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United States
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-17995
 
 Zix Corporation
 (Exact Name of Registrant as Specified in its Charter)
 Texas
    
    75-2216818(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification Number)
 2711 N. Haskell Avenue, Suite 2200, LB 36, Dallas, Texas 75204-2960  (Address of Principal Executive Offices)
 (214) 370-2000  (Registrants Telephone Number, Including Area Code)
 Securities Registered Pursuant to Section 12(b) of the Act:
 Title of each class of stock
    
    Name of each exchange on which registeredCommon Stock
$0.01 Par Value
    
    NASDAQ
 o þ
 o  þ
 þ o
 o o
 o
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
(Do not check if a smaller reporting company)
    
    o Smaller reporting company
 o þ




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##### 



TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    7Item 1B. Unresolved Staff Comments
    
    
    14Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. (Removed and Reserved)
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8. Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28Item 9A. Controls and Procedures
    
    
    28Item 9B. Other Information
    
    
    31PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    32Item 11. Executive Compensation
    
    
    32Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    32Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    32Item 14. Principal Accountant Fees and Services
    
    
    32PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    32EX-23.1EX-31.1EX-31.2EX-32.1
  2




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PART I
 
 Item 1. Business
 ® ®
 ®
 SM
 ®
 Email Encryption
 Overview:
  3




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Competition: The
   4




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e-Prescribing
 Overview:
 Regulatory Drivers
     5




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Sales and Marketing
  Employees
  Research and Development  Patents and Trademarks
  ® ® ®
   Compliance with Environmental Regulations
  Governmental Contracts
  Significant Customers
  Backlog
  6




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December 31, 2010
    
    
    December 31, 2009Email Encryption
    
    $
    49,911,000
    
    
    $
    42,901,000e-Prescribing
    
    
    
    
    
    
    1,399,000Total backlog
    
    $
    49,911,000
    
    
    $
    44,300,000
   Seasonality
  Geographic Information
  Available Information
 www.zixcorp.com.
 www.sec.gov.
 
 Item 1A. Risk Factors
  Our Email Encryption business depends upon customers using email to exchange confidential
information, and a significant shift of those messages to other communication channels could impair
our growth prospects and negatively affect our business, financial condition and financial results.
  7




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Public key cryptography technology used in our businesses is subject to technology integrity risks
that could reduce demand for our products and services and could negatively affect our business,
financial condition and financial results.
  The growth of our business may require significant investment in systems and infrastructure with no
guarantee of revenue, which could impair our profitability and negatively affect our business,
financial condition and financial results.
  We face strong competition, which could negatively affect our business, financial condition and
financial results.
  8




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Some competitors have advantages that may allow them to compete more effectively than us, which
could negatively affect our business, financial condition and financial results.
  We plan to increasingly rely on third party distributors to help us market our Email Encryption
products and services, and our failure to succeed in those relationships could negatively affect
our business, financial condition and financial results.
  Our business depends on market acceptance of our Email Encryption service, and our failure to
achieve market penetration could negatively affect our business, financial condition and financial
results.
  Unfavorable economic and political environments could negatively affect our business, financial
condition and financial results.
  9




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Our failure to keep pace with rapid technology changes could have a negative impact on our
business, financial condition and financial results.
  If our products do not work properly, our business, financial condition and financial results could
be negatively affected and we could experience negative publicity, declining sales and legal
liability.
  The infrastructure supporting our Email Encryption business may suffer capacity constraints and
business interruptions that could cause us to lose customers, increase our operating costs and
could negatively affect our business, financial condition and financial results.
  10




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Our Email Encryption business depends substantially on our data center facilities, and their
unreliability or unavailability for a significant period could cause us to lose customers and could
negatively affect our business, financial condition and financial results.
  Outages or problems with systems and infrastructure supplied by third parties could negatively
affect our business, financial condition and financial results.
  Problems with enforcing our intellectual property rights or using third party intellectual property
could negatively affect our business, financial condition and financial results. Our proprietary
rights may be difficult to enforce and may offer limited protection of our intellectual property
rights against potential infringers.
  We may have to defend our rights in intellectual property that we use in our services, and we could
be found to infringe the intellectual property rights of others, which could be disruptive and
expensive to our business.
  11




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We may face risks from using open source software that could negatively affect our business,
financial condition and financial results.
  We may fail to recruit and retain key personnel, which could impair our ability to meet key
objectives.
  Our usage of personal information, and inadvertent exposure of confidential information, could
cause us to violate data privacy laws or lose customers and could negatively affect our business,
financial condition and financial results.
  Governmental restrictions on the sale of our products and services in non-U.S. markets could
negatively affect our business, financial condition and financial results.
  12




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Our financial performance could be erratic and asset impairments could negatively affect our
financial condition and financial results.
  The market price of our securities could be volatile and our securities may decline in value.
  Exercises of options and warrants for our common stock would dilute the ownership interests of
existing shareholders and could negatively affect the value of our securities.
  Our issuances of additional debt or equity securities could dilute the ownership interests of
existing shareholders and could negatively affect the value of our securities.
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations,
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. (Removed and Reserved)
 14




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  2010
    
    
    2009Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    2.51
    
    
    $
    1.69
    
    
    $
    1.73
    
    
    $
    0.88June 30
    
    $
    2.70
    
    
    $
    2.09
    
    
    $
    1.94
    
    
    $
    0.95September 30
    
    $
    2.94
    
    
    $
    2.10
    
    
    $
    2.54
    
    
    $
    1.49December 31
    
    $
    4.55
    
    
    $
    2.70
    
    
    $
    2.30
    
    
    $
    1.53
     Performance Graph
  15




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Item 6. Selected Financial Data
  Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(In thousands, except per share data)Statement of Operations Data:Revenues
    
    $
    33,066
    
    
    $
    26,407
    
    
    $
    22,604
    
    
    $
    17,982
    
    
    $
    14,094Cost of revenues
    
    
    6,468
    
    
    
    4,576
    
    
    
    4,105
    
    
    
    4,361
    
    
    
    5,367Gross margin
    
    
    26,598
    
    
    
    21,831
    
    
    
    18,499
    
    
    
    13,621
    
    
    
    8,727Research and development expenses
    
    
    5,089
    
    
    
    3,619
    
    
    
    2,677
    
    
    
    2,748
    
    
    
    2,837Selling, general and administrative
expenses
    
    
    16,363
    
    
    
    15,927
    
    
    
    14,237
    
    
    
    13,530
    
    
    
    16,588Customer deposit forfeiture (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000
    )
    
    
    (1,000
    )Loss on extinguishment of convertible
debt (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    871Interest expense
    
    
    22
    
    
    
    21
    
    
    
    
    
    
    
    171
    
    
    
    1,126Gain on derivatives (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,043
    )Income tax (benefit) expense to
continuing operations (4)
    
    
    (35,500
    )
    
    
    67
    
    
    
    42
    
    
    
    181
    
    
    
    (60
    )Income (loss) from continuing operations
    
    
    40,720
    
    
    
    2,411
    
    
    
    2,149
    
    
    
    (724
    )
    
    
    (6,739
    )Basic income (loss) per common share from
continuing operations
    
    $
    0.63
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.12
    )Diluted income (loss) per common share
from continuing operations
    
    $
    0.61
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.12
    )Shares used in computing basic income
(loss) per common share
    
    
    64,401
    
    
    
    63,422
    
    
    
    62,982
    
    
    
    60,424
    
    
    
    57,068
 16




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Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(In thousands, except per share data)Shares used in computing diluted income
(loss) per common share
    
    
    66,742
    
    
    
    64,051
    
    
    
    65,856
    
    
    
    60,424
    
    
    
    57,068Statements of Cash Flows Data:Net cash flows provided by (used for):Operating activities
    
    $
    7,190
    
    
    $
    603
    
    
    $
    2,064
    
    
    $
    (1,443
    )
    
    $
    (16,678
    )Investing activities
    
    
    (1,467
    )
    
    
    (1,138
    )
    
    
    493
    
    
    
    (3,155
    )
    
    
    3,914Financing activities
    
    
    5,609
    
    
    
    577
    
    
    
    164
    
    
    
    2,339
    
    
    
    5,307Balance Sheet Data:Cash, Cash Equivalents and Marketable
Securities
    
    $
    24,619
    
    
    $
    13,312
    
    
    $
    13,245
    
    
    $
    12,258
    
    
    $
    12,783Working capital (deficit)(5)
    
    
    9,822
    
    
    
    (3,283
    )
    
    
    (3,010
    )
    
    
    (979
    )
    
    
    (897
    )Total assets
    
    
    66,852
    
    
    
    19,748
    
    
    
    19,357
    
    
    
    19,474
    
    
    
    20,366Debt obligations
    
    
    186
    
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    2,916Stockholders equity (deficit)
    
    
    46,887
    
    
    
    (1,989
    )
    
    
    (1,303
    )
    
    
    (289
    )
    
    
    927
 
 Operations Data in the preceding table excludes all activity of the discontinued
operations.(1)
    
    A Master Services Agreement was entered into with sanofi-aventis for $4.0
million in January 2004 calling for our performance on various future services to be
defined over the course of the agreement. Because the services to be provided to
sanofi-aventis had not been defined, the payment was recorded as a customer deposit. Because sanofi-aventis
failed to define or request services as the contracted delivery dates expired in 2005, 2006,
and 2007, the corresponding customer deposit was classified as a forfeiture.(2)
    
    The $255,000 loss on extinguishment of debt in 2007 resulted from the
restructuring of a note with sanofi-aventis. The $871,000 loss on extinguishment of debt in
2006 resulted from the retirement of a $5.0 million convertible promissory note
payable.(3)
    
    The $4.0 million gain in derivative in 2006 resulted from our April 2006
private placement of common stock. Associated warrants related to this private placement
were classified as derivative liabilities. Revaluations to the fair value of these warrants
were recorded as gain or loss to the statement of operations until new FASB guidance in
December 2006 required these components be prospectively adjusted to additional paid in
capital.(4)
    
    The $35.5 million tax benefit in 2010 resulted from the release of a portion
of our deferred tax asset valuation allowance. Based on analysis of both projected and
current earnings excluding discontinued operations, we have estimated these tax credits as
likely to be utilized prior to expiration. See Income Taxes in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.(5)
    
    Working capital includes deferred revenue totaling $15.3 million, $14.5
million, $15.0 million, $12.6 million and $8.4 million as of December 31, 2010, 2009, 2008,
2007, and 2006 respectively. Working capital also includes customer deposits totaling $2.0
million as of December 31, 2006. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
   17




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Strategy and Focus Areas
  ® ®
  
    
    New subscriptions (termed New First Year Orders (NFYO)) for the Email Encryption
Service;
    
    Retention of subscribers to the Email Encryption Service;
    
    Total orders (includes NFYOs, second and third years on multi-year orders and
renewals), and;
    
    Our ability to increase business volume with minimal cost increases.
   Discontinued Operations
  18




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Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues
    
    $
    2,632,000
    
    
    $
    4,244,000
    
    
    $
    5,431,000Cost of revenues
    
    
    1,266,000
    
    
    
    4,808,000
    
    
    
    5,745,000Gross margin
    
    
    1,366,000
    
    
    
    (564,000
    )
    
    
    (314,000
    )Research and development expenses
    
    
    300,000
    
    
    
    3,329,000
    
    
    
    3,481,000Selling, general and administrative expenses
    
    
    304,000
    
    
    
    2,953,000
    
    
    
    3,796,000Income (loss) before income taxes
    
    $
    762,000
    
    
    $
    (6,846,000
    )
    
    $
    (7,591,000
    )
   Revenue
  Operating Margins
  Other Financial Highlights
 
    
    We completed our exit from the e-Prescribing business. Our Statements of Operations
have been reclassified to reflect the impact of the discontinued e-Prescribing operation
    
    Email Encryption backlog was $49.9 million in 2010, compared with $42.9 at the end of
2009
    
    Total orders for 2010 were $40.8 million, an increase of 16% from the 2009 total orders
of $35.2 million
    
    Our deferred revenue at the end of 2010 was $16.8 million, compared with $17.3 million
at the end of 2009 (2009 deferred revenue included $1.2 million related to the discontinued
e-Prescribing segment)
    
    We generated cash flows from operations of $7.2 million during fiscal 2010. Our cash
and cash equivalents were $24.6 million at the end of 2010, compared with $13.3 million at
the end of 2009
    
    Our shared, cloud-based ZixDirectory now has approximately 25 million members including
some of the most respected institutions in the country
 19




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Critical Accounting Policies and Estimates
    
    
    Revenue recognition
    
    Income taxes
    
    Valuation of goodwill and other intangible assets
    
    Stock-based compensation costs
  Revenue Recognition
   
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred or services have been rendered,
    
    the price is fixed and determinable, and
    
    collectability is reasonably assured.
   20




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Income Taxes
   Valuation of Goodwill and Other Intangible Assets
    Stock-based Compensation
  21




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Full Year 2010 Summary of Operations
 Financial
 
    
    We completed our exit from the e-Prescribing business. Our income statement has been
reclassified to reflect the impact of the discontinued e-Prescribing operation.
    
    Revenue for 2010 was $33,066,000 compared with $26,407,000 in 2009 and $22,604,000 in
2008.
    
    Gross margin for 2010 was $26,598,000 or 80% of revenues compared to $21,831,000 or 83%
of revenues in 2009 and $18,499,000 or 82% of revenues in 2008.
    
    Income from continuing operations for the year 2010 was $40,720,000 compared with
income from continuing operations of $2,411,000 in 2009 and $2,149,000 in 2008.
    
    Net income for the year 2010 was $41,213,000 compared with net loss of $4,435,000 in
2009 and $5,442,000 in 2008. Included in Net income for 2010 was a reduction in our
deferred tax asset valuation allowance of $35,300,000 which was recorded as a tax benefit.
    
    Ending unrestricted cash was $24,619,000 on December 31, 2010.
 Results of Operations
 Revenue
  Variance
    
    VarianceYear Ended December 31,

    
    
    2010 vs. 2009
    
    
    2009 vs. 20082010
    
   
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenues
    
    $
    33,066,000
    
    
    $
    26,407,000
    
    
    $
    22,604,000
    
    
    $
    6,659,000
    
    
    
    25
    %
    
    $
    3,803,000
    
    
    
    17
    %
  Year Ended December 31,2010
    
    
    2009
    
    
    2008New first year order value
    
    $
    8,670,000
    
    
    $
    6,478,000
    
    
    $
    5,460,000
   22




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Revenue Outlook:
  Backlog and Orders
 Backlog 
  Orders 
 Cost of Revenues
  Variance
    
    VarianceYear Ended December 31,
    
    
    2010 vs. 2009
    
    
    2009 vs. 20082010
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Cost of revenues
    
    $
    6,468,000
    
    
    $
    4,576,000
    
    
    $
    4,105,000
    
    
    $
    1,892,000
    
    
    
    41
    %
    
    $
    471,000
    
    
    
    11
    %
   Research and Development Expenses
  Variance
    
    VarianceYear Ended December 31,
    
    
    2010 vs. 2009
    
    
    2009 vs. 20082010
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Research and development expenses
    
    $
    5,089,000
    
    
    $
    3,619,000
    
    
    $
    2,677,000
    
    
    $
    1,470,000
    
    
    
    41
    %
    
    $
    942,000
    
    
    
    35
    %
  23




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Selling, General and Administrative Expenses
  Variance
    
    VarianceYear Ended December 31,
    
    
    2010 vs. 2009
    
    
    2009 vs. 20082010
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Selling, general
and administrative
expenses
    
    $
    16,363,000
    
    
    $
    15,927,000
    
    
    $
    14,237,000
    
    
    $
    436,000
    
    
    
    3
    %
    
    $
    1,690,000
    
    
    
    12
    %
    Interest Expense
  Investment and Other Income
  Income Taxes
  24




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Net Income (Loss)
 Income from continuing operations
 Income (loss) from discontinued operations
 Net Income (loss)
 25




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Year Ended December 31,2010
    
    
    2009
    
    
    2008Unusual Items:Non-recurring severance payments
    
    $
    262,000
    
    
    $
    1,451,000
    
    
    $
    Decrease in the deferred tax asset valuation allowance
    
    
    (35,300,000
    )
    
    
    
    
    
    
    Expenses related to the strategic review of the
e-Prescribing business
    
    
    
    
    
    
    393,000
    
    
    
    Total unusual items
    
    $
    (35,038,000
    )
    
    $
    1,844,000
    
    
    $
    
 Liquidity and Capital Resources
 Overview
    Sources and Uses of Cash
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Net cash provided by operations
    
    $
    7,190,000
    
    
    $
    603,000
    
    
    $
    2,064,000Net cash provided by (used in) investing activities
    
    $
    (1,467,000
    )
    
    $
    (1,138,000
    )
    
    $
    493,000Net cash provided by financing activities
    
    $
    5,609,000
    
    
    $
    577,000
    
    
    $
    164,000
    Options and Warrants of ZixCorp Common Stock
  26




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Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included inOutstanding
    
    
    Outstanding
    
    
    outstanding
    
    
    Total Value ofExercise Price Range
    
    Shares
    
    
    Shares
    
    
    shares)
    
    
    Vested Shares$1.11  $1.99
    
    
    4,142,168
    
    
    $
    6,370,000
    
    
    
    3,841,090
    
    
    $
    5,901,000$2.00  $3.49
    
    
    1,200,648
    
    
    
    3,124,000
    
    
    
    904,389
    
    
    
    2,499,000$3.50  $4.99
    
    
    2,884,115
    
    
    
    12,780,000
    
    
    
    2,868,916
    
    
    
    12,714,000$5.00  $5.99
    
    
    515,927
    
    
    
    2,624,000
    
    
    
    515,927
    
    
    
    2,624,000$6.00  $8.99
    
    
    620,816
    
    
    
    4,052,000
    
    
    
    620,816
    
    
    
    4,052,000$9.00  $13.00
    
    
    861,881
    
    
    
    9,205,000
    
    
    
    861,881
    
    
    
    9,205,000Total
    
    
    10,225,555
    
    
    $
    38,153,000
    
    
    
    9,613,019
    
    
    $
    36,995,000
 Liquidity Summary
  Off-Balance Sheet Arrangements
  Contractual Obligations and Contingent Liabilities and Commitments
   Payments Due by PeriodTotal
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    > 5 YearsOperating leases
    
    $
    3,800,000
    
    
    $
    1,290,000
    
    
    $
    1,845,000
    
    
    $
    665,000
    
    
    $
    License subscription note payable
    
    
    198,000
    
    
    
    148,000
    
    
    
    50,000
    
    
    
    
    
    
    
    $
    3,998,000
    
    
    $
    1,438,000
    
    
    $
    1,895,000
    
    
    $
    665,000
    
    
    $
    
  New Accounting Standards
 Revenue Recognition
  27




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Effectiveness of Disclosure Controls and Procedure
 Annual Report on Form 10-K ,
  Managements Annual Report on Internal Control Over Financial Reporting
  Internal
ControlIntegrated Framework
  28




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##### Table of Contents



Changes in Internal Controls over Financial Reporting
  29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated
Framework Managements Report on Internal Control Over Financial Reporting
    Internal
ControlIntegrated Framework
   
 30




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##### Table of Contents



Item 9B. Other Information
  31




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  www.zixcorp.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements
  Financial Statement Schedules
  32




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##### Table of Contents



Exhibits
 ExhibitNumber
    
    
    
    Description3.1
    
    
    
    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 Corporations 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 Corporations Current Report on
Form 8-K, dated February 10, 2009, and incorporated herein by
reference.4.1
    
    
    
    Specimen certificate for common stock of Zix Corporation. Filed as
Exhibit 4.1 to Zix Corporations Annual Report on Form 10-K for
the year ended December 31, 1999, and incorporated herein by
reference.4.2
    
    
    
    Warrant to purchase 108,964 shares of common stock of Zix
Corporation re-issued to Iroquois Master Fund, Ltd., dated
December 17, 2007, which was originally issued by Zix Corporation
to Rodman & Renshaw, LLC., dated as of November 2, 2004 and filed
as Exhibit 4.2 to Zix Corporations Report on Form 8-K dated
December 29, 2006, and incorporated herein by reference.4.3
    
    
    
    Form of Warrant, dated August 9, 2005, to purchase shares of
Common Stock of Zix Corporation (including appendices) (issued in
connection with a $26.3 million private placement in 2005). Filed
as Exhibit 4.2 to Zix Corporations Current Report on Form 8-K,
dated August 9, 2005, and incorporated herein by reference.4.4
    
    
    
    Warrant, dated September 30, 2005, issued to Zix Corporation by
MITEM Corporation and exercisable for 400,000 shares of common
stock of MITEM Corporation issued in connection with the sale of
the Dr. Chart assets in 2005. Filed as Exhibit 2.3 to Zix
Corporations Current Report on Form 8-K, dated October 5, 2005,
and incorporated herein by reference.4.5
    
    
    
    Form of Warrant, as of April 6, 2006, to purchase approximately
5.9 million shares of Common Stock of Zix Corporation (issued to
various purchasers in connection with an $11.8 million private
placement in 2006). Filed as Exhibit 4.2 to Zix Corporations
Report on Form 8-K dated April 5, 2006, and incorporated herein by
reference.4.6
    
    
    
    Warrant, dated February 22, 2007, to purchase 145,853 shares of
Common Stock issued by Zix Corporation to sanofi-aventis, U.S.
Inc. issued in connection with the exchange of a promissory note
and issuance of a $1.6 million promissory note. Filed as Exhibit
4.3 to Zix Corporations Current Report on Form 8-K, dated
February 28, 2007, and incorporated herein by reference.
 33




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##### Table of Contents



ExhibitNumber
    
    
    
    Description4.7
    
    
    
    Registration Rights Agreement, dated June 24, 2003, by and among
Zix Corporation and the investors named therein (issued in
connection with the $5.75 million financing). Filed as Exhibit 4.3
to Zix Corporations Current Report on Form 8-K, dated June 25,
2003, and incorporated herein by reference.4.8
    
    
    
    Registration Rights Agreement, dated July 22, 2003, between Zix
Corporation and Pocket Script, L.L.C. Filed as Exhibit 4.2 to Zix
Corporations Current Report on Form 8-K, dated July 23, 2003, and
incorporated herein by reference.4.9
    
    
    
    Registration Rights Agreement, dated January 30, 2004, by and
among Zix Corporation, Aventis Inc., a Pennsylvania corporation,
and Aventis Holdings Inc., a Delaware corporation. Filed as
Exhibit 4.2 to Zix Corporations Current Report on Form 8-K, dated
February 10, 2004, and incorporated herein by reference.4.10
    
    
    
    Form of Registration Rights Agreement, dated as of November 2,
2004, by and between Zix Corporation and the Investors named
therein (issued in connection with a $20 million convertible note
private placement). Filed as Exhibit 4.5 to Zix Corporations
Current Report on Form 8-K, dated November 4, 2004, and
incorporated herein by reference.4.11
    
    
    
    Form of Amended and Restated Registration Rights Agreement by and
between Zix Corporation and the Investors (excluding exhibits)
(issued in connection with a $20 million convertible note private
placement). Filed as Exhibit 4.5 to Zix Corporations Current
Report on Form 8-K, dated April 14, 2005, and incorporated herein
by reference.4.12
    
    
    
    Securities Purchase Agreement, dated June 24, 2003, by and among
Zix Corporation and the investors named therein (including
schedules but excluding exhibits) in connection with a $5.75
million financing in 2003). Filed as Exhibit 4.1 to Zix
Corporations Current Report on Form 8-K, dated June 25, 2003, and
incorporated herein by reference.4.13
    
    
    
    Securities Purchase Agreement, dated as of August 9, 2005, by and
between Zix Corporation and the Purchasers listed on Schedule A
thereto (including schedules, appendices and exhibits) (issued in
connection with a $26.3 million private placement in 2005). Filed
as Exhibit 4.1 to Zix Corporations Current Report on Form 8-K/A,
dated October 21, 2005, and incorporated herein by reference.4.14
    
    
    
    Securities Purchase Agreement, dated as of April 4, 2006, by and
between Zix Corporation and the Purchasers listed on Schedule A
thereto (in connection with an $11.8 million private placement in
2006). Filed as Exhibit 4.1 to Zix Corporations Report on Form
8-K dated April 5, 2006, and incorporated herein by reference.4.15
    
    
    
    Purchase Agreement, dated as of November 1, 2004, by and between
Zix Corporation and Omicron Master Trust (excluding schedules and
exhibits) in connection with a $20 million convertible note
financing in 2004). Filed as Exhibit 4.1 to Zix Corporations
Current Report on Form 8-K, dated November 4, 2004, and
incorporated herein by reference.4.16
    
    
    
    Amendment No. 1 to Purchase Agreement, dated as of April 13, 2005,
by and between Zix Corporation and Omicron Master Trust (excluding
schedules and exhibits) in connection with a restructuring of the
$20 million convertible note financing in 2004. Filed as Exhibit
4.1 to Zix Corporations Current Report on Form 8-K, dated April
14, 2005, and incorporated herein by reference.4.17
    
    
    
    Purchase Agreement, dated as of November 1, 2004, by and between
Zix Corporation and Amulet Limited (excluding schedules and
exhibits) in connection with a $20 million convertible note
financing in 2004. Filed as Exhibit 4.2 to Zix Corporations
Current Report on Form 8-K, dated November 4, 2004, and
incorporated herein by reference.4.18
    
    
    
    Amendment No. 1 to Purchase Agreement, dated as of April 13, 2005,
by and between Zix Corporation and Amulet Limited (excluding
schedules and exhibits) in connection with a restructuring of the
$20 million convertible note financing in 2004. Filed as Exhibit
4.2 to Zix Corporations Current Report on Form 8-K, dated April
14, 2005, and incorporated herein by reference.
 34




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.1
    
    
    
    1990 Stock Option Plan of Zix Corporation (Amended and Restated as
of September 1999). Filed as Exhibit 10.1 to Zix Corporations
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999, and incorporated herein by reference.10.2
    
    
    
    1992 Stock Option Plan of Zix Corporation (Amended and Restated as
of August 2000). Filed as Exhibit 10.2 to Zix Corporations Annual
Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference.10.3
    
    
    
    1995 Long-Term Incentive Plan of Zix Corporation (Amended and
Restated as of September 20, 2000). Filed as Exhibit 10.3 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000, and incorporated herein by
reference.10.4
    
    
    
    1996 Employee Stock Purchase Plan of Zix Corporation (Amended and
Restated as of July 1, 2000). Filed as Exhibit 10.2 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000, and incorporated herein by reference.10.5
    
    
    
    Zix Corporation 1999 Directors Stock Option Plan (Amended and
Restated as of August 1, 2002). Filed as Exhibit 10.1 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002, and incorporated herein by reference.10.6
    
    
    
    Zix Corporation 2001 Employee Stock Option Plan (Amended and
Restated as of June 7, 2007). Filed as Exhibit 10.6 to Zix
Corporations Report on Form 8-K, filed June 12, 2007, and
incorporated herein by reference.10.7
    
    
    
    Zix Corporations 2001 Stock Option Plan (Amended and Restated as
of June 7, 2007). Filed as Exhibit 10.5 to Zix Corporations
Report on Form 8-K, filed June 12, 2007, and incorporated herein
by reference.10.8
    
    
    
    Zix Corporations 2003 New Employee Stock Option Plan (Amended and
Restated as of June 7, 2007). Filed as Exhibit 10.4 to Zix
Corporations Report on Form 8-K, filed June 12, 2007, and
incorporated herein by reference.10.9
    
    
    
    Zix Corporation 2004 Stock Option Plan (Amended and Restated as of
June 7, 2007). Filed as Exhibit 10.3 to Zix Corporations Report
on Form 8-K, filed June 12, 2007, and incorporated herein by
reference.10.10
    
    
    
    Zix Corporation 2004 Stock Option Plan (Amended and Restated as of
May 25, 2005). Filed as Exhibit 10.1 to Zix Corporations
Registration Statement on Form S-8 (Registration No. 333-126576),
dated July 13, 2005, and incorporated herein by reference.10.11
    
    
    
    Zix Corporation 2004 Directors Stock Option Plan, dated May 6,
2004. Filed as Exhibit 10.2 to Zix Corporations Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2004, and
incorporated herein by reference.10.12
    
    
    
    Zix Corporation 2006 Directors Stock Option Plan (Amended and
Restated as of June 7, 2007) Filed as Exhibit 10.1 to Zix
Corporations Current Report on Form 8-K, filed June 12, 2007, and
incorporated herein by reference.10.13
    
    
    
    Form of Stock Option Agreement (with no change in control
provision) for Zix Corporation Stock Option Plans. Filed as
Exhibit 10.2 to Zix Corporations Registration Statement on Form
S-8 (Registration No. 333-126576), dated July 13, 2005, and
incorporated herein by reference.10.14
    
    
    
    Form of Stock Option Agreement (with change in control
provision) for Zix Corporation Stock Option Plans. Filed as
Exhibit 10.3 to Zix Corporations Registration Statement on Form
S-8 (Registration No. 333-126576), dated July 13, 2005, and
incorporated herein by reference.10.15
    
    
    
    Form of Stock Option Agreement (with acceleration event
provision) for Zix Corporation Stock Option Plans and applicable
to option agreements held by the Companys chief executive officer
and direct reports. Filed as Exhibit 10.17 to Zix Corporations
Annual Report on Form 10-K for the year ended December 31, 2007,
and incorporated herein by reference.10.16
    
    
    
    Zix Corporation 401(k) Retirement Plan. Filed as Exhibit 10.10 to
Zix Corporations Annual Report on Form 10-K for the year ended
December 31, 2003, and incorporated herein by reference.
 35




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.17
    
    
    
    Adoption Agreement relating to Zix Corporation 401(k) Retirement
Plan. Filed as Exhibit 10.11 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2003, and incorporated
herein by reference.10.18
    
    
    
    Stock Option Agreement, dated February 24, 2004, between Zix
Corporation and Richard D. Spurr, covering 650,000 shares at
$10.80 exercise price per share. Filed as Exhibit 10.15 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2003, and incorporated herein by reference.10.19
    
    
    
    Stock Option Agreement, dated November 17, 2004, between Zix
Corporation and Richard D. Spurr, covering 350,000 shares at $6.00
exercise price per share. Filed as Exhibit 10.18 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2004, and incorporated herein by reference.10.20
    
    
    
    Stock Option Agreement, dated March 23, 2005, between Zix
Corporation and Richard D. Spurr, covering 350,000 shares at $3.78
exercise price per share. Filed as Exhibit 10.2 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2005, and incorporated herein by reference.10.21
    
    
    
    Stock Option Agreement, dated March 2, 2006, between Zix
Corporation and Richard D. Spurr, covering 350,000 shares at $4.00
exercise price per share. Filed as Exhibit 10.25 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2006, and incorporated herein by reference.10.22
    
    
    
    Stock Option Agreement, dated December 18, 2006, between Zix
Corporation and Richard D. Spurr, covering 400,000 shares at $1.50
exercise price per share. Filed as Exhibit 10.24 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2007, and incorporated herein by reference.10.23
    
    
    
    Stock Option Agreement, dated December 20, 2007, between Zix
Corporation and Richard D. Spurr, covering 400,000 shares at $4.87
exercise price per share. Filed as Exhibit 10.25 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2007, and incorporated herein by reference.10.24
    
    
    
    Stock Option Agreement, dated December 23, 2008, between Zix
Corporation and Richard D. Spurr, covering 100,000 shares at $1.11
exercise price per share. Filed as Exhibit 10.24 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.10.25
    
    
    
    Stock Option Agreement between Zix Corporation and Susan K. Conner
covering 130,000 shares at $1.70 exercise price per share (grant
date October 16, 2008). Filed as Exhibit 10.1 to Zix Corporations
Form 10-Q for the quarter ended September 30, 2008, and
incorporated herein by reference.10.26
    
    
    
    Form of Zix Corporation Outside Director Stock Option Agreement.
Filed as Exhibit 10.3 to Zix Corporations Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2004, and
incorporated herein by reference.10.27
    
    
    
    Amended and Restated Severance Agreement, entered into as of
December 18, 2008, between Zix Corporation and Richard D. Spurr
(amended for I.R.C. 409A compliance purposes). Filed as Exhibit
10.27 to Zix Corporations Annual Report on Form 10-K for the year
ended December 31, 2008, and incorporated herein by reference.10.28
    
    
    
    Amended and Restated Severance Agreement, entered into as of
December 30, 2008, between Zix Corporation and David J. Robertson
(amended for I.R.C. 409A compliance purposes). Filed as Exhibit
10.30 to Zix Corporations Annual Report on Form 10-K for the year
ended December 31, 2008, and incorporated herein by reference.10.29
    
    
    
    Form of Amended and Restated Separation Pay Agreement between Zix
Corporation and certain executive officers (amended for I.R.C.
409A compliance purposes). Filed as Exhibit 10.31 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.
 36




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.30
    
    
    
    Form of Amended and Restated Severance Agreement between Zix
Corporation and certain executive officers (amended for I.R.C.
409A compliance purposes). Filed as Exhibit 10.32 to Zix
Corporations Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.10.31
    
    
    
    Lease Agreement, dated December 29, 2003, between Zix Corporation and 7-Eleven, Inc.
(excluding exhibits) (relating to Zix Corporations Dallas, Texas
facilities). Filed as Exhibit 10.24 to Zix Corporations Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.10.32
    
    
    
    Letter of Agreement dated September 12, 2006 between MITEM Corporation and Zix Corporation.
Filed as Exhibit 10.2 to Zix Corporations Quarterly Report on Form 10-Q for the period ended September 30, 2006, and incorporated herein by reference.10.33
    
    
    
    Separation Pay Agreement, entered into as of February 8, 2010, between Zix
Corporation and James F. Brashear. Filed as Exhibit 10.40 to Zix
Corporations Annual Report on Form 10-K dated December 31, 2009, and incorporated herein by reference.10.34
    
    
    
    Form of Zix Corporation Outside Director Stock Option Agreement. Filed
as Exhibit 10.1 to Zix
Corporations Quarterly Report on Form 10-Q dated June 30, 2010, and incorporated herein by reference.10.35
    
    
    
    Form of Zix Corporation Employee Stock Option Agreement. Filed as Exhibit 10.2 to Zix
Corporations Quarterly Report on Form 10-Q dated June 30, 2010, and incorporated herein by reference.10.36
    
    
    
    Form of Outside Board of Directors Indemnification Agreement. Filed as Exhibit 10.1 to Zix
Corporations Current Report on Form 8-K dated December 20, 2010, and incorporated herein by reference.21.1
    
    
    
    Subsidiaries of Zix Corporation.
Filed as Exhibit 21.1 to Zix Corporations Annual Report on
Form 10-K dated December 31, 2009, and incorporated herein by reference.23.1*
    
    
    
    Consent of Independent Registered Public Accounting Firm (Whitley Penn LLP).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 Richard D. Spurr, Principal Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of CEO and PFO pursuant to 18 U.S.C. Section 1350, as adopted,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    
    
    Order and Final Judgment, United States District Court, Cause No.
3-04-CV-1931-K, Northern District of Texas, Dallas Division (dated June 16, 2008). Filed as Exhibit 99.1 to the Zix Corporation
Current Report on Form 8-K, filed June 17, 2008, and incorporated herein by reference.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement. 37




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##### Table of Contents



SIGNATURES
  ZIX CORPORATIONBy:
    /s/ MICHAEL W. ENGLISHMichael W. EnglishPrincipal Accounting Officer  Signature
    
    Title/s/ RICHARD D. SPURR
    
    Chairman, Chief Executive Officer, President and Director(Richard D. Spurr)
    
    (Principal Executive Officer and
Principal Financial Officer)/s/ ROBERT C. HAUSMANN
    
    Director(Robert C. Hausmann)/s/ JAMES S. MARSTON
    
    Director(James S. Marston)/s/ MARIBESS L. MILLER
    
    Director(Maribess L. Miller)/s/ ANTONIO R. SANCHEZ III
    
    Director(Antonio R. Sanchez III)
 38




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at December 31, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
    
    
    F-4Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2010,
2009 and 2008
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
  
 F-2




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##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,619,000
    
    
    $
    13,287,000Marketable securities
    
    
    
    
    
    
    25,000Receivables, net
    
    
    1,344,000
    
    
    
    760,000Prepaid and other current assets
    
    
    1,115,000
    
    
    
    1,135,000Deferred tax assets
    
    
    1,056,000
    
    
    
    7,000Total current assets
    
    
    28,134,000
    
    
    
    15,214,000Property and equipment, net
    
    
    2,209,000
    
    
    
    2,137,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred tax assets
    
    
    34,304,000
    
    
    
    63,000Other assets
    
    
    44,000
    
    
    
    173,000Total assets
    
    $
    66,852,000
    
    
    $
    19,748,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    562,000
    
    
    $
    769,000Accrued expenses
    
    
    2,282,000
    
    
    
    3,124,000Deferred revenue
    
    
    15,331,000
    
    
    
    14,478,000License subscription note payable
    
    
    137,000
    
    
    
    126,000Total current liabilities
    
    
    18,312,000
    
    
    
    18,497,000Long-term liabilities:Deferred revenue
    
    
    1,439,000
    
    
    
    2,821,000License subscription note payable
    
    
    49,000
    
    
    
    186,000Deferred rent
    
    
    165,000
    
    
    
    233,000Total long-term liabilities
    
    
    1,653,000
    
    
    
    3,240,000Total liabilities
    
    
    19,965,000
    
    
    
    21,737,000Commitments and contingencies (Note 17)Stockholders equity (deficit):Preferred stock, $1 par value, 10,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 175,000,000 shares authorized;
69,505,919 issued and 67,178,738 outstanding in 2010 and
66,053,772 issued and 63,726,591 outstanding in 2009
    
    
    695,000
    
    
    
    661,000Additional paid-in capital
    
    
    344,981,000
    
    
    
    337,352,000Treasury stock, at cost; 2,327,181 common shares in 2010 and 2009
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (287,282,000
    )
    
    
    (328,495,000
    )Total stockholders equity (deficit)
    
    
    46,887,000
    
    
    
    (1,989,000
    )Total liabilities and stockholders equity (deficit)
    
    $
    66,852,000
    
    
    $
    19,748,000
  F-3




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##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues
    
    $
    33,066,000
    
    
    $
    26,407,000
    
    
    $
    22,604,000Cost of revenues
    
    
    6,468,000
    
    
    
    4,576,000
    
    
    
    4,105,000Gross margin
    
    
    26,598,000
    
    
    
    21,831,000
    
    
    
    18,499,000Research and development expenses
    
    
    5,089,000
    
    
    
    3,619,000
    
    
    
    2,677,000Selling, general and administrative expenses
    
    
    16,363,000
    
    
    
    15,927,000
    
    
    
    14,237,000Operating income
    
    
    5,146,000
    
    
    
    2,285,000
    
    
    
    1,585,000Other income (expense):Investment and other income
    
    
    96,000
    
    
    
    214,000
    
    
    
    606,000Interest expense
    
    
    (22,000
    )
    
    
    (21,000
    )
    
    
    Total other income
    
    
    74,000
    
    
    
    193,000
    
    
    
    606,000Income from continuing operations before income taxes
    
    
    5,220,000
    
    
    
    2,478,000
    
    
    
    2,191,000Income tax benefit (expense)
    
    
    35,500,000
    
    
    
    (67,000
    )
    
    
    (42,000
    )Income from continuing operations
    
    $
    40,720,000
    
    
    $
    2,411,000
    
    
    $
    2,149,000Income (loss) from discontinued operations before
income taxes
    
    
    762,000
    
    
    
    (6,846,000
    )
    
    
    (7,591,000
    )Income tax expense
    
    
    (269,000
    )
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    $
    493,000
    
    
    $
    (6,846,000
    )
    
    $
    (7,591,000
    )Net income (loss)
    
    $
    41,213,000
    
    
    $
    (4,435,000
    )
    
    $
    (5,442,000
    )Basic income (loss) per common share:Income from continuing operations:
    
    $
    0.63
    
    
    $
    0.04
    
    
    $
    0.03Income (loss) from discontinued operations:
    
    $
    0.01
    
    
    $
    (0.11
    )
    
    $
    (0.12
    )Net income (loss):
    
    $
    0.64
    
    
    $
    (0.07
    )
    
    $
    (0.09
    )Diluted income (loss) per common share:Income from continuing operations:
    
    $
    0.61
    
    
    $
    0.04
    
    
    $
    0.03Income (loss) from discontinued operations:
    
    $
    0.01
    
    
    $
    (0.11
    )
    
    $
    (0.11
    )Net income (loss):
    
    $
    0.62
    
    
    $
    (0.07
    )
    
    $
    (0.08
    )Weighted average shares outstandingBasic common shares outstanding
    
    
    64,401,384
    
    
    
    63,422,088
    
    
    
    62,981,958Diluted common shares outstanding
    
    
    66,741,681
    
    
    
    64,050,751
    
    
    
    65,856,382
  F-4




---



##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 Stockholders Equity (Deficit)Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance, December 31, 2007
    
    
    64,959,649
    
    
    $
    650,000
    
    
    $
    329,186,000
    
    
    $
    (11,507,000
    )
    
    $
    (318,618,000
    )
    
    $
    (289,000
    )Issuance of common stock upon exercise
of stock options
    
    
    67,342
    
    
    
    1,000
    
    
    
    163,000
    
    
    
    
    
    
    
    
    
    
    
    164,000Shares issued to employees in lieu of
cash compensation
    
    
    619,672
    
    
    
    5,000
    
    
    
    1,692,000
    
    
    
    
    
    
    
    
    
    
    
    1,697,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    2,498,000
    
    
    
    
    
    
    
    
    
    
    
    2,498,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    48,000
    
    
    
    
    
    
    
    
    
    
    
    48,000Other
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    21,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,442,000
    )
    
    
    (5,442,000
    )Balance, December 31, 2008
    
    
    65,646,663
    
    
    
    656,000
    
    
    
    333,608,000
    
    
    
    (11,507,000
    )
    
    
    (324,060,000
    )
    
    
    (1,303,000
    )Issuance of common stock upon exercise
of stock options
    
    
    11,743
    
    
    
    1,000
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    19,000Issuance of common stock upon exercise
of warrants
    
    
    395,366
    
    
    
    4,000
    
    
    
    632,000
    
    
    
    
    
    
    
    
    
    
    
    636,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    3,063,000
    
    
    
    
    
    
    
    
    
    
    
    3,063,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    31,000
    
    
    
    
    
    
    
    
    
    
    
    31,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,435,000
    )
    
    
    (4,435,000
    )Balance, December 31, 2009
    
    
    66,053,772
    
    
    
    661,000
    
    
    
    337,352,000
    
    
    
    (11,507,000
    )
    
    
    (328,495,000
    )
    
    
    (1,989,000
    )Issuance of common stock upon exercise
of stock options
    
    
    1,537,147
    
    
    
    15,000
    
    
    
    2,771,000
    
    
    
    
    
    
    
    
    
    
    
    2,786,000Issuance of common stock upon exercise
of warrants
    
    
    1,915,000
    
    
    
    19,000
    
    
    
    2,930,000
    
    
    
    
    
    
    
    
    
    
    
    2,949,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    1,886,000
    
    
    
    
    
    
    
    
    
    
    
    1,886,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    42,000
    
    
    
    
    
    
    
    
    
    
    
    42,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,213,000
    
    
    
    41,213,000Balance, December 31, 2010
    
    
    69,505,919
    
    
    $
    695,000
    
    
    $
    344,981,000
    
    
    $
    (11,507,000
    )
    
    $
    (287,282,000
    )
    
    $
    46,887,000
  F-5




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##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    41,213,000
    
    
    $
    (4,435,000
    )
    
    $
    (5,442,000
    )Non-cash items in net income (loss):Depreciation and amortization
    
    
    1,402,000
    
    
    
    1,328,000
    
    
    
    1,268,000Common stock issued to employees and non-employees
in lieu of cash
    
    
    
    
    
    
    
    
    
    
    1,181,000Employee stock based compensation expense
    
    
    1,886,000
    
    
    
    3,063,000
    
    
    
    2,498,000Non-employee stock-based compensation
    
    
    42,000
    
    
    
    31,000
    
    
    
    48,000Changes in deferred taxes
    
    
    (35,290,000
    )
    
    
    4,000
    
    
    
    3,000Changes in operating assets and liabilities:Receivables
    
    
    (584,000
    )
    
    
    (284,000
    )
    
    
    643,000Prepaid and other assets
    
    
    150,000
    
    
    
    220,000
    
    
    
    416,000Accounts payable
    
    
    (190,000
    )
    
    
    168,000
    
    
    
    296,000Deferred revenue
    
    
    (529,000
    )
    
    
    (145,000
    )
    
    
    1,341,000Accrued and other liabilities
    
    
    (910,000
    )
    
    
    653,000
    
    
    
    (188,000
    )Net cash provided by operating activities
    
    
    7,190,000
    
    
    
    603,000
    
    
    
    2,064,000Investing activities:Purchases of property and equipment
    
    
    (1,492,000
    )
    
    
    (1,141,000
    )
    
    
    (1,238,000
    )Sales (purchases) of marketable securities
    
    
    25,000
    
    
    
    (25,000
    )
    
    
    1,734,000Restricted cash investments, net
    
    
    
    
    
    
    28,000
    
    
    
    (3,000
    )Net cash provided by (used in) investing activities
    
    
    (1,467,000
    )
    
    
    (1,138,000
    )
    
    
    493,000Financing activities:Proceeds from exercise of stock options
    
    
    2,786,000
    
    
    
    19,000
    
    
    
    164,000Proceeds from exercise of warrants
    
    
    2,949,000
    
    
    
    636,000
    
    
    
    Payment of license subscription note payable
    
    
    (126,000
    )
    
    
    (78,000
    )
    
    
    Net cash provided by financing activities
    
    
    5,609,000
    
    
    
    577,000
    
    
    
    164,000Increase in cash and cash equivalents
    
    
    11,332,000
    
    
    
    42,000
    
    
    
    2,721,000Cash and cash equivalents, beginning of year
    
    
    13,287,000
    
    
    
    13,245,000
    
    
    
    10,524,000Cash and cash equivalents, end of year
    
    $
    24,619,000
    
    
    $
    13,287,000
    
    
    $
    13,245,000
  F-6




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##### Table of Contents



ZIX CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Company Overview
   2. Summary of Significant Accounting Policies
 Basis of Presentation
 Use of Estimates
 Cash Equivalents
 Fair Value of Financial Instruments
 Valuation of Property and Equipment
  F-7




---



##### Table of Contents



Goodwill
   Deferred Tax Assets
 Leases
 Revenue Recognition
  
    
    persuasive evidence of an arrangement exists,
 F-8




---



##### Table of Contents




    
    delivery has occurred or services have been rendered,
    
    the price is fixed and determinable, and
    
    collectability is reasonably assured.
    Software Development Costs
  Advertising
Expense
 Stock Based Compensation
  Earnings Per Share (EPS)
 New Accounting Standards
 Revenue Recognition
 F-9




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##### Table of Contents



3. Discontinued Operations
   Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues
    
    $
    2,632,000
    
    
    $
    4,244,000
    
    
    $
    5,431,000Cost of revenues
    
    
    1,266,000
    
    
    
    4,808,000
    
    
    
    5,745,000Gross margin
    
    
    1,366,000
    
    
    
    (564,000
    )
    
    
    (314,000
    )Research and development expenses
    
    
    300,000
    
    
    
    3,329,000
    
    
    
    3,481,000Selling, general and administrative expenses
    
    
    304,000
    
    
    
    2,953,000
    
    
    
    3,796,000Income (loss) before income taxes
    
    $
    762,000
    
    
    $
    (6,846,000
    )
    
    $
    (7,591,000
    )
   4. Stock Options and Stock-based Employee Compensation
  Authorized
    
    
    Options
    
    
    Options
    
    
    AvailableShares
    
    
    Outstanding
    
    
    Vested
    
    
    for GrantEmployee and Director Stock Option Plans:1992 Stock Option Plan
    
    
    450,000
    
    
    
    12,833
    
    
    
    12,833
    
    
    
    1995 Long-term Incentive Plan
    
    
    1,825,000
    
    
    
    859,000
    
    
    
    859,000
    
    
    
    1999 Directors Stock Option Plan
    
    
    975,000
    
    
    
    237,091
    
    
    
    237,091
    
    
    
    2001 Stock Option Plan
    
    
    2,525,000
    
    
    
    1,416,391
    
    
    
    1,392,104
    
    
    
    315,6672001 Employee Stock Option Plan
    
    
    300,000
    
    
    
    180,055
    
    
    
    173,016
    
    
    
    55,5442003 New Employee Stock Option Plan
    
    
    500,000
    
    
    
    246,870
    
    
    
    168,369
    
    
    
    135,0742004 Stock Option Plan
    
    
    5,000,000
    
    
    
    3,069,226
    
    
    
    2,721,853
    
    
    
    959,280
 F-10




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##### Table of Contents



Authorized
    
    
    Options
    
    
    Options
    
    
    AvailableShares
    
    
    Outstanding
    
    
    Vested
    
    
    for Grant2004 Directors Stock Option Plan
    
    
    300,000
    
    
    
    185,000
    
    
    
    185,000
    
    
    
    2006 Directors Stock Option Plan
    
    
    1,100,000
    
    
    
    665,426
    
    
    
    510,090
    
    
    
    242,023Total employee and director stock option plans
    
    
    12,975,000
    
    
    
    6,871,892
    
    
    
    6,259,356
    
    
    
    1,707,588Executive Stock Option Agreements:Richard D. Spurr, Chairman, President and CEO
    
    
    650,000
    
    
    
    650,000
    
    
    
    650,000
    
    
    
    Other executive stock option agreements
    
    
    450,000
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    Total executive stock option agreements
    
    
    1,100,000
    
    
    
    775,000
    
    
    
    775,000
    
    
    
    Total
    
    
    14,075,000
    
    
    
    7,646,892
    
    
    
    7,034,356
    
    
    
    1,707,588
  Employee and Director Stock Option Plans
  Executive Stock Option Agreements:
 Richard D. Spurr
 Other Executive Stock Option Agreements
 Other Stock Option Agreements:
  Accounting Treatment
   Year Ended December 31,2010
    
    
    2009
    
    
    2008Cost of revenues
    
    $
    161,000
    
    
    $
    132,000
    
    
    $
    86,000Research and development expenses
    
    
    183,000
    
    
    
    169,000
    
    
    
    108,000Selling, general and administrative expenses
    
    
    1,449,000
    
    
    
    2,006,000
    
    
    
    1,626,000Discontinued operations
    
    
    93,000
    
    
    
    756,000
    
    
    
    678,000Stock-based compensation expense
    
    $
    1,886,000
    
    
    $
    3,063,000
    
    
    $
    2,498,000
 F-11




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Risk-free interest rate
    
    
    2.79
    %
    
    
    2.20
    %
    
    
    2.57
    %Expected option life (years)
    
    
    5.8
    
    
    
    5.7
    
    
    
    5.8Expected stock price volatility
    
    
    79
    %
    
    
    79
    %
    
    
    78
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    1.36
    
    
    $
    0.84
    
    
    $
    1.71
  Stock Option Activity
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualShares
    
    
    Price
    
    
    Term (Yrs)Outstanding at January 1, 2008
    
    
    9,538,713
    
    
    $
    5.16Granted at market price
    
    
    923,220
    
    
    $
    2.54Cancelled or expired
    
    
    (355,224
    )
    
    $
    10.16Exercised
    
    
    (67,342
    )
    
    $
    2.44Outstanding at December 31, 2008
    
    
    10,039,367
    
    
    $
    4.76Granted at market price
    
    
    196,684
    
    
    $
    1.49Cancelled or expired
    
    
    (653,196
    )
    
    $
    9.15Exercised
    
    
    (11,743
    )
    
    $
    1.55Outstanding at December 31, 2009
    
    
    9,571,112
    
    
    $
    4.40Granted at market price
    
    
    724,072
    
    
    $
    1.98Cancelled or expired
    
    
    (1,111,145
    )
    
    $
    6.29Exercised
    
    
    (1,537,147
    )
    
    $
    1.82Outstanding at December 31, 2010
    
    
    7,646,892
    
    
    $
    4.42
    
    
    
    5.04Options exercisable at December 31, 2010
    
    
    7,034,356
    
    
    $
    4.64
    
    
    
    4.72
 F-12




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    Number
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$1.11  $1.99
    
    
    1,709,358
    
    
    
    5.90
    
    
    $
    1.53
    
    
    
    1,408,280
    
    
    $
    1.53$2.00  $3.49
    
    
    1,200,648
    
    
    
    5.96
    
    
    $
    2.60
    
    
    
    904,389
    
    
    $
    2.77$3.50  $4.99
    
    
    2,738,262
    
    
    
    4.71
    
    
    $
    4.43
    
    
    
    2,723,063
    
    
    $
    4.43$5.00  $5.99
    
    
    515,927
    
    
    
    2.75
    
    
    $
    5.09
    
    
    
    515,927
    
    
    $
    5.09$6.00  $8.99
    
    
    620,816
    
    
    
    3.06
    
    
    $
    6.53
    
    
    
    620,816
    
    
    $
    6.53$9.00  $13.00
    
    
    861,881
    
    
    
    2.94
    
    
    $
    10.68
    
    
    
    861,881
    
    
    $
    10.687,646,892
    
    
    
    5.04
    
    
    $
    4.42
    
    
    
    7,034,356
    
    
    $
    4.64
  Reserved Common Stock
  Common Stock Issued in Lieu of Cash
  5. Supplemental Cash Flow Information
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Cash interest paid
    
    $
    22,000
    
    
    $
    21,000
    
    
    $
    Income tax payments
    
    $
    262,000
    
    
    $
    196,000
    
    
    $
    53,000Payables related to purchases of capitalized assets
    
    $
    17,000
    
    
    $
    89,000
    
    
    $
    51,000Assets sold to customers as part of their subscription service
    
    $
    9,000
    
    
    $
    2,000
    
    
    $
    16,000Issuance of promissory note for software license service agreement
    
    $
    
    
    
    $
    390,000
    
    
    $
    Stock issued in lieu of accrued expenses (see Note 4)
    
    $
    
    
    
    $
    
    
    
    $
    516,000Accrued expenses relating to private placement common stock
    
    $
    
    
    
    $
    
    
    
    $
    20,000
 F-13




---



##### Table of Contents



6. Receivables, net
 December 31,2010
    
    
    2009Receivables
    
    $
    1,376,000
    
    
    $
    786,000Allowance for returns and doubtful accounts
    
    
    (32,000
    )
    
    
    (26,000
    )Note receivable
    
    
    476,000
    
    
    
    484,000Allowance for note receivable
    
    
    (476,000
    )
    
    
    (484,000
    )Receivables, net
    
    $
    1,344,000
    
    
    $
    760,000
   7. Prepaid and other current assets
 December 31,2010
    
    
    2009Inventory
    
    $
    
    
    
    $
    8,000Deferred cost of sales charges
    
    
    
    
    
    
    97,000Prepaid insurance, maintenance, software licenses and other
    
    
    1,046,000
    
    
    
    1,029,000Tax-related
    
    
    69,000
    
    
    
    1,000Prepaid and other current assets
    
    $
    1,115,000
    
    
    $
    1,135,000
  8. Property and Equipment
 December 31,2010
    
    
    2009Computer and office equipment and software
    
    $
    24,173,000
    
    
    $
    23,711,000Leasehold improvements
    
    
    4,899,000
    
    
    
    4,876,000Furniture and fixtures
    
    
    1,366,000
    
    
    
    1,220,00030,438,000
    
    
    
    29,807,000Less accumulated depreciation and amortization
    
    
    (28,229,000
    )
    
    
    (27,670,000
    )$
    2,209,000
    
    
    $
    2,137,000
  9. Goodwill
  10. Accrued Expenses
 December 31,2010
    
    
    2009Employee compensation and benefits
    
    $
    818,000
    
    
    $
    1,496,000Professional fees
    
    
    492,000
    
    
    
    414,000Taxes
    
    
    641,000
    
    
    
    768,000Other
    
    
    331,000
    
    
    
    446,000Total accrued expenses
    
    $
    2,282,000
    
    
    $
    3,124,000
 F-14




---



##### Table of Contents



11. Fair Value Measurements
   12. Notes Payable
 License Subscription Note Payable
  13. April 2006 Private Placement of Common Stock
     F-15




---



##### Table of Contents



14. Equity Financing Arrangements and Related Warrants
 Warrants Summary
  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2010Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Exercise
    
    
    WarrantWarrant Grants:
    
    Outstanding
    
    
    Issued
    
    
    Expired
    
    
    Exercised
    
    
    Outstanding
    
    
    Price
    
    
    Expiration2006 private placement of common stock
(See Note 13)
    
    
    4,347,810
    
    
    
    
    
    
    
    
    
    
    
    (1,915,000
    )
    
    
    2,432,810
    
    
    $
    1.54
    
    
    Oct 20112005 private placement of common stock
    
    
    3,231,974
    
    
    
    
    
    
    
    (3,231,974
    )
    
    
    
    
    
    
    
    
    
    
    3.04
    
    
    Aug 20102005 private placement broker warrants
    
    
    108,964
    
    
    
    
    
    
    
    (108,964
    )
    
    
    
    
    
    
    
    
    
    
    3.04
    
    
    Aug 20102005 private placement agent warrants
    
    
    178,111
    
    
    
    
    
    
    
    (178,111
    )
    
    
    
    
    
    
    
    
    
    
    3.04
    
    
    Aug 20102002 private placement of equity securities
    
    
    916,667
    
    
    
    
    
    
    
    (916,667
    )
    
    
    
    
    
    
    
    
    
    
    57.60
    
    
    May 2010Promissory note payable
    
    
    145,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,853
    
    
    
    4.48
    
    
    Jan 2012Total
    
    
    8,929,379
    
    
    
    
    
    
    
    (4,435,716
    )
    
    
    (1,915,000
    )
    
    
    2,578,663
  2006 Private Placement of Common Stock and Warrants
  2005 Private Placement of Common Stock and Warrants
      2002 Private Placement of Equity Securities
  F-16




---



##### Table of Contents



15. Earnings Per Share and Potential Dilution
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Basic weighted average shares
    
    
    64,401,384
    
    
    
    63,422,088
    
    
    
    62,981,958Effect of dilutive securities:Employee and director stock options
    
    
    913,670
    
    
    
    211,185
    
    
    
    771,042Warrants
    
    
    1,426,627
    
    
    
    417,478
    
    
    
    2,103,382Potential dilutive common shares
    
    
    66,741,681
    
    
    
    64,050,751
    
    
    
    65,856,382
  16. Significant Customers
  17. Commitments and Contingencies
 Leases and Debt
   2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    1,290,000
    
    
    $
    958,000
    
    
    $
    887,000
    
    
    $
    665,000
    
    
    $
    
    
    
    $
    
    
    
    $
    3,800,000License subscription note payable
    
    
    137,000
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,000Total cash obligations
    
    
    1,427,000
    
    
    
    1,007,000
    
    
    
    887,000
    
    
    
    665,000
    
    
    
    
    
    
    
    
    
    
    
    3,986,000Interest on obligations
    
    
    11,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Total
    
    $
    1,438,000
    
    
    $
    1,008,000
    
    
    $
    887,000
    
    
    $
    665,000
    
    
    $
    
    
    
    $
    
    
    
    $
    3,998,000
 Claims and Proceedings
  18. Income Taxes
  2010
    
    
    2009
    
    
    2008Current:U.S
    
    $
    (99,000
    )
    
    $
    (95,000
    )
    
    $
    (111,000
    )State
    
    
    33,000
    
    
    
    (20,000
    )
    
    
    22,000Foreign
    
    
    126,000
    
    
    
    179,000
    
    
    
    139,000Deferred
 F-17




---



##### Table of Contents



2010
    
    
    2009
    
    
    2008Federal
    
    
    (35,300,000
    )
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    (48,000
    )Foreign
    
    
    9,000
    
    
    
    3,000
    
    
    
    40,000Income tax (benefit) expense
    
    
    (35,231,000
    )
    
    
    67,000
    
    
    
    42,000Discontinued operations
    
    
    269,000
    
    
    
    
    
    
    
    Continuing operations
    
    $
    (35,500,000
    )
    
    $
    67,000
    
    
    $
    42,000A reconciliation of the expected U.S. tax (benefit) expense to income taxes is as follows:2010
    
    
    2009
    
    
    2008Expected tax
expense (benefit) at U.S. statutory rate
    
    $
    1,988,000
    
    
    $
    (1,527,000
    )
    
    $
    (1,902,000
    )Decrease in valuations allowance- Operations
    
    
    (2,574,000
    )
    
    
    
    
    
    
    Decrease in valuations allowance- Other
    
    
    (35,300,000
    )
    
    
    
    
    
    
    Unbenefited U.S. losses, net
    
    
    
    
    
    
    1,546,000
    
    
    
    1,945,000Nondeductible expense and nontaxable income
    
    
    141,000
    
    
    
    (19,000
    )
    
    
    (43,000
    )Refundable U.S. research credits
    
    
    (50,000
    )
    
    
    (95,000
    )
    
    
    (111,000
    )State income taxes
    
    
    (80,000
    )
    
    
    (20,000
    )
    
    
    (26,000
    )Foreign income taxes
    
    
    134,000
    
    
    
    182,000
    
    
    
    179,000Other
    
    
    510,000
    
    
    
    
    
    
    
    Income tax (benefit) expense
    
    
    (35,231,000
    )
    
    
    67,000
    
    
    
    42,000Discontinued operations
    
    
    269,000
    
    
    
    
    
    
    
    Continuing operations
    
    $
    (35,500,000
    )
    
    $
    67,000
    
    
    $
    42,000
  2010
    
    
    2009Deferred tax assets:Nondeductible reserves
    
    $
    176,000
    
    
    $
    193,000U.S. net operating loss carryforwards
    
    
    97,308,000
    
    
    
    98,206,000State net operating loss carryforwards
    
    
    128,000
    
    
    
    144,000Tax credit carryforwards
    
    
    5,343,000
    
    
    
    5,494,000Stock-based compensation
    
    
    4,049,000
    
    
    
    4,364,000Intangible assets
    
    
    2,335,000
    
    
    
    2,848,000Depreciable assets
    
    
    1,184,000
    
    
    
    1,438,000Unrecognized gain on derivatives
    
    
    13,000
    
    
    
    21,000Other assets
    
    
    527,000
    
    
    
    571,000Total deferred tax assets
    
    
    111,063,000
    
    
    
    113,279,000Deferred tax liabilities:Prepaid expenses
    
    
    (351,000
    )
    
    
    Total deferred tax assets
    
    
    110,712,000
    
    
    
    113,279,000Less valuation allowance
    
    
    (75,352,000
    )
    
    
    (113,210,000
    )Net deferred income taxes
    
    $
    35,360,000
    
    
    $
    69,000
   F-18




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##### Table of Contents



.
    UnrecognizedTax BenefitsBalance at December 31, 2008
    
    $
    377,000Change in beginning balance due to currency fluctuation
    
    
    63,000Additions based on tax positions related to current year
    
    
    Decreases based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    Decreases based on tax positions related to prior years
    
    
    Additions based on tax positions related to settlements
    
    
    Decreases related to lapse of statute of limitations
    
    
    Balance at December 31, 2009
    
    
    440,000Change in beginning balance due to currency fluctuation
    
    
    21,000Additions based on tax positions related to current year
    
    
    Decreases based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    Decreases based on tax positions related to prior years
    
    
    Additions based on tax positions related to settlements
    
    
    Decreases related to lapse of statute of limitations
    
    
    Balance at December 31, 2010
    
    $
    461,000
   19. Employee Benefit Plan
 4 01(k) Plan
 20. Quarterly Results of Operations (Unaudited)
  F-19




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##### Table of Contents



Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312010Revenues
    
    $
    7,479,000
    
    
    $
    8,194,000
    
    
    $
    8,548,000
    
    
    $
    8,845,000Gross margin
    
    
    5,977,000
    
    
    
    6,624,000
    
    
    
    6,886,000
    
    
    
    7,111,000Income from continuing operations
    
    
    524,000
    
    
    
    1,379,000
    
    
    
    1,671,000
    
    
    
    37,146,000Basic income from continuing
operations per common share*
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.57Diluted income from continuing
operations per common share*
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.54Income from discontinued operations
    
    
    188,000
    
    
    
    122,000
    
    
    
    97,000
    
    
    
    86,000Basic income from discontinued
operations per common share*
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Diluted income from discontinued
per common share*
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income
    
    
    712,000
    
    
    
    1,501,000
    
    
    
    1,768,000
    
    
    
    37,232,000Basic net income per common share*
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.57Diluted net income per common share*
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.542009Revenues
    
    $
    6,242,000
    
    
    $
    6,379,000
    
    
    $
    6,685,000
    
    
    $
    7,101,000Gross margin
    
    
    5,229,000
    
    
    
    5,291,000
    
    
    
    5,506,000
    
    
    
    5,805,000Income from continuing operations
    
    
    747,000
    
    
    
    112,000
    
    
    
    723,000
    
    
    
    829,000Basic income from continuing
operations per common share*
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.01Diluted income from continuing
operations per common share*
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.01Loss from discontinued operations
    
    
    (2,289,000
    )
    
    
    (2,037,000
    )
    
    
    (1,380,000
    )
    
    
    (1,140,000
    )Basic loss from discontinued
operations per common share*
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.01
    )Diluted loss from discontinued
operations per common share*
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.01
    )Net loss
    
    
    (1,542,000
    )
    
    
    (1,925,000
    )
    
    
    (657,000
    )
    
    
    (311,000
    )Basic net loss per common share*
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.00
    )Diluted net loss per common share*
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.00
    )
 
 *
    
    Net loss per share is calculated independently for each quarter. The sum of Net loss per share
for each quarter does not equal the total Net loss per share for the year due to rounding
differences. 21. Subsequent Events
  F-20