UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2011
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 0-17995
ZIX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Texas
(State of Incorporation)
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75-2216818
(I.R.S. Employer Identification Number)
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2711 North Haskell Avenue
Suite 2200, LB 36
Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
(214) 370-2000
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at July 26, 2011
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Common Stock, par value $0.01 per share
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64,094,116
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ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
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December 31,
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2011
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2010
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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14,829,000
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$
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24,619,000
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Commercial Paper
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2,290,000
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Receivables, net
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1,084,000
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1,344,000
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Prepaid and other current assets
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1,462,000
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1,115,000
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Deferred tax assets
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815,000
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1,056,000
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Total current assets
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20,480,000
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28,134,000
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Property and equipment, net
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2,296,000
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2,209,000
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Goodwill
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2,161,000
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2,161,000
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Deferred tax assets
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34,542,000
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34,304,000
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Other assets
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44,000
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Total assets
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$
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59,479,000
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$
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66,852,000
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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480,000
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$
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562,000
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Accrued expenses
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2,127,000
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2,282,000
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Deferred revenue
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16,102,000
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15,331,000
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License subscription note payable
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118,000
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137,000
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Total current liabilities
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18,827,000
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18,312,000
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Long-term liabilities:
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Deferred revenue
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952,000
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1,439,000
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License subscription note payable
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49,000
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Deferred rent
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159,000
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165,000
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Total long-term liabilities
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1,111,000
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1,653,000
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Total liabilities
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19,938,000
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19,965,000
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Commitments and contingencies (see Note 8)
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Stockholders equity:
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Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding
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Common stock, $0.01 par value, 175,000,000 shares authorized; 70,611,320 issued and
63,998,539 outstanding at June 30, 2011 and 69,505,919 issued and 67,178,738
outstanding at December 31, 2010
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706,000
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695,000
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Additional paid-in capital
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347,520,000
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344,981,000
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Treasury stock, at cost; 6,612,781 common shares at June 30, 2011 and 2,327,181 common
shares at December 31, 2010
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(26,419,000
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)
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(11,507,000
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)
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Accumulated deficit
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(282,266,000
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)
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(287,282,000
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)
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Total stockholders equity
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39,541,000
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46,887,000
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Total liabilities and stockholders equity
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$
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59,479,000
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$
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66,852,000
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See notes to condensed consolidated financial statements.
3
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2011
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2010
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2011
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2010
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Revenues
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$
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9,431,000
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$
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8,194,000
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$
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18,702,000
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$
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15,673,000
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Cost of revenues
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1,756,000
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1,570,000
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3,573,000
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3,072,000
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Gross margin
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7,675,000
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6,624,000
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15,129,000
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12,601,000
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Operating expenses:
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Research and development
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1,292,000
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1,248,000
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2,605,000
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2,556,000
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Selling, general and administrative
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3,796,000
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3,988,000
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7,556,000
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8,216,000
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Total operating expenses
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5,088,000
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5,236,000
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10,161,000
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10,772,000
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Operating income
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2,587,000
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1,388,000
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4,968,000
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1,829,000
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Other income, net
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19,000
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15,000
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61,000
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44,000
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Income from continuing operations before income
taxes
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2,606,000
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1,403,000
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5,029,000
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1,873,000
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Income tax benefit (expense)
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11,000
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(24,000
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)
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(13,000
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)
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30,000
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Income from continuing operations
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2,617,000
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1,379,000
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5,016,000
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1,903,000
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Income from discontinued operations before income
taxes
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188,000
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478,000
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Income tax expense
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(66,000
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)
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(168,000
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)
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Income from discontinued operations
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122,000
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310,000
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Net Income
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$
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2,617,000
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$
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1,501,000
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$
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5,016,000
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$
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2,213,000
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Basic income per common share:
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Income from continuing operations
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$
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0.04
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$
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0.02
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$
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0.08
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$
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0.03
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Income from discontinued operations
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$
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0.00
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$
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0.00
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|
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|
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|
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|
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Net Income
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$
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0.04
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|
$
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0.02
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$
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0.08
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$
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0.03
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Diluted income per common share:
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Income from continuing operations
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$
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0.04
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|
|
$
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0.02
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|
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$
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0.07
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|
$
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0.03
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|
|
|
|
|
|
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Income from discontinued operations
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$
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0.00
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|
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$
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0.00
|
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|
|
|
|
|
|
|
|
|
|
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Net Income
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$
|
0.04
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|
|
$
|
0.02
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|
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$
|
0.07
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|
$
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0.03
|
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|
|
|
|
|
|
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|
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Basic weighted average common shares outstanding
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65,208,875
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63,976,551
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66,190,442
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63,883,974
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Diluted weighted average common shares outstanding
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67,280,939
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66,359,134
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68,638,470
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65,933,977
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See notes to condensed consolidated financial statements.
4
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
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|
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Stockholders Equity
|
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Additional
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Total
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Common Stock
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Paid-In
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Treasury
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Accumulated
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Stockholders
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Shares
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Amount
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Capital
|
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Stock
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Deficit
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Equity
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|
Balance, December 31, 2010
|
|
|
69,505,919
|
|
|
$
|
695,000
|
|
|
$
|
344,981,000
|
|
|
$
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(11,507,000
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)
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$
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(287,282,000
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)
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$
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46,887,000
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Issuance of common stock
upon exercise of stock
options
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635,591
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6,000
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1,604,000
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1,610,000
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Issuance of common stock
upon exercise of warrants
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469,810
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5,000
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|
719,000
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|
|
|
|
|
|
|
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|
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724,000
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Employee stock-based
compensation costs
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|
|
|
|
|
|
|
|
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201,000
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|
|
|
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|
|
|
|
|
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201,000
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Non-employee stock-based
compensation costs
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|
|
|
|
|
|
|
|
|
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15,000
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|
|
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|
|
|
|
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15,000
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Repurchase of common stock
|
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|
|
|
|
|
|
|
|
|
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(14,912,000
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)
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|
|
|
|
|
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(14,912,000
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)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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5,016,000
|
|
|
|
5,016,000
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011
|
|
|
70,611,320
|
|
|
$
|
706,000
|
|
|
$
|
347,520,000
|
|
|
$
|
(26,419,000
|
)
|
|
$
|
(282,266,000
|
)
|
|
$
|
39,541,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,016,000
|
|
|
$
|
2,213,000
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|
Non-cash items in net income:
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|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
672,000
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|
|
|
685,000
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|
Employee stock-based compensation costs
|
|
|
201,000
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|
|
|
976,000
|
|
Non-employee stock-based compensation costs
|
|
|
15,000
|
|
|
|
21,000
|
|
Changes in deferred taxes
|
|
|
3,000
|
|
|
|
7,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
260,000
|
|
|
|
196,000
|
|
Prepaid and other assets
|
|
|
(303,000
|
)
|
|
|
353,000
|
|
Accounts payable
|
|
|
(86,000
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)
|
|
|
(222,000
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)
|
Deferred revenue
|
|
|
284,000
|
|
|
|
958,000
|
|
Accrued and other liabilities
|
|
|
(161,000
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)
|
|
|
(766,000
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)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,901,000
|
|
|
|
4,421,000
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(755,000
|
)
|
|
|
(663,000
|
)
|
Purchase of commercial paper
|
|
|
(2,290,000
|
)
|
|
|
|
|
Sales of marketable securities
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,045,000
|
)
|
|
|
(638,000
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,610,000
|
|
|
|
469,000
|
|
Proceeds from exercise of warrants
|
|
|
724,000
|
|
|
|
|
|
Payment of license subscription note payable
|
|
|
(68,000
|
)
|
|
|
(62,000
|
)
|
Purchase of treasury shares
|
|
|
(14,912,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(12,646,000
|
)
|
|
|
407,000
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(9,790,000
|
)
|
|
|
4,190,000
|
|
Cash and cash equivalents, beginning of period
|
|
|
24,619,000
|
|
|
|
13,287,000
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,829,000
|
|
|
$
|
17,477,000
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
ZIX
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Zix Corporation (ZixCorp,
the Company, we, our, us) should be read in conjunction with the audited consolidated
financial statements included in the Companys 2010 Annual Report on Form 10-K. These financial
statements are unaudited, but have been prepared in the ordinary course of business for the purpose
of providing information with respect to the interim periods covered thereby. Management of the
Company believes that all adjustments necessary for a fair presentation of such periods have been
included and are of a normal recurring nature. The results of operations for the six-month period
ended June 30, 2011, are not necessarily indicative of the results to be expected for any future
interim periods or for the full fiscal year.
2. Recent Accounting Standards and Pronouncements
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (FASB) issued guidance on revenue
recognition that became effective January 1, 2011. Under the new guidance tangible products that
have software components that are essential to the functionality of the tangible product will no
longer be within the scope of the software revenue recognition guidance; such software-enabled
products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB
issued authoritative guidance on revenue arrangements with multiple deliverables that are outside
the scope of the software revenue recognition guidance. Under the new guidance, when Vendor
Specific Objective Evidence (VSOE) or third party evidence for deliverables in an arrangement
cannot be determined, a best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The new guidance
includes new disclosure requirements on how the application of the relative selling price method
affects the timing and amount of revenue recognition. This new guidance did not have a material
impact on our condensed consolidated financial statements.
3. Discontinued Operations
On December 31, 2010, we discontinued our e-Prescribing business. For information relating to
discontinued operations, see the Companys 2010 Annual Report on Form 10-K.
4. Stock Options and Stock-based Employee Compensation
As of June 30, 2011, there were 6,827,165 options outstanding and 1,433,834 available for
grant. Of the options available for grant, 1,187,310 options were available for grant to employees
and 246,524 were available for grant to the Companys directors. For the three month and six month
periods ended June 30, 2011, the total stock-based employee compensation expense was recorded to
the following line items of the Companys condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Cost of revenues
|
|
$
|
12,000
|
|
|
$
|
24,000
|
|
Research and development
|
|
|
13,000
|
|
|
|
26,000
|
|
Selling, general and administrative
|
|
|
68,000
|
|
|
|
151,000
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
93,000
|
|
|
$
|
201,000
|
|
|
|
|
|
|
|
|
There were 224,791 and 635,591 stock options exercised for the three and six month periods
ended June 30, 2011, respectively. There were 139,460 and 309,096 stock options exercised for the
three and six month periods ended June 30, 2010, respectively. The excess tax benefit recorded in
the three month period ended June 30, 2011, related to the 224,791 options exercises was $92,000.
The excess tax benefit recorded in the six month periods ended June 30, 2011, related to the
635,591 option exercises was $103,000. A deferred tax asset totaling $63,000 and $263,000,
resulting from stock-based compensation expense relating to the Companys U.S. operations, was
recorded for the six month periods ended June 30, 2011 and 2010, respectively. As of June 30, 2011,
there was
7
$493,000 of total unrecognized stock-based compensation related to non-vested stock-based
compensation awards granted under the stock option plans. This cost is expected to be recognized
over a weighted average period of 0.93 years.
Stock Option Activity
The following is a summary of all stock option transactions during the three months ended June 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Yrs)
|
|
|
Value
|
|
Outstanding at March 31, 2011
|
|
|
7,141,002
|
|
|
$
|
4.46
|
|
|
|
|
|
|
|
|
|
Granted at market price
|
|
|
45,000
|
|
|
$
|
3.52
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(134,046
|
)
|
|
$
|
6.06
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(224,791
|
)
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011
|
|
|
6,827,165
|
|
|
$
|
4.52
|
|
|
|
4.58
|
|
|
$
|
4,503,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2011
|
|
|
6,373,970
|
|
|
$
|
4.70
|
|
|
|
4.31
|
|
|
$
|
3,668,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the above-described stock options outstanding at June 30, 2011, 2,884,535 of such stock
options outstanding had an exercise price lower than the market price of the Companys common
stock.
For additional information regarding the Companys Stock Options and Stock-based Employee
Compensation, see Note 4 to the consolidated financial statements contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010.
5. Supplemental Cash Flow Information
Supplemental cash flow information relating to interest, taxes and non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Cash paid for interest
|
|
$
|
7,000
|
|
|
$
|
12,000
|
|
Cash income tax payments
|
|
$
|
107,000
|
|
|
$
|
149,000
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Payables related to purchases of fixed assets
|
|
$
|
(4,000
|
)
|
|
$
|
125,000
|
|
6. Receivables, net
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Receivables
|
|
$
|
1,116,000
|
|
|
$
|
1,376,000
|
|
Allowance for returns and doubtful accounts
|
|
|
(32,000
|
)
|
|
|
(32,000
|
)
|
Note receivable
|
|
|
468,000
|
|
|
|
476,000
|
|
Allowance for note receivable
|
|
|
(468,000
|
)
|
|
|
(476,000
|
)
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
1,084,000
|
|
|
$
|
1,344,000
|
|
|
|
|
|
|
|
|
The allowance for doubtful accounts includes all specific accounts receivable which we believe
are likely not collectible based on known information. In addition, we record 2.5% of all accounts
receivable greater than 90 days past due, net of those accounts specifically reserved, as a general
allowance against accounts that could potentially become uncollectible.
The note receivable represents the remaining outstanding balance of an original note related
to the sale of a product line in 2005 in the amount of $540,000. The note receivable is fully
reserved at June 30, 2011.
7. Earnings Per Share and Potential Dilution
Basic earnings per share are computed using the weighted average number of common shares
outstanding for the period. The dilutive effect of common shares potentially outstanding is
included in diluted earnings per share. The computations for basic and diluted earnings per share
for the three and six month periods ended June 30, 2011 and 2010, are as follows:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30,
|
|
|
Six Months ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Basic weighted average shares
|
|
|
65,208,875
|
|
|
|
63,976,551
|
|
|
|
66,190,442
|
|
|
|
63,883,974
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and director stock options
|
|
|
965,444
|
|
|
|
836,291
|
|
|
|
1,144,363
|
|
|
|
730,104
|
|
Warrants
|
|
|
1,106,620
|
|
|
|
1,546,292
|
|
|
|
1,303,665
|
|
|
|
1,321,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential dilutive common shares
|
|
|
67,280,939
|
|
|
|
66,359,134
|
|
|
|
68,638,470
|
|
|
|
65,935,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six month periods ended June 30, 2011, weighted average shares of
4,479,858 and 4,096,786 respectively, related to stock options were excluded from the calculation
of diluted earnings per share because the option exercise prices exceeded the market price of
ZixCorps common stock on that date, and the options were therefore anti-dilutive. During each of
those periods, 145,853 of shares related to anti-dilutive warrants were excluded from that
calculation. During the three and six month periods ended June 30, 2010, weighted average shares of
7,419,427 and 7,404,603 respectively, related to anti-dilutive stock options were excluded from the
calculation of diluted earnings per share. During those same periods, 3,664,902 and 4,123,236,
respectively, of shares related to anti-dilutive warrants were excluded from that calculation.
8. Commitments and contingencies
A summary of our fixed contractual obligations and commitments at June 30, 2011, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years 2 & 3
|
|
|
Beyond 3 Years
|
|
Operating leases
|
|
$
|
3,849,000
|
|
|
$
|
1,230,000
|
|
|
$
|
2,069,000
|
|
|
$
|
550,000
|
|
License subscription note payable
|
|
|
118,000
|
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
|
3,967,000
|
|
|
|
1,348,000
|
|
|
|
2,069,000
|
|
|
|
550,000
|
|
Interest on obligations
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,972,000
|
|
|
$
|
1,353,000
|
|
|
$
|
2,069,000
|
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not entered into any material, non-cancelable purchase commitments at June 30, 2011.
Claims and Proceedings
We are, from time to time, involved in various legal proceedings that arise in the ordinary
course of business. We do not believe the outcome of these legal proceedings either individually or
taken as a whole, will have a material adverse effect on our consolidated financial condition,
results of operations or cash flows. However, we cannot predict with certainty any eventual loss or
range of possible loss related to such matters.
9. Fair Value Measurements
FASB guidance regarding fair value measurement establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable
inputs for which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
For certain of the Companys financial instruments, including cash and cash equivalents,
commercial paper, trade receivables, and accounts payable, the fair values approximate carrying
values due to the short-term maturities of these instruments. The carrying values of other current
assets and accrued expenses are also not recorded at fair value, but approximate fair values
primarily due to their short-term nature.
10. Commercial Paper
The investment in commercial paper is classified as a held-to-maturity debt security as the
Company has the positive intent and ability to hold this investment until maturity. This short term
investment was purchased on February 18, 2011, and matures on October 25, 2011. At maturity, the
commercial paper will pay interest of approximately $10,000. The carrying value of this security
approximates fair market value due to the short-term maturity of the investment.
9
11. Common Stock Repurchase Program
On March 7, 2011, the Company announced that its Board of Directors approved a share
repurchase program that authorized the Company to purchase up to $15,000,000 of its shares of
common stock from time to time in the open market. During the three months ended June 30, 2011, the
Company repurchased 2,917,300 shares at an aggregate cost of $9,900,000. During the three months
ended March 31, 2011, the Company repurchased 1,368,300 shares at an aggregate cost of $5,000,000.
We completed the share repurchase program during the first week of July 2011 when the remaining
repurchased shares valued at approximately $100,000 were transferred to the Company.
12. Income Taxes
At the end of 2010, the Company recorded a $35,300,000 tax benefit by reducing the valuation
allowance related to its deferred tax assets. This reduction was determined through an assessment
of future deferred tax asset utilization following accounting guidance which relies largely on
historical earnings. Using the same methodology, and updating the future taxable earnings estimates
based on first six months 2011 actual earnings, the Company believes its future taxable earnings
estimate to be established at the end of 2011 will exceed the estimate used at the end of 2010. For
this reason, the Company offset its first and second quarter 2011 deferred tax provision by
reducing its valuation allowance by an equal amount; thereby eliminating any deferred tax provision
from the Companys first and second quarter 2011 financial statements. The Company expects to
follow this same methodology in the third quarter of 2011 and will reevaluate the need for its
valuation allowance at December 31, 2011, following the same assessment that was performed at
December 31, 2010.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements in this report which are not purely historical facts or which necessarily depend
upon future events, including statements about trends, uncertainties, hopes, beliefs,
anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements involve risks and uncertainties that could cause actual events or
results to differ materially from the events or results described in the forward-looking
statements, including risks and uncertainties described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010. Any of these risk factors could have a material adverse effect
on our business, financial condition or financial results and reduce the value of an investment in
our securities. We may not succeed in addressing these and other risks associated with an
investment in our securities, with our business and with our achieving any forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking statements. All
forward-looking statements are based upon information available to us on the date the statements
are made. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
We are a leader in providing secure, Internet-based applications in a Software as a Service
(SaaS) model. ZixCorp
®
Email Encryption Service enables the use of secure email for sensitive
information exchange primarily in the healthcare, financial services, insurance and government
sectors. More than 1,200 hospitals and over 1,500 financial institutions, including some of the
most influential companies and government organizations, use our Email Encryption Service.
Wellpoint, Humana, and the Securities and Exchange Commission (SEC) are among these notable
customers. Our Email Encryption Service is enhanced by ZixDirectory
®
, which includes approximately
27 million members. ZixDirectory allows for emails to be sent seamlessly whenever possible, across
the largest email encryption community in the world.
The business operations and service offerings are supported by the ZixData Center, a network
operations center dedicated to secure electronic transaction processing. The operations of the
ZixData Center are independently audited annually to maintain AICPA SysTrust
SM
certification in the areas of security, confidentiality, integrity and availability. Auditors also
produce a SAS70 Type II report on the effectiveness of operational controls used over the audit
period. The center is staffed 24 hours a day with a proven 99.99% reliability. We enable email
communications to be sent in a trusted, safe, and secure manner. This is our core competency and we
believe it is a competitive advantage.
10
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in accordance with accounting
principles generally accepted in the United States requires the Companys management to make
estimates and assumptions that affect the amounts reported in the Companys condensed consolidated
financial statements and accompanying notes. Actual results could differ from these estimates and
assumptions. Critical accounting policies and estimates are defined as those that are both most
important to the portrayal of the Companys financial condition and results and require
managements most subjective judgments.
We describe our significant accounting policies in Note 2,
Summary of Significant Accounting
Policies
, of the Notes to Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2010. We discuss our
Critical Accounting Policies and
Estimates
in Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the year ended December 31, 2010.
Results of Operations
Second Quarter 2011 Summary of Operations
Financial
|
|
Revenue for the quarter ended June 30, 2011, was $9,431,000 compared with $8,194,000 for the
same period in 2010 representing a 15% increase.
|
|
|
Gross profit for the quarter ended June 30, 2011, was $7,675,000 or 81% of revenues compared
with $6,624,000 or 81% of revenues for the comparable period in 2010.
|
|
|
Net income for the quarter ended June 30, 2011, was $2,617,000 compared with net income of
$1,501,000 for the same period 2010.
|
|
|
Ending cash and cash equivalents and commercial paper were $17,119,000 on June 30, 2011,
compared with $24,619,000 on December 31, 2010. During the six month period ended June 30,
2011, the company purchased 4,285,600 shares of its common stock at a cost of $14,912,000.
|
Operations
|
|
New first year orders (NFYOs) for the quarter ended June 30, 2011, were $2,039,000. As of
June 30, 2011, backlog was $52,584,000.
|
Revenues
Email Encryption is a subscription-based service. The following table sets forth a
period-over-period comparison of the Companys revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month Variance
|
|
|
|
|
|
|
|
|
|
|
6-month Variance
|
|
|
|
Three Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
Six Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
Email
Encryption revenues
|
|
$
|
9,431,000
|
|
|
$
|
8,194,000
|
|
|
$
|
1,237,000
|
|
|
|
15
|
%
|
|
$
|
18,702,000
|
|
|
$
|
15,673,000
|
|
|
$
|
3,029,000
|
|
|
|
19
|
%
|
The increase in Email Encryption revenue was due to the growth inherent in a successful
subscription model with steady additions to the subscriber base coupled with a high rate of
existing customer renewals.
Revenue Indicators Backlog and Orders
Backlog
Our end-user order backlog is comprised of contractually bound agreements that we
expect to amortize into revenue as the services are performed. The timing of revenue is affected by
both the length of time required to deploy a service and the length of the service contract.
11
As of June 30, 2011, total backlog was $52,584,000 and we expect approximately 57% of the
total backlog to be recognized as revenue during the next twelve months. The backlog as of June 30,
2011, was comprised of the following elements: $17,054,000 of deferred revenue that has been billed
and paid, $5,792,000 billed but unpaid, and approximately $29,738,000 of unbilled contracts.
Email Encryption Orders
Total orders for Email Encryption were $12,517,000 and $9,598,000
for the three-month periods ended June 30, 2011 and 2010, respectively. Total orders include
contract renewals, NFYOs, and in the case of new multi-year contracts, the years beyond the first
year of service. NFYOs were $2,039,000 and $2,108,000 for the three months ended June 30, 2011 and
2010, respectively.
Cost of Revenues
The following table sets forth a period-over-period comparison of the cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month Variance
|
|
|
|
|
|
|
|
|
|
|
6-month Variance
|
|
|
|
Three Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
Six Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
Email
Encryption
|
|
$
|
1,756,000
|
|
|
$
|
1,570,000
|
|
|
$
|
186,000
|
|
|
|
12
|
%
|
|
$
|
3,573,000
|
|
|
$
|
3,072,000
|
|
|
$
|
501,000
|
|
|
|
16
|
%
|
Cost of revenues is comprised of costs related to operating and maintaining the ZixData
Center, a field deployment team, customer service and support and the amortization of
Company-owned, customer-based computer appliances. A significant portion of the total cost of
revenues relates to the ZixData Center, which currently has excess capacity. The primary
contributor to the year over year increase in Cost of revenues was an increase in the allocation of
fixed costs relating to the data center and various fixed occupancy charges including facilities
and telecommunications and various shared costs. A portion of these fixed and shared costs had
previously been absorbed by the Companys e-Prescribing business that was discontinued at the end
of 2010. The Companys remaining product line, Email Encryption, began absorbing higher allocated
costs during 2010 as we were winding down the Companys e-Prescribing business. The increase in
cost of revenues in the second quarter of 2011 compared to the same quarter last year, resulted
primarily from higher allocated costs. For the six months ended June 30, 2011, the allocated costs
absorbed by Email Encryption increased approximately $450,000 compared to the first half of 2010.
The remaining year over year increase of approximately $50,000 resulted primarily from increases in
salaries and benefits.
Research and Development Expenses
The following table sets forth a period-over-period comparison of our research and development
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month Variance
|
|
|
|
|
|
|
|
|
|
|
6-month Variance
|
|
|
|
Three Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
Six Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
Email Encryption
|
|
$
|
1,292,000
|
|
|
$
|
1,248,000
|
|
|
$
|
44,000
|
|
|
|
4
|
%
|
|
$
|
2,605,000
|
|
|
$
|
2,556,000
|
|
|
$
|
49,000
|
|
|
|
2
|
%
|
Research and development expenses consist primarily of salary, benefits, and stock-based
compensation for our development staff, and other non-people costs associated with enhancing our
existing products and services and developing new products and services. For the quarter and year
to date ended June 30, 2011, research and development expenses increased slightly due to increases
in wages and benefit costs.
Selling, General and Administrative Expenses
The following table sets forth a period-over-period comparison of our selling, general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month Variance
|
|
|
|
|
|
|
|
|
|
|
6-month Variance
|
|
|
|
Three Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
Six Months Ended June 30,
|
|
|
2011 vs. 2010
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
Selling,
general and
administrative
|
|
$
|
3,796,000
|
|
|
$
|
3,988,000
|
|
|
$
|
(192,000
|
)
|
|
|
(5
|
%)
|
|
$
|
7,556,000
|
|
|
$
|
8,216,000
|
|
|
$
|
(660,000
|
)
|
|
|
(8
|
%)
|
12
Selling, general and administrative expenses consist primarily of salary, stock-based
compensation and benefit costs for marketing, sales, executive and administrative personnel as well
as costs associated with advertising, promotions, professional services and general corporate
activities. The $192,000 decrease in expense during the quarter ended June 30, 2011 compared to the
same period last year primarily resulted from decreases in bonus and commissions, stock based
compensation, and salaries and severance expenses totaling approximately $650,000, which was
partially offset by increases in professional fees, recruitment, advertising and investor relations
totaling approximately $350,000. The remaining decrease of $108,000 was spread over a wide range
of other selling, general and administrative activities.
The $660,000 decrease in expense for the six months ended June 30, 2011, compared to the same
period last year primarily resulted from decreases in bonus and commissions, stock based
compensation, and salaries and severance expenses totaling approximately $1,500,000, which was
partially offset by increases in professional fees, recruitment, advertising and investor relations
totaling approximately $600,000. The remaining decrease of $240,000 was spread over a wide range
of other selling, general and administrative activities.
Interest Expense
Interest expense was $3,000 and $7,000 for the three and six months ended June 30, 2011,
respectively. Interest expense was $5,000 and $12,000 for the three and six months ended June 30,
2010, respectively. Interest expense consists of interest related to a license subscription
promissory note payable.
Investment and Other Income
Investment and other income was $22,000 and $68,000 for the three and six months ended June
30, 2011, respectively. Investment and other income was $20,000 and $56,000 for the three and six
months ended June 30, 2010, respectively. Other income consists of interest and other income items
earned in the normal course of business.
Provision for Income Taxes
The provision for income taxes was $(11,000) and $90,000 for the three-month periods ended
June 30, 2011 and 2010, respectively, and $13,000 and $138,000 for the six month periods ended June
30, 2011 and 2010, respectively. The operating losses incurred by the Companys U.S. operations in
past years and the resulting net operating losses for U.S. Federal tax purposes are subject to a
$71,683,000 reserve because of the uncertainty of future taxable income levels sufficient to
utilize the net operating losses. Our 2011 provision of $13,000 consists of a benefit from
refundable tax credits on our U.S. operations totaling $48,000, and taxes related to our Canadian
operations totaling $35,000; and $26,000 in state taxes based on gross revenues. The 2010 provision
consisted of $53,000 in taxes on our U.S. operations, $69,000 in taxes on our Canadian operations,
and a small amount of state taxes based on gross revenues.
There were no penalty-related charges to selling, general and administrative expenses accrued
or recognized for the same comparative periods. Additionally, we have not taken a tax position that
would have a material effect on the financial statements or the effective tax rate for the
three-month period ended June 30, 2011. We are currently subject to a three-year statute of
limitations by major tax jurisdictions.
The Company previously recorded a $327,000 tax contingency liability related to tax year 2004
for its Canada operation, and that amount and the specifics therein have remained unchanged except
for currency translation adjustments. As of June 30, 2011, the gross amount of our unrecognized tax
benefits, inclusive of the $327,000 tax liability and $50,000 in other uncertain positions in 2008,
was approximately $472,000. Included in this balance are tax positions which, if recognized, would
impact our effective tax rate.
At June 30, 2011, the Company partially reserved its U.S. net deferred tax assets due to the
uncertainty of future taxable income sufficient to utilize net loss carryforwards prior to their
expiration. The Company did not reserve a portion, $35,348,000, of its U.S. net deferred tax assets
related to $48,000 in state tax credit carryforwards because such credits will be used to offset a
revenue-based state franchise tax and are therefore not contingent on the Companys reporting
taxable income in a future period, and $35,300,000 in U.S. net operating losses (NOLs) because we
believe the Company will generate sufficient taxable income in future years to utilize these NOLs
prior to their expiration.
At the end of 2010, the Company recorded a $35,300,000 tax benefit by reducing the valuation
allowance related to its deferred tax assets. This reduction was determined through an assessment
of future deferred tax asset utilization following accounting guidance
13
which relies largely on historical earnings. Using the same methodology, and updating the
future taxable earnings estimates based on first and second quarter 2011 actual earnings, the
Company believes its future taxable earnings estimate to be established at the end of 2011 will
exceed the estimate used at the end of 2010. For this reason, the Company offset its first and
second quarter 2011 deferred tax provision by reducing its valuation allowance by an equal amount,
thereby eliminating any deferred tax provision from the Companys first and second quarter 2011
financial statements. The Company expects to follow this same methodology in the third quarter of
2011 and will reevaluate the need for its valuation allowance at December 31, 2011 following the
same assessment methodology that was performed at December 31, 2010. Adjusting our valuation
allowance could have a significant impact on operating results in the period that it becomes more
likely than not that an additional portion of our deferred tax assets will or will not be realized.
We have determined that utilization of existing net operating losses against future taxable
income is not subject to limitation by Section 382 of the Internal Revenue Code. Future ownership
changes, however, may limit the companys ability to fully utilize its existing net operating loss
carryforwards against future taxable income.
As indicated earlier, the operating losses incurred by our U.S. operations and
the resulting net operating losses for U.S. Federal tax purposes are subject to a partial reserve.
Significant judgment is required in determining any reserve recorded against the deferred tax
asset. In assessing the need for a reserve, we consider all available evidence, including past
operating results, estimates of future taxable income, and the feasibility of tax planning
strategies.
Net Income
The net income for the quarter ending June 30, 2011, of $2,617,000 reflects the achievement of
profitability for the sixth consecutive quarter, and is an improvement of $1,116,000 compared to
the net income of $1,501,000 for the same period last year. The improvement in net income resulted
from higher gross profit, due to increased revenue, combined with flat R&D and lower SG&A expenses,
as discussed above.
Liquidity and Capital Resources
Overview
Based on our performance over the last four quarters and current expectations, we believe our
cash, cash equivalents, commercial paper and cash generated from operations, will satisfy our
working capital needs, capital expenditures, investment requirements, contractual obligations,
commitments, future customer financings, and other liquidity requirements associated with our
operations through at least the next twelve months. We plan for and measure our liquidity and
capital resources through an annual budgeting process. At June 30, 2011, our cash, cash
equivalents, and commercial paper totaled $17.1 million and our debt was $118,000. Our debt
consists of a note related to a three-year subscription for Microsoft licenses that is paid on a
monthly basis at approximately $12,000 per month.
Revenue is expected to grow at approximately 15% to 20% for the full year 2011 compared to
2010. For the three month period ended June 30, 2011, we achieved our sixth consecutive quarter of
profitability.
Cash, cash equivalents and commercial paper at June 30, 2011, were $17,119,000, a decrease of
$7,500,000 from the December 31, 2010, balance. This decrease was primarily driven by the
repurchase of $14,912,000 of our common stock under a repurchase program approved by our Board of
Directors in March 2011. We completed the share repurchase program during the first week of July
2011 when the remaining repurchased shares valued at approximately $100,000 were transferred to the
Company. Our decrease in cash was partially offset by cash generated from the exercise of stock
options, cash collections from customers, and relatively flat accounts payable and accrued
expenses.
We believe a significant portion of all other spending is discretionary and flexible and that
we have the ability to adjust overall cash spending to react, as needed, to any shortfalls in
projected cash.
Sources and Uses of Cash Summary
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operations
|
|
$
|
5,901,000
|
|
|
$
|
4,421,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(3,045,000
|
)
|
|
$
|
(638,000
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(12,646,000
|
)
|
|
$
|
407,000
|
|
14
Our primary source of liquidity from our operations is the collection of revenue in advance
from our customers and accounts receivable from our customers, net of the timing of payments to our
vendors and service providers.
Related to our investing activities in the first six months of 2011, we utilized $2,290,000 to
purchase commercial paper and $755,000 to purchase equipment, primarily computer and networking
equipment. In first six months of 2010, equipment purchases were $663,000. These 2010 purchases
were slightly offset by the $25,000 cash inflow from proceeds from the sales of maturing marketable
securities.
Cash used in financing activities in the first six months of 2011 included the $14,912,000
repurchase of common stock mentioned above and $68,000 to fund a small promissory note associated
with computer operating system licenses. These usages were partially offset by $2,334,000 received
from the exercise of stock options and warrants. In the first six months of 2010, the exercise of
stock options resulted in $469,000 in cash, which was partially offset by $62,000 used to fund the
above mentioned promissory note.
Options and Warrants of ZixCorp Common Stock
We have significant warrants and options outstanding that are currently vested. There is no
assurance that any of these options and warrants will be exercised; therefore, the extent of future
cash from additional warrant and option exercises is not certain. The following table summarizes
the warrants and options that were outstanding as of June 30, 2011. The vested shares are a subset
of the outstanding shares. The value of the shares is the number of shares multiplied by the
exercise price for each share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Outstanding Options and Warrants
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
|
(included in
|
|
|
Total Value of
|
|
Exercise Price Range
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding)
|
|
|
Vested
|
|
$1.11 - $1.99
|
|
|
3,342,679
|
|
|
$
|
5,129,000
|
|
|
|
3,144,410
|
|
|
$
|
4,810,000
|
|
$2.00 - $3.49
|
|
|
1,088,359
|
|
|
|
2,794,000
|
|
|
|
852,183
|
|
|
|
2,277,000
|
|
$3.50 - $4.99
|
|
|
2,638,945
|
|
|
|
11,670,000
|
|
|
|
2,620,195
|
|
|
|
11,601,000
|
|
$5.00 - $5.99
|
|
|
515,927
|
|
|
|
2,624,000
|
|
|
|
515,927
|
|
|
|
2,624,000
|
|
$6.00 - $8.99
|
|
|
545,316
|
|
|
|
3,578,000
|
|
|
|
545,316
|
|
|
|
3,578,000
|
|
$9.00 - $11.00
|
|
|
804,792
|
|
|
|
8,628,000
|
|
|
|
804,792
|
|
|
|
8,628,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,936,018
|
|
|
$
|
34,423,000
|
|
|
|
8,482,823
|
|
|
$
|
33,518,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
None.
Contractual Obligations, Contingent Liabilities and Commitments
A summary of our fixed contractual obligations and commitments at June 30, 2011, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years 2 & 3
|
|
|
Beyond 3 Years
|
|
Operating leases
|
|
$
|
3,849,000
|
|
|
$
|
1,230,000
|
|
|
$
|
2,069,000
|
|
|
$
|
550,000
|
|
Debt (long-term and short-term)
|
|
|
118,000
|
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
|
3,967,000
|
|
|
|
1,348,000
|
|
|
|
2,069,000
|
|
|
|
550,000
|
|
Interest on obligations
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,972,000
|
|
|
$
|
1,353,000
|
|
|
$
|
2,069,000
|
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not enter into any other material, non cancelable purchase commitments during the three
month period ended June 30, 2011.
We have severance agreements with certain employees which would require the Company to pay
approximately $1,554,000 if all such employees separated from employment with our Company in
certain circumstances, including a Change of Control or termination without Cause, as defined
in the severance agreements.
15
|
|
|
ITEM 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We have no material changes to the disclosure on this matter made in our Annual Report on Form
10-K for the year ended December 31, 2010.
|
|
|
ITEM 4.
|
|
CONTROLS AND PROCEDURES
|
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e)) under the Exchange Act as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of June 30, 2011.
Changes in Internal Controls over Financial Reporting
During the six months ended June 30, 2011, there have been no changes in our internal control
over financial reporting that have materially affected or are reasonably likely to materially
affect internal control over financial reporting.
PART II OTHER INFORMATION
|
|
|
ITEM 1.
|
|
Legal Proceedings
|
See Note 8 to the Condensed Consolidated Financial Statements set forth in this Form 10-Q.
See Part I, Item 1A, Risk Factors, of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2010. There have been no material changes in our risk factors from
those disclosed in such Annual Report on Form 10-K. The risk factors in our Form 10-K should be
read in conjunction with the considerations set forth above in Managements Discussion and
Analysis of Financial Condition and Results of Operations and in Managements Discussion and
Analysis of Financial Condition and Results of Operations set forth in our Annual Report on Form
10-K for the fiscal year ended December 31, 2010.
|
|
|
ITEM 2.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
(a)
|
|
None.
|
|
|
(b)
|
|
None.
|
|
|
(c)
|
|
Purchases of Equity Securities by the Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value) of Shares
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
(or Units) that May
|
|
|
|
|
|
|
|
|
|
|
|
part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Total Number of Shares
|
|
|
Average Price Paid
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
1
|
|
|
Programs
|
|
April 1, 2011 to April 30, 2011
|
|
|
440,000
|
|
|
$
|
3.66
|
|
|
|
440,000
|
|
|
$
|
8,389,000
|
|
May 1, 2011 to May 31, 2011
|
|
|
2,147,300
|
|
|
$
|
3.32
|
|
|
|
2,147,300
|
|
|
$
|
1,263,000
|
|
June 1, 2011 to June 30, 2011
|
|
|
330,000
|
|
|
$
|
3.56
|
|
|
|
330,000
|
|
|
$
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,285,600
|
|
|
$
|
3.48
|
|
|
|
4,285,600
|
|
|
$
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The shares were repurchased under the $15
million stock repurchase program announced March 7, 2011. No shares were
purchased other than through publicly announced programs during the periods
shown.
|
16
|
|
|
ITEM 3.
|
|
DEFAULTS UPON SENIOR SECURITIES
|
None.
|
|
|
ITEM 4.
|
|
(Removed and Reserved)
|
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
None.
a. Exhibits
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:
|
|
|
Exhibit No.
|
|
Description of Exhibits
|
3.1
|
|
Restated Articles of Incorporation of Zix Corporation, as
filed with the Texas Secretary of State on November 10, 2005.
Filed as Exhibit 3.1 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2005, and
incorporated herein by reference.
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Zix Corporation, dated February
4, 2009. Filed as Exhibit 3.1 to Zix Corporations Current
Report on Form 8-K, dated February 10, 2009, and incorporated
herein by reference.
|
|
|
|
10.1*
|
|
Form of Executive Termination Benefits Agreement.
|
|
|
|
10.2*
|
|
Description of Zix Corporation 2011 Variable Compensation Plan.
|
|
|
|
31.1*
|
|
Certification of Richard D. Spurr, President and Chief
Executive Officer of the Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of Michael W. English, Principal Financial
Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1**
|
|
Certification of CEO and CFO, pursuant to 18 U.S.C. Section
1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.1***
|
|
101. INS (XBRL Instance Document)
|
|
|
|
101. SCH (XBRL Taxonomy Extension Schema Document)
|
|
|
|
101. CAL (XBRL Calculation Linkbase Document)
|
|
|
|
101. LAB (XBRL Taxonomy Label Linkbase Document)
|
|
|
|
101. DEF (XBRL Taxonomy Linkbase Document)
|
|
|
|
101. PRE (XBRL Taxonomy Presentation Linkbase Document)
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Furnished herewith.
|
|
***
|
|
In accordance with Rule 406T of Regulation S-T, the XBRL related information shall not be
deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to
the liability of that section, and shall not be part of any registration statement or other
document filed under the Securities Act or the Exchange Act, except as shall be expressly set
forth by specific reference in such filing.
|
|
|
|
|
17
SIGNATURES
Pursuant to the requirements 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.
|
|
|
|
|
|
ZIX CORPORATION
|
|
Date: August 2, 2011
|
By:
|
/s/ MICHAEL W. ENGLISH
|
|
|
|
Michael W. English
|
|
|
|
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
|
|
18
Exhibit 10.1
EMPLOYMENT TERMINATION BENEFITS AGREEMENT
This Employment Termination Benefits Agreement, dated effective as of ______________,
20___, is entered into by and between Zix Corporation, a Texas corporation (
Company
), and the
undersigned individual (
Employee
).
Employee is an at will employee of an Affiliate of Company and is based in ______________.
Company wishes to specify terms under which Employee would leave employment in the
circumstances described in this agreement.
The parties agree as follows:
Capitalized terms not otherwise defined in this agreement have the meanings ascribed to them
in section 5.
1.
Separation Payment
. If the Company or its Affiliate terminates Employees employment
other than for Cause, then the Company shall pay to Employee the Separation Payment pursuant to and
in accordance with subsection 1.B. If Employee resigns from employment (subject to the notice and
cure provisions set forth below) with the Company and its Affiliates within 24 months after a
Change in Control and the resignation was for a Change In Control Good Reason, then the resignation
will be deemed to be a termination of Employees employment other than for Cause and the Company
shall pay to Employee the Separation Payment pursuant to and in accordance with subsection 1.B.
Neither Employees death nor Employees resignation or termination on account of disability will
give rise to any Separation Payment. The Companys obligation to make the Separation Payment will
not be mitigated or offset by virtue of Employee obtaining new employment or failing to seek new
employment. The Separation Payment encompasses and includes any applicable employment standards
entitlements.
A.
Notice Required for Change in Control Good Reason
. Notwithstanding anything to the
contrary in the preceding paragraph, Employee will not be deemed to have resigned employment for a
Change In Control Good Reason unless and until: (i) Employee provided to the Company notice of the
existence of the Change In Control Good Reason condition within 90 days of its initial existence;
(ii) the Company failed to remedy the Change In Control Good Reason condition within 30 days after
the Company received the notice; and (iii) Employee resigned employment within 180 days after the
initial existence of the Change In Control Good Reason condition.
B.
Time of Payment
. The Company shall pay the Separation Payment to Employee in equal
monthly payments over the number of months of base salary used to calculate the Separation Payment,
beginning as soon as practicable after termination of Employees employment but no later than 60
days after such termination.
C.
Liability Release as Condition to Payment
. Notwithstanding anything to the contrary
in this agreement, the Companys obligation to pay the Separation Payment is subject to and
conditioned upon: (i) the Companys receiving from the Employee, within 60 days after
1
Employees termination other than for Cause or resignation for a Change in Control Good
Reason, a duly executed separation agreement containing a release of claims in a form reasonably
satisfactory to the Company. If Employee fails to execute and deliver such a separation agreement
to the Company within that 60-day time period, or Employee revokes such release pursuant to the
terms of the separation agreement, then Employee is deemed to forfeit any entitlement to receive
the Separation Payment and shall promptly return any portion of the Separation Payment which he or
she received before such failure to execute and deliver or revocation. The Company will provide the
separation agreement to Employee promptly after Employees termination other than for Cause or
resignation for a Change in Control Good Reason.
D.
Withholding
. Employee is responsible for all withholdings for taxes and other
withholdings required by applicable law as to any amounts owed by Employee to Company, and Employee
shall pay the same to the Company promptly upon demand if not otherwise withheld.
2.
Accelerated Vesting of Stock Based Compensation
. Notwithstanding anything to
the contrary in any stock option agreement between Employee and Company:
A.
Change in Control
.
(1)
Stock Options not Assumed or Substituted by Surviving Entity.
Upon the
occurrence of a Change in Control, and except with respect to any awards described in
subsection 2.A(2) below: (i) all outstanding stock options granted by the Company to
Employee immediately become fully exercisable, and (ii) the Company has the right to settle
those options in accordance with subsection 2.C below. To the extent that this provision
causes incentive stock options to exceed the dollar limitation set forth in section 422(d)
of the Code, the excess stock options will be deemed to be nonstatutory stock options.
(2)
Stock Options Assumed or Substituted by Surviving Entity
. With respect to
awards that are assumed by the Surviving Entity or are otherwise equitably converted or
substituted in connection with a Change in Control in a manner approved by the Board: (i)
all outstanding stock options granted by the Company to Employee immediately become fully
exercisable if, within two years after the effective date of the Change in Control, either
(a) the Company or its Affiliate or the Surviving Entity terminates Employees employment
other than for Cause or (b) Employee resigns for a Change in Control Good Reason. Upon the
occurrence of an event described in the immediately preceding sentence, the Company has the
right to settle the described options in accordance with subsection 2.C below.
B.
Termination Other Than for Cause
. If the Company or its Affiliate terminates
Employees employment other than for Cause, then each issued and outstanding stock option granted
by the Company to Employee will immediately vest and become exercisable. Phrases referring to
Employees termination not for Cause or other than for Cause in this agreement exclude any
termination or resignation as a result of Employees death or disability. Neither Employees death
nor Employees resignation or termination on account of disability will give rise to any
accelerated vesting or right to settlement of any stock options under this agreement.
2
C.
Companys Election
. In the circumstances described in subsections 2.A, the Company
has the right to choose to settle in cash, as described in subsection 2.D below, all or any portion
of Employees stock options. The Employee shall surrender and transfer to the Company all stock
options that the Company elects to settled in cash. Any stock options that are not settled in cash
shall thereafter continue or lapse in accordance with the other provisions of the plan and the
award agreement under which they were granted.
D.
Settlement in Cash
. If the Company chooses to settle some or all of the stock
options in cash, pursuant to subsection 2.C above, it may do so by paying the Employee either (i)
the difference (if any, including a deemed distribution of $0) between the price being paid for the
Companys common stock in the Change in Control over the exercise price of the stock options (that
difference, the
Spread Amount
), multiplied by the number of such stock options; or (ii) the fair
value of those stock options under Generally Accepted Accounting Principles (as determined as of
the settlement date through the Black-Scholes, binomial, or any other option pricing model
permissible under FASB Accounting Standards Codification 718 or a successor standard), but only if
that fair value would yield a greater payment to Employee than the Spread Amount. The Company shall
pay the settlement amount, net of any required withholding, to Employee within 30 days after the
Company notifies Employee it has elected the cash settlement.
3.
No Conflict of Interest
. Without limiting Employees obligations to comply with the
Companys Code of Conduct and Code of Ethics, Employee agrees that during the term of Employees
employment:
A. Employee shall not engage, either directly or indirectly, in any activity that may involve
a conflict of interest with the Company or its Affiliate, including without limitation ownership in
any supplier, contractor, subcontractor, customer or other entity with which the Company or its
Affiliate does business (other than as a shareholder of less than one percent (1%) of a
publicly-traded or privately-held class of equity ownership) (
Conflict of Interest
);
B. Employee shall promptly report to the Companys Chief Compliance Officer any information
about which Employee becomes aware that might involve or give rise to a Conflict of Interest or
potential Conflict of Interest.
C. Employee shall not accept any material payment, service, loan, gift, trip, entertainment or
other favor from a supplier, contractor, subcontractor, customer or other entity with which the
Company or its Affiliate does business.
D. Employee shall promptly report to the Companys Chief Compliance Officer each offer by any
entity with which the Company or its Affiliate does business for any material payment, service,
loan, gift, trip, entertainment or other favor.
4.
Ongoing Covenants
. Employee acknowledges that the Company has a legitimate interest in
(i) maintaining the confidentiality of the Companys confidential information and (ii) restraining
Employee from competing against the Company and its Affiliates during and for a reasonable time
after Employees employment by the Company or its Affiliate. Employee agrees to the restrictions in
subsection 4.A: (i) in consideration of the benefits described in this agreement and the Companys
providing Employee with confidential information, and (ii) in
3
order to enforce Employees agreement to maintain the confidentiality of the Companys confidential
information.
A.
Restrictive Covenants
. Throughout the term of Employees employment by the Company
or its Affiliate, and throughout the six month period beginning upon Employees separation from
employment with the Company for any reason, Employee shall not do any of the following:
(1)
Non-Competition
. Directly or indirectly engage in, sell or otherwise
provide Competitive Services within the Restricted Territory while serving in a position
that is the same as or substantially similar to the [INSERT NAME OF POSITION EMPLOYEE HOLDS]
position that Employee held with the Company, whether on his own behalf or as a Principal or
Representative of any Person other than the Company;
provided
,
however
, that
the provisions of this Agreement shall not be deemed to prohibit the ownership by Employee
of not more than 1% of any class of securities of any corporation having a class of
securities registered pursuant to the Securities Exchange Act of 1934, as amended.
(2)
Non-Solicitation of Protected Customers
. Directly or indirectly, on
Employees own behalf or on behalf of a competitor of the Companys Business, or as a
Principal or Representative of any other Person, solicit, divert, take away or attempt to
solicit, divert, or take away a Protected Customer for purposes of providing or selling
services or products that are the same as or substantially similar to the services and
products that are provided or sold by the Company.
(3)
Non-Solicitation of Protected Employees
. Directly or indirectly, on
Employees own behalf or as Principal or Representative of any other Person, solicit or
induce or attempt to solicit or induce any Protected Employee to terminate his or her
employment with the Company or to enter into employment with any other Person.
B.
Restrictions Are Reasonable
. The Company and Employee have, in good faith, used
their best efforts to make the restrictions in subsection 4.A reasonable in all pertinent respects,
and it is not anticipated, nor is it intended, by either party that any arbitrator or court will
find it necessary to reform any restriction to make it reasonable. Employee has carefully read and
considered the restrictions in subsection 4.A and agrees that the restrictions, including, but not
limited to, the time period of restriction, the geographic areas of restriction, and the scope of
the restriction are fair and reasonable, are supported by sufficient and valid consideration, and
these restrictions do not impose any greater restraint than is necessary to protect the goodwill
and other legitimate business interests of the Company. Employee acknowledges that these
restrictions will not prevent Employee from obtaining gainful employment in Employees occupation
or field of expertise or cause Employee undue hardship and that there are numerous other employment
and business opportunities available to Employee that are not affected by these restrictions.
C.
Modification of Covenants
. It is the desire and intent of each of the parties that
the provisions of section 4.A be enforced to the fullest extent legally permissible. If an
arbitrator or court determines it is necessary to reform any restriction to make it reasonable in
all pertinent respects, then any damages due to a breach of the restriction, as so reformed, will
be deemed to accrue to the Company as and from the date of such a breach only, and only so far as
the
4
damages for such breach related to an action that accrued within the scope of the restriction
as so reformed. The covenants set forth in this Agreement shall be construed as separate and
independent covenants. Should any part or provision of any covenant be held invalid, void or
unenforceable, such invalidity, voidness, or unenforceability shall not render invalid, void or
unenforceable any other part or provision of this Agreement. If any portion of subsection 4.A is
adjudicated to be invalid or unenforceable, this section 4 will be deemed amended (i) to reform the
particular portion to provide for such maximum restrictions as will be valid and enforceable or, if
that is not possible, then (ii) to delete therefrom only the portion thus adjudicated to be invalid
or unenforceable
D.
Successors
. subsection 4.A will inure to the benefit of and be enforceable by any
successor to the Company and/or any successor to any Affiliate of the Company that is then
conducting the Email Encryption business or any Other Material Business.
E.
Notification of Future Employer
. Employee shall, and the Company has the right to,
notify any person or entity employing Employee or evidencing an intention to employ Employee about
the existence and terms of subsection 4.A.
F.
Remedies
. If Employee violates any of the obligations set forth in subsection 4.A,
the period of restriction applicable to each obligation violated shall cease to run during the
pendency of any litigation over such violation, provided that such litigation was initiated during
the period of restriction. Employee acknowledges that the violation of any of the covenants or
agreements contained in subsection 4.A would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation thereof would be inadequate, and
Employee agrees that the Company will be entitled, in addition to any other remedy, to temporary
and permanent injunctive or other equitable relief from a court of competent jurisdiction without
the necessity of proving actual damages or posting a bond as well as to the recovery of its
reasonable attorneys fees.
5.
Definitions
.
A.
Acquiring Person
means any person (including any person as such term is used in
subsections 13(d)(3) or 14(d)(2) of the Exchange Act) that, together with all Affiliates and
Associates of such person, is the beneficial owner (as the term beneficial owner is defined under
rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act)) of 10% or more
of the outstanding Common Stock. The term Acquiring Person does not include the Company, any
majority-owned subsidiary of the Company, any employee benefit plan of the Company or a
majority-owned subsidiary of the Company, or any person to the extent such person is holding Common
Stock for or pursuant to the terms of any such plan. For the purposes of this agreement, a person
who becomes an Acquiring Person by acquiring beneficial ownership of 10% or more of the Common
Stock at any time after the date of this agreement will continue to be an Acquiring Person whether
or not such person continues to be the beneficial owner of 10% or more of the outstanding Common
Stock.
B.
Affiliate
and
Associate
have the respective meanings ascribed to such terms in rule
12b-2 under the Exchange Act.
C.
Board
means the Companys board of directors or the compensation committee thereof.
5
D.
Cause
means any of the following shall have occurred: (1) the intentional and continued
failure by Employee to substantially perform Employees employment duties, such intentional failure
involving willful and deliberate malfeasance or gross negligence in the performance of Employees
duties (other than any such failure resulting from Employees incapacity due to physical or mental
illness), after (i) written demand for substantial performance is delivered by or on behalf of the
Company, which demand reasonably identifies the manner in which the Company believes Employee has
not substantially performed Employees duties, and (ii) Employees failure to cure such performance
failure within five business days after receipt of such written demand; (2) the intentional
engaging by Employee in misconduct that is materially injurious to the Company; (3) the conviction
of Employee or a plea of nolo contendere, or the substantial equivalent to either of the foregoing,
of or with respect to, any felony; (4) the commission by Employee of acts of moral turpitude that
are injurious to the Company; (5) a breach by Employee of the Confidentiality and Invention
Agreement between the Company (or its affiliate) and Employee; (6) a breach by Employee of
Employees obligations under this agreement or the Arbitration Agreement (as hereinafter defined);
or (7) a breach by Employee of the Companys Code of Ethics and Code of Conduct as then in effect.
For purposes of this definition, no act, or failure to act, on Employees part shall be considered
intentional unless done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in, or not opposed to, the best interest of the Company.
Notwithstanding the foregoing, Employee will not be deemed to have been terminated for Cause
without (1) reasonable written notice to Employee, setting forth the reasons for the Companys
intention to terminate for Cause; (2) an opportunity for Employee to be heard by the
[Company][Board] (or an authorized representative thereof); and (3) delivery to Employee of a
written notice of termination from the [Company][Board] (or its authorized representative) stating
that, in the good faith opinion of the [Company][Board] (or its authorized representative),
Employee engaged in the conduct set forth above in clause (1), (2), (4), (5), (6) or (7) of the
preceding paragraph or an event specified in clause (3) of the preceding paragraph has occurred.
E.
Change in Control
of the Company will be deemed to have occurred if any of the following
events occurs during Employees employment:
(1) The Company is merged, consolidated or reorganized into or with another corporation
or other legal person, other than an Affiliate, and as a result of such merger,
consolidation or reorganization, the Company or its shareholders or Affiliates immediately
before such transaction beneficially own, immediately after or as a result of such
transaction, equity securities of the surviving or acquiring person or such corporations
parent entity (the
Surviving Entity
) possessing less than 51% of the voting power of the
Surviving Entity;
(2) The Company sells all or substantially all of its assets to any other corporation
or other legal person, other than an Affiliate, and as a result of such sale, the Company or
its shareholders or Affiliates immediately before such transaction beneficially own,
immediately after or as a result of such transaction, equity securities of the Surviving
Entity possessing less than 51% of the voting power of the Surviving Entity (provided that
this paragraph will not apply to a registered public offering of securities of a subsidiary
of the Company, which offering is not part of a transaction otherwise a part of or related
to a Change in Control);
6
(3) Any Acquiring Person has become the beneficial owner (as the term beneficial
owner is defined under Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of securities which, when added to any securities already owned by such
person, would represent in the aggregate 35% or more of the then outstanding securities of
the Company which are entitled to vote to elect any class of directors;
(4) As measured over any 12 month period, Continuing Directors cease to constitute at
least a majority of the Board;
(5) The occurrence of an event required to be reported under Item 6(e) of Schedule 14A
of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act; or
(6) The Board in its sole discretion determines that any other event is deemed to be a
Change in Control.
F.
Change In Control Good Reason
means any of the following: (i) a material diminution in
Employees authority, duties or responsibilities, (ii) a material diminution in Employees base
salary, (iii) a material change in the geographic location at which Employee must perform services,
(iv) a material diminution in the authority, duties, or responsibilities of the supervisor to whom
Employee is required to report, (v) a material diminution in the budget over which Employee retains
authority, or (vi) any material breach by the Company of this agreement or any other agreement
under which Employee provides services to the Company or its Affiliates.
G.
Code
means the Internal Revenue Code of 1986 and applicable Internal Revenue Service
guidance and Treasury Regulations.
H.
Continuing Director
means a director of the Company who (1) is not an Acquiring Person or
an Affiliate or Associate thereof, or a representative of an Acquiring Person or nominated for
election by an Acquiring Person, and (2) was either (a) a member of the Board on the date of this
agreement or (b) subsequently became a director of the Company and whose initial election or
initial nomination for election by the Companys shareholders was approved by a majority of the
Continuing Directors then on the Board.
I.
Company
means Zix Corporation, a Texas corporation, or its successors in interest, as the
context requires.
J.
Competitive Services
means the Email Encryption business or any other material line of
business being conducted by the Company or any Affiliate.
K.
Exchange Act
means the Securities Exchange Act of 1934.
L.
Person
means any individual or any corporation, partnership, joint venture, limited
liability company, association or other entity or enterprise.
M.
Principal
or
Representative
means a principal, owner, partner, shareholder, joint
venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or
consultant.
7
N.
Protected Customer
means any customer to whom the Company sold its products or services
at any time during Employees employment
and
with whom Employee had business dealings on
behalf of the Company.
O.
Protected Employee
means any employee of the Company who was employed by the Company at
any time during Employees employment
and
(a) with whom Employee had a supervisory
relationship or (b) with whom Employee worked or communicated on a regular basis regarding the
Companys business.
P.
Restricted Territory
means the United States and Canada.
Q.
Separation Payment
means and equals 6 months of Employees base salary. For the purpose
of calculating the Separation Payment, the Employees base salary will be deemed to be Employees
highest base salary in any month during the term of Employees employment.
R.
Surviving Entity
has the meaning set forth in subsection 5.E(1).
6.
Miscellaneous
.
A.
Litigation Assistance
. During Employees employment and following Employees
separation from employment, Employee shall cooperate reasonably with the Company and its Affiliates
in the defense of litigation that pertains to (i) matters reasonably within the purview of
Employees job responsibilities while employed with the Company or its Affiliate or (ii) matters
for which Employee has particular knowledge, thereof, including signing affidavits and making
himself or herself available for interviews, deposition preparation, deposition, and trial.
Employee shall not, without the Companys prior consent, comment publicly on any such litigation or
any of the issues in the litigation. Employee shall not, without the Companys prior consent,
discuss any such litigation, or cooperate, with the Companys opponent(s) in such litigation, their
attorneys, or their representatives.
B.
Reimbursement for Litigation Assistance
. If Employee assists the Company or its
Affiliate with litigation activities following Employees separation from employment other than
those litigation activities in which Employee would be required to participate as a named party,
the Company shall pay all reasonable documented out-of-pocket costs (subject to a maximum of $1,000
per day) that Employee incurs in connection with such activities and will pay Employee for his or
her actual, demonstrated lost income (subject to a maximum of $10,000 in any tax year) for the
period in which Employee assists with such litigation activities. The Company shall pay the
out-of-pocket reimbursement as soon as practicable after Employee provides documentation of such
out-of-pocket costs but no later than the end of the tax year following the tax year in which such
expenses were incurred. The amount of expenses reimbursed to Employee pursuant to subsection 6.A
during Employees tax year will not impact the amount of such expenses eligible for reimbursement
during any other tax year of Employee. Employees right to reimbursement of expenses will not be
subject to liquidation or exchange for another benefit. Employee must provide documentation of the
lost income on or before January 15 of the year following the year in which the income is lost. The
lost income will be paid in a lump sum within 60 days after Employee provides documentation of the
same but in no event later than March 15 of the year following the year in which the income is
lost.
8
C.
Indemnification
. Employee and the Company acknowledge the indemnification
provisions set forth in the Companys bylaws.
D.
No Deemed Waivers
. The failure by a party to enforce any provision of this
agreement does not constitute a waiver of any subsequent breach of the same or any other provision.
No waiver is effective unless made in a writing signed by the waiving party.
E.
No Third Party Beneficiaries
. Except as otherwise stated in this agreement, nothing
in this agreement, is intended to confer any rights or remedies on any persons other than the
parties to it and their respective permitted successors and assigns and other legal
representatives.
F.
Remedies
. Employee hereby agrees that a violation of subsection 4.A would cause
irreparable injury to the Company for which it would have no adequate remedy at law. Accordingly,
in the event of any such violation, the Company shall be entitled to preliminary and other
injunctive relief without the necessity to post a bond or other security. Any such injunctive
relief shall be in addition to any other remedies to which the Company may be entitled at law or in
equity, or otherwise.
G.
Notice
. Any consent, notice, demand, or other communication regarding any payment
required or permitted hereby must be in writing to be effective and shall be deemed to have been
received on the date delivered, if delivered in person, or the date received, if delivered
otherwise (including by U.S. mail, overnight delivery or e-mail), addressed to the applicable party
at the address for such party set forth below or at such other address as such party may designate
by like notice:
The Company:
Zix Corporation
2711 North Haskell Avenue
Suite 2200, LB 36
Dallas, Texas 75204-2960
Attn: General Counsel
To Employee:
At the address on file in the Companys records.
H.
Entire Agreement
. This agreement, together with the Mutual Alternative Dispute
Resolution Agreement and the Confidentiality and Invention Agreement between the parties, and the
Code of Ethics and Code of Conduct, as currently in effect or hereafter amended from time-to-time,
embodies the entire agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject matter hereof.
I.
Successors and Assigns
. This Agreement will be binding upon and inure to the
benefit of the parties to this agreement and any successors-in-interest to the Company. Employee
cannot assign or transfer this agreement or any rights under this agreement, or delegate any
obligations under this agreement, and any attempted assignment, transfer or delegation is void
ab
initio
.
9
J.
Governing Law
. This Agreement is governed by and will be construed, interpreted and
enforced in accordance with, the laws of the State of Texas (excluding its conflict of laws rules)
and applicable federal law.
K.
Arbitration
. All claims, demands, causes of action, disputes, controversies, or
other matters in question, whether sounding in contract, tort, or otherwise and whether provided by
statute or common law, arising under or related to this agreement or Employees employment (or its
termination) are subject to resolution under the procedures descried in the parties Mutual
Alternative Dispute Resolution Agreement.
L.
Cumulative Remedies
. No remedy in this agreement conferred upon any party is
intended to be exclusive of any other benefit or remedy, and each and every such remedy shall be
cumulative and shall be in addition to every other benefit or remedy given under this agreement or
now or hereafter existing at law or in equity or by statute or otherwise. No single or partial
exercise by any party of any right, power, or remedy under this agreement shall preclude any other
or further exercise thereof.
M.
Multiple Counterparts
. This Agreement may be executed in a number of identical
counterparts, each of which constitute collectively, one agreement; but in making proof of this
agreement, it is not necessary to produce or account for more than one counterpart.
N.
Descriptive Headings
. The headings, captions, and arrangements used in this
agreement are for convenience only and do limit, amplify, or modify the terms of this agreement,
nor affect the meaning hereof.
O.
409A Compliance
.
(1)
General
. This Agreement will be interpreted and administered so that any
amount or benefit paid or provided is either exempt from or compliant with the requirements
section 409A of the Code (and any applicable transition relief under section 409A of the
Code). Nevertheless, the tax treatment of the amounts or benefits provided under the
Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers,
employees or advisers will be liable for any taxes, interest, penalties or other monetary
amounts owed by Employee as a result of the application of section 409A of the Code.
(2)
Definitional Restrictions
. Notwithstanding anything in this Agreement to
the contrary, to the extent that any amount or benefit that would constitute non-exempt
deferred compensation for purposes of section 409A of the Code (
Non-Exempt Deferred
Compensation
) would otherwise be payable or distributable hereunder, or a different form of
payment of such Non-Exempt Deferred Compensation would be effected, by reason of a Change in
Control or the Executives termination of employment, such Non-Exempt Deferred Compensation
will not be payable or distributable to the Executive, and/or such different form of payment
will not be effected, by reason of such circumstance unless the circumstances giving rise to
such Change in Control or termination of employment, as the case may be, meet any
description or definition of change in control event or separation from service, as the
case may be, in section 409A of the Code and applicable regulations (without giving effect
to any elective provisions that may be available under such definition). This provision does
not
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prohibit the
vesting
of any Non-Exempt Deferred Compensation upon a Change in Control or
termination of employment, however defined. If this provision prevents the payment or
distribution of any Non-Exempt Deferred Compensation, such payment or distribution shall be
made on the date, if any, on which an event occurs that constitutes a section 409A-compliant
change in control event or separation from service, as the case may be, or such later
date as may be required by subsection 6.O(3) below below. If this provision prevents the
application of a different form of payment of any amount or benefit, such payment shall be
made in the same form as would have applied absent such designated event or circumstance.
(3)
Six-Month Delay in Certain Circumstances
. Notwithstanding anything in this
Agreement to the contrary, if any amount or benefit that would constitute Non-Exempt
Deferred Compensation would otherwise be payable or distributable under this Agreement by
reason of Executives separation from service during a period in which he or she is a
Specified Employee (as defined in subsection 6.O(3)(iii)), then, subject to any permissible
acceleration of payment by the Company under Treasury Regulations section 1.409A-3(j)(4)(ii)
(domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of
employment taxes):
(i) The amount of such Non-Exempt Deferred Compensation that would
otherwise be payable during the six-month period immediately following Executives
separation from service will be accumulated through and paid or provided on the
first day of the seventh month following Executives separation from service (or,
if Executive dies during such period, within 30 days after Executives death) (in
either case, the
Required Delay Period
).
(ii) The normal payment or distribution schedule for any remaining payments
or distributions will resume at the end of the Required Delay Period.
(iii) For purposes of this Agreement, the term
Specified Employee
has the
meaning given such term in section 409A of the Code and the final regulations
thereunder;
provided, however
, that the Companys Specified Employees and its
application of the six-month delay rule of subsection 409A(a)(2)(B)(i) of the Code
will be determined in accordance with rules adopted by the Board or a committee
thereof, which will be applied consistently with respect to all nonqualified
deferred compensation arrangements of the Company, including this Agreement.
(4)
Treatment of Installment Payments
. Each payment of termination benefits
under section 1.B, including, without limitation, each installment Separation Payment, shall
be considered a separate payment, as described in Treasury Regulations section
1.409A-2(b)(2), for purposes of section 409A of the Code.
(5)
Timing of Release of Claims
. Whenever in this agreement a payment or
benefit is conditioned on Executives execution and non-revocation of a separation agreement
including a release of claims, such release must be executed and all revocation periods must
have expired within 60 days after the date of termination of Employees employment; failing
which such payment or benefit is forfeited. If such payment or benefit constitutes
Non-Exempt Deferred Compensation, then, subject to subsection 6.O(3), such payment or
benefit (including any installment payments) that
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would have otherwise been payable during such 60-day period shall be accumulated and paid on the
60
th
day after the date of termination provided such release shall have been
executed and such revocation periods shall have expired. If such payment or benefit is
exempt from section 409A of the Code, the Company may elect to make or commence payment at
any time during such 60-day period.
Each party is signing this Employment Termination Benefits Agreement on the date indicated under
its signature.
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Zix Corporation
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Employee
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By:
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Name:
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Name:
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Title:
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Dated:
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Date:
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