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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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ZIXIT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2216818
(I.R.S. Employer
(State of Incorporation) Identification Number)
2711 N. 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None Not Applicable
(Title of Class) (Name of Exchange on
Which Registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
$0.01 Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of January 31, 2002, there were 17,557,854 shares of ZixIt Corporation
$0.01 par value common stock outstanding, 15,149,274 of which having an
aggregate market value of $75,746,370 were held by non-affiliates. For purposes
of the above statement, all directors and officers of the Registrant are
presumed to be affiliates.
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PART I
ITEM 1. Business.
Overview
During 1998, ZixIt Corporation ("ZixIt" or the "Company") sold all of its
previous operating businesses and, since January 1999, the Company has been
developing and marketing products and services that bring privacy, security and
convenience to Internet communications.
ZixIt is a leading global provider of secure content delivery and management
(CDM) solutions and services that enable enterprises to enhance their current
email networks and enterprise applications to securely send and receive
electronic communications. ZixIt applies its award-winning technology and
managed, subscription-based services to enable global enterprises to securely
distribute electronic content with business partners, customers and internal
employees.
Email is being used in ways that were never envisioned, and it has become a
mission-critical, core communication technology for enterprises. However, many
inherent risks exist in the proliferated use of unsecured email by employees,
especially in the use of email across the public Internet.
In addition, federal regulations such as HIPAA (Health Insurance Portability
and Accountability Act) and enhanced security awareness in general have
organizations adopting data security faster than ever. Corporations, however,
require ubiquitous coverage that is cost-effective and quickly deployed.
To satisfy the need for enterprise-wide email security, ZixIt delivers
comprehensive solutions that are scalable, easily integrated within the
organization and quickly deployable. ZixIt solutions encompass a best-method of
delivery model and a centralized directory to enable simplicity of use,
flexibility and ease of management. ZixIt solutions include ZixMail(TM) and
ZixMail.net(TM) desktop solutions for sending and receiving secure email,
ZixBlast(TM), which is an automated broadcaster of high volumes of customized
messages, and the recently introduced Zix Virtual Private Mail (ZixVPM(TM)),
which is a server-based solution that represents the future evolution and
expansion of current products and services that satisfy ZixIt's customer's
content delivery and management needs.
ZixIt customers are able to keep existing network infrastructures without
imposing additional demands on those resources, and a corporate-wide deployment
can be completely integrated in half a day or less. With ZixVPM, ZixIt has the
ability to tap into a worldwide market for secure content delivery and
management that is estimated to total $23 billion in 2002, growing to $46
billion by 2005, according to IDC.
Successful growth 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 Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a description of certain management
assumptions, risks and uncertainties relating to the Company's operations.
ZixIt was incorporated in Texas in 1988. ZixIt's executive offices are
located at 2711 North Haskell Avenue, Suite 2300, LB 36, Dallas, Texas
75204-2960, (214) 370-2000. ZixIt's secure data center and its HTTP/SMTP relay
systems are also located in Dallas, Texas. ZixIt's Web site address is
www.zixit.com. Information contained on ZixIt's Web site is not a part of this
report.
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Products and Services
ZixVPM - ZixIt's Virtual Private Mail solution - is a server-based solution
for enterprises that require security and encryption for inbound and outbound
email communications. ZixVPM provides secure email correspondence among remote
employees, customers and business partners without requiring the enterprise to
create, deploy and manage end-user keys and software. ZixVPM operates
independently of existing email systems and can integrate seamlessly with
scanning and filtering tools and policies. ZixVPM is also completely
transparent to end-users and requires neither individual private or public keys
nor desktop software.
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. ZixMail provides desktop-level encryption and works
with existing email addresses and systems, and is available in versions that
integrate fully with Microsoft Outlook(R) and Lotus Notes.(R) As with ZixVPM,
ZixMail does not require the user to manually exchange or manage encryption
keys. ZixIt's secure data center automatically validates a user's unique
digital signature and distributes public keys in real time for each message.
Optional certified receipts irrefutably establish the exact time messages are
sent and opened.
Recipients who are not ZixMail subscribers can receive and reply to ZixMail
messages free of charge through the ZixMail.net service (a secure Web-based
portal) that provides a browser-based solution for viewing and composing secure
messages over a Secure Socket Layer (SSL) Internet connection. Messages are
stored until the expiration date (set by the sender) or until the recipient
opens and deletes the message. At the option of the sender, ZixMail.net will
generate and send a pick-up receipt and an expiration notice to the sender. The
ZixMail.net service allows ZixMail subscribers to send secure messages to
non-ZixMail subscribers, thus providing a send-to-anyone encryption solution.
ZixBlast, built on ZixIt's core technology, provides high-volume secure
electronic messaging for companies needing to communicate confidential
information to large numbers of customers or to other large audiences. ZixBlast
easily encrypts and delivers private information securely to any email address.
ZixBlast summary reports provide critical information by recording the number
of messages sent, the number opened and the percentage of messages opened.
Detailed reports supply this information for each recipient's email address,
indicating exactly when messages were sent and opened. Reports can be generated
daily, weekly or monthly, as needed, so senders can measure and know who is
reading messages sent and who is not.
ZixIt's key management system implements, in effect, PKI (Public Key
Infrastructure) functionality for email encryption. ZixIt's solutions are
provided as a service, thereby removing the significant implementation burden
and cost that PKI infrastructures or products require. The ZixIt implementation
is focused on ease of use to the senders and recipients of encrypted email
while affording them the option of the strongest encryption, an extended
feature set and the maximum user convenience possible. ZixIt users obtain:
. privacy with encryption
. authentication
. integrity of message
. non-repudiation - such that senders cannot deny sending, and recipient
cannot deny receiving, a message
ZixIt has several approaches for its "best-method" of delivery transmission
-- with a single administrative console that allows corporations to send
electronic content to anyone ... anywhere ... at anytime, securely. Due to
ZixIt's unique best-method of delivery and service capabilities, it provides
several added levels of security while assuming the burden of managing users'
public keys. These additional security components are:
. certified receipts
. storage security
3
. time stamps that are non-repudiable
. corporate policy enforcement
ZixIt's core technology and best-method of delivery is enabled by ZixIt's
centralized directory gateway. The centralized directory gateway provides a
stable, secure, highly responsive, and scalable environment for all secure
messaging needs. The centralized directory gateway provides the following
services:
. validation and distribution of public keys in real time for each message
. creation of irrefutable, time-stamped transaction certificates and
certified receipts
. delivery of ZixMail.net messages via SSL web-browser
The Company has also developed ZixCharge(TM), a shopping portal and Internet
payment authorization system that enables consumers, using their existing
charge cards, to purchase goods and services over the Internet without being
required to provide personal and charge card information to Internet merchants.
ZixCharge has not been commercially released. See Item 3. "Legal Proceedings"
below and Note 9 to the consolidated financial statements.
Sales and Marketing
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. The Company continues to pursue
collaborative relationships with third parties that market to companies with
large existing email user bases. Progress has been made marketing ZixMail in
the international arena, as evidenced by a distributor agreement with an entity
in Japan.
The Company is in the process of rebuilding its sales and marketing team and
refocusing its current distribution strategy. The Company is targeting
financial, healthcare and manufacturing markets, as well as international
markets and the Fortune 1000 list of corporations. The healthcare industry
offers commercial opportunities as a result of the provisions mandated by
HIPAA. Eliminating paper flow and maintaining privacy are two of the prime
objectives of this important piece of federal legislation.
Employees
ZixIt had 94 employees as of January 31, 2002.
Research and Development; Patents and Trademarks
ZixIt's continuing operations incurred research and development expenses of
$9,019,000, $8,661,000 and $23,548,000 in 2001, 2000 and 1999, respectively.
4
ZixIt has filed several patent applications covering concepts ZixIt is
employing, or may employ, in implementing its Internet businesses. In addition,
ZixIt and certain of its subsidiaries have filed applications for trademarks
and service marks, as applicable, for "ZixIt", "ZixMail", "ZixMail.net",
"ZixBlast", "ZixVPM" and other "Zix" related marks.
Customers
ZixIt, a development stage company, had no significant revenues in 2001,
2000 and 1999. The Company began charging for its ZixMail services in the first
quarter of 2001, with ZixVPM and ZixBlast expected to contribute to revenues in
the near-term.
Sales Backlog
As a development stage company, ZixIt had no measurable backlog as of
January 31, 2002 and January 31, 2001.
Geographic Information
ZixIt's operations are based in the United States ("U.S."), and its
corporate assets at December 31, 2001 were primarily comprised of cash
investments and marketable securities invested generally in U.S. corporate debt
securities and high-grade daily money market funds.
ITEM 2. Properties.
ZixIt leases approximately 9,400 square feet of space for its corporate
offices in Dallas, Texas under a sublease that expires in September 2004;
approximately 29,000 square feet of space for its primary secure data center
operations in Dallas, Texas under a sublease that expires in September 2004;
and approximately 6,910 square feet of space for back-up data center operations
in Dallas, Texas under a sublease that expires in July 2003. Through December
31, 2001, ZixIt has invested approximately $30,000,000 in property and
equipment to establish its secure data center. Features of the secure data
center include:
. Multi-level security, including cameras, access controlled with badge and
biometric hand readers and 24-hour operations personnel;
. Communications:
. Three redundantly configured DS3 (45 Mbit) fiber connections;
. Three independent ISPs; and
. Redundant Cisco 7500 routers;
. Power:
. Redundant electrical feeds from two independent utility power grids;
. Redundant 400 kw UPS systems;
. 1,000 kw diesel generator located underground; and
. Four redundantly configured Power Distribution Units (PDUs);
. Two Sun (Starfires) Enterprise 10,000 Application Servers; currently 64
Central Processing Units (CPUs), but expandable to 128 CPUs;
. 6 Sun Enterprise 4500 Application Servers;
. 220 Sun UltraSparc web Servers;
. 4 EMC Symmetrix 3830(TM) Enterprise Storage units for online storage (5
Terabytes currently, but expandable to 12 Terabytes);
5
. 2 EMC Symmetrix 3900 Enterprise Storage units for online storage (9
Terabytes currently, but expandable to 18 Terabytes);
. StorageTek automated tape library (360-tape capacity) for offline storage
(12-20 Terabytes); and
. Email-based customer response center systems, including 3 Intel-based
servers with estimated intelligent response capacity of 20,000 inquiries
per day.
ZixIt has two HTTP/SMTP relay systems located in Dallas, Texas. These relays
enable ZixIt to serve those ZixMail users who choose not to use their existing
SMTP mail servers or who desire to use a HTTP-based email address, such as a
Yahoo(TM) or HotMail(TM) address.
ITEM 3. Legal Proceedings.
On December 30, 1999, the Company and ZixCharge.com, Inc., 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 192/nd/ 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 effect on the Company's
consolidated financial statements.
ITEM 4. Submission of Matters to Vote of Security Holders.
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
ZixIt's common stock trades on the The Nasdaq Stock Market under the symbol
ZIXI. The following table shows the high and low sales prices by quarter for
2001 and 2000. These prices do not include adjustments for retail mark-ups,
mark-downs or commissions.
2001 2000
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Quarter Ended High Low High Low
------------- ------ ----- ------ ------
March 31............................................ $16.00 $6.50 $96.50 $29.50
June 30............................................. $13.45 $5.13 $71.50 $21.50
September 30........................................ $10.94 $4.06 $59.47 $27.62
December 31......................................... $ 9.92 $4.41 $31.38 $ 5.97
At January 31, 2002, there were 17,557,854 shares of common stock
outstanding held by 456 stockholders of record. On that date, the last reported
sales price of the common stock was $5.00.
ZixIt has not paid any cash dividends on its common stock during the last
two years and does not anticipate doing so in the foreseeable future.
6
ITEM 6. Selected Financial Data.
The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the years in the five-year period ended December 31, 2001, which
are derived from the audited consolidated financial statements of the Company.
The consolidated financial statements and notes thereto as of December 31, 2001
and 2000, and for the years ended December 31, 2001, 2000 and 1999, and the
report of Ernst & Young LLP thereon are included elsewhere in this Form 10-K.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein.
Year Ended December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- --------
(In thousands, except per share data)
Statement of Operations Data(1):
Revenues............................................... $ 317 $ 394 $ 99 $ -- $ --
Research and development expenses(5)................... (9,019) (8,661) (23,548) -- --
Operating costs and general corporate expenses(2)(5)... (44,888) (42,983) (16,696) (4,022) (2,931)
Investment and other income (loss), net(6)............. (3,204) 1,928 3,533 1,956 1,068
-------- -------- -------- ------- --------
Loss from continuing operations before income taxes.... (56,794) (49,322) (36,612) (2,066) (1,863)
Income taxes........................................... -- -- 807 576 (8)
-------- -------- -------- ------- --------
Loss from continuing operations........................ (56,794) (49,322) (35,805) (1,490) (1,871)
Discontinued operations(1)
Income (loss) from discontinued operations, net of
income taxes(3)(4)................................ -- -- -- 6,105 (12,089)
Gain (loss) on sale of discontinued operations, net
of income taxes................................... 48 441 1,453 21,651 (3,657)
-------- -------- -------- ------- --------
48 441 1,453 27,756 (15,746)
-------- -------- -------- ------- --------
Net income (loss)...................................... $(56,746) $(48,881) $(34,352) $26,266 $(17,617)
======== ======== ======== ======= ========
Basic and diluted earnings (loss) per common share.....
Continuing operations............................... $ (3.32) $ (3.03) $ (2.35) $ (0.09) $ (0.12)
Discontinued operations............................. -- 0.03 0.10 1.75 (1.05)
-------- -------- -------- ------- --------
Net income (loss)................................... $ (3.32) $ (3.00) $ (2.25) $ 1.66 $ (1.17)
======== ======== ======== ======= ========
Shares used in computing basic and diluted earnings
(loss) per share..................................... 17,083 16,266 15,244 15,836 15,081
Balance Sheet Data:
Working capital........................................ $ 17,266 $ 48,685 $ 39,766 $81,291 $ 63,648
Total assets........................................... 32,436 78,677 66,523 86,898 63,919
Total stockholders' equity............................. 27,529 75,130 62,894 81,449 63,696
Stockholders' equity per share......................... 1.57 4.41 4.10 5.40 3.76
--------
(1) In 1995, the Company acquired Cotag International Limited, Cardkey Systems,
Inc., Cardkey Systems Limited and WaveNet International, Inc. WaveNet
International, Inc. was sold in 1997, while the remainder of these
businesses and the Company's Transportation Systems Group ("TSG") were sold
in 1998. The operating results of these businesses have been classified as
discontinued operations for all periods presented. See Note 6 to the
consolidated financial statements included herein.
(2) Operating costs and general corporate expenses for the years 1997 and 1998
represent the costs associated with a holding company function.
(3) In 1997, loss from discontinued operations includes a $5.7 million pre-tax
contract loss provision related to a multi-year implementation of an
electronic toll collection system by the TSG.
7
(4) In 1997, income taxes related to discontinued operations includes $4.7
million representing the effect of establishing a valuation allowance for
U.S. deferred tax assets.
(5) In 2001, 2000 and 1999, expenses associated with continuing operations
include non-cash stock-based compensation of $8.4 million, $11.8 million
and $12.3 million, respectively. See Note 3 to the consolidated financial
statements included herein. In 2000, expenses include advertising costs
totaling $10.3 million. In 2001, expenses include a $3 million write-off of
digital identification certificates and advertising costs totaling $4.5
million.
(6) In 2001, the net investment loss includes the write-off of the Company's $5
million investment in Maptuit Corporation.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Prior to 1999, 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. These businesses 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 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 of 2001. The Company recently
announced two new products, ZixBlast, which is now generally available, and
ZixVPM (Zix Virtual Private Mail), which is scheduled to be released in the
first quarter of 2002. ZixBlast, priced on a transaction basis, will allow
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 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.
The Company anticipates further operating losses in 2002, but expects the
losses will be significantly less than those incurred in 2001. 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. Non-cash charges
in 2002 for stock-based compensation and depreciation and amortization should
be substantially less than the corresponding amounts in 2001.
8
Results of Operations
Continuing Operations
Revenues
The Company is in the development stage and had no significant revenues in
1999, 2000 and 2001. Substantially all of the Company's revenues since 1999
have been generated by Anacom Communications, Inc. ("Anacom") which ceased
operations in June 2001. The Company began charging for its ZixMail product 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
The Company began incurring development expenses for its current business
endeavors in the first quarter of 1999, resulting in total research and
development expenses of $23,548,000 in 1999, $8,661,000 in 2000 and $9,019,000
in 2001. The 1999 expenses include a net non-cash charge of $6,915,000
representing the fair value of options granted to Lante Corporation ("Lante"),
a third party Internet services company that assisted the Company with its
development efforts, reduced by $1,872,000, the fair value, on the date of
grant, of options granted to the Company by Lante. Lante's engagement was
completed in November 1999, resulting in a final valuation for the options
granted to Lante. The remaining research and development expenses in 1999 of
$16,633,000 primarily consisted of expenditures to third parties, including
$11,282,000 paid to Lante, for development of software for the Company's base
technology and related ZixMail and ZixCharge systems. In 2000, employee
compensation costs increased but were more than offset by a reduction in third
party consulting expenditures as a result of hiring additional technical
personnel to support the development of the Company's various Internet
products. In 2001, employee compensation costs continued to increase as
additional technical personnel were hired. These increases in compensation
costs were offset, for the most part, by continued reductions in third party
consulting expenditures.
Operating costs and general corporate expenses
Operating costs and general corporate expenses increased from $16,696,000 in
1999 to $42,983,000 in 2000 and further increased to $44,888,000 in 2001. The
change from 1999 to 2000, amounting to $26,287,000, is primarily due to
discretionary advertising costs of $10,267,000 for various print media and
online advertising on sites such as Yahoo!, Lycos and McAfee.com and non-cash
charges of $20,453,000, including stock-based compensation of $11,800,000.
Included in 1999 are non-cash charges of $8,257,000, including a non-recurring
expense of $3,335,000, relating to stock options granted in January 1999 to
certain of the Company's outside directors under a plan that was approved by
the stockholders in September 1999. The increase from 2000 to 2001, amounting
to $1,905,000, is primarily due to additional personnel in the areas of direct
sales and marketing support and increased depreciation expense due to an
increased investment in property and equipment, partially offset by a reduction
in discretionary advertising costs. In addition, with the ceasing of Anacom's
business mid-year 2001, operating losses of Anacom, excluding non-cash charges,
decreased from $1,676,000 in 2000 to $1,091,000 in 2001. Non-cash charges of
$21,475,000 in 2001 include stock-based compensation of $8,378,000 and a
$3,000,000 write-off of digital identification certificates. See Notes 3 and 7
to the consolidated financial statements.
Investment and other income, net
Investment income decreased from $3,533,000 in 1999 to $1,928,000 in 2000
and further decreased to an investment loss of $3,204,000 in 2001. The decrease
from 1999 to 2000 is primarily due to a write-down of the Company's equity
investment in Lante of $1,202,000, representing the decline in market value
that management believed was other than temporary. Also contributing to the
change is a decrease in invested cash and marketable securities partially
offset by an increase in interest rates. The decrease from 2000 to 2001 is
primarily due to a write-off of the Company's $5,000,000 related party
investment in Maptuit Corporation ("Maptuit"). See Note 7 to the consolidated
financial statements. Also contributing to the change are lower interest rates
in 2001 and a decrease in invested cash and marketable securities during 2001.
9
Income taxes
The income tax benefit on the loss from continuing operations in 1999, 2000
and 2001 is different from the U.S. statutory rate of 34%, primarily due to
unbenefitted U.S. losses and unbenefitted tax credits. The Company has fully
reserved its net deferred tax assets in 1999, 2000 and 2001 due to the
uncertainty of future taxable income.
Loss from continuing operations
As a result of the foregoing, the Company experienced losses from continuing
operations of $35,805,000 in 1999, $49,322,000 in 2000 and $56,794,000 in 2001.
Discontinued Operations
The Company sold all of its remaining operating businesses during 1998
realizing follow-on after-tax gains of $1,453,000, $441,000 and $48,000 in
1999, 2000 and 2001, respectively.
Liquidity and Capital Resources
At December 31, 2001, the Company's principal source of liquidity was its
net working capital position of $17,266,000, including cash and marketable
securities of $20,065,000. 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 2001 loss
from continuing operations included significant non-cash expenses, aggregating
$28,301,000, primarily consisting of depreciation and amortization, stock-based
compensation and write-offs of the Maptuit investment and digital
identification certificates. Net cash used by continuing operations in 2001 was
$27,015,000, 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 recently
announced two new products that should begin contributing to revenues in the
near-term. Under its reseller and distributor agreements, the Company expects
to receive minimum payments of $5,350,000 through 2004, including $900,000 in
2002. 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. As a
result of the cost reductions recently initiated, the Company's near-term
expenditure level is expected to average approximately $1,500,000 per month,
down from approximately $2,300,000 per month experienced in the last half of
2001. The trend for additions to property and equipment continues to decline,
with 2002 capital expenditures not expected to exceed $1,000,000.
The Company has made cash investments in Maptuit convertible debt and equity
securities totaling $5,000,000, which have been written off in the last half of
2001. 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 privately-held enterprises. See Note 7 to the consolidated
financial statements.
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
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 Company currently has no existing borrowings or credit
facilities.
10
Critical Accounting Policies
In preparing its consolidated financial statements in conformity with
accounting principles generally accepted in the United States, the Company must
make a variety of estimates that affect the reported amounts and related
disclosures. The following two accounting policies are currently considered
most critical to the preparation of the consolidated financial statements.
Property and Equipment
At December 31, 2001, a significant portion of the Company's total assets
(approximately 32%) consists of property and equipment. The net book value of
property and equipment totaled $10,263,000, of which $7,219,000 was related to
equipment in the Company's secure data center. The data center equipment is
being depreciated over a three-year useful life and will be substantially
depreciated by December 31, 2002. Management performs periodic reviews of the
carrying value of the data center equipment. To date, no impairment write-downs
have been recorded on the data center equipment as it continues to be used in
pursuit of the Company's business goals, and such equipment is believed to have
alternative uses which would allow the Company to realize its carrying value.
If the Company's plans change for the use of this equipment and if such
alternative future uses change, the Company may be required to record an
impairment charge.
Revenue Recognition
To date, the Company's revenues from secure email delivery services have
been derived from subscription fees. Subscription fees are initially recorded
as deferred revenue and recognized as revenues ratably over the subscription
period. In future periods, the Company expects to also generate revenues
through reseller arrangements. Under these arrangements, revenue will generally
be recognized as the Company provides the related services. Determination of
the timing of revenue recognition will be dependent on terms and conditions
specified in individual contracts and could involve a significant level of
judgment.
Recent Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 141 ("FAS 141"), "Business Combinations," effective July 1, 2001.
FAS 141 eliminates pooling-of-interest accounting for business combinations and
changed the requirements for the recognition of intangible assets apart from
goodwill. Thus, any acquisition completed after the effective date must be
accounted for as a purchase. The adoption of FAS 141 did not have any impact on
the Company's results of operations or financial position.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets,"
effective January 1, 2002. FAS 142 requires that goodwill and certain
indefinite-lived intangible assets no longer be amortized, but will be tested
at least annually for impairment. At December 31, 2001, the Company's recorded
goodwill was fully amortized. Accordingly, the adoption of FAS 142 will not
have any impact on the Company's results of operations or financial position.
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 Company does not expect the adoption of FAS
144 will have a material effect on its results of operations or financial
position.
11
Risks and Uncertainties
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this report contain
statements that constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (we refer to it
as the "Exchange Act"). The words "expect," "estimate," "anticipate,"
"predict," "believe," "plan," "should," "goal" and similar expressions and
variations thereof are intended to identify forward-looking statements. We
caution you 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.
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 existing cash
and marketable securities combined with the scheduled installment payments due
from resellers and distributors 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 and
e-commerce 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.
We are relying on establishing and maintaining strategic and other
collaborative relationships to gain customers and grow revenues. Failure to
establish and maintain such relationships would result in reduced revenues.
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.
Our industry is highly competitive and, if we do not compete effectively, we
may suffer price reductions, reduced gross margins and loss of market share.
We anticipate that the secure Internet communications business will remain
intensely competitive. We compete with larger and smaller companies that
provide products and services that are similar to ours. Our
12
competitors may develop new technologies in the future that are perceived as
being more secure, effective or cost efficient than the technology underlying
our products and services. We expect that competition will increase in the near
term and that our primary long-term competitors may not yet have entered the
market.
Increased competition could result in pricing pressures, reduced margins or
the failure of our secure Internet communications business to achieve or
maintain market acceptance, any of which could harm our business.
Our inability to introduce new products and services and to implement
technological changes could harm our business.
The emerging nature of the Internet and the secure Internet communications
business and their rapid evolution, require us continually to provide new
products and services and to improve the performance, features and reliability
of our existing products and services, particularly in response to competitive
offerings. The success of new or enhanced products and services depends on
several factors, including timely completion, introduction and 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.
If the market for secure Internet and e-commerce does not continue to grow,
demand for our products and services will be adversely affected.
The market for secure Internet and e-commerce is at an early stage of
development. Continued growth of the secure Internet and e-commerce market will
depend, in part, on the following:
. the continued expansion of Internet usage and the number of organizations
adopting or expanding intranets and extranets; and
. the public recognition of the potential threat posed by computer hackers
and other unauthorized users.
A decline in the growth of this market 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.
As traffic from our customers through our network increases, we may need 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
13
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.
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 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. The ZixMail and
ZixMail.net systems and our secure data center operations were entirely
separate from those of Anacom. No ZixIt technologies or operations were
involved in the incident. We are currently unable to assess the amount of the
liability, if any, to Anacom or us, which may result from the unauthorized
access to Anacom's databases.
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.
Any of our products and services could contain undetected defects or errors.
Despite our testing, defects or errors may occur, which could result in loss of
or delay in revenues, failure to achieve market acceptance, diversion of
development resources, injury to 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
mathematically derive a user's private key from the user's related public key.
Should methods be developed that
14
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 and other key
employees, particularly highly skilled technical and sales and marketing
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. There are no agreements with any of our personnel 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.
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.
15
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
Securities and Exchange Commission (we refer to it as the "SEC"). We are, of
course, also subject to general economic risks.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that it faces material market risk with respect
to its cash investments and marketable securities, which totaled $20,065,000
and $50,290,000 at December 31, 2001 and 2000, respectively. These investments,
which mature at various dates through April 2002, primarily consist of
high-grade U.S. corporate debt securities and daily money market funds, and do
not include derivative financial instruments or derivative commodity
instruments, as such terms are defined by the SEC in applicable regulations.
The Company has not undertaken any additional actions to cover interest rate
market risk and is not a party to any interest rate market risk management
activities. A hypothetical ten percent change in market interest rates over the
next year would not materially impact the Company's operating results or cash
flows due to the short-term, high credit quality nature of the Company's
investments.
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item begins on page F-1 hereof.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference from the
sections "Who are our directors, executive officers and significant employees?"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
2002 Proxy Statement, which will be filed in connection with the Company's 2002
annual meeting of stockholders.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference from the
section "Compensation of Directors and Executive Officers" in the Company's
2002 Proxy Statement, which will be filed in connection with the Company's 2002
annual meeting of stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference from the
section "How much stock do our principal stockholders, directors and executive
officers own?" in the Company's 2002 Proxy Statement, which will be filed in
connection with the Company's 2002 annual meeting of stockholders.
16
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference from the
section "Compensation of Directors and Executive Officers - Certain
Relationships and Related Transactions" in the Company's 2002 Proxy Statement,
which will be filed in connection with the Company's 2002 annual meeting of
stockholders.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1 hereof.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the SEC have been omitted because of the absence of the
conditions under which they are required or because the information required is
included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
No. Description
--- -----------
3.1* -- Restated Articles of Incorporation of ZixIt, dated December 4, 2001.
3.2* -- Restated Bylaws of ZixIt, dated November 8, 2001.
4.1 -- Specimen certificate for common stock of ZixIt. Filed as Exhibit 4.1 to ZixIt's Annual Report on
Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
10.1 -- 1990 Stock Option Plan of ZixIt (Amended and Restated as of September 1999). Filed as Exhibit
10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999,
and incorporated herein by reference.
10.2 -- 1992 Stock Option Plan of ZixIt (Amended and Restated as of September 1999). Filed as Exhibit
10.2 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999,
and incorporated herein by reference.
10.3 -- 401(k) Retirement Plan of ZixIt and related Adoption Agreement. Filed as Exhibit 10.5 to ZixIt's
Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by
reference.
10.4 -- 1995 Long-Term Incentive Plan of ZixIt (Amended and Restated as of September 20, 2000). Filed
as Exhibit 10.3 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.
10.5 -- 1996 Employee Stock Purchase Plan of ZixIt (Amended and Restated as of July 1, 2000). Filed as
Exhibit 10.2 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000, and incorporated herein by reference.
10.6 -- ZixIt's 1999 Directors' Stock Option Plan (Amended and Restated as of January 1, 2000). Filed as
Exhibit 10.5 to ZixIt's Annual Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.
10.7 -- ZixIt's 2001 Employee Stock Option Plan, dated May 31, 2001. Filed as Exhibit 10.1 to ZixIt's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, and incorporated
herein by reference.
17
Exhibit
No. Description
--- -----------
10.8 -- ZixIt's 2001 Stock Option Plan, effective as of May 15, 2001. Filed as Exhibit 4.1 in ZixIt's
Registration Statement on Form S-8 (Commission No. 333-62604), dated June 8, 2001, and
incorporated herein by reference.
10.9 -- Stock Option Agreement, effective as of April 29, 1998, between David P. Cook and ZixIt. Filed
as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998, and incorporated herein by reference.
10.10 -- Amendment No. 1 to Stock Option Agreement, dated February 18, 2000, between David P. Cook
and ZixIt. Filed as Exhibit 10.8 to ZixIt's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.
10.11 -- Amendment No. 2 to Stock Option Agreement, dated May 2, 2000, between David P. Cook and
ZixIt. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, and incorporated herein by reference.
10.12 -- Amendment No. 3 to Stock Option Agreement, dated November 2, 2000, between David P. Cook
and ZixIt. Filed as Exhibit 10.10 to ZixIt's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference.
10.13* -- Stock Option Agreement, effective as of December 26, 2000, between David P. Cook and ZixIt.
10.14 -- Employment Agreement, effective as of December 26, 2000, between David P. Cook and ZixIt.
Filed as Exhibit 10.11 to ZixIt's Annual Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference.
10.15 -- Stock Option Agreement, effective as of November 14, 2001, between John Ryan and ZixIt. Filed
as Exhibit 4.2 in ZixIt's Registration Statement on Form S-8 (Commission No. 333-74890), dated
December 11, 2001, and incorporated herein by reference. Portions of this exhibit were omitted
pursuant to a request for confidential treatment that was filed with the SEC on November 26,
2001. On December 5, 2001, the SEC approved the filing of this exhibit omitting the portions for
which confidential treatment was requested. The omitted information has been filed with the SEC.
10.16 -- Employment Agreement, effective as of November 14, 2001, between John Ryan and ZixIt. Filed
as Exhibit 4.1 in ZixIt's Registration Statement on Form S-8 (Commission No. 333-74890), dated
December 11, 2001, and incorporated herein by reference.
10.17* -- Severance Agreement, dated February 25, 2002, between ZixIt and Steve M. York.
10.18* -- Severance Agreement, dated February 25, 2002, between ZixIt and Ronald A. Woessner.
10.19* -- Form of Severance Agreement between ZixIt and Don Druckenbrodt, Gary Liu and Mike Poss.
10.20 -- Sublease Agreement, dated February 12, 1999, between Fidelity Corporate Real Estate, L.L.C.
and ZixIt Operating Corporation. Filed as Exhibit 10.13 to ZixIt's Annual Report on Form 10-K
for the year ended December 31, 1998, and incorporated herein by reference.
10.21 -- Sublease Agreement, dated May 8, 2000, between Rosewood Resources, Inc. and ZixIt. Filed as
Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000, and incorporated herein by reference.
10.22* -- Lease Agreement, dated July 10, 1998, between Dallas Galleria Limited and Amtech Corporation
d/b/a AMTC Corporation.
10.23 -- Common Stock and Warrant Purchase Agreement, dated April 11, 2000, between H. Wayne
Huizenga and his assigns and ZixIt. Filed as Exhibit 2.1 to ZixIt's Form 8-K, dated April 12,
2000, and incorporated herein by reference.
10.24 -- Letter Amendment, dated April 27, 2000, to the Common Stock and Warrant Purchase
Agreement, dated April 11, 2000, between H. Wayne Huizenga and his assigns and ZixIt. Filed as
Exhibit 2.2 to ZixIt's Form 8-K, dated May 3, 2000, and incorporated herein by reference.
18
Exhibit
No. Description
--- -----------
10.25 -- Distribution Agreement, dated August 17, 2000, between Yahoo! Inc. and ZixIt. Filed as Exhibit
10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000,
and incorporated herein by reference.
10.26 -- Marketing and Distribution Agreement, effective November 6, 2000, between ZixIt and Entrust,
Inc. Filed as Exhibit 10.4 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.
10.27 -- Enterprise and CA Services Agreement, effective November 6, 2000, between ZixIt and Entrust,
Inc. Filed as Exhibit 10.5 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.
10.28 -- International Distribution Agreement, dated June 6, 2001, between ZixIt and AlphaOmega Soft
Co., Ltd. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2001, and incorporated herein by reference.
10.29 -- International Distribution Agreement, dated October 25, 2001, between ZixIt and 911 Computer
Co., Ltd. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001, and incorporated herein by reference.
10.30 -- Investment Agreement, effective December 6, 2000, between Maptuit Corporation and ZixIt. Filed
as Exhibit 10.23 to ZixIt's Annual Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference.
10.31 -- Convertible Promissory Note of Maptuit Corporation, dated July 11, 2001. Filed as Exhibit 10.2 to
ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, and
incorporated herein by reference.
10.32 -- Security Agreement, dated July 11, 2001, between Maptuit Corporation and ZixIt. Filed as Exhibit
10.3 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, and
incorporated herein by reference.
21.1* -- Subsidiaries of ZixIt.
23.1* -- Consent of Independent Auditors.
24.1 -- Power of Attorney (included on page 20 of this Form 10-K).
--------
* Filed electronically herewith.
(b) Reports on Form 8-K
No reports of the Registrant on Form 8-K have been filed with the SEC during
the three months ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on February 27, 2002.
ZIXIT CORPORATION
By: /s/ STEVE M. YORK
-----------------------------
Steve M. York
Senior Vice President,
Chief Financial Officer and
Treasurer
19
POWER OF ATTORNEY
We, the undersigned directors and officers of ZixIt Corporation (''ZixIt''),
do hereby severally constitute and appoint John A. Ryan and Steve M. York, and
each or either of them, our true and lawful attorneys and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to ZixIt's
Annual Report on Form 10-K for the year ended December 31, 2001, and to file
the same with all exhibits thereto, and all other documents in connection
therewith, with the SEC, granting unto said attorneys and agents, and each or
either of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys and agents, and each of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JOHN A. RYAN Chairman, President, Chief February 27, 2002
----------------------------- Executive Officer and
(John A. Ryan) Director (Principal
Executive Officer)
/s/ STEVE M. YORK Senior Vice President, Chief February 27, 2002
----------------------------- Financial Officer and
(Steve M. York) Treasurer (Principal
Financial and Accounting
Officer)
/s/ DAVID P. COOK Founder and Director February 27, 2002
-----------------------------
(David P. Cook)
/s/ H. WAYNE HUIZENGA Co-Vice Chairman and Director February 27, 2002
-----------------------------
(H. Wayne Huizenga)
/s/ MICHAEL E. KEANE Director February 27, 2002
-----------------------------
(Michael E. Keane)
/s/ JAMES S. MARSTON Director February 27, 2002
-----------------------------
(James S. Marston)
/s/ JEFFREY P. PAPOWS Co-Vice Chairman and Director February 27, 2002
-----------------------------
(Jeffrey P. Papows)
/s/ ANTONIO R. SANCHEZ, JR. Director February 27, 2002
-----------------------------
(Antonio R. Sanchez, Jr.)
/s/ DR. BEN G. STREETMAN Director February 27, 2002
-----------------------------
(Dr. Ben G. Streetman)
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................................................ F-2
Consolidated Balance Sheets at December 31, 2001 and 2000............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 and for the
cumulative period from January 1, 1999 through December 31, 2001.................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Net Loss for the years ended
December 31, 2001, 2000 and 1999.................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 and for the
cumulative period from January 1, 1999 through December 31, 2001.................................... F-6
Notes to Consolidated Financial Statements............................................................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZixIt Corporation
We have audited the accompanying consolidated balance sheets of ZixIt
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ZixIt
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Dallas, Texas
January 30, 2002
F-2
ZIXIT CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 8,857,000 $ 13,347,000
Marketable securities..................................................... 11,208,000 36,943,000
Other current assets...................................................... 2,108,000 1,942,000
------------- ------------
Total current assets.................................................. 22,173,000 52,232,000
Investment in Maptuit Corporation............................................ -- 3,000,000
Property and equipment, net.................................................. 10,263,000 19,400,000
Other noncurrent assets, net................................................. -- 4,045,000
------------- ------------
$ 32,436,000 $ 78,677,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................................... $ 3,506,000 $ 2,431,000
Liabilities related to discontinued operations............................ 1,056,000 1,116,000
Deferred revenues......................................................... 345,000 --
------------- ------------
Total current liabilities............................................. 4,907,000 3,547,000
Commitments and contingencies................................................
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none
outstanding............................................................. -- --
Common stock, $0.01 par value, 175,000,000 shares authorized;
19,861,118 issued and 17,557,854 outstanding in 2001; 19,327,563
issued and 17,035,663 outstanding in 2000............................... 199,000 193,000
Additional capital........................................................ 177,119,000 180,128,000
Unearned stock-based compensation......................................... (2,536,000) (14,615,000)
Treasury stock, at cost; 2,303,264 shares in 2001 and 2,291,900 shares in
2000.................................................................... (11,414,000) (11,314,000)
Accumulated other comprehensive loss...................................... -- (169,000)
Accumulated deficit (includes deficit accumulated during the development
stage of $139,979,000 in 2001 and $83,233,000 in 2000).................. (135,839,000) (79,093,000)
------------- ------------
Total stockholders' equity............................................ 27,529,000 75,130,000
------------- ------------
$ 32,436,000 $ 78,677,000
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ZIXIT CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------------------
Cumulative During
Development Stage
(From January 1, 1999
Through
2001 2000 1999 December 31, 2001)
------------ ------------ ------------ ---------------------
Revenues............................... $ 317,000 $ 394,000 $ 99,000 $ 810,000
Research and development expenses...... (9,019,000) (8,661,000) (23,548,000) (41,228,000)
Operating costs and general corporate
expenses............................. (44,888,000) (42,983,000) (16,696,000) (104,567,000)
Investment and other income (loss), net (3,204,000) 1,928,000 3,533,000 2,257,000
------------ ------------ ------------ -------------
Loss from continuing operations before
income taxes......................... (56,794,000) (49,322,000) (36,612,000) (142,728,000)
Income taxes........................... -- -- 807,000 807,000
------------ ------------ ------------ -------------
Loss from continuing operations........ (56,794,000) (49,322,000) (35,805,000) (141,921,000)
Discontinued operations................ 48,000 441,000 1,453,000 1,942,000
------------ ------------ ------------ -------------
Net loss............................... $(56,746,000) $(48,881,000) $(34,352,000) $(139,979,000)
============ ============ ============ =============
Basic and diluted earnings (loss) per
common share:
Continuing operations............... $ (3.32) $ (3.03) $ (2.35)
Discontinued operations............. -- 0.03 0.10
------------ ------------ ------------
Net loss............................ $ (3.32) $ (3.00) $ (2.25)
============ ============ ============
Weighted average shares outstanding.... 17,083,037 16,266,196 15,244,291
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ZIXIT CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE NET LOSS
Accumulated
Common Stock Unearned other
------------------- Additional stock-based Treasury comprehensive
Shares Amount capital compensation stock loss
---------- -------- ------------ ------------ ------------ -------------
Balance, December 31, 1998................ 17,384,437 $174,000 $ 88,544,000 $ (95,000) $(11,314,000) $ --
Exercise of stock options for cash..... 245,492 2,000 1,619,000 -- -- --
Unearned employee stock-based
compensation.......................... -- -- 3,587,000 (3,587,000) -- --
Unearned stock-based compensation
for service providers................. -- -- 13,501,000 (13,501,000) -- --
Stock issuable for purchase of Anacom
Communications........................ -- -- 7,500,000 (7,500,000) -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 14,187,000 -- --
Other.................................. -- -- (11,000) -- -- --
Net loss............................... -- -- -- -- -- --
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 1999................ 17,629,929 176,000 114,740,000 (10,496,000) (11,314,000) --
Stock issued for cash in private
placement, net of issuance costs...... 916,667 9,000 43,775,000 -- -- --
Exercise of stock options for cash..... 327,417 3,000 2,239,000 -- -- --
Unearned employee stock-based
compensation.......................... -- -- 16,894,000 (16,894,000) -- --
Unearned stock-based compensation
for service providers................. 147,848 2,000 (690,000) 752,000 -- --
Stock issued for purchase of Anacom
Communications........................ 83,663 1,000 (224,000) 223,000 -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 11,800,000 -- --
Stock issued to Entrust................ 222,039 2,000 3,398,000 -- -- --
Other.................................. -- -- (4,000) -- -- --
Comprehensive net loss:
Net loss............................ -- -- -- -- -- --
Unrealized loss on marketable
securities......................... -- -- -- -- -- (169,000)
Comprehensive net loss.............. -- -- -- -- -- --
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 2000................ 19,327,563 193,000 180,128,000 (14,615,000) (11,314,000) (169,000)
Exercise of stock options for cash..... 27,500 -- 222,000 -- -- --
Unearned employee stock-based
compensation.......................... 152,672 2,000 973,000 (975,000) -- --
Unearned stock-based compensation
for service providers................. -- -- 49,000 (49,000) -- --
Cancellation of agreement to issue
stock for purchase of Anacom
Communications........................ -- -- (4,725,000) 4,725,000 -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 8,378,000 -- --
Stock issued to Entrust................ 353,383 4,000 396,000 -- -- --
Other.................................. -- -- 76,000 -- (100,000) --
Comprehensive net loss:
Net loss............................ -- -- -- -- -- --
Realized loss on marketable
securities......................... -- -- -- -- -- 169,000
Comprehensive net loss..............
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 2001................ 19,861,118 $199,000 $177,119,000 $ (2,536,000) $(11,414,000) $ --
========== ======== ============ ============ ============ =========
Retained
earnings Total
(accumulated stockholders'
deficit) equity
------------- -------------
Balance, December 31, 1998................ $ 4,140,000 $ 81,449,000
Exercise of stock options for cash..... -- 1,621,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- --
Stock issuable for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 14,187,000
Other.................................. -- (11,000)
Net loss............................... (34,352,000) (34,352,000)
------------- ------------
Balance, December 31, 1999................ (30,212,000) 62,894,000
Stock issued for cash in private
placement, net of issuance costs...... -- 43,784,000
Exercise of stock options for cash..... -- 2,242,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- 64,000
Stock issued for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 11,800,000
Stock issued to Entrust................ -- 3,400,000
Other.................................. -- (4,000)
Comprehensive net loss:
Net loss............................ (48,881,000) (48,881,000)
Unrealized loss on marketable
securities......................... -- (169,000)
------------
Comprehensive net loss.............. -- (49,050,000)
------------- ------------
Balance, December 31, 2000................ (79,093,000) 75,130,000
Exercise of stock options for cash..... -- 222,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- --
Cancellation of agreement to issue
stock for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 8,378,000
Stock issued to Entrust................ 400,000
Other.................................. -- (24,000)
Comprehensive net loss:
Net loss............................ (56,746,000) (56,746,000)
Realized loss on marketable
securities......................... -- 169,000
------------
Comprehensive net loss.............. (56,577,000)
------------- ------------
Balance, December 31, 2001................ $(135,839,000) $ 27,529,000
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ZIXIT CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
During
Development
Stage (From
January 1, 1999
Year ended December 31, Through
----------------------------------------- December 31,
2001 2000 1999 2001)
------------ ------------ ------------- ---------------
Cash flows from operating activities:
Loss from continuing operations............................ $(56,794,000) $(49,322,000) $ (35,805,000) $(141,921,000)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization............................ 10,799,000 9,928,000 3,476,000 24,203,000
Stock-based compensation................................. 8,378,000 11,800,000 12,315,000 32,493,000
Loss on Lante Corporation common stock................... 391,000 1,202,000 -- 1,593,000
Write-off of investment in Maptuit Corporation........... 5,000,000 -- -- 5,000,000
Write-off of digital identification certificates......... 3,000,000 -- -- 3,000,000
Other non-cash expenses.................................. 733,000 131,000 -- 864,000
Changes in assets and liabilities, excluding divestiture
of businesses:
Other assets........................................... (193,000) (601,000) (943,000) (1,737,000)
Current liabilities.................................... 1,671,000 480,000 126,000 2,277,000
------------ ------------ ------------- -------------
Net cash used by continuing operations................... (27,015,000) (26,382,000) (20,831,000) (74,228,000)
Net cash provided (used) by discontinued operations...... (12,000) 409,000 (1,855,000) (1,458,000)
------------ ------------ ------------- -------------
Net cash used by operating activities................ (27,027,000) (25,973,000) (22,686,000) (75,686,000)
Cash flows from investing activities:
Purchases of property and equipment, net................... (1,174,000) (7,625,000) (23,165,000) (31,964,000)
Purchases of marketable securities......................... (23,642,000) (37,250,000) (119,150,000) (180,042,000)
Sales and maturities of marketable securities.............. 49,155,000 33,994,000 112,893,000 196,042,000
Investment in Maptuit Corporation.......................... (2,000,000) (3,000,000) -- (5,000,000)
Purchase of Anacom Communications.......................... -- -- (2,500,000) (2,500,000)
Proceeds from sales of businesses, net of cash sold........ -- 581,000 5,304,000 5,885,000
------------ ------------ ------------- -------------
Net cash provided (used) by investing activities..... 22,339,000 (13,300,000) (26,618,000) (17,579,000)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of
issuance costs........................................... -- 43,784,000 -- 43,784,000
Proceeds from exercise of stock options.................... 222,000 2,242,000 1,621,000 4,085,000
------------ ------------ ------------- -------------
Net cash provided by financing activities............ 222,000 46,026,000 1,621,000 47,869,000
Effect of exchange rate changes on cash and cash
equivalents............................................... (24,000) (4,000) (11,000) (39,000)
------------ ------------ ------------- -------------
Increase (decrease) in cash and cash equivalents............ (4,490,000) 6,749,000 (47,694,000) (45,435,000)
Cash and cash equivalents, beginning of year................ 13,347,000 6,598,000 54,292,000 54,292,000
------------ ------------ ------------- -------------
Cash and cash equivalents, end of year...................... $ 8,857,000 $ 13,347,000 $ 6,598,000 $ 8,857,000
============ ============ ============= =============
Supplemental cash flow information:
Income taxes paid.......................................... $ -- $ -- $ 486,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation--The accompanying consolidated financial statements of
ZixIt Corporation include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions have been eliminated.
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. 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. As a result of the cost reductions recently initiated, the
Company's near-term expenditure level is expected to average approximately
$1,500,000 per month, down from approximately $2,300,000 per month experienced
in the last half of 2001. 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.
Cash investments and marketable securities--Cash investments with maturities
of three months or less when purchased are considered cash equivalents. Cash
and cash equivalents at December 31, 2001 primarily consist of high-grade daily
money market funds. Marketable securities, which are available-for-sale, are as
follows:
2001 2000
----------- -----------
U.S. corporate debt securities................... $10,946,000 $18,918,000
U.S. government agency debt securities........... -- 17,273,000
Lante Corporation common stock................... -- 501,000
Certificate of deposit........................... 262,000 251,000
----------- -----------
$11,208,000 $36,943,000
=========== ===========
Investments in debt securities are carried at amortized cost, which
approximates fair market value. Marketable securities held on December 31, 2001
mature on various dates through April 2002.
Derivatives and hedging activities--At December 31, 2001 and 2000, the
Company did not have any instruments or contracts which were classified as
derivatives. Derivatives are financial instruments or contracts with prescribed
characteristics which are recognized on the balance sheet at fair value.
Derivatives that are not
F-7
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
Property and equipment--Property and equipment are recorded at cost and
depreciated or amortized using the straight-line method over their estimated
useful lives as follows: computer equipment and software--3 years; leasehold
improvements--5 year lease term; and office equipment, furniture and
fixtures--5 years.
Goodwill--Goodwill of $2,429,000, which resulted from the October 1999
acquisition of Anacom Communications, Inc., was being amortized over two years
using the straight-line method until its carrying value was written-off in June
2001 (Note 3). Goodwill amortization was $894,000 in 2001, $1,228,000 in 2000
and $307,000 in 1999. The $894,000 net carrying value for goodwill at December
31, 2000 is included in other noncurrent assets.
Software development costs--Costs incurred in the development and testing of
software used in the Company's Internet products and services related to
research, project planning, training, maintenance and general and
administrative activities, and overhead costs are expensed as incurred. The
costs of relatively minor upgrades and enhancements to the software are also
expensed as incurred. Certain costs incurred during software application
development, including costs of materials, services and payroll and
payroll-related costs for employees directly associated with the development
project, qualify for capitalization. Due to the uncertainty of the amount and
timing of future net revenues to be generated from the Company's Internet
products and services, all development costs incurred through December 31, 2001
have been expensed and are included in research and development costs.
Long-lived assets--The Company reviews the original assumptions and
rationale utilized in the establishment of the carrying value and estimated
life of certain long-lived assets. The carrying value would be adjusted to fair
value if facts and circumstances indicating an impairment were present.
Revenue recognition--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.
Advertising expense--Advertising costs are expensed as incurred and totaled
$4,452,000 in 2001, $10,267,000 in 2000 and none in 1999.
Stock-based employee compensation--As permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Compensation expense for
employee stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Earnings per share--Basic earnings per share is computed by dividing
earnings (loss) by the weighted average number of common shares outstanding
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued.
F-8
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts presented for basic and diluted earnings (loss) per share in the
accompanying statements of operations have been computed by dividing the
applicable earnings (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, due to a loss from
continuing operations being reported for each period presented. The following
table sets forth antidilutive securities which were outstanding at the dates
set forth below and have been excluded from the computation of diluted earnings
(loss) per share:
Year ended December 31,
-----------------------------
2001 2000 1999
--------- --------- ---------
Stock options......................................... 6,837,341 5,104,190 5,679,542
Warrants.............................................. 2,138,890 2,138,890 --
Stock issuable for purchase of Anacom Communications.. -- 119,667 189,948
--------- --------- ---------
Total antidilutive securities excluded............. 8,976,231 7,362,747 5,869,490
========= ========= =========
Comprehensive income (loss)--Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," establishes standards for reporting
comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from non-owner sources. In 2000, the difference between
net loss and total comprehensive net loss was due to an unrealized loss on
marketable securities, which was considered to be temporary. In 2001, the loss
was realized upon the sale of the related marketable securities.
Use of estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Management reviews its estimates on an ongoing basis,
including those related to discontinued operations and the carrying value of
long-lived assets, and revises such estimates based upon currently available
facts and circumstances.
Recent accounting pronouncements--The Company adopted the provisions of
Statement of Financial Accounting Standards No. 141 ("FAS 141"), "Business
Combinations," effective July 1, 2001. FAS 141 eliminates pooling-of-interest
accounting for business combinations and changed the requirements for the
recognition of intangible assets apart from goodwill. Thus, any acquisition
completed after the effective date must be accounted for as a purchase. The
adoption of FAS 141 did not have any impact on the Company's results of
operations or financial position.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets,"
effective January 1, 2002. FAS 142 requires that goodwill and certain
indefinite-lived intangible assets no longer be amortized, but will be tested
at least annually for impairment. At December 31, 2001, the Company's recorded
goodwill was fully amortized. Accordingly, the adoption of FAS 142 will not
have any impact on the Company's results of operations or financial position.
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
F-9
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Company does not expect the adoption of FAS 144 will have a material effect
on its results of operations or financial position.
2. PROPERTY AND EQUIPMENT
2001 2000
------------ ------------
Computer equipment and software............. $ 26,321,000 $ 25,848,000
Leasehold improvements...................... 4,565,000 4,474,000
Office equipment, furniture and fixtures.... 999,000 961,000
------------ ------------
31,885,000 31,283,000
Less accumulated depreciation and
amortization.............................. (21,622,000) (11,883,000)
------------ ------------
$ 10,263,000 $ 19,400,000
============ ============
The Company's continuing operations include depreciation and amortization
expense related to property and equipment of $9,905,000 in 2001, $8,700,000 in
2000 and $3,169,000 in 1999.
3. STOCKHOLDERS' EQUITY
Stock Issued to Entrust, Inc.
In November 2000, the Company entered into an Enterprise and CA Services
Agreement with Entrust, Inc. ("Entrust") whereby the Company issued 222,039
shares of the Company's common stock to Entrust in exchange for licenses to use
certain software packages, future technical support and the right to issue a
specified number of digital identification certificates to users of the
Company's ZixMail products. These shares were subject to transfer restrictions
which lapsed in four equal quarterly installments ending in December 2001. The
agreement provided that if the aggregate value of the shares on the dates the
restrictions lapsed was less than the transaction value of $3,400,000, the
Company would be obligated to fund the deficiency by electing to pay cash or
issue additional shares of stock valued at the then-current fair market value
of the Company's common stock. Accordingly, an additional 296,533 shares of the
Company's common stock were issued in December 2001. The digital identification
certificates valued at $3,000,000 were written-off in 2001 due to the
uncertainty of future cash flows to be derived from their utilization.
Additionally, under a Marketing and Distribution Agreement with Entrust, the
Company issued 56,850 shares of the Company's common stock to Entrust valued at
$400,000 upon completion of the integration of the ZixMail service option into
the Entrust/Express(R) product in August 2001. The Company expects Entrust will
market the integrated product and the Company and Entrust will share in the
related revenues. Under this agreement, Entrust has guaranteed the Company
minimum annual payments of $500,000 for 2001, $1,000,000 for 2002, $1,250,000
for 2003 and $1,500,000 for 2004. At December 31, 2001, the $500,000 minimum
annual payment for 2001, collected in 2002, is included in other current assets
with a corresponding increase in other income.
Anacom Communications, Inc.
In October 1999, the Company purchased all of the outstanding shares of
Anacom Communications, Inc. ("Anacom"), a privately-held provider of real-time
transaction processing services to Internet merchants. Consideration consisted
of a cash payment of $2,500,000, primarily recorded as goodwill, and common
stock, valued at a mimimum of $7,500,000, to be delivered in two annual
installments beginning October 2000,
F-10
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assuming continued employment by the former owners. The minimum value of the
common stock issuable pursuant to the purchase agreement of $7,500,000 is
treated as compensation for financial accounting purposes and was being charged
to operating costs and general corporate expenses over two years with a
corresponding increase in stockholders' equity. Financial accounting rules
require the minimum number of common shares issuable be revalued on each
subsequent reporting date until performance is complete with a cumulative
catch-up adjustment recognized for any changes in their intrinsic value in
excess of $7,500,000. Based on the Company's common stock price of $8.75 per
share at December 31, 2000 and $39.63 per share at December 31, 1999, the
intrinsic value of these shares on those dates was $1,662,000 (less than the
minimum $7,500,000) and $7,529,000, respectively. Accordingly, the Company's
results of operations for 2000 and 1999 include non-cash charges of $3,611,000
and $937,000, respectively, for amortization of the market value of the common
shares issuable. In October 2000, 83,663 shares were delivered to the former
owners, which included 13,382 shares in excess of the minimum required for that
delivery date.
On June 20, 2001, the Company reported that the credit card databases at
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. Since its acquisition, Anacom had been operated as an independent
subsidiary and managed by its former owners. Later in June 2001, the Company
ceased all operations at Anacom, and the former owners of Anacom 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 non-recurring net reduction in operating costs of approximately
$3,000,000 in the second quarter of 2001. This reduction was primarily due to
the reversal of previously recorded unvested stock-based compensation expense,
including $1,800,000 previously recorded in 2001, related to the canceled
installment totaling $3,800,000, partially offset by severance costs and asset
write-downs, including goodwill. Substantially all of the Company's revenues
since 1999 have been generated by Anacom. 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 databases.
Private Placement of Equity Securities
In May 2000, the Company sold, in a private placement, newly issued equity
securities to an investor group led by H. Wayne Huizenga and received cash
totaling $44,000,000 in three installments. In exchange, the Company issued to
the investor group 916,667 shares of its common stock at $48.00 per share,
ten-year warrants to purchase 916,667 shares of the Company's common stock at
$57.60 per share and four-year warrants to purchase 1,222,223 shares of the
Company's common stock at $12.00 per share. The four-year warrants were
reallocated from options with an exercise price of $7.00 per share previously
held by Mr. David P. Cook, the Company's founder and chief executive officer at
the time of the private placement, and became exercisable on May 1, 2001.
Employee and Director Stock Options
The Company has non-qualified stock options outstanding to employees and
directors under various stock option plans. Options granted under these plans
are generally not less than the fair market value at the date of grant and,
subject to termination of employment, generally expire ten years from the date
of grant. Employee options are generally exercisable in installments over two
to five years or have been accelerated due to the Company's common stock
trading at appreciated price targets. Initial grants to new directors are
generally exercisable six months from the date of the grant, with annual
follow-on formula grants vesting annually over
F-11
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
three years. Option grants to employees and directors generally contain
accelerated vesting provisions upon the occurrence of a change of control, as
defined in the applicable option agreements. At December 31, 2001, 1,075,928
shares of common stock were available for future grants under the Company's
stock option plans.
In January 1999, certain outside directors were granted options to acquire
151,000 shares of common stock under a plan that was approved by the Company's
stockholders in September 1999. The Company recognized a non-cash compensation
expense of $3,335,000, which is included in operating costs and general
corporate expenses, based on the excess of the fair market value of the
Company's common stock on the date of plan approval, which was $32.75, over the
exercise price of the options of $10.65, which was 120% of the fair market
value of the Company's common stock on the date of grant.
In April 1998, Mr. Cook entered into an employment arrangement with the
Company whereby he received an option to acquire 4,254,627 shares of the
Company's common stock. The option exercise price is $7.00 per share, which was
twice the closing price of the Company's common stock on the date of grant. The
options have a five-year term and vested quarterly over two years. In the year
options are exercised, taxable compensation realized by Mr. Cook in excess of
$1,000,000 is not deductible by the Company for federal income tax purposes.
During 2000 and 2001, Mr. Cook reallocated options to acquire 807,127 shares of
the Company's common stock to certain of the Company's employees and a
director. These reallocated options have a five-year term, vest by April 2003
and have exercise prices ranging from $7.00 to $13.75 per share as compared to
Mr. Cook's exercise price of $7.00 per share. Non-cash compensation expense of
$16,815,000 is being recognized over the vesting periods ($9,047,000 in 2001
and $6,178,000 in 2000), representing the intrinsic value of the reallocated
options based upon the difference between the fair market value of the
Company's common stock on the dates the options were reallocated and the
respective option exercise prices.
In November 2001, Mr. John A. Ryan was appointed Chairman, President and
Chief Executive Officer of the Company and received a bonus of 152,672 shares
of the Company's common stock valued at $1,000,000. Such stock-based
compensation is being amortized over two years using the straight-line method.
In the event Mr. Ryan is terminated for cause, as defined, or resigns for any
reason other than for good reason, as defined, prior to November 16, 2002, at
the time of such employment termination, Mr. Ryan is required to return to the
Company 152,672 shares or $1,000,000 in cash. If such employment termination
occurs between November 15, 2002 and November 16, 2003, Mr. Ryan is required to
return to the Company 76,336 shares or $500,000 in cash.
F-12
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option transactions for 2001, 2000 and
1999:
Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding at December 31, 1998......... 5,007,197 $ 6.98
Granted at market price............... 400,000 $20.79
Granted at prices less than market.... 175,924 $13.26
Cancelled............................. (9,753) $ 6.05
Exercised............................. (230,492) $ 7.51
----------
Outstanding at December 31, 1999......... 5,342,876 $ 8.20
Granted at market price............... 1,156,630 $20.41
Granted at prices less than market.... 657,127 $ 9.01
Cancelled............................. (1,932,526) $ 7.90
Exercised............................. (327,417) $ 6.76
----------
Outstanding at December 31, 2000......... 4,896,690 $11.41
Granted at market price............... 1,156,556 $ 7.38
Granted at prices greater than market. 1,000,000 $ 5.24
Granted at prices less than market.... 150,000 $ 7.00
Cancelled............................. (518,127) $ 9.38
Exercised............................. (27,500) $ 9.14
----------
Outstanding at December 31, 2001......... 6,657,619 $ 9.85
==========
Summarized information about stock options outstanding at December 31, 2001
is as follows:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 3.56-$ 7.00. 4,597,260 4.4 $ 6.26 2,773,827 $ 6.74
$ 7.19-$16.50. 1,242,905 5.8 $ 9.66 500,449 $ 9.70
$18.44-$35.00. 595,250 6.7 $24.64 428,085 $24.52
$36.94-$73.75. 222,204 8.1 $45.57 92,234 $50.53
--------- ---------
6,657,619 3,794,595
========= =========
There were 2,902,007 and 3,796,572 exercisable options at December 31, 2000
and 1999, respectively.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its employee stock options. Accordingly, the Company does not
record compensation expenses for its employee stock option grants unless the
market price exceeds the exercise price on the date of grant. Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation,"encourages adoption of a fair-value based method for
valuing the cost of stock-based compensation; however, it allows companies to
continue to use the intrinsic value method under APB 25 and disclose pro forma
results and earnings per share in accordance with SFAS 123. Under SFAS 123,
compensation cost is measured at the grant date based upon the value of the
award and is recognized over the vesting period. As required, the pro forma
disclosures include only options granted since January 1, 1995. Because the
Company's stock options have
F-13
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions to the option valuation
models can materially affect their estimated fair value, in management's
opinion, the existing valuation methods do not necessarily provide a reliable
single measure of the fair value of its stock options. Had compensation cost
for the Company's stock-based compensation been determined consistent with SFAS
123, the Company's net loss and loss per share would have been as follows:
2001 2000 1999
------------ ------------ ------------
Net loss:
As reported................... $(56,746,000) $(48,881,000) $(34,352,000)
Pro forma..................... $(67,371,000) $(58,166,000) $(36,530,000)
Basic and diluted loss per share:
As reported................... $ (3.32) $ (3.00) $ (2.25)
Pro forma..................... $ (3.94) $ (3.58) $ (2.40)
The Company used the Black-Scholes option pricing model to determine the
fair value of grants made during 2001, 2000 and 1999. The following weighted
average assumptions were applied in determining the pro forma compensation cost:
2001 2000 1999
----- ------ ------
Risk-free interest rate............... 3.85% 6.22% 4.97%
Expected option life.................. 2.7 years 2.7 years 2.8 years
Expected stock price volatility....... 138% 118% 96%
Expected dividend yield............... -- -- --
Fair value of options:
Granted at market price............ $5.74 $13.92 $11.86
Granted at prices exceeding market. $3.49 -- --
Granted at prices less than market. $7.61 $30.64 $24.66
Third Party Stock Options
Lante Corporation
The Company entered into an agreement in February 1999 with Lante
Corporation ("Lante"), a third party Internet services company who develops
technology-based solutions for electronic markets, to assist the Company in
developing software for its new Internet-related businesses. In exchange for
the services provided by Lante, the Company paid discounted fees of $11,282,000
during 1999, included in research and development expenses, and initially
issued options to purchase 500,000 shares of the Company's common stock to
Lante at an exercise price of $7.62 per share, the closing price of the
Company's common stock on the date of the agreement. Upon completion of Lante's
engagement in November 1999, the terms of the original stock option were
revised whereby Lante received a fully vested option to acquire up to 166,666
shares of the Company's common stock at an exercise price of $7.62 per share
("Lante Option"). Pursuant to an agreement executed simultaneously with the
Lante Option, the Company received a fully vested option to acquire up to
400,000 shares of Lante's common stock at $7.00 per share ("ZixIt Option").
However, the number of shares of common stock issuable upon the cashless
exercise of either of the options could not exceed a number of shares having a
fair market value, as determined in accordance with a formula, at the time of
exercise of $12,000,000 in the aggregate. The fair value of the Lante Option
upon the completion of Lante's engagement was $8,787,000 using the
Black-Scholes option valuation model, and has been included in research and
development expenses. For financial accounting purposes, this non-cash charge
represents the final valuation for the Lante Option and no further
F-14
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting treatment is required. The Company valued the ZixIt Option on the
date of grant at $1,872,000, using the Black-Scholes option valuation model,
and reduced its research and development expenses in 1999 by such amount. In
2000, the Company exercised the ZixIt Option to acquire shares of Lante common
stock and received 320,802 shares. Also in 2000, Lante exercised the Lante
Option and received 142,848 shares of the Company's common stock. Investment
income for 2000 includes a write-down of the Company's equity investment in
Lante of $1,202,000, representing the decline in market value that management
believed was other than temporary. Investment loss in 2001 includes a loss of
$391,000 for the disposition of the Lante shares.
Other
The Company has issued options to third party service providers to purchase
up to 200,000 shares of the Company's common stock at a weighted average
exercise price of $29.09 per share. These options vest over periods of up to 42
months and have expiration dates ranging from four to eight years. The
Company's continuing operations in 2001, 2000 and 1999 include non-cash charges
of $1,035,000, $1,238,000 and $805,000, respectively, for amortization of the
fair value of options issued to third party service providers, as determined
using the Black-Scholes option valuation model, over their respective service
or vesting periods. The unamortized value of these options at December 31, 2001
is not significant.
4. INCOME TAXES
Components of the income taxes related to continuing operations are as
follows:
2001 2000 1999
---- ---- --------
Federal income tax benefit:
Current....................................... $ -- $ -- $807,000
Deferred...................................... -- -- --
---- ---- --------
$ -- $ -- $807,000
==== ==== ========
A reconciliation of the expected U.S. tax benefit to income taxes related to
continuing operations is as follows:
2001 2000 1999
------------ ------------ ------------
Expected tax benefit at U.S.
statutory rate............. $ 19,294,000 $ 16,769,000 $ 12,448,000
Unbenefitted U.S. losses, net (19,297,000) (16,749,000) (10,418,000)
Unbenefitted tax credits..... -- -- (1,819,000)
Other........................ 3,000 (20,000) 596,000
------------ ------------ ------------
$ -- $ -- $ 807,000
============ ============ ============
F-15
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax assets and liabilities as of December 31, 2001 and 2000
are as follows:
2001 2000
------------ ------------
Deferred tax assets:
Nondeductible reserves................ $ 620,000 $ 639,000
U.S. net operating loss carryforwards. 36,038,000 19,751,000
Tax credit carryforwards.............. 1,397,000 2,808,000
Stock option compensation............. 7,814,000 4,358,000
Start-up costs........................ 1,727,000 2,320,000
Intangible assets..................... 356,000 2,049,000
Investment in equity securities....... 1,751,000 301,000
Other assets.......................... 1,824,000 --
------------ ------------
Total deferred tax assets......... 51,527,000 32,226,000
Deferred tax liabilities:
Other, net............................ -- 277,000
------------ ------------
Net deferred tax assets.................. 51,527,000 31,949,000
Less valuation allowance................. (51,527,000) (31,949,000)
------------ ------------
Net deferred taxes....................... $ -- $ --
============ ============
The Company has fully reserved its net deferred tax assets in 2001 and 2000
due to the uncertainty of future taxable income. The Company has U.S. net
operating loss carryforwards of $105,993,000 which begin to expire in 2019. Tax
credit carryforwards of $1,397,000 consist of research tax credits which are
available through 2021 and alternative minimum tax credits which do not expire.
The net operating loss carryforwards include $9,155,000 resulting from the
exercise of non-qualified stock options for which a tax benefit of $3,113,000
will be credited to additional capital when recognized.
5. COMMITMENTS
The Company's continuing operations includes office rental expenses of
$1,038,000, $780,000 and $505,000, for 2001, 2000 and 1999, respectively. At
December 31, 2001, future minimum lease payments under noncancelable operating
leases are $845,000, $759,000 and $498,000 for 2002, 2003 and 2004,
respectively.
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 remaining future commitments to Yahoo! under this agreement
totaling $3,350,000, payable in installments through August 2002. The minimum
payments of $6,000,000 are being amortized over two years beginning in December
2000. In addition, the Company pays Yahoo! a specified portion of revenues
earned by the Company which are associated with Yahoo! users.
The Company has severance agreements with certain employees which would
require the Company to pay approximately $3,000,000 if all such employees
separated from employment with the Company following a change of control, as
defined in the severance agreements.
F-16
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. DISCONTINUED OPERATIONS
Prior to 1999, 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, the Transporation Systems Group, Cotag
International and Cardkey Systems, were sold during 1998 in three separate
transactions. These businesses are presented as Discontinued Operations in the
accompanying financial statements.
The gain on sale of discontinued operations includes $48,000, $341,000 and
$872,000 in 2001, 2000 and 1999, respectively, for the reduction of estimated
future costs for various indemnification issues associated with the disposal of
these businesses. The gain also includes $100,000 and $581,000 in 2000 and
1999, respectively, for contingent sales proceeds. There were no income taxes
recorded on these gains.
Liabilities related to discontinued operations of $1,056,000 and $1,116,000
at December 31, 2001 and 2000, respectively, consist of estimated future costs
for various indemnification issues associated with the disposal of these
businesses.
7. RELATED PARTY TRANSACTIONS
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, an early stage
company, is an Internet application service provider that supplies wireline and
wireless Internet location-based services. Built upon a comprehensive database
of the street network of North America, Maptuit provides address matching,
route generation, step-by-step directions, map rendering and real-cost
proximity searching services. Mr. Jeffrey P. Papows, a director of the Company
since March 2000 and the Company's chairman of its board of directors from
October 2000 to November 2001, serves as the president and chief executive
officer of Maptuit and holds a minority equity interest in Maptuit. There is no
readily determinable market value for the Company's investments in Maptuit
since Maptuit is privately held. 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 invesment risks inherent in
early stage enterprises. The Company records impairment losses when, in the
Company's judgment, events and circumstances indicate its investment has been
impaired. Maptuit has been seeking third party debt or equity financing to
sustain its operations. To date, no financing has been secured, and it is
uncertain whether Maptuit will be able to raise the necessary funds required to
execute its business plan such that the Company would be able to recover its
investment. Therefore, in the last half of 2001, the Company wrote off its
$5,000,000 investment in Maptuit.
In January 2001, the Company granted IT Factory, Inc. ("IT Factory") a
performance-based stock option whereby IT Factory could purchase up to 109,529
shares of the Company's common stock, at $9.13 per share, based upon the number
of customer email addresses it secured for the Company in 2001. In addition,
the Company paid IT Factory $300,000 in 2001 and committed to pay $250,000 in
2002 to support IT Factory's marketing efforts. IT Factory did not earn any
performance-based stock options in 2001, and the Company has subsequently
canceled the agreement, including the 2002 commitment for marketing support.
Separately, the Company paid IT Factory $420,000 in 2001 for certain software
development projects. Mr. Papows served as chairman of IT Factory until
December 2001.
F-17
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the fourth quarter of 2000, the Company and Entrust entered into certain
technology and marketing agreements (Note 3). Mr. Ryan, the Company's chairman,
president and chief executive officer, was chief executive officer of Entrust
when such agreements were executed and currently holds a minority equity
interest in Entrust.
During 1999, the Company engaged Lante to assist the Company in the
development of new Internet products (Note 3). The chairman and major
stockholder of Lante was a director of the Company from March 1999 to June 2000.
In 1999, the Company engaged Public Strategies, Inc. ("PSI"), an
international strategic communications firm, to assist in the marketing of the
Company's new Internet products and services. During 2000 and 1999, the Company
paid PSI $447,000 and $770,000, respectively, for services performed and
related expenses. The chairman of PSI was a director of the Company from August
1998 to March 2000.
In May 1998, the Company acquired Petabyte Corporation ("Petabyte"), a
digital data distribution start-up enterprise founded by Mr. Cook, the
Company's founder and chief executive officer at the time of the transaction.
In consideration of the sale of Petabyte, the Company paid Mr. Cook $200,000
and agreed to pay Mr. Cook four annual payments of $200,000 each. In March
1999, the Company returned to Mr. Cook title to a Petabyte patent covering
certain digital data distribution concepts, while retaining a use license to
the patent for a nominal one-time payment. In connection with the return of the
title, the Company's future payments to Mr. Cook, totaling $800,000, were
eliminated.
8. EMPLOYEE BENEFIT PLANS
The Company has a retirement savings plan structured under Section 401(k) of
the Internal Revenue Code covering substantially all employees. Under the plan,
contributions are voluntarily made by employees, and the Company may provide
contributions based on the employees' contributions. The Company's continuing
operations includes $80,000, $61,000 and $32,000 in 2001, 2000 and 1999,
respectively, for contributions to this plan.
The Company has an employee stock purchase plan for substantially all
employees that meet minimum service requirements. The plan provides for the
purchase of up to 300,000 previously issued shares of the Company's common
stock. The employee contributes 85% of the purchase price through payroll
deduction with the difference paid by the Company. Since inception of the plan
in 1996, a total of 172,895 shares have been purchased including 12,856, 4,608
and 3,597 shares purchased in 2001, 2000 and 1999, respectively.
9. LITIGATION
On December 30, 1999, the Company and ZixCharge.com, Inc., 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 192/nd /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.
F-18
ZIXIT CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
10. INTERNATIONAL DISTRIBUTION AGREEMENTS
In June 2001, the Company entered into an agreement with AlphaOmega Soft
Co., Ltd. ("AlphaOmega") whereby AlphaOmega became the exclusive distributor
for the ZixMail service in Japan for three years. The Company is to provide a
Japanese language version of ZixMail for AlphaOmega. A revenue sharing
arrangement provides for AlphaOmega to pay the Company a specified portion of
the subscription fees charged to AlphaOmega's customers. Pursuant to this
agreement, the Company is to receive minimum payments totaling $1,200,000
through March 2004, of which $100,000 was received in 2001.
In October 2001, the Company entered into an agreement with 911 Computer
Co., Ltd. ("911") whereby 911 became the exclusive distributor for the ZixMail
service in South Korea for two years. Pursuant to the agreement, the Company
and 911 are to share the related revenues, with 911 agreeing to pay the Company
minimum installment payments totaling $2,000,000 over the term of the
agreement, of which $100,000 was received in 2001. Currently, 911 is in default
of the agreement for the failure to pay scheduled installment payments totaling
$614,000. If the agreement is renegotiated rather than canceled, the Company
expects the minimum installment payments to be substantially reduced.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000:
Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2001
Revenues....................... $ 104,000 $ 123,000 $ 36,000 $ 54,000
Loss from continuing operations (13,610,000) (11,394,000) (12,440,000) (19,350,000)
Net loss....................... (13,562,000) (11,394,000) (12,440,000) (19,350,000)
Net loss per share............. (0.80) (0.67) (0.73) (1.13)
2000
Revenues....................... $ 96,000 $ 92,000 $ 99,000 $ 107,000
Loss from continuing operations (11,136,000) (9,764,000) (16,022,000) (12,400,000)
Net loss....................... (11,136,000) (9,456,000) (15,956,000) (12,333,000)
Net loss per share............. (0.72) (0.58) (0.96) (0.73)
The quarter ended June 30, 2001 includes a non-recurring net reduction in
operating costs of $3,000,000 as a result of ceasing all operations at Anacom
(Note 3). The quarter ended September 30, 2001 includes a $1,500,000 write-down
of the investment in Maptuit (Note 7). The quarter ended December 31, 2001
includes a $3,500,000 write-off of the remaining investment in Maptuit (Note 7)
and a $3,000,000 write-off of digital identification certificates (Note 3).
F-19