As filed with the Securities and Exchange Commission on October 4, 2002.
Registration No. 333-______.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ZIX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2216818
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2711 N. HASKELL AVENUE
SUITE 2300, LB 36
DALLAS, TEXAS 75204-2960
(214) 370-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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STEVE M. YORK
CHIEF FINANCIAL OFFICER
2711 N. HASKELL AVENUE
SUITE 2300, LB 36
DALLAS, TEXAS 75204-2960
(214) 370-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Approximate date of commencement of proposed sale to the public: From
time-to-time after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF SHARES AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
--------------- ------------- ---------------- ----------------- ------------
Common Stock,
$.01 par value 2,758,969 $3.75 $10,346,130.00 $951.84
(1) This registration statement covers 2,758,969 shares of the
registrant's common stock, consisting of: (i) 2,333,848 shares,
representing 110% of the shares of common stock issuable from
time-to-time to the selling shareholders upon conversion of the
registrant's 6.5% Secured Convertible Notes, including applicable
accrued interest, and (ii) 425,121 shares, representing 110% of
the shares of common stock issuable upon exercise of associated
warrants.
(2) Estimated solely for the purpose of calculating the registration
fee, pursuant to Rule 457(c) under the Securities Act, based on
the average of the high and low prices of the common stock on The
Nasdaq Stock Market on September 30, 2002.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed.
The selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and we are not soliciting
offers to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion
October 4, 2002
ZIX CORPORATION
2,758,969 SHARES
COMMON STOCK
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This prospectus relates to an offering of up to 2,758,969 shares of our
common stock, par value $.01 per share, that are issuable upon conversion of our
6.5% Secured Convertible Notes and associated warrants. The 6.5% Secured
Convertible Notes are referred to in this prospectus as the notes. The notes and
associated warrants were originally issued in a private placement in September
2002. The selling shareholders under this prospectus are HFTP Investment L.L.C.,
Gaia Offshore Master Fund, Ltd., and Caerus Fund Ltd. who, for convenience, are
generally referred to as the selling shareholders.
The common stock being registered is being offered for the account of
the selling shareholders. We will not receive any proceeds from the sale of the
shares of common stock offered under this prospectus.
The shares may be offered in transactions on The Nasdaq Stock Market,
in negotiated transactions or through a combination of methods of distribution,
at prices relating to the prevailing market prices, at negotiated prices or at
fixed prices that may be changed. Please see below under the heading "Plan of
Distribution."
Our common stock is quoted on The Nasdaq Stock Market under the symbol
"ZIXI." On October 2, 2002, the last sale price of our common stock, as reported
on The Nasdaq Stock Market, was $3.82 per share.
-----------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A LOSS OF ALL
OR A PORTION OF YOUR INVESTMENT.
PLEASE SEE BELOW UNDER THE HEADING "RISK FACTORS."
-----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this prospectus is October 4, 2002.
TABLE OF CONTENTS
PAGE
ZIX CORPORATION.........................................................................................1
THE TRANSACTIONS........................................................................................1
RISK FACTORS............................................................................................2
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS....................................................13
DOCUMENTS INCORPORATED BY REFERENCE....................................................................13
WHERE YOU CAN GET MORE INFORMATION.....................................................................14
SELLING SHAREHOLDERS...................................................................................15
PLAN OF DISTRIBUTION...................................................................................16
DESCRIPTION OF SECURITIES..............................................................................18
USE OF PROCEEDS........................................................................................30
LEGAL MATTERS..........................................................................................30
EXPERTS................................................................................................31
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
AND NOT ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. NEITHER ZIX
CORPORATION NOR ANY OF ITS REPRESENTATIVES HAS AUTHORIZED ANYONE TO PROVIDE
PROSPECTIVE INVESTORS WITH ANY INFORMATION OR TO REPRESENT ANYTHING NOT
CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. FURTHERMORE, NO
DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO
REPRESENT ANYTHING NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. THIS PROSPECTUS IS AN OFFER TO SELL ONLY THE SHARES OFFERED BY THIS
PROSPECTUS, BUT ONLY UNDER THE CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS
LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS
OF ITS DATE, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY
SALE OF THESE SECURITIES.
i
ZIX CORPORATION
We are a development-stage company and currently have no significant
revenues. Since January 1999, we have been developing and marketing products and
services that bring privacy, security and convenience to Internet users. We were
incorporated in Texas in 1988. Our executive offices are located at 2711 North
Haskell Avenue, Suite 2300, LB 36, Dallas, Texas 75204-2960, and our telephone
number is (214) 370-2000. Our Web site address is www.zixcorp.com. Information
contained on our Web site is not a part of this prospectus. In this prospectus,
"we," "us," "our" and "Zix" refer to Zix Corporation and its subsidiaries unless
the context otherwise requires.
THE TRANSACTIONS
On September 18, 2002, we announced the simultaneous closing of two
financing transactions under which we received $16,000,000 in gross cash
proceeds. In the first transaction, we issued:
o 819,886 shares of Series A Convertible Preferred Stock, par
value $1.00 per share;
o 1,304,815 shares of Series B Convertible Preferred Stock,
par value $1.00 per share; and
o warrants to purchase 709,528 shares of our common stock.
Purchasers of the Series A Convertible Preferred Stock and associated
warrants include John A. Ryan, our chairman, president and chief executive
officer, and Antonio R. Sanchez, Jr., a director of our company, and an
affiliated entity. Purchasers of the Series B Convertible Preferred Stock and
associated warrants include George W. Haywood, a 25.4% shareholder of our
company. The aggregate cash proceeds from the first transaction were $8,000,000.
In the second transaction, we issued to the selling shareholders:
o notes in a principal amount of $8,000,000; and
o warrants to purchase 386,473 shares of our common stock.
The aggregate cash proceeds from the second transaction were
$8,000,000.
The terms of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, the notes and associated warrants are described in
this prospectus under the heading "Description of Securities" and in our Current
Report on Form 8-K, dated September 20, 2002, which is incorporated in this
prospectus by reference.
1
RISK FACTORS
Before investing in our common stock offered by this prospectus, you
should carefully consider the following risks and uncertainties, in addition to
the other information contained or incorporated by reference in this prospectus.
Also, you should be aware that the risks and uncertainties described below are
not the only ones facing us. Additional risks and uncertainties that we do not
yet know of or that we currently think are immaterial may also impair our
business operations. If any of those risks or uncertainties or any of the risks
and uncertainties described below actually occur, our business, financial
condition, prospects or results of operations could be materially and adversely
affected. In that case, the trading price of the common stock offered in this
prospectus could decline, and you may lose all or part of your investment.
AS A DEVELOPMENT-STAGE COMPANY, WE HAVE NO SIGNIFICANT REVENUES, AND WE CONTINUE
TO USE SIGNIFICANT AMOUNTS OF CASH.
During 1998, we sold all of our operating businesses and, since 1999,
we have been developing and marketing products and services that bring privacy,
security and convenience to Internet users. Successful development of a
development-stage enterprise, particularly Internet-related businesses, is
costly and highly competitive. A development-stage enterprise involves risks and
uncertainties, and there are no assurances that we will be successful in our
efforts. We currently have no significant revenues and utilization of cash
resources continues at a substantial level.
THE MARKET MAY NOT BROADLY ACCEPT OUR PRODUCTS AND SERVICES, WHICH WOULD PREVENT
US FROM OPERATING PROFITABLY.
We must be able to achieve broad market acceptance for our products and
services in order to operate profitably. We have not yet been able to do this.
To our knowledge, there are currently no secure Internet communications
businesses similar to ours, that currently operate at the scale that we would
require, at our current expenditure levels and proposed pricing, to become
profitable. There is no assurance that our products and services will become
generally accepted or that they will be compatible with any standards that
become generally accepted, nor is there any assurance that enough paying users
will ultimately be obtained to enable us to operate profitably.
THOUGH WE HAVE ESTABLISHED STRATEGIC AND COLLABORATIVE RELATIONSHIPS WITH
SEVERAL STRATEGIC MARKETING PARTNERS, WE HAVE NOT REALIZED SIGNIFICANT REVENUES
FROM THESE RELATIONSHIPS AND MAY NOT IN THE FUTURE.
One of our primary business strategies has been to enter into strategic
or other similar collaborative relationships to reach a larger customer base
than we can reach through our direct sales and marketing efforts. To date, these
strategic and collaborative business relationships have not yielded any
significant revenues.
Assuming we are successful in entering into business relationships that
yield revenues, we will want to maintain these relationships and enter into
additional relationships to successfully execute our business plan. If we are
unable to do so, we will have to devote substantially more
2
resources to the distribution, sale and marketing of our products and services
than we would otherwise.
Furthermore, our ability to achieve future growth will also depend on
our ability to continue to establish direct seller channels and to develop
multiple distribution channels. Failure to enter into productive reseller
arrangements could harm our business.
COMPETITION IN THE SECURE E-MESSAGING DELIVERY BUSINESS IS EXPECTED TO INCREASE,
WHICH COULD CAUSE OUR BUSINESS TO FAIL.
Our solutions are targeted to the secure e-messaging delivery services
market. Although there are many large, well-funded participants in the
information technology (IT) security industry, none currently participate in
the secure e-messaging delivery services market. Our primary competitors in
this market are Tumbleweed Communications, Sigaba Corporation, Authentica,
PostX and CertifiedMail.com. We believe that the secure e-messaging delivery
service market is immature, and, for the most part, unpenetrated, unlike many
segments of the IT security industry - which are saturated. After several years
of infrastructure development and product development, we believe that we are
the only provider that has made the investments necessary to successfully
penetrate the relatively untapped secure e-messaging delivery services market.
We do not believe that our primary competitors have made the infrastructure and
development investments required to match our service offerings. Nevertheless,
others may, over time, make the necessary investments in infrastructure and
service offerings. These competitors may develop new technologies that are
perceived as being more secure, effective or cost efficient than our own. If we
are not successful in exploiting the technology advantage we believe we
currently hold, these competitors could successfully garner a significant share
of the market, to the exclusion of Zix. Furthermore, increased competition
could result in pricing pressures, reduced margins or the failure of our
business to achieve or maintain market acceptance, any of which could harm our
business.
OUR INABILITY TO DEVELOP AND INTRODUCE NEW SECURE E-MESSAGING PRODUCTS AND
RELATED SERVICES AND TO IMPLEMENT TECHNOLOGICAL CHANGES COULD HARM OUR BUSINESS.
The emerging nature of the Internet and the secure Internet e-messaging
business and their rapid evolution, require us continually to develop and
introduce new products and services and to improve the performance, features and
reliability of our existing products and services, particularly in response to
competitive offerings. To date, we have achieved no significant revenues from
the sale of any of our products and related services.
We also have under development new feature sets for our current product
line and are considering new secure e-messaging products. The success of new or
enhanced products and services depends on several factors - primarily, market
acceptance. We may not succeed in developing and marketing new or enhanced
products and services that respond to competitive and technological developments
and changing customer needs. This could harm our business.
3
IF THE MARKET FOR SECURE INTERNET E-MESSAGING DOES NOT CONTINUE TO GROW, DEMAND
FOR OUR PRODUCTS AND SERVICES WILL BE ADVERSELY AFFECTED.
The market for secure Internet e-messaging is at an early stage of
development. Continued growth of the secure Internet e-messaging market will
depend to a large extent on the public recognizing the potential threat posed by
computer hackers and other unauthorized users. Failure of the secure e-messaging
market to grow could reduce demand for our products and services, which would
harm our business.
CAPACITY LIMITS ON OUR TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE MAY BE
DIFFICULT TO PROJECT, AND WE MAY NOT BE ABLE TO EXPAND AND UPGRADE OUR SYSTEMS
TO MEET INCREASED USE, WHICH WOULD RESULT IN REDUCED REVENUES.
While we have ample through-put capacity to handle our customers'
requirements for the medium term, at some point we may be required to expand and
upgrade our technology and network hardware and software. We may not be able to
accurately project the rate of increase in usage on our network. In addition, we
may not be able to expand and upgrade, in a timely manner, our systems and
network hardware and software capabilities to accommodate increased traffic on
our network. If we do not timely and appropriately expand and upgrade our
systems and network hardware and software, we may lose customers and revenues.
SECURITY INTERRUPTIONS TO OUR SECURE DATA CENTER COULD DISRUPT OUR BUSINESS, AND
ANY SECURITY BREACHES COULD EXPOSE US TO LIABILITY AND NEGATIVELY IMPACT
CUSTOMER DEMAND FOR OUR PRODUCTS AND SERVICES.
Our business depends on the uninterrupted operation of our secure data
center. We must protect this center from loss, damage or interruption caused by
fire, power loss, telecommunications failure or other events beyond our control.
Any damage or failure that causes interruptions in our secure data center
operations could materially harm our business, financial condition and results
of operations.
In addition, our ability to issue digitally-signed certified
time-stamps and public encryption codes in connection with our products and
services depends on the efficient operation of the Internet connections between
customers and our data center. We depend on Internet service providers
efficiently operating these connections. These providers have experienced
periodic operational problems or outages in the past. Any of these problems or
outages could adversely affect customer satisfaction.
Furthermore, it is critical that our facilities and infrastructure
remain secure and the market perceives them to be secure. Despite our
implementation of network security measures, our infrastructure may be
vulnerable to physical break-ins, computer viruses, attacks by hackers and
similar disruptions from unauthorized tampering with our computer systems. In
addition, we are vulnerable to coordinated attempts to overload our systems with
data, resulting in denial or reduction of service to some or all of our users
for a period of time. We do not carry insurance to compensate us for losses that
may occur as a result of any of these events; therefore, it is possible that we
may have to use additional resources to address these problems.
4
Messages sent through our ZixMail.net(TM) message portal will reside,
for a user-specified period of time, in our data center facilities. Also, since
we receive certain payments online for our ZixMail service, certain confidential
customer information is retained in our data center facilities. Any physical or
electronic break-ins or other security breaches or compromises of this
information could expose us to significant liability, and customers could be
reluctant to use our Internet-related products and services.
As was previously announced, we determined in June 2001 that credit
card databases at our independently operated subsidiary, Anacom Communications,
Inc. (we refer to it as "Anacom"), had been improperly accessed. As a result of
this improper access, we shut down the Anacom operations and Anacom ceased doing
business. The ZixMail and ZixMail.net systems and our secure data center
operations were entirely separate from the systems operated by Anacom. No Zix
technologies or operations were involved in the incident, nor are the Anacom
technologies involved being used in our "Zix" family of secure e-messaging
products and services. Accordingly, we do not anticipate that this breach will
have any effect on the development and deployment of our secure e-messaging
products and related services. Although no claims have been asserted against us
with respect to this incident to date, claims could be asserted in the future.
We are unable to assess the amount of the liability, if any, to Anacom or us,
which may result from any claims that may be asserted.
WE MAY HAVE TO DEFEND OUR RIGHTS IN INTELLECTUAL PROPERTY THAT WE USE IN OUR
PRODUCTS AND SERVICES, WHICH COULD BE DISRUPTIVE AND EXPENSIVE TO OUR BUSINESS.
We may have to defend our intellectual property rights or defend
against claims that we are infringing the rights of others. Intellectual
property litigation and controversies are disruptive and expensive. Infringement
claims could require us to develop non-infringing products or enter into royalty
or licensing arrangements. Royalty or licensing arrangements, if required, may
not be obtainable on terms acceptable to us. Our business could be significantly
harmed if we are not able to develop or license the necessary technology.
Furthermore, it is possible that others may independently develop substantially
equivalent intellectual property, thus enabling them to effectively compete
against us.
OUR PRODUCTS AND SERVICES COULD CONTAIN UNKNOWN DEFECTS OR ERRORS.
We subject our products and services to quality assurance testing prior
to product release. To date, we have not become aware after product release of
any defect or error that materially affects their functionality. Nevertheless,
our products and services could contain undetected defects or errors. This could
result in loss of or delay in revenues, failure to achieve market acceptance,
diversion of development resources, injury to our reputation, litigation claims,
increased insurance costs or increased service and warranty costs. Any of these
could prevent us from implementing our business model and achieving the revenues
we need to operate profitably.
PUBLIC KEY CRYPTOGRAPHY TECHNOLOGY IS SUBJECT TO RISKS.
Our products and services employ, and future products and services may
employ, public key cryptography technology. With public key cryptography
technology, a user has a public key and a private key, which are used to encrypt
and decrypt messages. The security afforded by this technology depends, in large
measure, on the integrity of a user's private key, which is
5
dependent, in part, on the application of certain mathematical principles. The
integrity of a user's private key is predicated on the assumption that it is
difficult to mathematically derive a user's private key from the user's related
public key. Should methods be developed that make it easier to derive a user's
private key, the security of encryption products using public key cryptography
technology would be reduced or eliminated and such products could become
unmarketable. This could require us to make significant changes to our products,
which could damage our reputation and otherwise hurt our business. Moreover,
there have been public reports of the successful decryption of certain encrypted
messages. This, or related, publicity could adversely affect public perception
of the security afforded by public key cryptography technology, which could harm
our business.
WE DEPEND ON KEY PERSONNEL.
We depend on the performance of our senior management team - including
our chairman, president and chief executive officer, John A. Ryan, and his
direct reports and other key employees, particularly highly skilled technical
personnel. Our success also depends on our ability to attract, retain and
motivate these individuals. There is competition for these personnel, and we
face a tight employment market for the particular individuals we need to
attract. Other than Mr. Ryan, none of our employees have employment contracts
with us nor are there any agreements with members of our senior management team
or other key employees that prevent them from leaving Zix at any time. In
addition, we do not maintain key person life insurance for any of our personnel.
The loss of the services of any of our key employees or our failure to attract,
retain and motivate key employees could harm our business.
WE COULD BE AFFECTED BY GOVERNMENT REGULATION.
Exports of software products using encryption technology are generally
restricted by the United States (we refer to is as "U.S.") government. Although
we have obtained U.S. government approval to export our ZixMail product to
almost all countries in the world, the list of countries to which ZixMail cannot
be exported could be revised in the future. Furthermore, some foreign countries
impose restrictions on the use of encryption products, such as the ZixMail
product. Failure to obtain the required governmental approvals would preclude
the sale or use of the ZixMail product in international markets.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has fluctuated significantly in
the past and is likely to fluctuate in the future. Also, the market prices of
securities of other Internet-related companies have been highly volatile and, as
is well known, have generally declined substantially and broadly.
FURTHER ISSUANCES OF EQUITY SECURITIES MAY BE DILUTIVE TO CURRENT SHAREHOLDERS.
We recently completed a capital funding for $16,000,000 through the
issuance of $8,000,000 of notes and associated warrants, $3,250,000 of Series A
Convertible Preferred Stock and associated warrants and $4,750,000 of Series B
Convertible Preferred Stock and associated warrants. At the current conversion
rates, these securities are convertible and exercisable, in the aggregate, into
5,235,168 shares of our common stock (excluding accrued interest and dividends).
6
The common stock issuable upon conversion of the notes and associated warrants
is being offered under this prospectus. Furthermore, at some point in the
foreseeable future we may determine to seek additional capital funding. This
capital funding could involve one or more types of equity securities, including
convertible debt, common or convertible preferred stock and warrants to acquire
common or preferred stock. Such equity securities could be issued at or below
the then-prevailing market price for our common stock. In addition, we
incentivize employees and attract new employees by issuing options to purchase
our shares of common stock. The interest of our existing shareholders could be
diluted by stock option issuances to employees and any equity securities issued
in a capital funding financing. Moreover, we currently have on file registration
statements covering the resale of securities held by existing holders of our
common stock, holders of warrants or options to purchase shares of our common
stock and the resale of the common stock underlying the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, notes and associated
warrants.
TERRORIST ATTACKS HAVE CONTRIBUTED TO ECONOMIC INSTABILITY IN THE U.S.;
CONTINUED TERRORIST ATTACKS, WAR OR OTHER CIVIL DISTURBANCES COULD LEAD TO
FURTHER ECONOMIC INSTABILITY AND DEPRESS OUR STOCK PRICE.
On September 11, 2001, the U.S. was the target of terrorist attacks of
unprecedented scope. These attacks caused instability in the global financial
markets and contributed to volatility in the stock prices of U.S.
publicly-traded companies. These attacks may lead to armed hostilities or to
further acts of terrorism and civil disturbances in the U.S. or elsewhere, which
may further contribute to economic instability in the U.S. and could harm our
business.
WE MAY HAVE LIABILITY FOR INDEMNIFICATION CLAIMS ARISING FROM THE SALE OF OUR
PREVIOUS BUSINESSES IN 1998 AND 1997.
We disposed of our previous operating businesses in 1998 and 1997. In
selling those businesses, we agreed to provide customary indemnification to the
purchasers of those businesses for breaches of representations and warranties,
covenants and other specified matters. Although we believe that we have
adequately provided for future costs associated with these indemnification
obligations, indemnifiable claims could exceed our estimates.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR
SECURITIES. THEIR OWNERSHIP COULD ALLOW THEM TO EXERCISE SIGNIFICANT CONTROL
OVER CORPORATE DECISIONS AND TO IMPLEMENT CORPORATE ACTS THAT ARE NOT IN THE
BEST INTERESTS OF OUR SHAREHOLDERS AS A GROUP.
Our directors and executive officers beneficially own shares of our
securities that represent approximately 19.9% of the combined voting power
eligible to vote on matters brought before our shareholders, including the
Series A Convertible Preferred Stock and associated warrants acquired by Antonio
R. Sanchez, Jr., a director and current beneficial owner of 12.3% of our
outstanding common stock, and John A. Ryan, our chairman, president and chief
executive officer. The Series A Convertible Preferred Stock requires us to
obtain the consent of the holders of the Series A Convertible Preferred Stock,
voting separately as a class, before we may enter into mergers or other business
combination transactions. Therefore, our directors and executive officers, if
they acted together, could exert substantial influence over matters requiring
approval by our shareholders. These matters would include the election of
directors and, as noted above, the
7
approval of mergers or other business combination transactions. This
concentration of ownership and voting power may discourage or prevent someone
from acquiring our business.
A PRIVATE INVESTOR OWNS A LARGE PERCENTAGE OF OUR OUTSTANDING STOCK AND COULD
SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS.
George W. Haywood, a private investor, beneficially owns approximately
25.4% of our outstanding common stock. Furthermore, it is important to note that
Mr. Haywood acquired shares of our Series B Convertible Preferred Stock. Mr.
Haywood's Series B Convertible Preferred Stock shares are only currently
convertible into 388,366 shares of our common stock. This limitation was
required in order for us to comply with certain Nasdaq Marketplace Rules (see
below under "We Must Comply With The Listing Requirements of The Nasdaq Stock
Market or Our Common Stock and Liquidity Will Decline"). In the absence of this
Nasdaq limitation, Mr. Haywood's Series B Convertible Preferred Stock would be
convertible into 902,579 shares of our common stock, and assuming our
shareholders vote to remove this limitation, his preferred stock will be
convertible into this amount of our shares of common stock. Furthermore, Mr.
Haywood holds warrants, which are convertible, beginning March 18, 2003, into
305,986 shares of our common stock. Under applicable state law, the consent of
the holders of the Series B Convertible Preferred Stock, voting separately as a
class, is required before we may enter into mergers or other business
combination transactions. Because of his large percentage ownership, Mr. Haywood
could significantly influence all matters requiring approval by our
shareholders, including the election of directors and, as noted above, the
approval of mergers or other business combination transactions. Mr. Haywood's
interests may not be aligned with the interests of our other shareholders.
OUR ISSUANCE OF THE PREFERRED STOCK, NOTES AND ASSOCIATED WARRANTS COULD DILUTE
THE INTERESTS OF OUR SHAREHOLDERS.
One-ninth of the shares of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock are to be redeemed at two-month intervals
beginning eight months after issuance. The redemption amounts payable to the
holders of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock are paid in shares of our common stock.
If the approval of our common shareholders is obtained, the value of
the common stock used to determine the number of shares of common stock to be
issued upon redemption of shares of Series A Convertible Preferred Stock at the
final redemption date (that is, two years after issuance) will be the lesser of
$3.92 per share and the market value of the common stock at the time of
redemption, based on a closing bid price average formula. If the market price of
the common stock declines, the number of shares of common stock issuable to the
holders of Series A Convertible Preferred Stock upon such final redemption will
increase, perhaps substantially. There is no "floor" on the market value
calculation and, therefore, there is no "ceiling" on the number of shares of
common stock that may be issuable by us upon the final Series A Convertible
Preferred Stock redemption. A substantial decline in the market price of the
common stock would result in significant dilution to the existing holders of
common stock if the Series A Convertible Preferred Stock shares are redeemed at
a substantially lower price. This effect will be magnified if one or more
interim redemption amounts is deferred to the final redemption date.
The value of the common stock used to determine the number of shares of
common stock to be issued upon redemption of shares of Series B Convertible
Preferred Stock will be the lesser
8
of the Series B Conversion Price and 90% of the market value of the common stock
at the time of redemption, based on a volume-weighted average formula. If the
market price of the common stock declines, the number of shares of common stock
issuable to the holders of Series B Convertible Preferred Stock upon such
automatic redemptions will increase, perhaps substantially. There is no "floor"
on the market value calculation and, therefore, there is no "ceiling" on the
number of shares of common stock that may be issuable by us upon a Series B
Convertible Preferred Stock redemption. A substantial decline in the market
price of the common stock would result in significant dilution to the existing
holders of common stock if the Series B Convertible Preferred Stock shares are
redeemed at a substantially lower price.
The Series A Convertible Preferred Stock, the Series B Convertible
Preferred Stock and the notes are convertible by the holders into shares of
common stock at any time. The Series A Conversion Price is initially $4.12 per
share, the Series B Conversion Price is initially $3.78 per share and the Note
Conversion Price is initially $3.78 per share. The conversion prices could be
lowered, perhaps substantially, in a variety of circumstances. In the event we
issue, or are deemed to have issued, shares of common stock at a price per share
that is less than the conversion prices then in effect (other than certain
specified exempt issuances), the conversion prices and the number of shares
issuable upon conversion of the Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock are subject to weighted average
anti-dilution adjustment, and the conversion prices and number of shares
issuable upon conversion of the notes are subject to full anti-dilution
adjustment. The anti-dilution adjustments applicable to the shares of Series B
Convertible Preferred Stock, the notes and, following the approval of our common
shareholders, the shares of Series A Convertible Preferred Stock do (or would)
not have a "floor" that would limit reductions in the conversion price of such
shares and notes that may occur under certain circumstances. Correspondingly,
there is no "ceiling" on the number of shares of common stock that may be
issuable, under certain circumstances, following such anti-dilution adjustments.
We issued four-year warrants (first exercisable six months after issue)
to the purchasers of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock entitling the warrant holders to purchase an
aggregate of 709,528 shares of common stock at an exercise price of $4.51 per
share. The exercise price of these warrants is subject to weighted average
anti-dilution adjustment in the event we issue, or are deemed to have issued,
shares of common stock at a price per share that is less than the exercise price
then in effect (other than certain specified exempt issuances). The "floor" on
such anti-dilution adjustments is set at $3.92 per share.
We issued three-year warrants to the holders of the notes entitling the
warrant holders to purchase an aggregate of 386,473 shares of common stock at an
exercise price of $4.14 per share. The number of shares of common stock for
which these warrants are exercisable and the exercise price of these warrants
are subject to full anti-dilution adjustment in the event we issue, or are
deemed to have issued, shares of common stock at a price per share that is less
than the exercise price then in effect (other than certain specified exempt
issuances). The anti-dilution adjustments applicable to these warrants do not
have a "floor" that would limit reductions in the exercise price of such shares
that may occur under certain circumstances, and there is no "ceiling" on the
number of shares of common stock that may be issuable, under certain
circumstances, following such anti-dilution adjustments.
The number of shares of common stock that may be issued by us upon the
conversion or redemption of the shares of Series A Convertible Preferred Stock
and Series B Convertible
9
Preferred Stock, the conversion of the notes and the exercise of the warrants
issued to the purchasers of the notes may not exceed 3,623,856 prior to the
approval of our common shareholders. Assuming we receive the approval of our
common shareholders, there will be no limitation on the aggregate number of
shares of common stock that may be issuable upon the conversion, redemption or
exercise of these securities. Based on the initial conversion and exercise
prices, which are, as described above, subject to adjustment, the shares of
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock,
the notes and all of the warrants issued in the transactions are convertible,
redeemable and/or exercisable for an aggregate of 5,235,168 shares of common
stock (28.7% of our current outstanding common stock as of September 30, 2002).
Notwithstanding the foregoing, no holder of the notes or the associated warrants
is entitled to convert the notes or exercise the associated warrants to the
extent that such conversion or exercise would result in such person and its
affiliates being the holders of more than 4.99% of the shares of common stock
outstanding after giving effect to the conversion or exercise. This restriction
does not prohibit a holder from converting or exercising up to 4.99% of the
shares then outstanding, then selling those shares and later converting or
exercising up to 4.99% again. Upon the effectiveness of this registration
statement and the registration statements relating to the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and associated warrants,
the underlying shares of common stock will be eligible for immediate resale in
the public market. The market price of our securities could fall as a result of
these resales.
STOCK SALES AND HEDGING ACTIVITIES COULD AFFECT OUR STOCK PRICE.
To the extent the holders convert, redeem and exercise, as applicable,
the Series A Convertible Preferred Stock, the Series B Convertible Preferred
Stock and/or the notes and then sell the shares of our common stock they
receive, our stock price may decrease due to the additional amount of shares
available in the market. The subsequent sales of these shares could encourage
short-sales by our other shareholders and others that could place further
downward pressure on our stock price. This could lead to further increases in
the already large short position in our common stock (6,266,215 shares as of
September 13, 2002). Moreover, subject to applicable law and limitations as set
forth in the documents governing the transactions, the holders of the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock and the
notes may hedge their positions in our stock by shorting our stock, which could
further adversely affect the stock price. Furthermore, the perception that the
holders of the Series A Convertible Preferred Stock, the Series B Convertible
Preferred Stock and/or the notes may sell our common stock "short" may cause
others to sell their shares as well. An increase in the volume of sales of our
common stock, whether short sales or not and whether the sales are by the
holders of Series A Convertible Preferred Stock, the Series B Convertible
Preferred Stock and the notes or others, could cause the market price of our
common stock to decline. The effect of these activities on our stock price could
increase the number of shares required to be issued on the next applicable
conversion, redemption or exercise of the Series A Convertible Preferred Stock
and the Series B Convertible Preferred Stock.
10
OUR FAILURE TO SATISFY OUR REGISTRATION AND LISTING OBLIGATIONS WITH RESPECT TO
OUR COMMON STOCK COULD RESULT IN ADVERSE CONSEQUENCES, INCLUDING THE IMPOSITION
OF CASH DAMAGES AND THE EARLY REDEMPTION OF THE NOTES AT A SUBSTANTIAL PREMIUM.
We are required to maintain the effectiveness of the registration
statement covering the resale of the common stock underlying the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, notes and
associated warrants, until the earlier of the date the underlying common stock
may be resold pursuant to Rule 144(k) under the Securities Act or the date on
which the sale of all the underlying common stock is completed, subject to
certain exceptions. We will be subject to various penalties for failing to meet
our registration obligations and the related listing obligations for the
underlying common stock, which include cash damages and the right of the note
holders to require us to redeem all or any portion of the outstanding principal
and accrued interest under the notes.
WE ARE OBLIGATED TO MAKE SIGNIFICANT PERIODIC PAYMENTS OF PRINCIPAL AND INTEREST
UNDER THE NOTES. WE MAY BE OBLIGATED TO ISSUE ADDITIONAL NOTES OR MAKE CASH
PAYMENTS UPON THE MANDATORY REDEMPTION OF OUR PREFERRED STOCK.
We are required to make six monthly principal payments of $500,000 each
(plus accrued and unpaid interest) beginning in January 2003 with a final
payment of $5,000,000 (plus accrued and unpaid interest) on October 1, 2003. In
addition, without the approval of our common shareholders, we will not be able
to effect the redemption of all shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock through the issuance of shares of
common stock and, consequently, we will be required to pay the balance of the
redemption amount in either cash or by the issuance of a note. Any notes issued
in payment of the redemption amount will have a one-year term and accrue
interest. As a development-stage company, we currently have no significant
revenues and utilization of cash resources continues at a substantial level.
Furthermore, if we default on any of our payment obligations under any financing
instrument, the holders of the applicable instruments will have all rights
available under the instruments, including acceleration, termination and, with
respect to the notes, enforcement of security interests. Under such
circumstances, our cash position, liquidity and ability to operate would be
severally impacted, and it is possible we would not be able to pay our debts as
they come due.
WE MUST COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ STOCK MARKET OR OUR
COMMON STOCK AND LIQUIDITY WILL DECLINE.
To remain listed for trading on The Nasdaq Stock Market, we must abide
by the Nasdaq Marketplace Rules regarding the issuance of "future priced
securities." Nasdaq rules, including its rules regarding future priced
securities, prohibit an issuer of listed securities from issuing 20% or more of
its outstanding capital stock at less than the greater of book value or
then-current market value without obtaining prior shareholder consent.
These rules apply to the Series A Convertible Preferred Stock because,
following the approval of our common shareholders, the "floor" on the
anti-dilution adjustment may be
11
removed and the final redemption payment may be made in shares of common stock
based on a future market price of the common stock. These rules also apply to
the Series B Convertible Preferred Stock because additional shares of our common
stock are issuable upon redemption based on a future price of the common stock
and because the anti-dilution provisions in the Series B Convertible Preferred
Stock could result in conversion below the current market price. These rules
also apply to the notes and the warrants issued to the note purchasers because
the anti-dilution provisions in such securities could result in conversion or
exercise prices below the current market price.
The number of shares of common stock issuable upon the conversion,
redemption or exercise of such securities exceeds 20% of the number of our
outstanding shares immediately prior to the transactions. We did not obtain
shareholder consent prior to our sale of the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, the notes and the associated
warrants, nor, based on our interpretation of the Nasdaq Marketplace Rules and
discussions with Nasdaq staff members, did we believe that shareholder consent
was required prior to the closing of such sales. The documents relating to the
sales contain provisions that prohibit us from issuing a number of shares of
common stock that would equal or exceed 20% of our outstanding shares unless we
obtain shareholder approval prior to the issuance of shares above the 20% limit.
However, if Nasdaq disagrees with our interpretation of its rules or if we fail
to comply with Nasdaq's other listing requirements, Nasdaq could delist our
common stock from The Nasdaq Stock Market.
If Nasdaq delisted our common stock, we would likely seek to list our
common stock for quotation on a regional stock exchange. However, if we are
unable to obtain listing or quotation on such market or exchange, trading of our
common stock would occur in the over-the-counter market on an electronic
bulletin board for unlisted securities or in what are commonly known as the
"pink sheet." As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations for the price of, our common stock.
Consequently, broker-dealers may be less willing or able to sell and/or make a
market in our common stock. Finally, it may become more difficult for us to
raise funds through the sale of our securities.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDING WHEN NEEDED, WHICH COULD REDUCE
OUR ABILITY TO FUND OR EXPAND OPERATIONS.
Our obligations under the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock and the notes and the resale of the common
stock underlying the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock, the notes or the warrants may negatively affect our
ability to obtain financing. Some potential investors may either refuse to offer
us any financing or will offer financing at unacceptable rates or unfavorable
terms. In addition to substantially all of our assets being pledged to secure
the notes, for so long as the notes are outstanding, in the event we incur any
new debt (including any notes issuable upon the redemption of Series A
Convertible Preferred Stock or Series B Convertible Preferred Stock), the lender
must first enter into a subordination agreement with the holders of the notes
under which the indebtedness owed to such lenders will be subordinated in full
to the notes. The subordination and prior lien position of the notes may
prohibit us from obtaining any future debt financing. If we are unable to obtain
financing on favorable terms, we may be unable to fund or expand our operations
or we may only be able to fund or expand our operations on terms that adversely
affect our financial condition. If we are unable to obtain financing necessary
to fund our operations, we
12
may have to sell or liquidate all or a portion of our business or significantly
reduce our expenses, or a combination. This could adversely affect our ability
to effectively execute our business plan.
WE MAY ENCOUNTER OTHER UNANTICIPATED RISKS AND UNCERTAINTIES IN THE INTERNET
MARKET OR IN DEVELOPING NEW PRODUCTS AND SERVICES, AND WE CANNOT ASSURE YOU THAT
WE WILL BE SUCCESSFUL IN RESPONDING TO ANY UNANTICIPATED RISKS OR UNCERTAINTIES.
There are no assurances that we will be successful or that we will not
encounter other, and even unanticipated, risks. We discuss other operating,
financial or legal risks or uncertainties in our periodic filings with the
Securities and Exchange Commission (we refer to it as the "SEC"). We are, of
course, also subject to general economic risks.
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (we refer to it as the "Exchange
Act"). All statements other than statements of historical fact are
"forward-looking statements" for purposes of federal and state securities laws,
including: any projections of earnings, revenues or other financial items; any
statements of the plans, strategies and objectives of management for future
operations; any statements concerning proposed new products, services or
developments; any statements regarding future economic conditions or
performance; any statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements may include the
words "may," "will," "estimate," "intend," "continue," "believe," "expect" or
"anticipate" and other similar words. Such forward-looking statements may be
contained in the "Risk Factors" section above, among other places.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to inherent risks and
uncertainties, such as those disclosed in this document. We do not intend, and
undertake no obligation, to update any forward-looking statement.
DOCUMENTS INCORPORATED BY REFERENCE
We furnish our shareholders with annual reports containing audited
financial statements and other appropriate reports. We also file annual,
quarterly and special reports, proxy statements and other information with the
SEC. Instead of repeating information that we have already filed with the SEC,
we are allowed to "incorporate by reference" in this prospectus information
contained in those documents we have filed with the SEC. These documents are
considered to be part of this prospectus.
We incorporate by reference in this prospectus the documents listed
below and any future filings we make with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act until the selling shareholders sell all of the
shares of common stock offered by this prospectus:
o our Annual Report on Form 10-K/A, including audited financial
statements, for our fiscal year ended December 31, 2001;
13
o our Quarterly Report on Form 10-Q/A for the quarterly period ended
March 31, 2002;
o our Quarterly Reports on Form 10-Q for the quarterly period ended
June 30, 2002;
o our Current Report on Form 8-K dated September 20, 2002;
o all other reports we have filed pursuant to Section 13(a) or 15(d)
of the Exchange Act since the end of our fiscal year covered by
the Annual Report referred to above; and
o the description of our common stock contained in our Registration
Statement on Form 8-A, dated September 25, 1989, including any
amendment or report filed for the purpose of updating such
description.
Any documents that we file with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
offering, will also be considered to be part of this prospectus and will
automatically update and supersede the information contained in this prospectus.
At your request, we will provide you, without charge, a copy of any of
the documents we have incorporated by reference into this prospectus but not
delivered with the prospectus (other than exhibits to such documents, unless
those exhibits are specifically incorporated by reference into the documents
that this prospectus incorporates). If you want more information, write or call:
Steve M. York
Senior Vice President and Chief Financial Officer
Zix Corporation
2711 North Haskell Avenue
Suite 2300, LB 36
Dallas, Texas 75204-2960
Telephone: (214) 370-2000
WHERE YOU CAN GET MORE INFORMATION
We are delivering this prospectus to you in accordance with the U.S.
securities laws. We have filed a registration statement with the SEC to register
the common stock that the selling shareholders are offering to you. This
prospectus is part of that registration statement. As allowed by the SEC's
rules, this prospectus does not contain all of the information that is included
in the registration statement.
You may obtain a copy of the registration statement, or a copy of any
other filing we have made with the SEC, directly from the SEC. You may either:
14
o read and copy any materials we have filed with the SEC at the
SEC's Public Reference Room maintained at 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices:
233 Broadway, New York, New York 10279; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; or
o visit the SEC's Internet site at http://www.sec.gov, which
contains reports, proxy statements, and other information
regarding issuers that file electronically.
You can obtain more information about the SEC's Public Reference Room
by calling the SEC at 1-800-SEC-0330.
SELLING SHAREHOLDERS
On September 17, 2002, we entered into a securities purchase agreement
with the selling shareholders listed in the table below. Under this agreement we
issued and sold to the selling shareholders the notes and the associated
warrants. The common stock issuable upon conversion of the notes and associated
warrants are being offered under this prospectus.
We are registering the shares in order to permit the selling
shareholders to offer the shares of common stock for resale from time-to-time.
Except for the ownership of the notes and the associated warrants, the selling
shareholders have not had any material relationship with us within the past
three years.
The table below lists the selling shareholders and other information
regarding the ownership of our common stock by the selling shareholders. The
second column lists the number of shares of common stock held, plus the number
of shares of common stock that would have been issuable to the selling
shareholders as of September 30, 2002, based on its ownership of the notes and
the associated warrants, assuming conversion of all notes and exercise of the
associated warrants held by the selling shareholders on that date, without
regard to any limitations on conversions or exercise. The third column lists the
shares of common stock being offered by this prospectus by the selling
shareholders.
In accordance with the terms of the registration rights agreement with
the holders of the notes and the associated warrants, this prospectus generally
covers the resale of at least that number of shares of common stock equal to
110% of the number of shares of common stock issuable upon conversion of the
notes and upon exercise of the associated warrants, determined as if the
outstanding notes and associated warrants were converted or exercised, as
applicable, in full as of the second trading day immediately preceding the
filing of this registration statement. The fourth column assumes the sale of all
of the shares offered by the selling shareholders pursuant to this prospectus.
Under the terms of the notes and the associated warrants, the selling
shareholders may not convert the notes, or exercise the associated warrants, to
the extent such conversion or exercise would cause the selling shareholder,
together with its affiliates, to have acquired a number of shares of common
stock which would exceed 4.99% of our then-outstanding common
15
stock, excluding for purposes of such determination shares of common stock
issuable upon conversion of the notes which have not been converted and upon
exercise of the associated warrants which have not been exercised. The number of
shares in the second column does not reflect this limitation. The selling
shareholders may sell all, some or none of their shares in this offering. See
"Plan of Distribution."
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING
------------------------------ ----------------------------
NUMBER OF SHARES TO BE NUMBER OF
NAME OF OWNER SHARES SOLD SHARES PERCENTAGE
------------- --------- ------------ --------- ----------
HFTP Investment L.L.C.(1) 1,175,343 1,293,266 0 0%
Gaia Offshore Master 1,175,343 1,293,266 0 0%
Fund, Ltd.(1)
Caerus Fund Ltd.(1) 156,713 172,437 0 0%
----------
(1) Promethean Asset Management, LLC, a New York limited liability company,
serves as investment manager to HFTP Investment L.L.C., Gaia Offshore
Master Fund, Ltd. and Caerus Fund Ltd. and may be deemed to share
beneficial ownership of the shares beneficially owned by HFTP, Gaia and
Ceaerus. The ownership information for each of these three selling
shareholders does not include the ownership information for the others.
Promethean disclaims beneficial ownership of the shares beneficially
owned by HFTP, Gaia and Caerus, and each of HFTP, Gaia and Caerus
disclaims beneficial ownership of the shares beneficially owned by the
others. James F. O'Brien, Jr. indirectly controls Promethean. Mr.
O'Brien disclaims beneficial ownership of the shares beneficially owned
by Promethean, HFTP, Gaia and Caerus.
PLAN OF DISTRIBUTION
We are registering the shares of common stock issuable upon conversion
of the notes and upon exercise of the associated warrants to permit the resale
of the shares of common stock by the holders of the notes and the associated
warrants from time-to-time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling shareholders of the
shares of common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The selling shareholders may sell all or a portion of the common stock
beneficially owned by them and offered hereby from time-to-time directly or
through one or more underwriters, broker-dealers or agents. If the common stock
is sold through underwriters or broker-dealers, the selling shareholders will be
responsible for underwriting discounts or commissions or agent's commissions.
The common stock may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions,
16
(1) on any national securities exchange or quotation service on
which the securities may be listed or quoted at the time of
sale,
(2) in the over-the-counter market,
(3) in transactions otherwise than on these exchanges or systems
or in the over-the-counter market,
(4) through the writing of options, whether such options are
listed on an options exchange or otherwise, or
(5) through the settlement of short sales.
If the selling shareholders effect such transactions by selling shares
of common stock to or through underwriters, broker-dealers or agents, such
underwriters, brokers-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling shareholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, brokers-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the common stock or otherwise, the selling shareholders may enter
into hedging transactions with broker-dealers, which may in turn engage in short
sales of the common stock in the course of hedging in positions they assume.
Subject to the certain contractual limitations with our company, the selling
shareholders may also sell shares of common stock short and deliver shares of
common stock covered by this prospectus to close out short positions, provided
that the short sale is made after the registration statement is declared
effective and a copy of this prospectus is delivered in connection with the
short sale.
The selling shareholders may pledge or grant a security interest in
some or all of the notes or shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time-to-time pursuant
to the prospectus. The selling shareholders also may transfer and donate the
shares of common stock in other circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling beneficial
owners for purposes of the prospectus.
The selling shareholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions paid, or any
discounts or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
shareholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in some states the shares
17
of common stock may not be sold unless such shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
There can be no assurance that any selling shareholder will sell any or
all of the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
The selling shareholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M of the Exchange Act, which may limit the timing of purchases and sales of any
of the shares of common stock by the selling shareholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common
stock pursuant to the registration rights agreement estimated to be $19,000 in
total, including, without limitation, SEC filing fees and expenses of compliance
with state securities or "blue sky" laws; provided, however, that the selling
shareholders will pay all underwriting discounts and selling commissions, if
any. In connection with sales made pursuant to this prospectus, we will
indemnify the selling shareholders against liabilities, including some
liabilities under the Securities Act, in accordance with the registration rights
agreement, or the selling shareholders will be entitled to contribution. We will
be indemnified by the selling shareholders against civil liabilities, including
liabilities under the Securities Act that may arise from any written information
furnished to us by the selling shareholders for use in this prospectus, in
accordance with the related registration rights agreement, or we will be
entitled to contribution.
Once sold under the shelf registration statement, of which this
prospectus forms a part, the shares of common stock will be freely tradable in
the hands of persons other than our affiliates.
DESCRIPTION OF SECURITIES
COMMON STOCK
The holders of our common stock are entitled to one vote per share on
all matters to be voted on by shareholders and are entitled to receive dividends
when declared by our board of directors, at their discretion, from legally
available funds. The holders of our common stock are not entitled to preemptive,
subscription or conversion rights, and there are no redemption or sinking fund
provisions applicable to our common stock.
Upon liquidation or dissolution, the holders of our common stock are
entitled to receive all assets available for distribution to the shareholders,
subject to the preferential rights of the holders of the Series A Convertible
Preferred Stock and the Series B Convertible Preferred Stock and any other
series of preferred stock that may be outstanding.
18
The foregoing summary is qualified by reference to the description of
our common stock that is filed with our Registration Statement on Form 8-A,
dated September 25, 1989, including any amendment or report updating such
description.
PREFERRED STOCK
Shares of preferred stock are issuable in one or more series at the
time and for the consideration as our board of directors may determine.
Authority is expressly granted to our board of directors to fix, from
time-to-time, by resolution or resolutions providing for:
o the establishment and/or issuance of any series of preferred
stock,
o the designation of any series of preferred stock,
o the powers, preferences and rights of the shares of that series,
and
o the qualifications, limitations or restrictions of the preferred
stock.
We currently have designated two series of preferred stock. Each series
of preferred stock is summarized below.
THE SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED
STOCK
On September 16, 2002, we entered into a securities purchase agreement
with the investors named therein, under which we:
o issued 819,886 aggregate shares of Series A Convertible Preferred
Stock for a purchase price of $3.92 per share, or $3,213,969 in
the aggregate;
o issued 1,304,815 aggregate shares of Series B Convertible
Preferred Stock for a purchase price of $3.60 per share, or
$4,697,339 in the aggregate;
o issued to the purchasers of the Series A Convertible Preferred
Stock warrants to purchase up to an aggregate of 288,244 shares of
common stock for a purchase price of $.0125 per warrant share, or
$36,031 in the aggregate; and
o issued to the purchasers of the Series B Convertible Preferred
Stock warrants to purchase up to an aggregate of 421,284 shares of
common stock for a purchase price of $0.125 per warrant share, or
$52,661 in the aggregate.
Purchasers of the Series A Convertible Preferred Stock and associated
warrants include John A. Ryan, our chairman, president and chief executive
officer, and Antonio R. Sanchez, Jr., a director of our company. Purchasers of
the Series B Convertible Preferred Stock and associated warrants include George
W. Haywood, a 25.4% beneficial shareholder of our company. This transaction
closed on September 18, 2002.
19
TERMS OF SERIES A CONVERTIBLE PREFERRED STOCK
The Series A Convertible Preferred Stock ranks senior to the common
stock and on parity with the Series B Convertible Preferred Stock. The Series A
Convertible Preferred Stock accrues per annum dividends of 6.5% and has a
preference on liquidation (or deemed liquidation) equal to $3.92 per share plus
the amount of accumulated but unpaid dividends.
Conversion
The Series A Convertible Preferred Stock is convertible in whole or in
part into shares of common stock at the option of the holder at any time,
subject to the limitations described below.
The Series A Convertible Preferred Stock is convertible in whole or in
part into shares of common stock at our option if, following the effectiveness
of the registration statement described below in "Registration Requirements,"
the closing price of the common stock on The Nasdaq Stock Market is above $6.18
per share for each of the ten consecutive trading days immediately preceding our
notice of conversion. We must exercise our conversion rights with respect to the
Series A Convertible Preferred Stock simultaneously and in the same proportion
as we exercise our conversion rights with respect to the Series B Convertible
Preferred Stock.
The number of shares of common stock to be issued upon conversion will
be determined by dividing
(1) the principal amount being converted plus the amount of accumulated
but unpaid dividends on such shares to be converted, by
(2) the Series A Conversion Price in effect at the time of conversion.
Initially, the "Series A Conversion Price" is 105% of the original
issue price of the Series A Convertible Preferred Stock, or $4.12 per share. The
Series A Conversion Price and the number of shares of common stock issuable upon
conversion of the Series A Convertible Preferred Stock are subject to
proportional adjustment upon the occurrence of certain events, including stock
splits and similar changes affecting the common stock, and are subject to
weighted average anti-dilution adjustment in the event we issue, or are deemed
to have issued, shares of common stock at a price per share that is less than
the Series A Conversion Price then in effect (other than certain specified
exempt issuances). The Series A Conversion Price may not be adjusted pursuant to
the weighted average formula to a price that is less than $3.92 per share, that
price being the average of the closing bid prices of common stock for the four
trading days prior to the execution of the securities purchase agreement
relating to the Series A Convertible Preferred Stock and the trading day the
binding agreement was executed, without the prior approval of our shareholders
in accordance with the Nasdaq Marketplace Rules.
On the date of issue, the shares of Series A Convertible Preferred
Stock were convertible into 780,085 shares of common stock.
20
Redemption
The Series A Convertible Preferred Stock is subject to mandatory
redemption by our company, in equal installments of 1/9 of the original
aggregate shares issued, at two-month intervals beginning May 2003 and ending
September 2004. The redemption amount we are required to pay will be $3.92 per
share to be redeemed, plus all accrued and unpaid dividends on the redeemed
shares.
The redemption amount payable on any interim redemption date will be
payable in shares of common stock, valued at $3.92 per share. If, on any such
interim redemption date, $3.92 is higher than the then-current five-day average
closing bid price of the common stock on Nasdaq, then each holder has the option
to defer the scheduled interim redemption of such holder's Series A Convertible
Preferred Stock until the next succeeding redemption date. If we are prohibited
from issuing a sufficient number of shares of common stock to effect any interim
redemption because we have not obtained the approval of our shareholders
described below, the shares of Series A Convertible Preferred Stock that cannot
be redeemed by the issuance of common stock must be redeemed by our company in
cash (provided that the notes have been paid in full) or through the issuance of
a subordinated note, at our option. Each subordinated note will have a one-year
term, be unsecured, bear interest at 6.5% per annum and be subordinated to the
notes.
The redemption amount payable on the final redemption date (the
24-month anniversary of issuance) will be payable, at our option, either in cash
or by the issuance of shares of common stock, valued at the lesser of $3.92 per
share or the then-current five-day average closing bid price of the common stock
on Nasdaq. If the then-current five-day average closing bid price of the common
stock on Nasdaq is less than $3.92 and we are prohibited from issuing shares of
common stock at less than $3.92 because we have not obtained the approval of our
shareholders described below, then we must pay the redemption amount in cash. If
we are prohibited from issuing a sufficient number of shares of common stock
(because we have already exhausted the 870,693 shares that may be issued without
shareholder approval) to effect the final redemption because we have not
obtained the approval of our shareholders, the shares of Series A Convertible
Preferred Stock that cannot be redeemed by the issuance of common stock must be
redeemed by our company in cash.
Voting
The holder of each share of Series A Convertible Preferred Stock will
have the right to one vote for each share of common stock into which such Series
A Convertible Preferred Stock could be converted on the record date and will
vote upon all matters upon which holders of common stock have the right to vote.
In no event, however, may any share of Series A Convertible Preferred Stock
entitle the holder to a number of votes that is greater than the number of votes
the share would represent if it was then convertible into common stock based on
a conversion price of $3.92. The consent of the holders of a majority of the
shares of Series A Convertible Preferred Stock outstanding is required before we
may take certain actions, including the redemption or the payment of dividends
on the common stock.
21
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
The Series B Convertible Preferred Stock ranks senior to the common
stock and on parity with the Series A Convertible Preferred Stock. The Series B
Convertible Preferred Stock accrues per annum dividends of 6.5% and has a
preference on liquidation (or deemed liquidation) equal to $3.60 per share plus
the amount of accumulated but unpaid dividends.
Conversion
The Series B Convertible Preferred Stock is convertible in whole or in
part into shares of common stock at the option of the holder at any time,
subject to the limitations described below.
The Series B Convertible Preferred Stock is convertible in whole or in
part into shares of common stock at our option if, following the effectiveness
of the registration statement described below under "Registration Requirements,"
the closing price of the common stock on Nasdaq is above $5.67 per share for
each of the ten consecutive trading days immediately preceding our notice of
conversion. We must exercise our conversion rights with respect to the Series B
Convertible Preferred Stock simultaneously and in the same proportion as we
exercise our conversion rights with respect to the Series A Convertible
Preferred Stock.
The number of shares of common stock to be issued upon conversion will
be determined by dividing
(1) the principal amount being converted plus the amount of accumulated
but unpaid dividends on such shares to be converted, by
(2) the Series B Conversion Price in effect at the time of conversion.
Initially, the "Series B Conversion Price" is 105% of the original
issue price of the Series B Convertible Preferred Stock, or $3.78 per share. The
Series B Conversion Price and the number of shares of common stock issuable upon
conversion of the Series B Convertible Preferred Stock are subject to
proportional adjustment upon the occurrence of certain events, including stock
splits and similar changes affecting the common stock, and are subject to
weighted average anti-dilution adjustment in the event we issue, or are deemed
to have issued, shares of common stock at a price per share that is less than
the Series B Conversion Price then in effect (other than certain specified
exempt issuances).
On the date of issue, the shares of Series B Convertible Preferred
Stock were convertible into 1,242,680 shares of common stock.
Redemption
The Series B Convertible Preferred Stock is subject to mandatory
redemption by our company, in equal installments of 1/9 of the original
aggregate shares issued, at two-month intervals beginning May 2003 and ending
September 2004. The redemption amount to be paid by our company will be $3.60
per share to be redeemed, plus all accrued and unpaid dividends on such redeemed
shares.
22
The redemption amount will be payable in shares of common stock, valued
at the lesser of
(1) the Series B Conversion Price then in effect, or
(2) 90% of the average of the daily volume-weighted average prices of
the common stock on Nasdaq for the 20 trading days immediately preceding the
date of redemption.
If we are prohibited from issuing a sufficient number of shares of
common stock to effect any interim redemption because we have not obtained the
approval of our shareholders described below, the shares of Series B Convertible
Preferred Stock that cannot be redeemed by the issuance of common stock must be
redeemed by our company in cash (provided that the notes have been paid in full)
or through the issuance of a subordinated note, at our option. Each subordinated
note will have a one-year term, be unsecured, bear interest at 6.5% per annum
and be subordinated to the notes.
Voting
The shares of Series B Convertible Preferred Stock do not vote with the
common stock on an as-converted basis and have no other voting rights except
that the consent of the holders of a majority of the shares of Series B
outstanding is required before we may take certain actions, including the
redemption or the payment of dividends on the common stock.
LIMITATIONS ON SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE
PREFERRED STOCK SHARES WITHOUT SHAREHOLDER APPROVAL
Unless we obtain the approval of our shareholders as required by the
Nasdaq Marketplace Rules, we may not take any of the following actions with
respect to the Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock:
o issue more than 870,693 shares of common stock upon the conversion
or redemption of shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock; or
o issue shares of common stock upon the conversion or redemption of
shares of Series A Convertible Preferred Stock at less than $3.92
per share.
Under the securities purchase agreement relating to the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, we are
obligated to:
o prepare and file with the SEC a proxy statement relating to the
approval of our shareholders on or before October 25, 2002;
o use all reasonable efforts to obtain the approval of our
shareholders on or before February 28, 2003; and
23
o in any event, seek the approval of our shareholders no later than
our 2003 annual meeting of shareholders.
WARRANTS
In connection with the sale of the Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock, we issued warrants to the purchasers
of the Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock to purchase in whole or in part an aggregate of 709,528 shares of common
stock at an exercise price of $4.51 per share. These warrants are exercisable at
any time after the six-month anniversary of the issue date and prior to the
four-year anniversary of the issue date. The number of shares of common stock
for which these warrants are exercisable and the exercise price of these
warrants are subject to proportional adjustment for stock splits and similar
changes affecting the common stock. The exercise price of these warrants is also
subject to weighted average anti-dilution adjustment in the event we issue, or
are deemed to have issued, shares of common stock at a price per share that is
less than the exercise price then in effect (other than certain specified exempt
issuances) except that the exercise price may not be adjusted pursuant to the
weighted average formula to a price that is less than the market value on the
date of issuance of these warrants (that is, $3.92 per share).
REGISTRATION REQUIREMENTS
We also entered into with the purchasers of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock a registration rights
agreement, under which we agreed to prepare and file within 30 days of the
closing date a registration statement covering the resale of the shares of
common stock issuable upon the conversion or redemption of the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock and the
exercise of the associated warrants. We are required to have the registration
statement declared effective within 105 days after the closing date. In
addition, we agreed to prepare, file and seek the effectiveness of a
registration statement covering the resale of up to an aggregate additional
2,000,000 shares of common stock held by Antonio R. Sanchez, Jr., a director of
our company, and George W. Haywood, a 25.4% beneficial shareholder of our
company, upon their request no sooner than nine months after the date of the
agreement relating to the purchase of the Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock.
TRADING RESTRICTIONS
Except as described below, so long as any of the notes or associated
warrants described below are outstanding, a purchaser of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock may not engage in a
short sale or establish an open put equivalent position with respect to a number
of shares of common stock that is greater than
o the number of shares of common stock for which the associated
warrant held by the purchaser is then exercisable (without regard
to limitations on exercisability) plus
o the number of shares of common stock issuable to the purchaser
pursuant to a notice of conversion of shares of Series A
Convertible Preferred Stock or Series B Convertible Preferred
Stock, or a notice of exercise of an associated warrant, delivered
to us no later than the next succeeding business day.
24
These limitations terminate upon the occurrence of a "Triggering
Event," an "Event of Default," or the consummation or public announcement of a
"Change of Control," in each case, as such terms are defined in the notes.
TERMS OF THE NOTES
On September 17, 2002, we entered into a securities purchase agreement
with the buyers named therein, under which we issued and sold to the buyers the
notes in the aggregate principle amount of $8,000,000 and associated warrants to
purchase up to an aggregate of 386,473 shares of common stock. No purchaser of
the notes and associated warrants is an officer, director or substantial
shareholder of our company. This transaction closed on September 18, 2002.
Interest and Repayment Terms
The notes bear interest at the rate of 6.5% per annum. The notes are
payable in six consecutive monthly installments of $500,000 (plus accrued
interest) each beginning in January 2003 and a final payment of $5,000,000 (plus
accrued interest) on October 1, 2003.
Prepayment
We may prepay the notes at any time by the payment of 105% of the
principal amount being prepaid, plus all accrued interest thereon. Our right to
prepay the notes is subject to the satisfaction of certain conditions, including
the listing of the common stock on The Nasdaq Stock Market, the effectiveness of
the registration statement described below in "Registration Requirements", and
the absence of any default by us under the securities purchase agreement related
to the notes, the notes, the associated warrants and the registration rights
agreement described below. Our prepayment of the notes is also subject to the
right of the holder to convert any portion of the notes for which we have given
a notice of prepayment into shares of common stock, in the manner described
below.
Conversion
The unpaid principal amount and accrued interest of each note is
convertible in whole or in part into shares of common stock at the option of the
holder at any time.
The unpaid principal amount and accrued interest of each note is
convertible in whole or in part into shares of common stock at our option if,
following the tenth trading day after the effectiveness of the registration
statement described below, the weighted average price of the common stock on The
Nasdaq Stock Market is at or above $4.54 per share for the ten consecutive
trading days immediately preceding our notice of conversion. Our right to
convert the notes is also subject to the satisfaction of certain conditions,
including the listing of the common stock on The Nasdaq Stock Market, the
effectiveness of the registration statement described below and the absence of
any default by our company under the securities purchase agreement relating to
the notes, the notes, the associated warrants and the registration rights
agreement described below. If following our notice of conversion the weighted
average price of the common stock does not continue to exceed the initial note
conversion price of $3.78 per share through the mandatory conversion date, then
a pro-rata portion of the selected notes will be required to be converted based
on the number of days the weighted average price of the common stock did exceed
the
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initial note conversion price. The minimum principal amount of notes that we may
convert is the lesser of $1,000,000 and the aggregate principal amount
outstanding under the notes.
The number of shares of common stock to be issued upon conversion will
be determined by dividing
(1) the portion of the unpaid principal amount and accrued interest of
the note being converted, by
(2) the note conversion price in effect at the time of conversion.
Initially, the "Note Conversion Price" is $3.78 per share. The Note
Conversion Price and the number of shares of common stock issuable upon
conversion of the notes are subject to proportional adjustment for stock splits
and similar changes affecting the common stock and are subject to full
anti-dilution adjustment in the event we issue, or are deemed to have issued,
shares of common stock at a price per share that is less than the Note
Conversion Price then in effect (other than certain specified exempt issuances,
including any issuance of common stock upon the conversion or redemption of the
Series A Convertible Preferred Stock or the Series B Convertible Preferred
Stock).
Notwithstanding the foregoing, no holder of the notes or the associated
warrants is entitled to convert the notes or exercise the associated warrants to
the extent that such conversion or exercise would result in such person and its
affiliates being the holders of more than 4.99% of the shares of common stock
outstanding after giving effect to the conversion or exercise. This restriction
does not prohibit a holder from converting or exercising up to 4.99% of the
shares then outstanding, then selling those shares and later converting or
exercising up to 4.99% again.
In addition to the redemption rights described below, the holders of
the notes are entitled to receive from our company substantial cash damages in
the event we fail to timely honor a notice of conversion tendered by a holder.
On the date of issue, the notes were convertible into 2,116,402 shares
of our common stock.
Forced Redemption
If we are prohibited from issuing a sufficient number of shares of
common stock to effect any attempted conversion of the notes by a holder because
we have not obtained the approval of our shareholders (see below under the
heading "Limitations on Notes Without Shareholder Approval") each holder of a
note will have the right to redeem all or a portion of the principal amount
outstanding thereunder that cannot be converted for a cash payment equal to 100%
of the principal amount being redeemed, plus all accrued interest thereon.
If we fail to have the registration statement described below effective
prior to the fifth business day preceding the date of any scheduled payment
under the notes (with the first scheduled payment date being January 1, 2003),
each holder of a note will have the right to redeem such holder's portion of
such scheduled payment, or any portion thereof, for a cash payment equal to the
principal amount being redeemed and all accrued interest thereon, divided
26
by the Note Conversion Price then in effect and multiplied by the daily
volume-weighted average price of the common stock on The Nasdaq Stock Market on
the trading day immediately preceding the date of such failure.
Upon the occurrence of other "Triggering Events" (as defined in the
notes), each holder of a note will have the right to redeem all or a portion of
the principal amount outstanding thereunder for a cash payment that is the
greater of
(1) 125% of the principal amount being redeemed, plus all accrued
interest thereon, and
(2) the principal amount being redeemed and all accrued interest
thereon, divided by the Note Conversion Price then in effect and multiplied by
the daily volume-weighted average price of the common stock on The Nasdaq Stock
Market on the trading day immediately preceding such Triggering Event.
Other Triggering Events include, but are not limited to, our failure
to:
o make a scheduled payment under the notes when due,
o timely honor a notice of conversion, to list the common stock
underlying the notes and associated warrants for specified
periods, and
o to have the registration statement described below effective
prior to the 135th day following the issuance of the notes.
Upon the occurrence of a "Change of Control" (as defined in the notes),
each holder of a note will have the right to redeem all or a portion of the
principal amount outstanding thereunder for a cash payment that is the greater
of
(1) 115% of the principal amount being redeemed, plus all accrued
interest thereon, and
(2) the principal amount being redeemed and all accrued interest
thereon, divided by the Note Conversion Price then in effect and multiplied by
the average of the daily volume-weighted average prices of the common stock on
The Nasdaq Stock Market for the five trading days immediately preceding the
notice of redemption.
Defaults and Remedies
The notes contain "Events of Default" (as defined in the notes) that
include, but are not limited to,
o our failure to make required cash payments under the notes
when due,
o our failure to abide by the cash maintenance requirements
described below under "Security Agreement,"
27
o the existence of certain insolvency or bankruptcy events, and
o the existence of certain defaults by or claims against us in
excess of $100,000.
Upon an Event of Default, each holder of a note is entitled to accelerate all
amounts due thereunder, to assess interest at a default rate and to exercise any
other right or remedy available under the notes, the securities purchase
agreement relating to the notes or applicable law. If we fail to pay any
accelerated amounts to the holder within five days, the holder may void the
acceleration and cause the Note Conversion Price to be reset to the lesser of
the Note Conversion Price then in effect and the lowest daily volume-weighted
average price of the common stock on The Nasdaq Stock Market during the period
that acceleration amounts were due and payable to the holder.
Security Agreement
We and an agent for the purchasers of the notes entered into a security
agreement, pursuant to which the notes have been secured by a first priority
lien in virtually all of our assets (including, without limitation, cash,
accounts receivable, equipment and intangibles). The securities purchase
agreement relating to the notes requires us to maintain cash and cash
equivalents in accounts pledged under the security agreement in an amount at
least equal to the lesser of $5,000,000 and the aggregate amount outstanding
under the notes. The security purchase agreement relating to the notes also
places limitations on the amount of cash that we can maintain in accounts that
are not pledged under the security agreement.
Restrictions on our company
The terms of the notes strictly prohibit additional "Indebtedness" (as
defined in the notes) that may be incurred by us while the notes are
outstanding, as described in general terms below.
Payments of principal and interest and other amounts due under the
notes cannot be subordinated to any other obligations of our company. For so
long as the notes are outstanding, in the event we incur any debt (including any
notes issuable upon the redemption of shares of Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock), the lender must first enter into
a subordination agreement with purchasers of the notes pursuant to which the
indebtedness owed to such lenders will be subordinated in full to the notes. The
form of the subordination agreement will either be in the form attached to our
current report on Form 8-K, dated September 20, 2002, as an exhibit or otherwise
will contain terms and conditions acceptable to the purchasers of the notes.
While the notes are outstanding, we may not redeem or otherwise acquire
any of our capital stock (other than pursuant to the terms of the notes, the
warrants, the Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock) without the consent of the note holders. Generally, any
permitted redemption of the Series A Convertible Preferred Stock and the Series
B Convertible Preferred Stock may only be paid in shares of our common stock.
The note holders are entitled to receive any dividends paid or distributions
made on the common stock to
28
the same extent as though the holders had converted the notes in full into
shares of common stock.
Voting
The notes do not entitle their holders to any right to vote with our
shareholders.
WARRANTS
In connection with the sale of the notes, we issued warrants to the
purchasers of the notes to purchase in whole or in part an aggregate of 386,473
shares of our common stock at an exercise price of $4.14 per share. These
warrants are exercisable at any time prior to the three-year anniversary of the
issue date. The number of shares of common stock for which these warrants are
exercisable and the exercise price of these warrants are subject to proportional
adjustment for stock splits and similar changes affecting the common stock and
are subject to full anti-dilution adjustment in the event that we issue, or are
deemed to have issued, shares of common stock at a price per share that is less
than the exercise price then in effect (other than certain specified exempt
issuances, including any issuance of common stock upon the conversion or
redemption of the Series A Convertible Preferred Stock or the Series B
Convertible Preferred Stock).
If we are prohibited from issuing a sufficient number of shares of
common stock in connection with any attempted exercise of the warrants because
we have not obtained the approval of our shareholders described below, a warrant
holder will have the right to require us to pay a cash payment with respect to
the portion of the warrant sought to be exercised equal to the difference
between the warrant exercise price and the volume-weighted average price of the
common stock on The Nasdaq Stock Market as of the time of the attempted
exercise.
Notwithstanding the foregoing, no holder of the notes or the associated
warrants is entitled to convert the notes or exercise the associated warrants to
the extent that such conversion or exercise would result in such person and its
affiliates being the holders of more than 4.99% of the shares of common stock
outstanding after giving effect to the conversion or exercise. This restriction
does not prohibit a holder from converting or exercising up to 4.99% of the
shares then outstanding, then selling those shares and later converting or
exercising up to 4.99% again.
LIMITATIONS ON NOTES WITHOUT SHAREHOLDER APPROVAL
As required by the Nasdaq Marketplace Rules, unless we obtain
shareholder approval, we may not issue more than 2,753,163 shares of common
stock upon the conversion or redemption of the notes and the exercise of the
associated warrants. Under the securities purchase agreement relating to the
notes, we are obligated to:
o prepare and file with the SEC a proxy statement on or before
October 25, 2002;
o use all reasonable efforts to obtain the approval of our
shareholders on or before February 28, 2003; and
29
o in any event, seek the approval of our shareholders no later than
our 2003 annual meeting of shareholders.
REGISTRATION REQUIREMENTS
We and the purchasers of the notes entered into a registration rights
agreement, under which we agreed to prepare and file within 20 days of the
closing date a registration statement covering the resale of 110% of the shares
of common stock issuable upon the conversion of the notes and the exercise of
the associated warrants. We are required to have this registration statement
declared effective within 105 days of the closing date.
In addition to the redemption rights described above under "Forced
Redemption," the holders of the notes are entitled to receive from us
substantial cash damages in the event we fail to file the registration
statement, or have the registration statement declared effective, within the
time limits set forth above or, thereafter, to keep the registration statement
effective for certain periods of time.
TRADING RESTRICTIONS
The holders of the notes have also agreed to the following limitations
on trading in connection with their purchase of the notes and associated
warrants. So long as a holder holds any notes or associated warrants, he or it
may not engage in a short sale or establish an open put equivalent position with
respect to a number of shares of common stock that is greater than:
o the number of shares of common stock for which the warrants held
by him or it are then exercisable (without regard to limitations
on exercisability); plus
o the number of shares of common stock issuable to him or it under a
notice of conversion of the notes or notice of exercise of the
warrants delivered to us no later than the next succeeding
business day.
The foregoing description of our preferred stock, notes and associated
warrants is qualified by reference to our Current Report on Form 8-K, dated
September 20, 2002, and related exhibits which are incorporated by reference in
this prospectus.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock by the
selling shareholders, rather, the selling shareholders will receive those
proceeds directly.
LEGAL MATTERS
The validity of the stock offered hereby will be passed upon for us by
Ronald A. Woessner, our Senior Vice President, General Counsel and Secretary.
30
EXPERTS
The consolidated financial statements appearing in the Annual Report on
Form 10-K/A for our fiscal year ended December 31, 2001, referred to above under
the heading "Documents Incorporated by Reference" have been audited by Ernst &
Young LLP, our independent auditors, as set forth in their report thereon,
included therein, and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
31
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee $ 951.84
Accounting fees and expenses 2,500.00*
Legal fees and expenses of registrant 10,000.00*
Miscellaneous expenses 5,000.00*
----------
Total $18,451.84
==========
----------
* Estimated.
All of the above expenses will be borne by the registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Texas Business Corporation Act, the registrant's
Restated Articles of Incorporation provide that its directors shall not be
personally liable to the registrant or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability for (i) any breach
of the director's duty of loyalty to the registrant or its shareholders, (ii)
any act or omission not in good faith or which involves intentional misconduct
or a knowing violation of law, (iii) any transaction from which the director
derived any improper personal benefit, (iv) any act or omission where the
liability of the director is expressly provided for by statute, or (v) any act
related to an unlawful stock repurchase or payment of a dividend. In addition,
the registrant's Restated Articles of Incorporation and Restated Bylaws include
certain provisions permitted by the Texas Business Corporation Act whereby its
directors, officers, employees and agents generally are to be indemnified
against certain liabilities to the fullest extent authorized by the Texas
Business Corporation Act. Furthermore, the employment agreement between John A.
Ryan and us, dated November 14, 2001, provides Mr. Ryan, our chairman, president
and chief executive officer, with a contractual right to indemnification as an
officer and/or director of us as set forth in Article VII of our Restated
Bylaws, dated September 14, 1999. The registrant maintains insurance on behalf
of its directors and executive officers insuring them against any liability
asserted against them in their capacities as directors or officers or arising
out of such status.
ITEM 16. EXHIBITS.
The exhibits to this registration statement are listed in the Index to
Exhibits on page II-5 of this registration statement, which Index is
incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
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(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the estimated
maximum offering range may be reflected in
the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and
price represent no more than 20 percent
change in the maximum aggregate offering
price set forth in the "Calculation of
Registration Fee" table in the effective
registration statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement
is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a
post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to
Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall
be
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deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions described in Item 6 or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on October 4, 2002.
ZIX CORPORATION
By: /s/ Steve M. York
-----------------------------------------
Steve M. York
Senior Vice President, Chief
Financial Officer and Treasurer
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POWER OF ATTORNEY
Know all those by these presents, that each person whose signature
appears below constitutes and appoints each of Steve M. York and John A. Ryan,
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for such person and
in his name, place and stead, in any and all capacities, in connection with the
Registration Statement on Form S-3 of Zix Corporation under the Securities Act
of 1933, as amended, including, without limitation of the generality of the
foregoing, to sign the Registration Statement in the name and on behalf of Zix
Corporation, or on behalf of the undersigned as a director or officer of Zix
Corporation, and any and all amendments or supplements to the Registration
Statement, including any and all stickers and post-effective amendments to the
Registration Statement, and to sign any and all additional Registration
Statements relating to the same offering of Securities as the Registration
Statement that are filed pursuant to Rule 462 under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission and any
applicable securities exchange or securities self-regulatory body, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes ads he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on October 4, 2002.
Signature Title
--------- -----
/s/ John A. Ryan Chairman, President, Chief Executive
--------------------------------- Officer and Director (Principal Executive
John A. Ryan Officer)
/s/ Steve M. York Senior Vice President, Chief Financial
--------------------------------- Officer and Treasurer (Principal Financial
Steve M. York and Accounting Officer)
/s/ Michael E. Keane Director
---------------------------------
Michael E. Keane
/s/ James S. Marston Director
---------------------------------
James S. Marston
Director
---------------------------------
Antonio R. Sanchez, Jr.
/s/ Dr. Ben G. Streetman Director
---------------------------------
Dr. Ben G. Streetman
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Amendment to the Articles of Incorporation of Zix
Corporation, as filed with the Texas Secretary of State on
August 1, 2002. Filed as Exhibit 3.1 to Zix Corporation's Form
10-Q for the quarterly period ended June 30, 2002, and
incorporated herein by reference. Restated Articles of
Incorporation of Zix Corporation, as filed with the Texas
Secretary of State on December 4, 2001. Filed as Exhibit 3.1
to Zix Corporation's Form 10-K for the year ended December 31,
2001, and incorporated herein by reference.
3.2 Restated Bylaws of Zix Corporation, dated August 1, 2002.
Filed as Exhibit 3.2 to Zix Corporation's Form 10-Q for the
quarterly period ended June 30, 2002, and incorporated herein
by reference.
3.3 Statement of Designations of the Series A Convertible
Preferred Stock of Zix Corporation. (1)
3.4 Statement of Designations of the Series B Convertible
Preferred Stock of Zix Corporation. (1)
4.1 Securities Purchase Agreement, dated September 16, 2002, by
and between Zix Corporation, the Series A Investors named
therein and the Series B Investors named therein (including
schedules but excluding exhibits). (1)
4.2 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
(1)
4.3 Registration Rights Agreement, dated September 16, 2002, by
and among Zix Corporation and the Investors named therein. (1)
4.4 Securities Purchase Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein
(including schedules but excluding exhibits). (1)
4.5 Form of Convertible Notes, dated September 18, 2002, in the
aggregate amount of $8,000,000, issued by Zix Corporation. (1)
4.6 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
(1)
4.7 Registration Rights Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein. (1)
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4.8 Security Agreement, dated September 17, 2002, between Zix
Corporation and Promethean Asset Management, L.L.C., as
collateral agent (excluding schedules). (1)
4.9 Form of Subordination Agreement. (1)
4.10 Securities Account Control Agreement, dated September 17,
2002, between Deutsche Bank Alex. Brown, Zix Corporation and
Promethean Asset Management LLC. (1)
5.1 Opinion of Ronald A. Woessner. (2)
23.1 Consent of Ronald A. Woessner (included in his opinion filed
as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP. (2)
24.1 Power of Attorney (included in Part II of this registration
statement).
99.1 Press Release issued by the registrant on September 18, 2002.
(1)
----------
(1) Incorporated by reference from Zix Corporation's Current Report on Form 8-K,
dated September 20, 2002.
(2) Filed herewith.
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