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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 MARCH 31, 2000
[ ] 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 MAY 3, 2000
- -------------------------------------- ---------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE 16,553,363
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INDEX
PART I-FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS ------
Condensed Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 and for the
cumulative period from January 1, 1999 through March 31, 2000 4
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Net Loss for the three months ended March 31, 2000 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 and for the
cumulative period from January 1, 1999 through March 31, 2000 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,133 $ 6,598
Marketable securities 20,119 33,186
Due from sale of discontinued operations -- 581
Other current assets 6,686 3,030
---------- ----------
Total current assets 42,938 43,395
Property and equipment, net 20,645 21,006
Goodwill, net 1,816 2,122
---------- ----------
$ 65,399 $ 66,523
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,239 $ 2,481
Liabilities related to discontinued operations 1,253 1,148
---------- ----------
Total current liabilities 3,492 3,629
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 179 176
authorized; 17,903,596 issued, 15,611,696
outstanding in 2000 and 17,629,929 issued,
15,338,029 outstanding in 1999
Additional capital 110,422 104,244
Treasury stock, at cost (11,314) (11,314)
Accumulated other comprehensive income 3,968 --
Accumulated deficit (net of deficit accumulated during
the development stage of $45,488 at March 31, 2000 and
$34,352 at December 31, 1999) (41,348) (30,212)
---------- ----------
Total stockholders' equity 61,907 62,894
---------- ----------
$ 65,399 $ 66,523
========== ==========
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31 (From January 1, 1999
----------------------------- Through
2000 1999 March 31, 2000)
---------- ---------- ----------------------
Revenues $ 96 $ -- $ 195
Research and development expenses (2,211) (2,731) (25,759)
Operating costs and general corporate expenses (9,595) (775) (26,291)
Investment income 574 1,061 4,107
---------- ---------- ----------
Loss from continuing operations before income taxes (11,136) (2,445) (47,748)
Income tax benefit -- 30 807
---------- ---------- ----------
Loss from continuing operations (11,136) (2,415) (46,941)
Discontinued operations -- -- 1,453
---------- ---------- ----------
Net loss $ (11,136) $ (2,415) $ (45,488)
========== ========== ==========
Basic and diluted loss per common share $ (0.72) $ (0.16)
========== ==========
Weighted average shares outstanding 15,436 15,124
========== ==========
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE NET LOSS
(In thousands, except share data)
(Unaudited)
Accumulated
other Total
Common Stock Additional Treasury comprehensive Accumulated stockholders'
Shares Amount capital stock income deficit equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 17,629,929 $ 176 $ 104,244 $ (11,314) $ -- $ (30,212) $ 62,894
Exercise of stock options
for cash 273,667 3 1,908 -- -- -- 1,911
Stock option compensation -- -- 1,753 -- -- -- 1,753
Stock issuable from purchase of
Anacom Communications -- -- 2,521 -- -- 2,521
Other -- -- (4) -- -- -- (4)
Comprehensive net loss:
Net loss -- -- -- -- -- (11,136) (11,136)
Unrealized gain on
marketable securities -- -- -- -- 3,968 -- 3,968
----------
Comprehensive net loss -- -- -- -- -- -- (7,168)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2000 17,903,596 $ 179 $ 110,422 $ (11,314) $ 3,968 $ (41,348) $ 61,907
========== ========== ========== ========== ========== ========== ==========
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31 (From January 1, 1999
------------------------- Through
2000 1999 March 31, 2000)
--------- --------- ---------------------
Cash flows from operating activities:
Loss from continuing operations $ (11,136) $ (2,415) $ (46,941)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 2,222 15 5,698
Stock-based compensation 4,274 749 16,589
Changes in assets and liabilities, excluding divestiture of
businesses:
Other current assets 312 (27) (631)
Current liabilities (242) 252 (116)
--------- --------- ---------
Net cash used by continuing operations (4,570) (1,426) (25,401)
Net cash provided by discontinued operations 105 3,139 (1,750)
--------- --------- ---------
Net cash provided (used) by operating activities (4,465) 1,713 (27,151)
Cash flows from investing activities:
Purchases of property and equipment, net (1,555) (970) (24,720)
Purchases of marketable securities (2,933) (47,587) (122,083)
Sales and maturities of marketable securities 16,000 19,984 128,893
Purchase of Anacom Communications -- -- (2,500)
Investing activities of discontinued operations 581 -- 5,885
--------- --------- ---------
Net cash provided (used) by investing activities 12,093 (28,573) (14,525)
Cash flows from financing activities:
Proceeds from exercise of stock options 1,911 417 3,532
--------- --------- ---------
Net cash provided by financing activities 1,911 417 3,532
Effect of exchange rate changes on cash and cash equivalents (4) (7) (15)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 9,535 (26,450) (38,159)
Cash and cash equivalents, beginning of period 6,598 54,292 54,292
--------- --------- ---------
Cash and cash equivalents, end of period $ 16,133 $ 27,842 $ 16,133
========= ========= =========
See accompanying notes.
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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
1999 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, 1999 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 equity securities as explained in Note 2. The results of
operations for the three-month period ended March 31, 2000 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 classified as discontinued operations in the
accompanying financial statements.
Since January 1, 1999, the Company has been developing digital signature
and encryption technology and is planning a series of products that enhance
privacy, security and convenience over the Internet. To date, the Company has
not earned any revenues from these products. ZixMail(TM), which was commercially
released in March 2000, is a secure document delivery, private email and message
tracking service that enables Internet users worldwide to easily send and
receive encrypted and digitally signed communications without changing their
existing email systems or addresses. ZixCharge(TM), which has not been
commercially released, is a shopping portal and payment authorization system
that enables consumers to purchase goods and services over the Internet without
being required to provide personal and charge card information to Internet
merchants.
Successful development of a development stage enterprise, particularly
Internet related businesses, is costly and highly competitive. The Company's
growth depends on the timely development and market acceptance of new products.
A development stage enterprise involves risks and uncertainties and there are no
assurances that the Company will be successful in its efforts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
accompanying statements of operations and cash flows include cumulative totals
of the Company's results during the development stage.
The amount presented for basic and diluted loss per common share has been
computed based upon the weighted average number of common shares outstanding for
the period. The two presentations are equal in amounts because the assumed
exercise of common stock equivalents would be antidilutive, since a net loss was
reported for each period presented.
2. STOCKHOLDERS' EQUITY
Purchase of Anacom Communications
In October 1999, the Company purchased all of the outstanding shares of
Anacom Communications, Inc., a privately-held provider of Internet transaction
processing and real-time credit processing services to Internet merchants.
Consideration consisted of a cash payment of $2,500,000, primarily recorded as
goodwill, and common stock, valued at a minimum of $7,500,000, to be delivered
in two annual installments beginning October 2000, assuming continued employment
by the former owners. The minimum value of the common stock issuable pursuant to
the purchase agreement of $7,500,000 is treated as compensation for financial
accounting purposes and is being charged to operating costs and general
corporate expenses over two years with a corresponding increase in additional
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capital. Financial accounting rules require the minimum number of common shares
issuable be revalued on each subsequent reporting date until performance is
complete with a cumulative catch up adjustment recognized for any changes in
their intrinsic value in excess of $7,500,000. The Company's common stock price
has increased since the purchase date to $72.81 per share as of March 31, 2000.
Accordingly, the Company's results of operations for the three months ended
March 31, 2000 include a non-cash charge of $2,521,000 for amortization of the
current market value of the minimum number of common shares issuable. The
Company's results of operations for the remainder of 2000 and 2001 could be
materially impacted as a result of future increases or decreases in the price of
the Company's common stock; however, there would be no impact on the Company's
cash flows or total stockholder's equity. The number of shares to be delivered,
set at a minimum of 190,000 shares, may be increased should the market value of
the common stock be less than $39.48 at the time of delivery. However, if
additional consideration is required, the Company may elect to pay cash rather
than issue additional shares of common stock.
Third Party Stock Options
The Company has agreements with three service providers whereby the Company
granted options to purchase up to 200,000 shares of the Company's common stock
at a weighted average exercise price of $38.78. These options vest over periods
up to 42 months and have expiration dates ranging from four to eight years. On
the dates of grant, these options had an estimated fair value aggregating
$6,703,000 using the Black-Scholes option valuation model. Financial accounting
rules require these options to 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 since the dates of grant to $72.81 per share at March 31, 2000,
thereby increasing the estimated fair value of these options to $11,479,000 as
of March 31, 2000. The revalued amount for these options is being amortized over
the respective vesting periods. Accordingly, the Company's results of operations
for the three months ended March 31, 2000 include a non-cash charge of
$1,288,000 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 these stock options 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.
Reallocated Options to Employees and Director
In 2000, David P. Cook, the Company's chairman, president and chief
executive officer, reallocated options to acquire 404,627 shares of the
Company's common stock to certain of the Company's employees and a director.
These options have a five year term, vest from April 2001 to April 2003 and have
exercise prices ranging from $9.38 to $13.75 per share as compared to Mr. Cook's
exercise price of $7.00 per share. Non-cash compensation expense of $12,323,000
($448,000 for the three months ended March 31, 2000) will be recognized over the
vesting periods, representing the intrinsic value of the reallocated options
based upon the difference between the fair market value of the Company's common
stock on the dates the options were reallocated and the option exercise prices.
Lante Common Stock
In November 1999, the Company received a fully vested option to acquire up
to 400,000 shares of Lante Corporation's ("Lante") common stock at $7.00 per
share in accordance with a certain cashless exercise formula. The option was
valued at $1,872,000 on the date of grant, using the Black-Scholes option
valuation model, and was included in other current assets at December 31, 1999.
In 2000, the Company exercised its option to acquire shares of Lante common
stock. The Company and Lante are disputing the net number of Lante shares the
Company is to receive from this cashless exercise and have initiated arbitration
proceedings. Lante is disputing 128,532 of the 320,802 shares that the Company
believes it is entitled to receive. The fair market value of the Company's
undisputed shares of Lante common stock at March 31, 2000 is $5,840,000 ($30.38
per share) and is included in other current assets. An unrealized gain on these
shares of $3,968,000 is included in other comprehensive income as a component of
stockholders' equity; however, there are certain restrictions regarding the sale
or transfer of these shares. The closing price of Lante's common stock on May 3,
2000 was $23.94.
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3. LITIGATION
On December 30, 1999, the Company and ZixCharge.com, Inc. ("ZixCharge"), a
wholly-owned subsidiary of the Company, filed a lawsuit against Visa U.S.A.,
Inc. and Visa International Service Association (collectively "Visa") in the
192nd Judicial District Court of Dallas County, Texas. The suit alleges that
Visa undertook a series of actions that interfered with the Company's business
relationships and disparaged the Company, its products, its management and its
stockholders. The suit alleges that Visa intentionally set out to destroy the
Company's ability to market its ZixCharge shopping portal and payment
authorization system, which competed against the MasterCard and Visa-owned
Secure Electronic Transaction system. The suit seeks monetary damages and such
other relief as the court deems appropriate.
The Company is involved in legal proceedings that arise in the ordinary
course of business. In the opinion of management, the outcome of pending legal
proceedings will not have a material adverse affect on the Company's
consolidated financial statements.
4. SUBSEQUENT EVENT
On May 1, 2000, the Company sold, in a private placement, certain newly
issued equity securities to investors led by H. Wayne Huizenga. The Company is
to receive a total of $44,000,000 in three equal installments on May 1, 2000,
June 30, 2000 and September 1, 2000. The Company issued to the investor group
916,667 shares of its common stock valued at $48.00 per share, ten-year warrants
to purchase 916,667 shares of the Company's common stock at $57.60 per share and
four-year warrants to purchase 1,222,223 shares of the Company's common stock at
$12.00 per share. The four-year warrants were reallocated from David P. Cook and
will not be exercisable until May 1, 2001. Additionally, H. Wayne Huizenga has
been appointed vice chairman of the Company's board of directors.
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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 1998 and 1997 and have been classified as discontinued operations in the
condensed consolidated financial statements.
Since January 1999, the Company has been developing digital signature and
encryption technology and is planning a series of products that enhance privacy,
security and convenience over the Internet. To date, the Company has not earned
any revenues from these products. ZixMail(TM), which was commercially released
in March 2000, is a secure document delivery, private email and message tracking
service that enables Internet users worldwide to easily send and receive
encrypted and digitally signed communications without changing their existing
email systems or addresses. ZixCharge(TM), which has not been commercially
released, is a shopping portal and payment authorization system that enables
consumers to purchase goods and services over the Internet without being
required to provide personal and charge card information to Internet merchants.
Additionally, in October 1999, the Company purchased all of the outstanding
shares of Anacom Communications, Inc. ("Anacom"), a provider of Internet
transaction processing and real-time credit processing services to Internet
merchants.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Revenues
Revenues in the first quarter of 2000 are attributable to Anacom. The
Company is not currently charging for use of its ZixMail product, commercially
released in March 2000. The Company has not yet determined when it will begin
charging for the use of ZixMail. It is contemplated that it could begin charging
as early as July 1, 2000, or as late as January 1, 2001.
Research and development expenses
Research and development expenses decreased from $2,731,000 in the first
quarter of 1999 to $2,211,000 for the corresponding period in 2000. Expenses in
1999 include a non-cash charge of $746,000 for amortization of the fair value of
stock options granted to Lante Corporation, a third party Internet services
company that assisted the Company with its development efforts. In 2000,
compensation costs increased and third party consulting costs decreased from the
prior year resulting from the hiring of additional technical personnel to
support the development of the Company's various Internet products.
Operating costs and general corporate expenses
Operating costs and general corporate expenses increased from $775,000 in
the first quarter of 1999 to $9,595,000 for the same period in 2000. The
increase is primarily due to expenses for marketing, advertising, expanded lease
facilities, depreciation of property and equipment and personnel relating to
establishing the Company's Internet related businesses. In addition, the first
quarter of 2000 includes $4,274,000 of non-cash charges for stock-based
compensation resulting from the issuance of certain equity securities. See Note
2 to the Condensed Consolidated Financial Statements for a discussion regarding
the accounting for these equity securities and their potential impact on the
Company's future operating results.
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Investment income
Investment income decreased from $1,061,000 in the first quarter of 1999 to
$574,000 for the same period in 2000 primarily due to the decrease in invested
cash and marketable securities as a result of expenditures related to
establishing the Company's new Internet related businesses.
Income tax benefit
The income tax benefit on the loss from continuing operations in 2000 and
1999 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.
Loss from continuing operations
As a result of the foregoing, the Company experienced losses from
continuing operations of $2,415,000 in 1999 and $11,136,000 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's principal source of liquidity is its net
working capital position of $39,446,000, including cash and marketable
securities of $36,252,000. The Company plans to continue to invest its excess
cash in short-term, high-grade U.S. corporate debt securities or U.S. government
and agency securities. The Company's first quarter 2000 loss from continuing
operations included significant non-cash expenses. Net cash used by continuing
operations in the first quarter of 2000 was $4,570,000, primarily representing
development and start-up costs relating to the Company's Internet related
businesses. Additionally, in the first quarter of 2000, the Company invested
$1,555,000 in property and equipment for computer equipment associated with its
secure data center. The Company's near-term liquidity will be negatively
impacted as the Company continues its development stage activities, particularly
with regards to discretionary marketing and advertising costs; however, the
Company expects additional investment in property and equipment for 2000 to be
no more than $3,000,000.
On May 1, 2000, the Company sold, in a private placement, certain newly
issued equity securities to investors led by H. Wayne Huizenga. The Company is
to receive a total of $44,000,000 in three equal installments on May 1, 2000,
June 30, 2000 and September 1, 2000. The Company issued to the investor group
916,667 shares of its common stock valued at $48.00 per share, ten-year warrants
to purchase 916,667 shares of the Company's common stock at $57.60 per share and
four-year warrants to purchase 1,222,223 shares of the Company's common stock at
$12.00 per share. The four-year warrants were reallocated from David P. Cook,
the Company's chairman, president and chief executive officer and will not be
exercisable until May 1, 2001.
The Company believes its existing net working capital position along with
funds provided by the Huizenga investors will be sufficient to meet near-term
anticipated needs. The Company currently has no existing borrowings or credit
facilities. Acquisitions, if any, would be financed by the most attractive
alternative available, which could be cash or the issuance of debt or equity
securities.
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. The
Company has not experienced any problems with respect to the Year 2000 Issue.
Software systems developed for use in connection with the Company's new Internet
related businesses are designed and tested for Year 2000 compliance.
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RISKS AND UNCERTAINTIES
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this Quarterly
Report on Form 10-Q contain statements that constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. The words "expect," "estimate," "anticipate," "predict,"
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. These risks and uncertainties include, but are not limited to, the
following:
LIMITED OPERATING HISTORY
The Company has only a limited operating history in the Internet arena on
which to base an evaluation of its business and prospects. The Company's
prospects must be considered in light of the risks and uncertainties encountered
by other companies in the early stages of development. These risks and
uncertainties are often worse for companies in new and rapidly evolving markets,
particularly Internet-related businesses.
PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE
The ZixMail and ZixCharge products are targeted at the new and rapidly
evolving market for secure Internet communications and e-commerce. Although the
competitive environment in this market has yet to fully develop, the Company
anticipates that it will be intensely competitive, subject to rapid change and
significantly affected by new products and service introductions and other
market activities of industry participants. The Company's success will depend on
many factors, including, but not limited to, the following:
o The Company must be able to successfully and timely develop its
products. The commercial version of ZixMail was released in March
2000. ZixCharge has not been commercially released, however.
o The Company must be able to achieve broad market acceptance for its
products. There is currently no known Internet secure document
delivery and private messaging system, such as ZixMail, that currently
operates at the scale that the Company would require, at its current
expenditure levels and proposed pricing, to become profitable from its
ZixMail operations. To reach a larger ZixMail customer base than it
can reach through its direct sales and marketing efforts, the Company
is pursuing strategic or other similar collaborative relationships
with third parties. There is no assurance that the Company will be
successful in entering into these relationships, or that if entered
into, they will significantly assist the Company in obtaining large
numbers of ZixMail users. Moreover, in any event, there is no
assurance that enough paying users of ZixMail will be ultimately
obtained to enable the Company to operate profitably.
o Since the commercial version of ZixCharge has not yet been released,
there are currently no consumers or merchants using ZixCharge. The
success of ZixCharge will depend on the Company's ability to obtain,
as users, large numbers of consumers who desire to shop privately over
the Internet and its ability to obtain large numbers of merchants that
will permit them to do so using ZixCharge. To obtain access to large
numbers of consumers, the Company is pursuing strategic or similar
collaborative relationships with financial institutions or other
companies that have existing business relationships with large numbers
of people. There is no assurance that the Company will be successful
in entering into these relationships, or that if entered into, they
will significantly assist the Company in obtaining large numbers of
ZixCharge users. Moreover, in any event, there is no assurance that
the Company will be successful in obtaining a critical mass of
consumers as ZixCharge users or obtaining a critical mass of merchants
that will allow consumers to use ZixCharge. If the Company is unable
to obtain the necessary critical mass, the Company may decide not to
commercially introduce ZixCharge.
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REVENUES
The Company currently has no significant revenues.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is a new entrant into the rapidly evolving secure Internet
communications and e-commerce markets. 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 products
obsolete or noncompetitive. The Company's failure to develop and introduce new
products and services successfully on a timely basis and to achieve market
acceptance for those products and services could have a significant adverse
effect on its business, financial condition and results of operations. The
Company may decide, at any time, to delay, discontinue or not initiate the
development and release of any one or more of its planned or contemplated
products.
SECURITY INTERRUPTIONS AND SECURITY BREACHES
The Company's business depends on the uninterrupted operation of its secure
data center. The Company must protect this center from loss, damage or
interruption caused by fire, power loss, telecommunications failure or other
events beyond its control. Any damage or failure that causes interruptions in
the Company's secure data center operations could materially harm its business,
financial condition, and results of operations.
In addition, the Company's ability to issue digitally-signed certified
time-stamps and public encryption codes in connection with its ZixMail service
depends on the efficient operation of the Internet connections between customers
and the Company's data center. The Company depends on Internet service providers
efficiently operating these connections. These providers have experienced
periodic operational problems or outages in the past. Any of these problems or
outages could adversely affect customer satisfaction.
Furthermore, it is critical that the Company's facilities and
infrastructure remain secure and the market perceive them to be secure. Despite
the Company's security measures, its infrastructure may be vulnerable to
physical break-ins, computer viruses, attacks by hackers or similar disruptive
problems. It is possible that the Company may have to use additional resources
to address these problems. The Company's planned ZixCharge business will retain
certain confidential customer information in its secure data center. Any
physical or electronic break-ins or other security breaches or compromises of
this information could expose the Company to significant liability, and
customers could be reluctant to use its Internet-related products.
KEY PERSONNEL
The Company depends on the performance of its senior management team and
other key employees, particularly highly skilled technical and sales and
marketing personnel. The Company's success also depends on its ability to
attract, retain and motivate these individuals. There is intense competition for
these personnel, and the Company faces a tight employment market in general.
There are no agreements with any of the Company's personnel that prevent them
from leaving ZixIt at any time. In addition, the Company does not maintain key
person life insurance for any of its personnel. The loss of the services of any
of the Company's key employees or its failure to attract, retain and motivate
key employees could harm its business.
UNKNOWN DEFECTS OR ERRORS IN ZIXMAIL AND ZIXCHARGE
ZixMail and ZixCharge could contain undetected defects or errors. Despite
our testing, defects or errors may occur, which could result in loss of or delay
in revenues, failure to achieve market acceptance, diversion of development
resources, injury to the Company's reputation, litigation claims, increased
insurance costs or increased service and warranty costs. Any of these could harm
the Company's business.
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PUBLIC KEY CRYPTOGRAPHY TECHNOLOGY
The Company's ZixMail product employs, and future products may employ,
public key cryptography technology. With public key cryptography technology, a
user has a public key and a private key, which are used to encrypt and decrypt
messages. The security afforded by this technology depends, in large measure, on
the integrity of a user's private key, which is dependent, in part, on the
application of certain mathematical principles. The integrity of a user's
private key is predicated on the assumption that it is difficult to
mathematically derive a user's private key from the user's related public key.
Should methods be developed that make it easier to derive a user's private key,
the security of encryption products using public key cryptography technology
would be reduced or eliminated and such products could become unmarketable. This
could require the Company to make significant changes to its products, which
could damage its reputation and otherwise hurt its business. Moreover, there
have been public reports of the successful decryption of certain encrypted
messages. This, or related, publicity could affect public perception of the
security afforded by public key cryptography technology, which could harm the
Company's business.
GOVERNMENT REGULATION
Exports of software products using encryption technology are generally
restricted by the U.S. government. Although the Company has obtained U.S.
government approval to export its ZixMail product to almost all countries in the
world, the list of countries to which ZixMail cannot be exported could be
revised in the future. Furthermore, some foreign countries impose restrictions
on the use of software products using encryption technology, such as ZixMail.
Failure to obtain the required governmental approvals would preclude the Company
from selling ZixMail in international markets.
LACK OF STANDARDS
There is no assurance that ZixMail or ZixCharge will become a generally
accepted standard or that they will be compatible with any standards that become
generally accepted.
INTELLECTUAL PROPERTY RIGHTS
The Company may have to defend its intellectual property rights or defend
against claims that the Company is infringing the rights of others. Intellectual
property litigation and controversies are disruptive and expensive. Infringement
claims could require the Company to develop non-infringing products or enter
into royalty or licensing arrangements. Royalty or licensing arrangements, if
required, may not be obtainable on terms acceptable to the Company. The
Company's business could be significantly harmed if it is not able to develop or
license the necessary technology. Furthermore, it is possible that others may
independently develop substantially equivalent intellectual property, thus
enabling them to effectively compete against the Company.
SALES OF BUSINESSES
The Company disposed of its remaining operating businesses in 1998 and
1997. In selling those businesses, the Company agreed to provide customary
indemnification 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.
STOCK PRICE
The market price of the Company's common stock has fluctuated significantly
in the past and is likely to fluctuate in the future. Also, the market prices of
securities of other Internet-related companies have been highly volatile.
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OTHER UNANTICIPATED RISKS AND UNCERTAINTIES
There are no assurances that the Company will be successful or that it will
not encounter other, and even unanticipated, risks. The Company discusses other
operating, financial or legal risks or uncertainties in its other periodic SEC
filings. The Company is, of course, also subject to general economic risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 2000, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 1999 Annual Report to
Shareholders on Form 10-K.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 4 to Condensed Consolidated Financial Statements regarding the
Company's issuance of common stock and warrants to purchase additional shares of
common stock to H. Wayne Huizenga and his affiliates and assigns (the
"Investors"). The transaction is exempt from registration pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D thereunder because the
shares of common stock and warrants were issued in a transaction not involving a
public offering under Rule 506 of Regulation D. These securities were sold in a
single transaction to the Investors who all qualify as "accredited investors"
under Regulation D. All the terms and conditions of Rules 502 and 503 were
satisfied.
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, together with all
amendments thereto (filed as Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31,
1998, and incorporated herein by reference). Articles
of Amendment to Articles of Incorporation, dated
September 14, 1999 (filed as Exhibit 3.2 to the
Company's Form 10-Q for the quarterly period ended
September 30, 1999, and incorporated herein by
reference). Articles of Amendment to Articles of
Incorporation, dated October 12, 1999 (filed as
Exhibit 3.3 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999, and
incorporated herein by reference).
*3.2 Restated Bylaws of ZixIt Corporation, dated September
14, 1999.
*10.1 Amendment No. 2 to Stock Option Agreement, dated May
2, 2000, between David P. Cook and ZixIt Corporation.
*27.1 Financial Data Schedule.
b. The Registrant filed Forms 8-K with the Securities and Exchange
Commission on April 12, 2000 and May 3, 2000 to report the Common
Stock and Warrant Purchase Agreement, dated April 11, 2000 with
H. Wayne Huizenga and his affiliates and assigns and the May 1,
2000 closing of the transaction contemplated thereby,
respectively.
*Filed herewith.
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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: May 15, 2000 By: /s/Steve M. York
--------------------------------------
Steve M. York
Senior Vice President, Chief Financial
Officer, and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation, together with all amendments
thereto (filed as Exhibit 3.1 to the Company's Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference). Articles of Amendment to Articles of
Incorporation, dated September 14, 1999 (filed as Exhibit
3.2 to the Company's Form 10-Q for the quarterly period
ended September 30, 1999, and incorporated herein by
reference). Articles of Amendment to Articles of
Incorporation, dated October 12, 1999 (filed as Exhibit 3.3
to the Company's Form 10-Q for the quarterly period ended
September 30, 1999, and incorporated herein by reference).
*3.2 Restated Bylaws of ZixIt Corporation, dated September 14,
1999.
*10.1 Amendment No. 2 to Stock Option Agreement, dated May 2,
2000, between David P. Cook and ZixIt Corporation.
*27.1 Financial Data Schedule.
*Filed herewith.