AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2002
REGISTRATION NO. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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,
CO-CHAIRMAN AND CO-CHIEF EXECUTIVE 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, please 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
under the Securities Act, 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 SHARE(2) OFFERING PRICE(2) FEE
----------------------------------------- ------------------- --------------------- -------------------- -----------------
Common stock, $0.01 par value 3,036,246 $0.665 $2,019,103.50 $185.76
========================================= =================== ===================== ==================== =================
(1) 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.
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.
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 DECEMBER 18, 2002
PROSPECTUS
SSP SOLUTIONS, INC.
3,036,246 SHARES OF COMMON STOCK
An aggregate of 3,036,246 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. Of the total shares offered, an
aggregate of 476,923 shares are or may become issuable upon conversion of
promissory notes held by the selling security holders, and the remaining shares
are issued and outstanding.
Our common stock trades on The Nasdaq National Market under the symbol
"SSPX." The last reported sale price of our common stock on December 16, 2002,
was $0.64 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 , 2002.
TABLE OF CONTENTS
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Page
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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...........................25
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 $41.4 million, $53.2 million and $8.2 million for the
years 2000 and 2001 and the nine months ended September 30, 2002, respectively.
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, 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 opinion
contained in our consolidated financial statements as of December 31, 2001 and
2000 and for each of the years in the three-year period ended December 31, 2001
an explanatory paragraph related to our ability to continue as a going concern.
Reports of independent auditors questioning a company's ability to continue as a
going concern are generally viewed unfavorably by analysts and investors. This
report 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 report 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 and intend to satisfy fixed
obligations by obtaining additional debt and/or equity financing, using accounts
receivable financing, extending vendor payments, selling investments and issuing
stock as payment on obligations.
3
We currently do not have any commitments for additional financing. 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 against terrorists 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. Although we obtained waivers for past covenant defaults, 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 SALES OF OUR SSP SOLUTION SUITE(TM) OR
ESTABLISHED A SALES AND MARKETING FORCE TO PROMOTE THIS PRODUCT, WHICH
MAKES IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS PERFORMANCE AND FUTURE
PROSPECTS.
To date, we have not had any sales of our SSP Solution Suite(TM) and
have not established a sales aND marketing force to promote this product.
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 this portion of 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 and product reseller industries.
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 twelve month periods ended December 31, 2000 and 2001,
we derived 42% and 20%, respectively, of our consolidated net revenue from one
customer. During the nine months ended September 30, 2002, we derived 34% of our
consolidated net revenue from one 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 THE SSP
SOLUTION SUITE(TM) 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 SSP Solution Suite(TM) is a collection of technologies, some of
which are licensed from our allianCe and supplier partners. As a result, 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 as the SSP Solution Suite(TM), 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, INCLUDING THE SSP SOLUTION SUITE(TM), AND PREVENT US FROM
GENERATING SALES REVENUES.
We currently 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 the events on September 11, 2001 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 the follow-up 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 72%, 23% and
31% of our consolidated revenue for the fiscal year ended December 31, 2001 and
the three and nine-month periods ended September 30, 2002, respectively. Our
sales to these agencies are subject to risks that include:
o early termination of our contracts;
o disallowance of costs upon audit; and
8
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 that will comprise the SSP Solution Suite(TM). 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 Co-Chief Executive Officer, Kris Shah, has
been with us since 1970, and our Co-Chairman and Co-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 extremely
difficult to predict, but would likely result in, at a minimum, significant
costs to recruit, hire and retain a successor and impaired operating results
9
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.
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. The data
security and networking solution industries are characterized by a high level of
employee mobility, 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 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 plan to work 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 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.
refiled the action in May 2001. Pulsar intends to vigorously defend against the
plaintiffs' claims and has asserted defenses and counterclaims.
In May 2002, Contemporary Services Corporation filed an action against
us alleging breach of contract, fraud, negligent misrepresentation and violation
of California Corporations Code section 25400. The action relates to a term
sheet agreement that we entered into with the plaintiff in October 2001 in
10
connection with a potential strategic relationship between the plaintiff and us.
We filed an answer and cross-complaint. We intend to aggressively defend the
action and pursue the cross-complaint if we are unable to reach a satisfactory
resolution with the plaintiff.
In May 2002, Integral Systems, Inc. filed an action against us alleging
that we breached a promissory note for the payment of $389,610 and then obtained
a confessed judgment for approximately $327,250. We are working to document a
settlement 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 would require us to make payments of $20,000 per month 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. We surrendered possession of both properties and
negotiated a restructuring of our obligations under the leases. Under the
restructuring arrangement, 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 represents prepaid rent on a property we are leasing from Research Venture.
Research Venture will be entitled to entry of the stipulated judgment in the
maximum aggregate amount of $3.1 million, less consideration we pay prior to any
entry of the judgment, if we do not comply with the terms of the restructuring
arrangement through December 2004.
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 the quarter ended September 30, 2002, 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 are
working with legal counsel to finalize an agreement to extend the terms of the
existing accounts payable balance. We believe that an agreement will be
executed. If however, 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, certain 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.
ACQUISITION-RELATED ACCOUNTING CHARGES MAY CONTINUE TO DELAY OR REDUCE OUR
PROFITABILITY.
We accounted for our 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 goodwill and other intangible assets.
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement 142, "Goodwill and Other Intangible Assets." We adopted this statement
effective January 1, 2002. Under this statement, goodwill is no longer amortized
and is 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 be impaired, we would then be required to
complete the second step as soon as possible, but no later than December 31,
2002.
We assessed the fair value of our two reporting units by comparing the
book value of our equity interests to the fair value of our equity interests
based upon the terms of a financing we completed in April 2002. Given
consideration of this comparison and relevant factors, we concluded that as of
December 31, 2001, an impairment write-down of approximately $36.3 million was
required. Subsequently, as of March 31, 2002, June 30, 2002 and September 30,
2002, we reviewed the projected cashflows of our two reporting units and
discounted those cashflows using risk adjusted discount rates. We concluded that
the fair values of our reporting units exceeded the related carrying values, and
no additional write-down was required.
We are required to perform 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 an
additional impairment charge, or the amount of any such charge. If the charge is
significant, it could cause the market price of our common stock to decline.
12
A RELOCATION OF OUR SOFTWARE DEVELOPMENT TO INDIA 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, 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. DELISTING ALSO WOULD ENTITLE A THIRD PARTY TO FILE A POTENTIALLY
SUBSTANTIAL STIPULATED JUDGMENT AGAINST US.
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 will have until
February 20, 2003 to regain compliance with that requirement. If we are unable
to timely regain compliance with that requirement, or if we fail to maintain
compliance with any other listing requirement after any applicable cure periods,
Nasdaq staff will provide written notice to us that our common stock will be
delisted. At that time, we may appeal the staff's determination to a listing
qualifications panel for consideration. Alternatively, prior to February 20,
2003, we may 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. The successful transfer of the listing of our
common stock to The Nasdaq SmallCap Market would make available an extended
grace period through May 21, 2003 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.
Nasdaq qualitative listing standards require that listed companies that
do not qualify as small business issuers under Securities and Exchange
Commission regulations must maintain an audit committee of at least three
members, comprised solely of independent directors, each of whom meets certain
knowledge- or experience-related criteria. We currently have only two
independent directors and, therefore, are not in compliance with this listing
standard. In October 2002, Nasdaq verbally contacted us about our
non-compliance. We then submitted a written letter to Nasdaq requesting that
Nasdaq allow us until January 7, 2003 to regain compliance with this standard.
Nasdaq neither expressly approved or denied the request. If Nasdaq denies our
request, or if we are unable to timely regain compliance with this standard,
whether because of difficulties in attracting and retaining qualified
independent directors in the increasingly regulated public company environment
or otherwise, we may be delisted from The Nasdaq National Market and may be
unable to transfer the listing of our common stock to 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. Also, if we are
delisted from The Nasdaq National Market, Research Venture, LLC, our landlord
with whom we have entered into a litigation settlement, would be entitled to
entry of a stipulated judgment against us in the maximum aggregate amount of
$3.1 million, less consideration we pay prior to any entry of the judgment.
THE NON-CASH INTEREST EXPENSE REQUIRED BY 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
14
substantial non-cash charge as interest expense, with an offsetting increase to
our paid-in-capital. While recording this entry had no effect on our
stockholders' equity, the entry substantially increased our reported loss for
the three- and nine-month periods ended September 30, 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. Between January 1,
2002 and December 16, 2002, the high and low closing sale prices of our common
stock were $4.40 and $0.64, 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 us or the information technology
service sector.
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 you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
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 December 16, 2002, we had issued and outstanding 24,805,445
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
January 1, 2002 and December 16, 2002 was 9,472 shares. Selling security holders
may offer up to 3,036,246 shares for sale to the public under this prospectus.
15
If the selling security holders or other 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.
FUTURE CONVERSIONS OR EXERCISES OF OUR OUTSTANDING DERIVATIVE SECURITIES,
PARTICULARLY THOSE THAT CONTAIN "FULL RATCHET" ANTI-DILUTION PROVISIONS,
COULD SUBSTANTIALLY DILUTE YOUR INVESTMENT BY CAUSING LARGE NUMBERS OF
SHARES OF OUR COMMON STOCK TO BE ISSUED IN THE FUTURE.
Convertible notes and warrants such as those that we issued in December
2001 and April 2002 contain "full ratchet" anti-dilution provisions that are in
effect through April 16, 2003. This means that if we issue any common stock or
securities convertible into or exercisable for common stock prior to April 16,
2003 for consideration less than the conversion price of the notes (initially,
$1.00 per share) or the exercise price of the warrants (initially, $1.30 per
share), then the conversion price of the notes and/or the exercise price of the
warrants automatically will adjust down to the consideration per share in the
new issuance. So, for example, if we issue an option to purchase shares of our
common stock at $0.80 per share, both the conversion price of the notes and the
exercise price of the warrants will be reduced to $0.80 per share, and the
number of shares underlying the warrants will be increased in proportion to the
reduction in the warrant exercise price.
Recent declines in the market price of our common stock, future market
conditions and our present and future cash needs may require us to issue
securities at a lower price. If we do so, the new, lower effective conversion
price of the convertible notes would cause even more shares of our common stock
to become issuable upon conversion of the notes, and the number of shares
underlying the warrants would be adjusted upward in proportion to the downward
adjustment to the warrant exercise price, creating the possibility of
significant dilution of any future earnings per share.
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. You could,
therefore, experience a decline in the value of your investment as a result of
short sales 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.
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
16
required registration statements, 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 December 16, 2002, Kris Shah, Marvin Winkler and certain of their
family members and affiliates owned, in the aggregate, approximately 54.7% 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 our ability to achieve the intended benefits of recent and
future cost-cutting measures;
o our ability to obtain additional working capital;
o our ability to successfully implement our future business
plans;
o our ability to attract strategic partners and alliances;
o uncertainties relating to economic conditions in the markets
in which we currently operate and in which we intend to
operate in the future;
o our ability to hire and retain qualified personnel;
o the risks of uncertainty of trademark protection; and
o risks associated with existing and future governmental
regulation to which we are or may become subject.
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section
above 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 3,036,246 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 December 16, 2002. Except as indicated in the
private placement descriptions following the table, none of the selling security
holders or their affiliates has held any position, office or 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 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 24,805,445
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
PRIOR TO OFFERING STOCK AFTER OFFERING (1)
NAME OF -------------------------- BEING -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ------ ---------- ------- ------ ----------
Wave Systems Corp. (2) 4,883,083 19.69% 1,800,000 3,083,083 12.43%
Research Venture, LLC 1,236,246 (3) 4.93% 1,236,246 (3) -- --
__________________
(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 Peter Sprague, as Chairman, Steven
Sprague, as President, 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. Represents 963,938 shares issued and
outstanding and 272,308 shares underlying a convertible promissory
note.
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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, or
are issuable upon conversion of promissory notes that 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.
The number of shares issued under the Termination Agreement and upon
conversion of the note are subject to anti-dilution adjustments if, and
whenever, before April 16, 2003 we issue or sell, or are deemed to have issued
or sold, any shares of common stock at a price below the dilution rate then in
effect. These anti-dilution adjustments do not apply, however, to the issuance
of shares of common stock underlying exercisable or convertible securities that
were outstanding on or prior to September 30, 2002, shares of common stock
underlying any rights, warrants or options granted pursuant to any of our stock
option or stock purchase plans, or shares of common stock issued or deemed to
have been issued pursuant to stock splits, stock dividends, reclassifications,
reorganizations and the like.
The initial dilution rate is $1.00. If a dilutive issuance occurs, then
the dilution rate will be reduced to a price equal to the consideration per
share paid for the common stock in the dilutive issuance. A dilution percentage
equal to the percentage by which the dilution rate in effect immediately prior
to the dilutive issuance is reduced in connection with the dilutive issuance
will be calculated. Wave will then be entitled to receive a number of shares of
common stock equal to the dilution percentage multiplied by the aggregate number
of shares of common stock issued under the Termination Agreement and the note
prior to the dilutive issuance.
20
Contractual conversion restrictions prohibit the issuance of shares of
common stock under the Termination Agreement and the note to the extent that we
have not first made or obtained any necessary notifications to and/or approvals
of The Nasdaq Stock Market and our stockholders. In addition, we may not issue
to Wave under the Termination Agreement and the note an aggregate number of
shares of common stock that would result in Wave, together with its affiliates,
beneficially owning 20% or more of the then issued and outstanding shares of
common stock. We agreed to endeavor to make the required notifications and/or
obtain the required approvals, and to register the shares of common stock
issuable pursuant to the Termination Agreement and the note. Accordingly, 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 will permit Research Venture to obtain a
judgment against us in the maximum aggregate amount of $3.1 million, less
consideration we pay prior to any entry of the judgment, if we do not comply
with the terms of the restructuring arrangement through December 2004.
Under the restructuring arrangement, 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 is 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 and 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 transmit a conversion notice to Research Venture. The conversion
rate of the note is 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 issued or issuable upon conversion of the note at a
conversion price of $1.30 per share. All of those shares are registered for
resale by Research Venture under this prospectus.
The principal amount of the note represents prepaid rent on a property
we are leasing from Research Venture. Exceptions to our right to convert the
principal amount of the note into shares of common stock include 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 will be entitled to entry of the stipulated judgment
if we fail to comply with the terms of the restructuring arrangement.
Immediately prior to any entry of the stipulated judgment, Research Venture may
return to us any or all shares of common stock we issued under the settlement,
and we would receive a credit against the judgment amount equal to $1.30
multiplied by the number of shares of common stock not returned to us.
21
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees, transferees 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 at negotiated prices; or
o a price the 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 securities of SSP
or derivatives of SSP 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 are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
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.
The selling security holders, alternatively, may sell all or any part
of the shares offered in 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.
This prospectus does not cover the sale or other transfer of derivative
securities held by the selling security holders or the issuance of shares of
common stock to the holders of those derivative securities upon conversion of
those derivative securities. If a selling security holder transfers its
derivative securities prior to conversion, the transferee of those derivative
securities may not sell the shares of common stock issuable upon conversion of
those of derivative securities under the terms of this prospectus unless we
amend or supplement this prospectus to cover such sales.
For the period a holder holds our derivative securities, the holder has
the opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon conversion of those derivative securities. The terms on which we could
23
obtain additional capital during the period in which those derivative securities
remain outstanding may be adversely affected. The holders of the derivative
securities are most likely to voluntarily convert those derivative securities
when the conversion price is less than the market price for our common stock.
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.
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 schedule of SSP Solutions,
Inc. as of December 31, 2001 and 2000, and for each of the years in the
three-year period ended December 31, 2001, have been incorporated by reference
herein and in the registration statement 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.
The audit report covering the December 31, 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 Web 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 Web 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.
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 Amendment No. 1 to our annual report on Form 10-K for the
fiscal year ended December 31, 2001 filed with the Commission
on April 30, 2002 (File No. 000-26227);
o Our quarterly report on Form 10-Q for the quarter ended March
31, 2002 filed with the Commission on May 20, 2002 (File No.
000-26227);
o Our quarterly report on Form 10-Q for the quarter ended June
30, 2002 filed with the Commission on August 14, 2002 (File
No. 000-26227);
o Our quarterly report on Form 10-Q for the quarter ended
September 30, 2002 filed with the Commission on November 14,
2002 (File No. 000-26227);
o Our current report on Form 8-K for April 16, 2002 filed with
the Commission on April 22, 2002 (File No. 000-26227);
25
o Our current report on Form 8-K for July 25, 2002 filed with
the Commission on August 1, 2002 (File No. 000-26227);
o Amendment No. 1 to our current report on Form 8-K for July 25,
2002 filed with the Commission on August 6, 2002 (File No.
000-26227);
o Our current report on Form 8-K for September 27, 2002 filed
with the Commission on October 8, 2002 (File No. 000-26227);
o Our current report on Form 8-K for October 23, 2002 filed with
the Commission on November 4, 2002 (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.
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
26
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 ........$ 186
Printing expenses...........................................$ 500
Legal fees and expenses.....................................$ 5,000
Accounting fees.............................................$ 5,000
Miscellaneous expenses......................................$ 1,000
-----------
Total................................$ 11,686
===========
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)
5.1 Opinion of Rutan & Tucker, LLP (*)
23.1 Consent of KPMG LLP (*)
23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1) (*)
24.1 Power of Attorney (contained on the signature page to this
registration statement)
______________________
(*) To be filed by amendment.
(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.
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 arising
after the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in 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 material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided however, that paragraphs (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) For determining any liability under the Securities Act, each filing
of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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 December 18, 2002.
SSP SOLUTIONS, INC.
By: /s/ MARVIN J. WINKLER
---------------------------------------------------------------
Marvin J. Winkler, Co-Chairman and Co-Chief Executive Officer
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, Co-Chief December 18, 2002
--------------------- Executive Officer and Director
Marvin J. Winkler (Principal Executive Officer)
/s/ KRIS SHAH Co-Chairman of the Board, Co-Chief December 18, 2002
--------------------- Executive Officer and Director
Kris Shah
/s/ THOMAS E. SCHIFF Executive Vice President and December 18, 2002
--------------------- Chief Financial Officer
Thomas E. Schiff (Principal Financial Officer)
/s/ GREGG AMBER Director December 18, 2002
---------------------
Gregg Amber
/s/ JOEL RUBENSTEIN Director December 18, 2002
---------------------
Joel Rubenstein
II-4
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit No. Description
----------- -----------
24.1 Power of Attorney (contained on the signature page to this
registration statement)
II-5