U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15 (d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2004
[ ] Transition report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the transition period from _____________to _____________
Commission File Number: 000-50813
SAND HILL IT SECURITY ACQUISITION CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 20-0996152
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, California 94025
(Address of Principal Executive Offices) (Zip code)
(650) 926-7022
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
(Title of class)
Securities registered under Section 12(g) of the Exchange Act:
Units consisting of one share of Common Stock,
par value $.01 per share, and two Warrants
Common Stock, $.01 par value per share
Warrants to purchase shares of Common Stock
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: None
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of March 24, 2005, was approximately
$20,632,200. For purposes of this computation, all executive officers, directors
and 10% stockholders were deemed affiliates. Such a determination should not be
construed as an admission that such executive officers, directors or 10%
stockholders are affiliates.
As of March 24, 2005, 5,110,000 shares of common stock, par value $.01 per
share, were issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
SAND HILL IT SECURITY ACQUISITION CORP.
Page
PART I ................................................................1
Item 1. Description of Business.........................................1
Item 2. Description of Property........................................12
Item 3. Legal Proceedings..............................................13
Item 4. Submission of Matters to a Vote of Security Holders............13
PART II ...............................................................13
Item 5. Market for Common Equity and Related Stockholder Matters.......13
Item 6. Management's Discussion and Analysis or Plan of Operation......14
Item 7. Financial Statements...........................................15
Item 8. Changes In and Disagreements With Accountants or
Accounting and Financial Disclosure............................26
Item 8A. Controls and Procedures........................................26
PART III ...............................................................26
Item 9. Directors, Executive Officers, Promoters and
Control Persons................................................26
Item 10. Executive Compensation.........................................29
Item 11. Security Ownership of Certain Beneficial Owners
and Management.................................................29
Item 12. Certain Relationships and Related Transactions.................30
Item 14. Principal Accounting Fees and Services.........................35
SIGNATURES
EXHIBITS
PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Management's Discussion and Analysis or Plan of Operation" and elsewhere in, or
incorporated by reference into, this report.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Sand Hill IT Security Acquisition Corp. (the "Company") is a blank check
company formed to serve as a vehicle for the acquisition of a target business in
a specified industry. Our objective is to acquire an operating business in the
IT security industry. We were incorporated in Delaware on April 15, 2004. Our
initial stockholders purchased 1,000,000 shares of common stock, $.01 par value,
for $25,000. The registration statement for our initial public offering (the
"Offering") was declared effective July 26, 2004. We consummated the Offering on
July 30, 2004. The net proceeds, after deducting the underwriters discount and
offering expenses, and including the sale of 510,000 units in the underwriters
over-allotment option, was $22,022,462. $20,961,000 of these net proceeds has
been placed in a trust fund and invested in United States government securities.
The funds held in the trust account will not be released until the earlier of
the date on which we consummate a business combination or liquidate our assets.
We are not presently engaged in, and we will not engage in, any substantive
commercial business for an indefinite period of time following the Offering. We
intend to utilize cash derived from the proceeds of the Offering, our capital
stock, debt or a combination of these in effecting a business combination. Our
management has broad discretion with respect to the specific application of the
net proceeds of the Offering and, as a result, the Offering was characterized as
a blank check offering. While we may seek to effect business combinations with
more than one target business, we will probably have the ability, as a result of
our limited resources, to effect only a single business combination.
CURRENT TRENDS
Opportunities for market expansion have emerged for businesses in the IT
security industry. We believe that IT security is a favorable industry in which
to seek acquisitions and an attractive operating environment for a target
business for several reasons, including:
o International Data Corporation, or IDC predicts that the IT security
industry will continue to grow at an annual compound growth rate of
20% with security spending reaching $17.4 billion in 2006;
o IT security violations and incidents have increased from 3,000 in 1998
to more than 80,000 in 2002 according to the CERT Coordination Center,
or CERT; and
o The following macro forces create a strong demand for IT security
companies to provide solutions:
o Risk - fear of terrorism, vandalism and crime and the wide
recognition of the dependence of business and governmental
organizations on the viability of their networks;
o Regulation - federal regulation of financial and health care
sectors and state regulation to protect private data; and
o Liability - legal exposure from negligent disclosure and
accounting and other compliance violations.
IT security is a broad industry because it touches all aspects of networks
and computers. The industry is not a single market but encompasses many
sub-sectors at different stages of maturity. Within the IT security market,
industry analyst Trusted Strategies, an independent market research firm
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specializing in the IT security industry, has identified 600 companies and 46
defined market segments. In addition, new technologies requiring innovative
security solutions (such as instant messenger, VOIP and Wi-Fi) continue to
emerge and attract investment capital and market entrants. The resulting
industry landscape is highly fragmented and in a constant state of flux.
Furthermore, we believe that a limited IPO market and access to capital for
technology companies in general and for IT security companies in particular,
combined with an abundance of vendors has created significant opportunities for
consolidation and merger and acquisition opportunities in the sector. Our
company's management team has significant expertise and experience in the IT
security industry, as well as in acquisitions, operations and corporate
governance, which we believe gives us the ability to successfully acquire an
operating business in this industry.
The emergence of the commercial Internet marked the creation of the
enterprise security market. This market includes products and services that
preserve the integrity of critical information, networking and data systems, and
applications and services. Macro trends such as risk management, regulatory
compliance, online financial services, supply chain connectivity, mobile
computing, and terrorism all drive demand for robust systems that can anticipate
and withstand evolving threats to enterprise networks, systems and information.
Data security was originally a subset of the software market--technology
companies developed programs designed to address specific weaknesses in
enterprise networks. In the current environment, enterprises have recognized
that they need to adopt a more preventative approach to corporate security,
rather than implementing stop-gap remedies, because as the Internet grows in
complexity, the level of risk and security incidents has increased
exponentially. We believe the fragmented state of the industry, combined with
the convergence of security technologies and IT infrastructure has resulted in
the beginning of a consolidation trend that makes merger and acquisition targets
attractive.
Although we may consider target businesses in any segment of the IT
security industry, we currently intend to concentrate our search for an
acquisition candidate that offers comprehensive security solutions for critical
business infrastructure that include analysis and assessment, software
infrastructure, policy implementation, detection (monitoring) services, and
response services. We believe the following segments present attractive
opportunities:
o Productivity and connectivity products embedding security
o Products aimed at small to mid sized enterprises and home users
o Anti-Virus/Worm protection
o Anti-Spam solutions
o Identity theft and management solutions
o Internet access filtering
o Management of security applications
o Integration of firewalls, content and network management, and
application delivery/gateways
o Secure mobile and wireless communications
Using security products, enterprises, telecommunications carriers and
government entities can facilitate a variety of security and network protection
objectives including securing communication over the Internet, enforcing network
access policies and protecting against worm and virus outbreaks as well as
sophisticated intrusion attempts by hackers. The products and services of
companies in these targeted segments can be deployed in cost sensitive branch
offices and remote sites as well as in mission-critical environments such as
enterprise central sites, corporate extranets, major e-business Web sites and
carrier network infrastructures. We intend to target companies with solutions
that can be purchased and operated by individual users and enterprises and can
also be used by carriers to secure their infrastructure or deliver managed
security services to their enterprise customers.
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EFFECTING A BUSINESS COMBINATION
General
Although substantially all of the net proceeds of the Offering are intended
to be generally applied toward effecting a business combination in a specified
industry, the proceeds have not otherwise being designated for any more specific
purposes. Accordingly, our stockholders do not have an opportunity to evaluate
the specific merits or risks of any one or more business combinations. A
business combination may involve the acquisition of, or merger with, a company
that does not need substantial additional capital but which desires to establish
a public trading market for its shares, while avoiding what it may deem to be
adverse consequences of undertaking a public offering itself. These include time
delays, significant expense, loss of voting control and compliance with various
Federal and state securities laws. In the alternative, we may seek to consummate
a business combination with a company that may be financially unstable or in its
early stages of development or growth.
We have not identified a target business
To date, we have not selected any target business on which to concentrate
our search for a business combination. We intend to search for a target business
in the United States, Europe and Asia. Subject to the limitations that a target
business is an operating business in the IT security industry and has a fair
market value of at least 80% of our net assets at the time of the acquisition,
as described below in more detail, we will have great flexibility in identifying
and selecting a prospective acquisition candidate. Accordingly, there is no
basis for investors to evaluate the possible merits or risks of the target
business with which we may ultimately complete a business combination. To the
extent we effect a business combination with a financially unstable company or
an entity in its early stage of development or growth, including entities
without established records of sales or earnings, we may be affected by numerous
risks inherent in the business and operations of financially unstable and early
stage or potential emerging growth companies. Although our management will
endeavor to evaluate the risks inherent in a particular target business, there
can be no assurance that we will properly ascertain or assess all significant
risk factors.
Sources of target businesses
We anticipate that target business candidates will be brought to our
attention from various unaffiliated sources, including investment bankers,
venture capital funds, private equity funds, leveraged buyout funds, management
buyout funds and other members of the financial community, who may present
solicited or unsolicited proposals. Our officers and directors as well as their
affiliates may also bring to our attention target business candidates. While we
do not presently anticipate engaging the services of professional firms that
specialize in business acquisitions on any formal basis, we may engage these
firms in the future, in which event we may pay a finder's fee, retainer or other
compensation. In no event, however, will we pay any of our existing officers,
directors or stockholders or any entity with which they are affiliated any
finder's fee or other compensation for services rendered to us prior to or in
connection with the consummation of a business combination.
Selection of a target business and structuring of a business combination
Subject to the requirement that our initial business combination must be
with a target business with a fair market value that is at least 80% of our net
assets at the time of such acquisition, our management has virtually
unrestricted flexibility in identifying and selecting a prospective target
business. In evaluating a prospective target business, our management will
consider, among other factors, the following:
o financial condition and results of operation;
o growth potential;
o experience and skill of management and availability of additional
personnel;
o capital requirements;
o competitive position;
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o stage of development of the products, processes or services;
o degree of current or potential market acceptance of the products,
processes or services;
o proprietary features and degree of intellectual property or other
protection of the products, processes or services;
o regulatory environment of the industry; and
o costs associated with effecting the business combination.
These criteria are not intended to be exhaustive. Any evaluation relating
to the merits of a particular business combination will be based, to the extent
relevant, on the above factors as well as other considerations deemed relevant
by our management in effecting a business combination consistent with our
business objective. In evaluating a prospective target business, we will conduct
an extensive due diligence review which will encompass, among other things,
meetings with incumbent management and inspection of facilities, as well as
review of financial and other information which is made available to us.
The time and costs required to select and evaluate a target business and to
structure and complete the business combination cannot presently be ascertained
with any degree of certainty. Any costs incurred with respect to the
identification and evaluation of a prospective target business with which a
business combination is not ultimately completed will result in a loss to us and
reduce the amount of capital available to otherwise complete a business
combination.
Fair market value of target business
The initial target business that we acquire must have a fair market value
equal to at least 80% of our net assets at the time of such acquisition. The
fair market value of such business will be determined by our board of directors
based upon standards generally accepted by the financial community, such as
actual and potential sales, earnings and cash flow and book value. If our board
is not able to independently determine that the target business has a sufficient
fair market value, we will obtain an opinion from an unaffiliated, independent
investment banking firm that is a member of the National Association of
Securities Dealers, Inc. with respect to the satisfaction of these criteria.
Since any opinion, if obtained, would merely state that fair market value meets
the 80% of net assets threshold, it is not anticipated that copies of such
opinion would be distributed to our stockholders, although copies will be
provided to stockholders who request it. We are not required to obtain an
opinion from an investment banking firm as to the fair market value if our board
of directors independently determines that the target business has sufficient
fair market value.
Probable lack of business diversification
While we may seek to effect business combinations with more than one target
business, our initial business combination must be with a target business that
satisfies the minimum valuation standard at the time of such acquisition, as
discussed above. Consequently, it is probable that we will have the ability to
effect only a single business combination. Accordingly, the prospects for our
success may be entirely dependent upon the future performance of a single
business. Unlike other entities that may have the resources to complete several
business combinations of entities operating in multiple industries or multiple
areas of a single industry, it is probable that we will not have the resources
to diversify our operations or benefit from the possible spreading of risks or
offsetting of losses. By consummating a business combination with only a single
entity, our lack of diversification may:
o subject us to numerous economic, competitive and regulatory
developments, any or all of which may have a substantial adverse
impact upon the particular industry in which we may operate subsequent
to a business combination, and
o result in our dependency upon the development or market acceptance of
a single or limited number of products, processes or services.
4
Limited ability to evaluate the target business' management
Although we intend to closely scrutinize the management of a prospective
target business when evaluating the desirability of effecting a business
combination, there can be no assurance that our assessment of the target
business' management will prove to be correct. In addition, there can be no
assurance that the future management will have the necessary skills,
qualifications or abilities to manage a public company. Furthermore, the future
role of our officers and directors, if any, in the target business cannot
presently be stated with any certainty. While it is possible that one or more of
our directors will remain associated in some capacity with us following a
business combination, it is unlikely that any of them will devote their full
efforts to our affairs subsequent to a business combination. Moreover, we cannot
assure you that our officers and directors will have significant experience or
knowledge relating to the operations of the particular target business or that
they will be familiar with their responsibilities under the United States
securities laws.
Following a business combination, we may seek to recruit additional
managers to supplement the incumbent management of the target business. There
can be no assurance that we will have the ability to recruit additional
managers, or that additional managers will have the requisite skills, knowledge
or experience necessary to enhance the incumbent management.
Opportunity for stockholder approval of business combination
Prior to the completion of a business combination, we will submit the
transaction to our stockholders for approval, even if the nature of the
acquisition is such as would not ordinarily require stockholder approval under
applicable state law. In connection with seeking stockholder approval of a
business combination, we will furnish our stockholders with proxy solicitation
materials prepared in accordance with the Exchange Act, which, among other
matters, will include a description of the operations of the target business and
audited historical financial statements of the business.
In connection with the vote required for any business combination, all of
our initial stockholders, including all of our officers and directors, have
agreed to vote the 1,000,000 shares of common stock they owned immediately prior
to the Offering in accordance with the vote of the public stockholders owning a
majority of the shares of our common stock sold in our initial public offering.
This voting arrangement does not apply to shares included in units purchased in
the Offering or purchased following the Offering in the open market by any of
our initial stockholders, officers and directors. We will proceed with the
business combination only if public stockholders who own at least a majority of
the shares of common stock sold in the Offering vote in favor of the business
combination and public stockholders owning less than 20% of the shares sold in
the Offering exercise their conversion rights.
Conversion rights
At the time we seek stockholder approval of any business combination, we
will offer each public stockholder the right to have their shares of common
stock converted to cash if the stockholder votes against the business
combination and the business combination is approved and completed. The actual
per-share conversion price will be equal to the amount in the trust fund,
inclusive of any interest, as of the record date for determination of
stockholders entitled to vote on the business combination, divided by the number
of shares sold in the Offering. Without taking into any account interest earned
on the trust fund, the initial per-share conversion price would be $5.10. An
eligible stockholder may request conversion at any time after the mailing to our
stockholders of the proxy statement and prior to the vote taken with respect to
a proposed business combination at a meeting held for that purpose, but the
request will not be granted unless the stockholder votes against the business
combination and the business combination is approved and completed. Any request
for conversion, once made, may be withdrawn at any time up to the date of the
meeting. It is anticipated that the funds to be distributed to stockholders
entitled to convert their shares who elect conversion will be distributed
promptly after completion of a business combination. Public stockholders who
convert their stock into their share of the trust fund still have the right to
exercise the warrants that they received as part of the units. We will not
complete any business combination if public stockholders, owning 20% or more of
the shares sold in the Offering, exercise their conversion rights.
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Liquidation if no business combination
If we do not complete a business combination within 18 months after the
consummation of the Offering (January 30, 2006), or within 24 months (July 30,
2006) if the extension criteria described below have been satisfied, we will be
dissolved and will distribute to all of our public stockholders, in proportion
to their respective equity interests, an aggregate sum equal to the amount in
the trust fund, inclusive of any interest, plus any remaining net assets of the
Company. Our initial stockholders have waived their rights to participate in any
liquidation distribution with respect to shares of common stock owned by them
immediately prior to the Offering.
If we were to expend all of the net proceeds of the Offering, other than
the proceeds deposited in the trust fund, and without taking into account
interest, if any, earned on the trust fund, the initial per-share liquidation
price would be $5.10. The proceeds deposited in the trust fund could, however,
become subject to the claims of our creditors which could be prior to the claims
of our public stockholders. There can be no assurance that the actual per-share
liquidation price will not be less than $5.10, plus interest, due to claims of
creditors. Humphrey P. Polanen, our chairman of the board and chief executive
officer, has agreed pursuant to an agreement with us and the representatives of
the underwriters in the Offering, that, if we liquidate prior to the
consummation of a business combination, he will be personally liable to pay
debts and obligations to vendors or other entities that are owed money by us for
services rendered or products sold to us in excess of the net proceeds of the
Offering not held in the trust account. There can be no assurance, however, that
Mr. Polanen would be able to satisfy those obligations.
If we enter into a letter of intent, an agreement in principle or a
definitive agreement to complete a business combination prior to the expiration
of 18 months after the consummation of the Offering (January 30, 2006), but are
unable to complete the business combination within the 18-month period, then we
will have an additional six months (July 30, 2006) in which to complete the
business combination contemplated by the letter of intent, agreement in
principle or definitive agreement. If we are unable to do so by the expiration
of the 24-month period from the consummation of the Offering, we will then
liquidate. Upon notice from us, the trustee of the trust fund will commence
liquidating the investments constituting the trust fund and will turn over the
proceeds to our transfer agent for distribution to our stockholders. We
anticipate that our instruction to the trustee would be given promptly after the
expiration of the applicable 18-month or 24-month period.
Our public stockholders are entitled to receive funds from the trust fund
only in the event of our liquidation or if the stockholders seek to convert
their respective shares into cash upon a business combination that the
stockholder voted against and which is actually completed by us. In no other
circumstances shall a stockholder have any right or interest of any kind to or
in the trust fund. There will be no distribution from the trust fund with
respect to our warrants.
COMPETITION
In identifying, evaluating and selecting a target business, we expect to
encounter intense competition from other entities having a business objective
similar to ours. Many of these entities are well established and have extensive
experience identifying and effecting business combinations directly or through
affiliates. Many of these competitors possess greater technical, human and other
resources than us and our financial resources will be relatively limited when
contrasted with those of many of these competitors. While we believe there are
numerous potential target businesses that we could acquire with the net proceeds
of the Offering, our ability to compete in acquiring certain sizable target
businesses will be limited by our available financial resources. This inherent
competitive limitation gives others an advantage in pursuing the acquisition of
a target business. Further:
o our obligation to seek stockholder approval of a business combination
may delay the completion of a transaction;
o our obligation to convert into cash shares of common stock held by our
public stockholders in certain instances may reduce the resources
available to us for a business combination; and
o our outstanding warrants and options, and the future dilution they
potentially represent, may not be viewed favorably by certain target
businesses.
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Any of these obligations may place us at a competitive disadvantage in
successfully negotiating a business combination. Our management believes,
however, that our status as a public entity and potential access to the United
States public equity markets may give us a competitive advantage over privately
held entities having a similar business objective as us in acquiring a target
business with significant growth potential on favorable terms.
If we succeed in effecting a business combination, there will be, in all
likelihood, intense competition from competitors of the target business in the
IT security industry and elsewhere. There can be no assurance that, subsequent
to a business combination, we will have the resources or ability to compete
effectively.
FACILITIES
We maintain our executive offices at 3000 Sand Hill Road, Building 1, Suite
240, Menlo Park, California 94025. The cost for this space is included in the
$7,500 per-month fee Sand Hill Security, LLC charges us for general and
administrative services pursuant to a letter agreement between us and Sand Hill
Security, LLC. Sand Hill Security, LLC is an affiliate of certain of our
directors and executive officers. We believe, based on rents and fees for
similar services in the Menlo Park, California metropolitan area, that the fee
charged by Sand Hill Security, LLC is at least as favorable as we could have
obtained from an unaffiliated person. We consider our current office space
adequate for our current operation.
EMPLOYEES
We have three executive officers, each of whom are members of our board of
directors. These individuals are not obligated to contribute any specific number
of hours per week and intend to devote only as much time as they deem necessary
to our affairs. The executive officers are also involved with business ventures
other than the Company. The amount of time they will devote in any time period
will vary based on the availability of suitable target businesses to
investigate. We do not intend to have any full time employees prior to the
consummation of a business combination.
RISKS ASSOCIATED WITH OUR BUSINESS
In addition to other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
We are a development stage company with a limited operating history and will be
unable to generate any revenues until we complete a business combination.
We are a development stage company that has earned no revenues to date.
Since we have a limited operating history, there is no basis upon which to
evaluate our ability to achieve our business objective, which is to acquire an
operating business in the IT security industry. We will not generate any
revenues (other than interest income on the proceeds of the Offering) until, at
the earliest, after the consummation of a business combination.
The Company's management has broad discretion with respect to the specific
application of the net proceeds of the Offering.
Although substantially all of the net proceeds of the Offering are to be
generally applied toward consummating a merger with or acquisition of an
operating business whose primary business is in the IT security industry,
management has virtually unrestricted flexibility in identifying and selecting a
prospective target business. Stockholders must therefore rely on management's
due diligence review and evaluation of potential acquisition candidates. There
can be no assurances that, if we complete the acquisition of a target business,
such acquisition will be successful.
If we are forced to liquidate before a business combination, our public
stockholders could receive less than their purchase price per share upon
distribution of the trust fund and our warrants will expire worthless.
If we are unable to complete a business combination and are forced to
liquidate our assets, the per-share liquidation distribution could be less than
the purchase price per share that purchasers paid for our securities because of
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the expenses of the Offering, our general and administrative expenses and the
anticipated costs of seeking a business combination. Furthermore, there will be
no distribution with respect to our outstanding warrants and, accordingly, the
warrants will expire worthless if we liquidate before the completion of a
business combination.
If third parties bring claims against us, the proceeds held in trust could be
reduced and the per share liquidation price received by stockholders could be
less than their purchase price per share.
Our placing of funds in trust may not protect those funds from third party
claims against us. The proceeds held in trust could be subject to claims which
could take priority over the claims of our public stockholders. There can be no
assurance that the per-share liquidation price will not be less than the
purchase price per share that purchasers paid for our securities, plus interest,
due to claims of creditors. If we liquidate before the completion of a business
combination, Humphrey P. Polanen, our chairman of the board and chief executive
officer, will be personally liable under certain circumstances to ensure that
the proceeds in the trust fund are not reduced by the claims of various vendors
or other entities that are owed money by us for services rendered or products
sold to us. However, we cannot assure you that Mr. Polanen will be able to
satisfy those obligations.
Since we have not yet selected any target business with which to complete a
business combination, we are unable to currently ascertain the merits or risks
of the business which we may ultimately operate.
Subject to the limitations that a target business be an operating business
in the IT security industry and have a fair market value of at least 80% of our
net assets at the time of the acquisition, we will have flexibility in
identifying and selecting a prospective acquisition candidate. To the extent we
complete a business combination with a financially unstable company or an entity
in its development stage, we may be affected by numerous risks inherent in the
business operations of those entities. Although our management will endeavor to
evaluate the risks inherent in a particular target business, there can be no
assurance that we will properly ascertain or assess all of the significant risk
factors. There also can be no assurance that an investment in our company will
not ultimately prove to be less favorable to investors than a direct investment,
if an opportunity were available, in a target business.
Resources could be wasted in researching acquisitions that are not consummated.
It is anticipated that the investigation of each specific business
acquisition or merger and the negotiation, drafting, and execution of relevant
agreements, disclosure documents, and other instruments will require substantial
management time and attention and substantial costs for accountants, attorneys,
and others. If a decision is made not to complete a specific business
acquisition or merger, the costs incurred up to that point for the proposed
transaction would not be recoverable. Furthermore, even if an agreement is
reached for the acquisition of or merger with a specific business, the failure
to consummate that transaction (which failure could occur as a result of any
number of reasons, including issues beyond our control) will result in a loss to
us of the related costs incurred. Such a loss could materially adversely affect
subsequent attempts to locate and acquire or merge with another business.
We may issue shares of our capital stock or debt securities to complete a
business combination, which would reduce the equity interest of our stockholders
and likely cause a change of control of our ownership.
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. There are 35,960,000
authorized but unissued shares of our common stock (after appropriate
reservation for the issuance of shares upon full exercise of our outstanding
warrants, the purchase option granted to I-Bankers Securities and Newbridge
Securities, the representatives of the underwriters in the Offering, and the
exercise of stock options to be granted to Advisory Board members) and all of
the 5,000,000 shares of preferred stock available for issuance. Although we have
no commitments as of December 31, 2004 to issue our securities, except with
respect to 100,000 shares of common stock reserved for issuance upon the
exercise of stock options granted to Advisory Board members, which options are
not exercisable prior to a business combination, we will, in all likelihood,
issue a substantial number of additional shares of our common stock or preferred
stock, or a combination of common and preferred stock, to complete a business
combination. The issuance of additional shares of our common stock or any number
of shares of our preferred stock:
o may significantly reduce the equity interest of our stockholders;
8
o will likely cause a change in control if a substantial number of our
shares of common stock are issued, which may affect, among other
things, our ability to use our net operating loss carry forwards, if
any, and most likely also result in the resignation or removal of our
present officers and directors; and
o may adversely affect prevailing market prices for our common stock,
our warrants and the units.
Similarly, if we issued debt securities, it could result in:
o default and foreclosure on our assets if our operating cash flow after
a business combination were insufficient to pay our debt obligations;
o acceleration of our obligations to repay the indebtedness even if we
have made all principal and interest payments when due if the debt
security contained covenants that required the maintenance of certain
financial ratios or reserves and any such covenant were breached
without a waiver or renegotiation of that covenant;
o our immediate payment of all principal and accrued interest, if any,
if the debt security was payable on demand;
o covenants that limit our ability to acquire capital assets or make
additional acquisitions; and
o our inability to obtain additional financing, if necessary, if the
debt security contained covenants restricting our ability to obtain
additional financing while such security was outstanding.
Our current officers and directors may resign upon consummation of a business
combination or earlier. We may have limited ability to evaluate the management
of the target business.
Our ability to successfully effect a business combination will be totally
dependent upon the efforts of our key personnel. The future role of our key
personnel in the target business, however, cannot presently be ascertained. In
addition, current key personnel may choose to resign from service to the
Company. Although it is possible that some of our key personnel will remain
associated in various capacities with the target business following a business
combination, it is also possible that the management of the target business at
the time of the business combination will remain in place. Although we intend to
closely scrutinize the management of a prospective target business in connection
with evaluating the desirability of effecting a business combination, we cannot
assure you that our assessment of management will prove to be correct.
Our officers and directors may allocate their time to other businesses, which
could cause a conflict of interest as to which business they present a viable
acquisition opportunity.
Our officers and directors are not required to commit their full time to
our affairs, which may result in a conflict of interest in allocating their time
between our operations and other businesses. Some of these persons may in the
future become affiliated with entities, including other "blank check" companies,
engaged in business activities similar to those intended to be conducted by us.
Our officers and directors may become aware of business opportunities that may
be appropriate for presentation to us as well as the other entities with which
they may be affiliated. Accordingly, they may have conflicts of interest in
determining to which entity a particular business opportunity should be
presented. We cannot assure you that these conflicts will be resolved in our
favor.
All of our officers and directors own stock in our company, but have waived
their right to receive distributions upon liquidation. The shares and warrants
owned by our directors and officers will be worthless if we do not consummate a
business combination. The personal and financial interests of our directors and
officers may influence their motivation in identifying and selecting a target
business and completing a business combination within the time allotted.
Consequently, our directors and officers' discretion in identifying and
selecting a suitable target business may result in a conflict of interest when
determining whether the terms, conditions and timing of a particular business
combination are appropriate and in our stockholders' best interest.
9
If our common stock becomes subject to the SEC's penny stock rules, broker
dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,000 or less and our
common stock has a market price per share of less than $5.00, transactions in
our common stock may be subject to the "penny stock" rules promulgated under the
Exchange Act. Under these rules, broker-dealers who recommend such securities to
persons other than institutional accredited investors must:
o make a special written suitability determination for the purchaser;
o receive the purchaser's written agreement to a transaction prior to
sale;
o provide the purchaser with risk disclosure documents that identify
certain risks associated with investing in "penny stocks" and which
describe the market for these "penny stocks" as well as a purchaser's
legal remedies; and
o obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
If our common stock becomes subject to these rules, broker-dealers may find
it difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.
It is probable that we will only be able to complete one business combination,
which will cause us to be solely dependent on a single business and a limited
number of products or services.
We presently have approximately $21.1 million on deposit in a trust fund
which we may use to complete a business combination. Our initial business
combination must be with a business with a fair market value of at least 80% of
our net assets at the time of such acquisition. Consequently, it is probable
that we will have the ability to complete only a single business combination.
Accordingly, the prospects for our success may be:
o solely dependent upon the performance of a single business, or
o dependent upon the development or market acceptance of a single or
limited number of products, processes or services.
In this case, we will not be able to diversify our operations or benefit
from the possible spreading of risks or offsetting of losses, unlike other
entities that may have the resources to complete several business combinations.
Because of our limited resources and the significant competition for business
combination opportunities, we may not be able to consummate a business
combination.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions in the IT
security industry. Many of these entities are well established and have
extensive experience in identifying and effecting business combinations directly
or through affiliates. Many of these competitors possess greater technical,
human and other resources than we do and our financial resources will be
relatively limited when contrasted with those of many of these competitors.
While we believe that there are numerous potential target businesses that we
could acquire with the net proceeds of the Offering, our ability to compete in
acquiring certain sizable target businesses will be limited by our available
financial resources. This inherent competitive limitation gives others an
advantage in pursuing the acquisition of certain target businesses. Further, the
obligation we have to seek stockholder approval of a business combination may
delay the consummation of a transaction, and our obligation to convert into cash
the shares of common stock held by public stockholders in certain instances may
reduce the resources available for a business combination. Additionally, our
outstanding warrants, and the future dilution they potentially represent, may
not be viewed favorably by certain target businesses. Any of these obligations,
combined with the time limitation within which we must complete a business
combination, may place us at a competitive disadvantage in successfully
negotiating a business combination.
10
We may be unable to obtain additional financing, if required, to complete a
business combination or to fund the operations and growth of the target
business, which could compel us to restructure the transaction or abandon a
particular business combination.
Although we believe that the net proceeds of the Offering will be
sufficient to allow us to consummate a business combination, in as much as we
have not yet identified any prospective target business, we cannot ascertain the
capital requirements for any particular transaction. If the cash on deposit in
our trust account is insufficient, either because of the size of the business
combination or the depletion of the available net proceeds in search of a target
business, or because we become obligated to convert into cash a significant
number of shares from dissenting stockholders, we will be required to seek
additional financing. There can be no assurance that such financing would be
available on acceptable terms, if at all. To the extent that additional
financing proves to be unavailable when needed to consummate a particular
business combination, we would be compelled to restructure the transaction or
abandon that particular business combination and seek an alternative target
business candidate. In addition, if we consummate a business combination, we may
require additional financing to fund the operations or growth of the target
business. The failure to secure additional financing could have a material
adverse effect on the continued development or growth of the target business.
None of our officers, directors or stockholders is required to provide any
financing to us in connection with or after a business combination.
Our initial stockholders, including our officers and directors, control a
substantial interest in us and thus may influence certain actions requiring
stockholder vote.
As of February 1, 2005, our initial stockholders (including all of our
officers and directors) collectively owned 20.0% of our issued and outstanding
shares of common stock. Our board of directors is divided into three classes,
each of which will generally serve for a term of three years with only one class
of directors being elected in each year. It is unlikely that there will be an
annual meeting of stockholders to elect new directors prior to the consummation
of a business combination, in which case all of the current directors will
continue in office at least until the consummation of a business combination or
our liquidation. If there is an annual meeting, as a consequence of our
"staggered" board of directors, only a minority of the board of directors will
be considered for election and our initial stockholders, because of their
ownership position, will have considerable influence regarding the outcome.
Accordingly, our initial stockholders will continue to exert control at least
until the consummation of a business combination. In addition, our initial
stockholders and their affiliates and relatives are not prohibited from
purchasing units, warrants or shares in the aftermarket. If they do, there can
be no assurance that our initial stockholders will not have considerable
influence upon the vote in connection with a business combination.
Our outstanding warrants and options may have an adverse effect on the market
price of our common stock and make it more difficult to effect a business
combination.
We currently have 9,130,000 shares of common stock reserved for issuance
upon exercise of issued and outstanding warrants, the option to purchase 270,000
units that we granted to the representatives of the underwriters in the
Offering, and the options to be granted to Advisory Board members. To the extent
we issue shares of common stock to effect a business combination, the potential
for the issuance of substantial numbers of additional shares upon exercise of
these warrants and options could make us a less attractive acquisition vehicle
in the eyes of a target business as such securities, when exercised, will
increase the number of issued and outstanding shares of our common stock, reduce
the ownership the stockholders would have had excluding the shares issued from
the exercise of warrants and options, and may reduce the value of the shares
issued to complete the business combination. Accordingly, our warrants and
options may make it more difficult to effectuate a business combination or
increase the cost of the target business. Additionally, the sale, or even the
possibility of sale, of the shares underlying the warrants and options could
have an adverse effect on the market price for our securities or on our ability
to obtain future public financing. If and to the extent these warrants and
options are exercised, stockholders may experience dilution to their holdings.
If our initial stockholders exercise their registration rights, it may have an
adverse effect on the market price of our common stock and the existence of
theses rights may make it more difficult to effect a business combination.
Our initial stockholders are entitled to demand that we register the resale
of their shares of common stock at any time after the date on which their shares
are released from escrow. If our initial stockholders exercise their
registration rights with respect to all of their shares of common stock, then
11
there will be an additional 1,000,000 shares of common stock eligible for
trading in the public market. The presence of this additional number of shares
of common stock eligible for trading in the public market may have an adverse
effect on the market price of our securities. In addition, the existence of
these rights may make it more difficult to effectuate a business combination, or
may increase the cost of the target business, as the stockholders of the target
business may be discouraged from entering into a business combination with us or
will request a higher price for their securities as a result of these
registration rights and the potential future effect their exercise may have on
the trading market for our securities.
Our securities lack a significant trading market.
Our securities are not eligible for trading on any national or regional
exchange. Our securities are eligible for trading in the over-the-counter market
on the OTC Bulletin Board pursuant to Rule 15c2-11 of the Exchange Act. This
market tends to be highly illiquid, in part because there is no national
quotation system by which potential investors can trace the market price of
shares except through information received or generated by certain selected
broker-dealers that make a market in these particular securities. There are
currently no plans, proposals, arrangements or understandings with any person
with regard to the development of a trading market in our securities. There can
be no assurance that an active trading market in our securities will develop, or
if such a market develops, that it will be sustained. In addition, there is a
greater chance for market volatility for securities that trade on the OTC
Bulletin Board as opposed to securities that trade on a national exchange or
quotation system. This volatility may be caused by a variety of factors,
including the lack of readily available quotations, the absence of consistent
administrative supervision of "bid" and "ask" quotations and generally lower
trading volume.
If we are deemed to be an investment company, we may be required to institute
burdensome compliance requirements and our activities may be restricted, which
may make it difficult for us to complete a business combination.
If we are deemed to be an investment company under the Investment
Company Act of 1940, our activities may be restricted, including:
o restrictions on the nature of our investments; and
o restrictions on the issuance of securities,
which may make it difficult for us to complete a business combination.
In addition, we may have imposed upon us burdensome requirements,
including:
o registration as an investment company under federal and state laws;
o adoption of a specific form of corporate structure; and
o reporting, record keeping, voting, proxy and disclosure requirements
and other rules and regulations.
We do not believe that our principal business activities will subject us to
the Investment Company Act of 1940. To this end, the proceeds of the Offering
that are held in trust may only be invested by the trust agent in "government
securities" with specific maturity dates. By restricting the investment of the
proceeds to these instruments, we intend to meet the requirements for the
exemption provided in Rule 3a-1 promulgated under the Investment Company Act of
1940. If we were deemed to be subject to the act, compliance with these
additional regulatory burdens would require additional expense that we have not
allotted for.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our executive offices at 3000 Sand Hill Road, Building 1, Suite
240, Menlo Park, California 94025. The cost for this space is included in the
$7,500 per-month fee Sand Hill Security, LLC charges us for general and
administrative services pursuant to a letter agreement between us and Sand Hill
Security, LLC. We believe, based on rents and fees for similar services in the
Menlo Park, California metropolitan area, that the fee charged by Sand Hill
Security, LLC is at least as favorable as we could have obtained from an
unaffiliated person. We consider our current office space adequate for our
current operation.
12
ITEM 3. LEGAL PROCEEDINGS
We are not presently a party to any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters for submission to a vote of security holders during
the last fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The units, common stock and warrants are listed on the OTC Bulletin Board
under the symbols SHQCU, SHQC and SHQCW, respectively. The following table
indicates the quarterly high and low bid price for the units, common stock and
warrants on the OTC Bulletin Board for the periods indicated since such units
began trading on July 27, 2004 and common stock and warrants began trading on
August 24, 2004. Such inter-dealer quotations do not necessarily represent
actual transactions, and do not reflect retail mark-ups, mark-downs or
commissions.
OTC
BULLETIN BOARD
BID PRICE
UNITS COMMON STOCK WARRANTS
-------------------- ------------------------------- ------------------------------ -------------------------------
2004 HIGH LOW HIGH LOW HIGH LOW
-------------------- --------------- --------------- --------------- -------------- --------------- ---------------
Third Quarter $ 6.25 $ 5.55 $ 5.10 $ 4.50 $ 0.80 $ 0.45
Fourth Quarter $ 6.20 $ 5.42 $ 4.95 $ 4.55 $ 0.70 $ 0.43
As of December 31, 2004, we had 2 holders of record of our units, 8 holders
of record of our common stock, and 1 holder of record of our warrants.
We have not paid any dividends on our common stock to date and do not
intend to pay dividends in the foreseeable future, but intend to retain earnings
for future growth.
Equity Compensation Plan
The following table provides information as of December 31, 2004, about our
common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans (including individual
arrangements):
Number of securities remaining
Number of securities to be Weighted-average available for future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved -- -- --
by security holders
Equity compensation plans not 100,000 $ 4.75 --
approved by security holders
-------------------------- ----------------------------------
Total 100,000 $ 4.75 --
========================== ==================================
On December 1, 2004, the Board of Directors of the Company created an
Advisory Board, consisting of four independent members to advise the Company
with respect to the research and structuring of a business combination with an
operating business in the IT security industry. The Board of Directors
13
authorized the Company to reserve 100,000 shares of common stock for issuance
pursuant to the exercise of stock options to purchase shares of common stock at
an exercise price of $4.75 per share, to be granted to the initial members of
the Advisory Board. Pursuant to the terms of the stock option agreement, the
options will vest (i) 50% one year from the grant of the option and (ii) 50% two
years from the grant of the option; however, the options will not be exercisable
prior to the consummation of a business combination by the Company.
Recent Sales of Unregistered Securities
In April 2004, we sold the following shares of Common Stock without
registration under the Securities Act:
Stockholders Number of Shares
------------------------------------------------------------
Humphrey Polanen 459,441
Sand Hill Security, LLC 100,000
Keith Walz 174,825
Scott Broomfield 174,825
Cary Grossman 48,951
Dan Johnson 20,979
Alberto Micalizzi 20,979
Such shares were issued in connection with our organization pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act as
they were sold in a transaction not involving a public offering. The shares were
sold at purchase prices of $0.025 per share.
On July 30, 2004, we closed the Offering of 3,600,000 Units, with each Unit
consisting of one share of our common stock and two warrants, each to purchase
one share of our common stock at an exercise price of $5.00 per share. The Units
were sold at an offering price of $6.00 per Unit, generating gross proceeds of
$21,600,000. Additionally, the underwriters' purchased 510,000 units, pursuant
to the exercise of the over-allotment option granted in connection with the
Offering, generating gross proceeds of $3,060,000. The representatives of the
underwriters in the Offering were I-Bankers Securities Incorporated and
Newbridge Securities Corporation. The securities sold in the Offering were
registered under the Securities Act pursuant to a registration statement on Form
S-1 (No. 333-114861). The Securities and Exchange Commission declared the
registration statement effective on July 26, 2004.
We paid a total of $2,250,900 in underwriting discounts and commissions,
including $648,000 for the underwriters' non-accountable expense allowance, and
approximately $386,000 for other costs and expenses related to the Offering.
After deducting the underwriting discounts and commissions and the Offering
expenses, the total net proceeds to us from the Offering were approximately
$22,022,462, of which $20,961,000 was deposited into a trust fund and the
remaining proceeds are available to be used to provide for business, legal and
accounting due diligence on prospective business combinations and continuing
general and administrative expenses. Through December 31, 2004, we have used
$281,623 of the net proceeds that were not deposited into the trust fund to pay
general and administrative expenses. The net proceeds deposited into the trust
fund remain on deposit in the trust fund and have earned $139,510 in interest
through December 31, 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this report.
We were formed on April 15, 2004, to serve as a vehicle to effect a merger,
capital stock exchange, asset acquisition or other similar business combination
with an operating business in the IT security industry. We intend to utilize
cash derived from the proceeds of the Offering, our capital stock, debt or a
combination of cash, capital stock and debt, in effecting a business
combination. We consummated the Offering on July 30, 2004.
14
The net loss of $49,907 reported for the period from April 15, 2004
(inception) through December 31, 2004 consists primarily of $51,408 for director
and officer liability and other insurance, $37,500 for a monthly administrative
services fee, $53,826 for professional fees, and $49,210 for travel and other
expenses. Interest accreted on the trust fund was $139,510, and other interest
income was $2,529.
We will use substantially all of the net proceeds of the Offering to
acquire a target business, including identifying and evaluating prospective
acquisition candidates, selecting the target business, and structuring,
negotiating and consummating the business combination. To the extent that our
capital stock is used in whole or in part as consideration to effect a business
combination, the proceeds held in the trust fund as well as any other net
proceeds not expended will be used to finance the operations of the target
business. We believe that we have sufficient available funds outside of the
trust fund to operate through July 30, 2006, assuming that a business
combination is not consummated during that time.
Over the 24-month period subsequent to the consummation of the Offering, we
anticipate approximately $250,000 of expenses for legal, accounting and other
expenses related to the due diligence investigations, structuring and
negotiating of a business combination, $180,000 for the administrative fee
payable to Sand Hill Security, LLC ($7,500 per month for two years), $100,000 of
expenses for the due diligence and investigation of a target business, $75,000
of expenses in legal and accounting fees relating to our SEC reporting
obligations and $475,000 for general working capital that will be used for
miscellaneous expenses and reserves, including approximately $180,000 for
director and officer liability insurance premiums, inclusive of the amounts set
out in the preceding paragraph. We do not believe we will need to raise
additional funds in order to meet the expenditures required for operating our
business. However, we may need to raise additional funds through a private
offering of debt or equity securities if such funds are required to consummate a
business combination. We would only consummate such a fund raising
simultaneously with the consummation of a business combination.
We are obligated, commencing July 26, 2004, to pay to Sand Hill Security,
LLC, an affiliate of our directors and executive officers, a monthly fee of
$7,500 for general and administrative services. In addition, in April 2004, Sand
Hill Security, LLC advanced an aggregate of $40,000 to us, on a non-interest
bearing basis, for payment of offering expenses on our behalf. This amount was
repaid in August 2004 out of the proceeds of the Offering.
Off-balance Sheet Arrangements
There were no off-balance sheet arrangements during the period from
April 15, 2004 (inception) through December 31, 2004, that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that is material to our
investors.
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sand HIll IT Security Acquisition Corp.
Houston, Texas
We have audited the accompanying balance sheet of Sand Hill IT Security
Acquisition Corp. (a corporation in the development stage) as of December 31,
2004, and the related statement of operations, stockholders' equity and cash
flows for the period from April 15, 2004 (inception) to December 31, 2004. These
financial statements are the responsbility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Sand Hill IT Security
Acquisition Corp. at December 31, 2004, and the results of their operations and
their cash flows for the period from April 15, 2004 (inception) to December 31,
2004 in conformity with accounting principles generally accepted in the United
States of America.
/s/ HEIN & ASSOCIATES LLP
March 15, 2005
Houston, Texas
16
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
BALANCE SHEET
December 31, 2004
-------------------------
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ 783,133
Treasury bill held in trust .................................................... 21,100,510
Prepaid expenses................................................................ 132,131
-------
Total current assets....................................................... 22,015,774
----------
TOTAL ASSETS.................................................................... $ 22,015,774
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses...................................... $ 15,772
------
Total Liabilities............................................................... 15,772
------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value
Authorized 5,000,000 shares; none issued................................... --
Common stock, $0.01 par value
Authorized 50,000,000 shares
Issued and outstanding, 5,110,000 shares................................... 51,100
Additional paid-in capital...................................................... 21,998,809
Deficit accumulated during the development stage................................ (49,907)
TOTAL STOCKHOLDERS' EQUITY...................................................... 22,000,002
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 22,015,774
==========
See accompanying notes to financial statements.
17
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENT OF OPERATIONS
Period from April 15,
2004 (inception) to
December 31, 2004
-------------------------
Formation and operating costs............................................ $ (191,946)
--------------
Operating loss........................................................... (191,946)
--------------
Interest income.......................................................... 142,039
--------------
Net loss................................................................. $ (49,907)
==============
Weighted Average Shares Outstanding...................................... 3,468,784
==============
Net Loss Per Share (Basic and Diluted)................................... $ (0.01)
==============
See accompanying notes to financial statements.
18
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENT OF CASH FLOWS
Period from April 15,
2004 (inception) to
December 31, 2004
--------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss................................................................ $ (49,907)
Accretion of treasury bill.............................................. (75,510)
Increase in prepaid expenses............................................ (132,131)
Increase in accounts payable and accrued expenses....................... 15,772
Compensation expense related to issuance of Advisory Board options...... 2,447
Net cash provided by (used in) operating activities....................... (239,329)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of treasury bill in trust account.............................. (21,025,000)
Net cash used in investing activities..................................... (21,025,000)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from sale of common stock to initial shareholders.............. 25,000
Gross proceeds from public offering..................................... 24,660,000
Costs of public offering................................................ (2,637,538)
Proceeds from stockholder loan.......................................... 40,000
Repayment of stockholder loan.......................................... (40,000)
--------------
Net cash provided by financing activities................................. 22,047,462
--------------
NET INCREASE IN CASH...................................................... 783,133
CASH AT BEGINNING OF PERIOD............................................... --
--------------
CASH AT END OF PERIOD..................................................... $ 783,133
==============
See accompanying notes to financial statements.
19
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENT OF STOCKHOLDERS' EQUITY
Period from April 15, 2004 (inception) to December 31, 2004
Deficit
Accumulated
Additional During
Paid-In Development
Shares Amount Capital Stage Total
---------- ------- ---------- ------------ --------------
Balance, April 15, 2004 (inception)............... $ -- $ -- $ -- $ -- $ --
Sale of 1,000,000 shares of common
stock to initial stockholders at
$0.025 per share.................................. 1,000,000 $10,000 $ 15,000 $ 25,000
Sale of 3,600,000 shares of common
stock to public stockholders at
$6.00 per share, net of
offering expenses of $2,637,538................... 3,600,000 $36,000 $18,926,462 $ 18,962,462
Sale of 510,000 shares of common stock
to underwriters at $6.00 per share................ 510,000 $ 5,100 $ 3,054,900 $ 3,060,000
Amortization of Advisory Board
Compensation...................................... $ 2,447 $ 2,447
Net loss for the period April 15, 2004
(inception) to December 31, 2004.................. $ (49,907) $ (49,907)
---------- ------- ------------ ---------- -------------
Balance, December 31, 2004........................ $5,110,000 $51,100 $ 21,998,809 $ (49,907) $ 22,000,002
========== ======= ============ ========== =============
See accompanying notes to financial statements.
20
SAND HILL IT SECURITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS OPERATIONS
Sand Hill IT Security Acquisition Corp. was incorporated in Delaware on
April 15, 2004 as a blank check company whose objective is to merge with or
acquire an operating business in the IT Security industry. The Company's initial
stockholders' purchased 1,000,000 shares of common stock, $0.01 par value, for
$25,000 on April 20, 2004.
The registration statement for the Company's initial public offering (the
"Offering") was declared effective on July 26, 2004. The Company consummated the
Offering on July 30, 2004 and received proceeds, net of the underwriters'
discount, of $22,022,462. Subsequently, the underwriters exercised their over
allotment option and the Company received an additional $2,861,100 in proceeds,
net of the underwriters' discount. The Company's management has broad discretion
with respect to the specific application of the net proceeds of the Offering,
although substantially all of the net proceeds of the Offering are intended to
be generally applied toward consummating a merger with or acquisition of an
operating business in the IT security industry ("Business Combination"). There
is no assurance that the Company will be able to successfully affect a Business
Combination. An amount equal to $21,025,000 was deposited in an interest bearing
trust account ("Trust Fund") until the earlier of (i) the consummation of its
first Business Combination or (ii) liquidation of the Company. Under the
agreement governing the Trust Fund, funds may only be invested in United States
government securities with a maturity of 180 days or less. The trust fund
balance has been invested in a United States Treasury Bill, which is accounted
for as a trading security and is recorded at its market value of approximately
$21,100,510 at December 31, 2004. The excess of market value over cost is
included in interest income in the accompanying Statement of Operations. The
remaining proceeds of the Offering may be used to pay for business, legal and
accounting due diligence on prospective mergers or acquisitions and continuing
general and administrative expenses.
The Company, after signing a definitive agreement for the merger with or
acquisition of a target business, will submit such transaction for stockholder
approval. In the event that stockholders owning 20% or more of the outstanding
stock excluding, for this purpose, those persons who were stockholders
immediately prior to the Offering, vote against the Business Combination, the
Business Combination will not be consummated. All of the Company's stockholders
prior to the Offering, including all of the officers and directors of the
Company ("Initial Stockholders"), have agreed to vote their founding shares of
common stock in accordance with the vote of the majority in interest of all
other stockholders of the Company ("Public Stockholders") with respect to a
Business Combination. After consummation of the Company's first Business
Combination, these voting safeguards no longer apply.
With respect to the first Business Combination which is approved and
consummated, any Public Stockholder who voted against the Business Combination
may demand that the Company redeem his or her shares. The per share redemption
price will equal the amount in the Trust Fund as of the record date for
determination of stockholders entitled to vote on the Business Combination
divided by the number of shares of common stock held by Public Stockholders at
the consummation of the Offering. Accordingly, Public Stockholders holding
19.99% of the aggregate number of shares owned by all Public Stockholders may
seek redemption of their shares in the event of a Business Combination. Such
Public Stockholders are entitled to receive their per share interest in the
Trust Fund computed without regard to the shares held by Initial Stockholders.
The Company's Certificate of Incorporation provides for the mandatory
liquidation of the Company, without stockholder approval, in the event that the
Company does not consummate a Business Combination within 18 months from the
date of the consummation of the Offering (January 30, 2006), or 24 months from
the consummation of the Offering (July 30, 2006) if certain extension criteria
have been satisfied. In the event of liquidation, it is likely that the per
share value of the residual assets remaining available for distribution
(including Trust Fund assets) will be less than the initial public offering
price per share in the Offering (assuming no value is attributed to the Warrants
contained in the Units to be offered in the Offering as described in Note 3).
21
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of the Company. The Company
commenced operations effective July 31, 2004. All activity through July 30,
2004, is related to the Company's formation and preparation of the Offering. The
Company has selected December 31 as its fiscal year end.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual amounts could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents. The Company's policy is to limit the
amount of credit exposure to any one financial institution and place investments
with financial institutions evaluated as being creditworthy, or in short-term
money market funds which are exposed to minimal interest rate and credit risk.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. At December 31, 2004, a deferred income tax asset relating to the
Company's net operating loss is offset by a full valuation allowance based upon
a lack of earnings history for the Company.
Earnings per Common Share
Basic earnings per share ("EPS") is computed by dividing net income
applicable to common stock by the weighted average common shares outstanding
during the period. Diluted EPS reflects the additional dilution for all
potentially dilutive securities such as stock warrants.
Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others"
(Interpretation No. 45"). Interpretation No. 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 apply on a
prospective basis to guarantees issued or modified after December 31, 2002.
Interpretation No. 45 did not have an effect on the financial statements.
22
In January 2003, the Financial Accounting Standard Board ("FASB") issued
Interpretation No. 46 (FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," and addresses consolidation by business
enterprises of variable interest entities (more commonly known as Special
Purpose Entities or SPE's). In December 2003, FASB issued FIN No. 46R which
replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, non-controlling interests and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. This FIN requires the
consolidation of results of variable interest entities in which the Company is
the primary beneficiary of the variable interest entity. The Company has not
owned an interest in a variable interest entity that met the consolidation
requirements and as such the adoption of FIN No. 46R did not have any effect on
the financial condition, results of operations, or liquidity of the Company.
Interests in entities acquired or created after December 31, 2003 will be
evaluated based on FIN No. 46R criteria and consolidated, if required.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", an amendment of FASB
Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, "Interim No. 28,
"Interim Financial Reporting", to require disclosure about those effects in
interim financial information. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. SFAS 148 did not have an effect
on the financial statements.
Stock-Based Compensation. On December 16, 2004, the FASB issued Statement
of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) will require companies to measure
all employee stock-based compensation awards using a fair value method and
record such expense in the financial statements. In addition, the adoption of
SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment
arrangements. For public entities that file as small business filers, SFAS No.
123(R) is effective beginning as of the first interim or annual reporting period
that begins after December 15, 2005. There was no impact on the Company's basic
financial statements resulting from the issuance of SFAS No. 123(R).
3. PUBLIC OFFERING
On July 30, 2004, the Company sold 3,600,000 units ("Units") in a public
offering, which included granting the underwriters' an over-allotment option to
purchase up to an additional 540,000 Units. Subsequently, the underwriters
exercised their over-allotment option and purchased an additional 510,000
shares. Each Unit consists of one share of the Company's common stock, $0.01 par
value, and two Redeemable common stock Purchase Warrants ("Warrants"). Each
Warrant will entitle the holder to purchase from the Company one share of common
stock at an exercise price of $5.00 commencing on the later of the completion of
a Business Combination or July 25, 2005 and expiring July 25, 2009. The Warrants
will be redeemable by the Company at a price of $0.01 per Warrant upon 30 days'
notice after the Warrants become exercisable, only in the event that the last
sale price of the common stock is at least $8.50 per share for any 20 trading
days within a 30 trading day period ending on the third day prior to the date on
which notice of the redemption is given. In connection with the Offering, the
Company issued an option for $100 to the underwriters' to purchase 270,000 Units
at an exercise price of $7.50 per Unit. The Units issuable upon exercise of this
option are identical to those included in the Offering except that exercise
price of the Warrants included in the Units is $6.65 per share.
4. COMMITMENT
The Company presently occupies office space provided by an Initial
Stockholder. Such affiliate has agreed that, until the acquisition of a target
business by the Company, it will make such office space, as well as certain
office and secretarial services, available to the Company, as may be required by
23
the Company from time to time. The Company has agreed to pay such affiliate
$7,500 per month for such services commencing on July 31, 2004.
5. NOTE PAYABLE
Sand Hill Security, LLC, an Initial Stockholder and affiliate of the
officers and directors of the Company, entered into a revolving credit agreement
with the Company in the amount of $60,000. Advances under the credit facility
amounted to $40,000 during 2004. The loan was repaid out of the net proceeds of
the Offering.
6. PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock, par
value $.01, with such designations, voting and other rights and preferences as
may be determined from time to time by the Board of Directors as of December 31,
2004, no shares of preferred stock have been issued.
7. INVESTMENTS HELD IN TRUST
Investments held in trust as of December 31, 2004 is comprised of a zero
coupon United States treasury bill with a face value of $21,124,800 purchased at
a discount of 99.53% due January 27, 2005. The investment is carried on the
Company's financial statements at $20,100,510, which includes accreted interest
of $75,510.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share as of December 31, 2004.
BASIC:
Numerator: Net loss $(49,907)
Denominator: Average common shares outstanding 3,468,784
Basic earnings per share $ (0.01)
DILUTED:
Numerator: Net loss $(49,907)
Denominator: Average common shares outstanding 3,468,784
Diluted earnings per share $ (0.01)
There is no dilution because of the loss.
Operations commenced subsequent to the Offering, therefore, average common
shares outstanding reflect shares issued in the Offering. No computation for
diluted earnings per share was prepared for the common stock Purchase Warrants
and the underwriters' option that were outstanding at December 31, 2004 to
purchase an aggregate of 9,030,000 share of common stock at $5.00 per share and
$6.65 per share, respectively, because the warrants' exercise price was greater
than the average market price of the common shares and conversion of the
warrants and underwriters' option would have had an antidilutive effect on loss
per share.
7. STOCK OPTION PLAN
On December 1, 2004, the Board of Directors of the Company created an
Advisory Board, consisting of four independent members to advise the Company
with respect to the research and structuring of a business combination with an
operating business in the IT security industry. The Board of Directors
authorized the Company to reserve 100,000 shares of common stock for issuance
pursuant to the exercise of stock options to purchase shares of common stock at
an exercise price of $4.75 per share, to be granted to the initial members of
the Advisory Board. Pursuant to the terms of the stock option agreement, the
options will vest (i) 50% one year from the grant of the option and (ii) 50% two
years from the grant of the option; however, the options will not be exercisable
prior to the consummation of a business combination by the Company.
The Company has 9,130,000 shares of common stock reserved for issuance upon
exercise of issued and outstanding warrants, the option to purchase 270,000
units that we granted to the representatives of the underwriters in the
Offering, and the options granted to Advisory Board Members.
24
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing ("Black-Scholes") model with the following weighted
average assumptions for 2004: (i) risk-free interest rate of 4.17%, (ii) a
dividend yield of 0.00%, (iii) volatility factors of the historical market price
of the Company's common stock of 10.1% and (iv) a weighted average expected life
of 5 years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
THE ESTIMATED FAIR VALUE OF THE OPTIONS IS AMORTIZED TO EXPENSE OVER
THE VESTING PERIOD OF THE STOCK OPTIONS.
A SUMMARY OF THE STATUS AND ACTIVITY OF THE COMPANY'S FIXED STOCK
OPTION PLANS IS PRESENTED BELOW:
Weighted Average Weighted Average
Shares Exercise Prices Fair Value
--------------- ------------------- -----------------
Stock options outstanding at April 15, 2004............. - $ - $ -
Options granted...................................... 60,000 4.75 .98
Options cancelled.................................... - - -
---------------
Stock options outstanding at December 31, 2004 60,000 $ 4.75 $ .98
Common shares authorized under the 2004 Stock Plan...... 100,000
Outstanding options.................................. (60,000)
Outstanding stock grants............................. -
Options available for grant at December 31, 2004........ 40,000
======
Shares exercisable at December 31, 2004................. 60,000 $ 4.75
The weighted average remaining contractual life of options is 5 years.
25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2004 (the "Evaluation Date"), and,
based on their evaluation, our chief executive officer and chief financial
officer have concluded that these controls and procedures were effective as of
the Evaluation Date. There were no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our current directors and executive officers are as follows:
Name Age Position
------------------------------------------------------------------------------
Humphrey P. Polanen 55 Chief Executive Officer and Chairman of the
Board of Directors
Keith Walz 37 President, Chief Financial Officer and
Director
Scott Broomfield 48 Executive Vice President of Corporate
Development and Director
Cary M. Grossman 51 Director
Daniel Johnson, Jr. 56 Director
Alberto Micalizzi 36 Director
HUMPHREY P. POLANEN has been our chairman of the board and chief executive
officer since our inception. He has had a career as an entrepreneur in
technology, a global executive for leading technology companies and as an
international corporate lawyer. From January 2000 until December 2003, Mr.
Polanen served as founder and Managing Director of Internet Venture Partners, a
strategic consulting and venture capital management firm for technology
companies. From February 1998 through February 1999, he was President and CEO of
Trustworks Systems, a Netherlands based network security software company.
Between 1995 and 1998 he was General Manager of two operating product divisions
(the Internet Commerce & Security Business Units) of Sun Microsystems, where he
was responsible for executing Sun's vision of being the global leader in secure
networks and systems and his divisions' products won security industry awards
for product of the year for three consecutive years. Mr. Polanen addressed the
World Economic Forum, The World Bank Annual Meeting and the U.S. Congress, as
Sun's spokesperson on Internet security while General Manager of Sun's first
Internet Commerce Division and later the Network Security Division. From 1981 to
1995, he was with Tandem Computers (acquired by Compaq/Hewlett-Packard), the
market leader in secure failsafe systems for large enterprises, where he held
several positions of leadership in new ventures, business and corporate
development, creating distribution channels in Asia Pacific, Latin America,
North America and Europe. In addition, as Director of Ventures he structured and
was a board member of several international ventures in which Tandem held an
equity stake and three of which Tandem subsequently acquired. In addition to his
career with large technology companies, Mr. Polanen has been active with early
stage companies as an entrepreneur, advisor and board member. He has been a
board member or on the advisory board of IT security companies: Cranite Systems
(wireless security), Certco (Digital Identity Management) and Trustworks
Systems. As a founder of the Heritage Bank of Commerce in 1994, Mr. Polanen
helped to create a new business bank in Silicon Valley from the startup phase to
a successful IPO on the Nasdaq exchange in September 1998. Heritage Bank now has
four operating banks and one billion dollars in assets. In 2001 Heritage Bank
acquired the Bank of Los Altos in a $40 million transaction. Mr. Polanen has
been a member of the board of directors since the bank's inception and has been
chair of the board's audit committee for ten years. He is also a member of the
board's governance and compensation committees. Mr. Polanen is a graduate of
Hamilton College and the Harvard Law School, where he was an editor of the
Harvard International Law Journal.
26
KEITH WALZ has been our Chief Financial Officer since January 10, 2005 and a
member of our board since inception. Mr. Walz is President of ABN AMRO Capital
(USA) and a Managing Director in ABN AMRO's Global Private Equity division. Mr.
Walz joined ABN AMRO Capital (USA) at inception in 1996. As a Senior Partner,
Mr. Walz participated in the sourcing, evaluation, and monitoring of over 35
investments, representing $200 million of capital invested. Mr. Walz focused on
Enterprise Software and Network Infrastructure investments. Mr. Walz has served
on the Board of Directors of over a dozen companies in which ABN AMRO has
invested. Also, he has held operating roles with ABN AMRO portfolio companies,
including Chairman and CEO of Worldweb.net and was a member of the Argus
Systems, Board of Directors, a developer of Trusted Computer Operating Systems.
Prior to joining ABN AMRO Capital, Mr. Walz was a Vice President in ABN AMRO's
Investment Banking division, responsible for financial reporting, analysis, and
systems. Prior to joining ABN AMRO he spent two years as a finance associate
with Tyson Foods, Inc., where he focused on enhancing enterprise business
processes and systems through the use of client/server computing technologies.
Mr. Walz is also a director of GT Nexus, Yellowbrix, and Oasis Technology. He
received an M.B.A. from DePaul University and a B.S. in Finance from the
University of Arkansas.
SCOTT BROOMFIELD has been a member of our board since inception. Mr. Broomfield
has been the CEO of Visuale, a private business process software company that he
recently sold to Onyx Software Corporation (NASDAQ: ONXS). Prior to joining
Visuale and from 1997 until 2001, Mr. Broomfield was the CEO of Centura Software
Corporation (NASDAQ: MBNEQ.PNK) (formerly Gupta Technologies, a NASDAQ traded
company), a $50 million software business specializing in secure, embedded and
mobile databases and application development tools. During his tenure as CEO of
Gupta, Mr. Broomfield completed the acquisition of Raima Corporation and in
three years built its market capitalization from $6 million to $700 million by
early 2000. Prior to Centura, he was a Managing Director of Hickey & Hill, Inc.,
a turnaround consultancy. At Hickey & Hill he was in charge of the high
technology restructuring practice. Mr. Broomfield structured the acquisition of
Polyscan and the equity recapitalization for ETEC Corporation. He was also
instrumental in the following company divestitures: Dazix, Domain Technologies,
Priam, Everex and Zitel, where he acquired 2 businesses to reposition Zitel in
the market. Prior to Hickey & Hill, Mr. Broomfield was the CFO of Trilogy
Technology Corporation which was sold to Digital Equipment Corporation. Mr.
Broomfield holds an MBA from Santa Clara University and is a member of Business
Executives for National Security (BENS), where he was the co-chair of BENS'
cyber security task force and Y2K initiatives.
CARY M. GROSSMAN has been a member of our board since inception and served as
our Chief Financial Officer from inception through January 10, 2005. Since May
19, 2004, Mr. Grossman has been the Chairman and Co-Chief Executive Officer of
Coastal Bancshares Acquisition Corp. (OTCBB: CBAS), a blank check company formed
to acquire or merge with a commercial bank or bank holding company. Mr. Grossman
has been Executive Vice President and Chief Financial Officer of Gentium, S.p.A,
an Italian biopharmaceutical company, since August 2004. He is also a director
of I-Sector Corp., an internet telephony company, since December 2004. From 2002
until 2003 he served as Executive Vice President and Chief Financial Officer at
U S Liquids, Inc, an AMEX listed environmental services company. Mr. Grossman
left U S Liquids, Inc. in 2003 as a result of the acquisition of three of its
businesses by a private equity firm and was President and Chief Executive
Officer of the acquiring company, ERP Environmental Services until November
2003. From 1997 until 2002, Mr. Grossman served Pentacon, Inc. (NSYE: JIT), a
provider of inventory management services and distributor of components to
Fortune 50 original equipment manufacturers, as a board member and in several
senior executive positions including :Chairman of the Board of Directors, Acting
Chief Financial Officer (2001-2002) and Lead Director (1998-2001) from the time
the Pentacon went public in March 1998 until becoming Chairman in 2001. Pentacon
acquired five businesses when it completed its initial public offering and
subsequently acquired four other businesses. Pentacon and substantially all of
its subsidiaries filed a Joint Chapter 11 Plan of Debtors in 2002. From 1991
until 2002, Mr. Grossman was the Managing Partner of McFarland, Grossman &
Company, Inc., an investment banking and financial advisory firm he co-founded
in 1991. Prior to that, Mr. Grossman practiced public accounting for 15 years.
He earned a Bachelor of Business Administration in Accounting from The
University of Texas, and is a Certified Public Accountant.
DANIEL JOHNSON, JR. has been a member of our board since inception and is a
senior partner in the Silicon Valley law firm Fenwick and West, where he
specializes in patent litigation and other complex intellectual property cases
and is a member of the Executive Committee. He has acted as lead trial counsel
in numerous technology cases involving, among other things, Internet software,
27
firmware, non-volatile memory, printed circuit board design, digital cellular
technology and lasers. Mr. Johnson has also advised client companies on
acquisition matters, including Netscreen in its acquisition by Juniper Networks.
Mr. Johnson is recognized as an outstanding trial lawyer by numerous national
and international associations and publications. He is a co-author of the Rules
of Civil Procedure in Patent Cases for the Northern District of California, has
participated in numerous panels on trial advocacy and has presented on the use
of multi-media at trial on behalf of the American Bar Association. Mr. Johnson
is a graduate of Yale University Law School, J.D., and of the University of
California, Berkeley, A.B., in political science, with honors.
ALBERTO MICALIZZI has been a member of our board since inception. Dr Micalizzi
is the Chairman of Dynamic Decisions Group Ltd, an independent quantitative
research house providing advisory activity to large institutional investors in
the fields of equity research and asset management. Mr. Micalizzi joined Dynamic
Decision Group Ltd in September 2001. He is Professor of Finance at Bocconi
University, Milan (Italy), and Researcher at the Centre for Quantitative
Finance, Imperial College, London University (UK), where he specializes in the
Bio-Pharma and Telecom-Technology sector sectors. Until July 2001, he was the
CEO of the Real Options Group, an international research center affiliated to
several US and European universities and business schools. From December 1998 to
March 2000, Mr. Micalizzi worked with an association of researchers that
developed into the Real Ophons Group. In 1997 he was appointed by Nomura
International (Milan) as an external advisor for the designing of structured
products in the bond market. In 1999 he was appointed by Andersen Consulting
(London) as an advisor on the valuation of start up businesses in the e-venture
segment. Other advisory experiences include Eli Lilly, Schering Plough, Glaxo,
La Roche, Danone Group and Ernst & Young. Dr. Micalizzi earned a degree in
Business Administration at Bocconi University (Milan, Italy), is a Chartered
Professional Accountant (CPA) and received his Ph.D in Finance at Imperial
College, London University (UK).
The Company is not aware of any "family relationships" among directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers.
The Company is not aware of any event (as listed in Item 401(d) of
Regulation S-B promulgated by the Securities and Exchange Commission) that
occurred during the past five years that are material to an evaluation of the
ability or integrity of any director, person nominated to become a director,
executive officer, promoter or control person of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities (the "10% Stockholders") to file reports of
ownership and changes of ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and 10% Stockholders of the Company are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms so
filed. Based solely on correspondence with, and a review of copies of Section
16(a) forms received from executive officers and directors and 10% Stockholders
(if any), the Company does not believe that, during the last fiscal year any of
the Reporting Persons was deficient in filing reports of ownership or changes in
ownership with the SEC.
Audit Committee
We do not have a standing audit committee or an audit committee financial
expert serving on our board of directors. As our plan of operations involves
identifying a target business and completing a business combination with such
business, we presently do not have material operations and do not experience
complex accounting issues. Accordingly, our board of directors has determined
that it is not necessary for us to have a standing audit committee or an audit
committee financial expert at this time.
Code of Ethics
In August 2004, our board of directors adopted a code of business conduct
and ethics that applies to our directors, officers and employees as well as
those of our subsidiaries. A copy of our code of ethics has been filed as an
exhibit to our Quarterly Report on Form 10-Q for the period ending July 30,
2004, and is available on our website at www.sandhillsecurity.com.
28
ITEM 10. EXECUTIVE COMPENSATION
No executive officer has received any cash compensation for services
rendered. Commencing on July 31, 2004 through the acquisition of a target
business, we will pay Sand Hill Security, LLC, an affiliate of our directors and
executive officers, a fee of $7,500 per month for providing us with office space
and certain office and secretarial services. Other than this $7,500 per-month
fee, no compensation of any kind, including finder's and consulting fees, will
be paid to any of our initial stockholders, or any of their respective
affiliates for services rendered to us prior to or with respect to a business
combination. However, our initial stockholders will be reimbursed for any
out-of-pocket expenses incurred in connection with activities on our behalf such
as identifying potential target businesses and performing due diligence on
suitable business combinations. There is no limit on the amount of these
out-of-pocket expenses and there will be no review of the reasonableness of the
expenses by anyone other than our board of directors, which includes persons who
may seek reimbursement, or a court of competent jurisdiction if such
reimbursement is challenged.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 1, 2005 by:
o each person known by us to be the beneficial owner of more than 5% of
our outstanding shares of common stock;
o each of our officers and directors; and
o all our officers and directors as a group.
Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
Amount and Approximate
Nature of Percentage of
Beneficial Outstanding
Name and Address of Beneficial Owner (1) Ownership Common Stock
------------------------------------------- ------------- -------------
Humphrey Polanen 459,441 9.0%
Sand Hill Security, LLC (2) 100,000 2.0%
Keith Walz 174,825 3.4%
Scott Broomfield (3) 174,825 3.4%
Cary Grossman (4) 48,951 1.0%
Dan Johnson 20,979 *
Alberto Micalizzi (5) 20,979 *
Sapling, LLC (6) 400,000 7.8%
All directors and executive officers as
a group (6 individuals) 1,000,000 19.6%
________________________
* less than 1%
(1) Unless otherwise indicated, the business address of each of the
following is 3000 Sand Hill Road, Building 1, Suite 240, Menlo Park,
California 94025.
(2) Sand Hill Security, LLC Membership Interests are held by (i) the
Polanen and Nicodimos Family Trust, of which Mr. Polanen is a trustee,
(ii) the Broomfield Family Trust, of which Mr. Broomfield is a
trustee, (iii) Dan Johnson, (iv) Keith Walz, (v) Alberto Micalizzi,
and (vi) the Grossman Family Limited Partnership, of which Mr.
Grossman is a general partner.
(3) Mr. Broomfield's shares are held by the Broomfield Family Trust, of
which Mr. Broomfield is a Co-Trustee.
29
(4) Mr. Grossman's shares are held by Grossman Family Limited Partnership,
of which Mr. Grossman is a general partner.
(5) Mr. Micalizzi's business address is Corso Italia 66, 20136 Milan,
Italy.
(6) The business address for Sapling, LLC is 535 Fifth Ave., 31st floor,
New York, New York 10003.
All of the shares of our common stock owned by the initial stockholders
have been placed in escrow with American Stock Transfer & Trust Company, as
escrow agent, until the earliest of:
o July 30, 2007;
o our liquidation; or
o the consummation of a liquidation, merger, stock exchange or other
similar transaction that results in all of our stockholders having the
right to exchange their shares of common stock for cash, securities or
other property subsequent to our consummating a business combination
with a target business.
During the escrow period, the holders of these shares will not be able to
sell or transfer their securities except to their spouses and children, trusts
or family partnerships established for their benefit, or to a transferee that
does not affect beneficial ownership but will retain all other rights as our
stockholders, including, without limitation, the right to vote their shares of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will also be
placed in escrow. If we are unable to effect a business combination and
liquidate, none of our initial stockholders will receive any portion of the
liquidation proceeds with respect to common stock owned by them prior to the
Offering.
Mr. Polanen may be deemed to be our "parent" and "promoter," as these terms
are defined under the federal securities law.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Offering, we issued 1,000,000 shares of our common stock to
the individuals set forth below for $25,000 in cash, at an average purchase
price of approximately $0.025 per share, as follows:
Name Number of Shares Relationship To Us
---- ---------------- ------------------
Humphrey Polanen 459,441 Chief Executive Officer and Chairman of the Board of
Directors
Sand Hill Security, LLC 100,000 Affiliate of our directors and executive officers
Keith Walz 174,825 President, Chief Financial Officer and Director
Scott Broomfield 174,825 Executive Vice President of Corporate Development and
Director
Cary Grossman 48,951 Director
Dan Johnson 20,979 Director
Alberto Micalizzi 20,979 Director
The holders of the majority of these shares are entitled to make up to two
demands that we register these shares pursuant to an agreement executed in
connection with the Offering. The holders of the majority of these shares may
elect to exercise these registration rights at any time after the date on which
these shares of common stock are released from escrow. In addition, these
stockholders have certain "piggy-back" registration rights on registration
statements filed subsequent to the date on which these shares of common stock
are released from escrow. We will bear the expenses incurred in connection with
the filing of any such registration statements.
Sand Hill Security, LLC, an affiliate of certain of our directors and
executive officers, has agreed that, commencing July 31, 2004 through the
acquisition of a target business, it will make available to us a small amount of
office space and certain office and secretarial services, as we may require from
time to time. We have agreed to pay Sand Hill Security, LLC $7,500 per month for
these services. In addition, in April 2004, Sand Hill Security, LLC advanced an
aggregate of $40,000 to us, on a non-interest bearing basis, for payment of
offering expenses on our behalf. This amount was repaid in August 2004 out of
the proceeds of the Offering.
30
We will reimburse our officers and directors for any reasonable
out-of-pocket business expenses incurred by them in connection with certain
activities on our behalf such as identifying and investigating possible target
businesses and business combinations. There is no limit on the amount of
accountable out-of-pocket expenses reimbursable by us, which will be reviewed
only by our board or a court of competent jurisdiction if such reimbursement is
challenged.
Other than the $7,500 per month administrative fee and reimbursable
out-of-pocket expenses payable to our officers and directors, no compensation or
fees of any kind, including finders and consulting fees, will be paid to any of
our initial stockholders, officers or directors who owned our common stock prior
to the Offering, or to any of their respective affiliates for services rendered
to us prior to or with respect to the business combination.
All ongoing and future transactions between us and any of our officers and
directors or their respective affiliates will be on terms believed by us to be
no less favorable than are available from unaffiliated third parties and will
require prior approval in each instance by a majority of the members of our
board who do not have an interest in the transaction.
31
ITEM 13. EXHIBITS
(a) The following exhibits are filed as part of report K:
Exhibit No. Description
---------- -----------
1.1 Underwriting Agreement by and between the Company,
I-Bankers Securities Incorporated and Newbridge
Securities Corporation dated July 26, 2004*
3.1 Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
3.2 By-laws (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form
S-1, registration no. 333-114861, filed with the
Securities and Exchange Commission)
4.1 Specimen Unit Certificate (incorporated by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.2 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.3 Specimen Warrant Certificate (incorporated by
reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.4.1 Unit Purchase Option No. UPO-2 dated July 30,
2004, granted to Newbridge Securities Corporation*
4.4.2 Unit Purchase Option No. UPO-3 dated July 30,
2004, granted to James E. Hosch*
4.4.3 Unit Purchase Option No. UPO-4 dated July 30,
2004, granted to Maxim Group, LLC*
4.4.4 Unit Purchase Option No. UPO-5 dated July 30,
2004, granted to Broadband Capital Management,
LLC*
4.4.5 Unit Purchase Option No. UPO-6 dated July 30,
2004, granted to I-Bankers Securities
Incorporated*
4.5 Warrant Agreement between American Stock Transfer
& Trust Company and the Registrant*
32
10.1 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Humphrey P. Polanen*
10.2 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Cary M. Grossman*
10.3 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Daniel J. Johnson*
10.4 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Keith A. Walz*
10.5 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Scott Broomfield*
10.6 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Alberto Micalizzi*
10.8 Investment Management Trust Agreement between
American Stock Transfer & Trust Company and the
Registrant*
10.9 Stock Escrow Agreement between the Registrant,
American Stock Transfer & Trust Company and the
Initial Stockholders*
10.10 Registration Rights Agreement among the Registrant
and the Initial Stockholders*
10.11 Letter Agreement between Sand Hill Security, LLC
and Registrant regarding administrative support*
10.12 Revolving Credit Agreement in the principle amount
of $60,000 between the Registrant and Sand Hill
Security, LLC*
10.13 Warrant Purchase Agreement among Humphrey P.
Polanen and Newbridge Securities Corporation and
I-Bankers Securities Incorporated (incorporated by
reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*
33
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
--------------
* filed herewith
34
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The firm of Hein & Associates LLP acts as our principal accountant. The
following is a summary of fees paid to our principal accountant for services
rendered.
AUDIT FEES
During the fiscal year ended December 31, 2004, the fees for our principal
accountant are $23,600 in connection with our initial public offering (financial
statements included in the Form S-1 and Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 3, 2004), the review of our
June 30 and September 30 Quarterly Reports on Form 10-QSB and the audit of our
December 31, 2004 Annual Report on Form 10-KSB.
AUDIT-RELATED FEES
During 2004, our principal accountant did not render assurance and related
services reasonably related to the performance of the audit or review of
financial statements.
TAX FEES
During 2004, our principal accountant did not render services to us for tax
compliance, tax advice and tax planning.
ALL OTHER FEES
During 2004, there were no fees billed for products and services provided
by the principal accountant other than those set forth above.
AUDIT COMMITTEE APPROVAL
We currently do not have an audit committee. Our Board of Directors
approved the engagement of Hein Associates as our independent registered public
accounting firm by unanimous consent on September 30, 2004.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this annual report on Form 10-KSB to be
signed on its behalf by the undersigned thereto duly authorized.
Sand Hill IT Security Acquisition Corp.
(Registrant)
Date: March 29, 2005 By: /s/ Humphrey P. Polanen
------------------------
Humphrey P. Polanen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report on Form 10-KSB has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE
--------- ------ ----
Chief Executive Officer and
Director (Principal Executive
/s/ Humphrey P. Polanen Officer) March 29, 2005
-------------------------------------------
Humphrey P. Polanen
President, Chief Financial
Officer and Director (Principal
/s/ Keith Walz Financial and Accounting Officer) March 29, 2005
--------------------------------------------
Keith Walz
Executive Vice President of March 29, 2005
Corporate Development and
s/s Scott Broomfield Director
--------------------------------------------
Scott Broomfield
/s/ Cary M. Grossman Director March 29, 2005
--------------------------------------------
Cary M. Grossman
/s/ Daniel Johnson, Jr. Director March 29, 2005
--------------------------------------------
Daniel Johnson, Jr.
/s/ Alberto Micalizzi Director March 29, 2005
--------------------------------------------
Alberto Micalizzi
S-1
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------
1.1 Underwriting Agreement by and between the Company,
I-Bankers Securities Incorporated and Newbridge
Securities Corporation dated July 26, 2004
3.1 Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
3.2 By-laws (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form
S-1, registration no. 333-114861, filed with the
Securities and Exchange Commission)
4.1 Specimen Unit Certificate (incorporated by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.2 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.3 Specimen Warrant Certificate (incorporated by
reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
4.4.1 Unit Purchase Option No. UPO-2 dated July 30,
2004, granted to Newbridge Securities Corporation
4.4.2 Unit Purchase Option No. UPO-3 dated July 30,
2004, granted to James E. Hosch
4.4.3 Unit Purchase Option No. UPO-4 dated July 30,
2004, granted to Maxim Group, LLC
4.4.4 Unit Purchase Option No. UPO-5 dated July 30,
2004, granted to Broadband Capital Management,
LLC
4.4.5 Unit Purchase Option No. UPO-6 dated July 30,
2004, granted to I-Bankers Securities
Incorporated
4.5 Warrant Agreement between American Stock Transfer
& Trust Company and the Registrant
E-1
10.1 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Humphrey P. Polanen
10.2 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Cary M. Grossman
10.3 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Daniel J. Johnson
10.4 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Keith A. Walz
10.5 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Scott Broomfield
10.6 Letter Agreement among the Registrant, Newbridge
Securities and I-Bankers Securities Incorporated
and Alberto Micalizzi
10.8 Investment Management Trust Agreement between
American Stock Transfer & Trust Company and the
Registrant
10.9 Stock Escrow Agreement between the Registrant,
American Stock Transfer & Trust Company and the
Initial Stockholders
10.10 Registration Rights Agreement among the Registrant
and the Initial Stockholders
10.11 Letter Agreement between Sand Hill Security, LLC
and Registrant regarding administrative support
10.12 Revolving Credit Agreement in the principle amount
of $60,000 between the Registrant and Sand Hill
Security, LLC
10.13 Warrant Purchase Agreement among Humphrey P.
Polanen and Newbridge Securities Corporation and
I-Bankers Securities Incorporated (incorporated by
reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-1, registration
no. 333-114861, filed with the Securities and
Exchange Commission)
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
E-2
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
E-3