SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] 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 2300, LB 36
Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
(214) 370-2000
(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 April 30, 2002
-------------------------------------- -----------------------------
Common Stock, par value $.01 per share 17,674,687
INDEX
PART I-FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001 and for the
cumulative period from January 1, 1999 through March 31, 2002 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2002 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 and for the
cumulative period from January 1, 1999 through March 31, 2002 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 17
PART II-OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,906 $ 8,857
Marketable securities 10,253 11,208
Other current assets 1,495 2,108
--------- ---------
Total current assets 16,654 22,173
Property and equipment, net 7,829 10,263
--------- ---------
$ 24,483 $ 32,436
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,346 $ 3,506
Liabilities related to discontinued operations 1,048 1,056
Deferred revenues 255 345
--------- ---------
Total current liabilities 4,649 4,907
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 200 199
authorized; 19,977,951 issued, 17,674,687 outstanding
in 2002 and 19,861,118 issued, 17,557,854 outstanding in 2001
Additional capital 178,527 177,119
Unearned stock-based compensation (1,852) (2,536)
Treasury stock, at cost (11,414) (11,414)
Accumulated deficit (net of deficit accumulated during
the development stage of $149,767 at March 31, 2002
and $139,979 at December 31, 2001) (145,627) (135,839)
--------- ---------
Total stockholders' equity 19,834 27,529
--------- ---------
$ 24,483 $ 32,436
========= =========
See accompanying notes.
3
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31 (From January 1, 1999
-------------- Through
2002 2001 March 31, 2002)
---- ---- ---------------
Revenues $ 389 $ 104 $ 1,199
Cost of revenues (2,895) (3,274) (33,001)
Research and development expenses (2,064) (2,205) (43,292)
Selling, general and administrative expenses (5,333) (8,909) (79,794)
Investment and other income 115 674 8,965
Realized and unrealized loss on investments -- -- (6,593)
------- -------- ---------
Loss from continuing operations before income taxes (9,788) (13,610) (152,516)
Income taxes -- -- 807
------- -------- ---------
Loss from continuing operations (9,788) (13,610) (151,709)
Discontinued operations -- 48 1,942
------- -------- ---------
Net loss $ (9,788) $(13,562) $(149,767)
======== ======== =========
Basic and diluted loss per common share:
Continuing operations $ (0.56) $ (0.80)
Discontinued operations -- --
-------- --------
Net loss $ (0.56) $ (0.80)
======== ========
Weighted average shares outstanding 17,563 17,040
-------- --------
See accompanying notes.
4
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Unearned Total
Common Stock Additional stock-based Treasury Accumulated stockholders'
Shares Amount capital compensation stock deficit equity
------ ------ ---------- ------------ -------- ----------- -------------
Balance, December 31, 2001 19,861,118 $199 $177,119 $ (2,536) $(11,414) $(135,839) $27,529
Stock issued to Tumbleweed 116,833 1 761 -- -- -- 762
Unearned stock-
based compensation
for service providers -- -- 651 (651) -- -- --
Amortization of
unearned stock-
based compensation -- -- -- 1,335 -- -- 1,335
Other -- -- (4) -- -- -- (4)
Net loss -- -- -- -- -- (9,788) (9,788)
---------- ------ ---------- ------------ -------- ----------- -------
Balance, March 31, 2002 19,977,951 $200 $178,527 $(1,852) $(11,414) $(145,627) $19,834
========== ====== ========== ============ ======== =========== =======
See accompanying notes.
5
ZIXIT CORPORATION
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31 (From January 1, 1999
-------------- Through
2002 2001 March 31, 2002)
---- ---- ---------------
Cash flows from operating activities:
Loss from continuing operations $ (9,788) $ (13,610) $ (151,709)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 2,476 2,749 26,679
Stock-based compensation 1,331 3,959 33,824
Stock issued to Tumbleweed 762 -- 762
Loss on Lante Corporation common stock -- -- 1,593
Write-off of investment in Maptuit Corporation -- -- 5,000
Write-off of digital identification certificates -- -- 3,000
Other non-cash expenses -- 100 864
Changes in assets and liabilities, excluding
divestiture of businesses:
Other assets 613 141 (1,124)
Current liabilities (250) 92 2,027
----------- ----------- ------------
Net cash used by continuing operations (4,856) (6,569) (79,084)
Net cash provided (used) by discontinued operations (8) 43 (1,466)
----------- ----------- ------------
Net cash used by operating activities (4,864) (6,526) (80,550)
Cash flows from investing activities:
Purchases of property and equipment, net (42) (525) (32,006)
Purchases of marketable securities (4,971) (3,960) (185,013)
Sales and maturities of marketable securities 5,926 32,185 201,968
Investment in Maptuit Corporation -- -- (5,000)
Purchase of Anacom Communications -- -- (2,500)
Proceeds from sales of businesses, net of cash sold -- -- 5,885
----------- ----------- ------------
Net cash provided (used) by investing activities 913 27,700 (16,666)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of issuance costs -- -- 43,784
Proceeds from exercise of stock options -- 24 4,085
----------- ----------- ------------
Net cash provided by financing activities -- 24 47,869
Effect of exchange rate changes on cash and cash equivalents -- (4) (39)
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents (3,951) 21,194 (49,386)
Cash and cash equivalents, beginning of period 8,857 13,347 54,292
----------- ----------- ------------
Cash and cash equivalents, end of period $ 4,906 $ 34,541 $ 4,906
=========== =========== ============
See accompanying notes.
6
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
2001 Annual Report to Shareholders on Form 10-K/A, 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, 2001 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 three-month period ended March 31, 2002 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 and marketing products and
services that bring privacy, security and convenience to Internet users.
ZixMail(TM) is a secure email application and messaging service that enables
Internet users worldwide to easily send encrypted, digitally-signed
communications to any email address in the world, even if the recipient does not
subscribe to ZixMail. The Company did not begin to charge for the use of ZixMail
until the first quarter of 2001. The Company recently announced that two new
products, ZixBlast(TM) and ZixVPM(TM) (Zix Virtual Private Messenger), are now
generally available. ZixBlast, priced on a transaction basis, allows enterprises
to track messages and receive cumulative reports detailing receipt confirmations
for customized, encrypted, time and date stamped emails sent via ZixMail to
large volumes of recipients. ZixVPM is a server-based, highly secure
enterprise-wide solution for email sent over the Internet that allows IT
administrators to ensure that all email sent beyond a company's firewall by
specified individuals or departments is encrypted. 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. The Company currently has no
significant revenues and utilization of cash resources continues at a
substantial level. The Company has taken steps, in late 2001 and early 2002, to
decrease its cash expenditure rate including reducing personnel and decreasing
expenditures for outside consultants and discretionary advertising and promotion
costs. The Company believes its existing cash and marketable securities combined
with scheduled installment payments due from resellers and distributors are
sufficient to sustain its estimated level of operating expenditures through the
end of the first quarter of 2003. New revenue streams expected in 2002 should
lengthen such time period. The Company is considering various capital funding
alternatives in order to strengthen the Company's financial position, but there
can be no assurances that the Company will be able to raise additional capital
on satisfactory terms if and when needed.
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.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
2. Stockholders' Equity
Research and development expenses in the first quarter of 2002 include a
one-time charge of $762,000, representing the value of approximately 117,000
shares of the Company's common stock issued to Tumbleweed
7
Communications Corp. ("Tumbleweed"), in connection with an agreement granting
the Company a license to certain Tumbleweed patents and the right to license
future patents at a fixed price.
3. Revenues
Revenues are recorded when services are rendered. Subscription fees billed
or received from customers in advance are recorded as deferred revenue and
recognized as revenues ratably over the subscription period. Presently, the
Company's subscription service includes the delivery of licensed software,
customer support and secure email solutions. The customer generally downloads
the software over the Internet, receives a diskette for general enterprise
deployment or is provided an appliance with pre-installed software.
Subscriptions to date have generally been annual non-refundable contracts with
no automatic renewal provisions. The subscription period begins on the date
specified by the parties.
Revenues in the first quarter of 2002 included $234,000 as a result of the
pro-rata recognition of the future minimum payments associated with the
Company's Marketing and Distribution Agreement with Entrust Inc. ("Entrust").
Entrust is scheduled to pay the Company future minimum payments aggregating
$3,750,000 through January 2005, which are being recognized as revenue ratably
over the four year maximum service period ending in December 2005. Additionally,
in March 2002, the Company cancelled its agreement with 911 Computer Co., Ltd.
("911"), its exclusive distributor in South Korea, for failure to pay scheduled
installment payments when due. As a result, the $100,000 minimum payment
received from 911 in 2001 is included in first quarter 2002 revenues.
4. Contingencies
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, which alleges that Visa
undertook a series of actions that interfered with its ZixCharge prospective
business relationships and disparaged the Company, its products, its management
and its stockholders. The suit, which is scheduled for trial in July 2002, seeks
monetary damages and such other relief as the court deems appropriate. The
Company believes it is unlikely that any Visa member banks would 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.
The Company is currently unable to assess the amount of the liability, if
any, to Anacom or the Company, which may result from the June 2001 unauthorized
access to Anacom's databases. Anacom, an independent subsidiary of the Company,
ceased all operations in June 2001. No ZixIt technologies or operations were
involved in the incident.
5. Recent Accounting Pronouncement
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. FAS 144 supercedes Statement of
Financial Accounting Standards 121, ("FAS 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." FAS 144
retains FAS 121's fundamental provisions while providing more guidelines on
estimating cash flows when performing a recoverability test, requires specific
classification of a long-lived asset or asset group to be disposed of other than
by sale and establishes more restrictive criteria to classify an asset or asset
group as "held for sale." The adoption of FAS 144 had no effect on the Company's
results of operations or financial position for the quarter ended March 31,
2002.
8
6. Subsequent Event
In April 2002, the Company and Yahoo! Inc. ("Yahoo!") entered into an
agreement that terminated the Company's obligation to provide secure messaging
services to users of Yahoo! Mail. The original arrangement primarily addressed
the consumer market for the Company's products and services, rather than the
commercial markets in which the Company is now focusing. In connection with the
termination of the secure messaging services, the total remaining commitment
owed to Yahoo! was reduced by $850,000, and the Company issued a promissory note
in the amount of $2,500,000, which may be paid in either cash or registered
common stock. The note is expected to be satisfied in the second quarter of 2002
when the registration of the required shares with the SEC becomes effective,
using the then current stock price. The Company will record contract termination
costs of $600,000 in the second quarter of 2002.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
In 1998 and prior years, the Company provided 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 Company determined in 1998 that the Company's
businesses were low margin and the markets in which they operated were
approaching maturity. Accordingly, the Company decided to exit its then-current
businesses, and during 1998 it sold all of its operating units, which have been
classified as discontinued operations in the condensed consolidated financial
statements. It began evaluating new Internet-related business opportunities ----
which it deemed to offer more promising prospects for growth and profitability
than the previous businesses.
The Company perceived a need for products and services to bring privacy,
security and convenience to Internet communications and since January 1999, the
Company has been developing and marketing products and services that bring
privacy, security and convenience to Internet users. ZixMail is a secure email
application and messaging service that enables Internet users worldwide to
easily send encrypted, digitally-signed communications to any email address in
the world, even if the recipient does not subscribe to ZixMail. The Company
began charging for the use of its ZixMail product and related services in the
first quarter 2001. The Company recently announced two new products, ZixBlast
and ZixVPM (Zix Virtual Private Messenger), which are now generally available.
ZixBlast, priced on a transaction basis, allows enterprises to track messages
and receive cumulative reports detailing receipt confirmations for customized,
encrypted, time and date stamped emails sent via ZixMail to large volumes of
recipients. ZixVPM is a server-based, highly secure enterprise-wide solution for
email sent over the Internet that allows IT administrators to ensure that all
email sent beyond a company's firewall by specified individuals or departments
is encrypted.
The Company's initial product in the secure email and messaging space,
ZixMail, was originally marketed to both the consumer and business markets. In
the Spring of 2001, the Company began focusing its ZixMail sales and marketing
efforts exclusively toward the business market -- but experienced only modest
success. Subsequently, in the Fall of 2001, the Company began revamping its
sales and marketing team and has hired seasoned sales and account executives
with prior experience in either selling security products and services or
enterprise software products and services. These changes have had no significant
effect on the Company's revenues to-date. However, the Company believes that its
new, experienced sales team will be able to significantly expand the Company's
sales and revenues, given the new focus on the business market and the expansion
of the Company's product portfolio.
The foundation of the Company's business model for its current set of
products 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 its secure data center operations, the core
of which is expected to remain relatively stable. New business, primarily
focused on the corporate market, is expected to be generated from the Company's
own direct sales efforts and the promotional efforts of strategic marketing
partners. For financial accounting purposes, subscription fees will generally be
recognized as revenue on a prorated basis over the length of the subscription
period, usually one year. Subscription fees are generally expected to be
collected annually at the beginning of the subscription period.
Anacom Communications, Inc. ("Anacom"), a privately-held provider of
real-time transaction processing services to Internet merchants purchased by the
Company in October 1999, ceased operations in June 2001 followng the
unauthorized access to Anacom's databases. Anacom, an independently operated
subsidiary, was purchased in conjunction with the Company's development of the
ZixCharge product which has not been commercially released. See Note 4 to the
condensed consolidated financial statements. Future operating losses
10
and liquidity will be favorably impacted by Anacom's shut-down, as Anacom
recorded operating losses, excluding non-cash charges, of $1,676,000 and
$1,091,000 for 2000 and 2001, respectively.
The cessation of the Anacom operations will have no affect on the Company's
secure e-messaging services since the Anacom business and technologies were not
used in this part of the Company's business. Rather, Anacom's credit card
processing technologies were to have been used to perform the payment gateway
functionality -- as a component of our ZixCharge Internet payment system. At
such time, if ever, that our ZixCharge system is commercially released, we will
either use the Anacom technology or a comparable technology to perform the
payment gateway functionality. Accordingly, the cessation of the Anacom
operations will not materially impede our ability to commercially release the
ZixCharge system.
The Company anticipates further operating losses in 2002, but expects the
losses will be significantly less than those incurred in 2001. The Company took
steps, in late 2001 and early 2002, to decrease its cash expenditure rate,
including reducing personnel and decreasing expenditures for outside consultants
and discretionary advertising and promotion costs. Non-cash charges in 2002 for
stock-based compensation and depreciation and amortization should be
substantially less than the corresponding amounts in 2001.
Results of Operations
Continuing Operations
Revenues
The Company is in the development stage and had revenues of $104,000 and
$389,000 for the first quarter of 2001 and 2002, respectively. The Company began
charging for its ZixMail product and services in first quarter 2001; however,
substantially all of the Company's revenues for the first quarter of 2001 were
generated by Anacom Communications, Inc. ("Anacom"), an independent subsidiary
of the Company which ceased operations in June 2001. Revenues in the first
quarter of 2002 included $234,000 as a result of the pro-rata recognition of the
future minimum payments associated with the Company's Marketing and Distribution
Agreement with Entrust Inc. ("Entrust"). Entrust is scheduled to pay the Company
future minimum payments aggregating $3,750,000 through January 2005, which are
being recognized as revenue ratably over the four year maximum service period
ending in December 2005. Additionally, in March 2002, the Company cancelled its
agreement with 911 Computer Co., Ltd. ("911"), its exclusive distributor in
South Korea, for failure to pay scheduled installment payments when due. As a
result, the $100,000 minimum payment received from 911 in 2001 is included in
first quarter 2002 revenues. Subscription fees billed or received from customers
in advance are recorded as deferred revenue and recognized as revenues ratably
over the subscription period.
Cost of revenues
Cost of revenues decreased from $3,274,000 in the first quarter of 2001 to
$2,895,000 for the corresponding period in 2002. This decrease is primarily
attributable to Anacom expenditures of $278,000 in the first quarter of 2001
that were eliminated in the comparable 2002 period following the cessation of
Anacom's operations in June 2001. Non-cash charges decreased slightly from
$2,103,000 in 2001 to $2,068,000 in 2002.
Research and development expenses
Research and development expenses decreased slightly from $2,205,000 in the
first quarter 2001 to $2,064,000 for the corresponding period in 2002. Expenses,
excluding non-cash charges, decreased by $911,000 from $1,851,000 in 2001 to
$940,000 in 2002 primarily due to reduced third party consulting expenditures of
$845,000. This decrease was partially offset by an increase in non-cash charges
of $770,000 from $354,000 in 2001 to $1,124,000 in 2002. The increase is
primarily due to a non-recurring charge of $762,000 for the cost to license
certain patents held by Tumbleweed Communications Corp.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased from $8,909,000 in
the first quarter 2001 to $5,333,000 for the same period in 2002. Expenses,
excluding non-cash charges, decreased by $602,000 from $4,558,000 in 2001 to
$3,956,000 in 2002 primarily due to a decrease in discretionary advertising
expenditures of $687,000 from $1,584,000 in 2001 to $897,000 in 2002. Also
contributing to the decrease was first quarter 2001 Anacom expenditures of
$277,000 that were eliminated in the comparable 2002 period following the
cessation of Anacom's
11
operations in June 2001. Non-cash charges decreased by $2,974,000 from
$4,351,000 in 2001 to $1,377,000 in 2002 primarily due to stock-based
compensation related to stock option grants to employees declining by
$1,598,000. Also stock-based compensation related to Anacom of $910,000 in the
first quarter 2001 was eliminated in the comparable 2002 period.
Investment and other income
Investment income decreased from $674,000 in the first quarter 2001 to
$115,000 for the same period in 2002 primarily due to the decrease in invested
cash and marketable securities and lower interest rates.
Income taxes
The income tax benefit on the loss from continuing operations in 2001 and
2002 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 first quarter losses
from continuing operations of $13,610,000 in 2001 and $9,788,000 in 2002.
Discontinued Operations
The Company recorded a gain of $48,000 for the three months ended March 31,
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 March 31, 2002, the Company's principal source of liquidity was its net
working capital position of $12,005,000, including cash and marketable
securities of $15,159,000. The Company plans to invest its excess cash primarily
in short-term, high-grade U.S. corporate debt securities, U.S. government and
agency securities or money market funds. The Company's first quarter 2002 loss
from continuing operations included significant non-cash expenses, aggregating
$4,569,000, primarily consisting of depreciation and stock-based compensation.
Net cash used by continuing operations for the first quarter 2002 was
$4,856,000, primarily representing continued development and operating costs
relating to establishing the Company's Internet-related business.
The Company's near-term liquidity will be negatively impacted as the
Company continues its development stage activities. The Company began charging
for its ZixMail product and related services in the first quarter of 2001 and
announced in late 2001 two new products that should begin contributing to
revenues in the near-term. Under its reseller and distributor agreements with
Entrust, Inc., AlphaOmega Soft Co., Ltd. and Digitopia Co. Ltd., the Company
expects to receive future minimum payments of $6,050,000 through 2005, including
$300,000 in 2002. The Company took steps, in late 2001 and early 2002, to
decrease its cash expenditure rate, including reducing personnel and decreasing
expenditures for outside consultants and discretionary advertising and promotion
costs. The trend for additions to property and equipment continues to decline,
with 2002 capital expenditures not expected to exceed $1,000,000.
The Company currently has no significant revenues; however, it believes
existing cash and marketable securities combined with scheduled installment
payments due from resellers and distributors are sufficient to sustain its
estimated level of operating expenditures through the end of the first quarter
2003. New revenue streams expected in 2002 should lengthen such time period. The
Company is considering various capital funding alternatives in order to
strengthen the Company's financial position. These capital funding alternatives
could involve one or more types of equity securities, including convertible
debt, common or convertible preferred stock and warrants to acquire common or
preferred stock. Such equity securities could be issued at or below the then
12
prevailing market price for the Company's shares of common stock. There can be
no assurances that the Company will be able to raise additional capital on
satisfactory terms if and when needed. The Company currently has no existing
borrowings or credit facilities.
Risks and Uncertainties
In these risk factors, "we," "us," "our" and "ZixIt" refer to ZixIt
Corporation and its subsidiaries.
We have no significant revenues, and we may not be able to raise needed
funds
We currently have no significant revenues; however, we believe $15,159,000
in cash and marketable securities at March 31, 2002, combined with scheduled
installment payments due from resellers and distributors of approximately
$1,400,000, are sufficient to sustain our estimated level of operating
expenditures through the end of the first quarter of 2003. We are considering
various capital funding alternatives in order to strengthen our financial
position. We cannot assure you that we will be able to raise additional capital
on satisfactory terms, if and when needed.
The market may not broadly accept our products and services, which would
prevent us from operating profitably
We must be able to achieve broad market acceptance for our products and
services in order to operate profitably. We have not yet been able to do this.
To our knowledge, there are currently no secure Internet communications
businesses similar to ours, that currently operate at the scale that we would
require, at our current expenditure levels and proposed pricing, to become
profitable. There is no assurance that our products and services will become
generally accepted or that they will be compatible with any standards that
become generally accepted, nor is there any assurance that enough paying users
will ultimately be obtained to enable us to operate profitably.
Though we have established strategic and collaborative relationships with
several strategic marketing partners, we have not realized significant revenues
from these relationships and may not in the future
One of our primary business strategies has been to enter into strategic or
other similar collaborative relationships to reach a larger customer base than
we can reach through our direct sales and marketing efforts. To date, these
strategic and collaborative business relationships have not yielded any
significant revenues.
Assuming we are successful in entering into business relationships that
yield revenues, we will want to maintain these relationships and enter into
additional relationships to successfully execute our business plan. If we are
unable to do so, we will have to devote substantially more resources to the
distribution, sale and marketing of our products and services than we would
otherwise.
Furthermore, our ability to achieve future growth will also depend on our
ability to continue to establish direct seller channels and to develop multiple
distribution channels. Failure to enter into productive reseller arrangements
could harm our business.
Competition in the secure messaging delivery business is expected to
increase, which could cause our business to fail
ZixIt's products and services are targeted to the secure messaging delivery
market. Although there are many large, well-funded participants in the
information technology (IT) security industry, none currently participate in the
secure messaging delivery market. ZixIt's primary competitors in this market are
Tumbleweed Communications, CertifiedMail.com, PrivateExpress, and Sigaba
Corporation. ZixIt believes that the secure messaging delivery market is
immature, and, for the most part, unpenetrated, unlike many segments of the IT
security industry - which are saturated. After several years of infrastructure
deployment and product development, ZixIt believes that it is the only provider
that has made the investments necessary to successfully penetrate the relatively
untapped secure messaging delivery market. ZixIt does not believe that its
primary competitors have made the investments required to match ZixIt's
infrastructure development and product offerings. Nevertheless, others may, over
time, make the
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necessary investments in infrastructure and product offerings. These competitors
may develop new technologies that are perceived as being more secure, effective
or cost efficient than our own. If ZixIt is not successful in exploiting the
technology advantage it believes it currently holds, these competitors could
successfully garner a significant share of the market, to the exclusion of
ZixIt. Furthermore, increased competition could result in pricing pressures,
reduced margins or the failure of our business to achieve or maintain market
acceptance, any of which could harm our business.
Our inability to develop and introduce new secure e-messaging products and
related services and to implement technological changes could harm our business
The emerging nature of the Internet and the secure Internet e-messaging
business and their rapid evolution, require us continually to develop and
introduce new products and services and to improve the performance, features and
reliability of our existing products and services, particularly in response to
competitive offerings. We have received no significant revenues from the sale of
any of our products and related services.
We also have under development new feature sets for our current product
line and are considering new secure e-messaging products. The success of new or
enhanced products and services depends on several factors - primarily, market
acceptance. We may not succeed in developing and marketing new or enhanced
products and services that respond to competitive and technological developments
and changing customer needs. This could harm our business. We do not currently
anticipate using any significant portion of our cash resources to acquire new
technologies from third parties in connection with developing new secure
e-messaging products or new feature sets for our current products.
If the market for secure Internet electronic messaging does not continue to
grow, demand for our products and services will be adversely affected
The market for secure Internet electronic messaging is at an early stage of
development. Continued growth of the secure Internet electronic messaging market
will depend to a large extent on the public recognizing the potential threat
posed by computer hackers and other unauthorized users. Failure of the secure
e-messaging market to grow could reduce demand for our products and services,
which would harm our business.
Capacity limits on our technology and network hardware and software may be
difficult to project, and we may not be able to expand and upgrade our systems
to meet increased use, which would result in reduced revenues
While we have ample through-put capacity to handle our customers'
requirements for the medium term, at some point we may be required to expand and
upgrade our technology and network hardware and software. We may not be able to
accurately project the rate of increase in usage on our network. In addition, we
may not be able to expand and upgrade, in a timely manner, our systems and
network hardware and software capabilities to accommodate increased traffic on
our network. If we do not timely and appropriately expand and upgrade our
systems and network hardware and software, we may lose customers and revenues.
Security interruptions to our secure data center could disrupt our business,
and any security breaches could expose us to liability and negatively impact
customer demand for our products and services
Our business depends on the uninterrupted operation of our secure data
center. We must protect this center from loss, damage or interruption caused by
fire, power loss, telecommunications failure or other events beyond our control.
Any damage or failure that causes interruptions in our secure data center
operations could materially harm our business, financial condition and results
of operations.
In addition, our ability to issue digitally-signed certified time-stamps
and public encryption codes in connection with our products and services depends
on the efficient operation of the Internet connections between customers and our
data center. We depend 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.
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Furthermore, it is critical that our facilities and infrastructure remain
secure and the market perceives them to be secure. Despite our implementation of
network security measures, our infrastructure may be vulnerable to physical
break-ins, computer viruses, attacks by hackers and similar disruptions from
unauthorized tampering with our computer systems. In addition, we are vulnerable
to coordinated attempts to overload our systems with data, resulting in denial
or reduction of service to some or all of our users for a period of time. We may
not carry sufficient business interruption insurance to compensate us for losses
that may occur as a result of any of these events; therefore, it is possible
that we may have to use additional resources to address these problems.
Messages sent through our ZixMail.net(TM) message portal will reside, for a
user-specified period of time, in our data center facilities. Also, since we
receive payments online for our ZixMail service, certain confidential customer
information is retained in our data center facilities. Any physical or
electronic break-ins or other security breaches or compromises of this
information could expose us to significant liability, and customers could be
reluctant to use our Internet-related products and services.
As was previously announced, we determined in June 2001 that credit card
databases at our independently operated subsidiary, Anacom Communications, Inc.
(we refer to it as "Anacom"), had been improperly accessed. As a result of this
improper access, we shut down the Anacom operations and Anacom ceased doing
business. The ZixMail and ZixMail.net systems and our secure data center
operations were entirely separate from the systems operated by Anacom. No ZixIt
technologies or operations were involved in the incident, nor are the Anacom
technologies involved being used in our "Zix" family of secure e-messaging
products and services. Accordingly, we do not anticipate that this breach will
have any lasting effect on the development and deployment of our secure
e-messaging products and related services. Although no claims have been asserted
against us with respect to this incident to date, claims could be asserted in
the future. We are unable to assess the amount of the liability, if any, to
Anacom or us, which may result from any claims that may be asserted.
We may have to defend our rights in intellectual property that we use in our
products and services, which could be disruptive and expensive to our business
We may have to defend our intellectual property rights or defend against
claims that we are infringing the rights of others. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us 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 us. Our business could be significantly
harmed if we are 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 us.
Our products and services could contain unknown defects or errors
We subject our products and services to quality assurance testing prior to
product release. To date, we have not become aware after product release of any
defect or error that materially affects their functionality. Nevertheless, our
products and services could contain undetected defects or errors. This could
result in loss of or delay in revenues, failure to achieve market acceptance,
diversion of development resources, injury to our reputation, litigation claims,
increased insurance costs or increased service and warranty costs. Any of these
could prevent us from implementing our business model and achieving the revenues
we need to operate profitably.
Public key cryptography technology is subject to risks
Our 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
15
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 us to make significant changes to our products, which could damage
our reputation and otherwise hurt our business. Moreover, there have been public
reports of the successful decryption of certain encrypted messages. This, or
related, publicity could adversely affect public perception of the security
afforded by public key cryptography technology, which could harm our business.
We depend on key personnel
We depend on the performance of our senior management team - including our
Chairman, President and Chief Executive Officer, John A. Ryan, and his direct
reports; our Founder, David P. Cook; and other key employees, particularly
highly skilled technical personnel. Our success also depends on our ability to
attract, retain and motivate these individuals. There is competition for these
personnel, and we face a tight employment market for the particular individuals
we need to attract. Other than for Messrs. Ryan and Cook, none of our employees
have employment contracts with us nor are there any agreements with members of
our senior management team or other key employees that prevent them from leaving
ZixIt at any time. In addition, we do not maintain key person life insurance for
any of our personnel. The loss of the services of any of our key employees or
our failure to attract, retain and motivate key employees could harm our
business.
We could be affected by government regulation
Exports of software products using encryption technology are generally
restricted by the United States government (we refer to it as the "U.S.").
Although we have obtained U.S. government approval to export our 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 encryption products, such as the
ZixMail product. Failure to obtain the required governmental approvals would
preclude the sale or use of the ZixMail product in international markets.
Our stock price may be volatile
The market price of our 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 generally declined substantially and broadly.
Further issuances of equity securities may be dilutive to current
shareholders
As noted above, we are considering various capital funding alternatives in
order to strengthen our financial position. These capital funding alternatives
could involve one or more types of equity securities, including convertible
debt, common or convertible preferred stock and warrants to acquire common or
preferred stock. Such equity securities could be issued at or below the
then-prevailing market price for our shares of common stock. In addition, we
incentivize employees and attract new employees by issuing options to purchase
our shares of common stock. The interest of our existing shareholders could be
diluted by stock option issuances to employees and any equity securities issued
in a capital funding financing. Moreover, we currently have on file registration
statements covering the resale of securities held by existing holders of our
common stock and holders of warrants or options to purchase shares of our common
stock.
A private investor owns a large percentage of our outstanding stock and
could significantly influence the outcome of actions
George Weaver Haywood, a private investor, has beneficial ownership of
approximately 20% of our outstanding common stock, according to his recent
filings with the Securities and Exchange Commission (we refer to it as the
"SEC"). Mr. Haywood, in his most recent SEC filing, has stated that our stock
was not acquired for, and is not being held for, the purpose of, or with the
effect of, changing or influencing the control of ZixIt. However, because of his
large percentage ownership, Mr. Haywood could be able to significantly influence
all matters
16
requiring approval by our shareholders, including the election of directors and
the approval of mergers or other business combination transactions. Mr.
Haywood's interests may not be aligned with the interests of our other
shareholders.
Terrorist attacks have contributed to economic instability in the U.S.;
continued terrorist attacks, war or other civil disturbances could lead to
further economic instability and depress our stock price
On September 11, 2001, the U.S. was the target of terrorist attacks of
unprecedented scope. These attacks caused instability in the global financial
markets and contributed to volatility in the stock prices of U.S. publicly
traded companies. These attacks may lead to armed hostilities or to further acts
of terrorism and civil disturbances in the U.S. or elsewhere, which may further
contribute to economic instability in the U.S. and could harm our business.
We may have liability for indemnification claims arising from the sale of
our previous businesses in 1998 and 1997
We disposed of our remaining operating businesses in 1998 and 1997. In
selling those businesses, we agreed to provide customary indemnification to the
purchasers of those businesses for breaches of representations and warranties,
covenants and other specified matters. Although we believe that we have
adequately provided for future costs associated with these indemnification
obligations, indemnifiable claims could exceed our estimates.
We may encounter other unanticipated risks and uncertainties in the
Internet market or in developing new products and services, and we cannot assure
you that we will be successful in responding to any unanticipated risks or
uncertainties
There are no assurances that we will be successful or that we will not
encounter other, and even unanticipated, risks. We discuss other operating,
financial or legal risks or uncertainties in our periodic filings with the SEC.
We are, of course, also subject to general economic risks.
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, both as amended. All statements other than statements of
historical fact are "forward-looking statements" for purposes of federal and
state securities laws, including: any projections of earnings, revenues or other
financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements concerning proposed new
products, services or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. Forward-looking statements may
include the words "may," "will," "estimate," "intend," "continue," "believe,"
"expect" or "anticipate" and other similar words. Such forward-looking
statements may be contained in the "Risk Factors" section above, among other
places.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to inherent risks and
uncertainties, such as those disclosed in this document. We do not intend, and
undertake no obligation, to update any forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 2002, 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 2001 Annual Report to Shareholders on
Form 10-K/A.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ZixIt's 2002 Annual Meeting of Stockholders will be held on July 29, 2002
at 9:00 a.m., Central time. This annual meeting date is more than 30 days later
than the anniversary date of the 2001 Annual Meeting of Stockholders. The
deadline for submitting stockholder proposals to be included in ZixIt's proxy
statement for the 2003 Annual Meeting of Stockholders has been changed from
January 6, 2003 to February 10, 2003. The deadline for submitting matters to be
brought before the 2002 Annual Meeting of Stockholders has not been changed from
February 18, 2002.
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 Amendment No. 4 to Stock Option Agreement, dated March
1, 2002, between David P. Cook and ZixIt.
*10.2 Form of Severance Agreement between the Company and
Dennis Heathcote and Wael Mohamed.
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
March 31, 2002.
*Previously filed
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
ZIXIT CORPORATION
(Registrant)
Date: May 24, 2002 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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