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, 2001
[ ] 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.
<Table>
<Caption>
CLASS OUTSTANDING AT JULY 31, 2001
- -------------------------------------- -----------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE 17,029,299
</Table>
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INDEX
PART I-FINANCIAL INFORMATION
<Table>
<Caption>
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at June 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2001 and 2000 and for
the cumulative period from January 1, 1999 through June 30, 2001 4
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Net Loss for the six months ended June 30, 2001 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 and for the
cumulative period from January 1, 1999 through June 30, 2001 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 16
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
</Table>
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<Table>
<Caption>
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,896 $ 13,347
Marketable securities 4,556 36,943
Other current assets 1,419 1,942
------------ ------------
Total current assets 36,871 52,232
Investment in Maptuit Corporation, at cost 3,000 3,000
Property and equipment, net 14,905 19,400
Other noncurrent assets, net 3,050 4,045
------------ ------------
$ 57,826 $ 78,677
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,704 $ 2,431
Liabilities related to discontinued operations 1,079 1,116
Deferred revenues 189 --
------------ ------------
Total current liabilities 3,972 3,547
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 193 193
authorized; 19,332,563 issued, 17,040,663
outstanding in 2001 and 19,327,563 issued,
17,035,663 outstanding in 2000
Additional capital 176,112 180,128
Unearned stock-based compensation (6,652) (14,615)
Treasury stock, at cost (11,314) (11,314)
Accumulated other comprehensive loss (436) (169)
Accumulated deficit (net of deficit accumulated during
the development stage of $108,189 at June 30, 2001
and $83,233 at December 31, 2000) (104,049) (79,093)
------------ ------------
Total stockholders' equity 53,854 75,130
------------ ------------
$ 57,826 $ 78,677
============ ============
</Table>
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)
<Table>
<Caption>
Cumulative During
Three Months Six Months Development Stage
Ended June 30 Ended June 30 (From January 1, 1999
------------------------ ------------------------ Through
2001 2000 2001 2000 June 30, 2001)
---------- ---------- ---------- ---------- ---------------------
Revenues $ 123 $ 92 $ 227 $ 188 $ 720
Research and development expenses (2,591) (2,205) (4,796) (4,416) (37,005)
Operating costs and general corporate expenses (9,394) (8,287) (21,577) (17,882) (81,256)
Investment income, net 468 636 1,142 1,210 6,603
---------- ---------- ---------- ---------- ----------
Loss from continuing operations before income
taxes (11,394) (9,764) (25,004) (20,900) (110,938)
Income tax benefit -- -- -- -- 807
---------- ---------- ---------- ---------- ----------
Loss from continuing operations (11,394) (9,764) (25,004) (20,900) (110,131)
Discontinued operations -- 308 48 308 1,942
---------- ---------- ---------- ---------- ----------
Net loss $ (11,394) $ (9,456) $ (24,956) $ (20,592) $ (108,189)
========== ========== ========== ========== ==========
Basic and diluted income (loss) per common share:
Continuing operations $ (0.67) $ (0.60) $ (1.46) $ (1.32)
Discontinued operations -- 0.02 -- 0.02
---------- ---------- ---------- ----------
Net loss $ (0.67) $ (0.58) $ (1.46) $ (1.30)
========== ========== ========== ==========
Weighted average shares outstanding 17,041 16,227 17,040 15,832
========== ========== ========== ==========
</Table>
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)
<Table>
<Caption>
Unearned
stock- Accumulated
based other Total
Common Stock Additional compen- Treasury comprehensive Accumulated stockholders'
Shares Amount capital sation stock loss deficit equity
---------- ------ ---------- ---------- --------- ------------- ----------- -------------
Balance, December 31, 2000 19,327,563 $ 193 $ 180,128 $ (14,615) $(11,314) $ (169) $ (79,093) $ 75,130
Exercise of stock options
for cash 5,000 -- 16 -- -- -- -- 16
Unearned stock-
based compensation
for service providers -- 694 (694) -- -- -- --
Cancellation of stock issuable
for purchase of Anacom
Communications -- -- (4,725) 4,725 -- -- -- --
Amortization of
unearned stock-
based compensation -- -- -- 3,932 -- -- -- 3,932
Other -- -- (1) -- -- -- -- (1)
Comprehensive net loss:
Net loss -- -- -- -- -- -- (24.956) (24,956)
Unrealized loss on
marketable securities -- -- -- -- -- (267) -- (267)
----------
Comprehensive net loss -- -- -- -- -- -- -- (25,223)
---------- ------ ---------- ---------- -------- ------ ---------- ----------
Balance, June 30, 2001 19,332,563 $ 193 $ 176,112 $ (6,652) $(11,314) $ (436) $ (104,049) $ 53,854
========== ====== ========== ========== ======== ====== ========== ==========
</Table>
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<Table>
<Caption>
Cumulative During
Six Months Development Stage
Ended June 30 (From January 1, 1999
------------------------ Through
2001 2000 June 30, 2001)
---------- ---------- ---------------------
Cash flows from operating activities:
Loss from continuing operations $ (25,004) $ (20,900) $ (110,131)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 5,999 4,627 19,403
Stock-based compensation 3,932 5,996 28,047
Write-down of marketable securities -- -- 1,202
Other non-cash expenses 200 -- 331
Changes in assets and liabilities, excluding divestiture of
businesses:
Other assets 423 (2,203) (1,121)
Current liabilities 713 (530) 1,319
---------- ---------- ----------
Net cash used by continuing operations (13,737) (13,010) (60,950)
Net cash provided (used) by discontinued operations 11 253 (1,435)
---------- ---------- ----------
Net cash used by operating activities (13,726) (12,757) (62,385)
Cash flows from investing activities:
Purchases of property and equipment, net (860) (4,739) (31,650)
Purchases of marketable securities (3,960) (9,052) (160,360)
Sales and maturities of marketable securities 36,080 19,000 182,967
Investment in Maptuit Corporation -- -- (3,000)
Purchase of Anacom Communications -- -- (2,500)
Proceeds from sales of discontinued operations, net of cash sold -- 581 5,885
---------- ---------- ----------
Net cash provided (used) by investing activities 31,260 5,790 (8,658)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of issuance -- 27,534 43,784
costs
Proceeds from exercise of stock options 16 2,044 3,879
---------- ---------- ----------
Net cash provided by financing activities 16 29,578 47,663
Effect of exchange rate changes on cash and cash equivalents (1) (4) (16)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 17,549 22,607 (23,396)
Cash and cash equivalents, beginning of period 13,347 6,598 54,292
---------- ---------- ----------
Cash and cash equivalents, end of period $ 30,896 $ 29,205 $ 30,896
========== ========== ==========
</Table>
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 2000 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, 2000 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 adjustments relating to Anacom Communications, Inc. as
explained in Note 3. The results of operations for the six-month period ended
June 30, 2001 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 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. ZixMail(TM) is a
secure email application and 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 did not begin to
charge for the use of ZixMail until the first quarter of 2001. 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 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."
The amounts presented for basic and diluted loss per common share in
the accompanying statements of operations have been computed by dividing the
applicable loss by the weighted average number of common shares outstanding. The
two presentations are equal in amounts because the assumed exercise of common
stock equivalents would be antidilutive, because a loss from continuing
operations was reported for each period presented.
2. STOCKHOLDERS' EQUITY
The Company recognizes significant non-cash stock-based compensation
expense resulting from certain stock option grants made to third party service
providers, employees and directors. Unearned stock-based compensation expense of
$5,477,000 as of June 30, 2001 related to certain of these equity securities is
fixed in amount and will be amortized to expense primarily through 2002. The
determination of the amount to be expensed for the remaining equity securities
requires that they be revalued on each reporting date until performance is
complete with a cumulative catch up adjustment recognized for any changes in
their fair value. The Company's future results of operations could be materially
impacted by a change in valuation of these variable equity securities as a
result of future increases or decreases in the price of the Company's common
stock.
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3. ANACOM COMMUNICATIONS, INC.
As previously announced on June 20, 2001, the Company reported that the
credit card data bases at its independently operated subsidiary Anacom
Communications, Inc. ("Anacom") had been improperly accessed and fraudulent
transactions had been processed, causing Anacom to advise its merchant customer
base to transfer their electronic commerce transactions to other payment
gateways for processing. The Company is currently unable to assess the amount of
the liability, if any, to Anacom or the Company, which may result from the
unauthorized access to Anacom's data bases. Anacom, an on-line credit card
processing service provider, was purchased by the Company in 1999 and was
managed by the former owners.
Subsequently, the Company has ceased all operations at Anacom and the
former owners of Anacom have separated from employment with Anacom. As a result,
the October 2001 final installment of the Company's common stock issuable to the
former owners in connection with the purchase of Anacom, which aggregated
$4,725,000, was canceled. These events resulted in a second quarter 2001
non-recurring net reduction in operating costs of approximately $3,000,000. This
favorable adjustment was primarily due to the reversal of previously recorded
unvested stock-based compensation expense related to the canceled installment
totaling $3,800,000, partially offset by severance costs and asset write-downs,
including goodwill. Over the last four quarters, Anacom's operating losses have
averaged $1,450,000, including non-cash charges of $1,075,000 per quarter for
amortization of goodwill and stock-based compensation. Substantially all of the
Company's revenues since 1999 have been associated with Anacom.
4. COMMITMENTS
In the third quarter of 2000, the Company entered into an agreement
with Yahoo! Inc. ("Yahoo!") to provide Yahoo! Mail users with the option to send
encrypted email messages through the Company's ZixMail.net messaging portal. The
Company has minimum future commitments to Yahoo! under this agreement totaling
$4,188,000, payable in quarterly installments through August 2002. In addition,
the Company will pay Yahoo! a specified portion of revenues earned by the
Company which are associated with Yahoo! users.
5. 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. To obtain
large numbers of consumers and merchants as users of its ZixCharge system, the
Company's initial marketing efforts were focused on obtaining financial
institutions as sponsors of the ZixCharge system. The suit alleges that Visa
undertook a series of actions that interfered with these prospective 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 system, which competed against the
MasterCard and Visa-owned Secure Electronic Transaction system. The suit, which
is in the discovery phase, seeks monetary damages and such other relief as the
court deems appropriate. The Company believes it is unlikely that any Visa
member banks will enter into any ZixCharge sponsorship agreements until the Visa
litigation is resolved. Moreover, 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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6. SUBSEQUENT EVENT -- RELATED PARTY TRANSACTION
In December 2000, the Company purchased approximately 9% of the equity
ownership of Maptuit Corporation ("Maptuit") for $3,000,000 in cash and
committed to make a follow-on investment. Accordingly, in July 2001, the Company
made an additional $2,000,000 cash investment in Maptuit and received a
promissory note convertible into Maptuit equity securities. The note bears
interest at prime plus 1%, is due in July 2006 and automatically converts into
Maptuit equity securities at the same price per share obtained if a third party
equity financing arrangement is completed, as defined. Maptuit is currently
seeking such third party equity funding. If Maptuit is unable to obtain
additional equity funding or if such funding is obtained at a price per share
which is less than the price per share the Company paid for its initial
investment, the carrying value of the Company's investment in Maptuit may be
impaired and therefore subject to write-down for financial accounting purposes.
Maptuit, an early stage company, is a privately-held Internet application
service provider that supplies wireline and wireless Internet location-based
services. Mr. Jeffrey P. Papows, a director of the Company since March 2000 and
the Company's chairman of its board of directors since October 2000, serves as
the president and chief executive officer of Maptuit and holds a minority equity
interest in Maptuit.
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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. The Company's operations included 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. ZixMail(TM) is
the only product currently being marketed and sold. ZixMail is a secure email
application and 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 did not begin charging for the
use of its ZixMail product and related services until the first quarter of 2001.
The foundation of the Company's business model for its ZixMail product
and services centers around the financial leverage expected to be generated by
revenues that are believed to be predominantly recurring in nature and an
efficient cost structure for data center operations, the core of which is
expected to remain relatively stable regardless of the number of users. New
business, primarily focused on the corporate market, is expected to be generated
from the Company's own direct sales efforts, the promotional efforts of its
strategic marketing partners and its affiliate marketing programs. Revenue
streams in the near term are projected to consist primarily of ZixMail
subscription fees, which are list priced at $24.00 per year per email address
and generally expected to be collected annually at the beginning of the
subscription period. The Company began charging for its ZixMail services in the
first quarter of 2001 and, during 2001, has expanded its sales and marketing
reach and expects to incur certain variable customer acquisition costs
associated with generating subscription fees. These 2001 variable costs include
revenue sharing arrangements with the Company's strategic marketing partners,
ranging from 20 to 65 percent of subscription fees, and performance-based
incentive compensation earned by the Company's direct sales staff. As of July
31, 2001, the Company had a base of approximately 8,000 ZixMail subscribers. The
Company has set a goal of obtaining 600,000 ZixMail subscribers by the end of
2001.
Based upon its anticipated cost structure, the Company currently
estimates that it can become cash flow positive from operations in any period in
which it receives annual subscription fees from an average of 150,000 or more
new subscribers per month. The Company believes that it is possible to attain
such levels of order activity sometime in the first half of 2002. Thereafter, if
a base of 1,800,000 subscribers is attained, the Company expects to achieve the
financial leverage generated by recurring revenues and a relatively stable cost
structure, which is expected to result in a favorable cash flow scenario as new
subscribers are added. For financial accounting purposes, subscription fees will
be recognized as revenue on a prorated basis over the length of the subscription
period, usually one year. As a result of the spreading of revenues over the
applicable service period, a large portion of the new business added in 2001
will not be recognized as revenue in 2001; however, the deferred revenues
generated should provide the Company with additional cash and a base level of
revenue leading into 2002. The Company expects to incur a substantial net loss
in the last half of 2001 based upon anticipated order activity and the related
method of recognizing revenue, current cash expenditure levels and the
significant levels of non-cash expenses, which are expected to be approximately
$8,800,000. However, as was the case in the first half of 2001, the anticipated
reduction in the Company's cash resources in the last half of 2001 will be
substantially less than the expected net loss.
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Additionally, in October 1999, the Company purchased all of the
outstanding shares of Anacom, a privately-held provider of real-time transaction
processing services to Internet merchants. In June 2001, the operations of
Anacom were discontinued.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Revenues
The Company is in the development stage and had no significant revenues
in 2000 and 2001. The Company began charging for its ZixMail products and
services in the first quarter of 2001. Subscription fees billed or received from
customers in advance are recorded as deferred revenue and recognized as revenues
ratably over the subscription period.
Research and development expenses
Research and development expenses increased from $2,205,000 and
$4,416,000 for the three months and six months ended June 30, 2000 to $2,591,000
and $4,796,000 for the corresponding periods in 2001. In 2001, employee
compensation costs increased over both of the comparable reporting periods in
2000 and were partially 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 and services.
Operating costs and general corporate expenses
Operating costs and general corporate expenses increased from
$8,287,000 and $17,882,000 for the three months and six months ended June 30,
2000 to $9,394,000 and $21,577,000 for the corresponding periods in 2001. The
increases for both periods are primarily due to additional costs incurred for
sales and marketing of the ZixMail products and services, including strategic
marketing expenses with Yahoo! and the hiring of additional personnel in the
areas of direct sales and marketing support. Also, depreciation expense is
higher in the 2001 periods due to an increased investment in property and
equipment. The increases in both periods are partially offset by a non-recurring
reduction in operating costs of approximately $3,000,000, recorded in June 2001,
related to the cessation of the Anacom business (See Note 3 to the condensed
consolidated financial statements). In the near-term, the Company plans to
continue to expand its sales and marketing efforts. Additionally, the Company
will begin incurring new categories of costs such as variable customer
acquisition costs associated with generating new subscription fees.
Investment income, net
Investment income decreased from $636,000 and $1,210,000 for the three
months and six months ended June 30, 2000 to $468,000 and $1,142,000 for the
corresponding periods of 2001 due to lower interest rates and a decrease in
invested cash and marketable securities.
Income taxes
The income tax benefit on the loss from continuing operations in 2001
and 2000 is different from the U.S. statutory rate of 34%, primarily due to
unbenefitted losses and tax credits. The Company has fully reserved its net
deferred tax assets due to the uncertainty of future taxable income from the
Company's business initiatives.
Loss from continuing operations
As a result of the foregoing, the Company experienced losses from
continuing operations of $11,394,000 and $25,004,000 for the three months and
six months ended June 30, 2001, respectively, as compared to losses of
$9,764,000 and $20,900,000 for the corresponding periods in 2000.
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Discontinued Operations
The Company recorded a gain of $48,000 for the six months ended June
30, 2001, primarily due to a reduction in estimated future costs for various
indemnification issues associated with the disposal of its remaining operating
businesses in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company's principal source of liquidity is its
net working capital position of $32,899,000, including cash and marketable
securities of $35,452,000. The Company plans to invest its excess cash primarily
in short-term, high-grade U.S. corporate debt securities or U.S. government and
agency securities. The Company's first six months 2001 loss from continuing
operations included significant non-cash expenses such as depreciation and
amortization, and stock-based compensation aggregating $10,131,000. Net cash
used by continuing operations in the first six months of 2001 was $13,737,000,
primarily representing continued development and operating costs relating to the
Company's Internet related businesses. The Company began charging for its
ZixMail products and services in the first quarter of 2001. 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 and costs associated with forming or supporting
its strategic marketing partners, such as a minimum future commitment to Yahoo!
totaling $4,188,000, payable in quarterly installments through August 2002. The
trend for additions to property and equipment continues to decline with 2001
capital expenditures not expected to exceed $2,000,000.
The Company has made cash investments in Maptuit Corporation equity
securities totaling $5,000,000, $2,000,000 of which occurred in July 2001. (See
Note 6 to the condensed consolidated financial statements). There is currently
no public market for the Maptuit equity securities and the Company does not
anticipate there being any near-term opportunity for liquidating its investment.
Investments of this nature are subject to significant fluctuations in fair
market value due to the volatility of the equity markets and the significant
business and investment risks inherent in early stage enterprises. Separately,
the Company's common shares issued to Entrust Technologies, Inc. in December
2000 are subject to transfer restrictions which lapse in four equal quarterly
installments ending in December 2001. If the aggregate value of the shares on
the dates the restrictions lapse is less than $3,400,000, the Company is
obligated to fund such deficiency in December 2001. Presently, $1,387,000 of
additional consideration in cash or stock at ZixIt's option would be required to
be delivered, based on the value of the shares on the dates that restrictions
have already lapsed and assuming the market value of the Company's common stock
on the dates the remaining restrictions lapse is $9.15, the market value of the
Company's common stock on June 30, 2001.
The Company currently has no significant revenues, however, it believes
existing cash and marketable securities are sufficient to sustain its current
level of operating expenditures through the second quarter of 2002. The Company
will consider various capital funding alternatives based upon the Company's
revenue growth and strategic business plans. 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.
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," "should," "goal" 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:
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LIMITED OPERATING HISTORY IN INTERNET ARENA
ZixIt'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 these markets has yet to fully develop, ZixIt
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.
ZixIt has only a limited operating history in the Internet arena on
which to base an evaluation of its business and prospects. ZixIt'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.
TIMELY DEVELOPMENT OF PRODUCTS AND SERVICES
ZixIt must be able to successfully and timely develop its products and
services. The commercial version of ZixMail was first released in March 2000.
ZixIt's new Internet secure-messaging portal - ZixMail.net(TM) - was first
opened at the end of July 2000. ZixIt has not earned any significant revenues
from its ZixMail products or services, although ZixIt first began charging for
these products and services in the first quarter of 2001. ZixCharge(TM) has not
been commercially released.
MARKET ACCEPTANCE
ZixIt must be able to achieve broad market acceptance for its products
and services. To ZixIt's knowledge, there are currently no Internet
secure-messaging services, such as ZixMail, that currently operate at the scale
that ZixIt would require, at its current expenditure levels and proposed
pricing, to become profitable from its secure-messaging operations. ZixIt's
direct sales efforts are primarily focused on the corporate market. To reach a
larger customer base for its ZixMail products and services than ZixIt can reach
through its direct sales efforts, ZixIt is pursuing distribution arrangements
and collaborative relationships with third parties with large existing user
bases to assist ZixIt in promoting its ZixMail services. There is no assurance
that ZixIt will be successful in entering into these arrangements or
relationships, or that if entered into, they will significantly assist ZixIt in
obtaining large numbers of ZixMail users. Moreover, in any event, there is no
assurance that enough paying ZixMail users will ultimately be obtained to enable
ZixIt to operate profitably.
ZIXCHARGE UNCERTAINTIES
Since the commercial version of ZixCharge has not yet been released,
there are currently no consumers or merchants using ZixCharge. As noted in its
periodic SEC filings, ZixIt has initiated litigation against Visa, which alleges
that Visa set out to destroy ZixIt's ability to market ZixCharge. ZixIt believes
it is unlikely that any Visa member banks will enter into any ZixCharge
sponsorship agreements until the Visa litigation is resolved. Moreover, the
resolution of this litigation could have a material effect on ZixIt's ability to
market the ZixCharge system.
NO SIGNIFICANT REVENUES
ZixIt currently has no significant revenues, however, it believes
existing cash and marketable securities are sufficient to sustain its current
level of operating expenditures through the second quarter of 2002. ZixIt will
consider various capital funding alternatives based upon ZixIt's revenue growth
and strategic business plans.
COMPETITION
ZixIt is a new entrant into the rapidly evolving secure Internet
communications and e-commerce markets. ZixIt will be competing with larger
companies that have access to greater capital, research and development,
marketing, distribution and other resources than it does. In addition, the
Internet arena is characterized by extensive research efforts and rapid product
development and technological change that could render ZixIt's products and
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services obsolete or noncompetitive. ZixIt'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. ZixIt 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.
Attempts have been made to define the size and nature of the market
comprising secure Internet communications. A 2000 Robert W. Baird & Co. study of
this market has coined the term "Secure e-Document Delivery Industry" to
describe the activity and business within this sector. This report is
instructive with respect to the competition within this market segment as it
seeks to identify the market segments and to analyze the various participants.
The analysis divides the secure e-document delivery industry into three
segments: (1) email content management; (2) email statement creation and
delivery; and (3) secure messaging. The report identifies 26 companies that
participate in one, two or all three of these market segments. These companies
include: Aladdin Knowledge Systems, CertifiedMail.com, click2send, Content
Technologies, Critical Path, Disappearing, Inc., e-Docs, eLynx, ePage, e-Parcel,
Hushmail, MessagingDirect, MicroVault, NetEx, PostX, Private Express, Slam Dunk
Networks, SRA International, Ten Four AB, Trend Micro, Tumbleweed
Communications, United Parcel Service, ValiCert, Xenos, ZipLip and ZixIt. Other
participants in these market segments not included in this listing are PGP
(Pretty Good Privacy), a division of Network Associates, and SigabaSecure.
While several of these companies participate in two or three of the
market segments listed above, more than half -- 14 companies, including ZixIt --
focus only on the secure messaging segment. The report notes that this field is
crowded because the technological requirements to compete in this space are
widely available -- like public key infrastructure and encryption, as well as
standard Internet and email protocols. While many of these companies compete
with ZixIt, some of these companies do not. For example, although Slam Dunk
Networks delivers messages securely, it does so within an
enterprise-to-enterprise environment - the automated exchange of purchase orders
between business partners, for example. Today, ZixIt participates primarily in
the Desktop-to-Desktop market allowing individuals to transmit items like
contracts, spreadsheets and other sensitive documents that are prepared on an ad
hoc basis. Competition in this market includes, but is not limited to,
CertifiedMail, Hushmail, PGP, Private Express, SigabaSecure and ZipLip.
Although the foregoing analysis attempts to categorize and classify the
secure e-document delivery industry into specific niches, it is too early in the
evolution of this industry to accurately portray its structure. What may be
viewed today as competitive relationships between two or more participants may,
in the near future, become collaborative relationships. Thus, while assessment
of the competition is a fundamental part of this analysis, the fluid nature of
the evolving technology in this market could produce alliances between apparent
competitors that are impossible to predict today.
SECURITY INTERRUPTIONS AND SECURITY BREACHES
ZixIt's business depends on the uninterrupted operation of its secure
data center. ZixIt 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 its secure data
center operations could materially harm its business, financial condition and
results of operations.
In addition, ZixIt's ability to issue digitally-signed certified
time-stamps and public encryption codes in connection with its ZixMail service
and deliver messages through its ZixMail.net message portal depends on the
efficient operation of the Internet connections between customers and ZixIt's
data center. ZixIt 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 ZixIt's facilities and infrastructure
remain secure and the market perceives them to be secure. Despite ZixIt'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 ZixIt may have to use additional resources to address these
problems. Messages sent through ZixIt's ZixMail.net message portal will
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reside, for a user-specified period of time, in its data center facilities.
Also, ZixIt's planned ZixCharge business will retain certain confidential
customer information in its data center facilities. Any physical or electronic
break-ins or other security breaches or compromises of this information could
expose ZixIt to significant liability, and customers could be reluctant to use
its Internet-related products and services.
As was previously announced, ZixIt determined in June 2001 that credit
card data bases at its independently operated subsidiary, Anacom, had been
improperly accessed. (See Note 3 to the condensed consolidated financial
statements). The ZixMail and ZixMail.net systems and ZixIt secure data center
are entirely separate from those of Anacom. No ZixIt technologies or operations
were involved in the incident. The Company is currently unable to assess the
amount of the liability, if any, to Anacom or the Company, which may result from
the unauthorized access to Anacom's data bases.
KEY PERSONNEL
ZixIt depends on the performance of its senior management team and
other key employees, particularly highly skilled technical and sales and
marketing personnel. ZixIt's success also depends on its ability to attract,
retain and motivate these individuals. There is competition for these personnel,
and ZixIt faces a tight employment market in general. There are no agreements
with any of ZixIt's personnel that prevent them from leaving ZixIt at any time.
In addition, ZixIt does not maintain key person life insurance for any of its
personnel. The loss of the services of any of ZixIt's key employees or its
failure to attract, retain and motivate key employees could harm its business.
UNKNOWN DEFECTS OR ERRORS
Any of ZixMail, the ZixMail.net message portal or ZixCharge could
contain undetected defects or errors. Despite ZixIt'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 ZixIt's
reputation, litigation claims, increased insurance costs or increased service
and warranty costs. Any of these could harm ZixIt's business.
PUBLIC KEY CRYPTOGRAPHY TECHNOLOGY
ZixIt'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 ZixIt 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 ZixIt's business.
GOVERNMENT REGULATION
Exports of software products using encryption technology are generally
restricted by the U.S. government. Although ZixIt 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 ZixIt from
selling the ZixMail product in international markets.
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LACK OF GENERALLY ACCEPTED STANDARDS
There is no assurance that ZixIt'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
ZixIt may have to defend its intellectual property rights or defend
against claims that ZixIt is infringing the rights of others. Intellectual
property litigation and controversies are disruptive and expensive. Infringement
claims could require ZixIt 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 ZixIt. ZixIt'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 ZixIt.
SALE OF BUSINESSES
ZixIt disposed of its remaining operating businesses in 1998 and 1997.
In selling those businesses, ZixIt agreed to provide customary indemnification
to the purchasers of those businesses for breaches of representations and
warranties, covenants and other specified matters. Although ZixIt believes that
it has adequately provided for future costs associated with these
indemnification obligations, indemnifiable claims could exceed ZixIt's
estimates.
STOCK PRICE
The market price of ZixIt'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 and, as
is well known, have declined substantially and broadly.
OTHER UNANTICIPATED RISKS AND UNCERTAINTIES
There are no assurances that ZixIt will be successful or that it will
not encounter other, and even unanticipated, risks. ZixIt discusses other
operating, financial or legal risks or uncertainties in its periodic SEC
filings. ZixIt is, of course, also subject to general economic risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the six month period ended June 30, 2001, the Company did not
experience any material changes in market risk exposures with respect to its
cash investments and marketable securities that affect the quantitative and
qualitative disclosures presented in the Company's 2000 Annual Report to
Shareholders on Form 10-K.
The Company has made investments in Maptuit Corporation totaling
$5,000,000, comprised of $3,000,000 in preferred stock and $2,000,000 in a
promissory note convertible into Maptuit equity securities. Maptuit is an early
stage privately-held company. There is no readily determinable market value for
the Company's investments in Maptuit Corporation. Investments of this nature are
subject to significant fluctuations in fair market value due to the volatility
of the equity markets and the significant business and investment risks inherent
in early stage enterprises. The Company identifies and records impairment losses
when events and circumstances indicate the investment has been impaired.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 15, 2001. At
this meeting, the shareholders elected as directors of the Company, David P.
Cook, H. Wayne Huizenga, Michael E. Keane, James S. Marston, Jeffrey P. Papows,
Antonio R. Sanchez, Jr. and Dr. Ben G. Streetman. The tabulation of votes with
respect to the election of directors is as follows:
<Table>
<Caption>
Nominee Shares For Shares Withheld
------- ---------- ---------------
David P. Cook 14,528,259 845,927
H. Wayne Huizenga 14,519,428 854,758
Michael E. Keane 15,246,510 127,676
James S. Marston 15,247,923 126,263
Jeffrey P. Papows 15,211,928 162,258
Antonio R. Sanchez, Jr. 15,246,111 128,075
Dr. Ben G. Streetman 15,247,745 126,441
</Table>
The shareholders voted to approve the adoption of the ZixIt Corporation
2001 Stock Option Plan. The tabulation of votes with respect to the adoption of
the 2001 Stock Option Plan is as follows:
<Table>
For 13,623,864
Against 1,710,701
Abstain 37,621
Non-vote 2,000
</Table>
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 International Distribution Agreement,
dated June 6, 2001, between ZixIt
Corporation and AlphaOmega Soft Co., Ltd.
*10.2 Convertible Promissory Note of Maptuit
Corporation, dated July 11, 2001.
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*10.3 Security Agreement, dated July 11, 2001,
between Maptuit Corporation and ZixIt
Corporation.
b. Reports on Form 8-K
No reports of the Registrant on Form 8-K have been
filed with the Securities and Exchange Commission
during the three months ended June 30, 2001.
*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 2, 2001 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
<Table>
<Caption>
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
(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 International Distribution Agreement, dated June 6, 2001,
between ZixIt Corporation and AlphaOmega Soft Co., Ltd.
*10.2 Convertible Promissory Note of Maptuit Corporation, dated July
11, 2001.
*10.3 Security Agreement, dated July 11, 2001, between Maptuit
Corporation and ZixIt Corporation.
</Table>
* Filed herewith.