SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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
ZIXIT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2216818
(State of Incorporation) (I.R.S. Employer
Identification Number)
One Galleria Tower
13355 Noel Road
Suite 1555
Dallas, Texas 75240-6604
(Address of Principal Executive Offices)
(972) 702-7055
(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 X No
---- ----
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 October 31, 1999
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 15,308,929
INDEX
PART I-FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II-OTHER INFORMATION
Item 2. Changes in Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
2
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,007 $ 54,292
Short-term marketable securities 32,701 26,929
Due from sale of discontinued operations -- 5,304
Other current assets 775 215
--------- ---------
Total current assets 39,483 86,740
Long-term marketable securities 17,000 --
Property and equipment, net 19,059 158
--------- ---------
$ 75,542 $ 86,898
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,098 $ 1,574
Liabilities related to discontinued operations 1,360 3,875
--------- ---------
Total current liabilities 8,458 5,449
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 175,000,000 shares 176 174
authorized; 17,600,829 issued, 15,308,929
outstanding in 1999 and 17,384,437 issued, 15,092,537
outstanding in 1998
Additional capital 100,177 88,449
Treasury stock, at cost (11,314) (11,314)
Retained earnings (deficit) (net of deficit accumulated during
the development stage of $26,095 in 1999) (21,955) 4,140
--------- ---------
Total stockholders' equity 67,084 81,449
--------- ---------
$ 75,542 $ 86,898
========= =========
See accompanying notes.
3
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Research and development expenses:
Non-employee stock option compensation $ 1,418 $ -- $ (6,387) $ --
Other (6,530) -- (12,790) --
------- ------ ------- ------
(5,112) -- (19,177) --
Operating costs and general corporate expenses (7,310) (523) (10,585) (3,350)
Investment income 837 582 2,874 1,154
------- ------ ------- ------
Income (loss) from continuing operations before income taxes (11,585) 59 (26,888) (2,196)
Income tax (provision) benefit 65 (54) 185 645
------- ------ ------- ------
Income (loss) from continuing operations (11,520) 5 (26,703) (1,551)
Discontinued operations:
Income from discontinued operations, net of
income taxes -- 1,262 -- 4,965
Gain (loss) on sale of discontinued operations 210 -- 608 (1,561)
------- ------ ------- ------
210 1,262 608 3,404
------- ------ ------- ------
Net income (loss) $ (11,310) $ 1,267 $ (26,095) $ 1,853
======= ====== ======= ======
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.75) $ -- $ (1.75) $ (0.10)
Discontinued operations 0.01 0.08 0.04 0.21
------- ------ ------- ------
Net income (loss) $ (0.74) $ 0.08 $ (1.71) $ 0.11
======= ====== ======= ======
Weighted average shares outstanding 15,282 14,903 15,219 16,134
======= ====== ======= ======
See accompanying notes.
4
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30
------------------
1999 1998
---- ----
Cash flows from operating activities:
Loss from continuing operations $ (26,703) $ (1,551)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 1,446 10
Non-employee stock option compensation 10,202 --
Employee stock option compensation 275 516
Changes in assets and liabilities, excluding divestiture of businesses:
Other current assets (560) (21)
Current liabilities 2,324 321
-------- -------
Net cash used by continuing operations (13,016) (725)
Net cash provided (used) by discontinued operations (1,907) 3,857
-------- -------
Net cash provided (used) by operating activities (14,923) 3,132
Cash flows from investing activities:
Purchases of property and equipment, net (17,147) (100)
Purchases of marketable securities (119,015) (16,053)
Sales and maturities of marketable securities 96,243 1,010
Investing activities of discontinued operations:
Proceeds from sales of businesses, net of cash sold 5,304 23,483
Purchases of property and equipment, net and other -- (2,438)
-------- -------
Net cash provided (used) by investing activities (34,615) 5,902
Cash flows from financing activities:
Proceeds from exercise of stock options 1,264 389
-------- -------
Net cash provided by financing activities 1,264 389
Effect of exchange rate changes on cash and cash equivalents (11) 22
-------- -------
Increase (decrease) in cash and cash equivalents (48,285) 9,445
Cash and cash equivalents, beginning of period 54,292 12,583
-------- -------
Cash and cash equivalents, end of period $ 6,007 $ 22,028
======== =======
See accompanying notes.
5
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements, which should be read in conjunction
with the audited consolidated financial statements included in the Company's
1998 Annual Report to Shareholders on Form 10-K, are unaudited but have been
prepared in the ordinary course of business for the purpose of providing
information with respect to the interim periods. The Condensed Consolidated
Balance Sheet at December 31, 1998 was derived from the audited Consolidated
Balance Sheet at that date which is not presented herein. Management of the
Company believes that all adjustments necessary for a fair presentation for such
periods have been included and are of a normal recurring nature, except the
accounting for the fair value of stock options granted to non-employees as
explained in Note 3. The results of operations for the nine-month period ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year.
During 1998, the Company sold all of its operating businesses and,
accordingly, the assets and liabilities, operating results and cash flows of
these businesses have been reclassified as discontinued operations in the
accompanying financial statements. The results of the discontinued operations
do not include any interest expense or allocation of corporate expenses.
Basic and diluted earnings per common share are both computed based on the
weighted average number of shares of common stock outstanding. The assumed
exercise of outstanding stock options would be antidilutive for all periods
presented.
2. New Business
The Company has no revenue producing businesses. In 1999, the Company has
been developing a digital signature and encryption technology and is planning a
series of products that use this technology. Two products being actively
developed are ZixMail(TM) , a secure Internet messaging system, and
ZixCharge(TM), an Internet transaction authorization system. Successful growth
of a start-up enterprise, like the Company, is costly. Moreover, the Internet
arena is highly competitive. The Company's internal growth depends, in large
measure, on the timely development and market acceptance of its new products,
and its growth involves risks and uncertainties. There are no assurances that
the Company will be successful in its current business endeavors. See Notes 3
and 4, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
3. Non-Employee Stock Options
Director Stock Option Plan
In January 1999, certain non-employee directors were granted
immediately vested options to purchase, in the aggregate, approximately 150,000
shares of the Company's common stock under a plan that was approved by the
Company's shareholders on September 14, 1999. The options have an exercise price
of $10.65 per share, which was 120% of the closing price of the common stock on
the date of grant. In accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," the Company recorded a non-cash
general corporate expense of $3,335,000 in the third quarter of 1999
representing the excess of the closing price of the common stock on September
14, 1999 over the exercise price.
New Business Initiatives
The Company entered into an agreement in February 1999 with Lante
Corporation ("Lante"), a third party software development firm, to assist the
Company in developing software for its new Internet-related businesses. In
exchange for the services provided by Lante, the Company pays cash for work
performed at
6
discounted rates and has issued options to purchase 500,000 shares of the
Company's common stock to Lante at an exercise price of $7.62 per share, the
closing price of the Company's common stock on the date of the agreement. The
options vest over three years and expire at the end of ten years. On the date of
grant, these options had an estimated fair value of $2,865,000 or $5.73 per
share, using the Black-Scholes option valuation model. Accounting for these
options require that they be revalued on each subsequent reporting date until
performance is complete with a cumulative catch up adjustment recognized for any
changes in their fair value. The Company's common stock price has increased from
$7.62 per share at the date of grant to $29.63 per share at September 30, 1999,
thereby increasing the estimated fair value of these options to $13,525,000 or
$27.05 per share as of September 30, 1999. The revalued amount for these options
is being amortized over the three year vesting period; accordingly, the
Company's results of operations for the three months and nine months ended
September 30, 1999 include a non-cash credit of $1,418,000 (resulting from a
lower common stock price at the end of the third quarter as compared to the
$55.94 common stock price at the end of the second quarter) and a non-cash
charge of $6,387,000, respectively, for amortization of the fair value of these
options. The Company's future results of operations could be materially impacted
by a change in valuation of the stock options issued to Lante as a result of
future increases or decreases in the price of the Company's common stock.
However, the required accounting treatment has no impact on the Company's cash
flows or total stockholders' equity.
4. Subsequent Event
In October 1999, the Company purchased all of the outstanding shares of
Anacom Communications, Inc. ("Anacom"), a privately-held, Dallas-based provider
of Internet transaction processing and real-time credit card processing services
to Internet merchants. Consideration consists of $2,500,000 in cash paid at
closing and common stock, valued at a minimum of $7,500,000, to be delivered in
two annual allotments. The number of shares to be delivered, set at a minimum
of approximately 190,000 shares, may be increased depending on the market value
of the common stock at the time of delivery. The final value of the transaction
for financial accounting purposes will reflect the value of the common stock
when delivered. The purchase price is expected to be amortized to income over
two years. The historical results of operations of Anacom are not significant
compared to the Company's results of operations.
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Historically, the Company operated in one industry segment, the provision
of systems and solutions for the intelligent transportation, electronic security
and other markets through the design, manufacturing, installation and support of
hardware and software products utilizing the Company's wireless data and
security technologies. The businesses comprising this industry segment were sold
during 1997 and 1998 and have been reclassified as discontinued operations in
the consolidated financial statements.
In 1999, the Company has been developing a digital signature and encryption
technology (the "ZixIt (TM) technology") and is planning a series of products
that use this technology. Products being actively developed are: ZixMail (TM), a
secure Internet messaging system, and ZixCharge (TM), an Internet transaction
authorization system. ZixMail, which is expected to be released to the public
soon, will enable Internet users to send and receive encrypted and digitally
signed email communications without changing their existing email addresses. The
ZixMail software uses 1024-bit public key and Triple-DES encryption and can be
exported throughout the world except to certain prohibited countries and
territories. ZixCharge is designed to allow consumers to purchase items over the
Internet without divulging personal information to Web merchants.
Successful growth of a start-up enterprise, like the Company, is costly.
Moreover, the Internet arena is highly competitive. The Company's prospects in
the near-term depend on the timely development and market acceptance of its new
products. The Company's future growth involves risks and uncertainties, and
there are no assurances that the Company will be successful in its current
business endeavors.
Results of Operations
Continuing Operations
Research and development expenses
The Company first incurred development expenses for its current
business endeavors in the first quarter of 1999. Non-employee stock option
compensation consists of a non-cash credit of $1,418,000 and a non-cash charge
of $6,387,000 for the three months and nine months ended September 30, 1999,
respectively, for amortization of the fair value of stock options granted to a
third party software development firm that is assisting the Company with its
development efforts. See Note 3 to the Condensed Consolidated Financial
Statements for additional discussion regarding non-employee stock options. Other
research and development expenses of $6,530,000 and $12,790,000 for the three
months and nine months ended September 30, 1999, respectively, primarily consist
of expenditures to third parties for development of software for the Company's
ZixIt technology and related ZixMail and ZixCharge systems.
Operating costs and general corporate expenses
Operating costs and general corporate expenses for the three months and
nine months ended September 30, 1999 increased $6,787,000 and $7,235,000 from
the prior year periods, respectively, primarily due to expenditures for
marketing, expanded lease facilities, personnel and start-up operating costs
relating to establishing the Company's Internet-related businesses. Also
contributing to the increase was a non-recurring, non-cash expense of
$3,335,000, recognized by the Company in 1999's third quarter, relating to stock
options granted in January 1999 to certain of the Company's outside directors
under a plan that was approved by the shareholders in September 1999.
8
Investment income
Investment income for the three months and nine months ended September
30, 1999 increased from $582,000 to $837,000 and increased from $1,154,000 to
$2,874,000, respectively. The increase for both periods is primarily due to the
increase in invested cash and marketable securities resulting from the sale of
the Company's businesses during 1998.
Income tax (provision) benefit
The income tax benefit on the loss from continuing operations of
$65,000 and $185,000 for the three months and nine months ended September 30,
1999 and the income tax provision of $54,000 and the income tax benefit of
$645,000 for the comparable periods in 1998, respectively, is different from the
U.S. statutory rate of 34%, primarily due to unbenefitted U.S. losses. The
Company fully reserves its deferred tax assets due to the uncertainty of future
taxable income from the Company's new business initiatives.
Income (loss) from continuing operations
As a result of the foregoing, the Company experienced losses from
continuing operations of $11,520,000 and $26,703,000 for the three months and
nine months ended September 30, 1999 as compared to income of $5,000 and a loss
of $1,551,000 for the same periods in 1998.
Discontinued Operations
The Company sold its remaining operating businesses in 1998 and,
accordingly, their net operating income of $1,262,000 and $4,965,000 for the
three months and nine months ended September 30, 1998, respectively, has been
reclassified as discontinued operations. Discontinued operations in 1998 also
included the net loss from the sales of the Company's Transportation Systems
Group and Cotag International. The Company recorded a gain of $210,000 and
$608,000 for the three months and nine months ended September 30, 1999,
respectively, primarily due to a reduction in estimated future costs for various
indemnification issues associated with the disposal of these businesses.
Liquidity and Capital Resources
At September 30, 1999, the Company's principal source of liquidity is its
cash investments and marketable securities totaling $55,708,000. The Company
plans to continue to invest its excess cash in high-grade U.S. corporate debt
securities or U.S. government and agency securities.
The Company's new business initiative to create Internet related businesses
requires significant investment. The Company's purchase of Anacom
Communications, Inc. in October 1999 included a cash payment of $2,500,000. In
addition, the Company currently expects to invest $9,000,000 to $12,000,000
during the fourth quarter of 1999 on ZixCharge and ZixMail for software
development, marketing, expanded lease facilities, communications, computers and
related equipment to expand its computing center and related personnel and
start-up operating costs. Management believes the Company's existing cash
position will be sufficient to meet near-term anticipated needs. The Company
has no existing borrowings or credit facilities. Acquisitions, if any, would be
financed by the most attractive alternative available, which could be the
utilization of cash or the issuance of debt or equity securities.
Non-Employee Stock Options
See Note 3 to the Condensed Consolidated Financial Statements regarding the
accounting for stock options granted to non-employees and their potential impact
on the Company's future operating results.
9
Impact of the Year 2000
The Year 2000 Issue is primarily the result of computer programs being
written using two digits rather than four to define the applicable year. There
are no material Year 2000 compliance requirements confronting the Company since
it has no existing operating businesses. The Company's current financial and
administrative systems are fully compliant. Accordingly, the Company has no
ongoing remediation plans with respect to its current systems.
Software systems developed for use in connection with the Company's new
Internet related businesses will be designed and tested for Year 2000
compliance. The Company continues to assess the impact, if any, the Year 2000
Issue will have on its key vendors and development partners before the inception
of a relationship. If the Company's assessments of the impact of the Year 2000
Issue prove to be incorrect, the Company's new Internet related businesses may
be materially affected.
Risks and Uncertainties
The Company has no revenue producing businesses. In 1999, the Company has
been developing the ZixIt technology and is planning a series of products that
use this technology. The Company's future success is subject to risks and
uncertainties, including, but not limited to, the following:
Product Development and Market Acceptance
. There are no assurances that the Company will be able to successfully
and timely develop its planned products, that it will be able to
compete effectively against similar or alternative businesses, that
it will gain market acceptance, that it will not be made obsolete by
further technological development, that it will be able to provide or
attract the necessary capital, or that it will not encounter other,
and even unanticipated, risks.
. Use of the Internet by consumers, while growing, is still at an early
stage of development, and market acceptance of the Company's planned
products is subject to a high level of uncertainty.
. The Company may decide, at any time, to delay or discontinue the
development and release of any one or more of its planned products.
Competition and Technological Change
The Company will be competing with larger companies that have access to
greater capital, research and development, marketing, distribution and other
resources than the Company. In addition, the Internet arena is characterized by
extensive research efforts and rapid product development and technological
change that could render the Company's planned products obsolete or
noncompetitive.
Intellectual Property Rights
The Company relies, in part, on patents, trade secrets and proprietary
technology to remain competitive. It may be necessary to defend these rights or
to defend against claims that the Company is infringing the rights of others.
Intellectual property litigation and controversies are disruptive and expensive.
Lack of Standards
There are currently no generally accepted standards for secure Internet
messaging systems or Internet transaction authorization systems. There is no
assurance that any of the Company's planned products will become a generally
accepted standard or that any of them will be compatible with any standards that
become generally accepted.
10
Sales of Businesses
The Company disposed of its operating businesses in 1998 and 1997. In
connection with those dispositions, the Company agreed to provide customary
indemnifications to the purchasers of those businesses for breaches of
representations and warranties, covenants and other specified matters. Although
the Company believes that it has adequately provided for future costs associated
with these indemnification obligations, indemnifiable claims could exceed the
Company's estimates.
Other Uncertainties.
Other operating, financial or legal risks or uncertainties are discussed
in this Form 10-Q in specific contexts and in the Company's other periodic SEC
filings. The Company is, of course, also subject to general economic risks,
dependence on key personnel and other risks and uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 1998 Annual Report to
Shareholders on Form 10-K.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
See Note 4 to Condensed Consolidated Financial Statements regarding the
Company's acquisition of Anacom Communications, Inc. ("Anacom"). The
transaction is exempt from registration pursuant to section 4(2) of the
Securities Act of 1933 and Regulation D thereunder since the shares of common
stock, valued at a minimum of $7,500,000, are to be delivered to the two owners
of Anacom, who qualify as "accredited investors" under Regulation D.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on September 14, 1999.
At this meeting, the shareholders elected as directors of the Company, David P.
Cook, Michael E. Keane, James S. Marston, Jack L. Martin, Antonio R. Sanchez,
Jr., Dr. Ben G. Streetman and Mark A. Tebbe. The tabulation of votes with
respect to the election of directors is as follows:
Nominee Shares For Shares Withheld
------- ---------- ---------------
David P. Cook 14,620,052 211,144
Michael E. Keane 14,606,295 224,901
James S. Marston 14,627,095 204,101
Jack L. Martin 14,604,145 227,051
Antonio R. Sanchez, Jr. 14,618,150 213,046
Dr. Ben G. Streetman 14,566,045 265,151
Mark A. Tebbe 14,614,200 216,996
11
The shareholders voted to amend the Company's Articles of Incorporation to
change the Company's name from CustomTracks Corporation to ZixIt Corporation.
The tabulation of the votes with respect to the Company's name change is as
follows:
For 14,687,759
Against 112,801
Abstain 30,286
Non-Vote 350
The shareholders voted to amend the Company's Articles of Incorporation to
increase the number of authorized shares of common stock, par value $0.01, from
30,000,000 to 175,000,000 shares. The tabulation of the votes with respect to
the change in the number of authorized shares of common stock is as follows:
For 13,845,891
Against 937,426
Abstain 47,429
Non-Vote 450
The shareholders voted to adopt the 1999 Directors' Stock Option Plan. The
tabulation of votes with respect to adopting the plan is as follows:
For 13,830,121
Against 757,055
Abstain 91,132
Non-Vote 152,888
ITEM 5. OTHER INFORMATION
See Note 4 to Condensed Consolidated Financial Statements regarding the
Company's acquisition of Anacom Communications, Inc.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following is a list of exhibits filed as part of this
Quarterly Report on Form 10-Q.
Description of Exhibits
-----------------------
* 3.1 Articles of Incorporation of Amtech Corporation, dated
January 28, 1988.
* 3.2 Articles of Amendment to the Articles of Incorporation
of CustomTracks Corporation, dated September 14, 1999.
* 3.3 Articles of Amendment to the Articles of Incorporation
of ZixIt Corporation, dated October 12, 1999.
* 10.1 ZixIt Corporation 1990 Stock Option Plan
(Amended and Restated as of September 1999).
* 10.2 ZixIt Corporation 1992 Stock Option Plan
(Amended and Restated as of September 1999).
* 10.3 ZixIt Corporation 1995 Long-Term Incentive Plan
(Amended and Restated as of September 1999).
* 10.4 ZixIt Corporation 1999 Directors' Stock Option Plan.
* 27.1 Financial Data Schedule.
b. The Registrant filed Form 8-K with the Securities and Exchange
Commission on October 13, 1999 to report the October 1, 1999
purchase of Anacom Communications, Inc.
*Filed herewith.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ZIXIT CORPORATION
(Registrant)
Date: November 15, 1999 By: /s/ Steve M. York
--------------------------------------
Steve M. York
Senior Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
14