1
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 JUNE 30, 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)
2711 NORTH HASKELL AVENUE
SUITE 2850, LB 36
DALLAS, TEXAS 75204-2911
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 515-7300
(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 JULY 31, 2000
- -------------------------------------- -----------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE 16,569,363
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INDEX
PART I-FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS ------
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999 and for the
cumulative period from January 1, 1999 through
June 30, 2000 4
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Net Loss for the six months ended June 30, 2000 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 and for the
cumulative period from January 1, 1999 through June 30, 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 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
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3
ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 29,205 $ 6,598
Marketable securities 23,238 33,186
Due from sale of discontinued operations -- 581
Other current assets 7,291 3,030
--------- ---------
Total current assets 59,734 43,395
Property and equipment, net 21,866 21,006
Goodwill, net 1,509 2,122
--------- ---------
$ 83,109 $ 66,523
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,086 $ 2,481
Liabilities related to discontinued operations 1,093 1,148
--------- ---------
Total current liabilities 3,179 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
authorized; 18,846,263 issued, 16,554,363
outstanding in 2000 and 17,629,929 issued,
15,338,029 outstanding in 1999 188 176
Additional capital 177,264 114,740
Notes receivable for shares sold (16,270) --
Unearned stock-based compensation (21,192) (10,496)
Treasury stock, at cost (11,314) (11,314)
Accumulated other comprehensive income 2,058 --
Accumulated deficit (net of deficit accumulated during
the development stage of $54,944 at June 30, 2000 and
$34,352 at December 31, 1999) (50,804) (30,212)
--------- ---------
Total stockholders' equity 79,930 62,894
--------- ---------
$ 83,109 $ 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 Six Months Development Stage
Ended June 30 Ended June 30 (From January 1, 1999
-------------------- -------------------- Through
2000 1999 2000 1999 June 30, 2000)
-------- -------- -------- -------- ---------------------
Revenues $ 92 $ -- $ 188 $ -- $ 287
Research and development expenses (2,205) (11,334) (4,416) (14,065) (27,964)
Operating costs and general corporate expenses (8,287) (2,500) (17,882) (3,275) (34,578)
Investment income 636 976 1,210 2,037 4,743
-------- -------- -------- -------- --------
Loss from continuing operations before income taxes (9,764) (12,858) (20,900) (15,303) (57,512)
Income tax benefit -- 90 -- 120 807
-------- -------- -------- -------- --------
Loss from continuing operations (9,764) (12,768) (20,900) (15,183) (56,705)
Discontinued operations 308 398 308 398 1,761
-------- -------- -------- -------- --------
Net loss $ (9,456) $(12,370) $(20,592) $(14,785) $(54,944)
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.60) $ (0.84) $ (1.32) $ (1.00)
Discontinued operations 0.02 0.03 0.02 0.03
-------- -------- -------- --------
Net loss $ (0.58) $ (0.81) $ (1.30) $ (0.97)
======== ======== ======== ========
Weighted average shares outstanding 16,227 15,249 15,832 15,187
======== ======== ======== ========
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)
Unearned
Notes stock-
receivable based
Common Stock Additional for shares compen-
Shares Amount capital sold sation
---------- -------- ------------ ---------- ------------
Balance, December 31, 1999 17,629,929 $ 176 $ 114,740 $ -- $ (10,496)
Stock issued in private
placement, net of
issuance costs 916,667 9 43,795 (16,270) --
Exercise of stock options
for cash 299,667 3 2,041 -- --
Unearned employee
stock-based
compensation -- -- 12,323 -- (12,323)
Unearned stock-
based compensation
for service providers -- -- 3,118 -- (3,118)
Stock issuable from
purchase of Anacom
Communications -- -- 1,251 -- (1,251)
Amortization of
unearned stock-
based compensation -- -- -- -- 5,996
Other -- -- (4) -- --
Comprehensive net loss:
Net loss -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- --
Comprehensive net loss -- -- -- -- --
---------- -------- ------------ ---------- ------------
Balance, June 30, 2000 18,846,263 $ 188 $ 177,264 $ (16,270) $ (21,192)
========== ======== ============ ========== ============
Accumulated
other Total
Treasury comprehensive Accumulated stockholders'
stock income deficit equity
-------- ------------- ----------- ------------
Balance, December 31, 1999 $(11,314) $ -- $ (30,212) $ 62,894
Stock issued in private
placement, net of
issuance costs -- -- -- 27,534
Exercise of stock options
for cash -- -- -- 2,044
Unearned employee
stock-based
compensation -- -- -- --
Unearned stock-
based compensation
for service providers -- -- -- --
Stock issuable from
purchase of Anacom
Communications -- -- -- --
Amortization of
unearned stock-
based compensation -- -- -- 5,996
Other -- -- -- (4)
Comprehensive net loss:
Net loss -- -- (20,592) (20,592)
Unrealized gain on
marketable securities -- 2,058 -- 2,058
------------
Comprehensive net loss -- -- -- (18,534)
-------- ------------- ----------- ------------
Balance, June 30, 2000 $(11,314) $ 2,058 $ (50,804) $ 79,930
======== ============= =========== ============
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Cumulative During
Six Months Development Stage
Ended June 30 (From January 1, 1999
--------------------------- Through
2000 1999 June 30, 2000)
------------ ------------ ---------------------
Cash flows from operating activities:
Loss from continuing operations $ (20,900) $ (15,183) $ (56,705)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 4,627 351 8,103
Stock-based compensation 5,996 8,137 18,311
Changes in assets and liabilities, excluding divestiture
of businesses:
Other current assets (2,203) (412) (3,146)
Current liabilities (530) 212 (404)
----------- ----------- -------------
Net cash used by continuing operations (13,010) (6,895) (33,841)
Net cash provided (used) by discontinued operations 253 (2,017) (1,602)
----------- ----------- -------------
Net cash used by operating activities (12,757) (8,912) (35,443)
Cash flows from investing activities:
Purchases of property and equipment, net (4,739) (10,123) (27,904)
Purchases of marketable securities (9,052) (88,340) (128,202)
Sales and maturities of marketable securities 19,000 64,610 131,893
Purchase of Anacom Communications -- -- (2,500)
Investing activities of discontinued operations 581 5,304 5,885
----------- ----------- -------------
Net cash provided (used) by investing activities 5,790 (28,549) (20,828)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of issuance
costs 27,534 -- 27,534
Proceeds from exercise of stock options 2,044 950 3,665
----------- ----------- -------------
Net cash provided by financing activities 29,578 950 31,199
Effect of exchange rate changes on cash and cash equivalents (4) (11) (15)
----------- ----------- -------------
Increase (decrease) in cash and cash equivalents 22,607 (36,522) (25,087)
Cash and cash equivalents, beginning of period 6,598 54,292 54,292
----------- ----------- -------------
Cash and cash equivalents, end of period $ 29,205 $ 17,770 $ 29,205
=========== =========== =============
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. The results of operations for the six-month period ended June 30, 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 1999, the Company has been developing a digital signature
and encryption technology and is developing a series of products and services
that enhance privacy, security and convenience over the Internet. To date, the
Company has not earned any revenues from these products and services.
ZixMail(TM), which was first commercially released in March 2000, is a user
friendly, 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. The Company released an enhanced version of ZixMail in July 2000,
which includes spell checking, hyperlink support and rich-text formatting
features, and the ability to send secure messages to recipients that are not
ZixMail users.
Also in July 2000, the Company opened ZixIt's new Internet
secure-messaging portal -- SecureDelivery.com(TM). The architecture of the
SecureDelivery.com portal allows for interoperability between encryption formats
and allows for the delivery of messages to recipients through secure (SSL)
browsers, secure email and other modes of communication. Immediately available
services include sending secure and authenticated messages from the
SecureDelivery.com Web message form and delivering those messages to
authenticated recipients over secure browser connections. Also, current ZixMail
users can route messages to any email address through SecureDelivery.com, even
though the recipient is not a ZixMail user. In the future, SecureDelivery.com is
expected to enable users to also manage incoming secure messages from other
sources, including Lotus(R) Notes(R), Microsoft(R) Outlook(R) and branded
Web-based email compose forms, and in other encryption formats, such as S/MIME
(X.509) and PGP(R). When completed, SecureDelivery.com will forward these
incoming messages directly to the recipient, based on recipient selected
encryption options.
ZixCharge(TM), which has not been commercially released, is a shopping
portal and payment authorization system designed to enable consumers to purchase
goods and services over the Internet without being required to provide personal
and charge card information to Internet merchants. See Note 3, "Litigation."
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 its new
products and services. 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 - Risks and Uncertainties." The accompanying
statements of operations and cash flows include cumulative totals of the
Company's results during the development stage.
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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
Private Placement of Equity Securities
In May 2000, the Company sold, in a private placement, certain
newly issued equity securities to an investor group led by H. Wayne Huizenga.
The Company is to receive cash totalling $44,000,000 in three installments. The
Company received $27,730,000 through June 30, 2000 and an additional $1,778,000
in July 2000, with the remaining proceeds of $14,492,000 due on September 1,
2000. Accordingly, at June 30, 2000, notes receivable for shares sold totalling
$16,270,000 is reported in the accompanying financial statements as a reduction
of stockholders' equity. In exchange, 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 options
previously held by David P. Cook, the Company's chairman, president and chief
executive officer, and are not exercisable until May 1, 2001. In May 2000,
subsequent to the completion of the private placement, the Company filed a
registration statement on Form S-3 with the Securities and Exchange Commission
covering the public resale of the shares of common stock and the shares
underlying the warrants issued to the investor group.
Purchase of Anacom Communications
In October 1999, the Company purchased all of the outstanding
shares of Anacom Communications, Inc., a privately-held provider of real-time
transaction 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 stockholders' equity. 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. Based on the Company's common stock price of
$39.63 per share at December 31, 1999, $72.81 per share at March 31, 2000 and
$46.06 per share at June 30, 2000, the intrinsic value of these shares on those
dates was $7,529,000, $13,832,000 and $8,750,000, respectively. Accordingly, the
Company's results of operations for the three months and six months ended June
30, 2000 include a non-cash credit of $177,000 and a non-cash charge of
$2,344,000, respectively, for amortization of the market value of the minimum
number of common shares issuable. Unearned stock-based compensation, not yet
charged to income, is $5,469,000 based on the intrinsic value of these shares at
June 30, 2000. 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 stockholders' 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 per share. These
options vest over periods of 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
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their fair value. Based on the Company's common stock price of $39.63 per share
at December 31, 1999, $72.81 per share at March 31, 2000 and $46.06 per share at
June 30, 2000, the fair value of these options on those dates was $4,617,000,
$11,479,000 and $7,031,000, respectively. Accordingly, the Company's results of
operations for the three months and six months ended June 30, 2000 include
non-cash charges of $64,000 and $1,352,000 respectively, for amortization of the
fair value of these options over their respective service or vesting periods.
Unearned stock-based compensation, not yet charged to income, is $4,873,000
based on the fair value of these options at June 30, 2000. 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, there would be no impact on the Company's
cash flows or total stockholders' equity.
Reallocated Options to Employees and Director
In 2000, David P. Cook reallocated options to acquire 404,627
shares of the Company's common stock to certain of the Company's employees and a
director. These reallocated 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 will be recognized over the vesting periods ($1,630,000
and $2,078,000 for the three months and six months ended June 30, 2000,
respectively), 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 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 approximately 130,000 of the approximately
322,000 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 June
30, 2000 is $3,930,000 ($20.44 per share) and is included in other current
assets. An unrealized gain on these shares of $2,058,000 is included in other
comprehensive income as a component of stockholders' equity. There are certain
restrictions regarding the sale or transfer of these shares.
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, which is in the early
discovery phase, seeks monetary damages and such other relief as the court deems
appropriate. The resolution of the lawsuit could have a material effect on the
Company's ability to market the ZixCharge system.
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.
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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 a digital signature
and encryption technology and is developing a series of products and services
that enhance privacy, security and convenience over the Internet. To date, the
Company has not earned any revenues from these products and services.
ZixMail(TM), which was first commercially released in March 2000, is a user
friendly, 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. The Company released an enhanced version of ZixMail in July 2000,
which includes spell checking, hyperlink support and rich-text formatting
features, and the ability to send secure messages to recipients that are not
ZixMail users.
Also in July 2000, the Company opened ZixIt's new Internet
secure-messaging portal -- SecureDelivery.com(TM). The architecture of the
SecureDelivery.com portal allows for interoperability between encryption formats
and allows for the delivery of messages to recipients through secure (SSL)
browsers, secure email and other modes of communication. Immediately available
services include sending secure and authenticated messages from the
SecureDelivery.com Web message form and delivering those messages to
authenticated recipients over secure browser connections. Also, current ZixMail
users can route messages to any email address through SecureDelivery.com, even
though the recipient is not a ZixMail user. In the future, SecureDelivery.com is
expected to enable users to also manage incoming secure messages from other
sources, including Lotus(R) Notes(R), Microsoft(R) Outlook(R) and branded
Web-based email compose forms, and in other encryption formats, such as S/MIME
(X.509) and PGP(R). When completed, SecureDelivery.com will forward these
incoming messages directly to the recipient, based on recipient selected
encryption options.
ZixCharge(TM), which has not been commercially released, is a shopping
portal and payment authorization system designed to enable consumers to purchase
goods and services over the Internet without being required to provide personal
and charge card information to Internet merchants. As described in Note 3 to
Condensed Consolidated Financial Statements, the Company has initiated
litigation against Visa. The litigation alleges that Visa set out to destroy the
Company's ability to market ZixCharge.
Additionally, in October 1999, the Company purchased all of the
outstanding shares of Anacom Communications, Inc. ("Anacom"), a provider of
real-time transaction processing services to Internet merchants.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Revenues
Revenues in the second quarter and first six months of 2000 are
attributable to Anacom. The Company is not currently charging for the use of its
ZixMail or SecureDelivery.com products or services. The Company plans to begin
charging for its products and services at the beginning of 2001.
Research and development expenses
Research and development expenses decreased from $11,334,000 and
$14,065,000 for the three months and six months ended June 30, 1999 to
$2,205,000 and $4,416,000 for the corresponding periods in 2000. Expenses in
1999 include non-cash charges of $7,059,000 and $7,805,000 in the three month
and six month periods,
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respectively, 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 but
were more than offset by a reduction in third party consulting expenditures as a
result of hiring 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
$2,500,000 and $3,275,000 for the three months and six months ended June 30,
1999 to $8,287,000 and $17,882,000 for the corresponding periods in 2000. The
increase between years 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,
expenses in 2000 include non-cash charges of $1,722,000 and $5,996,000 in the
three month and six month periods, respectively, 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.
Investment income
Investment income decreased from $976,000 and $2,037,000 for the three
months and six months ended June 30, 1999 to $636,000 and $1,210,000 for the
corresponding periods 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 $9,764,000 and $20,900,000 for the three months and six
months ended June 30, 2000, respectively, as compared to losses of $12,768,000
and $15,183,000 for the corresponding periods in 1999.
DISCONTINUED OPERATIONS
In the second quarter of 1999 and 2000, the Company recorded gains of
$398,000 and $308,000, respectively, primarily due to a reduction in estimated
future costs for various indemnification issues associated with the disposal of
its operating businesses in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's principal source of liquidity is its
net working capital position of $56,555,000, including cash and marketable
securities of $52,443,000. 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 six months 2000 loss from continuing
operations included significant non-cash expenses for stock-based compensation
and depreciation and amortization aggregating $10,623,000. Net cash used by
continuing operations in the first six months of 2000 was $13,010,000, primarily
representing development and start-up costs relating to the Company's Internet
related businesses. Additionally, in the first six months of 2000, the Company
invested $4,739,000 in property and equipment, primarily for additional 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, or incurs costs associated with forming strategic alliances,
if any are concluded. The Company expects additional investment in property and
equipment for 2000 to be approximately $2,500,000.
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In May 2000, the Company sold, in a private placement, certain newly
issued equity securities to an investor group led by H. Wayne Huizenga. The
Company is to receive cash totalling $44,000,000 in three installments. The
Company received $27,730,000 through June 30, 2000 and an additional $1,778,000
in July 2000, with the remaining proceeds of $14,492,000 due on September 1,
2000. Accordingly, at June 30, 2000, notes receivable for shares sold totalling
$16,270,000 is reported in the accompanying financial statements as a reduction
of stockholders' equity. In exchange, 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 options
previously held by David P. Cook, the Company's chairman, president and chief
executive officer, and are not exercisable until May 1, 2001.
The Company believes its existing net working capital position along
with the remaining note payments to be received from 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.
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," "plan" 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 Internet companies in the early stages of development.
These risks and uncertainties are often more pronounced for companies in new and
rapidly evolving markets, particularly Internet related businesses.
PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE
The Company's products and services are targeted at the new and
rapidly evolving markets 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
and services. The commercial version of ZixMail was first released in March
2000 and an enhanced version was released in July 2000. The Company's new
Internet secure-messaging portal - SecureDelivery.com -- was first opened
at the end of July
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2000. The Company is not currently charging for use of its ZixMail or
SecureDelivery.com products or services. ZixCharge has not been
commercially released.
o The Company must be able to achieve broad market acceptance for its
products and services. There is currently no known Internet
secure-messaging services, such as ZixMail and SecureDelivery.com, that
currently operate at the scale that the Company would require, at its
current expenditure levels and proposed pricing, to become profitable from
its secure-messaging operations. To reach a larger customer base for its
secure-messaging products and services than it can reach through its direct
sales and marketing efforts, the Company is pursuing collaborative
relationships with third parties with large existing user bases to assist
the Company in promoting its secure-messaging services. 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 or SecureDelivery.com users.
Moreover, in any event, there is no assurance that enough paying users or
enough advertising revenue 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 (1) 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, and (2) whether sufficient profit can be
generated from potential sources of revenue. To obtain access to large
numbers of consumers and merchants, the Company is seeking collaborative
relationships with companies that have large existing user bases to assist
the Company in promoting ZixCharge. In this regard, initial efforts were
focused on banking institutions. As described in Note 3 to the Condensed
Consolidated Financial Statements, the Company has initiated litigation
against Visa. The litigation alleges that Visa set out to destroy the
Company's ability to market ZixCharge. The Company now believes it is
unlikely that any Visa member banks will enter into any ZixCharge related
collaborative relationship until the Visa litigation is resolved. Moreover,
the resolution of this litigation could have a material effect on the
Company's ability to market the ZixCharge system.
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 or
that sufficient profit can be generated from the ZixCharge operations. If
the Company is unable to obtain the necessary critical mass or generate
sufficient profit, the Company may decide not to commercially introduce
ZixCharge or to discontinue it, if introduced.
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 and services 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 and services.
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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 and deliver messages through its SecureDelivery.com message portal
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. Messages sent through the Company's
SecureDelivery.com message portal will reside, for a user-specified period of
time, in the Company's data center facilities. Also, the Company's planned
ZixCharge business will retain certain confidential customer information in the
Company's data center facilities. 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 PRODUCTS OR SERVICES
Any of ZixMail, the SecureDelivery.com message portal or ZixCharge
could contain undetected defects or errors. Despite the Company's 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.
CRYPTOGRAPHY TECHNOLOGY
The Company's products and services employ, and future products and
services 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.
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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 the ZixMail
product. Failure to obtain the required governmental approvals would preclude
the Company from selling the ZixMail product in international markets.
LACK OF STANDARDS
There is no assurance that the Company's products and services will
become generally accepted standards 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.
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 June 30, 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.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 2 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. Subsequently, on May 23, 2000, the Registrant filed a registration
statement on Form S-3 with the Securities and Exchange Commission covering the
public resale of the shares of common stock and the shares underlying the
warrants issued to the Investors.
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 (filed as Exhibit
3.2 to the Company's Form 10-Q for the
quarterly period ended March 31, 2000, and
incorporated herein by reference).
*10.1 Sublease Agreement, dated May 8, 2000,
between Rosewood Resources, Inc. and ZixIt
Corporation.
*10.2 1996 Employee Stock Purchase Plan of ZixIt
Corporation (Amended and Restated as of
July 1, 2000).
*27.1 Financial Data Schedule.
b. Reports on Form 8-K
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: August 11, 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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INDEX TO EXHIBITS
EXHIBIT
NUMBER 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
(filed as Exhibit 3.2 to the Company's Form 10-Q for the
quarterly period ended March 31, 2000, and incorporated herein
by reference).
*10.1 Sublease Agreement, dated May 8, 2000, between Rosewood
Resources, Inc. and ZixIt Corporation.
*10.2 1996 Employee Stock Purchase Plan of ZixIt Corporation (Amended
and Restated as of July 1, 2000).
*27.1 Financial Data Schedule.