AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 2003
REGISTRATION NO. 333-101959
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
SSP SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0757190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17861 CARTWRIGHT ROAD
IRVINE, CALIFORNIA 92614
(949) 851-1085
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
______________________
MARVIN J. WINKLER, CHIEF EXECTIVE OFFICER
SSP SOLUTIONS, INC.
17861 CARTWRIGHT ROAD
IRVINE, CALIFORNIA 92614
(949) 851-1085
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPY TO:
GREGG AMBER, ESQ.
CRISTY LOMENZO PARKER, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, SUITE 1400
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
Approximate Date of Commencement of Proposed Sale to 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 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please 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, 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, 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
========================================== =================== ======================= ====================== ===================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(2)
------------------------------------------ ------------------- ----------------------- ---------------------- -------------------
Common stock, $0.01 par value 2,856,242 $0.665 $1,899,400.90 $174.75
========================================== =================== ======================= ====================== ===================
(1) As originally filed on December 18, 2002, this registration statement
covered an aggregate of 3,036,246 shares of common stock. In the event of a
stock split, stock dividend, or similar transaction involving common stock
of the registrant, in order to prevent dilution, the number of shares
registered shall automatically increase to cover the additional shares in
accordance with Rule 416(a) under the Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
payable pursuant hereto, as determined in accordance with Rule 457(c) under
the Securities Act based on the average of the high and low sales prices
per share as reported on The Nasdaq National Market on December 16, 2002.
(3) Registration fee is calculated based upon a fee rate of $92 per million. A
registration fee of $185.76 was paid with the initial filing of this
registration statement.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION
8(a), MAY DETERMINE.
-2-
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SECURITY HOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL
SECURITIES UNDER THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART BECOMES EFFECTIVE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 2003
PROSPECTUS
SSP SOLUTIONS, INC.
2,856,242 SHARES OF COMMON STOCK
An aggregate of 2,856,242 issued and outstanding shares of our common
stock are being offered for resale under this prospectus by some of our security
holders identified in this prospectus for their own accounts.
Our common stock currently trades on The Nasdaq National Market under
the symbol "SSPX." The last reported sale price of our common stock on September
12, 2003 was $1.01 per share.
Our principal offices are located at 17861 Cartwright Road, Irvine,
California 92614, and our telephone number is (949) 851-1085.
_________________________
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 3.
_________________________
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THOSE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
The date of this prospectus is _____________, 2003.
TABLE OF CONTENTS
Page
----
RISK FACTORS..................................................................3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................18
SELLING SECURITY HOLDERS.....................................................19
PLAN OF DISTRIBUTION.........................................................22
USE OF PROCEEDS..............................................................24
INDEMNIFICATION OF DIRECTORS AND OFFICERS....................................24
EXPERTS......................................................................24
LEGAL MATTERS................................................................25
TRANSFER AGENT AND REGISTRAR.................................................25
WHERE YOU CAN FIND MORE INFORMATION..........................................25
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................26
2
RISK FACTORS
AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT IN SHARES OF OUR
COMMON STOCK. THIS PROSPECTUS CONTAINS OR INCORPORATES BY REFERENCE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY ADVERSELY
IMPACT OUR BUSINESS AND OUR STOCKHOLDERS BY, AMONG OTHER THINGS, MAKING IT
DIFFICULT FOR US TO RAISE ADDITIONAL DEBT OR EQUITY FINANCING TO THE EXTENT
NEEDED FOR OUR CONTINUED OPERATIONS OR FOR PLANNED EXPANSION.
We may not become profitable or significantly increase our revenue. We
incurred net losses of $8.6 million and $53.2 million for the years ended
December 31, 2002 and 2001, respectively, and $3.4 million for the six months
ended June 30, 2003. To achieve profitability, we will need to generate and
sustain sufficient revenues while maintaining reasonable cost and expense
levels. We expect to continue to incur significant operating expenses primarily
to support research and development and expansion of our sales and marketing
efforts. These expenditures may not result in increased revenues or customer
growth. We do not know when or if we will become profitable. We may not be able
to sustain or increase profitability on a quarterly or annual basis.
Our losses from operations, our use of cash in operating activities,
and our accumulated deficit and working capital deficiency at December 31, 2002
and 2001, among other factors, raised substantial doubt about our ability to
continue as a going concern and led our independent auditors to include in their
opinions contained in our consolidated financial statements as of December 31,
2002 and 2001, and for each of the years in the three-year period ended December
31, 2002, an explanatory paragraph related to our ability to continue as a going
concern. Analysts and investors generally view reports of independent auditors
questioning a company's ability to continue as a going concern unfavorably.
These reports may make it difficult for us to raise additional debt or equity
financing to the extent needed for our continued operations or for planned
expansion, particularly if we are unable to attain and maintain profitable
operations in the future. Consequently, future losses may adversely affect our
business, prospects, financial condition, results of operations and cash flows.
We urge potential investors to review the reports of our independent auditors
and our consolidated financial statements before making a decision to invest in
our company.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY TERMS, WHICH
COULD INTERFERE WITH OUR EXISTING AND PLANNED OPERATIONS, DILUTE OUR
STOCKHOLDERS OR IMPOSE BURDENSOME FINANCIAL RESTRICTIONS ON OUR BUSINESS.
Historically, we have relied upon cash from financing activities to
fund a significant portion of the cash requirements of our operating and
investing activities, and there is no assurance we will be able to generate
sufficient cash from our operating activities in the future. We do not expect
future fixed obligations to be paid from operations during 2003 and intend to
satisfy fixed obligations by obtaining additional debt and/or equity financing,
using accounts receivable financing, extending vendor payments, and issuing
stock as payment on obligations.
3
Some of our secured convertible promissory notes contain the grant of a
continuing security interest in substantially all of our assets and restrict our
ability to obtain debt and/or equity financing. In addition, deteriorating
global economic conditions and the effects of military actions may cause
prolonged declines in investor confidence in and accessibility to capital
markets.
Any future financing may cause significant dilution to existing
stockholders. Any debt financing or other financing of securities senior to
common stock will likely include financial and other covenants that will
restrict our flexibility. At a minimum, we expect these covenants to include
restrictions on our ability to pay dividends on our common stock. Any failure to
comply with these covenants would adversely affect our business, prospects,
financial condition, results of operations and cash flows. Financing
arrangements to raise additional funds may require us to relinquish rights to
certain technologies, products or marketing territories. Our failure to raise
capital when needed and on terms acceptable to us could adversely affect our
business, operating results, financial condition and prospects by impairing our
ability to fund our existing and planned operations.
DEFAULTS UNDER OUR SECURED CREDIT ARRANGEMENTS COULD RESULT IN A
FORECLOSURE ON OUR ASSETS BY OUR CREDITORS.
All of our assets are pledged as collateral to secure portions of our
debt. We were not able to obtain waivers for past covenant defaults, and we may
in the future default under certain covenants of these credit arrangements. This
means that if we are unable to obtain waivers in the future or if we incur a
monetary default on our secured debt obligations, our indebtedness could become
immediately due and payable and the lenders could foreclose on our assets.
WE HAVE NOT GENERATED ANY SIGNIFICANT SALES OF OUR PRODUCTS WITHIN THE
COMPETITIVE COMMERCIAL MARKET NOR HAVE WE ESTABLISHED A SUFFICIENT SALES
AND MARKETING FORCE TO PROMOTE OUR PRODUCTS TO POTENTIAL COMMERCIAL
CUSTOMERS, WHICH MAKES IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS
PERFORMANCE AND FUTURE PROSPECTS.
Although we have had some success in selling our security solutions to
government agencies, we are just beginning to enter the complex and competitive
commercial market for digital commerce and communications security solutions. We
believe that many potential customers in our target markets are not fully aware
of the need for security products and services in the digital economy.
Historically, only enterprises that had substantial resources developed or
purchased security solutions for delivery of digital content over the Internet
or through other means. Also, there is a perception that security in delivering
digital content is costly and difficult to implement. Therefore, we will not
succeed unless we can educate our target markets about the need for security in
delivering digital content and convince potential customers of our ability to
provide this security in a cost-effective and easy-to-use manner.
Even if we convince our target markets about the importance of and need
for such security, we do not know if this will result in the sale of our
products. We may be unable to establish sales and marketing operations at levels
necessary for us to grow our business, especially if we are unsuccessful at
selling this product into vertical markets. We may not be able to support the
promotional programs required by selling simultaneously into several markets. If
we are unable to develop an efficient sales system, or if our products or
components do not achieve wide market acceptance, then our operating results
will suffer and our earnings per share will be adversely affected.
4
WE FACE INTENSE COMPETITION AND PRICING PRESSURES FROM A NUMBER OF SOURCES,
WHICH MAY REDUCE OUR AVERAGE SELLING PRICES AND GROSS MARGINS.
The markets for our products and services are intensely competitive. As
a result, we face significant competition from a number of sources. We may be
unable to compete successfully because many of our competitors are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than we have. In addition,
there are several smaller and start-up companies with which we compete from time
to time. We expect competition to increase as a result of consolidation in the
information security technology industry.
The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support required. We expect
competition to increase in the future. As we experience pricing pressure, we
anticipate that the average selling prices and gross margins for our products
will decrease over product lifecycles. These same competitive pressures may
require us to write down the carrying value of any inventory on hand, which
would adversely impact our operating results and adversely affect our earnings
per share.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
CUSTOMERS, AND THE LOSS OF ONLY ONE OF THOSE CUSTOMERS COULD ADVERSELY
IMPACT OUR OPERATING RESULTS.
We depend on a limited number of customers for a substantial portion of
our revenue. During the year ended December 31, 2002, and the three and six
months ended June 30, 2003, we derived 32%, 33% and 26%, respectively, of our
consolidated net revenue for that period from an individual customer. Many of
our contracts with our significant customers are short-term contracts. The
non-renewal of any significant contract upon expiration, or a substantial
reduction in sales to any of our significant customers, would adversely affect
our business unless we were able to replace the revenue we received from those
customers.
OUR RELIANCE ON THIRD PARTY TECHNOLOGIES FOR THE DEVELOPMENT OF SOME OF OUR
PRODUCTS AND OUR RELIANCE ON THIRD PARTIES FOR MANUFACTURING MAY DELAY
PRODUCT LAUNCH, IMPAIR OUR ABILITY TO DEVELOP AND DELIVER PRODUCTS OR HURT
OUR ABILITY TO COMPETE IN THE MARKET.
Our ability to license new technologies from third parties is and will
continue to be critical to our ability to offer a complete suite of products
that meets customer needs and technological requirements. Some of our licenses
do not run for the full duration of the third party's patent for the licensed
technology. We may not be able to renew our existing licenses on favorable
terms, or at all. If we lose the rights to a patented technology, we may need to
stop selling or may need to redesign our products that incorporate that
technology, and we may lose a competitive advantage. In addition, competitors
could obtain licenses for technologies for which we are unable to obtain
licenses, and third parties may develop or enable others to develop a similar
solution to digital communication security issues, either of which events could
erode our market share. Also, dependence on the patent protection of third
parties may not afford us any control over the protection of the technologies
upon which we rely. If the patent protection of any of these third parties were
compromised, our ability to compete in the market also would be impaired.
5
THIRD PARTIES COULD OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION OR COULD
INDEPENDENTLY DEVELOP SIMILAR TECHNOLOGIES BECAUSE OF THE LIMITED
PROTECTION FOR OUR INTELLECTUAL PROPERTY.
Despite the precautions we take, third parties may copy or
obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or may independently develop
technologies similar or superior to our technologies. In addition, the
confidentiality and non-competition agreements between us and our employees,
distributors and clients may not provide meaningful protection of our
proprietary technologies or other intellectual property in the event of
unauthorized use or disclosure. Policing unauthorized use of our technologies
and other intellectual property is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. Furthermore, the laws of other
jurisdictions may afford little or no effective protection of our intellectual
property rights. Our business, financial condition and operating results could
be adversely affected if we are unable to adequately protect our intellectual
property rights.
WE MAY FACE HARMFUL CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS, WHICH
COULD REQUIRE US TO DEVOTE SUBSTANTIAL TIME AND RESOURCES TOWARD MODIFYING
OUR PRODUCTS OR OBTAINING APPROPRIATE LICENSES.
There is a risk that our products infringe the proprietary rights of
third parties. Regardless of whether our products infringe on proprietary rights
of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expenses in defending them.
If any infringement claims or actions are asserted against us, we may be
required to modify our products or seek licenses for these intellectual property
rights. We may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our failure to do
so could adversely affect our business by preventing us from selling some or all
of our products.
OUR INABILITY TO MAINTAIN AND DEVELOP NEW STRATEGIC RELATIONSHIPS WITH
PARTNERS AND SUPPLIERS COULD IMPACT OUR ABILITY TO OBTAIN OR SELL OUR
PRODUCTS AND PREVENT US FROM GENERATING SALES REVENUES.
We obtain and sell many of our products through strategic alliance and
supplier agreements. The loss of any of our existing strategic relationships, or
the inability to create new strategic relationships in the future, could
adversely affect our ability to develop and market our products.
We depend upon our partners to develop and market products and to fund
and perform their obligations as contemplated by our agreements with them. We do
not control the time and resources devoted by our partners to these activities.
These relationships may not continue or may require us to spend significant
financial, personnel and administrative resources from time to time. We may not
have the resources available to satisfy our commitments, which may adversely
affect our strategic relationships. Further, our products and services may
compete with the products and services of our strategic partners. This
competition may adversely affect our relationships with our strategic partners,
which could adversely affect our business.
If alliance or supplier agreements are cancelled, modified or delayed,
if alliance or supplier partners decide not to purchase our products or to
purchase only limited quantities of our products, or if we are unable to enter
into additional alliance or supplier agreements, our ability to produce and sell
our products and to generate sales revenues could be adversely affected.
6
ANY COMPROMISE OF PKI TECHNOLOGY WOULD ADVERSELY AFFECT OUR BUSINESS BY
REDUCING OR ELIMINATING DEMAND FOR MANY OF OUR DATA SECURITY PRODUCTS.
Many of our products are based on public key infrastructure, or PKI,
technology, which is the standard technology for securing Internet-based
commerce and communications. The security afforded by this technology depends on
the integrity of a user's private key, which depends in part on the application
of algorithms, or advanced mathematical factoring equations. The occurrence of
any of the following could result in a decline in demand for our data security
products:
o any significant advance in techniques for attacking PKI
systems, including the development of an easy factoring method
or faster, more powerful computers;
o publicity of the successful decoding of cryptographic messages
or the misappropriation of private keys; and
o government regulation limiting the use, scope or strength of
PKI.
A SECURITY BREACH OF OUR INTERNAL SYSTEMS OR THOSE OF OUR CUSTOMERS DUE TO
COMPUTER HACKERS OR CYBER TERRORISTS COULD HARM OUR BUSINESS BY ADVERSELY
AFFECTING THE MARKET'S PERCEPTION OF OUR PRODUCTS AND SERVICES.
Since we provide security for Internet and other digital communication
networks, we may become a target for attacks by computer hackers. The ripple
effects throughout the economy of terrorist threats and attacks and military
activities may have a prolonged effect on our potential commercial customers, or
on their ability to purchase our products and services. Additionally, because we
provide security products to the United States government, we may be targeted by
cyber terrorist groups for activities threatened against United States-based
targets.
We will not succeed unless the marketplace is confident that we provide
effective security protection for Internet and other digital communication
networks. Networks protected by our products may be vulnerable to electronic
break-ins. Because the techniques used by computer hackers to access or sabotage
networks change frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these techniques. Although we
have not experienced any act of sabotage or unauthorized access by a third party
of our internal network to date, if an actual or perceived breach of security
for Internet and other digital communication networks occurs in our internal
systems or those of our end-user customers, regardless of whether we caused the
breach, it could adversely affect the market's perception of our products and
services. This could cause us to lose customers, resellers, alliance partners or
other business partners.
WE MAY BE EXPOSED TO SIGNIFICANT LIABILITY FOR ACTUAL OR PERCEIVED FAILURE
TO PROVIDE REQUIRED PRODUCTS OR SERVICES.
Products as complex as those we offer may contain undetected errors or
may fail when first introduced or when new versions are released. Despite our
product testing efforts and testing by current and potential customers, it is
possible that errors will be found in new products or enhancements after
commencement of commercial shipments. The occurrence of product defects or
errors could result in adverse publicity, delay in product introduction,
diversion of resources to remedy defects, loss of or a delay in market
acceptance, or claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business.
7
Because our customers rely on our products for critical security
applications, we may be exposed to claims for damages allegedly caused to an
enterprise as a result of an actual or perceived failure of our products. An
actual or perceived breach of enterprise network or data security systems of one
of our customers, regardless of whether the breach is attributable to our
products or solutions, could adversely affect our business reputation.
Furthermore, our failure or inability to meet a customer's expectations in the
performance of our services, or to do so in the time frame required by the
customer, regardless of our responsibility for the failure, could:
o result in a claim for substantial damages against us by the
customer;
o discourage customers from engaging us for these services; and
o damage our business reputation.
IF USE OF THE INTERNET AND OTHER COMMUNICATION NETWORKS BASED ON INTERNET
PROTOCOLS DOES NOT CONTINUE TO GROW, DEMAND FOR OUR PRODUCTS MAY NOT
INCREASE.
Increased demand for our products largely depends on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are evolving,
we cannot predict the size of the market and its sustainable growth rate. A
number of factors may affect market size and growth rate, including increases in
governmental regulation and the continued ability of the Internet infrastructure
and communications services to support growing demands, which ability could be
adversely affected by, among other things, delays in development or adoption of
new standards and protocols to handle increased levels of activity. If the use
of electronic commerce and communications does not increase, or increases more
slowly than we expect, demand for our products and services will be adversely
impacted.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCT AND
SERVICE OFFERINGS COULD BECOME OBSOLETE.
The markets we serve are characterized by rapidly changing technology,
emerging industry standards and frequent introduction of new products. The
introduction of products embodying new technologies and the emergence of new
industry standards may render our products obsolete or less marketable. The
process of developing our products and services is extremely complex and
requires significant continuing development efforts. If we are unable to modify
existing products and develop new products and services that are responsive to
changing technology and standards and to meet customer needs in a timely and
cost effective manner, our business could be adversely affected because we would
be unable to sell our product and service offerings that have become obsolete.
DOING BUSINESS WITH THE UNITED STATES GOVERNMENT ENTAILS MANY RISKS THAT
COULD ADVERSELY AFFECT US BY DECREASING THE PROFITABILITY OF GOVERNMENTAL
CONTRACTS WE ARE ABLE TO OBTAIN AND INTERFERING WITH OUR ABILITY TO OBTAIN
FUTURE GOVERNMENTAL CONTRACTS.
Sales to United States government agencies accounted for 18%, 39% and
44% of our consolidated revenues for the year ended December 31, 2002, and the
three and six months ended June 30, 2003, respectively. Our sales to these
agencies are subject to risks that include:
o early termination of our contracts;
8
o disallowance of costs upon audit; and
o the need to participate in competitive bidding and proposal
processes, which are costly and time consuming and may result
in unprofitable contracts.
In addition, the government may be in a position to obtain greater
rights with respect to our intellectual property than we would grant to other
entities. Government agencies also have the power, based on financial
difficulties or investigations of their contractors, to deem contractors
unsuitable for new contract awards. Because we engage in the governmental
contracting business, we have been and will be subject to audits and may be
subject to investigation by governmental entities. Failure to comply with the
terms of any of our governmental contracts could result in substantial civil and
criminal fines and penalties, as well as our suspension from future governmental
contracts for a significant period of time, any of which could adversely affect
our business by requiring us to spend money to pay the fines and penalties and
prohibiting us from earning revenues from governmental contracts during the
suspension period.
DELAYS IN DELIVERIES FROM OUR SUPPLIERS OR DEFECTS IN GOODS OR COMPONENTS
SUPPLIED BY OUR VENDORS COULD CAUSE OUR REVENUES AND GROSS MARGINS TO
DECLINE.
We rely on a limited number of vendors for certain components for the
products we are developing. Any undetected flaws in components supplied by our
vendors could lead to unanticipated costs to repair or replace these parts. We
currently purchase some of our components from a single supplier, which presents
a risk that the components may not be available in the future on commercially
reasonable terms or at all. For example, Atmel Corporation has completed
development of a specially designed Forte microprocessor that we have
incorporated into a Forte PKI card. Commercial acceptance of the Forte
microprocessor will be dependent on continued development of applications to
service customer requirements. Any inability to receive or any delay in
receiving adequate supplies of the Forte microprocessor, whether as a result of
delays in development of applications or otherwise, would adversely affect our
ability to sell the Forte PKI card.
We do not anticipate maintaining a supply agreement with Atmel
Corporation for the Forte microprocessor. If Atmel Corporation were unable to
deliver the Forte microprocessor for a lengthy period of time or were to
terminate its relationship with us, we would be unable to produce the Forte PKI
card until we could design a replacement computer chip for the Forte
microprocessor. We anticipate this would take substantial time and resources to
complete, which could result in delays or reductions in product shipments that
could adversely affect our business by requiring us to expend resources while
preventing us from selling the Forte PKI card.
Also, if we are unable to obtain or generate sufficient funds to
sustain our operations, we may damage our relationships with our vendors. Slow
and delinquent payments may cause vendors not to sell products to us, or only
with advance payment. If this occurs, we will not have components and services
available for our products. We may not be able to replace any of our supply
sources on economically advantageous terms. Further, if we experience price
increases for the components for our products, we will experience declines in
our gross margins.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR CURRENT MANAGEMENT TEAM.
Our founder, co-chairman and president, Kris Shah, has been with us
since 1970, and our co-chairman and chief executive officer, Marvin Winkler,
co-founded one of our wholly-owned subsidiaries. Their experience, expertise,
industry knowledge and historical company knowledge would be extremely difficult
to replace if we were to lose the services of either of them. The precise impact
of the loss of services of either of them is difficult to predict, but would
likely result in, at a minimum, significant costs to recruit, hire and retain a
successor and impaired operating results while the successor was being recruited
and transitioning into the position. We do not currently maintain life insurance
on the lives of either of these officers.
9
THERE IS SIGNIFICANT COMPETITION IN OUR INDUSTRY FOR HIGHLY SKILLED
EMPLOYEES, AND OUR FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL WOULD
ADVERSELY AFFECT OUR BUSINESS BY IMPAIRING OUR ABILITY TO EFFICIENTLY
CONDUCT OUR OPERATIONS.
We may not be able to attract or retain highly skilled employees. Our
inability to hire or retain highly qualified individuals may impede our ability
to develop, install, implement and service our software and hardware systems, to
retain existing customers and attract new customers, or to efficiently conduct
our operations, all of which would adversely affect our business. A high level
of employee mobility characterizes the data security and networking solution
industries, and the market for highly qualified individuals in computer-related
fields is intense. This competition means there are fewer highly qualified
employees available to hire, and the costs of hiring and retaining these
individuals are high. Even if we are able to hire these individuals, we may be
unable to retain them. Furthermore, the hiring and retention of technical
employees typically necessitates the issuance of stock options and other equity
interests, which may dilute earnings per share.
OUR EFFORTS TO EXPAND OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER
OF RISKS, ANY OF WHICH COULD ADVERSELY AFFECT OUR FUTURE INTERNATIONAL
SALES.
We have obtained approvals to export certain of our products and we
plan to increase our international sales. Our inability to obtain or maintain
federal or foreign regulatory approvals relating to the import or export of our
products on a timely basis could adversely affect our ability to expand our
international business. Additionally, our international operations could be
subject to a number of risks, any of which could adversely affect our future
international sales, including:
o increased collection risks;
o trade restrictions;
o export duties and tariffs;
o uncertain political, regulatory and economic developments; and
o inability to protect our intellectual property rights.
WE ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS
PENDING AGAINST US AND OUR SUBSIDIARY COULD ADVERSELY AFFECT OUR BUSINESS
BY, AMONG OTHER THINGS, SUBJECTING US TO SUBSTANTIAL COSTS AND LIABILITIES
AND DIVERTING MANAGEMENT'S ATTENTION AND RESOURCES.
G2 Resources, Inc. and Classical Financial Services, LLC have filed
complaints against one of our subsidiaries, Pulsar Data Systems, Inc., or
Pulsar, alleging that Pulsar breached a contract by failing to make payments to
G2 Resources, Inc. in connection with services allegedly provided by G2
Resources, Inc. In April 2001, the court dismissed, for lack of prosecution
activity for more than twelve months, the original complaint that G2 Resources,
Inc. had filed against Pulsar in January 1998. G2 Resources, Inc. re-filed the
action in May 2001. In 2002, the court moved this case into the same division
handling other matters related to G2 and Classic Financial Services, LLC, and
stayed any further action in this case pending the resolution of matters between
G2 and Classical. We intend to vigorously defend against the plaintiffs' claims
and have asserted defenses and counterclaims.
10
In May 2002, Integral Systems, Inc. filed an action against us alleging
that we breached a promissory note for the payment of $389,610. Integral then
obtained a confessed judgment for approximately $327,250. In March 2003, we
executed settlement papers that would permit Integral Systems to file a
stipulated judgment against us in the amount of the unpaid balance if we default
on a payment schedule that requires us to make payments of $20,000 per month
until the balance is paid in full. We placed 400,000 shares of our common stock
into a third party escrow as security until the balance is paid in full.
In June 2002, Research Venture, LLC filed two lawsuits against us
alleging unlawful detainer and seeking possession of two leased properties,
alleged damages and lost rent. In October 2002, we negotiated a restructuring of
our obligations under the leases. We subsequently defaulted on those
obligations, and Research Venture obtained a judgment against us per prior
stipulation in the amount of $2.7 million. In August 2003, we entered into a
settlement agreement with Research Venture that imposes, among other things,
registration obligations on us regarding shares of common stock that we issued
to Research Venture. If we are unable to comply with those obligations, Research
Venture will be entitled to entry of a stipulated judgment against us in an
amount up to $1.7 million.
In July 2003, Control Break International, or CBI, filed an action in
Florida to initiate collection of $456,000 that we owed to CBI under two
promissory notes. We intend to defend against the action and to file a motion to
dismiss based upon lack of jurisdiction. We have held discussions with CBI to
resolve the matter, but there can be no assurance as to the outcome of those
discussions.
In June 2003, Venetian Casino Resort, LLC, or the Venetian, sent a
demand letter to our subsidiary demanding funding, or alternatively taking
action to terminate our subsidiary's operating agreement for failure of our
subsidiary to meet its funding commitment and threatening to take action against
our subsidiary in the matter. Subsequently, the Venetian sent a letter claiming
to terminate the operating agreement. We have recorded an impairment charge
equal to the remaining book value of our investment in our subsidiary.
Any or all of these litigation matters could subject us to substantial
costs and liabilities and divert our management's attention and resources during
our current and future financial reporting periods. If we believe it is probable
that we will incur an estimable amount of expenses in connection with a
litigation matter, we will include the estimated amount of expenses in accounts
payable or accrued liabilities. If we feel unable to make a reasonable judgment
as to the ultimate outcome of, or to assess or quantify our exposure relating
to, a litigation matter, we will not include in our financial statements an
estimated amount of expenses for that matter. Consequently, if we are unable
during any financial reporting period to accurately estimate our potential
liability in connection with a litigation matter, our financial condition and
results of operations in future financial reporting periods may be adversely
affected when we record any unreserved costs or liabilities we actually have
incurred in connection with a litigation matter.
A NUMBER OF VENDORS HAVE FILED OR THREATENED TO FILE LAWSUITS TO COLLECT
AMOUNTS DUE FROM US. IF WE ARE UNABLE TO REACH A FAVORABLE RESOLUTION OF
THESE MATTERS, WE MAY HAVE TO DEFEND OURSELVES IN COSTLY LITIGATION AND BE
SUBJECT TO SUBSTANTIAL MONETARY JUDGMENTS.
During 2002 and 2003, several vendors filed or threatened to file suits
against us related to outstanding account balances that are included within our
accounts payable. We reached oral agreement with several vendors, including one
vendor who had filed suit against us. We are making payments on the amount owed
to the vendor who filed suit against us and executed an agreement to extend the
terms of the existing accounts payable balance. However, if we fail to make the
required payments and the collection suit goes to judgment, there would be an
adverse impact on our financial condition and liquidity.
11
GOVERNMENTAL REGULATIONS AFFECTING SECURITY OF INTERNET AND OTHER DIGITAL
COMMUNICATION NETWORKS COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES.
The United States government and foreign governments have imposed
controls, export license requirements and restrictions on the import or export
of some technologies, including encryption technology. Any additional
governmental regulation of imports or exports or failure to obtain required
export approval of encryption technologies could delay or prevent the acceptance
and use of encryption products and public networks for secure communications and
could limit the market for our products and services. In addition, some foreign
competitors are subject to less rigorous controls on exporting their encryption
technologies. As a result, they may be able to compete more effectively than us
in the United States and in international security markets for Internet and
other digital communication networks. In addition, governmental agencies such as
the Federal Communications Commission periodically issue regulations governing
the conduct of business in telecommunications markets that may negatively affect
the telecommunications industry and us.
OUR ADOPTION OF SFAS NO. 142 EFFECTIVE JANUARY 1, 2002, MAY INCREASE OUR
LOSSES IN FUTURE ACCOUNTING PERIODS IF WE DETERMINE THAT THERE HAS BEEN AN
IMPAIRMENT OF GOODWILL AND COULD CAUSE US TO INCUR LARGE LOSSES, IN
ADDITION TO THE $36.3 MILLION IMPAIRMENT OF INTANGIBLES WRITE-DOWN RECORDED
FOR THE YEAR ENDED DECEMBER 31, 2001.
We accounted for our August 2001 acquisition of BIZ as a purchase.
Under the purchase method of accounting, the purchase price was allocated to the
fair value of the identifiable tangible and intangible assets and liabilities
that we acquired from BIZ. The excess of the purchase price over BIZ's tangible
net assets resulted in original goodwill and other intangible assets of
approximately $64.5 million. These amounts were subsequently reduced by
amortization and impairment charges to a carrying value of $25.9 million as of
December 31, 2001.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 142, "Goodwill and Other Intangible Assets." We adopted this statement
effective January 1, 2002. Under this statement, goodwill is no longer amortized
and became subject to annual testing for impairment beginning January 1, 2002.
The provisions of this statement require us to perform a two-step test to assess
goodwill for impairment. In the first step, we compare the fair value of each
reporting unit to its carrying value. If the fair value exceeds the carrying
value, then goodwill is not impaired and we need not proceed to the second step.
If the carrying value of a reporting unit exceeds its fair value, then we must
determine and compare the implied fair value of the reporting unit's goodwill to
the carrying value of its goodwill. If the carrying value of the reporting
unit's goodwill exceeds its implied fair value, then we will record an
impairment loss in the amount of the excess. With regard to a reporting unit's
goodwill balance at January 1, 2002, we were required to perform the first step
of the annual testing for impairment by June 30, 2002. If the results of that
step indicated that goodwill may have been impaired, we were then required to
complete the second step as soon as possible, but no later than December 31,
2002.
We concluded that as of December 31, 2001, an impairment write-down of
approximately $36.3 million was required. Through June 30, 2003, no further
write-downs were required to the goodwill carrying value relating BIZ. However,
we are required to perform additional tests for impairment at least annually.
Tests for impairment between annual tests may be required if events occur or
circumstances change that would more likely than not reduce the fair value of
the net carrying amount. We cannot predict whether or when there will be
additional impairment charges, or the amount of any such charges. If the charges
are significant, they could cause the market price of our common stock to
decline.
12
WE MAY RELOCATE A PORTION OF OUR SOFTWARE DEVELOPMENT TO INDIA, WHICH COULD
PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS
ACTIVITIES.
We may relocate portions of our software development activities to
India in an effort to reduce our operating expenses. We are subject to a number
of risks associated with international business activities that could adversely
affect any operations we may develop in India and could slow our growth. These
risks generally include, among others:
o difficulties in managing and staffing our Indian operations;
o difficulties in obtaining or maintaining regulatory approvals
or in complying with Indian laws;
o reduced or less certain protection for intellectual property
rights;
o differing technological advances, preferences or requirements;
o trade restrictions;
o foreign currency fluctuations; and
o general economic conditions, including instability, in the
Indian market.
Any of these risks could adversely affect our business and results of
operations.
CONFLICTS INVOLVING INDIA COULD ADVERSELY AFFECT ANY OPERATIONS WE MAY
ESTABLISH IN INDIA, WHICH COULD INTERFERE WITH OUR ABILITY TO CONDUCT ANY
OR ALL OF OUR OTHER OPERATIONS.
South Asia has from time to time experienced civil unrest and
hostilities among neighboring countries, including India and Pakistan. In April
1999, India and Pakistan conducted long-range missile tests. Since May 1999,
military confrontations between India and Pakistan have occurred in disputed
regions. In October 1999, the leadership of Pakistan changed as a result of a
coup led by the military. Additionally, more recent events have significantly
heightened the tensions between India and Pakistan. If a major armed conflict or
nuclear war involving India and any of its neighboring countries occurs, it
could, among other things, prevent us from establishing or maintaining
operations in India. If the successful conduct of operations in India becomes
critical to any or all of our other operations, our business would be harmed to
the extent we are unable to establish or maintain operations in India.
WE ARE EXPOSED TO LIABILITY FOR ACTIONS TAKEN BY OUR DOMESTIC EMPLOYEES
WHILE ON ASSIGNMENT AND MAY ALSO BE EXPOSED TO LIABILITY FOR ACTIONS TAKEN
BY ANY FOREIGN EMPLOYEES WE MAY HIRE.
As a professional services provider, a portion of our business involves
employing people and placing them in the workplace of other businesses.
Therefore, we are exposed to liability for actions taken by our employees while
on assignment. In addition, to the extent we hire employees in India or other
foreign locations, we may also be exposed to liability for actions taken by
those employees in the scope of their employment.
13
RISKS RELATED TO THIS OFFERING
NASDAQ MAY DELIST OUR COMMON STOCK, WHICH COULD DECREASE THE MARKET PRICE
OF OUR COMMON STOCK AND MAKE IT MORE DIFFICULT FOR OUR STOCKHOLDERS TO
DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK AND FOR US TO OBTAIN
FINANCING.
The qualitative listing standards of The Nasdaq National Market
require, among other things, that listed companies meet independent director and
audit committee composition requirements. We received a Nasdaq staff
determination on August 20, 2003, which indicated that we failed to comply with
these requirements and that our common stock, therefore, is subject to delisting
from The Nasdaq National Market. We have submitted a written response to the
staff determination outlining our current plans for compliance with these
requirements through the appointment of directors from a potential investment
group. However, we cannot offer assurance that the Nasdaq listing qualifications
panel will grant our request for continued listing.
The quantitative listing standards of The Nasdaq National Market
require, among other things, that listed companies maintain a minimum bid price
of $1.00. In November 2002, we received a notice from Nasdaq indicating that our
common stock had failed to maintain the required minimum bid price of $1.00 for
the last 30 consecutive trading days and that, therefore, we had until February
20, 2003 to regain compliance with that requirement. We did not timely regain
compliance with that requirement. In March 2003, we received a notice from
Nasdaq that the period to regain compliance with the $1.00 minimum bid price had
been extended an additional 90 days, through May 21, 2003. On May 22, 2003, we
received a Nasdaq staff determination that we failed to timely regain compliance
with the minimum bid price requirement and that our stock was subject to
delisting. We appealed the staff's determination to a listing qualifications
panel for consideration. On August 14, 2003, we received the findings of the
panel, which allowed us through October 31, 2003, to evidence a closing bid
price of at least $1.00 per share, with the requirement to have a closing bid
price immediately thereafter of at least $1.00 per share for ten consecutive
trading days, which we may decide to accomplish through a reverse stock split.
Alternatively, we may be permitted to submit an application to transfer the
listing of our common stock to The Nasdaq SmallCap Market if we satisfy the
continued inclusion requirements for The Nasdaq SmallCap Market, including the
independent director and audit committee composition requirements described
above. The successful transfer of the listing of our common stock to The Nasdaq
SmallCap Market would make available an extended grace period for the minimum
$1.00 bid price requirement and would make available an additional 180 calendar
day grace period if we meet the initial listing criteria for The Nasdaq SmallCap
Market.
In addition to the quantitative and qualitative requirements described
above, Nasdaq's qualification standards require, among other things, that
issuers apply for initial inclusion on Nasdaq following a change of control.
Nasdaq looks at many factors in determining whether a change of control has
occurred, including without limitation, changes in the management, board of
directors, voting power and ownership of a company. Depending on the terms and
conditions of any future financings or other transactions we may enter into, if
Nasdaq determines that a change of control has occurred, we would need to file a
new listing application if we want to maintain our Nasdaq listing. We do not
know whether, at the time, if any, that we would file a new listing application
with Nasdaq, we would meet the initial listing standards of either The Nasdaq
National Market or The Nasdaq SmallCap Market.
If we are delisted from The Nasdaq National Market, our stock price
could decline further and the ability of any potential or future investors to
achieve liquidity from our common stock could be severely limited, particularly
if we are unable to transfer the listing of our common stock to The Nasdaq
SmallCap Market. This could inhibit, if not preclude, our ability to raise
additional working capital on acceptable terms, if at all.
14
THE NON-CASH INTEREST EXPENSE REQUIRED IN CONNECTION WITH THE DETACHABLE
WARRANTS AND BENEFICIAL CONVERSION FEATURES OF OUR APRIL 2002 FINANCING MAY
ADVERSELY AFFECT OUR STOCK PRICE.
The secured convertible promissory notes we issued in April 2002 are
convertible into shares of our common stock at a conversion price below the
market price of our common stock at the commitment date for the notes. In
addition, the notes were accompanied by common stock purchase warrants with an
exercise price below the market price of our common stock at the commitment
date. Accordingly, under accounting guidelines, we were required to record a
substantial non-cash charge as interest expense, with an offsetting increase to
our paid-in-capital. While recording this entry had no net effect on our
stockholders' equity, the entry substantially increased our reported loss for
the year ended December 31, 2002, and may cause a decline in our stock price.
OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the 52-week
period ended September 2, 2003, the high and low closing sale prices of our
common stock were $1.33 and $.50, respectively. The market price of our common
stock may exhibit significant fluctuations in the future in response to various
factors, many of which are beyond our control and which include:
o variations in our annual or quarterly financial results, which
variations could result from, among other things, the timing,
size, mix and customer acceptance of our product and service
offerings and those of our competitors, and the timing and
magnitude of required capital expenditures;
o company-issued earnings announcements that vary from consensus
analyst estimates;
o changes by financial research analysts in their
recommendations or estimates of our earnings;
o conditions in the economy in general or in the information
technology service sector in particular;
o announcements of technological innovations or new products or
services by us or our competitors; and
o unfavorable publicity or changes in applicable laws and
regulations, or their judicial or administrative
interpretations, affecting the information technology service
sector and us.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which investors purchase shares of our common stock
may not be indicative of the price that will prevail in the trading market.
Investors may be unable to sell their shares of common stock at or above their
purchase price, which may result in substantial losses.
15
A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK ARE OR WILL BECOME
ELIGIBLE FOR PUBLIC SALE, AND SALES OF LARGE NUMBERS OF OUR SHARES COULD
ADVERSELY AFFECT THEIR MARKET PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of September 15, 2003, we had issued and outstanding 27,836,733
shares of common stock, a majority of which were unrestricted, were eligible for
resale without registration under Rule 144 of the Securities Act of 1933, or
were registered for resale or issued with registration rights. Our common stock
historically has been thinly traded. Our average daily trading volume between
September 3, 2002, and September 2, 2003, was 11,766 shares. If our stockholders
seek to sell numbers of shares significantly in excess of our typical volume,
the market price of our shares may decline. Any adverse effect on the market
price for our common stock could make it more difficult for us to sell equity
securities at a time and at a price that we deem appropriate.
THE MARKET PRICE OF OUR COMMON STOCK COULD SUBSTANTIALLY DECLINE IF ALL OR
A SIGNIFICANT PORTION OF OUR OUTSTANDING DERIVATIVE SECURITIES WERE
CONVERTED INTO OR EXERCISED FOR SHARES OF OUR COMMON STOCK AND RESOLD INTO
THE MARKET, OR IF A PERCEPTION EXISTS THAT A SUBSTANTIAL NUMBER OF SHARES
WILL BE ISSUED UPON CONVERSION OR EXERCISE AND THEN RESOLD INTO THE MARKET.
As of September 15, 2003, we had outstanding 27,836,733 shares of
common stock and also had outstanding options, warrants and promissory notes
that were exercisable for or convertible into approximately 14,421,000 shares of
our common stock. If the conversion or exercise prices at which our outstanding
derivative securities are converted or exercised are lower than the market
price, immediate dilution will occur. In addition, sales of a substantial number
of shares of common stock issued upon conversion or exercise of our outstanding
derivative securities, or even the perception that such sales could occur, could
adversely affect the market price of our common stock. Therefore a substantial
decline in the value of our shares could result from both the actual and
potential conversion or exercise of our outstanding derivative securities and
the actual and potential resale of the underlying shares into the market.
IF OUR SECURITY HOLDERS ENGAGE IN SHORT SALES OF OUR COMMON STOCK,
INCLUDING SALES OF SHARES TO BE ISSUED UPON CONVERSION OR EXERCISE OF
DERIVATIVE SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.
Selling short is a technique used by a security holder to take
advantage of an anticipated decline in the price of a security. A significant
number of short sales or a large volume of other sales within a relatively short
period of time can create downward pressure on the market price of a security.
The decrease in market price would allow holders of our derivative securities
that have conversion or exercise prices based upon a discount on the market
price of our common stock to convert or exercise their derivative securities
into or for an increased number of shares of our common stock. Further sales of
common stock issued upon conversion or exercise of our derivative securities
could cause even greater declines in the price of our common stock due to the
number of additional shares available in the market, which could encourage short
sales that could further undermine the value of our common stock.
IF WE ARE UNSUCCESSFUL IN COMPLYING WITH OUR REGISTRATION OBLIGATIONS, WE
MAY BE IN DEFAULT UNDER OUR SECURED CONVERTIBLE PROMISSORY NOTES AND
LITIGATION SETTLEMENTS AND COULD FACE SIGNIFICANT PENALTIES AND A
SUBSTANTIAL STIPULATED JUDGMENT.
16
The agreements we entered into in connection with our issuance of
secured convertible promissory notes and related warrants and in connection with
settlement of litigation require us to, among other things, register for resale
the shares of common stock issued or issuable under those arrangements and to
maintain the effectiveness of the registration statements for an extended period
of time. If we are unable to timely obtain and maintain effectiveness of the
required registration statements or obtain appropriate waivers or if we default
under the arrangements for any other reason, then the holders of the notes
could, among other things, require us to pay substantial penalties, require us
to repay the notes at a premium and/or foreclose upon their security interest in
our assets, and the parties to the settlement arrangements could take action
against us that could include the filing of a substantial stipulated judgment.
Any of these events would adversely affect our business, operating results,
financial condition, and ability to service our other indebtedness by negatively
impacting our cash flows.
A SMALL NUMBER OF STOCKHOLDERS, WHO INCLUDE CERTAIN OF OUR OFFICERS AND
DIRECTORS, HAVE THE ABILITY TO CONTROL STOCKHOLDER VOTES AND TO TAKE ACTION
BY WRITTEN CONSENT WITHOUT A MEETING OF STOCKHOLDERS.
As of September 15, 2003, our co-chairmen, Kris Shah and Marvin
Winkler, and certain of their family members and affiliates owned, in the
aggregate, approximately 51.0% of our outstanding common stock. Those
stockholders, if acting together, have the ability to elect our directors and to
determine the outcome of corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote. Further, those stockholders
have the ability to take action by written consent on those matters without a
meeting of stockholders. Those matters could include the election of directors,
changes in the size and composition of the board of directors, and mergers and
other business combinations involving our company. In addition, through control
of the board of directors and voting power, they may be able to control certain
decisions, including decisions regarding the qualification and appointment of
officers, dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), and the
acquisition or disposition of our assets. Also, the concentration of voting
power in the hands of those individuals could have the effect of delaying or
preventing a change in control of our company, even if the change in control
would benefit our stockholders, and may adversely affect the market price of our
common stock.
17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and our filings that are incorporated by reference into
this prospectus contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. We intend that those forward-looking statements be subject to the safe
harbors created by those sections.
Those forward-looking statements generally include the plans and
objectives of management for future operations, including plans and objectives
relating to our future economic performance, and can generally be identified by
the use of the words "believe," "intend," "plan," "expect," "forecast,"
"project," "may," "should," "could," "seek," "pro forma," "estimates,"
"continues," "anticipate" and similar words. Those forward-looking statements
and associated risks may include, relate to, or be qualified by other important
factors, including, without limitation:
o anticipated trends in our financial condition and results of
operations;
o growth or contraction in the information security products and
services markets in which we operate;
o our ability to finance our working capital and other cash
requirements;
o our business strategy for expanding our presence in the
Internet data security market; and
o our ability to distinguish ourselves from our current and
future competitors.
We do not undertake to update, revise or correct any forward-looking
statements. The forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating forward-looking statements include:
o the shortage of reliable market data regarding the Internet
data security market;
o changes in external competitive market factors or in our
internal budgeting process that might impact trends in our
results of operations;
o changes in our business strategy or an inability to execute
our strategy due to unanticipated changes in the contract
support services markets; and
o various other factors that may prevent us from competing
successfully in the marketplace.
The information contained in this prospectus is not a complete
description of our business or the risks associated with an investment in our
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures we made in this
prospectus, and in our other materials filed with the Securities and Exchange
Commission that discuss our business in greater detail and that disclose various
risks, uncertainties and other factors that may affect our business, results of
operations or financial condition. In particular, you should review the "Risk
Factors" section of this prospectus. Any of the factors described above or in
the "Risk Factors" section of this prospectus could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.
18
SELLING SECURITY HOLDERS
SELLING SECURITY HOLDER TABLE
This prospectus covers the offer and sale by the selling security
holders of up to 2,856,242 shares of common stock. Each selling security holder
has indicated to us that it is acting individually, not as a member of a group.
The following table sets forth, to our knowledge, certain information about the
selling security holders as of September 15, 2003. Except as indicated in the
private placement descriptions following the table, none of the selling security
holders or their affiliates has held any position or office or had any other
material relationship with us in the past three years.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, or the Commission, and includes voting or
investment power with respect to the securities. To our knowledge, except as
indicated by footnote, and subject to community property laws where applicable,
the persons named in the table below have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Shares of common stock underlying derivative securities, if any, that currently
are exercisable or convertible or are scheduled to become exercisable or
convertible for or into shares of common stock within 60 days after the date of
the table are deemed to be outstanding in calculating the percentage ownership
of each listed person or group but are not deemed to be outstanding as to any
other person or group. Percentage of beneficial ownership is based on 27,836,733
shares of common stock outstanding as of the date of the table.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders named below.
SHARES OF SHARES OF
COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED COMMON BENEFICIALLY OWNED
NAME OF PRIOR TO OFFERING STOCK AFTER OFFERING(1)
NAME OF ----------------------- BEING -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
Wave Systems Corp. (2) 4,785,583 17.19% 1,800,000 2,985,583 10.73%
Research Venture, LLC (3) 1,470,692 5.28% 1,056,242 414,450 1.49%
__________________
(1) The figures shown assume the sale of all shares being offered under
this prospectus.
(2) Power to vote or dispose of the shares beneficially owned by Wave
Systems Corp. is held by each of John Bagalay, Jr., Ph.D., as chairman,
Steven Sprague, as president and chief executive officer, and Gerard
Feeney, as chief financial officer.
(3) Power to vote or dispose of the shares beneficially owned by Research
Venture, LLC is held by Jack J. Kessler, as managing member, and
Jeffrey Soffer, as member.
19
PRIVATE PLACEMENTS THROUGH WHICH THE SELLING SECURITY HOLDERS OBTAINED
BENEFICIAL OWNERSHIP OF THE OFFERED SHARES
All of the shares being offered under this prospectus were issued in
the following private placement transactions:
TERMINATION AGREEMENT AND MUTUAL RELEASE WITH WAVE SYSTEMS CORP.
As of September 30, 2002, we executed a Termination Agreement and
Mutual Release by and among us, BIZ Interactive Zone, Inc., or BIZ, and Wave
Systems Corp., or Wave. The Termination Agreement documented the mutual
termination effective as of August 31, 2002, of a Purchase, Development and
Deployment Agreement, or the Wave Agreement, between BIZ and Wave dated October
2, 2000, as amended on May 10, 2001.
Under the Wave Agreement, Wave was to provide development work in
exchange for cash payments by BIZ of $278,000 per month from June 1, 2001, to
December 1, 2002. If BIZ did not make the required monthly payments, then Wave
had the right to issue to BIZ default notices requesting payment in the form of
common stock of BIZ. If the default notices were not cured within 30 days of
written notice, then the unpaid installment would convert from a cash obligation
into a stock acquisition right, or SAR. The SAR would give Wave the right to
acquire a number of fully paid, nonassessable shares of common stock determined
by dividing the fair market value (the average closing price of a share of
common stock for the ten trading-day period prior to the date of exercise) of a
share of common stock on the date of exercise of the SAR into the aggregate
portion of the installment payments that were the subject of an uncured default.
The Wave Agreement provided that in the event of a merger or combination
involving BIZ, the shares to be issued upon exercise of the SARs would be the
shares of BIZ's successor in interest. In August 2001, BIZ became a wholly-owned
subsidiary of ours through a merger transaction. Consequently, shares of our
common stock became issuable under the SARs.
Under the Termination Agreement, the Wave Agreement was terminated as
of August 31, 2002, and we issued to Wave a non-negotiable, non-interest
bearing, subordinated convertible promissory note due December 31, 2005, in the
principal amount of $270,000 and 1,600,000 shares of common stock. The
conversion rate of the note initially was $1.35 and was subject to adjustments
for stock splits, stock dividends, reclassifications, reorganizations and the
like. On December 13, 2002, we converted the entire principal balance of the
note into 200,000 shares of common stock at the initial conversion rate of
$1.35. We have registered for resale by Wave under this prospectus the shares
issued under the Termination Agreement and the note.
RESTRUCTURING ARRANGEMENT AND SETTLEMENT WITH RESEARCH VENTURE, LLC
Research Venture, LLC filed a complaint against us on June 4, 2002,
and filed first amended complaints against us on August 6 and August 7, 2002,
alleging unlawful detainer and seeking possession of two leased properties,
alleged damages and lost rent. We surrendered possession of both properties and
negotiated a restructuring of our obligations under the leases. The
restructuring involved, among other terms, our entry on October 23, 2002, into
a stipulation for entry of judgment that permitted Research Venture to obtain a
judgment against us in the maximum aggregate amount of $3.1 million, less
consideration we paid prior to any entry of the judgment, if we did not comply
with the terms of the restructuring arrangement through December 2004.
20
Under the restructuring arrangement, one of the leases was cancelled
and we agreed to take occupancy of the other leased building under a seven-year
operating lease beginning in December 2002. In addition, we agreed to make cash
payments to Research Venture aggregating $500,000, and we issued 959,323 shares
of common stock and a subordinated convertible promissory note in the principal
amount of $360,000 that was convertible at our option, with certain exceptions,
into shares of our common stock at a conversion price equal to the greater of
$1.30 per share or the arithmetic mean of the closing sale prices of a share of
our common stock for the 30-day period ending on the fifth day prior to the date
upon which we transmitted a conversion notice to Research Venture. The
conversion rate of the note was subject to adjustments for stock splits, stock
dividends, reclassifications, and the like.
We agreed to register for resale the 959,323 shares of common stock
initially issued in connection with the settlement and an additional 276,923
shares of common stock that were issued or issuable upon conversion of the
subordinated convertible promissory note. The principal amount of the note
represented prepaid rent on the property we were leasing from Research Venture.
Exceptions to our right to convert the principal amount of the note into shares
of common stock included the occurrence of a change of control of our company,
as defined in the note, our failure to comply with our registration obligations
under the settlement, or entry of the stipulated judgment.
Research Venture was entitled to entry of the stipulated judgment if we
failed to comply with the terms of the restructuring arrangement. Immediately
prior to any entry of the stipulated judgment, Research Venture had the right to
return to us any or all shares of common stock we issued under the settlement,
and we were to receive a credit against the judgment amount equal to $1.30
multiplied by the number of shares of common stock not returned to us.
We did not timely tender the full cash payments that were due under the
restructuring agreement. As a result, on August 11, 2003, Research Venture
obtained entry of the stipulated judgment in the amount of $2.7 million.
On August 29, 2003, we entered into an agreement of settlement on
stipulated judgment with Research Venture. Under that settlement agreement,
Research Venture retained the 959,323 shares of common stock initially issued in
connection with the restructuring arrangement and 96,919 shares of common stock
issued upon conversion of the note, and we agreed to register those shares for
resale by Research Venture under this prospectus on or prior to September 15,
2003. In addition, Research Venture canceled and surrendered the note, we paid
to Research Venture cash in the amount of $865,000 and issued to Research
Venture 414,450 shares of common stock that are to be registered for resale by
Research Venture under a separate registration statement on or prior to November
30, 2003, and the building lease agreement was terminated. The settlement
agreement contained mutual general release language, and Research Venture
authorized us to obtain entry of a stipulation to vacate the August 11, 2003
stipulated judgment.
We and Research Venture also entered into an amended stipulation for
entry of judgment on August 29, 2003. Under the amended stipulation, if we do
not timely obtain and maintain effectiveness of the registration statement of
which this prospectus is a part, then Research Venture will have the right to
obtain entry against us of a stipulated judgment in the amount of $1.7 million
less the product of $1.30 multiplied by the number of shares included under this
prospectus that Research Venture sells prior to entry of the stipulated
judgment. Also, if we do not timely obtain and maintain effectiveness of the
registration statement covering the additional 414,450 shares of common stock
issued as of August 29, 2003, then subject to a grace period if our failure to
meet the requirements is solely as a result of a Commission review of the
registration statement to which we respond diligently, Research Venture will be
entitled to obtain entry against us of a stipulated judgment in the amount of
$373,005 less the product of $0.90 multiplied by the number of the additional
414,450 shares of common stock that Research Venture sells prior to entry of the
stipulated judgment. If the stipulated judgment is entered, any unsold shares
will be returned to us for cancellation.
21
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock being offered under this prospectus on any
stock exchange, automated interdealer quotation system, market or trading
facility on which the shares are traded, in the over-the-counter market or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock
that the seller does not own, or certificates for which are not
within his control, so as to be available for delivery at the time
when, under applicable rules, delivery must be made;
o transactions to cover short sales;
o through the distribution of the shares by any selling security
holder to its partners, members or stockholders;
o broker-dealers may agree with the selling security holders to sell
a specified number of shares at a stipulated price per share;
o one or more underwritten offerings on a firm commitment or best
efforts basis;
o a combination of any of these methods of sale; or o any other
method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o a negotiated price; or
o a price a selling security holder determines from time to time.
22
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may also engage in short sales against the
box, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in our securities or
derivatives of our securities and may sell or deliver shares in connection with
these trades. The selling security holders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a selling
security holder defaults on a margin loan, the broker may, from time to time,
offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.
The selling security holders and any broker-dealers or agents that
participate in selling the shares offered under this prospectus may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
these sales. Commissions received by these broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. Any
broker-dealers or agents that are deemed to be underwriters may not sell shares
offered under this prospectus unless and until we set forth the names of the
underwriters and the material details of their underwriting arrangements in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders, alternatively, may sell all or any part
of the shares offered under this prospectus through an underwriter. To our
knowledge, no selling security holder has entered into any agreement with a
prospective underwriter, and we cannot assure you as to whether any such
agreement will be entered into. If a selling security holder informs us that it
has entered into such an agreement or agreements, any material details will be
set forth in a supplement to this prospectus or, if required, in a replacement
prospectus included in a post-effective amendment to the registration statement
of which this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holders or any other person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities
for a specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
If any shares of common stock offered for sale pursuant to this
prospectus are transferred other than pursuant to a sale under this prospectus,
then subsequent holders could not use this prospectus until a post-effective
amendment or prospectus supplement is filed, naming such holders. We cannot
assure you as to whether any of the selling security holders will sell all or
any portion of the shares offered under this prospectus.
23
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus. Rather, the selling security holders
will receive those proceeds directly for their own accounts.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
Our amended and restated certificate of incorporation provides that,
except in certain specified instances, our directors shall not be personally
liable to us or our stockholders for monetary damages for breach of their
fiduciary duty as directors.
In addition, our amended and restated certificate of incorporation and
bylaws obligate us to indemnify our directors and officers against expenses and
other amounts reasonably incurred in connection with any proceeding arising from
the fact that such person is or was an agent of ours. Our bylaws also authorize
us to purchase and maintain insurance on behalf of any of our directors or
officers against any liability asserted against that person in that capacity,
whether or not we would have the power to indemnify that person under the
provisions of the Delaware General Corporation Law.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling us
under the provisions described above, we have been informed that in the opinion
of the Commission, indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXPERTS
The consolidated financial statements and financial statement schedule
of SSP Solutions, Inc. and subsidiaries as of December 31, 2002, and for the
year then ended, have been incorporated by reference into this prospectus and
into the registration statement of which this prospectus is a part in reliance
upon the report of Haskell & White LLP, independent auditors, which report is
incorporated by reference into this prospectus, and upon authority of that firm
as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule
of SSP Solutions, Inc. and subsidiaries as of December 31, 2001, and for each of
the years in the two-year period ended December 31, 2001, have been incorporated
by reference herein and in the registration statement, of which this prospectus
is a part, in reliance upon the report of KPMG LLP, independent auditors,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
Each of the audit reports covering the December 31, 2002 and 2001,
consolidated financial statements contains an explanatory paragraph that states
that SSP Solutions, Inc.'s significant operating losses, cash used in operating
activities, accumulated deficit and deficit working capital raise substantial
doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
24
LEGAL MATTERS
The legality of the securities offered under this prospectus will be
passed upon for SSP Solutions, Inc. by Rutan & Tucker, LLP, Costa Mesa,
California.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is American
Stock Transfer & Trust Company. Its telephone number is (212) 936-5100.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any document we
file at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
information on the operation of the Public Reference Room. Our filings with the
Commission are also available to the public at the Commission's Internet site at
http://www.sec.gov. Our common stock is quoted on The Nasdaq National Market.
Our reports, proxy statements and other information are also available to the
public on Nasdaq's Internet site at http://www.nasdaq.com.
This prospectus is part of a registration statement on Form S-3 filed
with the Commission under the Securities Act. This prospectus omits some of the
information contained in the registration statement. You should refer to the
registration statement for further information with respect to SSP Solutions,
Inc. and the securities offered by this prospectus. Any statement contained in
this prospectus concerning the provisions of any document filed as an exhibit to
the registration statement or otherwise filed with the Commission is not
necessarily complete, and in each case you should refer to the copy of the
document filed for more complete information.
25
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows us to incorporate by reference information we
file with it, which means we can disclose important information to you by
referring you to documents we have filed with the Commission. The information
incorporated by reference is considered to be a part of this prospectus. We
incorporate by reference the documents listed below and any future filings we
make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of the offering covered by this
prospectus:
o Our current report on Form 8-K for January 27, 2003, filed with
the Commission on January 30, 2003, (File No. 000-26227);
o Amendment no. 1 to our quarterly report on Form 10-Q for the
quarter ended June 30, 2002, filed with the Commission on March
21, 2003, (File No. 000-26227);
o Amendment no. 1 to our annual report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on April 30,
2003, (File No. 000-26227);
o Our current report on Form 8-K for April 9, 2003, filed with the
Commission on April 16, 2003, (File No. 000-26227);
o Our current report on Form 8-K for May 29, 2003, filed with the
Commission on May 30, 2003, (File No. 000-26227);
o Amendment no. 1 to our current report on Form 8-K for April 9,
2003, filed with the Commission on July 18, 2003, (File No.
000-26227);
o Our quarterly report on Form 10-QSB for the quarter ended March
31, 2003, filed with the Commission on May 20, 2003, (File No.
000-26227);
o Our current report on Form 8-K for July 11, 2003, filed with the
Commission on August 5, 2003, (File No. 000-26227);
o Our quarterly report on Form 10-QSB for the quarter ended June 30,
2003, filed with the Commission on August 19, 2003, (File No.
000-26227);
o Our current report on Form 8-K for August 27, 2003, filed with the
Commission on September 9, 2003, (File No. 000-26227);
o Amendment no. 1 to our quarterly report on Form 10-QSB for the
quarter ended March 31, 2003, filed with the Commission on
September 16, 2003, (File No. 000-26227);
o Amendment no. 2 to our annual report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on September
16, 2003, (File No. 000-26227); and
o The description of our common stock incorporated by reference into
our Form 8-A filed with the Commission on June 1, 1999, (File No.
000-26227) from our registration statement on Form S-1 filed with
the Commission on June 9, 1999, (Registration No. 333-72151),
together with any amendment or report filed for the purpose of
amending or updating such description.
Any statement in a document incorporated or deemed to be incorporated
by reference in this prospectus is deemed to be modified or superseded to the
extent that a statement contained in this prospectus, or in any other document
we subsequently file with the Commission, modifies or supersedes that statement.
If any statement is modified or superseded, it does not constitute a part of
this prospectus, except as modified or superseded.
26
We will provide to each person, including any beneficial owner, to whom
a prospectus is delivered, a copy of any or all of the information that has been
incorporated by reference in this prospectus but not delivered with this
prospectus. You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and phone number:
SSP Solutions, Inc.
17861 Cartwright Road
Irvine, California 92614
Attention: Thomas E. Schiff, Chief Financial Officer
Telephone: (949) 851-1085
27
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the issuance and distribution of
the securities being registered (estimated except for the registration fee), all
of which will be borne by the registrant, are as follows:
Securities and Exchange Commission registration fee ...........$ 175
Printing expenses..............................................$ 500
Legal fees and expenses........................................$ 15,000
Accounting fees................................................$ 25,000
Miscellaneous expenses.........................................$ 1,000
--------
Total...................................$ 41,675
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
The registrant's amended and restated certificate of incorporation
provides that, except in certain specified instances, a director of the
registrant shall not be personally liable to the registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director.
In addition, the registrant's amended and restated certificate of
incorporation and bylaws obligate the registrant to indemnify its directors and
officers against expenses and other amounts reasonably incurred in connection
with any proceeding arising from the fact that such person is or was an agent of
the registrant. The bylaws also authorize the registrant to purchase and
maintain insurance on behalf of any director or officer of the registrant
against any liability asserted against that person in that capacity, whether or
not the registrant would have the power to indemnify that person under the
provisions of the Delaware General Corporation Law.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the registrant under the provisions described above, the registrant has been
informed that in the opinion of the Commission, indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-1
ITEM 16. EXHIBITS.
Exhibit No. Description
----------- -----------
4.1 Termination Agreement and Mutual Release dated effective as of
August 31, 2002, by and among SSP Solutions, Inc., BIZ
Interactive Zone, Inc. and Wave Systems Corp. (1)
4.2 Subordinated Convertible Promissory Note dated as of September
30, 2002, in the principal amount of $270,000 made by SSP
Solutions, Inc. in favor of Wave Systems Corp. (1)
4.3 First Amendment to Standard Industrial/Commercial
Single-Tenant Lease - Net dated October 23, 2002, between SSP
Solutions, Inc. and Research Venture, LLC relating to real
property located at 9012 Research Drive, Irvine, California
(2)
4.4 Subordinated Convertible Promissory Note dated October 23,
2002, in the principal amount of $360,000 made by SSP
Solutions, Inc. in favor of Research Venture, LLC (2)
4.5 Stipulation for Entry of Judgment dated October 23, 2002,
between SSP Solutions, Inc. and Research Venture, LLC (2)
4.6 Agreement of Settlement on Stipulated Judgment dated August
29, 2003, between SSP Solutions, Inc. and Research Venture,
LLC (3)
4.7 Lease Surrender and Termination Agreement dated August 29,
2003, between SSP Solutions, Inc. and Research Venture, LLC
(3)
4.8 Amended Stipulation for Entry of Judgment dated August 29,
2003, between SSP Solutions, Inc. and Research Venture, LLC
(3)
5.1 Opinion of Rutan & Tucker, LLP
23.1 Consent of Haskell & White LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
23.3 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on the signature page to this
registration statement)
___________________
(1) Filed with the Commission on October 8, 2002, as an exhibit to
the registrant's current report on Form 8-K for September 27,
2002, and incorporated herein by reference.
(2) Filed with the Commission on November 4, 2002, as an exhibit
to the registrant's current report on Form 8-K for October 23,
2002, and incorporated herein by reference.
(3) Filed with the Commission on September 9, 2003, as an exhibit
to the registrant's current report on Form 8-K for August 27,
2003, and incorporated herein by reference.
II-2
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in this registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) to include any additional or changed material
information on the plan of distribution;
provided however, that paragraphs (1)(i) and (1)(ii) shall not apply if 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
Exchange Act that are incorporated by reference in this registration statement.
(2) For determining any liability under the Securities Act, each
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 file a post-effective amendment to remove from registration any
of the securities being registered on this registration statement that remain
unsold at the termination of the offering.
(4) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the 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 small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer 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 small business issuer 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.
II-3
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 Irvine, State of California, on September 15, 2003.
SSP SOLUTIONS, INC.
By: /s/ MARVIN J. WINKLER
----------------------------------------------------------
Marvin J. Winkler, Co-Chairman and Chief Executive Officer
II-4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of SSP Solutions, Inc., a Delaware corporation that is filing a
registration statement on Form S-3 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoint Marvin J. Winkler and Kris Shah, and each of them, their
true and lawful attorneys-in-fact and agents; with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such registration statement and any or all amendments to the
registration statement, including a prospectus or an amended prospectus therein,
and all other documents in connection therewith to be filed with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, 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 interests and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their substitute or substitutes, 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 below by the following persons in the
following capacities on the dates indicated.
Name Title Date
---- ----- ----
/s/ MARVIN J. WINKLER Co-Chairman of the Board, Chief September 15, 2003
--------------------- Executive Officer and Director
Marvin J. Winkler (Principal Executive Officer)
/s/ KRIS SHAH Co-Chairman of the Board, President September 15, 2003
--------------------- and Director
Kris Shah
/s/ THOMAS E. SCHIFF Executive Vice President and September 15, 2003
--------------------- Chief Financial Officer
Thomas E. Schiff (Principal Financial Officer)
/s/ GREGG AMBER Director September 15, 2003
---------------------
Gregg Amber
/s/ JOEL RUBENSTEIN Director September 15, 2003
---------------------
Joel Rubenstein
/s/ RON R. GOLDIE Director September 15, 2003
---------------------
Ron R. Goldie
II-5
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit No. Description
----------- -----------
5.1 Opinion of Rutan & Tucker, LLP
23.1 Consent of Haskell & White LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
23.3 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on the signature page to this
registration statement)
II-6