ZIX CORPORATION

CHARTER OF THE AUDIT COMMITTEE

OF THE BOARD OF DIRECTORS

 

 

 

I.

PURPOSE.

      The Audit Committee (the “Committee”) shall discharge the responsibilities of the Board of Directors (the “Board”) by:

 

 

 

      A. Reviewing and inquiring into the conduct and integrity of the Company’s financial reporting process;

 

 

 

      B. Reviewing and inquiring into the performance of the Company’s systems of internal accounting, financial controls and audit function;

 

 

 

      C. Reviewing and inquiring into the performance, qualifications, compensation, engagement and independence of the Company’s independent auditors, their conduct of the annual audit of the Company’s financial statements, and their engagement for any other services;

 

 

 

      D. Preparing the audit committee report required to be included in the Company’s annual proxy statement; and

 

 

 

      E. Overseeing the Company’s legal and regulatory compliance, the Company’s code of conduct and ethics and any related party transactions.

 

 

 

II.

STRUCTURE AND OPERATIONS.

 

 

 

 

      A. Size. The Committee shall be appointed for a one-year term at the annual organization meeting of the Board and be comprised of at least three members of the Board, which number shall be determined by the Board and consistent with the Company’s bylaws.

 

 

 

      B. Appointment of Members. The Board shall appoint the members of the Committee from qualified members of the Board. Each member of the Committee will be “independent” in accordance with, and the members will possess any additional qualifications required by, NASDAQ, the Securities Act of 1934 and the rules and regulations of the Securities and Exchange Commission (the “Commission”). Each member shall meet the financial literacy requirements of NASDAQ at the time of such member’s appointment. At least one member of the Committee shall meet the requirements of an “audit committee financial expert” as such term is defined under applicable Commission rules.

 

 

 

      C. Removal. Members shall continue to be members until their successors are elected and qualified or until their earlier resignation or removal. Any member may be removed by the Board, with or without cause, at any time.

 

 

 

      D. Chair. Unless a Chair is elected by the full Board in accordance with the Company’s bylaws, the members of the Committee shall designate a Chair by majority vote of the full Committee membership. The Chair will chair all regular sessions of the Committee and set the agendas for Committee meetings. If a Chair is not designated or is not present at any meeting, the members of the Committee may designate a chairman for such meeting by majority vote of the Committee.

 

 

 

      E. Delegation. The Committee shall be entitled to delegate certain of its responsibilities, where appropriate, to the Chair or to one or more other members of the Committee, subject to policies and/or procedures adopted by the Committee, which shall be consistent with applicable legal and regulatory requirements.

 

 

 

      F. Funding. The Company shall provide adequate resources to support the Committee’s activities, including (i) compensation of the outside auditor, (ii) compensation of the Committee’s counsel,

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consultants and other advisors and (iii) ordinary administrative expenses that are necessary or appropriate in carrying out its duties.

 

 

 

III.

MEETINGS.

 

 

 

 

      A. Meetings. The Committee shall meet at least four times annually, or more frequently as circumstances dictate. The Committee shall maintain minutes or other records of the meetings and activities of the Committee. The Committee shall meet periodically with management and with the outside auditor in separate executive sessions to discuss any matters that the Committee believes should be discussed privately.

 

 

 

      B. Attendance of Non-Members. The Committee may invite to its meetings any director, any manager of the Company and any other persons it deems appropriate in order to carry out its responsibilities. The Committee may also exclude from its meetings any persons it deems appropriate in order to carry out its responsibilities.

 

 

 

IV.

AUTHORITY, RESPONSIBILITIES AND DUTIES.

      The following functions shall be within the power of the Committee in carrying out its purposes outlined in Section I of this Charter. These functions should serve as a guide with the understanding that the Committee may carry out additional functions and adopt additional or different policies and procedures as may be appropriate in light of changing business, legislative, regulatory, legal or other conditions. The Committee shall also have such further powers as may be delegated to it by the Board from time to time related to the purposes of the Committee outlined in Section I of this Charter.

      The Committee’s role is one of oversight and it recognizes that the Company’s management is responsible for preparing the Company’s financial statements and that the outside auditors are responsible for auditing those financial statements. Additionally, the Committee recognizes that financial management as well as the outside auditors, have more time, knowledge and more detailed information about the Company than do Committee members. Consequently, in carrying out its oversight responsibilities, the Committee is not providing any expert or special assurance as to the Company’s financial statements or any professional certification as to the outside auditor’s work.

      The Committee, in fulfilling its responsibilities, is empowered to study or investigate any matter of interest or concern that the Committee deems appropriate and shall have independent authority to retain outside counsel or other experts for this purpose.

     A. Supervise the Independent Audit.

      1. The Committee shall have the direct responsibility for the appointment, compensation, retention and oversight of the work of the outside auditor, including, where appropriate, the dismissal of the outside auditor. The outside auditor shall report directly to the Committee, and the Committee’s responsibility includes the resolution of disagreements between management and the outside auditor regarding financial reporting.

      2. The Committee shall review and approve the scope of the annual audit, and pre-approve any audit-related services provided by the Company’s independent auditors. All non-audit services permitted pursuant to law to be provided by the auditor must also be considered and pre-approved by the Committee, except in the limited circumstances permitted by Rule 2-01(c)(7)(i) of SEC Regulation S-X. The Committee may delegate the authority to grant pre-approvals to one or more members of the Committee, whose decisions must be presented to the full Committee at its scheduled meetings.

      3. The Committee shall review a formal written statement from the outside auditor delineating all relationships between the outside auditor and the Company, consistent with Independence Standards Board Standard No. 1. The Committee shall actively engage in a dialogue with the outside auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the outside auditor and take appropriate action in response to the outside auditor’s report to satisfy itself of the auditor’s independence. The Committee shall also (i) consider whether, in the interest of assuring continuing

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independence of the outside auditor, the Company should regularly rotate its outside auditor and (ii) set clear hiring policies for employees or former employees of the outside auditors.

      4. The Committee shall consider and review with management, the Chief Financial Officer or Controller and the outside auditor: (i) significant findings during the year, including the status of previous audit recommendations; (ii) any audit problems or difficulties encountered in the course of audit work including any restrictions on the scope of activities or access to required information; (iii) any changes required in the planned scope of the audit plan; (iv) the audit budget and staffing; and (v) the coordination of audit efforts in order to monitor completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.

     B. Oversee Internal Audit, Internal Controls and Risk Management.

      1. The Committee shall consider and review with the outside auditors and management: (i) the adequacy of the Company’s disclosure controls and procedures and internal controls; (ii) all significant deficiencies in the design or operation of the Company’s internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data; (iii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and (iv) the related findings and recommendations of the outside auditors together with management’s responses.

      2. The Committee shall inquire of management, the outside auditor, and the Chief Financial Officer or Controller about significant risks or exposures and assess the steps management has taken to minimize such risks. The Committee shall discuss with management, the outside auditor, and the Chief Financial Officer or Controller and oversee the Company’s underlying policies with respect to risk assessment and risk management.

      3. The Committee shall establish and maintain procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by Company employees of concerns regarding questionable accounting or auditing matters.

      4. The Committee shall review and concur in the appointment, replacement, reassignment, or dismissal of the Chief Financial Officer or Controller.

     C. Oversee Financial Reporting.

      1. The Committee shall review and discuss with management and the outside auditor the accounting policies that may be viewed as critical, and review and discuss any significant changes in the accounting policies of the Company and any accounting and financial reporting proposals that may have a significant impact on the Company’s financial reports.

      2. The Committee shall review and discuss with the independent auditor the matters required to be discussed with the independent auditor by: (i) Statement of Auditing Standards No. 90, including whether management’s choices of accounting principles are conservative, moderate, or aggressive from the perspective of income, asset, and liability recognition, and whether those principles are common practices or are minority practices, (ii) Statement of Auditing Standards No. 61, including the auditor’s responsibility under generally accepted auditing standards, the significant accounting policies used by the Company, accounting estimates used by the Company and the process used by management in formulating them, any consultation with other accountants and any major issues discussed with management prior to its retention, and (iii) Statement of Auditing Standards No. 100, including the review of the interim financial information of the Company and any material modifications that need to be made to the interim financial information for it to conform with GAAP.

      3. The Committee shall review and discuss with management and the outside auditor any material financial or non-financial arrangements of the Company which do not appear on the financial statements of the Company.

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      4. The Committee shall review with the independent auditor (i) any accounting adjustments that were noted or proposed by the auditors but were “passed” (as immaterial or otherwise), (ii) any communications between the audit team and the audit firm’s national office respecting auditing or accounting issues presented by the engagement and (iii) any “management” or “internal control” letter issued, or proposed to be issued, by the independent auditors to the Company.

      5. The Committee shall review the Company’s financial statements, including (i) prior to public release, reviewing with management and the independent auditor the Company’s annual and quarterly financial statements to be filed with the Commission, including (A) the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and (B) any certifications regarding the financial statements or the Company’s internal accounting and financial controls and procedures and disclosure controls or procedures filed with the Commission by the Company’s senior executive and financial officers; (ii) with respect to the independent auditor’s annual audit report and certification, before release of the annual audited financial statements, meeting separately with the independent auditor without any management member present and discussing the adequacy of the Company’s system of internal accounting and financial controls and the appropriateness of the accounting principles used in and the judgments made in the preparation of the Company’s audited financial statements and the quality of the Company’s financial reports; (iii) making a recommendation to the Board regarding the inclusion of the audited annual financial statements in the Company’s Annual Report on Form 10-K to be filed with the Commission; and (iv) prior to submission to any governmental authority of any financial statements of the Company that differ from the financial statements filed by the Company with the Commission, reviewing such financial statements and any report, certification or opinion thereon provided by the independent auditor.

      6. The Committee shall, at least annually, obtain and review a report by the outside auditor describing: (i) the firm’s internal quality-control procedures; (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, regarding one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (iii) all relationships between the outside auditor and the Company (to be set out in the formal written statement described above).

      7. The Committee shall inquire as to the outside auditor’s view of the accounting treatment related to significant new transactions or other significant matters or events not in the ordinary course of business.

     D. Oversee Legal and Ethical Compliance.

      1. The Committee shall review periodically with the General Counsel (i) legal and regulatory matters that may have a material impact on the Company’s financial statements and (ii) the scope and effectiveness of compliance policies and programs.

      2. The Committee shall review periodically with senior management the provisions of the Company’s Code of Conduct (including the Company’s policies and procedures with regard to trading by Company personnel in securities of the Company and use in trading of proprietary or confidential information) as adopted by the Board, including any waivers provided under such Code since the last annual review. The Board must approve any waivers for directors or executive officers and report such approval to the Committee.

     E. Related Party Transactions.

      1. The Committee shall review and address conflicts of interest of directors and executive officers.

      2. The Committee shall review, discuss with management and the outside auditor and approve any transactions or courses of dealing with related parties (e.g., including significant shareholders of the Company, directors, corporate officers or other members of senior management or their family members) that are significant in size or involve terms or other aspects that differ from those that would likely be negotiated with independent parties.

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     F. Reporting.

      1. The Committee shall oversee the preparation and approve all reports required by the Committee, including the report for inclusion in the Company’s annual proxy statement stating whether or not the Committee (i) has reviewed and discussed the audited financial statements with management; (ii) has discussed with the outside auditors the matters required to be discussed by Statement of Auditing Standards Nos. 61 and 90; (iii) has received the written disclosure and letter from the outside accountants (delineating all relationships they have with the Company) and has discussed with them their independence; and (iv) based on the review and discussions referred to above, the members of the Committee recommended to the Board that the audited financials be included in the Company’s Annual Report on Form 10-K for filing with the Commission.

      2. The Committee shall report its findings and recommendations regularly to the Board, including any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the outside auditors or the performance of the internal audit function, if established.

 

 

 

V.

ANNUAL PERFORMANCE EVALUATION.

      The Committee shall perform a review and evaluation, at least annually, of the performance of the Committee, including but not limited to reviewing the compliance of the Committee with this Charter. In conducting its evaluation, the Committee may address all matters that it considers relevant to its performance, including but not limited to (a) the adequacy, appropriateness and quality of the information and recommendations presented by the Committee to the Board, (b) the manner in which they were discussed or debated or (c) whether the number and length of meetings of the Committee were adequate for the Committee to complete its work in a thorough and thoughtful manner. In addition, the Committee shall review and reassess, at least annually, the adequacy of this Charter and recommend to the Board any improvements to this Charter that the Committee considers necessary or desirable. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.

 

 

 

VI.

GENERAL.

      Notwithstanding any other provision of this Charter to the contrary, no provision of this Charter will, except to the extent required by applicable law, rule or regulation, be construed to create any duty, liability or obligation on the part of the Committee or any of its members or create any third party beneficiaries.