##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-17995
 ZIX CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 Texas
    
    75-2216818(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 2711 North Haskell Avenue
Suite 2200, LB 36
Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
 (214) 370-2000
(Registrants Telephone Number, Including Area Code)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer o Accelerated filer o Non-accelerated filer þ
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
 Class
    
    Outstanding at November 12, 2007Common Stock, par value $0.01 per share
    
    60,634,241




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006 (audited)
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and
2006
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit) for the nine months ended September 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35Certification of President and CEO, Pursuant to Section 302Certification of CFO and Treasurer, Pursuant to Section 302Certification of President and CEO and CFO and Treasurer, Pursuant to Section 906
  2




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,885,000
    
    
    $
    12,783,000Restricted cash
    
    
    400,000
    
    
    
    Receivables, net
    
    
    836,000
    
    
    
    746,000Prepaid and other current assets
    
    
    1,521,000
    
    
    
    2,178,000Total current assets
    
    
    12,642,000
    
    
    
    15,707,000Restricted cash
    
    
    1,300,000
    
    
    
    35,000Property and equipment, net
    
    
    2,048,000
    
    
    
    2,404,000Intangible assets, net
    
    
    
    
    
    
    23,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred financing costs and other assets
    
    
    142,000
    
    
    
    36,000Total assets
    
    $
    18,293,000
    
    
    $
    20,366,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    560,000
    
    
    $
    221,000Accrued expenses
    
    
    3,319,000
    
    
    
    3,079,000Deferred revenue
    
    
    11,926,000
    
    
    
    8,388,000Customer deposit
    
    
    
    
    
    
    2,000,000Promissory note payable
    
    
    400,000
    
    
    
    2,661,000Short-term note payable
    
    
    26,000
    
    
    
    255,000Total current liabilities
    
    
    16,231,000
    
    
    
    16,604,000Long-term liabilities:Deferred revenue
    
    
    4,172,000
    
    
    
    2,496,000Promissory note payable
    
    
    1,109,000
    
    
    
    Deferred rent
    
    
    329,000
    
    
    
    339,000Total long-term liabilities
    
    
    5,610,000
    
    
    
    2,835,000Total liabilities
    
    
    21,841,000
    
    
    
    19,439,000Commitments and contingencies (see Note 16)Stockholders equity (deficit):Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 175,000,000 shares authorized; 62,676,020 issued and
60,348,839 outstanding in 2007 and 61,966,020 issued and 59,638,839 outstanding in 2006
    
    
    627,000
    
    
    
    620,000Additional paid-in capital
    
    
    324,560,000
    
    
    
    322,330,000Treasury stock, at cost; 2,327,181 common shares in 2007 and 2006
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (317,228,000
    )
    
    
    (310,516,000
    )Total stockholders equity (deficit)
    
    
    (3,548,000
    )
    
    
    927,000Total liabilities and stockholders equity
    
    $
    18,293,000
    
    
    $
    20,366,000
  3




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    6,191,000
    
    
    $
    4,710,000
    
    
    $
    17,133,000
    
    
    $
    12,814,000Cost of revenues
    
    
    2,662,000
    
    
    
    3,131,000
    
    
    
    8,162,000
    
    
    
    9,596,000Gross margin
    
    
    3,529,000
    
    
    
    1,579,000
    
    
    
    8,971,000
    
    
    
    3,218,000Operating expenses:Research and development expenses
    
    
    1,320,000
    
    
    
    1,630,000
    
    
    
    3,962,000
    
    
    
    4,851,000Selling, general and administrative expenses
    
    
    4,236,000
    
    
    
    5,210,000
    
    
    
    13,685,000
    
    
    
    18,351,000Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )(Gain) on sale of product lines
    
    
    
    
    
    
    (11,000
    )
    
    
    
    
    
    
    (11,000
    )Asset impairment charge
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    125,000Loss on impairment of operating lease
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    Total operating expenses
    
    
    5,556,000
    
    
    
    6,954,000
    
    
    
    15,747,000
    
    
    
    22,316,000Operating loss
    
    
    (2,027,000
    )
    
    
    (5,375,000
    )
    
    
    (6,776,000
    )
    
    
    (19,098,000
    )Other (expense) income:Investment and other income
    
    
    143,000
    
    
    
    229,000
    
    
    
    437,000
    
    
    
    740,000Interest expense
    
    
    (35,000
    )
    
    
    (114,000
    )
    
    
    (141,000
    )
    
    
    (1,009,000
    )Gain on derivative liabilities (See Note 13)
    
    
    
    
    
    
    1,120,000
    
    
    
    
    
    
    
    4,050,000Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (871,000
    )Total other (expense) income
    
    
    108,000
    
    
    
    1,235,000
    
    
    
    118,000
    
    
    
    2,910,000Loss before income taxes
    
    
    (1,919,000
    )
    
    
    (4,140,000
    )
    
    
    (6,658,000
    )
    
    
    (16,188,000
    )Income taxes benefit (expense)
    
    
    (17,000
    )
    
    
    (11,000
    )
    
    
    (54,000
    )
    
    
    77,000Net loss
    
    $
    (1,936,000
    )
    
    $
    (4,151,000
    )
    
    $
    (6,712,000
    )
    
    $
    (16,111,000
    )Basic and diluted loss per common share
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.11
    )
    
    $
    (0.29
    )Basic and diluted weighted average common
shares outstanding
    
    
    60,344,165
    
    
    
    59,638,839
    
    
    
    60,189,352
    
    
    
    56,201,207
  4




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 Stockholders EquityAdditional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance, January 1, 2007
    
    
    61,966,020
    
    
    $
    620,000
    
    
    $
    322,330,000
    
    
    $
    (11,507,000
    )
    
    $
    (310,516,000
    )
    
    $
    927,000Issuance of common stock upon exercise
of stock options
    
    
    10,000
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000Common stock issued upon restructure of
promissory note payable
    
    
    700,000
    
    
    
    7,000
    
    
    
    1,386,000
    
    
    
    
    
    
    
    
    
    
    
    1,393,000Employee share-based compensation costs
    
    
    
    
    
    
    
    
    
    
    740,000
    
    
    
    
    
    
    
    
    
    
    
    740,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    89,000
    
    
    
    
    
    
    
    
    
    
    
    89,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,712,000
    )
    
    
    (6,712,000
    )Balance, September 30, 2007
    
    
    62,676,020
    
    
    $
    627,000
    
    
    $
    324,560,000
    
    
    $
    (11,507,000
    )
    
    $
    (317,228,000
    )
    
    $
    (3,548,000
    )
  5




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (6,712,000
    )
    
    $
    (16,111,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    1,246,000
    
    
    
    2,195,000Amortization of debt discount / premium, financing costs and other
    
    
    36,000
    
    
    
    797,000Value of additional warrants issued
    
    
    
    
    
    
    10,000Loss on extinguishment of debt
    
    
    178,000
    
    
    
    871,000Gain on derivative liabilities
    
    
    
    
    
    
    (4,050,000
    )Loss on impairment of operating lease
    
    
    100,000
    
    
    
    Employee share-based compensation costs
    
    
    740,000
    
    
    
    2,008,000Non-employee share-based compensation costs
    
    
    89,000
    
    
    
    1,000Customer deposit forfeiture
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Changes in deferred taxes
    
    
    (106,000
    )
    
    
    (96,000
    )Asset impairment charge
    
    
    
    
    
    
    125,000Common stock issued to employees and non-employee in lieu of cash
    
    
    
    
    
    
    187,000Gain on sale of product lines
    
    
    
    
    
    
    (11,000
    )Changes in operating assets and liabilities:Receivables
    
    
    (90,000
    )
    
    
    (488,000
    )Prepaid and other current assets
    
    
    661,000
    
    
    
    278,000Accounts payable
    
    
    246,000
    
    
    
    (73,000
    )Deferred revenue
    
    
    5,214,000
    
    
    
    1,073,000Accrued and other liabilities
    
    
    148,000
    
    
    
    (586,000
    )Net cash used by operating activities
    
    
    (250,000
    )
    
    
    (14,870,000
    )Investing activities:Purchases of property and equipment
    
    
    (769,000
    )
    
    
    (1,024,000
    )Restricted cash investments, net
    
    
    (1,665,000
    )
    
    
    5,100,000Proceeds from sale of product lines
    
    
    
    
    
    
    11,000Net cash provided (used) by investing activities
    
    
    (2,434,000
    )
    
    
    4,087,000Financing activities:Proceeds from exercise of stock options
    
    
    15,000
    
    
    
    Proceeds from private placement of common stock
    
    
    
    
    
    
    11,817,000Payment of expenses relating to private placement of common stock
    
    
    
    
    
    
    (836,000
    )Payment of convertible debt
    
    
    
    
    
    
    (5,000,000
    )Payment of premium on convertible debt
    
    
    
    
    
    
    (200,000
    )Payment of short-term notes payable, capital leases and other
    
    
    (229,000
    )
    
    
    (396,000
    )Net cash provided (used) by financing activities
    
    
    (214,000
    )
    
    
    5,385,000Decrease in cash and cash equivalents
    
    
    (2,898,000
    )
    
    
    (5,398,000
    )Cash and cash equivalents, beginning of period
    
    
    12,783,000
    
    
    
    20,240,000Cash and cash equivalents, end of period
    
    $
    9,885,000
    
    
    $
    14,842,000
  6




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##### Table of Contents



ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  3. Company Overview and Liquidity
  ®
  7




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##### Table of Contents




    
    As of September 30, 2007, total cash on hand was $11,585,000 (including $1,700,000 of
restricted cash);
    
    Cash receipts for the next twelve months are projected to be approximately
$32,700,000 based on current contracted billings and estimated contract renewals, prepay
amounts and estimated new business; and
    
    Operating spending including debt payments and capital asset purchases for the next
twelve months is projected to be approximately $35,300,000 based on the Companys
organization and order and deployment rates as of September 30, 2007.
    
    During the period from October 1, 2007 through November 12, 2007, the Company
received proceeds of approximately $738,000 in exchange for 285,000 shares of the
Companys common stock as a result of the exercise of stock options and warrants which
were outstanding as of September 30, 2007. The Company currently intends to prepay the
2008 installments ($600,000) of the sanofi-aventis promissory note from these proceeds.
   4. Revenue and Significant Customers
 Software
Revenue Recognition, Modification of SOP 97-2, Software Revenue Recognition, With respect
to Certain Transactions, Revenue Arrangements with Multiple Deliverables, Revenue Recognition in
Financial Statements,
 8




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##### Table of Contents



5. Segment Information
    9




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##### Table of Contents



Three Months Ended September 30, 2007
    
    
    Three Months Ended September 30, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    4,631,000
    
    
    $
    1,560,000
    
    
    $
    
    
    
    $
    6,191,000
    
    
    $
    3,585,000
    
    
    $
    1,125,000
    
    
    $
    
    
    
    $
    4,710,000Cost of revenues
    
    
    1,029,000
    
    
    
    1,633,000
    
    
    
    
    
    
    
    2,662,000
    
    
    
    1,297,000
    
    
    
    1,834,000
    
    
    
    
    
    
    
    3,131,000Gross margin (loss)
    
    
    3,602,000
    
    
    
    (73,000
    )
    
    
    
    
    
    
    3,529,000
    
    
    
    2,288,000
    
    
    
    (709,000
    )
    
    
    
    
    
    
    1,579,000Direct expenses
    
    
    2,487,000
    
    
    
    1,725,000
    
    
    
    
    
    
    
    4,212,000
    
    
    
    2,703,000
    
    
    
    2,452,000
    
    
    
    
    
    
    
    5,155,000Segment contribution (loss)
    
    
    1,115,000
    
    
    
    (1,798,000
    )
    
    
    
    
    
    
    (683,000
    )
    
    
    (415,000
    )
    
    
    (3,161,000
    )
    
    
    
    
    
    
    (3,576,000
    )Unallocated (expense)/incomeMarketing, general and
administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,344,000
    )
    
    
    (1,344,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,685,000
    )
    
    
    (1,685,000
    )Gain on sale of product line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    11,000Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,120,000
    
    
    
    1,120,000Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125,000
    )
    
    
    (125,000
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    143,000
    
    
    
    143,000
    
    
    
    
    
    
    
    
    
    
    
    229,000
    
    
    
    229,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (35,000
    )
    
    
    (35,000
    )
    
    
    
    
    
    
    
    
    
    
    (114,000
    )
    
    
    (114,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (1,236,000
    )
    
    
    (1,236,000
    )
    
    
    
    
    
    
    
    
    
    
    (564,000
    )
    
    
    (564,000
    )Income (loss) before income taxes
    
    $
    1,115,000
    
    
    $
    (1,798,000
    )
    
    $
    (1,236,000
    )
    
    $
    (1,919,000
    )
    
    $
    (415,000
    )
    
    $
    (3,161,000
    )
    
    $
    (564,000
    )
    
    $
    (4,140,000
    )
 Nine Months Ended September 30, 2007
    
    
    Nine Months Ended September 30, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    12,685,000
    
    
    $
    4,448,000
    
    
    $
    
    
    
    $
    17,133,000
    
    
    $
    10,287,000
    
    
    $
    2,527,000
    
    
    $
    
    
    
    $
    12,814,000Cost of revenues
    
    
    3,255,000
    
    
    
    4,907,000
    
    
    
    
    
    
    
    8,162,000
    
    
    
    4,082,000
    
    
    
    5,514,000
    
    
    
    
    
    
    
    9,596,000Gross margin (loss)
    
    
    9,430,000
    
    
    
    (459,000
    )
    
    
    
    
    
    
    8,971,000
    
    
    
    6,205,000
    
    
    
    (2,987,000
    )
    
    
    
    
    
    
    3,218,000Direct expenses
    
    
    7,897,000
    
    
    
    5,344,000
    
    
    
    
    
    
    
    13,241,000
    
    
    
    8,426,000
    
    
    
    7,920,000
    
    
    
    
    
    
    
    16,346,000Segment contribution (loss)
    
    
    1,533,000
    
    
    
    (5,803,000
    )
    
    
    
    
    
    
    (4,270,000
    )
    
    
    (2,221,000
    )
    
    
    (10,907,000
    )
    
    
    
    
    
    
    (13,128,000
    )Unallocated (expense)/incomeMarketing, general and
administrative expense
    
    
    
    
    
    
    
    
    
    
    (4,406,000
    )
    
    
    (4,406,000
    )
    
    
    
    
    
    
    
    
    
    
    (6,856,000
    )
    
    
    (6,856,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (178,000
    )
    
    
    
    
    
    
    
    
    
    
    (871,000
    )
    
    
    (871,000
    )Gain on sale of product line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    11,000Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,050,000
    
    
    
    4,050,000Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125,000
    )
    
    
    (125,000
    )Operating
lease impairment charge
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000,000Investment and other income
    
    
    
    
    
    
    
    
    
    
    437,000
    
    
    
    437,000
    
    
    
    
    
    
    
    
    
    
    
    740,000
    
    
    
    740,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (141,000
    )
    
    
    (141,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,009,000
    )
    
    
    (1,009,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (2,388,000
    )
    
    
    (2,388,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,060,000
    )
    
    
    (3,060,000
    )Income (loss) before income taxes
    
    $
    1,533,000
    
    
    $
    (5,803,000
    )
    
    $
    (2,388,000
    )
    
    $
    (6,658,000
    )
    
    $
    (2,221,000
    )
    
    $
    (10,907,000
    )
    
    $
    (3,060,000
    )
    
    $
    (16,188,000
    )
   September 30, 2007
    
    December 31, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    e-Prescribing
    
    Corporate
    
    Total
    
    Encryption
    
    e-Prescribing
    
    Corporate
    
    TotalTotal Assets
    
    $
    3,466,000
    
    
    $
    1,166,000
    
    
    $
    13,661,000
    
    
    $
    18,293,000
    
    
    $
    3,377,000
    
    
    $
    1,813,000
    
    
    $
    15,176,000
    
    
    $
    20,366,000
 10




---



##### Table of Contents



6. Stock Options and Stock-based Employee Compensation
  Three Months Ended
    
    
    Nine Months EndedSept 30, 2007
    
    
    Sept 30, 2007Cost of revenues
    
    $
    5,000
    
    
    $
    93,000Research and development expenses
    
    
    8,000
    
    
    
    71,000Selling, general and administrative expenses
    
    
    (76,000
    )
    
    
    665,000Stock-based compensation expense
    
    $
    (63,000
    )
    
    $
    829,000
   Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at June 30, 2007
    
    
    9,559,642
    
    
    $
    5.30Granted at market price
    
    
    51,404
    
    
    $
    1.86Granted above market price
    
    
    
    
    
    $
    Cancelled or expired
    
    
    (121,200
    )
    
    $
    2.56Exercised
    
    
    (10,000
    )
    
    $
    1.50Outstanding at Sept 30, 2007
    
    
    9,479,846
    
    
    $
    5.32
    
    
    
    5.85
    
    
    $
    860,000Options exercisable at Sept 30, 2007
    
    
    6,992,724
    
    
    $
    6.45
    
    
    
    5.08
    
    
    $
    223,000
  Common Stock Issued in Lieu of Cash
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Common stock issued to
employees for compensation in
lieu of cash
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    157,000Stock granted to third parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    187,000
 11




---



##### Table of Contents



7. Supplemental Cash Flow Information
  Nine Months Ended September 30,2007
    
    2006Cash paid for interest
    
    $
    66,000
    
    
    $
    263,000Cash (refunded) paid for income tax
    
    $
    133,000
    
    
    $
    (21,000
    )Noncash investing and financing activities:Issuance of common stock and warrants related to the restructure of the
prior promissory note payable
    
    $
    1,393,000
    
    
    $
    Issuance of a replacement promissory note payable
    
    $
    1,477,000
    
    
    $
    Accrued expenses relating to private placement of common stock (Note 13)
    
    $
    
    
    
    $
    72,000Valuation of beneficial conversion, net of subsequent reversal (Note 12)
    
    $
    
    
    
    $
    94,000Accrued expenses related to fixed asset purchases
    
    $
    102,000
    
    
    $
    127,000Assets sold to customers as part of their subscription service
    
    $
    
    
    
    $
    19,000Value of additional warrants issued (Note 12)
    
    $
    
    
    
    $
    130,000
 8. Restricted Cash
  9. Receivables, net
 September 30,
    
    
    December 31,2007
    
    
    2006Gross trade accounts receivable
    
    $
    4,316,000
    
    
    $
    4,523,000Allowance for returns and doubtful accounts
    
    
    (66,000
    )
    
    
    (71,000
    )Unpaid portion of deferred revenue
    
    
    (3,414,000
    )
    
    
    (3,706,000
    )Trade receivables, net
    
    
    836,000
    
    
    
    746,000Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Note receivables, net
    
    
    
    
    
    
    Total receivables, net
    
    $
    836,000
    
    
    $
    746,000
    12




---



##### Table of Contents



10. Prepaid and other current assets
 September 30,
    
    
    December 31,2007
    
    
    2006Inventory
    
    $
    257,000
    
    
    $
    767,000Deferred cost of sales charges
    
    
    336,000
    
    
    
    334,000Prepaid insurance, maintenance and other
    
    
    900,000
    
    
    
    1,025,000Tax related
    
    
    28,000
    
    
    
    52,000Prepaid and other current assets
    
    $
    1,521,000
    
    
    $
    2,178,000
 Inventory
 Deferred cost of sales charges
 Prepaid insurance, maintenance and other
 11. Customer Deposit
   12. Notes Payable
  Promissory
    
    
    
    
    
    
    Promissory
    
    
    Totalnote payable
    
    
    Short-Term
    
    
    note payable
    
    
    notessanofi-aventis
    
    
    note payable
    
    
    sanofi-aventis
    
    
    payableStated interest rate
    
    
    4.50
    %
    
    
    6.99
    %
    
    
    5.00
    %Effective interest rate
    
    
    11.00
    %
    
    
    6.99
    %
    
    
    9.09
    %Term
    
    Mar-07
    
    
    Nov-07
    
    
Jan-10December 31, 2006, net book value
    
    $
    2,661,000
    
    
    $
    255,000
    
    
    $
    
    
    
    $
    2,916,000Additional discount / warrants
    
    
    (139,000
    )
    
    
    
    
    
    
    (126,000
    )
    
    
    (265,000
    )
 13




---



##### Table of Contents



Promissory
    
    
    
    
    
    
    Promissory
    
    
    Totalnote payable
    
    
    Short-Term
    
    
    note payable
    
    
    notessanofi-aventis
    
    
    note payable
    
    
    sanofi-aventis
    
    
    payableExtinguishment of debt
    
    
    (2,700,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,700,000
    )Loss on extinguishment
    
    
    178,000
    
    
    
    
    
    
    
    
    
    
    
    178,000Additional debt / discount / amortization
    
    
    
    
    
    
    
    
    
    
    1,635,000
    
    
    
    1,635,000Payments made
    
    
    
    
    
    
    (229,000
    )
    
    
    
    
    
    
    (229,000
    )September 30, 2007, net book value
    
    $
    
    
    
    $
    26,000
    
    
    $
    1,509,000
    
    
    $
    1,535,000
 Promissory Note Payable
       14




---



##### Table of Contents



Debt Extinguishment Determination:Present value of new note payable
    
    $
    1,474,000Issuance of common stock (700,000 shares @ $1.81/share)
    
    
    1,267,000Black Scholes value of warrants issued
    
    
    126,000Paid fees & expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000Loss on extinguishment of debt
    
    
    (178,000
    )Original note value
    
    $
    2,700,000Recording of New Note:New note value
    
    $
    1,600,000Discount on note payable
    
    
    (126,000
    )Issuance of common stock (700,000 shares @ $0.01/share)
    
    
    7,000Additional paid in capital
    
    
    1,260,000Additional paid in warrants
    
    
    126,000Accrued expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000
 Short-term Notes Payable
  Convertible Promissory Notes Payable
  13. April 2006 Private Placement of Common Stock
     15




---



##### Table of Contents



.
  Gross proceeds
    
    $
    11,817,000Less:Fair value of warrants and liquidated damages to investors
    
    
    (6,024,000
    )Liquidated damages for common stock
    
    
    (77,000
    )Potential future payments to brokers
    
    
    (60,000
    )Warrants issued to underwriters
    
    
    (199,000
    )Cash issuance costs
    
    
    (908,000
    )Proceeds allocated to common stock
    
    $
    4,549,000
 Warrants issued to investors in the private placement and related liquidated damages
  Liquidated damages related to common stock
  Potential future payments to transaction underwriters
 16




---



##### Table of Contents



Warrants issued to underwriters
 Common stock
  (Gain)/
    
    
    SeptemberApril 5, 2006
    
    
    Loss on
    
    
    30, 2006Derivative Liability
    
    Fair Value
    
    
    Revaluation
    
    
    Fair ValueLiquidated damages related to common stock
    
    $
    77,000
    
    
    $
    (16,000
    )
    
    $
    61,000Warrants issued to investors and related liquidated damages
    
    
    6,024,000
    
    
    
    (4,038,000
    )
    
    
    1,986,000Potential future payments to transaction underwriters
    
    
    59,000
    
    
    
    4,000
    
    
    
    63,000Total
    
    $
    6,160,000
    
    
    $
    (4,050,000
    )
    
    $
    2,110,000
 Accounting for Registration
Payment Arrangements
 14. Loss on Impairment of Operating Lease
  15. Earnings Per Share and Potential Dilution
  September 30,2007
    
    2006Stock options
    
    
    9,479,846
    
    
    
    8,501,575Warrants issued in relation to debt and equity arrangements
    
    
    13,365,741
    
    
    
    12,082,755Shares issuable for conversion of convertible promissory notes payable
    
    
    
    
    
    
    658,878Total antidilutive securities excluded from EPS Calculation
    
    
    22,845,587
    
    
    
    21,243,208
 17




---



##### Table of Contents



16. Contingencies
       18




---



##### Table of Contents



17. Subsequent Event
 Stock Option and Warrant Exercises
  
 ITEM 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
     19




---



##### Table of Contents




    
    Rate of new subscriptions (termed new first year orders) for the Email Encryption
Service;
    
    Renewal rates for the Email Encryption Service;
    
    Additional payor sponsorship of the e-Prescribing service to the physician by new or
existing insurance payors;
    
    Successful adoption and usage of the e-Prescribing service by physicians;
    
    Retention of the users (physicians) of the e-Prescribing service as indicated by
subscription renewals;
    
    Future transaction fees (or related fees) associated with the use of the e-Prescribing
service; and
    
    Our ability to increase business volume with reasonable cost increases.
   Critical Accounting Policies and Estimates
  Property and Equipment, Long-Lived and Other Intangible Assets, Depreciation and Amortization
   20




---



##### Table of Contents



Deferred Tax Assets
 Revenue Recognition Software Revenue Recognition, Modification of SOP 97-2, Software Revenue
Recognition, With respect to Certain Transactions, Revenue Arrangements
with Multiple Deliverables, Revenue Recognition in Financial Statements,
 Deferred cost of sales charge
 Stock-based compensation Share-Based
Payment Accounting for Stock Issued to
Employees
 Results of Operations
 Third Quarter 2007 Summary of Operations
 Financial Statement
 s
    
    Revenue for the quarter ended September 30, 2007, was $6,191,000 compared with $4,710,000 for the same period in 2006.s
    
    Gross Margin for the quarter ended September 30, 2007, was $3,529,000 or 57% of revenues compared to $1,579,000 or 34%
of revenues for the comparable period in 2006.s
    
    Email Encryption  gross margin for this segment for the quarter ended September 30, 2007, was $3,602,000 or 78% of
revenues totaling $4,631,000 compared to $2,288,000 or 64% of revenues totaling $3,585,000 for the comparable period in
2006.s
    
    e-Prescribing  the gross margin loss incurred by this segment for the quarter ended September 30, 2007, was $73,000
or a negative 5% of revenues totaling $1,560,000 compared to a loss of $709,000 or a negative 63% of revenues totaling
$1,125,000 for the comparable period in 2006.
 21




---



##### Table of Contents



s
    
    Loss before income taxes for the quarter ended September 30, 2007, was $1,919,000 compared with a loss before income
taxes of $4,140,000 for the same period in 2006.s
    
    The Companys ending unrestricted cash balance at September 30, 2007, was $9,885,000.s
    
    Cash used by operations for the first nine months of 2007 was $250,000. Total cash and cash equivalent balances
(including unrestricted and restricted cash) decreased by $551,000 in the third quarter of 2007.
 Operations
 s
    
    The Company secured new first year orders in the quarter ended September 30, 2007, totaling $1,359,000 for its Email
Encryption services and achieved customer contract renewals of 101% on a contract value basis for Email Encryption
customers, as discussed below under Revenues  Email Encryption.s
    
    The Company deployed approximately 540 new e-Prescribing devices to physicians under sponsorship arrangements with
several insurance payor/sponsors.s
    
    The Company exceeded 1,765,000 electronic prescriptions transacted in the three months ended September 30, 2007,
through use of its e-Prescribing service.
 Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended, September 30,
    
    
    2007 vs. 2006
    
    
    Nine Months Ended, September 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Email Encryption
    
    $
    4,631,000
    
    
    $
    3,585,000
    
    
    $
    1,046,000
    
    
    
    29
    %
    
    $
    12,685,000
    
    
    $
    10,287,000
    
    
    $
    2,398,000
    
    
    
    23
    %e-Prescribing
    
    
    1,560,000
    
    
    
    1,125,000
    
    
    
    435,000
    
    
    
    39
    %
    
    
    4,448,000
    
    
    
    2,527,000
    
    
    
    1,921,000
    
    
    
    76
    %Total revenues
    
    $
    6,191,000
    
    
    $
    4,710,000
    
    
    $
    1,481,000
    
    
    
    31
    %
    
    $
    17,133,000
    
    
    $
    12,814,000
    
    
    $
    4,319,000
    
    
    
    34
    %
 Email Encryption 
  e-Prescribing 
  22




---



##### Table of Contents



Revenue Indicators  Backlog, Orders, and Deployments
 Revenue Outlook:
 Company-wide backlog 
   Email Encryption Orders 
  2007
    
    
    2006Three month period ending:March 31
    
    $
    1,352,000
    
    
    $
    1,011,000June 30
    
    
    1,397,000
    
    
    
    1,402,000September 30
    
    
    1,359,000
    
    
    
    1,234,000December 31
    
    
    
    
    
    
    1,089,000Total new first year orders
    
    $
    4,108,000
    
    
    $
    4,736,000
   23




---



##### Table of Contents



e-Prescribing 
      Cost of Revenues
  24




---



##### Table of Contents



3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended, September 30,
    
    
    2007 vs. 2006

    
    Nine Months Ended, September 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %

    
    2007
    
    
    2006
    
    
    $
    
    
    %Email Encryption
    
    $
    1,029,000
    
    
    $
    1,297,000
    
    
    $
    (268,000
    )
    
    
    (21
    %)
    
    $
    3,255,000
    
    
    $
    4,082,000
    
    
    $
    (827,000
    )
    
    
    (20
    %)e-Prescribing
    
    
    1,633,000
    
    
    
    1,834,000
    
    
    
    (201,000
    )
    
    
    (11
    %)
    
    
    4,907,000
    
    
    
    5,514,000
    
    
    
    (607,000
    )
    
    
    (11
    %)Total cost of revenues
    
    $
    2,662,000
    
    
    $
    3,131,000
    
    
    $
    (469,000
    )
    
    
    (15
    %)
    
    $
    8,162,000
    
    
    $
    9,596,000
    
    
    $
    (1,434,000
    )
    
    
    (15
    %)
   Email Encryption 
 e-Prescribing 
 Research and Development Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended, September 30,
    
    
    2007 vs. 2006

    
    Nine Months Ended, September 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Total Research and Development
    
    $
    1,320,000
    
    
    $
    1,630,000
    
    
    $
    (310,000
    )
    
    
    (19
    %)
    
    $
    3,962,000
    
    
    $
    4,851,000
    
    
    $
    (889,000
    )
    
    
    (18
    %)
  Selling, General and Administrative Expenses
  25




---



##### Table of Contents



3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended, September 30,
    
    
    2007 vs. 2006

    
    Nine Months Ended, September 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %

    
    2007
    
    
    2006
    
    
    $
    
    
    %Total selling, general and
administrative expenses
    
    $
    4,236,000
    
    
    $
    5,210,000
    
    
    $
    (974,000
    )
    
    
    (19
    %)
    
    $
    13,685,000
    
    
    $
    18,351,000
    
    
    $
    (4,666,000
    )
    
    
    (25
    %)
   Customer Deposit Forfeiture
  Gain on Sale of Product Line
  Asset Impairments
  Loss on impairment of operating lease
  Investment and Other Income
  Interest Expense
  26




---



##### Table of Contents



Stated
    
    
    FinancingInterest on
    
    
    Cost
    
    
    Warrants
    
    
    Discount
    
    
    Total InterestNotes
    
    
    Amortization
    
    
    Issued
    
    
    Amortization
    
    
    ExpensePromissory note payable (original note)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38,000
    
    
    $
    38,000Promissory note payable (new note)
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    80,000Short-term promissory note
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Other
    
    
    14,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000Total
    
    $
    67,000
    
    
    $
    
    
    
    $
    
    
    
    $
    74,000
    
    
    $
    141,000
  Stated
    
    
    FinancingInterest on
    
    
    Cost
    
    
    Warrants
    
    
    Discount
    
    
    Total InterestNotes
    
    
    Amortization
    
    
    Issued
    
    
    Amortization
    
    
    ExpenseConvertible promissory note payable
    
    $
    185,000
    
    
    $
    122,000
    
    
    $
    10,000
    
    
    $
    354,000
    
    
    $
    671,000Promissory note payable (original note)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,000
    
    
    
    321,000Short-term promissory note
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Capital leases
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Other
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Total notes payable
    
    $
    202,000
    
    
    $
    122,000
    
    
    $
    10,000
    
    
    $
    675,000
    
    
    $
    1,009,000
  Gain on Valuation of Derivative Liability
  Loss on extinguishment of debt
   Income Taxes
  27




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##### Table of Contents



Net Loss
  Liquidity and Capital Resources
 Overview
     Email
Encryption
 28




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##### Table of Contents



e-Prescribing
      Sources and Uses of Cash Summary
  29




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##### Table of Contents



Nine Months Ended September 30,2007
    
    
    2006
    
    
    VarianceOperating Cash Receipts
    
    $
    23,699,000
    
    
    $
    13,803,000
    
    
    $
    9,896,000
    
    
    
    72
    %Net Operating Cash Spending
    
    
    (23,949,000
    )
    
    
    (28,673,000
    )
    
    
    4,724,000
    
    
    
    16
    %Net Cash Used by Operating Activities
    
    $
    (250,000
    )
    
    $
    (14,870,000
    )
    
    $
    14,620,000
    
    
    
    98
    %
     Cash Sources
  
    
    contractual backlog;
    
    Email Encryption growth and retention;
    
    e-Prescribing growth and retention; and
    
    e-Prescribing transaction and performance-based fees.
 Backlog
 30




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##### Table of Contents



Email
Encryption growth and retention
 e-Prescribing
growth and retention
 e-Prescribing
transaction and performance-based fees
     31




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##### Table of Contents



Liquidity Summary
  
    
    As of September 30, 2007, total cash on hand was $11,585,000 (including $1,700,000 of
restricted cash);
    
    Cash receipts for the next twelve months are projected to be approximately
$32,700,000 based on current contracted billings and estimated contract renewals, prepay
amounts and estimated new business; and
    
    Operating spending including debt payments and capital asset purchases for the next
twelve months is projected to be approximately $35,300,000 based on the Companys
organization and order and deployment rates as of September 30, 2007.
    
    During the period from October 1, 2007 through November 12, 2007, the Company
received proceeds of approximately $738,000 in exchange for 285,000 shares of the
Companys common stock as a result of the exercise of stock options and warrants which
were outstanding as of September 30, 2007. The Company currently intends to prepay the
2008 installments ($600,000) of the sanofi-aventis promissory note
from these proceeds. There is no assurance that the Company will
continue to receive cash proceeds from stock option or warrant
exercises in the foreseeable future.
  Options and Warrants of ZixCorp Common Stock
  Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included in
    
    
    Total Value ofExercise Price Range
    
    Outstanding Shares
    
    
    Outstanding Shares
    
    
    Outstanding shares)
    
    
    Vested Shares$1.21 - $1.99
    
    
    8,961,325
    
    
    $
    13,838,847
    
    
    
    7,383,750
    
    
    $
    11,390,217$2.00 - $3.49
    
    
    5,213,615
    
    
    
    15,565,894
    
    
    
    4,590,674
    
    
    
    13,784,145$3.50 - $4.99
    
    
    3,592,294
    
    
    
    15,564,637
    
    
    
    3,343,189
    
    
    
    14,554,942$5.00 - $5.99
    
    
    1,651,448
    
    
    
    8,544,592
    
    
    
    1,651,448
    
    
    
    8,537,986$6.00 - $8.99
    
    
    1,022,715
    
    
    
    6,538,633
    
    
    
    985,215
    
    
    
    6,312,379$9.00 - $19.99
    
    
    1,266,495
    
    
    
    13,472,974
    
    
    
    1,266,495
    
    
    
    13,462,842$20.00 - $57.60
    
    
    1,137,695
    
    
    
    60,548,598
    
    
    
    1,137,695
    
    
    
    60,547,051Total
    
    
    22,845,587
    
    
    $
    134,074,175
    
    
    
    20,358,466
    
    
    $
    128,589,562
 32




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    1 Year
    
    2-3 Year
    
    > 3 YearsDebt (long-term and short-term)
    
    $
    1,737,000
    
    
    $
    484,000
    
    
    $
    1,253,000
    
    
    $
    Operating leases
    
    
    6,994,000
    
    
    
    1,212,000
    
    
    
    2,126,000
    
    
    
    3,656,000Other
    
    
    163,000
    
    
    
    163,000
    
    
    
    
    
    
    
    Total
    
    $
    8,894,000
    
    
    $
    1,859,000
    
    
    $
    3,379,000
    
    
    $
    3,656,000
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  34




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##### Table of Contents



ITEM 6. EXHIBITS
 a. Exhibits
  Exhibit No.
    
    Description of Exhibits3.1
    
    Restated Articles of Incorporation of Zix Corporation, as filed with the Texas Secretary of
State on November 10, 2005. Filed as Exhibit 3.1 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2005, and incorporated herein by reference.3.2
    
    Restated Bylaws of Zix Corporation, dated October 30, 2002. Filed as Exhibit 3.2 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002, and incorporated herein by reference.99.1
    
    Preliminary Approval Order, United States District Court, Northern District of Texas, Dallas
Division (filed August 16, 2007). Filed as Exhibit 99.1 to the Companys Current Report on
Form 8-K, filed August 21, 2007, and incorporated herein by reference.99.2
    
    Notice of Proposed Settlement of Derivative Litigation, Hearing Thereon, and Right to Appear.
Filed as Exhibit 99.2 to the Companys Current Report on Form 8-K, filed August 21, 2007,
and incorporated herein by reference.31.1*
    
    Certification of Richard D. Spurr, President and Chief Executive Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Barry W. Wilson, Chief Financial Officer and Treasurer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**
    
    Certification of Richard D. Spurr, President and Chief Executive Officer of the Company, and
Barry W. Wilson, Chief Financial Officer and Treasurer of the Company, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 35




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##### Table of Contents



SIGNATURES
   By:
    /s/ Barry W. WilsonBarry W. WilsonChief Financial Officer and Treasurer  Signature
    
    Title/s/ Richard D. Spurr
    
    Chairman, Chief Executive Officer, President and Director(Richard D. Spurr)
    
    (Principal
Executive Officer)/s/ Barry W. Wilson
    
    Chief Financial Officer and Treasurer(Barry W. Wilson)
    
    (Principal
Financial and Accounting Officer)/s/ Robert C. Hausmann
    
    Director(Robert C. Hausmann)/s/ Charles N. Kahn III
    
    Director(Charles N. Kahn III)/s/ James S. Marston
    
    Director(James S. Marston)/s/ Antonio R. Sanchez III
    
    Director(Antonio R. Sanchez III)/s/ Paul E. Schlosberg
    
    Director(Paul E. Schlosberg)
 36