), shall
be no less than 100 percent of the Fair Market Value per
Share on the Date of Grant.
(A) In the case of an Incentive Stock Option granted to an
Employee who on the Date of Grant owns stock representing more
than 10 percent of the voting power of all classes of stock
of the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than 110 percent of the
Fair Market Value per Share on the Date of Grant.
(B) Any Option that is (1) granted to a Grantee in
connection with the acquisition (“Acquisition”),
however effected, by the Company of another corporation or
entity (“Acquired Entity”) or the assets thereof,
(2) associated with an option to purchase shares of stock
or other equity interest of the Acquired Entity or an affiliate
thereof (“Acquired Entity Option”) held by such
Grantee immediately prior to such Acquisition, and
(3) intended to preserve for the Grantee the economic value
of all or a portion of such Acquired Entity Option, may be
granted with such exercise price as the Administrator determines
to be necessary to achieve such preservation of economic value.
(d)
Waiting Period and Exercise Dates.
At
the time an Option is granted, the Administrator shall fix the
period within which the Option may be exercised and shall
determine any conditions that must be satisfied before the
Option may be exercised. An Option shall be exercisable only to
the extent that it is vested according to the terms of the Award
Agreement.
E-8
(e)
Form of Consideration.
The
Administrator shall determine the acceptable form of
consideration for exercising an Option, including the method of
payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of
consideration at the time of grant. The acceptable form of
consideration may consist of any combination of the following:
cash; pursuant to procedures approved by the Administrator,
through the sale of the Shares acquired on exercise of the
Option through a broker-dealer to whom the Grantee has submitted
an irrevocable notice of exercise and irrevocable instructions
to deliver promptly to the Company the amount of sale or loan
proceeds sufficient to pay the exercise price, together with, if
requested by the Company, the amount of federal, state, local or
foreign withholding taxes payable by the Grantee by reason of
such exercise (a “cashless exercise”) or; subject to
the approval of the Administrator:
(i) by the surrender of all or part of an Award (including
the Award being exercised);
(ii) by the tender to the Company of Shares owned by the
Grantee and registered in his name having a Fair Market Value
equal to the amount due to the Company;
(iii) in other property, rights and credits deemed
acceptable by the Administrator, including the
Participant’s promissory note; or
(iv) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Law and
deemed acceptable by the Administrator.
(f)
Exercise of Option
.
(i)
Procedure for Exercise; Rights as a Shareholder
.
(A) Any Option granted hereunder shall be exercisable
according to the terms of the Plan and at such times and under
such conditions as determined by the Administrator and set forth
in the Award Agreement.
(B) An Option may not be exercised for a fraction of a
Share.
(C) An Option shall be deemed exercised when the Company
receives:
(1) written or electronic notice of exercise (in accordance
with the Award Agreement and any action taken by the
Administrator pursuant to Section 4(b) of the Plan or
otherwise) from the person entitled to exercise the
Option, and
(2) full payment for the Shares with respect to which the
Option is exercised.
(D) Shares issued upon exercise of an Option shall be
issued in the name of the Grantee or, if requested by the
Grantee, in the name of the Grantee and his or her spouse. Until
the stock certificate evidencing such Shares is issued (as
evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in
Section 13 of the Plan.
(E) Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
7.
Stock Appreciation Rights.
(a)
Grant of SARs.
Subject to the terms
and conditions of the Plan, the Administrator may grant SARs in
tandem with an Option or alone and unrelated to an Option.
Tandem SARs shall expire no later than the expiration of the
underlying Option. In no event shall the term of a SAR exceed
ten years from the Date of Grant.
(b)
Exercise of SARs.
SARs shall be
exercised by the delivery of a written or electronic notice of
exercise (in accordance with the Award Agreement and any action
taken by the Administrator pursuant to
E-9
Section 4(b) of the Plan or otherwise), setting forth the
number of Shares over which the SAR is to be exercised. Tandem
SARs may be exercised:
(i) with respect to all or part of the Shares subject to
the related Option upon the surrender of the right to exercise
the equivalent portion of the related Option;
(ii) only with respect to the Shares for which its related
Option is then exercisable; and
(iii) only when the Fair Market Value of the Shares subject
to the Option exceeds the exercise price of the Option.
The value of the payment with respect to the tandem SAR may be
no more than 100 percent of the difference between the
exercise price of the underlying Option and the Fair Market
Value of the Shares subject to the underlying Option at the time
the tandem SAR is exercised.
(c)
Payment of SAR Benefit.
Upon exercise
of a SAR, the Grantee shall be entitled to receive payment from
the Company in an amount determined by multiplying:
(i) the excess of the Fair Market Value of a Share on the
date of exercise over the SAR exercise price; by
(ii) the number of Shares with respect to which the SAR is
exercised;
provided, that the Administrator may provide in the Award
Agreement that the benefit payable on exercise of a SAR shall
not exceed such percentage of the Fair Market Value of a Share
on the Date of Grant, or any other limitation, as the
Administrator shall specify. The payment upon exercise of a SAR
shall be in Shares that have an aggregate Fair Market Value (as
of the date of exercise of the SAR) equal to the amount of the
payment.
(d) No Employee shall be granted, in any fiscal year, SARs
with respect to more than [1,000,000] Shares. The
limitation described in this Section 7(d) shall be adjusted
proportionately in connection with any change in the
Company’s capitalization as described in Section 13 of
the Plan. If a SAR is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a
transaction described in Section 13 of the Plan), the
canceled SAR will be counted against the limitation described in
this Section 7(d).
8.
Restricted Stock Awards.
Subject to
the terms of the Plan, the Administrator may grant Restricted
Stock Awards to any Eligible Recipient, in such amount and upon
such terms and conditions as shall be determined by the
Administrator.
(a)
Administrator Action.
The
Administrator acting in its sole and absolute discretion shall
have the right to grant Restricted Stock to Eligible Recipients
under the Plan from time to time. Each Restricted Stock Award
shall be evidenced by a Restricted Stock Agreement, and each
Restricted Stock Agreement shall set forth the conditions, if
any, which will need to be timely satisfied before the grant
will be effective and the conditions, if any, under which the
Grantee’s interest in the related Stock will be forfeited.
The Administrator may make grants of Performance-Based
Restricted Stock and grants of Restricted Stock that are not
Performance-Based Restricted Stock; provided, however, that only
the Compensation Committee may serve as the Administrator with
respect to grants of Performance-Based Restricted Stock.
(b)
Performance-Based Restricted Stock
.
(i)
Effective Date.
A grant of
Performance-Based Restricted Stock shall be effective as of the
date the Compensation Committee certifies that the applicable
conditions described in Section 8(b)(iii) of the Plan have
been timely satisfied.
(ii)
Share Limitation.
No more than
1,500,000 shares of Performance-Based Restricted Stock may
be granted to an Eligible Recipient in any calendar year.
(iii)
Grant Conditions.
The Compensation
Committee, acting in its sole and absolute discretion, may
select from time to time Eligible Recipients to receive grants
of Performance-Based Restricted Stock in such amounts as the
Compensation Committee may, in its sole and absolute discretion,
determine, subject to any
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limitations provided in the Plan. The Compensation Committee
shall make each grant subject to the attainment of certain
performance targets. The Compensation Committee shall determine
the performance targets which will be applied with respect to
each grant of Performance-Based Restricted Stock at the time of
grant, but in no event later than 90 days after the
commencement of the period of service to which the performance
targets relate. The performance criteria applicable to
Performance-Based Restricted Stock grants will be one or more of
the following criteria: (1) stock price; (2) average
annual growth in earnings per share; (3) increase in
shareholder value; (4) earnings per share; (5) net
income; (6) return on assets; (7) return on
shareholders’ equity; (8) increase in cash flow;
(9) operating profit or operating margins;
(10) revenue growth of the Company; and (11) operating
expenses. Each performance target applicable to a Cash Award
intended to be Performance Based Compensation and the deadline
for satisfying each such target shall be stated in the Agreement
between the Company and the Employee. The Compensation Committee
must certify in writing that each such target has been satisfied
before the Performance Based Compensation award is paid.
The related Restricted Stock Agreement shall set forth the
applicable performance criteria and the deadline for satisfying
the performance criteria.
(iv)
Forfeiture Conditions.
The
Compensation Committee may make each Performance-Based
Restricted Stock grant (if, when and to the extent that the
grant becomes effective) subject to one, or more than one,
objective employment, performance or other forfeiture condition
which the Compensation Committee acting in its sole and absolute
discretion deems appropriate under the circumstances for
Eligible Recipients generally or for a Grantee in particular,
and the related Restricted Stock Agreement shall set forth each
such condition and the deadline for satisfying each such
forfeiture condition. A Grantee’s nonforfeitable interest
in the Shares related to a Performance-Based Restricted Stock
grant shall depend on the extent to which each such condition is
timely satisfied. A Stock certificate shall be issued (subject
to the conditions, if any, described in this Section 8(b))
to, or for the benefit of, the Grantee with respect to the
number of shares for which a grant has become effective as soon
as practicable after the date the grant becomes effective.
(c)
Restricted Stock Other Than Performance-Based
Restricted Stock
.
(i)
Effective Date.
A Restricted Stock
grant which is not a grant of Performance-Based Restricted Stock
shall be effective (a) as of the date set by the
Administrator when the grant is made or, if the grant is made
subject to one, or more than one, condition, (b) as of the
date the Administrator determines that such conditions have been
timely satisfied.
(ii)
Grant Conditions.
The Administrator
acting in its sole and absolute discretion may make the grant of
Restricted Stock which is not Performance-Based Restricted Stock
to a Grantee subject to the satisfaction of one, or more than
one, objective employment, performance or other grant condition
which the Administrator deems appropriate under the
circumstances for Eligible Recipients generally or for a Grantee
in particular, and the related Restricted Stock Agreement shall
set forth each such condition and the deadline for satisfying
each such grant condition.
(iii)
Forfeiture Conditions.
The
Administrator may make each grant of Restricted Stock which is
not a grant of Performance-Based Restricted Stock (if, when and
to the extent that the grant becomes effective) subject to one,
or more than one, objective employment, performance or other
forfeiture condition which the Administrator acting in its sole
and absolute discretion deems appropriate under the
circumstances for Eligible Recipients generally or for a Grantee
in particular, and the related Restricted Stock Agreement shall
set forth each such condition and the deadline for satisfying
each such forfeiture condition. A Grantee’s nonforfeitable
interest in the Shares related to a grant of Restricted Stock
which is not a grant of Performance-Based Restricted Stock shall
depend on the extent to which each such condition is timely
satisfied. A Stock certificate shall be issued (subject to the
conditions, if any, described in this Section 8(c)) to, or
for the benefit of, the Grantee with respect to the number of
shares for which a grant has become effective as soon as
practicable after the date the grant becomes effective.
(d)
Dividends and Voting Rights.
Each
Restricted Stock Agreement shall state whether the Grantee shall
have a right to receive any cash dividends which are paid with
respect to his or her Restricted Stock after the date his or her
Restricted Stock grant has become effective and before the first
day that the Grantee’s interest
E-11
in such stock is forfeited completely or becomes completely
nonforfeitable. If a Restricted Stock Agreement provides that a
Grantee has no right to receive a cash dividend when paid, such
agreement shall set forth the conditions, if any, under which
the Grantee will be eligible to receive one, or more than one,
payment in the future to compensate the Grantee for the fact
that he or she had no right to receive any cash dividends on his
or her Restricted Stock when such dividends were paid. If a
Restricted Stock Agreement calls for any such payments to be
made, the Company shall make such payments from the
Company’s general assets, and the Grantee shall be no more
than a general and unsecured creditor of the Company with
respect to such payments. If a stock dividend is declared on
such a Share after the grant is effective but before the
Grantee’s interest in such Stock has been forfeited or has
become nonforfeitable, such stock dividend shall be treated as
part of the grant of the related Restricted Stock, and a
Grantee’s interest in such stock dividend shall be
forfeited or shall become nonforfeitable at the same time as the
Share with respect to which the stock dividend was paid is
forfeited or becomes nonforfeitable. If a dividend is paid other
than in cash or stock, the disposition of such dividend shall be
made in accordance with such rules as the Administrator shall
adopt with respect to each such dividend. A Grantee shall have
the right to vote the Shares related to his or her Restricted
Stock grant after the grant is effective with respect to such
Shares but before his or her interest in such Shares has been
forfeited or has become nonforfeitable.
(e)
Satisfaction of Forfeiture
Conditions.
A Share shall cease to be Restricted
Stock at such time as a Grantee’s interest in such Share
becomes nonforfeitable under the Plan, and the certificate
representing such share shall be reissued as soon as practicable
thereafter without any further restrictions related to
Section 8(b) or Section 8(c) and shall be transferred
to the Grantee.
9.
Performance Units and Performance Shares.
(a)
Grant of Performance Units and Performance
Shares.
Subject to the terms of the Plan, the
Administrator may grant Performance Units or Performance Shares
to any Eligible Recipient in such amounts and upon such terms as
the Administrator shall determine.
(b)
Value/Performance Goals.
Each
Performance Unit shall have an initial value that is established
by the Administrator on the Date of Grant. Each Performance
Share shall have an initial value equal to the Fair Market Value
of a Share on the Date of Grant. The Administrator shall set
performance goals that, depending upon the extent to which they
are met, will determine the number or value of Performance Units
or Performance Shares that will be paid to the Grantee.
(c)
Payment of Performance Units and Performance
Shares
.
(i) Subject to the terms of the Plan, after the applicable
Performance Period has ended, the holder of Performance Units or
Performance Shares shall be entitled to receive a payment based
on the number and value of Performance Units or Performance
Shares earned by the Grantee over the Performance Period, to the
extent the corresponding performance goals have been achieved.
(ii) If a Grantee is promoted, demoted or transferred to a
different business unit of the Company during a Performance
Period, then, to the extent the Administrator determines
appropriate, the Administrator may adjust, change or eliminate
the performance goals or the applicable Performance Period as it
deems appropriate in order to make them appropriate and
comparable to the initial performance goals or Performance
Period.
(d)
Form and Timing of Payment of Performance Units and
Performance Shares.
Payment of earned Performance
Units or Performance Shares shall be made in a lump sum
following the close of the applicable Performance Period. The
Administrator may pay earned Performance Units or Performance
Shares in cash or in Shares (or in a combination thereof) that
have an aggregate Fair Market Value equal to the value of the
earned Performance Units or Performance Shares at the close of
the applicable Performance Period. Such Shares may be granted
subject to any restrictions deemed appropriate by the
Administrator. The form of payout of such Awards shall be set
forth in the Award Agreement pertaining to the grant of the
Award.
10.
Cash Awards.
The Administrator may
grant Cash Awards at such times and in such amounts as it deems
appropriate.
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(a)
Annual Limits.
Notwithstanding the
foregoing, the amount of any Cash Award in any Fiscal Year to
any Grantee shall not exceed the greater of $300,000 or 100% of
his cash compensation (excluding any Cash Award under the Plan)
for such Fiscal Year.
(b)
Restrictions.
Cash Awards may be
subject or not subject to conditions (such as an investment
requirement), restricted or nonrestricted, vested or subject to
forfeiture and may be payable currently or in the future or
both. The Administrator may make grants of Cash Awards that are
intended to be Performance Based Compensation and grants of Cash
Awards that are not intended to be Performance Based
Compensation; provided, however, that only the Compensation
Committee may serve as the Administrator with respect to grants
of Cash Awards that are intended to be Performance-Based
Compensation.
The Compensation Committee shall determine the performance
targets which will be applied with respect to each grant of Cash
Awards that are intended to be Performance Based Compensation at
the time of grant, but in no event later than 90 days after
the beginning of the period of service to which the performance
targets relate. The performance criteria applicable to
Performance Based Compensation awards will be one or more of the
following: (1) stock price; (2) average annual growth
in earnings per share; (3) increase in shareholder value;
(4) earnings per share; (5) net income;
(6) return on assets; (7) return on shareholders’
equity; (8) increase in cash flow; (9) operating
profit or operating margins; (10) revenue growth of the
Company; and (11) operating expenses. Each performance
target applicable to a Cash Award intended to be Performance
Based Compensation and the deadline for satisfying each such
target shall be stated in the Agreement between the Company and
the Employee. The Compensation Committee must certify in writing
that each such target has been satisfied before the Performance
Based Compensation award is paid.
11.
Other Stock Based Awards.
The
Administrator shall have the right to grant Other Stock Based
Awards which may include, without limitation, the grant of
Shares based on certain conditions, the payment of cash based on
the performance of the Common Stock, and the grant of securities
convertible into Shares.
12.
Tax Withholding.
The Company shall
deduct from all cash distributions under the Plan any taxes
required to be withheld by federal, state, local or foreign
government. Whenever the Company proposes or is required to
issue or transfer Shares under the Plan, the Company shall have
the right to require the recipient to remit to the Company an
amount sufficient to satisfy any federal, state, local and
foreign withholding tax requirements prior to the delivery of
any certificate or certificates for such shares. A Grantee may
pay the withholding tax in cash, or, if the applicable Award
Agreement provides, a Grantee may elect to have the number of
Shares he is to receive reduced by the smallest number of whole
Shares that, when multiplied by the Fair Market Value of the
Shares determined as of the Tax Date (defined below), is
sufficient to satisfy federal, state, local and foreign, if any,
withholding taxes arising from exercise or payment of a grant
under the Plan (a “Withholding Election”). A Grantee
may make a Withholding Election only if the Withholding Election
is made on or prior to the date on which the amount of tax
required to be withheld is determined (the “Tax Date”)
by executing and delivering to the Company a properly completed
notice of Withholding Election as prescribed by the
Administrator. The Administrator may in its sole and absolute
discretion disapprove and give no effect to the Withholding
Election.
13.
Adjustments Upon Changes in Capitalization or Change
in Control.
(a)
Changes in Capitalization.
Subject to
any required action by the shareholders of the Company, the
number of Covered Shares, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but
as to which no Awards have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an
Award, as well as the price per share of Covered Stock, shall be
proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the
Company shall not be deemed to have been “effected without
receipt of consideration.” Such adjustment shall be made by
the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or
securities
E-13
convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Covered Stock.
(b)
Change in Control.
In the event of a
Change in Control, then the following provisions shall apply:
(i) all outstanding Options shall become fully exercisable,
except to the extent that the right to exercise the Option is
subject to restrictions established in connection with a SAR
that is issued in tandem with the Option;
(ii) all outstanding SARs shall become immediately payable,
except to the extent that the right to exercise the SAR is
subject to restrictions established in connection with an Option
that is issued in tandem with the SAR;
(iii) all Shares of Restricted Stock shall become fully
vested;
(iv) all Performance Shares and Performance Units shall be
deemed to be fully earned and shall be paid out in such manner
as determined by the Compensation Committee; and
(v) all Cash Awards, Other Stock Based Awards and other
Awards shall become fully vested
and/or
earned and paid out in such manner as determined by the
Compensation Committee.
In addition to the provisions of Section 13(b) above and to
the extent not inconsistent therewith the Compensation
Committee, in its sole discretion, may: (1) provide for the
purchase of any Award for an amount of cash equal to the amount
which could have been attained upon the exercise or realization
of such Award had such Award been currently exercisable or
payable; (2) make such adjustment to the Awards then
outstanding as the Compensation Committee deems appropriate to
reflect such transaction or change;
and/or
(3) cause the Awards then outstanding to be assumed, or new
Awards substituted therefore, by the surviving corporation in
such change.
14.
Term of Plan.
The Plan shall become
effective upon its approval by the shareholders of the Company.
Such shareholder approval shall be obtained in the manner and to
the degree required under applicable federal and state law. The
Plan shall continue in effect until the tenth anniversary of
adoption of the Plan by the Board, unless terminated earlier
under Section 15 of the Plan.
15.
Amendment and Termination of the Plan.
(a)
Amendment and Termination.
The Board
may at any time amend, alter, suspend or terminate the Plan.
(b)
Shareholder Approval.
The Company
shall obtain shareholder approval of any Plan amendment to the
extent necessary and desirable to comply with
Rule 16b-3
or with Section 422 or Section 162(m) of the Code (or
any successor rule or statute) or other Applicable Law. Such
shareholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the Applicable Law.
(c)
Effect of Amendment or
Termination.
No amendment, alteration, suspension
or termination of the Plan shall impair the rights of any
Grantee, unless mutually agreed otherwise between the Grantee
and the Administrator, which agreement must be in writing and
signed by the Grantee and the Company.
16.
Conditions Upon Issuance of Shares.
(a)
Legal Compliance.
Shares shall not be
issued pursuant to an Award unless the exercise, if applicable,
of such Award and the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the Exchange
Act, the rules and regulations promulgated thereunder,
Applicable Law, and the requirements of any stock exchange or
quotation system upon which the Shares may then be listed or
quoted, and any insider trading policy adopted by the Company,
and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b)
Investment Representations.
As a
condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the
time of any such exercise that the Shares are
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being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion
of counsel for the Company, such a representation is required.
17.
Liability of Company.
(a)
Inability to Obtain Authority.
The
inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the
Company’s counsel to be necessary to the lawful issuance
and sale of any Shares hereunder, shall relieve the Company of
any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been
obtained.
(b)
Grants Exceeding Allotted Shares.
If
the Covered Stock covered by an Award exceeds, as of the date of
grant, the number of Shares that may be issued under the Plan
without additional shareholder approval, such Award shall be
void with respect to such excess Covered Stock, unless
shareholder approval of an amendment sufficiently increasing the
number of Shares subject to the Plan is timely obtained in
accordance with Section 15 of the Plan.
18.
Reservation of Shares.
The Company,
during the term of the Plan, will at all times reserve and keep
available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
19.
Rights of Employees.
Neither the Plan
nor any Award shall confer upon a Grantee any right with respect
to continuing the Grantee’s employment relationship with
the Company, nor shall they interfere in any way with the
Grantee’s right or the Company’s right to terminate
such employment relationship at any time, with or without cause.
20.
Sub-plans
for Foreign Subsidiaries.
The Board may adopt
sub-plans
applicable to particular foreign Subsidiaries. All Awards
granted under such
sub-plans
shall be treated as grants under the Plan. The rules of such
sub-plans
may take precedence over other provisions of the Plan, with the
exception of Section 3, but unless otherwise superseded by
the terms of such
sub-plan,
the provisions of the Plan shall govern the operation of such
sub-plan.
21.
Construction.
The Plan shall be
construed under the laws of the State of Delaware, to the extent
not preempted by federal law, without reference to the
principles of conflict of laws.
22.
Certain Limitations on Awards to Ensure Compliance
with Code Section 409A.
For purposes of this
Plan, references to an award term or event (including any
authority or right of the Company or a Grantee) being
“permitted” under Code Section 409A mean, for a
409A Award (meaning an Award that constitutes a deferral of
compensation under Code Section 409A and regulations
thereunder), that the term or event will not cause the Grantee
to be liable for payment of interest or a tax penalty under Code
Section 409A and, for a Non-409A Award (meaning all Awards
other than 409A Awards), that the term or event will not cause
the Award to be treated as subject to Code Section 409A.
Other provisions of the Plan notwithstanding, the terms of any
409A Award and any Non-409A Award, including any authority of
the Company and rights of the Grantee with respect to the Award,
shall be limited to those terms permitted under Code
Section 409A, and any terms not permitted under Code
Section 409A shall be automatically modified and limited to
the extent necessary to conform with Code Section 409A. For
this purpose, other provisions of the Plan notwithstanding, the
Company shall have no authority to accelerate distributions
relating to 409A Awards in excess of the authority permitted
under Code Section 409A, and any distribution subject to
Code Section 409A(a)(2)(A)(i) (separation from service) to
a “key employee” as defined under Code
Section 409A(a)(2)(B)(i), shall not occur earlier than the
earliest time permitted under Code Section 409A(a)(2)(B)(i).
E-15
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
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Item 20.
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Indemnification
of Officers and Directors.
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Under Section 145 of the DGCL a corporation may indemnify
any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Section 145 also provides that a corporation has the power
to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that the person is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys’ fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation. However, no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Expenses (including attorneys’ fees) incurred by an officer
or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it
shall ultimately be determined that such person is not entitled
to be indemnified by the corporation as authorized in
Section 145 of the DGCL. Such expenses (including
attorneys’ fees) incurred by former directors and officers
or other employees and agents may be so paid upon such terms and
conditions, if any, as the corporation deems appropriate.
Notwithstanding the instances outlined above where a corporation
may indemnify its current and former directors and officers, a
corporation may purchase and maintain insurance on behalf of any
person who is or was a director or officer of the corporation
against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such
person’s status as such. Correspondingly, we have purchased
and maintain insurance on behalf of our directors and officers
against any liability asserted against such directors and
officers in their capacities as such.
VeriChip will indemnify and hold harmless, to the fullest extent
authorized or permitted by applicable law, each person (other
than a party plaintiff in a proceeding that was not authorized
by the board of directors) who is, or is threatened to be made,
a party to, or is otherwise involved in, any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, because he or she is
or was a director or officer of VeriChip or, while a director or
officer of VeriChip, is or was serving at the request of
VeriChip as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee
or agent, or in any other capacity while serving as a director,
officer, employee or agent, against all expense, liability and
loss (including, without limitation, attorneys’ fees,
judgments, fines, ERISA excise taxes and penalties and amounts
paid in settlement) reasonably incurred or suffered by such
II-1
person in connection with such action, suit or proceeding. This
right to indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification and advancement of
expenses is a contractual right and includes the right to be
paid by VeriChip the expenses incurred in defending or otherwise
participating in any such proceeding in advance of its final
disposition to the fullest extent authorized by the DGCL.
VeriChip may purchase and maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of
VeriChip or another corporation, partnership, limited liability
company, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not VeriChip would
have the power to indemnify such person against such expense,
liability or loss under the DGCL.
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Item 21.
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Exhibits
and Financial Statement Schedules.
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Exhibit
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Number
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Exhibit Description
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2
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.1
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Agreement and Plan of Reorganization by and among VeriChip,
Steel Vault and VeriChip Acquisition Corp. dated
September 4, 2009 (included as Annex A-1 to the joint
proxy statement/prospectus forming part of this Registration
Statement and incorporated herein by reference)
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2
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.2*
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Amendment #1 to Agreement and Plan of Reorganization by and
among VeriChip, Steel Vault and VeriChip Acquisition Corp. dated
October 1, 2009 (included as Annex A-2 to the joint
proxy statement/prospectus forming part of this Registration
Statement and incorporated herein by reference)
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3
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.1*
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Second Amended and Restated Certificate of Incorporation of
VeriChip, as amended
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3
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.2
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Amended and Restated Bylaws of VeriChip (incorporated by
reference to Exhibit 3.2 to VeriChip’s
Form S-1
filed with the SEC on December 29, 2005)
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4
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.1
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Form of specimen common stock certificate for VeriChip
(incorporated by reference to Exhibit 4.3 to
VeriChip’s
Form S-1/A
filed with the SEC on January 22, 2007)
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5
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.1*
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Opinion of Holland & Knight LLP regarding validity of
the shares of VeriChip common stock registered hereunder
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8
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.1*
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Opinion of Holland & Knight LLP regarding material
federal income tax consequences relating to the merger
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10
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.1
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Convertible Preferred Stock Purchase Agreement, dated
September 29, 2009, between VeriChip and Optimus Capital
Partners, LLC (incorporated by reference to Exhibit 10.1 to
VeriChip’s
Form 8-K
filed with the SEC on September 29, 2009)
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23
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.1*
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Consent of Eisner LLP with respect to VeriChip
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23
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.2*
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Consent of Eisner LLP with respect to Steel Vault
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23
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.3*
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Consent of J.H. Cohn LLP with respect to Steel Vault
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23
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.4*
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Consent of Holland & Knight LLP (included as part of
Exhibit 5.1)
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23
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.5*
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Consent of Holland & Knight LLP (included as part of
Exhibit 8.1)
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24
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.1**
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Powers of Attorney of VeriChip (included on signature page)
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99
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.1*
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Form of Proxy for VeriChip
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99
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.2*
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Form of Proxy for Steel Vault
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99
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.3**
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Opinion of Ladenburg Thalmann & Co. Inc. (included as
Annex B to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
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99
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.4**
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Opinion of Hyde Park Capital Advisors, LLC (included as
Annex C to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
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99
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.5**
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Consent of Ladenburg Thalmann & Co. Inc.
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99
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.6**
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Consent of Hyde Park Capital Advisors, LLC
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II-2
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration statement
(or the most recent post-effective amendment hereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act,
each filing of the registrant’s annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c)(1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus:
(i) that is filed pursuant to paragraph
(1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial
bona fide
offering thereof.
II-3
(d) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13
of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
(f) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information
concerning a transaction, and Steel Vault being acquired
involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Delray Beach, State of Florida, on
October 2, 2009.
VERICHIP CORPORATION
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By:
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/s/ William
J. Caragol
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William J. Caragol
Acting Chief Financial Officer
Pursuant to the requirements of Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
POWER
OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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*
(Scott
R. Silverman)
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Chief Executive Officer and Executive Chairman of the Board of
Directors
(Principal Executive Officer)
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October 2, 2009
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(William
J. Caragol)
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Acting Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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October 2, 2009
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(Jeffrey
S. Cobb)
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Director
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October 2, 2009
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(Barry
M. Edelstein)
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Director
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October 2, 2009
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(Steven
R. Foland)
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Director
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October 2, 2009
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(Michael
E. Krawitz)
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Director
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October 2, 2009
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*
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William J. Caragol hereby signs this registration statement on
behalf of the persons for whom he is attorney-in-fact on
October 2, 2009, pursuant to a power of attorney previously
filed.
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By:
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/s/ William
J. Caragol
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Attorney-in-Fact
II-5
EXHIBIT INDEX
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Exhibit
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Number
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Exhibit Description
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2
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.1
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Agreement and Plan of Reorganization by and among VeriChip,
Steel Vault and VeriChip Acquisition Corp. dated
September 4, 2009 (included as Annex A-1 to the joint
proxy statement/prospectus forming part of this Registration
Statement and incorporated herein by reference)
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2
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.2*
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Amendment #1 to Agreement and Plan of Reorganization by and
among VeriChip, Steel Vault and VeriChip Acquisition Corp. dated
October 1, 2009 (included as Annex A-2 to the joint
proxy statement/prospectus forming part of this Registration
Statement and incorporated herein by reference)
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3
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.1*
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Second Amended and Restated Certificate of Incorporation of
VeriChip, as amended
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3
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.2
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Amended and Restated Bylaws of VeriChip (incorporated by
reference to Exhibit 3.2 to VeriChip’s
Form S-1
filed with the SEC on December 29, 2005)
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4
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.1
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Form of specimen common stock certificate for VeriChip
(incorporated by reference to Exhibit 4.3 to
VeriChip’s
Form S-1/A
filed with the SEC on January 22, 2007)
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5
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.1*
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Opinion of Holland & Knight LLP regarding validity of
the shares of VeriChip common stock registered hereunder
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8
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.1*
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Opinion of Holland & Knight LLP regarding material
federal income tax consequences relating to the merger
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10
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.1
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Convertible Preferred Stock Purchase Agreement, dated
September 29, 2009, between VeriChip and Optimus Capital
Partners, LLC (incorporated by reference to Exhibit 10.1 to
VeriChip’s
Form 8-K
filed with the SEC on September 29, 2009)
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23
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.1*
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Consent of Eisner LLP with respect to VeriChip
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23
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.2*
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Consent of Eisner LLP with respect to Steel Vault
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23
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.3*
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Consent of J.H. Cohn LLP with respect to Steel Vault
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23
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.4*
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Consent of Holland & Knight LLP (included as part of
Exhibit 5.1)
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23
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.5*
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Consent of Holland & Knight LLP (included as part of
Exhibit 8.1)
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24
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.1**
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Powers of Attorney of VeriChip (included on signature page)
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99
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.1*
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Form of Proxy for VeriChip
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99
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.2*
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Form of Proxy for Steel Vault
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99
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.3**
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Opinion of Ladenburg Thalmann & Co. Inc. (included as
Annex B to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
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99
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.4*
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Opinion of Hyde Park Capital Advisors, LLC (included as
Annex C to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
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99
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.5**
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Consent of Ladenburg Thalmann & Co. Inc.
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99
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.6**
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Consent of Hyde Park Capital Advisors, LLC
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II-6
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