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Zix Corporation Announces Second Quarter 2005 Financial Results


DALLAS--(BUSINESS WIRE)--Aug. 4, 2005--Zix Corporation (ZixCorp(R)), (Nasdaq:ZIXI), a global provider of secure e-messaging, e-prescribing, and e-transaction applications and services, today announced financial results for the second quarter ended June 30, 2005. ZixCorp recorded second quarter revenues of $3.45 million. ZixCorp recorded a second quarter 2005 net loss of $8.92 million, or $0.28 per share, compared with a net loss of $9.88 million, or $0.31 per share, in the corresponding 2004 quarter. As of June 30, 2005, the company's cash, cash equivalents, and marketable securities balances approximated $18.1 million, including restricted cash of $10.4 million.

"ZixCorp continues to deliver results," said Rick Spurr, chief executive officer of ZixCorp. "We exceeded guidance in every category, posted another record quarter in eSecure orders, achieved operating level cash flow breakeven for the eSecure business ahead of schedule, signed a contract with Aetna to sponsor an e-prescribing program, and are close to signing an agreement with another significant payor. We also expanded our addressable markets and product capabilities through agreements with targeted industry leaders.

"Strategic business decisions, our results-oriented culture, and our proven technology have enabled us to take the lead in two exciting, high-growth segments: secure e-messaging and e-prescribing. And with first-mover advantage and our strong reputation for quality and dependability, the company is well positioned to sustain this leadership."

Business Highlights

  • The company received record new eSecure orders of $5.33 million for the quarter, which represents a more than 20 percent compounded quarterly growth rate over the last four quarters. ZixCorp ended the quarter with an order backlog of $25.9 million.
  • Momentum continues to build for e-prescribing with a signed contract for a pilot program from Aetna and a Letter of Engagement from another prominent payor. With a growing number of the largest and most recognized healthcare organizations working with ZixCorp, the company's model for achieving broad adoption and utilization is being validated.
  • Progress with the eRx Collaborative in Massachusetts continued, with 615 prescribers signed by ZixCorp to use PocketScript(R) e-prescribing. During the second quarter, 522 prescribers were deployed and more than 616,800 e-scripts were transmitted.
  • ZixCorp announced the availability of PocketScript 5.52, which supports direct computer connectivity to transmit prescriptions electronically to pharmacies via the SureScripts Electronic Prescribing Network, enhances alternative formulary messaging, and provides additional logging/reporting functions.
  • ZixCorp has formed strategic alliances with MedAptus and eClinicalWorks. PocketScript now interfaces with MedAptus' charge capture system and will also interface with eClinicalWorks' electronic medical record (EMR) and practice management systems (PMS). As the healthcare technology market evolves, integration of ZixCorp solutions with other systems and applications used in physicians' offices has become increasingly important.
  • ZixCorp successfully achieved operating level cash flow breakeven in its eSecure business one quarter earlier than predicted due to cash receipts in the quarter exceeding the company's estimates of costs specifically related to the eSecure business.
  • eSecure new first year orders increased 28 percent over first quarter levels, as the company continued to strengthen its leadership position in the email encryption market. The financial services segment continues to gain momentum, with 15 new customers added during the second quarter, including significant contracts with Commerce Bank in Missouri and Northwestern Mutual. ZixCorp also added 31 new healthcare organizations to its network of users, including Thomas Jefferson University hospitals and the Bronson Healthcare Group.
  • ZixCorp's eSecure services were selected as a proven option for the members of the Conference of State Bank Supervisors. This association interacts with over 6,300 financial institutions throughout all 50 states and U.S. territories. Its approval of the ZixCorp solution demonstrates the growing importance of secure email within the financial community.
  • With ZixCorp continuing to grow in its primary vertical markets -- healthcare and financial services -- the company has added expertise and vision from veteran industry leaders Charles N. "Chip" Kahn III and Paul E. Schlosberg, who joined ZixCorp's board of directors in June. Kahn is president of the Federation of American Hospitals, the national advocacy organization for investor-owned hospitals and health systems, and has extensive health policy and policy-making experience. Schlosberg, with nearly 30 years of experience in investment banking, is currently the founder, chairman, and CEO of INCA Group LLC, a newly formed entity facilitating corporate restructuring, merger, acquisition, and capital funding activities for both public and private enterprises.
  • Increased activity from secure e-messaging customers and the accelerated ramp of e-prescribing deployments enabled the ZixData Center(TM) to process over 291 million transactions in the second quarter, an increase of 14 percent when compared with 255 million transactions in the first quarter of 2005. e-Prescribing transactions (electronic scripts) increased to more than 610,000, for a 20 percent increase over first quarter levels.

Financial Highlights for the Quarter

Revenues: Revenues in second quarter 2005 were $3.45 million. Although essentially flat with those reported in the first quarter 2005, the company sold its Inspector product line on March 11, 2005, and when normalized to remove Inspector revenue in prior periods, second quarter revenue increased by $1.0 million over the prior-year quarter and by $494,000 over the first quarter.

                     Proforma Revenue Comparison
                       (expressed in $ millions)
                                      $Change               $Change
                   Q2 05     Q1 05    Q1 05 to     Q2 04     Q2 04 to
                                       Q2 05                  Q2 05
Total revenue       3.449     3.583     (0.134)    3.521       (0.072)
Inspector
 products
revenue             0.009     0.637     (0.628)    1.087       (1.078)
Normalized
 revenue            3.440     2.946      0.494     2.434        1.006
% Change versus                      17%                  41%
Q2 05                                Increase             Increase
                                     quarter              year
                                     on quarter           on year

The normalized 17 percent quarter-on-quarter increase and the 41 percent year-on-year increase are mostly attributed to growth in the eSecure subscription base. Second quarter revenue exceeded company guidance of $3.0 to 3.3 million, due primarily to sales of eSecure solutions early in the quarter that led to increased in-quarter revenue recognition from new orders, and several key systems installations of the Dr. Chart(R) product.

Costs: In the second quarter, ZixCorp's operating costs totaled $11.6 million (excluding infrequent gains or losses and interest income or expense), compared with $13.4 million in both the second quarter 2004 and the first quarter of 2005. The $1.8 million decrease reflects various cost-cutting initiatives undertaken by the company in late 2004 and early 2005, as well as the sale of the Inspector product lines.

Cash Utilization: The company's cash and marketable securities balance (both restricted and non-restricted) declined by $5.8 million, from $23.9 million at the end of the first quarter 2005 to $18.1 million at the end of the second quarter. This was higher than the company's previous guidance of $17.3 to $17.5 million. Net cash used by operating activities totaled $5.8 million, compared with $7.4 million in the first quarter of 2005. In the second quarter, the company collected a total of $5.1 million in cash receipts (excluding a $500,000 scheduled payment from Cyberguard associated with the Inspector sale), compared with $4.1 million in cash collected during the first quarter. The cash receipts increase of $1.0 million resulted from a $1.7 million increase in eSecure business due to strong new order input, earlier in-quarter sales, and strong renewals from existing customers. The gains in eSecure were partially offset by a decline of $500,000 in cash receipts resulting from the sale of the Inspector product line late in the first quarter. Net cash outlays approximated $11.0 million in the most recent quarter, compared with $12.2 million in the first quarter, for an improvement of $1.2 million due primarily to various cost-cutting initiatives.

Corporate Governance: ZixCorp announced, in accordance with Nasdaq Marketplace Rule 4350, that the company recently awarded 236,660 stock options to 26 newly hired employees for a variety of positions throughout the company. Exercise prices ranged from $3.02 to $3.87 per share, with a weighted average price of $3.18. Approximately one-third of the options vest on the first anniversary of the grant, with the balance vesting on a pro rata basis over the next eight quarters.

About Zix Corporation

Zix Corporation (ZixCorp(R)) provides easy-to-use-and-deploy e-communication services that protect, manage, and deliver sensitive information to enterprises and consumers in healthcare, finance, insurance, and government. ZixCorp's eSecure services enable policy-driven email encryption, content filtering, and send-to-anyone capability while its eHealth services improve patient care, reduce costs, and improve efficiency through e-prescribing and e-lab solutions. For more information, visit www.zixcorp.com.

Safe Harbor Statement for ZixCorp

The following is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained in this release are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the company's continued operating losses and substantial utilization of cash resources; the company's ability to achieve broad market acceptance for the company's products and services, including the electronic prescribing services offered by its PocketScript, Inc. subsidiary; reliance on establishing and maintaining strategic relationships to gain customers and grow revenues; the expected increase in competition in the e-messaging protection and electronic prescription businesses; and the company's ability to successfully and timely introduce new e-messaging protection and electronic prescription products and services or related products and services and implement technological changes. Further details on such risks and uncertainties may be found in the company's public filings with the SEC.


                            ZIX CORPORATION
                 CONDENSED CONSOLIDATED BALANCE SHEETS
                              (Unaudited)

                                             June 30,    December 31,
                                               2005          2004
                                           ------------- -------------
ASSETS
Current assets:
 Cash and cash equivalents                   $7,673,000    $3,856,000
 Marketable securities                               --    16,000,000
 Accounts receivable, net                       327,000       561,000
 Notes receivable, net                          971,000            --
 Prepaid and other current assets             1,217,000     1,950,000
                                           ------------- -------------
   Total current assets                      10,188,000    22,367,000
Restricted cash                              10,412,000    10,374,000
Property and equipment, net                   4,686,000     5,024,000
Intangible assets, net                        1,601,000     3,832,000
Goodwill                                      6,958,000     9,119,000
Deferred financing costs and other assets     1,134,000     1,526,000
                                           ------------- -------------
                                            $34,979,000   $52,242,000
                                           ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                              $692,000    $1,234,000
 Accrued expenses                             4,476,000     4,709,000
 Deferred revenue                             6,988,000     6,372,000
 Customer deposits                            1,008,000       968,000
 Capital lease obligations                      249,000       130,000
 Short-term note payable                        112,000       193,000
 Convertible promissory notes payable         7,357,000     3,848,000
                                           ------------- -------------
   Total current liabilities                 20,882,000    17,454,000
Long-term liabilities:
 Deferred revenue                             1,389,000     1,731,000
 Customer deposit                             2,000,000     3,000,000
 Convertible promissory notes payable         9,351,000    13,347,000
 Promissory notes payable                     2,027,000     1,840,000
 Capital lease obligations and other            299,000       105,000
                                           ------------- -------------
   Total long-term liabilities               15,066,000    20,023,000
                                           ------------- -------------
                                             35,948,000    37,477,000
Stockholders' equity (deficiency):
 Common stock                                   348,000       346,000
 Additional paid-in capital                 272,157,000   269,406,000
 Treasury stock, at cost                    (11,507,000)  (11,507,000)
 Accumulated deficit                       (261,967,000) (243,480,000)
                                           ------------- -------------
   Total stockholders' equity (deficiency)     (969,000)   14,765,000
                                           ------------- -------------
                                            $34,979,000   $52,242,000
                                           ============= =============


                            ZIX CORPORATION
            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                              (Unaudited)

                 Three Months Ended June    Six Months Ended June 30,
                            30,
                 ------------------------- ---------------------------
                    2005         2004          2005          2004
                 ------------ ------------ ------------- -------------
Revenues:
 Services         $3,199,000   $2,786,000    $6,497,000    $5,273,000
 Hardware            241,000      293,000       426,000       322,000
 Software              9,000      442,000       109,000       769,000
                 ------------ ------------ ------------- -------------
   Total
    revenues       3,449,000    3,521,000     7,032,000     6,364,000
Costs and
 expenses:
 Cost of
  revenues         3,508,000    3,704,000     7,399,000     6,878,000
 Research and
  development
  expenses         1,535,000    2,311,000     3,510,000     5,156,000
 Selling,
  general and
  administrative
  expenses         6,559,000    7,349,000    14,061,000    15,155,000
 Customer
  deposit
  forfeiture        (960,000)          --      (960,000)           --
 Gain of sale of
  product lines           --           --      (950,000)           --
                 ------------ ------------ ------------- -------------
   Total costs
    and expenses  10,642,000   13,364,000    23,060,000    27,189,000
                 ------------ ------------ ------------- -------------
Operating loss    (7,193,000)  (9,843,000)  (16,028,000)  (20,825,000)
Other (expense)
 income:
 Investment and
  other income       143,000       79,000       286,000       137,000
 Interest
  expense         (1,996,000)     (85,000)   (2,826,000)     (140,000)
 Recovery of
  previously
  impaired
  investment              --           --            --        70,000
                 ------------ ------------ ------------- -------------
   Total other
    (expense)
    income        (1,853,000)      (6,000)   (2,540,000)       67,000
                 ------------ ------------ ------------- -------------
Loss before
 income taxes     (9,046,000)  (9,849,000)  (18,568,000)  (20,758,000)
Income taxes         131,000      (27,000)       81,000       (56,000)
                 ------------ ------------ ------------- -------------
Net loss         $(8,915,000) $(9,876,000) $(18,487,000) $(20,814,000)
                 ============ ============ ============= =============
Basic and
 diluted loss
 per common
 share                $(0.28)      $(0.31)       $(0.57)       $(0.67)
                 ============ ============ ============= =============
Weighted average
 common shares
 outstanding      32,391,777   31,687,841    32,343,737    30,943,779
                 ============ ============ ============= =============


                            ZIX CORPORATION
            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited)

                                            Six Months Ended June 30,
                                               2005          2004
                                           ------------- -------------
Operating activities:
 Net loss                                  $(18,487,000) $(20,814,000)
 Non-cash items in net loss:
 Depreciation and amortization                2,195,000     2,760,000
 Amortization of debt financing costs,
  discount on notes payable and other         2,198,000            --
 Employee stock compensation expense            243,000     1,075,000
 Common stock issued in lieu of cash
  compensation                                       --     1,515,000
 Common stock issued in lieu of cash
  interest payment                              267,000            --
 Amortization of unearned stock-based
  compensation                                  119,000        30,000
 Recovery of investment in Maptuit
  Corporation                                        --       (70,000)
 Customer deposit forfeiture                   (960,000)           --
 Gain on sale of product lines                 (950,000)           --
 Changes in operating assets and
  liabilities, excluding effects of
  acquisitions:
 Accounts receivable                            234,000      (176,000)
 Other assets                                   682,000       147,000
 Accounts payable                              (542,000)      920,000
 Deferred revenue                             1,820,000     1,516,000
 Customer deposits received                          --     4,000,000
 Accrued and other liabilities                  (23,000)     (415,000)
                                           ------------- -------------
   Net cash used by operating activities    (13,204,000)   (9,512,000)
Investing activities:
 Purchases of property and equipment         (1,010,000)   (1,909,000)
 Purchases of marketable securities                  --    (5,077,000)
 Sales and maturities of marketable
  securities                                 16,000,000     6,964,000
 Purchase of restricted cash investment         (38,000)           --
 Proceeds from sale of product lines          2,340,000            --
 Cash received from Maptuit Corporation              --        70,000
                                           ------------- -------------
   Net cash provided by investing
    activities                               17,292,000        48,000
Financing activities:
 Proceeds from exercise of stock options          3,000    15,338,000
 Proceeds from exercise of warrants                  --     5,338,000
 Payment of short term note payable            (165,000)           --
 Payment of capital lease                       (87,000)           --
 Proceeds from promissory note payable               --     3,000,000
 Other                                          (22,000)           --
                                           ------------- -------------
   Net cash (used) provided by financing
    activities                                 (271,000)   23,676,000
                                           ------------- -------------
Increase in cash and cash equivalents         3,817,000    14,212,000
Cash and cash equivalents, beginning of
 period                                       3,856,000     6,599,000
                                           ------------- -------------
Cash and cash equivalents, end of period     $7,673,000   $20,811,000
                                           ============= =============

CONTACT: Zix Corporation
Public Relations:
Christa Osswald, 214-370-2175
publicrelations@zixcorp.com
or
Investor Relations:
Peter Wilensky, 214-515-7357
invest@zixcorp.com

SOURCE: Zix Corporation