UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
SEPTEMBER 20, 2002 (SEPTEMBER 18, 2002)
ZIX CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 0-17995 75-2216818
----- ------- ----------
(STATE OR OTHER (COMMISSION FILE (IRS EMPLOYER
JURISDICTION OF NUMBER) IDENTIFICATION NO.)
INCORPORATION)
2711 NORTH HASKELL AVENUE
SUITE 2300, LB 36
DALLAS, TEXAS 75204-2960
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(214) 370-2000
ZIXIT CORPORATION
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
ITEM 5. OTHER EVENTS.
On September 18, 2002, Zix Corporation (the "Registrant") announced the
simultaneous closing of two financing transactions (the "Transactions") pursuant
to which the Registrant received $16,000,000 in gross cash proceeds. In the
first transaction ("Transaction One"), the Registrant issued the following:
o 819,886 shares of Series A Convertible Preferred
Stock;
o 1,304,815 shares of Series B Convertible Preferred
Stock; and
o warrants to purchase 709,528 shares of the
Registrant's common stock, par value $.01 per share
(the "Common Stock").
The aggregate cash proceeds from Transaction One were $8,000,000.
In the second transaction ("Transaction Two"), the Registrant issued:
o secured convertible notes in a principal amount of
$8,000,000; and
o warrants to purchase 386,473 shares of Common Stock.
The aggregate cash proceeds from Transaction Two were $8,000,000.
Following is a summary of certain terms of the Transactions. This
summary is qualified in its entirety by reference to the full text of the
underlying documents governing the Transactions. These documents are filed as
exhibits to this report and incorporated by reference.
TRANSACTION ONE: SERIES A AND SERIES B CONVERTIBLE PREFERRED SHARES AND
WARRANTS.
On September 16, 2002, the Registrant entered into a Securities
Purchase Agreement (the "Preferred Stock Purchase Agreement") with the investors
named therein (the "Investors"), pursuant to which the Registrant:
o issued to the Series A Investors 819,886 aggregate
shares of Series A Convertible Preferred Stock (the
"Series A Preferred") for a purchase price of $3.92
per share (the "Series A Original Issue Price"), or
$3,213,969 in the aggregate;
o issued to the Series B Investors 1,304,815 aggregate
shares of Series B Convertible Preferred Stock (the
"Series B Preferred") for a purchase price of $3.60
per share (the "Series B Original Issue Price"), or
$4,697,339 in the aggregate;
o issued to the Series A Investors 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
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o issued to the Series B Investors 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 (the Series A and Series B
warrants are collectively, the "Investor Warrants").
This transaction closed on September 18, 2002.
Terms of Series A Preferred
Purchasers of the Series A Preferred include John A. Ryan, the
Registrant's chairman, president and chief executive officer, and Antonio R.
Sanchez, Jr., a director and a 11.2% shareholder of the Registrant, and certain
of his affiliated entities. The Series A Preferred ranks senior to the Common
Stock and on parity with the Series B Preferred. The Series A Preferred 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 Preferred is convertible in whole or in part into shares
of Common Stock at the option of the holder at any time.
The Series A Preferred is convertible in whole or in part into shares
of Common Stock at the option of the Registrant if, following the effectiveness
of the Investor Registration Statement (as described below in "Registration
Requirements"), the closing price of the Common Stock on the Nasdaq National
Market ("Nasdaq") is above $6.18 per share for each of the ten consecutive
trading days immediately preceding the Registrant's notice of conversion. The
Registrant must exercise its conversion rights with respect to the Series A
Preferred simultaneously and in the same proportion as it exercises its
conversion rights with respect to the Series B Preferred.
The number of shares of Common Stock to be issued upon conversion will
be determined by dividing (i) the principal amount being converted plus the
amount of accumulated but unpaid dividends on such shares to be converted, by
(ii) the Series A Conversion Price in effect at the time of conversion.
Initially, the "Series A Conversion Price" is 105% of the Series A Original
Issue Price, 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 Preferred 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 the Registrant
issues, or is 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 Preferred
Stock Purchase Agreement and the trading day the binding agreement was executed,
without the prior approval of the Registrant's shareholders in accordance with
the Nasdaq Marketplace Rules.
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On the date of issue, the shares of Series A Preferred were convertible
into 780,085 shares of Common Stock.
Redemption
The Series A Preferred is subject to mandatory redemption by the
Registrant, 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 the Registrant will be $3.92 per share to be
redeemed, plus all accrued and unpaid dividends on such 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 Preferred
until the next succeeding redemption date. If the Registrant is prohibited from
issuing a sufficient number of shares of Common Stock to effect any interim
redemption because it has not obtained the Shareholder Approval described below,
the shares of Series A Preferred that cannot be redeemed by the issuance of
Common Stock must be redeemed by the Registrant in cash (provided that the
convertible notes issued in Transaction Two have been paid in full) or through
the issuance of a subordinated note, at the Registrant's option. Each
subordinated note will have a one-year term, be unsecured, bear interest at 6.5%
per annum and be subordinated to the convertible notes issued in Transaction
Two.
The redemption amount payable on the final redemption date (the
twenty-four month anniversary of issuance) will be payable, at the option of the
Registrant, 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 the
Registrant is prohibited from issuing shares of Common Stock at less than $3.92
because it has not obtained the "Shareholder Approval" described below, then the
Registrant must pay the redemption amount in cash. If the Registrant is
prohibited from issuing a sufficient number of shares of Common Stock (because
the Registrant has already exhausted the 870,693 shares that may be issued
without shareholder approval) to effect the final redemption because it has not
obtained the Shareholder Approval, the shares of Series A Preferred that cannot
be redeemed by the issuance of Common Stock must be redeemed by the Registrant
in cash.
Voting
The holder of each share of Series A Preferred will have the right to
one vote for each share of Common Stock into which such Series A Preferred 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 Preferred 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 outstanding is required
for the Registrant to take certain actions, including the redemption or the
payment of dividends on the Common Stock.
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Qualification of Summary
The foregoing is qualified by reference to the Statement of
Designations of the Series A Preferred that is filed as an exhibit to this
report and incorporated by reference.
Terms of Series B Preferred
Purchasers of the Series B Preferred include George W. Haywood, a 23.9%
shareholder of the Registrant. The Series B Preferred ranks senior to the Common
Stock and on parity with the Series A Preferred. The Series B Preferred 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 Preferred is convertible in whole or in part into shares
of Common Stock at the option of the holder at any time.
The Series B Preferred is convertible in whole or in part into shares
of Common Stock at the option of the Registrant if, following the effectiveness
of the Investor Registration Statement, 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 the Registrant's notice of conversion. The Registrant must
exercise its conversion rights with respect to the Series B Preferred
simultaneously and in the same proportion as it exercises its conversion rights
with respect to the Series A Preferred.
The number of shares of Common Stock to be issued upon conversion will
be determined by dividing (i) the principal amount being converted plus the
amount of accumulated but unpaid dividends on such shares to be converted, by
(ii) the Series B Conversion Price in effect at the time of conversion.
Initially, the "Series B Conversion Price" is 105% of the Series B Original
Issue Price, 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 Preferred 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 the Registrant
issues, or is 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 Preferred were convertible
into 1,242,680 shares of Common Stock.
Redemption
The Series B Preferred is subject to mandatory redemption by the
Registrant, in equal installments of 1/9 of the original aggregate shares
issued, at two-month intervals beginning May
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2003 and ending September 2004. The redemption amount to be paid by the
Registrant will be $3.60 per share to be redeemed, plus all accrued and unpaid
dividends on such redeemed shares.
The redemption amount will be payable in shares of Common Stock, valued
at the lesser of (a) the Series B Conversion Price then in effect or (b) 90% of
the average of the daily volume-weighted average prices of the Common Stock on
Nasdaq for the twenty trading days immediately preceding the date of redemption.
If the Registrant is prohibited from issuing a sufficient number of
shares of Common Stock to effect any interim redemption because it has not
obtained the Shareholder Approval described below, the shares of Series B
Preferred that cannot be redeemed by the issuance of Common Stock must be
redeemed by the Registrant in cash (provided that the convertible notes issued
in Transaction Two have been paid in full) or through the issuance of a
subordinated note, at the Registrant's option. Each subordinated note will have
a one-year term, be unsecured, bear interest at 6.5% per annum and be
subordinated to the convertible notes issued in Transaction Two.
Voting
The shares of Series B Preferred 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 for
the Registrant to take certain actions, including the redemption or the payment
of dividends on the Common Stock.
Qualification of Summary
The foregoing is qualified by reference to the Statement of
Designations of the Series B Preferred that is filed as an exhibit to this
report and incorporated by reference.
Limitations on Series A Preferred and Series B Preferred Shares Without
Shareholder Approval
Unless the Registrant obtains the approval of its shareholders as
required by the Nasdaq Marketplace Rules (the "Shareholder Approval"), the
Registrant may not take any of the following actions with respect to the Series
A Preferred and the Series B Preferred:
o may not issue more than 870,693 shares of Common
Stock upon the conversion or redemption of shares of
Series A Preferred and Series B Preferred; and
o may not issue shares of Common Stock upon the
conversion or redemption of shares of Series A
Preferred at less than $3.92 per share.
Pursuant to the Preferred Stock Purchase Agreement, the Registrant is
obligated to:
o prepare and file with the Securities and Exchange
Commission a proxy statement relating to the
Shareholder Approval on or before October 25, 2002;
o use all reasonable efforts to obtain the Shareholder
Approval on or before February 28, 2003; and
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o in any event, seek Shareholder Approval no later than
the 2003 Annual Meeting of Shareholders of the
Registrant.
Warrants
In connection with the sale of the Series A Preferred and Series B
Preferred, the Registrant issued the Investor Warrants to the Investors 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. The Investor 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 the Investor Warrants are exercisable and the exercise price of the
Investor Warrants are subject to proportional adjustment for stock splits and
similar changes affecting the Common Stock. The exercise price of the Investor
Warrants is also subject to weighted average anti-dilution adjustment in the
event the Registrant issues, or is 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 (that is, $3.92 per share).
The foregoing is qualified by reference to the form of Warrant that is
filed as an exhibit to this report and incorporated by reference.
Registration Requirements
The Registrant and the Investors entered into a Registration Rights
Agreement, pursuant to which the Registrant has 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 Preferred and Series B Preferred and the exercise of the Investor
Warrants (the "Investor Registration Statement"). The Registrant is required to
have the Investor Registration Statement declared effective within 105 days
after the closing date. In addition, the Registrant has agreed to prepare, file
and seek the effectiveness of a registration statement covering the resale of up
to an additional 2,000,000 shares of Common Stock held by Antonio R. Sanchez,
Jr., a director and a 11.2% shareholder of the Registrant, and certain of his
affiliated entities, and George W. Haywood, a 23.9% shareholder of the
Registrant, and certain of his affiliated entities, upon their request no sooner
than nine months after the date of the Preferred Stock Purchase Agreement.
The foregoing is qualified by reference to the Registration Rights
Agreement that is filed as an exhibit to this report and incorporated by
reference.
Trading Restrictions
So long as any of the notes or warrants issued in Transaction Two are
outstanding, no Investor may 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 (a) the number of shares of Common Stock for which the Investor
Warrant held by such Investor is then exercisable (without regard to limitations
on exercisability) plus (b) the number of shares of Common Stock issuable to
such
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Investor pursuant to a notice of conversion of shares of Series A Preferred or
Series B Preferred, or a notice of exercise of an Investor Warrant, delivered to
the Registrant no later than the next succeeding business day.
TRANSACTION TWO: SECURED CONVERTIBLE NOTES AND WARRANTS.
On September 17, 2002, the Registrant entered into a Securities
Purchase Agreement (the "Note Purchase Agreement") with the buyers named therein
(the "Buyers"), pursuant to which the Registrant issued and sold to the Buyers
secured convertible notes in the aggregate principle amount of $8,000,000 (the
"Notes") and warrants to purchase up to an aggregate of 386,473 shares of Common
Stock (the "Buyer Warrants"). No purchaser of the Notes and related Buyer
Warrants is an officer, director, or substantial shareholder of the Registrant.
This transaction closed on September 18, 2002.
Terms of Secured Convertible Notes
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 (the "Scheduled Payments").
Prepayment
The Registrant may prepay the Notes at any time by the payment of 105%
of the principal amount being prepaid, plus all accrued interest thereon. The
right of the Registrant to prepay the Notes is subject to the satisfaction of
certain conditions, including the listing of the Common Stock on Nasdaq, the
effectiveness of the Buyer Registration Statement (as described below in
"Registration Requirements") and the absence of any default by the Registrant
under the Note Purchase Agreement, the Notes, the Buyer Warrants and the
Registration Rights Agreement (as described below in "Registration
Requirements"). The prepayment of the Notes by the Registrant is also subject to
the right of the holder to convert any portion of the Notes for which the
Registrant has 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 the option of the
Registrant if, following the tenth trading day after the effectiveness of the
Buyer Registration Statement, the weighted average price of the Common Stock on
Nasdaq is at or above $4.54 per share for the ten consecutive trading days
immediately preceding the Registrant's notice of conversion. The right of the
Registrant to
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convert the Notes is also subject to the satisfaction of certain conditions,
including the listing of the Common Stock on Nasdaq, the effectiveness of the
Buyer Registration Statement and the absence of any default by the Registrant
under the Note Purchase Agreement, the Notes, the Buyer Warrants and the
Registration Rights Agreement. If following the Registrant's 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 initial Note Conversion Price. The minimum
principal amount of Notes that may be converted by the Registrant 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 (i) the portion of the unpaid principal amount and
accrued interest of the Note being converted, by (ii) 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 the Registrant issues,
or is 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 Preferred or the Series B Preferred).
Notwithstanding the foregoing, no holder of the Notes or the Buyer
Warrants is entitled to convert the Notes or exercise the Buyer 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 the Registrant substantial cash damages
in the event the Registrant fails 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 Common Stock.
Forced Redemption
If the Registrant is prohibited from issuing a sufficient number of
shares of Common Stock to effect any attempted conversion of the Notes by a
holder because it has not obtained the Shareholder Approval described below,
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 the Registrant fails to have the Buyer Registration Statement
effective prior to the fifth business day preceding the date of any Scheduled
Payment (with the first such Scheduled
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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 by the Note Conversion Price then in effect
and multiplied by the daily volume-weighted average price of the Common Stock on
Nasdaq 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 (a) 125% of the principal amount being redeemed, plus all accrued
interest thereon, and (b) 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
Nasdaq on the trading day immediately preceding such Triggering Event. Such
other Triggering Events include, but are not limited to, the failure of the
Registrant to make a Scheduled Payment when due, the failure of the Registrant
to timely honor a notice of conversion, the failure of the Common Stock to be
listed on Nasdaq for specified periods and the failure to have the Buyer
Registration Statement 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 (a) 115% of the principal amount being redeemed, plus all accrued interest
thereon, and (b) 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
Nasdaq 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, the failure of the Registrant to make required
cash payments under the Notes when due, the failure of the Registrant to abide
by the cash maintenance requirements described below under "Security Agreement,"
the existence of certain insolvency or bankruptcy events and the existence of
certain defaults by or claims against the Registrant 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 Note Purchase Agreement or
applicable law. If the Registrant fails 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
Nasdaq during the period that acceleration amounts were due and payable to the
holder.
Security Agreement
The Registrant and an agent for the Buyers entered into a Security
Agreement, pursuant to which the Notes have been secured by a first priority
lien in virtually all of the Registrant's personal property and rights to
personal property (including, without limitation, cash, accounts
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receivable, equipment and intangibles). The Note Purchase Agreement requires the
Registrant 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 Note Purchase Agreement
also places limitations on the amount of cash that the Registrant can maintain
in accounts that are not pledged under the Security Agreement.
Restrictions on the Registrant
The terms of the Notes strictly prohibit the additional Indebtedness
(as defined in the Notes) that may be incurred by the Registrant 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 the Registrant. For so
long as the Notes are outstanding, in the event the Registrant incurs any debt
(including any notes issuable upon the redemption of shares of Series A
Preferred or Series B Preferred), the lender must first enter into a
subordination agreement with the Buyers 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 this Report as an
exhibit or otherwise will contain terms and conditions acceptable to the Buyers.
While the Notes are outstanding, the Registrant may not redeem or
otherwise acquire any of its capital stock (other than pursuant to the terms of
the Notes, the Buyer Warrants, the Series A Preferred and the Series B
Preferred) without the consent of the Note holders. Generally, any permitted
redemption of the Series A Preferred and the Series B Preferred may only be paid
in shares of the Registrant's Common Stock. The Note holders are entitled to
receive any dividends paid or distributions made on the Common Stock to 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 the
shareholders of the Registrant.
Qualification of Summary
The foregoing is qualified by reference to the form of Note, the
Security Agreement, and the Note Purchase Agreement that are filed as exhibits
to this report and incorporated by reference.
Warrants
In connection with the sale of the Notes, the Registrant issued the
Buyer Warrants to the Buyers to purchase in whole or in part an aggregate of
386,473 shares of Common Stock at an exercise price of $4.14 per share. The
Buyer 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 the Buyer
Warrants are exercisable and the exercise price of the Buyer Warrants are
subject to
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proportional adjustment for stock splits and similar changes affecting the
Common Stock and are subject to full anti-dilution adjustment in the event the
Registrant issues, or is 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 Preferred or the Series B
Preferred).
If the Registrant is prohibited from issuing a sufficient number of
shares of Common Stock in connection with any attempted exercise of the Warrants
because it has not obtained the Shareholder Approval described below, such
Warrant holder will have the right to require the Registrant 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 Nasdaq as of the time of the attempted
exercise.
Notwithstanding the foregoing, no holder of the Notes or the Buyer
Warrants is entitled to convert the Notes or exercise the Buyer 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.
The foregoing is qualified by reference to the form of Buyer Warrant
that is filed as an exhibit to this report and incorporated by reference.
Limitations on Convertible Notes Without Shareholder Approval
As required by the Nasdaq Marketplace Rules, unless the Registrant
obtains the approval of its shareholders (the "Shareholder Approval"), the
Registrant 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 Buyer Warrants.
Pursuant to the Note Purchase Agreement, the Registrant is obligated to:
o prepare and file with the Securities and Exchange
Commission a proxy statement relating to the
Shareholder Approval on or before October 25, 2002;
o use all reasonable efforts to obtain the Shareholder
Approval on or before February 28, 2003; and
o in any event, seek Shareholder Approval no later than
the 2003 Annual Meeting of Shareholders of the
Registrant.
Registration Requirements
The Registrant and the Buyers entered into a Registration Rights
Agreement, pursuant to which the Registrant has 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 Buyer Warrants (the "Buyer Registration
12
Statement"). The Registrant is required to have the Buyer 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 the
Registrant substantial cash damages in the event the Registrant fails to file
the Buyer Registration Statement, or have the Buyer Registration Statement
declared effective, within the time limits set forth above or, thereafter, to
keep the Buyer Registration Statement effective for certain periods of time.
The foregoing is qualified by reference to the Registration Rights
Agreement that is filed as an exhibit to this report and incorporated by
reference.
Trading Restrictions
So long as a Buyer holds any Notes or Buyer Warrants, such Buyer 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 (a) the
number of shares of Common Stock for which the Buyer Warrants held by such
Investor are then exercisable (without regard to limitations on exercisability)
plus (b) the number of shares of Common Stock issuable to such Buyer pursuant to
a notice of conversion of the Notes or notice of exercise of the Buyer Warrants
delivered to the Registrant no later than the next succeeding business day. Such
trading restrictions will not apply following the occurrence of any "Triggering
Event" or "Event of Default" (each as defined in the notes) or following a
"Change of Control" (as defined in the Notes) or the public announcement of a
pending, proposed or intended "Change of Control."
USE OF PROCEEDS
Subject to the limitations on the access to the proceeds from
Transaction Two discussed above under "Security Agreement," the Registrant will
use the $16,000,000 in gross cash proceeds from the issuance of the securities
in the Transactions for working capital and other general corporate purposes.
EFFECT OF SECURITIES LAWS; FORWARD-LOOKING STATEMENTS
The securities described herein have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or under any state
securities laws and may not be offered or sold within the United States absent
registration under the Securities Act and applicable state securities laws or an
applicable exemption from those registration requirements.
Included in this Form 8-K are certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements are
based on assumptions that are subject to a wide range of business risks. Actual
results could differ materially from those included in such forward-looking
statements and important factors that could cause such a material difference are
described in the periodic filings of the Registrant with the Securities and
Exchange Commission, including its annual report on Form 10-K/A for the fiscal
year ended December 31, 2001. The
13
Registrant does not undertake any obligation to update or revise its
forward-looking statements, whether as the result of new information, future
events or otherwise.
RISK FACTORS
OUR ISSUANCE OF THE PREFERRED STOCK, CONVERTIBLE NOTES AND WARRANTS COULD
DILUTE THE INTERESTS OF SHAREHOLDERS.
One-ninth of the shares of Series A Preferred and Series B Preferred
are to be redeemed at two-month intervals beginning eight months after issuance.
The redemption amounts payable to the holders of Series A Preferred and Series B
Preferred are paid in shares of Common Stock.
If the Shareholder Approval 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 Preferred 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 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 Preferred
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 Preferred 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 Preferred 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 Preferred will
be the lesser 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 Preferred 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
Preferred 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 Preferred shares are redeemed at a substantially lower
price.
The Series A Preferred, the Series B Preferred and the Notes are
convertible by the holders into shares of Common Stock at any time. The Series A
Conversion Price initially is $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 Preferred and the Series B Preferred 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
14
adjustments applicable to the shares of Series B Preferred, the Notes and,
following Shareholder Approval, the shares of Series A Preferred 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 Preferred and Series B Preferred 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 Preferred and Series B
Preferred, 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 Shareholder
Approval. Assuming Shareholder Approval, 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 such securities. Based on the initial
conversion and exercise prices, which are, as described above, subject to
adjustment, the shares of Series A Preferred and Series B Preferred, the Notes
and all of the warrants issued in the Transactions (collectively, the
"Securities") are convertible, redeemable and/or exercisable for an aggregate of
5,235,168 shares of Common Stock (28.89% of our current outstanding Common
Stock). Notwithstanding the foregoing, no holder of the Notes or the Buyer
Warrants is entitled to convert the Notes or exercise the Buyer 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 the registration
statements described above, these shares of Common Sock will be eligible for
immediate resale in the public market. The market price of our securities could
fall as a result of such resales.
15
STOCK SALES AND HEDGING ACTIVITIES COULD AFFECT OUR STOCK PRICE.
To the extent the holders convert, redeem and exercise, as applicable,
the Securities 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. Moreover, subject to the limitations described above and as set
forth in the documents governing the Transactions, the holders of Securities may
hedge their positions in our stock by shorting our stock, which could further
adversely affect the stock price. Furthermore, the perception that the
Securities holders may sell short our Common Stock 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 Securities holders
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 Securities.
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 securities
issued in the Transactions, 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 Shareholder Approval, we will not be able to effect the
redemption of all shares of Series A Preferred and Series B Preferred 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. The Registrant, a development stage company, currently
has 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
16
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 MARKET OR OUR COMMON
STOCK AND LIQUIDITY WOULD DECLINE.
To remain listed for trading on the Nasdaq Market, we must abide by
Nasdaq's rules regarding the issuance of "future priced securities." Nasdaq
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 Preferred because, following
Shareholder Approval, the "floor" on the anti-dilution adjustment may be 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 Preferred 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 Preferred 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 entering into the Transactions, nor, based on our
interpretation of Nasdaq's rules and discussions with Nasdaq staff members, did
we believe that shareholder consent was required prior to the closing of the
Transactions. The Transaction documents 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, Nasdaq could delist our Common Stock from the
Nasdaq 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.
17
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 Securities and the resale of the Common Stock
underlying the Securities 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 Preferred or Series B Preferred),
the lender must first enter into a subordination agreement with the holders of
the Notes pursuant to 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 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.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
3.1 Statement of Designations of the Series A Convertible
Preferred Stock of Zix Corporation.
3.2 Statement of Designations of the Series B Convertible
Preferred Stock of Zix Corporation.
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).
4.2 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
4.3 Registration Rights Agreement, dated September 16, 2002, by
and among Zix Corporation and the Investors named therein.
4.4 Securities Purchase Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein
(including schedules but excluding exhibits).
4.5 Form of Convertible Notes, dated September 18, 2002, in the
aggregate amount of $8,000,000, issued by Zix Corporation.
18
4.6 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
4.7 Registration Rights Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein.
4.8 Security Agreement, dated September 17, 2002, between Zix
Corporation and Promethean Asset Management, L.L.C., as
collateral agent (excluding schedules).
4.9 Form of Subordination Agreement.
4.10 Securities Account Control Agreement, dated September 17,
2002, between Deutsche Bank Alex. Brown, Zix Corporation and
Promethean Asset Management LLC.
99.1 Press Release issued by the Registrant on September 18, 2002.
ITEM 9. REGULATION FD DISCLOSURE.
The Registrant is making the following disclosure as required by
the Note Purchase Agreement.
The disclosure schedules appended to the Securities Purchase
Agreements entered into with the investors in connection with the Transactions
apprised those investors of a telephone call received by the Registrant from the
Enforcement Division of the Securities and Exchange Commission (the "SEC
Enforcement Division") on August 22, 2002, inquiring into the revenue
recognition method employed by the Registrant in connection with its Marketing
and Distribution Agreement, effective November 6, 2000, between the Registrant
and Entrust, Inc. (filed as exhibit 10.4 to Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2000). Under this agreement, the
Registrant's ZixMail service option was integrated into the Entrust/Express
product in 2001 and it was contemplated that Entrust would market the integrated
product, with the Registrant and Entrust sharing the related revenues based upon
pre-determined percentages. Although, to date, Entrust has made no sales of the
integrated product, per the agreement, Entrust guaranteed the Registrant minimum
annual payments of $500,000 for 2001, $1,000,000 for 2002, $1,250,000 for 2003
and $1,500,000 for 2004. As stated in the Registrant's Form 10-Q/A for the
quarter ended March 31, 2002, filed with the Securities and Exchange Commission
on May 24, 2002: "Revenues in the first quarter of 2002 included $234,000 as a
result of the pro-rata recognition of the future minimum payments associated
with the Registrant's Marketing and Distribution Agreement with Entrust Inc.
("Entrust"). Entrust is scheduled to pay the Registrant future minimum payments
aggregating $3,750,000 through January 2005, which are being recognized as
revenue ratably over the four year maximum service period ending in December
2005."
The Registrant advised the SEC Enforcement Division that the
Registrant's revenue recognition method for minimum guaranteed payments was
previously reviewed with the
19
Securities and Exchange Commission's Division of Corporate Finance in connection
with such Division's review, routinely concluded in May 2002, of the
Registrant's Form 10-K for the year ended December 31, 2001 and Form 10-Q for
the quarterly period ended March 31, 2002, and that no revisions were required
by the Division with respect to the accounting for such transactions. On August
22, 2002 the Registrant forwarded the correspondence between the Registrant and
the Division of Corporate Finance to the SEC Enforcement Division, and has not
received any further inquiries. While the Registrant has not received any
further contact from the SEC Enforcement Division, there is no assurance that
they have completed their review of this issue to their satisfaction or that
they will not take a position contrary to that of the Registrant.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
ZIX CORPORATION
Date: September 20, 2002 By: /s/ Steve M. York
---------------------------------------
Steve M. York
Senior Vice President, Chief Financial
Officer and Treasurer
21
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Statement of Designations of the Series A Convertible
Preferred Stock of Zix Corporation.
3.2 Statement of Designations of the Series B Convertible
Preferred Stock of Zix Corporation.
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).
4.2 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
4.3 Registration Rights Agreement, dated September 16, 2002, by
and among Zix Corporation and the Investors named therein.
4.4 Securities Purchase Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein
(including schedules but excluding exhibits).
4.5 Form of Convertible Notes, dated September 18, 2002, in the
aggregate amount of $8,000,000, issued by Zix Corporation.
4.6 Form of Warrant, dated September 18, 2002, to purchase shares
of common stock of Zix Corporation, issued by Zix Corporation.
4.7 Registration Rights Agreement, dated September 17, 2002, by
and among Zix Corporation and the Buyers named therein.
4.8 Security Agreement, dated September 17, 2002, between Zix
Corporation and Promethean Asset Management, L.L.C., as
collateral agent (excluding schedules).
4.9 Form of Subordination Agreement.
4.10 Securities Account Control Agreement, dated September 17,
2002, between Deutsche Bank Alex. Brown, Zix Corporation and
Promethean Asset Management LLC.
99.1 Press Release issued by the Registrant on September 18, 2002.
22