SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
June 1, 2003
---------------------------------------------------
Date of Report (Date of earliest event reported)
ZIM CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Canada 0-31691 None
------------- --------------- -----------------
(State or jurisdiction (Commission File No.) (IRS Employer I.D. No.)
of incorporation or
organization) Incorporation)
20 Colonnade Road
Suite 200
Ottawa, Ontario
Canada, K2E 7M6
(613)727-1397
-------------------------------
(Address and telephone number of
principal executive offices)
with copies to:
Hank Gracin, Esq.
Lehman & Eilen LLP
50 Charles Lindbergh Boulevard
Suite 505
Tel: (516) 222-0888
Fax: (516) 222-0948
EXPLANATORY NOTE
This Amendment No. 2 to the Current Report on Form 8-K for June 1, 2003, as
amended on June 30, 2003 (the "Report") of ZIM Corporation, a corporation
governed by the Canada Business Corporations Act (the "Registrant"), is being
filed in order to provide the financial statements of ZIM Technologies
International, Inc., a corporation governed by the Canada Business Corporations
Act. ZIM Technologies International, Inc. is the sole operating subsidiary of
the Registrant and as such represents the business acquired in the transactions
recorded in the Report of June 1, 2003. No pro forma financial information is
presented under Item 7(b) of this Form 8-K because the pro forma financial
information would not be materially different than the historical information
set forth in Item 7(a), and as such is not required pursuant to Article 11 of
Regulation S-X. The reincorporation merger and amalgamation constituted a
recapitalization of ZIM Corporation and resulted in an immaterial adjustment to
ZIM Corporation's shareholders' equity.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- -------
(a) Financial Statements of Business Acquired
Set forth below are the audited historical consolidated balance sheet
of ZIM Technologies International, Inc., the operating subsidiary of ZIM
Corporation, as at May 31, 2003 and the consolidated statements of earnings,
shareholders' (deficiency) and cash flows for the year then ended.
AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
ZIM TECHNOLOGIES INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2003
Raymond Chabot Grant Thornton General
Partnership Auditors' Report 2
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Difference 3
KPMG LLP. Auditors' Report 4
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Difference 5
Financial Statements
Consolidated Earnings
Consolidated Shareholders' Equity (Deficiency)
Consolidated Cash Flows
Consolidated Balance Sheets
Notes to Consolidated Financial Statements
AUDITORS' REPORT
To the Board of Directors and Shareholders of
ZIM Technologies International Inc.
We have audited the consolidated balance sheet of ZIM Technologies International
Inc. as at May 31, 2003 and the consolidated statements of earnings,
shareholders' equity (deficiency) and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada and the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at May 31, 2003
and the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
3
The consolidated financial statements as at May 31, 2002 and for each of the
years in the two-year period ended May 31, 2002 were audited by other auditors
who expressed an opinion without reservation on those statements in their report
dated October 8, 2002.
Chartered Accountants
/s/ Raymond Chabot Grant Thornton General Partnership
Ottawa, Canada
July 25, 2003
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA-U.S. REPORTING DIFFERENCE
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast substantial
doubt on the Corporation's ability to continue as a going concern, such as those
described in Note 2 to the financial statements. Our report to the Board of
Directors and the Shareholders dated July 25, 2003 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such events
and conditions in the auditors' report when these are adequately disclosed in
the financial statements.
Chartered Accountants
/s/ Raymond Chabot Grant Thornton General Partnership
Ottawa, Canada
July 25, 2003
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of ZIM Technologies
International Inc. as at May 31, 2002 and 2001 and the consolidated statements
of operations, shareholders' equity (deficiency) and cash flows for each of the
years in the two-year period ended May 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada and the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2002 and
2001 and the results of its operations and its cash flows for each of the years
in the two-year period ended May 31, 2002 in accordance with Canadian generally
accepted accounting principles.
Chartered Accountants
/s/ KPMG LLP
Ottawa, Canada
October 8, 2002
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast substantial
doubt on the Company's ability to continue as a going concern, such as those
described in Note 2 to the financial statements. Our report to the directors
dated October 8, 2002 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditor's report when these are adequately disclosed in the financial
statements.
Chartered Accountants
/s/ KPMG LLP
Ottawa, Canada
October 8, 2002
4
ZIM TECHNOLOGIES INTERNATIONAL INC.
CONSOLIDATED EARNINGS
Years ended May 31, 2003, 2002 and 2001
(Expressed in Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
REVENUES
Software 1,212,502 1,534,310 999,429
Maintenance 1,242,428 1,462,213 508,693
Consulting 94,674 209,541 63,970
----------------- ----------------- -----------------
2,549,604 3,206,064 1,572,092
----------------- ----------------- -----------------
Expenses
Selling, general and administrative 3,698,902 5,461,484 5,239,915
Research and development, net of investment tax credits
(Note 13) 591,357 3,684,878 653,229
Amortization of property and equipment 291,239 265,191 198,552
Amortization of customer list 30,550 32,750
Interest 99,627 33,996 61,741
Foreign exchange loss (gain) 59,348 (18,812) (26,891)
Other (1,544) (2,305) (100,797)
----------------- ----------------- -----------------
4,769,479 9,457,182 6,025,749
----------------- ----------------- -----------------
Net loss before income taxes (2,219,875) (6,251,118) (4,453,657)
Income taxes (Note 13) 6,324 85,666
----------------- ----------------- -----------------
Net loss (2,226,199) (6,336,784) (4,453,657)
================= ================= =================
Loss per share - basic and fully diluted (Note 14) (0.07) (0.19) (0.31)
================= ================= =================
Weighted average number of shares outstanding 33,186,158 33,205,025 14,497,588
================= ================= =================
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
ZIM TECHNOLOGIES INTERNATIONAL INC.
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
Years ended May 31, 2003, 2002 and 2001
(Expressed in Canadian dollars)
- ------------------------------------------------------------------------------------------------------------------------------
Share Foreign Total
Share subscriptions Contributed currency shareholders'
capital received surplus translation equity
(Note 11) (Note 11) (Note 11) adjustment Deficit (deficiency)
----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $
Balance at May 31, 2000 1,296,572 (2,551,956) (1,255,384)
Shares issued 3,334,448 3,334,448
Shares subscriptions received 4,010,500 4,010,500
Shares redeemed (850) (150) (1,000)
Stock options issued to non-employees 1,339,833 1,339,833
Net loss for the year (4,453,657) (4,453,657)
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 2001 4,630,170 4,010,500 1,339,833 - (7,005,763) 2,974,740
Shares issued 7,111,550 (4,010,500) 3,101,050
Stock options issued to non-employees 163,324 163,324
Currency translations 6,490 6,490
Net loss for the year (6,336,784) (6,336,784)
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 2002 11,741,720 - 1,503,157 6,490 (13,342,547) (91,180)
Shares issued 8,333 8,333
Modification of outstanding stock options 41,395 41,395
Options issued for contingent consideration 182,301 182,301
Currency translations (15,870) (15,870)
Net loss for the year (2,226,199) (2,226,199)
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 2003 11,750,053 - 1,726,853 (9,380) (15,568,746) (2,101,220)
=========== =========== =========== =========== =========== ===========
==============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
ZIM TECHNOLOGIES INTERNATIONAL INC.
CONSOLIDATED CASH FLOWS
Years ended May 31, 2003, 2002 and 2001
(Expressed in Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
OPERATING ACTIVITIES
Net loss (2,226,199) (6,336,784) (4,453,657)
Items not involving cash:
Provision for losses on accounts receivable (89,817) (154,361)
Amortization of property and equipment 291,239 265,191 198,552
Amortization of customer list 30,550 32,750
Compensation expense (Note 11) 41,395 163,324 1,339,833
Common shares issued for acquired technology 2,000,000
Gain on disposal of ZIM Technologies (B'Dos) Ltd. (2,017)
Loss on disposal of property and equipment 13,598
Common shares issued for future royalty stream (Note 11) 186,000
Common shares issued for services 53,000
Changes in operating working capital (Note 15) 204,418 (690,193) 14,728
----------------- ----------------- -----------------
Cash flows from operating activities (1,658,597) (4,643,948) (2,815,905)
----------------- ----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (45,697) (473,960) (158,859)
Proceeds from disposal of property and equipment 4,470
Acquisition of ZTI do Brasil Ltda., net of cash (88,708)
Disposal of ZIM Technologies (B'Dos) Ltd. (3,386)
----------------- ----------------- -----------------
Cash flows from investing activities (41,227) (566,054) (158,859)
----------------- ----------------- -----------------
FINANCING ACTIVITIES
Repayment of bank loans (63,332) (183,334)
Repayment of capital lease obligations (51,919) (46,806) (40,351)
Net proceeds from (repayment of) due to related parties 1,800,000 1,400,000 (36,931)
Issue of common shares 8,333 1,050 2,635,825
Issue of special shares 1,100,000
Share subscriptions received 4,010,500
Redemption of common shares (1,000)
----------------- ----------------- -----------------
Cash flows from financing activities 1,756,414 2,390,912 6,384,709
----------------- ----------------- -----------------
Effect of changes in exchange rates on cash
and cash equivalents (5,294) 6,490 -
----------------- ----------------- -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51,296 (2,812,600) 3,409,945
Cash and cash equivalents, beginning of year 716,468 3,529,068 119,123
----------------- ----------------- -----------------
Cash and cash equivalents, end of year 767,764 716,468 3,529,068
================= ================= =================
Supplemental cash flow disclosure
Interest paid 9,533 26,050 41,742
================= ================= =================
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
7
ZIM TECHNOLOGIES INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002
----------------- -----------------
$ $
ASSETS
Current assets
Cash and cash equivalents 767,764 716,468
Accounts receivable (Note 6) 386,288 271,053
Investment tax credits receivable 189,447 409,104
Prepaid expenses 31,690 48,398
----------------- -----------------
1,375,189 1,445,023
Property and equipment (Note 7) 383,954 644,544
Customer list (Note 8) 31,300 61,850
Goodwill (Note 5) 641,430 459,127
----------------- -----------------
2,431,873 2,610,544
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable 146,625 175,991
Accrued liabilities 753,626 550,957
Deferred revenue 415,467 505,482
Current portion of capital lease obligations (Note 9) 17,375 51,919
Due to related parties (Note 10) 3,200,000 1,400,000
----------------- -----------------
4,533,093 2,684,349
Capital lease obligations (Note 9) 17,375
Shareholders' deficiency (2,101,220) (91,180)
----------------- -----------------
2,431,873 2,610,544
================= =================
Future operations (Note 2)
Commitments and contingencies (Note 17)
Subsequent events (Note 19)
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
On behalf of the Board,
- --------------------------------- -----------------------------------
Director Director
8
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
1 - GOVERNING STATUTES AND NATURE OF OPERATIONS
ZIM Technologies International Inc. (the Corporation) was incorporated under the
Canada Business Corporations Act on November 13, 1997 to provide
enterprise-class software and tools for designing, developing and manipulating
database systems and applications. The Corporation has built upon its core
database technology to create an innovative solution to provide wireless data
services and systems that enable people to engage in remote or mobile
decision-making based on real-time interactive data communications and
transactions.
- --------------------------------------------------------------------------------
2 - BASIS OF PRESENTATION
These financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assumes that the Corporation will
realize the carrying value of its assets and satisfy its obligations as they
become due in the normal course of operations. As at May 31, 2003, the
Corporation has negative working capital of $3,157,904, has incurred a loss of
$2,226,199 for the year then ended and has had losses during the last five
years. In addition, the Corporation generated negative cash flows from
operations of $1,658,597 for the year ended May 31, 2003 and has generated
negative cash flows from operations during the last five years. The Corporation
has accumulated losses of $15,568,746 as at May 31, 2003 and a deficiency in
shareholders' equity of $2,101,220.
The Corporation's management team has focused the direction of the Corporation
from a mature database and application development technology player to a
provider of interactive mobile messaging for enterprise database systems. To
establish the interactive mobile messaging, the Corporation needs substantial
funds for marketing and subsequent development.
All of the factors above raise substantial doubt about the Corporation's ability
to continue as a going concern. Management's plans to address these issues
include continuing to raise capital through the placement of equity, obtaining
additional advances from related parties and, if necessary, renegotiating the
repayment terms of accounts payable and accrued liabilities. The Corporation's
ability to continue as a going concern is subject to management's ability to
successfully implement the above plans. Failure to implement these plans could
have a material adverse effect on the Corporation's position and/or results of
operations and may necessitate a reduction in operating activities. The
financial statements do not include adjustments that may be
required if the assets are not realized and the liabilities settled in the
normal course of operations.
In the longer term, the Corporation has to generate the level of sales which
would result in cash self sufficiency and it may need to continue to raise
capital by selling additional equity or by obtaining credit facilities. The
Corporation's future capital requirements will depend on many factors,
including, but not limited to, the market acceptance of its software, the level
of its promotional activities and advertising required to support its software.
No assurance can be given that any such additional funding will be available or
that, if available, it can be obtained on terms favorable to the Corporation.
9
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
3 - CHANGES IN ACCOUNTING POLICIES
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective June 1, 2002, the Corporation adopted prospectively the
recommendations of the Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3870, "Stock-based Compensation and Other Stock-based
payments." This section defines recognition, measurement and disclosure
standards for stock-based payments to non-employees and employees. Under these
new standards, all stock-based payments must be systematically accounted for in
the enterprise's financial statements. The adoption of the new recommendations
resulted in a $41,395 charge to the Corporation's net loss for the year with
regards to stock-based payments to non-employees.
These standards define a fair value-based method of accounting for its
stock-based employee compensation plans. Under this method, compensation cost
should be measured at the grant date based on the fair value of the award and
should be recognized over the related service period. An entity that does not
adopt the fair value method of accounting for its awards granted to employees is
required to include in its financial statements pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied. The Corporation has adopted the latter alternative treatment. The
supplementary information required for its employees by this new section is
presented in Note 12 - Stock options.
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
In September 2001, the CICA issued Handbook Sections 1581 "Business
Combinations" and 3062 "Goodwill and Other Intangible Assets." The new standards
mandate the purchase method of accounting for business combinations and require
that goodwill and intangible assets determined to have an indefinite useful life
are no longer amortized and are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that they might be
impaired.
The Corporation has adopted Section 3062 effective June 1, 2002. As of the date
of adoption, the Corporation had unamortized goodwill of $459,127 which is no
longer being amortized. The Corporation determined as at the date of adoption
that it has two reporting units - ZIM Technologies International Inc. and Zim
Technologies do Brasil Ltda. The Corporation allocated assets (including
goodwill) and liabilities to Zim Technologies do Brasil Ltda., and conducted the
first step of the transitional goodwill impairment test as of the date of
adoption. Based on this test, the Corporation compared the fair value of the
reporting unit with its carrying amount, including goodwill, and determined that
there was no potential impairment in goodwill since the fair value of the
reporting unit exceeds its carrying amount. The fair value of the reporting unit
was determined by estimating the present value of future cash flows.
- --------------------------------------------------------------------------------
4 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Corporation
and its subsidiaries, all of which are wholly owned. The results of operations
for acquisitions are included in these consolidated financial statements from
the date of acquisition. Intercompany transactions and balances are eliminated
upon consolidation.
10
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements and
notes to financial statements. These estimates are based on management's best
knowledge of current events and actions that the Corporation may undertake in
the future. Actual results may differ from those estimates.
REVENUE RECOGNITION
Substantially, all of the Corporation's revenues are derived from the perpetual
license of the Corporation's software products and the sale of related
maintenance and consulting. The Corporation's standard license agreement
provides a license to use the Corporation's products based on the number of
licensed users. The Corporation may license its software in multiple element
arrangements if the customer purchases any combination of maintenance,
consulting or training services in conjunction with the license.
The Corporation recognizes revenue pursuant to the requirements of the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP
97-2) "Software Revenue Recognition", as amended by SOP 98-9 "Software Revenue
Recognition with Respect to Certain Transactions." Revenue is recognized using
the residual method when Corporation-specific objective evidence of fair value
exists for all of the undelivered elements in the arrangement, but does not
exist for one or more delivered elements. The Corporation allocates revenue to
each undelivered element based on its respective fair value determined by the
price charged when that element is sold separately. The Corporation defers
revenue for the undelivered elements and recognizes the residual amount of the
arrangement fee, if any, when the basic criteria in SOP 97-2 have been met.
Under SOP 97-2, revenue is recognized when the following four criteria have been
met:
- - Persuasive evidence of an arrangement exists;
- - Delivery has occurred;
- - The fee is fixed and determinable; and
- - Collectibility is probable.
The Corporation records revenue as earned as evidenced by contracts or invoices
for its services at prices established by contract, price list and/or fee
schedule less applicable discounts. If at the outset of an arrangement the
Corporation determines that the arrangement fee is not fixed or determinable,
revenue is deferred until the arrangement fee becomes due. If at the outset of
an arrangement the Corporation determines that the collectibility is not
probable, revenue is deferred until payment is received.
Collectibility is assessed based on the collection history of the client,
current economic trends, customer concentrations and customer credit worthiness.
Delivery of the software has occurred once the customer has accepted the product
or has been provided with permanent keys to the FTP site. If an arrangement
allows for customer acceptance of the software or services, the Corporation
defers revenue recognition until the earlier of customer acceptance or when the
acceptance right lapses.
11
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance revenues are recognized equally over the term of the maintenance
contract.
Consulting revenue, which represents services provided on a per diem basis to
customers, is recognized as the services are performed as there are no customer
acceptance provisions involved in these types of arrangements.
RESEARCH AND DEVELOPMENT EXPENSES
Costs related to research, design and development of software products are
charged to research and development expense as incurred. Software development
costs are capitalized beginning when a product's technological feasibility has
been established, which generally occurs upon completion of a working model, and
ending when a product is available for general release to customers. All
subsequent costs are expensed as incurred. To date, completing a working model
of the Corporation's products and the general release of the products have
substantially coincided. As a result, the Corporation has not capitalized any
software development costs since such costs have not been significant.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs amounted to
$22,167 for the year ended May 31, 2003 ($11,492 as at May 31, 2002; $19,973 as
at May 31, 2001).
INVESTMENT TAX CREDITS
Investment tax credits are accounted for using the cost reduction approach
whereby they are recorded as a reduction of the related expense or the cost of
the assets acquired when there is reasonable assurance that they will be
realized.
GOVERNMENT ASSISTANCE
Government assistance is recorded as a reduction of the related expense or the
cost of the assets acquired. Government assistance is recorded in the accounts
when reasonable assurance exists that the Corporation has complied with the
terms and conditions of the approved grant program.
FOREIGN CURRENCY TRANSLATION
The accounts of the Corporation's self-sustaining foreign operation are
translated into Canadian dollars using the current rate method. Assets and
liabilities are translated at rates of exchange at the balance sheet date, and
revenue and expenses are translated at average exchange rates. Gains and losses
arising from the translation of financial statements of foreign operations are
deferred and included as a separate component of shareholders' equity
(deficiency).
12
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Monetary assets and liabilities of the Corporation's integrated foreign
operations were translated into Canadian dollars at exchange rates in effect as
at the balance sheet date. Non-monetary assets and liabilities were translated
at historic exchange rates, and revenues and expenses were translated at average
exchange rates prevailing during the period. Exchange gains and losses are
reflected in the consolidated statement of earnings.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Future tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. When necessary, a valuation allowance is
recorded to reduce tax assets to an amount for which realization is more likely
than not. The effect of changes in tax rates is recognized in the period in
which the rate change occurs.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the reporting period. Diluted earnings per share is calculated giving
effect to the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted to such shares at
the later of the beginning of the period or the issuance date. The
"if-converted" method is used to determine the dilutive effect of common shares.
The treasury stock method is used to determine the dilutive effect of warrants.
The treasury stock method assumes that proceeds received from the exercise of
in-the-money share purchase warrants are used to repurchase common shares at the
average market price during the period.
STOCK OPTION PLAN
The Corporation has a stock option plan, which is described in Note 12. No
compensation expense is recognized for this plan when stock options are issued
to directors and employees of the Corporation. Any consideration paid by the
eligible participants on exercise of stock options is credited to share capital.
If stock options are repurchased from eligible participants, the excess of the
consideration paid over the carrying amount of the stock option cancelled is
charged to shareholders' deficiency. Since the Corporation does not account for
options granted to participants using the fair value method, it discloses pro
forma information related to net income and earnings per share figures, which
are calculated as if the entity applied the fair value method of accounting to
stock options granted to participants.
CASH EQUIVALENTS
The Corporation considers cash equivalents to be highly liquid investments with
original maturities of three months or less.
13
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION
Property and equipment are recorded at cost. Property under capital leases is
initially recorded at the present value of minimum lease payments at the
inception of the lease. Amortization is provided over the estimated useful lives
of the underlying assets on a straight-line basis using the following annual
rates:
Computer equipment 3 to 5 years
Software 2 to 5 years
Office furniture and equipment 5 to 10 years
Voice communications equipment 1 year
Automobiles 5 years
Leasehold improvements 5 years
LEASES
Leases are classified as either capital or operating in nature. Capital leases
are those which substantially transfer the benefits and risks of ownership to
the Corporation. Assets acquired under capital leases are amortized at the same
rates as those described for property and equipment. Obligations recorded under
capital leases are reduced by the principal portion of lease payments. The
imputed interest portion of lease payments is charged to expense.
CUSTOMER LIST
Customer list represents the fair value of expected future maintenance contracts
that will be earned from software licenses in place at Zim Technologies do
Brasil Ltda. as at August 1, 2001. The customer list is being amortized based on
the estimated rate of customer attrition which has been assumed to be 40% in the
first year, 50% of the then residual in the second and third years, and 100% of
the remaining balance in the fourth year.
- --------------------------------------------------------------------------------
5 - ACQUISITION AND DISPOSITION
ACQUISITION OF ZTI DO BRASIL LTDA.
Effective August 1, 2001, the Corporation acquired 100% of the issued and
outstanding common shares of its South American distributor, ZTI do Brasil Ltda.
Upon acquisition, ZTI do Brasil Ltda.'s name was changed to Zim Technologies do
Brasil Ltda. This acquisition provided the Corporation with the opportunity to
share in 100% of Zim Technologies do Brasil Ltda.'s profits and losses. The
transaction has been accounted for using the purchase method, whereby the cost
of acquisition is allocated to the identifiable assets acquired and liabilities
assumed using estimates of their fair value. The goodwill recorded for Zim
Technologies do Brasil Ltda. is not tax deductible.
14
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
5 - ACQUISITION AND DISPOSITION (CONTINUED)
The total cost of the acquisition, after the adjustment described under
"Contingent consideration" below, was allocated to the assets acquired and
liabilities assumed as follows:
$
-----------------
Assets acquired
Cash 198,496
Other current assets 127,127
Property and equipment 54,490
Customer list 94,600
Goodwill 641,430
-----------------
1,116,143
Liabilities assumed
Current liabilities 646,638
-----------------
469,505
=================
Consideration given
Cash 287,204
Stock options - contributed surplus (Note 11) 182,301
-----------------
469,505
=================
In accordance with the Corporation's accounting policy, goodwill that arose in
acquisitions subsequent to June 30, 2001 has not been amortized. All of the
Corporation's goodwill arose on the acquisition of ZTI do Brasil Ltda. which
occurred on August 1, 2001 and the settlement of the related contingent
consideration. As a result, there is no impact on the Corporation's net loss or
loss per share in prior periods as a result of ceasing to amortize goodwill.
Contingent consideration
At May 31, 2002, cash consideration in the amount of $200,000 was payable to the
previous shareholders of Zim Technologies do Brasil Ltda. in the event the
Corporation was not a reporting issuer in Ontario with its common shares listed
on any North American stock exchange on or before December 31, 2002. During
December 2002, the Corporation entered into an agreement to settle the
contingency through the issuance of 300,000 stock options as well as employment
contracts for two years for one shareholder and one year for the other. The
options were granted December 23, 2002, subject to approval by the Board of
Directors, with an exercise price of $1.10, a contractual life of three years
and immediate vesting. On June 10, 2003, the Board of Directors approved the
grant of options. Goodwill has been increased by $182,301 to reflect the
settlement of the contingency through the granting of employment contracts and
the issuance of options.
Supplemental pro forma information
Had the acquisition of Zim Technologies do Brasil Ltda. occurred on June 1,
2001, the pro forma combined revenue and net loss of the Corporation at May 31,
2002 would have been $13,159,843 and $6,632,862, respectively.
15
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
5 - ACQUISITION AND DISPOSITION (CONTINUED)
Had the acquisition of Zim Technologies do Brasil Ltda. occurred on June 1,
2000, the pro forma combined revenue and net loss of the Corporation at May 31,
2001 would have been $3,246,468 and $3,991,842, respectively.
DISPOSAL OF ZIM TECHNOLOGIES (B'DOS) LTD.
In June 2001, the Corporation disposed of its 100% interest in ZIM Technologies
(B'Dos) Ltd.
The total cost of the disposal has been allocated to the assets disposed of and
liabilities transferred as follows:
$
-----------------
Assets disposed of
Cash 3,387
Other current assets 13,425
Property and equipment 26,012
-----------------
42,824
Liabilities transferred
Current liabilities 44,840
-----------------
(2,016)
Consideration received - cash 1
-----------------
Gain of disposal (2,017)
=================
- -------------------------------------------------------------------------------
6 - ACCOUNTS RECEIVABLE
2003 2002
----------------- -----------------
$ $
Trade accounts receivable 395,103 345,884
Allowance for doubtful accounts (48,407) (92,911)
Other (Note 10) 39,592 18,080
----------------- -----------------
386,288 271,053
================= =================
16
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- ------------------------------------------------------------------------------------------------------------------
7 - PROPERTY AND EQUIPMENT
2003
-------------------------------------------------------
Accumulated
Cost amortization Net
----------------- ----------------- -----------------
$ $ $
Computer equipment 845,046 633,276 211,770
Software 60,827 44,693 16,134
Office furniture and equipment 165,535 94,237 71,298
Voice communications equipment 26,960 22,911 4,049
Automobiles 9,592 3,704 5,888
Leasehold improvements 145,746 118,660 27,086
Office furniture and equipment under capital leases 187,111 139,382 47,729
----------------- ----------------- -----------------
1,440,817 1,056,863 383,954
================= ================= =================
2002
-------------------------------------------------------
Accumulated
Cost amortization Net
----------------- ----------------- -----------------
$ $ $
Computer equipment 817,356 476,641 340,715
Software 58,225 17,206 41,019
Office furniture and equipment 171,158 68,772 102,386
Voice communications equipment 21,329 6,867 14,462
Automobiles 12,630 2,217 10,413
Leasehold improvements 146,457 96,282 50,175
Office furniture and equipment under capital leases 187,111 101,737 85,374
----------------- ----------------- -----------------
1,414,266 769,722 644,544
================= ================= =================
- ------------------------------------------------------------------------------------------------------------------
8 - CUSTOMER LIST
2003 2002
----------------- -----------------
$ $
Customer list 94,600 94,600
Accumulated amortization (63,300) (32,750)
----------------- -----------------
----------------- -----------------
Net 31,300 61,850
================= =================
Aggregate amortization expense for each of the next three years is estimated to
be $16,300 for 2004, $12,883 for 2005 and $2,117 for 2006.
17
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- ------------------------------------------------------------------------------------------------------------
9 - CAPITAL LEASE OBLIGATIONS
2003 2002
----------------- -----------------
$ $
Year ended May 31,
2003 59,135
2004 17,968 17,968
----------------- -----------------
17,968 77,103
Less amount representing interest (with interest rates varying between
13% and 17%) 593 7,809
----------------- -----------------
Present value of net minimum lease payments 17,375 69,294
Current portion of obligations under capital leases 17,375 51,919
----------------- -----------------
- 17,375
================= =================
- --------------------------------------------------------------------------------
10 - RELATED PARTY TRANSACTIONS
DUE FROM RELATED PARTIES
Included in other accounts receivable at May 31, 2003 is $24,908 ($7,306 in
2002) due from an officer, director and significant shareholder of the
Corporation.
DUE TO RELATED PARTIES
The amounts due to related parties represent cash advances from an officer of
the Corporation who is a significant shareholder and a holding Corporation that
is owned by the spouse of the significant shareholder. The amounts bear interest
at 5% per annum and are due on demand. An amount of $111,852 ($7,945 in 2002),
which represents the interest on the amounts due to related parties, has been
included in accrued liabilities.
TRANSACTIONS WITH RELATED PARTIES
During the year ended May 31, 2001, lease payments of $100,600 were incurred
under the terms of a lease with a shareholder.
During the year ended May 31, 2001, the Corporation issued 1,550,000 common
shares to a related party to cancel a software development contract which would
have required the Corporation to make future software royalty payments. The
common shares were valued at $186,000 which represents the fair value of the
shares.
On June 1, 2001, the Corporation acquired certain technology from two employees
in exchange for 2,000,000 common shares. The common shares were valued at
$2,000,000 which represents the fair value of the shares.
18
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
11 - SHARE CAPITAL
AUTHORIZED
Unlimited number of shares without par value
Preferred shares, bearing a non-cumulative dividend at a rate to be
determined by the Board of Directors, redeemable for $1 per share
Special shares, non-voting, participating, convertible into common shares
on a one-for-one basis at any time at the option of the holder and
automatically on the earlier of: (i) the fifth day following the date of
issuance of a receipt for a final prospectus qualifying the common shares
issuable upon conversion of the special shares; (ii) June 1, 2004
Common shares
Number
of shares Amount
----------------- -----------------
ISSUED AND OUTSTANDING $
Special shares
Balance, June 1, 2001
Issued for cash 5,010,500 5,110,500
Converted from common shares 153,000 153,000
----------------- -----------------
Balance, May 31, 2002 and May 31, 2003 5,163,500 5,263,500
----------------- -----------------
Common shares
Balance, May 31, 2000 5,989,524 1,296,572
Issued for cash 19,920,657 2,635,825
Issued for services 405,000 53,000
Issued on conversion of amounts due to related party 3,473,740 459,623
Issued in exchange for future royalty stream 1,550,000 186,000
Redemption of shares (4,000) (850)
----------------- -----------------
Balance, May 31, 2001 31,334,921 4,630,170
Issued for cash 2,000 1,050
Issued in exchange for technology 2,000,000 2,000,000
Converted to special shares (153,000) (153,000)
----------------- -----------------
Balance, May 31, 2002 33,183,921 6,478,220
Options exercised for common shares 8,333 8,333
----------------- -----------------
Balance, May 31, 2003 33,192,254 6,486,553
----------------- -----------------
Total special and common shares 38,355,754 11,750,053
================= =================
2002
During the year ended May 31, 2002, the Corporation issued 4,010,500 special
shares in respect of a cash subscription of $4,010,500 received prior to May 31,
2001.
Included in research and development expenses for the year ended May 31, 2002,
is a non-cash expense of $2,000,000 that represents the fair value of common
shares issued in exchange for acquired technology.
19
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
11 - SHARE CAPITAL (CONTINUED)
2001
Included in selling, general and administrative expenses for the year ended May
31, 2001, is a non-cash expense of $186,000 which represents the fair value of
common shares issued to cancel a contract which would have required the
Corporation to make future software royalty payments.
CONTRIBUTED SURPLUS
2003
During the year ended May 31, 2003, the Corporation issued options for
contingent consideration, and contributed surplus has been increased by $182,301
to reflect this settlement (Note 5).
The fair value is estimated on the day of the modification using the
Black-Scholes option pricing model. For the year ended May 31, 2003, the
weighted average assumptions were:
Dividend yield Nil
Expected volatility 104%
Risk-free interest rate 3.18%
Expected life 2.00 years
During the year ended May 31, 2003, the Corporation modified certain stock
options granted to employees to allow them to retain the original award upon a
change in status from employee to non-employee. As a result, the Corporation
recorded a non-cash compensation expense of $41,395, which represents the fair
value of the stock options at the date of change in status.
Dividend yield Nil
Expected volatility 81%
Risk-free interest rate 3.48%
Expected life 1.58 year
2002 AND 2001
During the year ended May 31, 2002, the Corporation issued stock options to
non-employees, which resulted in a non-cash compensation expense of $163,324
($1,339,833 in 2001) which represents the fair value of the stock options at the
time of the issuance. The compensation expense is included in selling, general
and administrative expenses.
20
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
12 - STOCK OPTIONS
Under the Corporation's Stock Option Plan, the Corporation may grant options to
its officers, directors and employees for up to 10,800,000 common shares. As at
May 31, 2003, 6,578,332 options were outstanding under the Stock Option Plan. In
addition, 8,285,000 options were issued prior to the year ended May 31, 2003
outside of the Corporation's stock option plan. Stock options are granted with
an exercise price equal to the stock's fair market value at the date of grant as
determined by the Board of Directors. Options are granted periodically and both
the maximum term of an option and the vesting period are set at the Board's
discretion.
A summary of the status of the stock options is as follows:
2003 2002
------------------------------------ ------------------------------------
Number Weighted Number Weighted
of options average of options average
outstanding exercise price outstanding exercise price
----------------- ----------------- ----------------- -----------------
$ $
Options outstanding, beginning of year 15,306,665 1 11,806,833 1
Granted(a) 4,153,332 1
Exercised (8,333) 1 (2,000) 1
Forfeited (435,000) 1 (651,500) 1
----------------- ----------------- ----------------- -----------------
Options outstanding, end of year 14,863,332 1 15,306,665 1
================= ================= ================= =================
As at May 31, 2003, there were 14,863,332 options exercisable (15,306,665 as at
May 31, 2002) with a weighted average exercise price of $1.00 ($1.00 as at May
31, 2002).
(a) On June 10, 2003 the Board of Directors approved the grant of 300,000
options related to the settlement of the contingent consideration in
December 2002 (Note 5).
The following table represents a summary of the options outstanding as at May
31, 2003:
Options outstanding Options exercisable
------------------------------------------------------- ------------------------------------
Weighted
average Weighted Weighted
Range of Number expected average Number average
exercise of options contractual exercise of options exercise
price outstanding life price exercisable price
- ---------------- ---------------- ----------------- ----------------- ----------------- -----------------
$ $ $
0.25 125,000 1.37 year 0.25 125,000 0.25
0.45 - 0.60 400,000 1.71 year 0.50 400,000 0.50
0.75 - 1.05 11,996,650 0.94 year 1.00 11,996,650 1.00
1.05 - 1.25 2,341,682 1.52 year 1.01 2,341,682 1.01
---------------- ----------------- ----------------- ----------------- -----------------
14,863,332 1.06 year 1.00 14,863,332 1.00
================ ================= ================= ================= =================
21
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
12 - STOCK OPTIONS (CONTINUED)
STOCK-BASED COMPENSATION EXPENSE
The Corporation does not record any stock-based compensation expense to
employees. No pro forma disclosures of net loss and net loss per share are
required since no options were granted to employees during the year. The
disclosures are only required for compensation cost related to options awarded
after June 1, 2002.
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the use of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can have a material effect on the fair value estimate, in
management's opinion, the existing option-pricing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
- --------------------------------------------------------------------------------
13 - INCOME TAXES
Income tax expense varies from the amount that would be computed by applying the
basic federal and provincial income tax rates to loss before taxes, as follows:
2003 2002 2001
----------------- ----------------- -----------------
% % %
Tax rate 37.79 40.66 42.12
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Expected Canadian income tax recovery (854,533) (2,590,199) (1,875,880)
Decrease resulting from
Change in valuation allowance for originating
temporary differences and loss carry forwards 822,857 1,415,000 816,000
Adjustments to opening future tax asset for changes
in tax laws and rates 276,000
Acquired technology 813,000
Difference between Canadian and foreign tax rates 22,000 192,000 207,000
Non-deductible stock options benefits 16,000 66,000 564,300
Other 189,865 12,580
----------------- ----------------- -----------------
6,324 85,666 -
================= ================= =================
22
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
13 - INCOME TAXES (CONTINUED)
The change in valuation allowance for originating temporary differences and loss
carry forwards is calculated in the reconciliation above using the rate shown in
the table. The rate at which such amounts may be realized as disclosed as part
of the future tax asset and related valuation allowance takes into account the
enacted tax rate decreases over the expected period of realization.
Income tax expense of $6,324 for the year ended May 31, 2003 ($85,666 in 2002;
nil in 2001) relates to income taxes paid by the Corporation's Brazilian
subsidiary.
Future income taxes reflect the impact of temporary differences between amounts
of assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws. The tax effects of temporary differences that gave rise to
significant portions of the future tax asset and future tax liability are as
follows :
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Future tax asset
Loss carry forwards 2,335,000 1,960,000 1,195,000
Property and equipment - differences in net book
value and unamortized capital cost 85,000 76,000 113,000
Scientific research and experimental development -
amounts deductible for tax in excess of amounts
deductible for accounting 955,000 355,000 88,000
Other 229,000 103,000 50,000
----------------- ----------------- -----------------
Total gross future tax assets 3,604,000 2,494,000 1,446,000
Less valuation allowance (3,604,000) (2,494,000) (1,446,000)
----------------- ----------------- -----------------
Net future tax assets - - -
================= ================= =================
The differences in the amounts deductible for tax and accounting purposes relate
primarily to differences in the values of property and equipment on these bases
and undeducted scientific research expenditures.
The Corporation has federal and provincial non-capital losses available to
reduce taxable income in Canada which expire in the following years:
Federal Provincial
----------------- -----------------
$ $
2004 45,000 96,000
2005 1,060,000 1,108,000
2006 430,000 483,000
2007 439,000 439,000
2008 2,837,000 2,724,000
2009 2,070,000 1,908,000
2010 944,000 790,000
----------------- -----------------
7,825,000 7,548,000
================= =================
23
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
13 - INCOME TAXES (CONTINUED)
As at May 31, 2003, the Corporation had accumulated unclaimed federal and
provincial scientific research and experimental development deductions of
approximately $2,053,000 and $2,531,000 respectively ($1,742,000 and $2,200,000
in 2002; $1,113,000 and $1,113,000 in 2001). This amount can be carried forward
indefinitely to reduce income taxes payable in future years.
The Corporation has federal scientific research and experimental development
credits available to reduce income taxes in Canada which expire in the following
years:
$
-----------------
2011 29,000
2012 354,000
-----------------
383,000
=================
For the year ended May 31, 2003, the Corporation recorded an amount of $376,869
($398,938 in 2002; $13,557 in 2001) of investment tax credits. This amount is
recorded in the consolidated statements of earnings against Research and
development expenses.
- --------------------------------------------------------------------------------
14 - LOSS PER SHARE
For the purposes of the loss per share computation, the weighted average number
of common shares outstanding has been used. Had the treasury stock method been
applied to the unexercised share options and the special shares been converted,
the effect on the loss per share would be anti-dilutive.
The following securities could potentially dilute basic earnings per share in
the future but have not been included in diluted earnings per share because
their effect was antidilutive:
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Stock options 14,863,332 15,306,665 11,806,833
Special shares 5,163,500 5,163,500 -
24
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
15 - CHANGES IN OPERATING WORKING CAPITAL
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Accounts receivable (115,235) 234,656 243,704
Investment tax credits receivable 219,657 (395,547) 66,324
Prepaid expenses 16,708 9,023 (19,928)
Accounts payable (29,366) (394,663) (398,137)
Accrued liabilities 202,669 (10,244) 339,327
Deferred revenue (90,015) (133,418) (216,562)
----------------- ----------------- -----------------
204,418 (690,193) 14,728
================= ================= =================
- --------------------------------------------------------------------------------
16 - FINANCIAL INSTRUMENTS
RISK MANAGEMENT ACTIVITIES
The Corporation operates internationally, giving rise to significant exposure to
market risks from changes in foreign exchange rates.
FOREIGN EXCHANGE RISK MANAGEMENT
Accounts receivable at May 31, 2003 include amounts receivable in US dollars of
$121,646 ($100,788 in 2002) and amounts receivable in Brazilian reales of
R$441,806 (R$314,272 in 2002). Accounts payable at May 31, 2003 included $4,934
($741 in 2002) payable in US dollars and R$56,573 (R$108,840 in 2002) payable in
Brazilian reales.
CONCENTRATION OF CREDIT RISK
The Corporation is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments. Credit exposure is
minimized by dealing with only creditworthy counterparties in accordance with
established credit approval policies.
Concentrations of credit risk in accounts receivable are indicated below by the
percentage of the total balance receivable from customers in the specified
geographic area:
2003 2002
----------------- -----------------
% %
Canada 19 8
North and South America, excluding Canada 59 83
Europe 19 6
Other 3 3
25
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
16 - FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE
The carrying values of cash and cash equivalents, accounts receivable,
investment tax credits receivable, accounts payable, accrued liabilities and due
to related parties approximate their fair value due to the relatively short
periods to maturity of the instruments. The fair value of other financial assets
and liabilities included in the consolidated balance sheets is as follows:
2003 2002 2001
------------------------------------ ------------------------------------ ------------------------------------
Carrying Carrying Carrying
amount Fair value amount Fair value amount Fair value
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
$ $ $ $ $ $
Capital
lease
obligations 17,375 17,375 69,294 68,698 116,100 104,326
The following methods and assumptions were used to estimate the fair value of
capital lease obligations: At the present value of contractual future payments,
capital lease obligations were discounted at the current market rates of
interest available to the Corporation for the same or similar debt instruments.
- --------------------------------------------------------------------------------
17 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Corporation has the following lease commitments relating to facilities and
equipment:
$
-----------------
2004 172,800
2005 144,700
2006 149,200
2007 151,300
2008 25,200
-----------------
643,200
=================
For the year ended May 31, 2003, rent expense was $285,182 ($277,223 in 2002;
$288,776 in 2001).
LEGAL PROCEEDINGS
The Corporation is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Corporation's consolidated financial position, results of operations or
liquidity.
26
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
GOVERNMENT ASSISTANCE
During the year ended May 31, 2002, the Corporation received $122,962 from the
Canadian International Development Agency for the purpose of undertaking a
viability study of acquiring Zim Technologies do Brasil Ltda. The amount has
been recorded in the consolidated statement of earnings as a reduction in
selling, general and administrative expenses. The amount is repayable, based on
1% of Zim Technologies do Brasil Ltda.'s revenues from July 23, 2001 to May 31,
2005 to a maximum of $122,962, if revenues realized by Zim Technologies do
Brasil Ltda. exceed $5,000,000 cumulatively.
OTHER
The Corporation is committed to pay US$75,000 (C$102,637) upon the listing of
ZIM Corporation's common shares on a national securities exchange selected by
ZIM Corporation's board of directors.
Zim Technologies do Brasil Ltda. may be subject to the Contribution of
Intervention on Economic Domain tax on values remitted abroad. However, the
Corporation's management intend to contest this assessment if issued.
Consequently, no provision has been accounted for in that respect. If an
assessment is issued and the Corporation is unsuccessful at contesting the
assessment, the resulting settlement would not have a material impact on the
consolidated financial statements of the Corporation.
- --------------------------------------------------------------------------------
18 - SEGMENT REPORTING
Management has determined that the Corporation operates in one reportable
segment, which involves providing enterprise software for designing, developing
and manipulating database systems and applications.
The following table sets forth external revenues attributable to geographic
areas based on the location of the customer:
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Canada 423,901 262,204 384,054
United States 380,966 457,817 210,641
Brazil 1,238,331 1,646,202 620,437
Australia 77,043 192,316 206,187
Denmark 82,129 150,773
Europe 341,855 550,925
Other 8,685 14,471
----------------- ----------------- -----------------
2,470,781 3,206,064 1,572,092
================= ================= =================
27
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
18 - SEGMENT REPORTING (CONTINUED)
The following table sets forth consolidated assets located in different
geographic areas:
2003
-------------------------------------------------------
Canada Brazil Total
----------------- ----------------- -----------------
$ $ $
Property and equipment 357,372 26,582 383,954
Maintenance contracts 31,300 31,300
Goodwill 641,430 641,430
Current assets 1,375,189
-----------------
2,431,873
=================
2002
-------------------------------------------------------
Canada Brazil Total
----------------- ----------------- -----------------
$ $ $
Property and equipment 594,040 50,504 644,544
Maintenance contracts 61,850 61,850
Goodwill 459,127 459,127
Current assets 1,445,023
-----------------
2,610,544
=================
The Corporation is not dependent on one major customer as a revenue source.
- --------------------------------------------------------------------------------
19 - SUBSEQUENT EVENTS
On June 1, 2003, ZIM Corporation, a corporation governed by the Canada Business
Corporations Act, consummated a merger of Private Capital Investors, Inc., a
Florida corporation ("Private Capital"), with and into PCI Merge, Inc. ("PCI
Merge"), a Florida corporation and a wholly-owned subsidiary of ZIM Corporation,
with PCI Merge as the surviving entity. On June 1, 2003, ZIM Corporation also
consummated the amalgamation of ZIM Technologies International Inc. ("ZIM
Technologies") with PCI-ZTI Canada, Inc. ("PCI-ZTI"), a corporation governed by
the Canada Business Corporations Act and a wholly-owned subsidiary of ZIM
Corporation. As a result of the amalgamation, a new entity named ZIM
Technologies International Inc. has been formed. PCI Merge and ZIM Technologies
became wholly-owned subsidiaries of ZIM Corporation.
28
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
19 - SUBSEQUENT EVENTS (CONTINUED)
In these transactions, each outstanding share of common stock of Private Capital
and ZIM Technologies was converted into a share of ZIM Corporation. As a result
of these shares exchanges, the shareholders of ZIM Technologies and Private
Capital now control ZIM Corporation, therefore, this transaction is accounted
for as a reverse take over transaction in ZIM Corporation's consolidated
financial statements. This reverse acquisition is treated as a capital
transaction in substance since this transaction was accomplished through the use
of a non-operating enterprise. No goodwill or intangible assets are recorded
following this transaction. ZIM Corporation succeeded Private Capital's SEC
registration under the SEC Act of 1934 as reporting corporation registration.
This transaction has no financial impact on the Corporation's consolidated
financial statements except for the expenses incurred to undergo these
transactions.
- --------------------------------------------------------------------------------
20 - SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES IN CANADA AND
IN THE UNITED STATES OF AMERICA
The financial statements presented herein have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The significant
differences between Canadian and US GAAP and their effect on the consolidated
financial statements of the Corporation are described below:
CONSOLIDATED STATEMENTS OF EARNINGS
The following table reconciles net loss as reported in the accompanying
consolidated statements of earnings to net loss that would have been reported
had the consolidated financial statements been prepared in accordance with US
GAAP:
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Net loss in accordance with Canadian GAAP (2,226,199) (6,336,784) (4,453,657)
Compensation expense (639,494)
----------------- ----------------- -----------------
Net loss in accordance with US GAAP (2,226,199) (6,976,278) (4,453,657)
Other comprehensive loss :
Foreign currency translation adjustment (15,870) 6,490
----------------- ----------------- -----------------
Comprehensive loss in accordance with US GAAP (2,242,069) (6,969,788) (4,453,657)
================= ================= =================
Loss per share - basic and fully diluted (0.07) (0.21) (0.31)
================= ================= =================
Shareholders' equity (deficiency) in accordance with
Canadian GAAP (2,101,220) (91,180) 2,974,740
Compensation expense(a) (639,494) (639,494)
Additional paid-in capital 639,494 639,494
----------------- ----------------- -----------------
Shareholders' equity (deficiency) in accordance
with US GAAP (2,101,220) (91,180) 2,974,740
================= ================= =================
Shares outstanding 33,186,158 33,205,025
================= =================
29
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
20 - SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES IN CANADA AND
IN THE UNITED STATES OF AMERICA (CONTINUED)
(a) During the year ended May 31, 2002, the Corporation modified certain stock
options granted to employees to allow them to retain the original award
upon a change in status from employee to non-employee. Under US GAAP, if
the original terms of a stock option require forfeiture upon a change of
status from employee to non-employee and the individual retains the award,
then compensation cost measured at the date of change in status is
recognized in full over the remaining vesting period. As a result, under US
GAAP the Corporation recorded a non-cash compensation charge of $639,494 to
be reflected in earnings. No such charge was required to be recorded by the
Corporation under Canadian GAAP at that time.
As of June 1, 2002, the Corporation has adopted the new accounting
recommendations published by the Canadian Institute of Chartered
Accountants relating to stock-based compensation and other stock-based
payments made in exchange for goods and services. As a result, the
modification of certain stock options upon a change in status from employee
to non-employee in the year ended May 31, 2003 was recorded as a non-cash
compensation expense under Canadian GAAP and therefore no further GAAP
difference exists.
OTHER DISCLOSURES REQUIRED UNDER US GAAP
Stock-based compensation
The Corporation measures compensation costs related to stock options granted to
employees using the intrinsic value method as prescribed by APB Opinion 25,
"Accounting for Stock Issued to Employees" as permitted by SFAS No. 123.
However, SFAS No. 123 does require the disclosure of pro forma net loss and net
loss per share information as if the Corporation had accounted for its employee
stock options under the fair value method prescribed by SFAS No. 123.
Accordingly, the fair value of the options issued was determined using the
Black-Scholes option pricing model (excluding a volatility assumption) with the
following assumptions: risk-free interest rate of 3.38% to 5.24% in 2002,
expected dividend yield of 0%, and an expected life of 2 years in 2002. No stock
options were granted during the year. As a result of the adoption of the new
accounting recommendations published by the CICA related to stock-based
compensation and other stock-based payments, there is no further GAAP difference
in the disclosure requirements for the options granted to employees after June
1, 2002.
The weighted average grant date fair values of options issued was $0.08 per
share in 2002. Had the Corporation determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Corporation's net income would have been reduced to the pro forma amounts
indicated below:
2003 2002 2001
----------------- ----------------- ----------------
$ $ $
Net loss, as reported under US GAAP (2,242,069) (6,976,278) (4,453,657)
Net loss, pro forma (2,558,947) (7,293,156) (5,731,440)
30
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
20 - SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES IN CANADA AND
IN THE UNITED STATES OF AMERICA (CONTINUED)
Accumulated other comprehensive income (loss)
2003 2002 2001
----------------- ----------------- -----------------
$ $ $
Opening balance of foreign currency translation account 6,490 - -
Foreign currency translation account (15,870) 6,490 -
----------------- ----------------- -----------------
Accumulated other comprehensive income (loss) (9,380) 6,490 -
================= ================= =================
Recent accounting pronouncements
(I) SFAS NO. 145
In April of 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds FASB No. 4 and 64 in relation to reporting
gains and losses from extinguishment of debt. The Statement amends SFAS No. 4
and 64 and requires gains and losses from extinguishment of debt to be
classified as extraordinary items only if they meet the criteria in Opinion 30.
Applying the provisions of Opinion 30 will differentiate between normal
recurring operations of a company and transactions that are unusual or
infrequent in nature. SFAS No. 145 also amends Statement No. 13, to the effect
that sale-leaseback accounting for certain lease modifications should be
accounted for in the same manner as sale-leaseback transactions. The adoption of
this standard has no material impact of the Corporation's financial position.
(II) SFAS NO. 146
In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when incurred at
fair value. The Statement in turn eliminates the definition and requirements of
EITF Issue 94-3. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 may have an
effect on the timing of future restructuring charges taken, if and when they
occur.
(III) SFAS NO. 148
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." The Statement is effective for fiscal years ended after December 15, 2002.
SFAS No. 148 requires new disclosures about the effect of stock-based employee
compensation on reported results. The Statement requires that effects be
disclosed more prominently by specifying the form, content and location of those
disclosures. SFAS No. 148 permits several ways of transitioning to the Fair
Value method of accounting for stock-based compensation, however the Statement
does not require that companies discontinue the intrinsic value method of
accounting for stock-based compensation. The Corporation will continue to use
the intrinsic value method of accounting for stock-based compensation and has
adopted the disclosure requirements of the Statement.
31
ZIM TECHNOLOGIES INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2003 and 2002
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
20 - SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES IN CANADA AND
IN THE UNITED STATES OF AMERICA (CONTINUED)
(IV) FINANCIAL INTERPRETATION NO. 45
In November of 2002, the FASB issued FASB Interpretation No. 45, "Guarantors
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 discusses the
necessary disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees that it has issued. It also
discusses that the guarantor must recognize a liability, at fair value, at the
inception of the guarantee the obligation incurred in issuing the guarantee. The
disclosure requirements are effective for 2002. The reporting requirements are
effective on a prospective basis for guarantees issued after December 31, 2002.
(V) EITF 00-21
In November 2002, the Emerging Issues Task Force issued its final consensus on
Revenue Arrangements with Multiple Deliverables. This guidance is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003 or alternatively, entities may elect to report the change in accounting as
a cumulative-effect adjustment. EITF 00-21 discusses criteria necessary to
determine when an arrangement may be viewed to have separate units of accounting
(and thus revenue) and when an arrangement should be viewed as a single unit of
accounting. The Corporation is currently performing an analysis of how this
might affect revenue recognition for arrangements the Corporation routinely
enters into that have multiple deliverables.
(VI) FINANCIAL INTERPRETATION NO. 46
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The Interpretation is applied to the enterprise
no later than the end of the first annual reporting period beginning after June
15, 2003. The application of this Interpretation is not expected to have a
material effect on the Corporation's financial statements.
(b) Pro Forma Financial Information (Unaudited)
See Explanatory Note above.
(c) Exhibits
Exhibit No. Description
----------- -----------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
ZIM CORPORATION
(Registrant)
Date: August ___, 2003 By: /S/ JENNIFER NORTH
------------------------------
Jennifer North,
Chief Financial Officer