UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT 0F 1934
FOR THE PERIOD ENDED: FEBRUARY 29, 2004
OR
|_| 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 0-30432
------------------
ZIM CORPORATION
(Exact name of small business issuer as specified in its charter)
CANADA N/A
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20 COLONNADE ROAD, SUITE 200, OTTAWA, ONTARIO, K2E 7M6
CANADA (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, including Area Code: (613) 727-1397
----------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
The Issuer's former fiscal year end was May, 31.
------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes|X| No|_|
Indicate the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 8, 2004
- --------------------------------------------------------------------------------
Common shares 55,181,026
- --------------------------------------------------------------------------------
Transitional Small Business Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended February 29, 2004 and February 28, 2003...........2
Consolidated Statement of Shareholders' Deficit (Unaudited) for the
Nine Months Ended February 29, 2004...........................................3
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended February 29, 2004 and February 28, 2003.....................4
Consolidated Balance Sheets as at February 29, 2004 (Unaudited)
and May 31, 2003..............................................................5
Notes to Consolidated Financial Statements (Unaudited)........................6
Item 2. Management's Discussion or Plan of Operation........................15
Item 3. Controls and Procedures.............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................27
Item 2. Changes in Securities...............................................27
Item 3. Defaults upon Senior Securities.....................................28
Item 4. Submission of Matters to a Vote of Security Holders.................28
Item 5. Other Information...................................................28
Item 6. Exhibits and Reports on Form 8-K....................................28
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ZIM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three and nine months ended February 29
(Expressed in US dollars)
(Unaudited) (Unaudited)
Three Three (Unaudited) (Unaudited)
months months Nine months Nine months
ended ended ended ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------------ ----------------- ----------------- ------------------
$ $ $ $
REVENUES
762,905 361,199 1,591,823 1,161,263
------------------ ----------------- ----------------- ------------------
EXPENSES
Selling, general and administrative 1,027,783 610,748 2,349,055 1,750,231
Research and development 201,140 153,114 513,523 436,698
Amortization of property and equipment 35,962 45,214 101,594 143,262
Amortization of intangibles 30,510 4,684 36,529 15,035
Foreign exchange loss (gain) (9,370) 25,364 4,853 20,646
------------------ ----------------- ----------------- ------------------
1,286,025 839,124 3,005,554 2,365,872
------------------ ----------------- ----------------- ------------------
Net loss from operations (523,120) (477,925) (1,413,731) (1,204,610)
Interest 1,992 19,156 2,806 40,291
Other income (495) (1,001)
------------------ ----------------- ----------------- ------------------
Net loss before income taxes (525,112) (496,586) (1,416,537) (1,243,900)
Income taxes (221,561) (48,038) (199,990) (186,763)
------------------ ----------------- ----------------- ------------------
Net loss (303,551) (448,548) (1,216,547) (1,057,137)
================== ================= ================= ==================
Loss per share - basic and diluted (Note 9) (0.01) (0.01) (0.03) (0.03)
================== ================= ================= ==================
Weighted average number of shares outstanding 47,073,209 33,183,921 42,412,978 33,183,921
================== ================= ================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
2
ZIM CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended February 29, 2004
(Expressed in US dollars)
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Accumulated
Share capital other Total
Issued and Share Contributed comprehensive Shareholders'
outstanding Capital surplus Deficit loss Equity
-----------------------------------------------------------------------------------------------------
$ $ $ $ $
BALANCE AS AT MAY 31, 2003 1 1 1,261,811 (11,376,084) (6,854) (10,121,126)
Effect of reverse take-over
transaction 40,090,208 8,637,992 (162,905) 8,475,087
Shares issued through the
exercise of options 719,300 347,258 347,258
Shares issued upon conversion
of debt (Note 7 and 10) 9,211,511 3,960,950 3,960,950
Shares issued in private
placement (Note 10) 1,151,006 863,255 863,255
Shares issued upon acquisition
(Note 6 and 10) 4,000,000 3,280,000 3,280,000
Comprehensive loss
Loss for the period (1,216,547)
Cumulative translation
adjustment (162,922)
Total comprehensive
loss (1,379,468)
-----------------------------------------------------------------------------------------------------
BALANCE AS AT
FEBRUARY 29, 2004 55,172,026 17,089,456 1,261,811 (12,755,536) (169,776) 5,425,956
======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
ZIM CORPORATION
Nine months ended February 29
(Expressed in US dollars)
(Unaudited) (Unaudited)
Nine months Nine months
ended ended
February 29, February 28,
2004 2003
------------------- -------------------
$ $
OPERATING ACTIVITIES
Net loss (1,216,547) (1,057,137)
Items not involving cash:
Amortization of property and equipment 101,594 143,262
Amortization of customer list 36,529 15,035
Stock based compensation expense 13,957
Loss on property and equipment 326
Changes in operating working capital (431,990) 44,765
------------------- -------------------
Cash flows used in operating activities (1,510,414) (839,792)
------------------- -------------------
INVESTING ACTIVITIES
Purchase of property and equipment (79,646) (19,576)
Business acquisitions (320,028)
Proceeds from disposal of property and equipment 2,037
------------------- -------------------
Cash flows used in investing activities (399,674) (17,539)
------------------- -------------------
FINANCING ACTIVITIES
Repayment of capital lease obligations (12,696) (28,637)
Shares issued through the exercise of options 347,258 5,421
Shares and warrants issued through a private placement 863,255
Net proceeds from related parties 1,268,030 835,960
------------------- -------------------
Cash flows from financing activities 2,465,847 812,744
------------------- -------------------
Effect of changes in exchange rates on cash (16,613) 48,850
------------------- -------------------
INCREASE IN CASH AND CASH EQUIVALENTS 539,146 4,263
Cash and cash equivalents, beginning of period 561,026 468,893
------------------- -------------------
Cash and cash equivalents, end of period 1,100,172 473,156
=================== ===================
Supplemental cash flow disclosure
Interest paid 943 4,093
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
4
ZIM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
(Unaudited) (Audited)
February 29 May 31
2004 2003
------------------ -----------------
$ $
ASSETS
Current assets
Cash and cash equivalents 1,100,172 561,026
Accounts receivable, net 1,248,675 282,271
Investment tax credits receivable 235,825 138,434
Prepaid expenses 25,676 23,157
------------------ -----------------
2,610,348 1,004,888
Property and equipment, net 612,295 280,566
Intangible assets, net 1,461,319 22,872
Goodwill 2,353,918 468,710
------------------ -----------------
7,037,880 1,777,036
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 638,174 107,143
Accrued liabilities 560,150 550,695
Deferred revenue 413,599 303,593
Current portion of capital lease obligations 12,696
Due to related parties (Note 7 and Note 10) 2,338,327
------------------ -----------------
1,611,924 3,312,454
Shareholders' equity (deficit) 5,425,956 (1,535,418)
------------------ -----------------
7,037,880 1,777,036
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
5
ZIM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED FEBRUARY 29, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
1 - CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements of ZIM Corporation ("ZIM" or the
"Corporation") and its subsidiaries have been prepared by the Corporation
pursuant to the rules and regulations of the United States Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles of the United States of America ("US GAAP") have
been condensed or omitted pursuant to such rules and regulations. This Form
10-QSB should be read in conjunction with the Form 10-QSB for the first and
second quarter of this year as well as the Form 8-K that includes audited
consolidated financial statements for the years ended May 31, 2003 and 2002, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the three years ended May 31, 2003.
On June 1, 2003, ZIM became a domestic filer with the SEC. As a result, all
comparative figures have been restated to reflect US GAAP. In addition, ZIM
changed its reporting currency to the US dollar. Assets and liabilities of the
current and prior period have been translated into US dollars at period end
exchange rates. Revenues and expenses have been translated at the weighted
average exchange rates for the relevant period. Gains and losses arising from
the translation of the financial statements have been included in a separate
component of shareholders' equity.
On January 7, 2004, ZIM changed its fiscal year end from May 31 to March 31. As
a result, the Corporation will file a Form 10-KSB to cover the transitional
period, ending March 31, 2004. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the 10 month period
ending March 31, 2004.
2 - BASIS OF PRESENTATION
These financial statements have been prepared on a going concern basis 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 February 29, 2004 the Corporation has incurred a loss of $1,216,547 for
the nine months then ended and has incurred losses during each of the last five
years. In addition, the Corporation generated negative cash flows from
operations of $1,510,414) for the nine months ended February 29, 2004 and has
generated negative cash flows from operations during each of the last five
years.
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. To establish the interactive mobile
messaging, the Corporation needs substantial funds for marketing and business
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
consolidated 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.
6
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.
3 - REVERSE TAKE OVER
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.
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. This transaction has been 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.
As there were no material transactions for Private Capital, PCI Merge or ZIM
Corporation for the three and nine months ended February 28, 2003, there is no
pro forma financial information presented on these interim consolidated
financial statements. Pro forma financial information would not be materially
different than the comparative information presented for the three and nine
months ended February 28, 2003.
7
4 - CHANGES IN ACCOUNTING POLICIES
Effective June 1, 2003, the Corporation changed its method of amortizing
property and equipment from the straight line method to the declining balance
method. The Corporation's management believes this method is preferable because
it provides a better matching of costs with related revenues. The adoption of
the declining balance method did not have a material effect on the financial
statements of the prior periods therefore they have not been restated to apply
the new method retroactively.
5 - SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amount net of an allowance for
doubtful accounts; these accounts do not bear interest. The Corporation
determines its allowance for doubtful accounts by considering a number of
factors, including the age of the receivable, the financial stability of the
customer, discussions that may have occurred with the customer and management's
judgment as to the overall collectibility of the receivable from that customer.
In addition, the Corporation may establish an allowance for all the receivables
for which no specific allowances are deemed necessary. This general allowance
for doubtful accounts is based on a percentage of the total accounts receivable
with different percentages used based on the different age of the receivables.
The percentages used are based on the Corporation's historical experience and
management's current judgment regarding the state of the economy. The
Corporation writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities recorded in functional currencies other than Canadian
dollars are translated into Canadian dollars at the period end rate of exchange.
Revenues and expenses are translated at the weighted average exchange rates for
the period. The resulting translation are charged or credited to other
comprehensive income.
Gains or losses from foreign currency transactions such as those resulting from
the settlement of receivables or payables denominated in foreign currency are
included in the earnings of the current period.
The Corporation's reporting currency is US dollars and all assets and
liabilities are translated into US dollars at the period end rate. Revenues and
expenses are translated at the weighted average exchange rates for the period.
Gains and losses arising from the translation of financial statements are
defined and included in other comprehensive income in shareholders' deficiency.
AMORTIZATION
Property and equipment are recorded at cost. Amortization is calculated using
the following rates and bases:
Computer equipment and software 40% declining balance
Furniture and fixtures 20% declining balance
Office equipment 40% declining balance
Automobile 20% declining balance
Leasehold improvements Straight-line over the lease term
8
The carrying value of property and equipment is assessed when factors indicating
a possible impairment are present. If impairment is determined to exist, the
assets are reported at the lower of carrying value or net recoverable amount.
Any impairment charges would be recorded in earnings.
6 - BUSINESS ACQUISITIONS
Effective February 10, 2004, ZIM acquired all of the issued and outstanding
common stock of EPL Communications Limited and E-Promotions (together referred
to as EPL). EPL is a provider of wireless messaging solutions and is part of
ZIM's international growth strategy. The acquisition has been accounted for
using the purchase method of accounting and accordingly, the purchase price has
been allocated to the identifiable assets acquired and liabilities assumed using
estimates of their fair value. The results of operations are included in the
consolidated financial statements beginning on the acquisition date. The total
purchase price of $3,606,247 included cash of $250,000, acquisition costs of
$76,247 and $3,280,000 in common shares. 4,000,000 common shares were issued, of
which 400,000 will be held in escrow. These shares were valued at $0.82 based on
the market price on February 10, 2004.
The aggregate purchase price for these acquisitions has been allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
at the date of acquisition as follows:
$
------------
Assets acquired:
Cash 6,219
Accounts receivable 501,222
Software and equipment 361,406
Goodwill 1,881,355
Intangibles 1,480,000
------------
4,230,202
Current liabilities assumed 623,955
------------
Total purchase price 3,606,247
------------
9
SUPPLEMENTAL PRO FORMA INFORMATION
Had the acquisition of EPL occurred on June 1, 2003 the pro forma combined
revenue and net loss of the Corporation at February 29, 2004 would have been as
follows:
Three Three Nine Nine
months months months months
ended ended ended ended
February 29, February 29, February 29, February 29,
2004 2004 2004 2004
-----------------------------------------------------------------------------
$ $ $ $
Revenue 1,185,357 1,359,153 2,725,444 2,725,896
=============================================================================
Net loss (363,556) (628,675) (1,356,156) (1,431,658)
=============================================================================
Basic net loss per share (0.007) (0.017) (0.029) (0.039)
=============================================================================
Diluted net loss per share (0.007) (0.017) (0.029) (0.039)
=============================================================================
7 - RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
The amounts due to related parties at May 31, 2003, represented 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 had an interest rate of 5% per annum and were due on demand.
On January 7, 2004, the Board of Directors of ZIM approved the conversion of
$3,960,950 due to related parties, at a market price of $0.43, in return for
9,211,511 common shares of the Corporation.
8 - STOCK OPTIONS AND WARRANTS
Stock option grants are accounted for in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations including Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price or in connection with the modification to outstanding awards
and/or changes in grantee status. No employee stock option compensation expense
is reflected in our results of operations, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
10
Compensation expense related to stock options granted to non-employees is
accounted for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) which requires entities to
recognize an expense based on the fair value of the related awards. We are not
required, and we currently do not intend to transition to use a fair value
method of accounting for stock-based employee compensation. The following table
illustrates the effect on net loss and basic and diluted net loss per share as
if we had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation.
Three Three Nine Nine
months months months months
ended ended ended ended
February 29, February 29, February 29, February 29,
2004 2004 2004 2004
------------ ------------ ------------ ------------
$ $ $ $
Net loss, as reported (303,551) (448,548) (1,216,547) (1,057,137)
Stock-based employee
compensation expense
determined under fair value
based method for all awards, net
of related tax effects (231,978) (505,930)
------------ ------------ ------------ ------------
Pro forma net loss (535,528) (448,548) (1,722,477) (1,057,137)
============ ============ ============ ============
Basic and diluted net loss per
share:
As reported, basic and diluted (0.01) (0.01) (0.03) (0.03)
============ ============ ============ ============
Pro forma, basic and diluted (0.01) (0.01) (0.04) (0.03)
============ ============ ============ ============
Options granted during the three and nine months ended February 29, 2004, were
1,135,005 and 7,260,539, respectively. No options were granted during the three
and nine months ended February 28, 2003. The fair value of stock options and
stock purchased under our employee stock purchase plan (ESOP) at date of grant
was estimated using the Black-Scholes pricing model with an expected life of 18
months, and expected volatility of 80%, a risk free rate of 1.54% and dividend
yield of NIL.
Warrants issued to investors in private placements have been valued using the
fair value of the equity instrument issued, as this was more readily
determinable. As these warrants were issued as a cost associated with raising
capital through the private placements, no entry was recorded to additional
paid-in capital.
11
9 - 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, 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 anti-dilutive:
February 29, 2004 February 28, 2003
----------------------------------------------
Stock options 2,100,000 14,800,000
======================== =====================
10 - STOCKHOLDERS' EQUITY
The Corporation issued 572,300 common shares in the three months ended February
29, 2004 and 719,300 for the nine months ended February 29, 2004. The issuance
of shares was pursuant to the exercise of stock options by employees.
On January 7, 2004, the Board of Directors of ZIM approved the conversion of all
amounts due to related parties, in return for 9,211,511 common shares of the
Corporation.
On January 30, 2004, the Corporation completed a non-brokered private placement
of 1,151,006 units at $0.75 per unit, for total gross proceeds of $863,255. Each
unit consists of one common share and one common share purchase warrant. Each
warrant may be exercised at any time prior to July 30, 2004.
In connection with the acquisition of EPL, the Corporation issued 4,000,000
common shares to the shareholders of EPL.
12
11 - COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are reported
directly in a separate component of stockholders' equity in our Unaudited
Consolidated Balance Sheets. The components of comprehensive loss are as
follows:
Three Three Nine Nine
months months months months
ended ended ended ended
February February February February
29, 2004 28, 2004 29, 2004 29, 2004
$ $ $ $
Net loss, as reported (303,551) (448,548) (1,216,547) (1,057,137)
Foreign currency translation adjustment (160,643) 3,572 (162,922) 5,127
----------- ---------- -------------- ------------
Comprehensive loss (464,193) (444,976) (1,379,468) (1,052,010)
=========== ========== ============== ============
12 - RECENT ACCOUNTING PRONOUNCEMENTS
(I) SFAS NO. 149
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, except for certain hedging relationships designated after June
30, 2003. Since ZIM does not currently transact in such instruments nor
undertake hedging transactions, the adoption of this statement did not have a
material impact on our financial condition or results of operations.
(II) SFAS NO. 150
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. We do not
expect the adoption of this statement to have a material impact on our financial
condition or results of operations.
13
(III) FINANCIAL INTERPRETATION NO. 46
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities", which requires the consolidation of and disclosures about variable
interest entities ("VIEs"). VIEs are entities for which control is achieved
through means other than voting rights. In December 2003, the FASB revised FIN
No. 46 to incorporate all decisions, including those in previously issued FASB
Staff Positions, into one Interpretation. The revised Interpretation supercedes
the original Interpretation. Generally, the requirements were effective
immediately for all VIEs in which an interest was acquired after January 31,
2003. For variable interests in special purpose entities in which an interest
was acquired before February 1, 2003, the requirements are effective at the end
of our fiscal 2004. Requirements for non-special purpose entities acquired
before February 1, 2003, are effective at the end of the first quarter of fiscal
2005. FIN No. 46 has not had, and is not expected to have, a significant impact
on our consolidated financial statements.
14
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
ZIM Corporation and its subsidiaries are collectively referred to as "ZIM" or
the "Corporation". The following includes a discussion of the results of
operations and cash flows for the three and nine months ended February 29, 2004.
Such discussion and comments on the liquidity and capital resources of the
Corporation should be read in conjunction with the information contained in the
unaudited interim consolidated financial statements and related notes of the
Corporation.
This Management's Discussion and Analysis or Plan of Operation contains
forward-looking statements that are based on current expectations, estimates and
projections about the Corporation and the industries in which it operates. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the Corporation. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements. The Corporation undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, other than as required by law.
Potential risks and uncertainties include, without limitation, the uncertainties
inherent in the development of new software products, the Corporation's need for
significant additional funding, the uncertain market acceptance of the
Corporation's products, the uncertainties inherent in managing the integration
of the Corporation's acquired businesses, and rapid developments in technology,
including developments by competitors. We operate in a very competitive and
rapidly changing environment. New risks can arise and it is not possible for
management to predict all such risks, nor can it assess the impact of all such
risks on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
EXECUTIVE SUMMARY
Beginning in 2001, the Corporation expanded its business strategy to include the
design and development of a line of mobile data software products based on SMS
(Short Messaging Service) technology. Commencing in this fiscal period, revenues
from these SMS applications have become a significant contributor to the
Corporation's total revenues. Management expects that revenues from SMS
applications will become the dominant contributor for the up-coming fiscal year,
beginning on April 1, 2004.
The revenue sources from SMS applications are a result of the completion of a
suite of SMS products by ZIM as well as the recently acquired UK-based company,
EPL Communications. For the 19 day period, during this fiscal quarter, that EPL
operated while owned by ZIM, revenues were approximately $198,000. Management
expects to see revenues continue at this level during the fiscal year beginning
on April 1, 2004.
15
In addition to the increased sales of SMS applications, the sales of Zim IDE
Software increased during this quarter primarily as a result of increased
attention to sales opportunities. Management does not expect to see continued
significant growth in this area.
OVERVIEW
Historically ZIM has been known as a developer and provider of the Zim
Integrated Development Environment, or the Zim IDE software. Zim IDE software is
currently used by companies in the design, development, and management of
information databases and mission critical applications. The technology for Zim
IDE software was developed at Bell Northern Research in Ottawa, Ontario in the
1980s and acquired by ZIM in 1996. The software is now licensed to thousands of
customers through direct sales as well as an established network of VARs and
distributors.
Beginning in 2001, the Corporation expanded its business strategy to include the
design and development of a line of mobile data software products. ZIM designs
these mobile data software products to take advantage of the existing wireless
data network infrastructure known as SMS. SMS, or text messaging as it is also
known, enables users to communicate person to person and application to person
through cellular handsets and other SMS-enabled devices. The use of SMS has
already experienced a significant increase throughout Europe and Asia and the
market is now expanding in North America.
On February 10, 2004, ZIM purchased UK-based SMS firms EPL Communications
Limited and E-Promotions (together referred to as EPL) in a combined share and
cash deal worth approximately US$ 3.5 million. The acquisition allows ZIM to
expand into the global SMS market for premium, bulk, location based and
interactive two-way SMS delivery. ZIM completed the transaction as of February
10, 2004.
Founded in 1999, EPL is an SMS provider in the UK with customers such as the BBC
and EMI Music. EPL's partners include four of the world's largest SMS network
operators; Vodafone, Orange, O2, and T-Mobile. The main products of EPL include
Premium SMS delivery with direct mobile telephone bill charges, a Location
Gateway for Location Based Services (LBS) including traffic and weather, a high
performance global inbound SMS solution called Virtual Mobile that involves
two-way SMS interaction of applications and services and a Bulk SMS service for
SMS campaigns that delivers to a network of some 250 mobile operators worldwide.
In addition, we announced the following in the third quarter of 2004:
o StarHub, an info-communications provider based in Singapore, launched
StarHub SMSOffice (Standard Edition), a wireless e-mail tool developed
by ZIM. This mobile office solution will use SMS text messaging to
provide the functionality of advanced wireless handheld devices on any
SMS-enabled mobile phone.
o Radius-ED, a Malaysia-based SMS gateway and solutions provider in the
Asia-Pacific region, signed an agreement for distribution of our
mobile office products featuring two-way SMS text messaging in the
Asia-Pacific region. The products, including ZIM SMS Office and ZIM
SMS Mail, offer wireless e-mail, providing the functionality of
advanced wireless handheld devices on any mobile phone.
16
o Rogers AT&T Wireless, a Canadian telecommunications company, launched
a new mobile chat application developed by ZIM that enables real time
chats between computer users and Rogers AT&T Wireless customers. The
product, labeled Rogers Desktop TXT, brings instant messaging to
wireless phones by enabling users to communicate easily from a
computer with mobile contacts in real time using two-way text
messaging.
o Telcel, a Mexico-based company, selected three of our wireless
products. Telcel is a wholly-owned subsidiary of America Movil. The
products, to be called Telcel SMS Office (Standard and Enterprise) and
Telcel SMS Mail, will offer wireless e-mail to Telcel's customers.
o Beijing Dowstrong Ltd., a Chinese mobile value-added service company,
signed an agreement for distribution of ZIM's mobile office products.
Commitments for customer pilots have already been secured in three
regions of China for the first quarter of fiscal 2005.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 29, 2004
COMPARED TO THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2003
The following discussion includes information from unaudited interim
consolidated statements of earnings for the three and nine months ended February
29, 2004 and February 28, 2003. The information, in management's opinion, has
been prepared on a basis consistent with the audited consolidated financial
statements, with the exception of the method of amortizing property and
equipment from the straight line method to the declining balance method, for the
year ended May 31, 2003, as filed with the Securities Exchange Commission and
includes all adjustments necessary for a fair presentation of information
presented. These operating results are not necessarily indicative of results for
any future period. You should not rely on them to predict our future
performance.
All financial information is prepared in accordance with generally accepted
accounting principles (GAAP) in the United States and is stated in US dollars.
REVENUES
ZIM currently derives a significant portion of its revenue from product sales of
its Zim IDE software as well as, the resulting maintenance and consulting
services relating to the software. Commencing in fiscal 2004, ZIM began to
recognize revenue from its SMS technology. In the third quarter of fiscal 2004
ZIM has included revenues of approximately $198,000 relating to operations in
EPL.
17
COMPARISON OF THE NINE MONTHS ENDED FEBRUARY 29, 2004 TO THE NINE MONTHS
ENDED FEBRUARY 28, 2003
(Unaudited) (Unaudited)
Nine months Nine months
ended ended Change
February 29, February 28,
2004 2003
------------- ------------- -----------
$ $
Software 551,010 514,222 7%
Maintenance 675,976 607,829 11%
Consulting 30,196 39,213 -23%
SMS 334,090
------------- -------------
1,591,272 1,161,263 37%
------------- -------------
Overall increase 430,009
SMS as a percentage of increase 78%
Total revenues for the nine months ended February 29, 2004 were $1,591,272,
representing an increase of 37% from the same period in the prior year. Of this
increase, 78% is attributable to revenues in SMS applications. In addition,
there were slight increases in software sales and maintenance revenue.
Management expects revenues to continue to grow significantly in the SMS market.
Management also expects constant revenue streams from software sales and
maintenance revenue.
Software sales have increased for the nine months ended February 29, 2004, as
compared to the nine months ended February 28, 2003, primarily as a result of
increased attention to sales opportunities for the Zim IDE software. Management
does not expect to see continued significant growth in this area.
As a result of the new software sales, maintenance revenue has also increased.
Management anticipates the maintenance revenue will fluctuate consistently with
software sales.
Consulting revenues have decreased 23% in this fiscal period, relative to the
same period last year. This decrease is a reflection of the customers'
fluctuating need for consulting services. As the customer relationships age,
there is a reduced need for consulting services.
Revenues from SMS applications include sales of ZIM's SMS Gateway and Portal
services, SMS marketing campaigns, SMS Office and SMS Mail. In addition, in the
third quarter of this fiscal year, we have recognized approximately $198,000 in
revenue from EPL since the date of acquisition, February 10, 2004.
18
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 29, 2004 TO THE THREE MONTHS ENDED
FEBRUARY 28, 2003
(Unaudited) (Unaudited)
Nine months Nine months
ended ended Change
February 29, February 28,
2004 2003
------------ ------------- -----------
$ $
Software 307,501 163,999 88%
Maintenance 222,391 192,995 15%
Consulting 4,651 4,205 11%
SMS 227,811
------------- ------------
762,354 361,199 111%
------------- ------------
Overall increase 401,155
SMS as a percentage
of increase 57%
Total revenue for the three months ended February 29, 2004 was $762,354, an
increase of 111% from the same period in the prior year. Of this increase, 57%
relates to SMS revenues which did not exist in the prior year with the balance
being primarily in software sales.
As mentioned in the analysis of the nine month period, management of ZIM made a
commitment to focus on sales opportunities for the Zim IDE software. In the
third quarter of fiscal 2004, we were able to secure two significant contracts
with departments in the Brazilian government. These contracts generated
approximately $164,000 in recognized revenue in the third quarter.
Maintenance revenues increased 15% for the third quarter of 2004, relative to
the third quarter of 2003. This increase is consistent with the second quarter
increase of 17%. The increase is a result of the increase in software sales and
the resulting user base.
Consulting revenues increased slightly in the third quarter of 2004, as compared
to the third quarter of 2003. Although ZIM does offer consulting services, it is
not a focus of the Corporation's current strategy and it is entirely based on
customer demands. Management does not expect to see significant revenues from
consulting.
Revenue from ZIM's SMS applications for the three months ended February 29, 2004
was $227,811 as compared to Nil for the same period in the prior year. This is
also a substantial increase from SMS revenues of $47,109 in the second quarter
of fiscal 2004. As mentioned above, ZIM has included approximately $198,000 in
revenue from EPL activities for the period February 10, the date of acquisition,
to February 29, 2004. Other SMS revenues decreased slightly in the third quarter
of fiscal 2004, relative to the second quarter of 2004. This decrease is a
result of the timing of the contracts for various applications of ZIM's
software.
19
EXPENSES
COMPARISON OF THE NINE MONTHS ENDED FEBRUARY 29, 2004 TO THE NINE MONTHS ENDED
FEBRUARY 28, 2003
(Unaudited) % (Unaudited)
Nine months As a % change Nine months As a %
ended of total from ended of total
February 29, expenses prior Febuary 28, expenses
2004 years 2003
---------------------------------------------------------------------
$ $
EXPENSES
Selling, general and
administrative 2,349,055 78% 34% 1,750,231 73%
Research and development 513,523 17% 18% 436,698 18%
Other 145,782 5% -33% 218,233 9%
-------------- ---------------
3,008,360 25% 2,405,163
============== ===============
INCOME TAXES (199,990) 7% (186,763)
============== ===============
Expenses increased 25% from $2,405,163 to $3,008,360 in the first nine months of
fiscal 2004, as compared to the same period in the prior year. This increase is
similar to the 22% increase recorded after the first six months of fiscal 2004.
This increase is a result of increased expenditures in both research and
development and selling, general and administrative expenditures.
SELLING, GENERAL AND ADMINISTRATIVE
The 34% increase in selling, general and administrative expenses for the first
nine months of 2004 is a result of increased activities relating to operating a
public company; including increased expenses relating to filings with the SEC,
corporate governance and professional fees.
RESEARCH AND DEVELOPMENT
Research and development increased in the first nine months of 2004 as ZIM has
been focusing on the development of new SMS applications that were released
during the period. As a result of this focus, additional engineering and
documentation staff were hired and additional expenditures were incurred.
20
OTHER
Included in other expenses are amortization on property and equipment and the
customer list, foreign exchange gains and losses, interest expense, and other
miscellaneous items. There was a 33% decrease in other expenses between the
first nine months of fiscal 2003 and the first nine months of fiscal 2004. This
decrease is a result of reduced interest expense relating to a capital lease
that was paid in full during June 2003. In addition, debt held by the CEO, that
was earning interest at 5% per annum was converted into equity on January 7,
2004. This conversion further reduced interest expense.
Commencing in the third quarter of fiscal 2004, ZIM will be amortizing the
intangible assets purchased in the acquisition of EPL. Included in other
expenses for the periods ended February 29, 2004 is approximately $27,000
relating to this amortization.
INCOME TAXES
Included in income taxes are taxes paid on revenues earned in Brazil as well
investment tax credits (ITC) on research and development expenditures in Canada.
The ITC's for the nine months ended February 29, 2004 were approximately
$235,000. Included in this amount is approximately $55,000 received in fiscal
2004 relating to expenditures in fiscal 2003.
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 29, 2004 TO THE THREE MONTHS ENDED
FEBRUARY 28, 2003
(Unaudited) (Unaudited)
Three % Three
months As a % change months As a %
ended of total from ended of total
February 29, expenses prior Febuary 28, expenses
2003 years 2003
------------------------------------------------------------------
$ $
EXPENSES
Selling, general and
administrative 1,027,783 80% 68% 610,748 71%
Research and development 201,140 16% 31% 153,114 18%
Other 59,094 5% -37% 93,923 11%
------------- --------------
1,288,017 50% 857,785
============= ==============
INCOME TAXES (221,561) 361% (48,038)
============= ==============
Expenses increased 50% from $857,785 for the three months ended February 28,
2003 to $1,288,017 for the three months ended February 29, 2004.
21
SELLING, GENERAL AND ADMINISTRATIVE
As mentioned above, the increase in selling, general and administrative expenses
for this quarter is a result of increased activities relating to operating a
public company. In addition, in the third quarter of fiscal 2004, management
commenced an acquisition growth strategy that has resulted in increased
financial, legal and other miscellaneous administrative costs. Management
expects this trend to be continued for the balance of the year.
RESEARCH AND DEVELOPMENT
Research and development increased by 31% in the third quarter of 2004 as
compared to the third quarter of fiscal 2003. This increase is a reflection of
additional staff and expenditures to support development of new SMS applications
in new countries.
OTHER
As with the comments relating to the nine month period, other expenses include
amortization on property and equipment and the intangible assets, foreign
exchange gains and losses, interest expense, and other miscellaneous items.
There was a decrease in other expenses between the third quarter of fiscal 2003
and the third quarter of fiscal 2004. This decrease is a result of reduced
interest expense relating to a capital lease that was paid in full during June
2003 and the conversion of the debt held by the CEO into equity on January 7,
2004.
INCOME TAXES
As mentioned above, included in income taxes are taxes paid on revenues earned
in Brazil as well investment tax credits (ITC) on research and development
expenditures in Canada. The ITC's for the three months ended February 29, 2004
were approximately $235,000. Included in this amount is approximately $55,000
received in fiscal 2004 relating to expenditures in fiscal 2003. These ITCs,
although recognized in the income tax line for the third quarter of 2004, relate
to expenses incurred over the entire nine months. Prior quarters reflected the
ITCs as netted against research and development expenses.
OTHER COMPREHENSIVE INCOME
Changes in other comprehensive income for the nine months ended February 29,
2004 relate to foreign exchange translations. On June 1, 2003, ZIM became a
domestic filer with the SEC. As a result, ZIM changed its reporting currency to
the US dollar. Assets and liabilities of the current and prior period have been
translated into US dollars at period end exchange rates. Revenues and expenses
have been translated at the weighted average exchange rates for the relevant
period. Gains and losses arising from the translation of the financial
statements have been included in other comprehensive income.
22
NET LOSS
(Unaudited) (Unaudited) (Unaudited)
Three % Three (Unaudited) % Nine
months change months Nine months change months
ended from ended ended from ended
February prior February February 29, prior February
29, 2004 years 28, 2003 2004 years 28, 2003
----------- ----------- ------------ -----------
$ $ $ $
----------- ----------- ------------- ------------
Net loss (303,551) -32% (448,548) (1,216,547) 15% (1,057,137)
=========== =========== ============= ============
COMPARISON OF THE NINE MONTHS ENDED FEBRUARY 29, 2004 TO THE NINE MONTHS ENDED
FEBRUARY 28, 2003
As a result of the factors described above, the net loss for the nine months
ended February 29, 2004 was $1,216,547, an increase of 15%, compared to the nine
months ended February 28, 2003.
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 29, 2004 TO THE THREE MONTHS ENDED
FEBRUARY 28, 2004
As a result of the factors described above, the net loss for the three months
ended February 29, 2004 was $303,551, a decrease of 32%, compared to the three
months ended February 28, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 2004, ZIM had cash and cash equivalents of $1,100,072 and
working capital was $1,000,801, which is an increase of $3,308,367 from May 31,
2003. This increase is a result of the conversion of the debt to related parties
to equity and the above equity transactions. Management expects this cash to
fund operations for the next six months.
23
Cash flows for the nine months ended February 29, 2004 and February 28, 2003,
were as follows:
(Unaudited) (Unaudited)
Nine months Nine months
ended ended
February 29, February 28,
2004 2003
--------------- -----------
$ $
Cash flows used in operating activities (1,510,414) (839,792)
Cash flows used in investing activities (399,674) (17,539)
Cash flows used in financing activities 2,465,847 812,744
--------------- -----------
Net cash (used) provided, before translation affect 555,759 (44,587)
=============== ===========
ZIM used cash from operating activities of $1,510,414 and $839,792 through the
nine months of February 29, 2004 and February 28, 2003, respectively. The
increase in cash used in operations is attributed primarily to increase in the
net loss for the respective periods.
ZIM used $399,674 of cash in its investing activities during the nine months
ended February 29, 2004, as compared to $17,539 for the same period in the
previous year. Of this amount in 2004, $320,028 related to the purchase of EPL.
The balance was used in the purchase of fixed assets.
The Corporation increased its cash by $2,465,847 from its various financing
activities in the first nine months of the 2004 fiscal year, as compared to
$812,744 in the prior year.
ZIM will need additional financing in order to fund its operating losses and
other working capital requirements. ZIM does not have a bank credit facility or
other working capital credit line under which ZIM may borrow funds.
Historically, ZIM has received cash advances from the CEO of the Corporation who
is a significant shareholder and a holding Corporation that is owned by the
spouse of the significant shareholder. To date, ZIM has received approximately
$3.9 million from Dr. Cowpland and the related holding company. For the
nine-month period ended February 29, 2004, ZIM received $1.29 million. For the
three-month period ended February 29, 2004, ZIM received approximately $375,000.
On January 7, 2004, the Board of Directors of ZIM approved the conversion of
$3,960,950 debt owed to related parties, at a market price of $0.43, in return
for 9,211,511 common shares of the Corporation.
Other sources of cash during the nine months ended February 29, 2004 was the
issuance of shares, pursuant to the exercise of stock options by employees. We
issued 572,300 common shares in the three months ended February 29, 2004 and
719,300 for the nine months ended February 29, 2004. Also, on January 30, 2004,
the Corporation completed a non-brokered private placement of 1,151,006 units at
$0.75 per unit, for total gross proceeds of $863,255. Each unit consists of one
common share and one common share purchase warrant. Each warrant may be
exercised at any time prior to July 30, 2004 at an exercise price of $.75.
24
ZIM expects to obtain further financing through the sale of its securities to
investors as well as the exercising of options from option holders and warrants.
However, ZIM has not received any commitments from any third parties to provide
additional financing.
Future liquidity and cash requirements will depend on a wide range of factors
including the level of business in existing operations and the Corporation's
ability to raise additional financing. Accordingly, there can be no assurance
that ZIM will be able to meet its working capital needs for any future period.
As a result of some of the items noted above, and conditions which existed as of
May 31, 2003, the Independent Auditors' Report for the year ended May 31, 2003
indicated that there was substantial doubt regarding our ability to continue as
a going concern.
NEW ACCOUNTING PRONOUNCEMENTS
(I) SFAS NO. 149
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, except for certain hedging relationships designated after June
30, 2003. Since ZIM does not currently transact in such instruments nor
undertake hedging transactions, the adoption of this statement did not have a
material impact on our financial condition or results of operations.
(II) SFAS NO. 150
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. We do not
expect the adoption of this statement to have a material impact on our financial
condition or results of operations.
(III) FINANCIAL INTERPRETATION NO. 46
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities", which requires the consolidation of and disclosures about variable
interest entities ("VIEs"). VIEs are entities for which control is achieved
through means other than voting rights. In December 2003, the FASB revised FIN
No. 46 to incorporate all decisions, including those in previously issued FASB
Staff Positions, into one Interpretation. The revised Interpretation supercedes
the original Interpretation. Generally, the requirements were effective
immediately for all VIEs in which an interest was acquired after January 31,
2003. For variable interests in special purpose entities in which an interest
was acquired before February 1, 2003, the requirements are effective at the end
of our fiscal 2004. Requirements for non-special purpose entities acquired
before February 1, 2003, are effective at the end of the first quarter of fiscal
2005. FIN No. 46 has not had, and is not expected to have, a significant impact
on our consolidated financial statements.
25
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, which requires management to
make certain estimates and apply judgment that affect reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. We base our estimates and judgments on
historical experience, current trends, and other factors that management
believes to be important at the time the consolidated financial statements are
prepared. On an ongoing basis, management reviews our accounting policies and
how they are applied and disclosed in our consolidated financial statements.
While management believes that the historical experience, current trends and
other factors considered support the preparation of our consolidated financial
statements in accordance with accounting principles generally accepted in the
United States, actual results could differ from our estimates, and such
differences could be material.
Our significant accounting policies are described in note 4 of the Notes to
Consolidated Financial Statements included in our Form 8-K for the fiscal year
ended May 31, 2003. Effective June 1, 2003, the Corporation changed its method
of amortizing property and equipment from the straight line method to the
declining balance method. The Corporation's management believes this method is
preferable because it provides a better matching of costs with related revenues.
The adoption of the declining balance method did not have a material effect on
the financial statements of the prior periods therefore they have not been
restated to apply the new method retroactively. There were no other changes in
our accounting policies or estimates since our fiscal year ended May 31, 2003.
OUTLOOK
EXTERNAL ENVIRONMENT
The market for SMS technology continues to grow exponentially throughout the
world. It is estimated by the Cellular Telecommunications & Internet Association
that the North American market is increasing its use of SMS messages at a rate
of 20% per month, while countries such as Finland send an average of 150
messages per user per month. The Corporation believes that by 2008, we will have
a market penetration of approximately .2% or approximately 4 million users. For
each user, it is estimated that the fee will be approximately $18 per month.
INTERNAL ENVIRONMENT
The Corporation expects to incur further losses from commercial operations as it
continues its business development of SMS applications.
26
ITEM 3 - CONTROLS AND PROCEDURES
As required by the rules of the United States Securities and Exchange Commission
("SEC"), we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report. This evaluation was carried out under the supervision and with
the participation of our management, including our principal executive officer
and our principal financial officer. Based on this evaluation, these officers
have concluded that the design and operation of our disclosure controls and
procedures are effective. There were no significant changes to our controls or
procedures or in other factors that could significantly affect our controls or
procedures subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
The Corporation is working closely with its corporate and securities lawyers to
ensure that it maintains compliance with the Sarbanes-Oxley Act of 2002 and the
SEC regulations promulgated pursuant to that Act.
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES
The following sets forth certain information regarding sales of and other
transactions with respect to, our securities issued during the three months
ended February 29, 2004:
On January 7, 2004, the Corporation issued 9,211,511 common shares in a private
placement to its President and majority shareholder Dr. Michael Cowpland and a
holding company that is owned by Dr. Cowpland's wife, upon the conversion of
approximately $3.8 million of debt held by Dr. Cowpland and the holding company
based on the closing price of the Corporation's shares on the Over-the-Counter
Bulletin Board on January 6, 2004.
27
On January 30, 2004, the Corporation issued 1,150,006 units in a non-brokered
private placement at $.75 per unit. Each unit consists of one common share and
one warrant to purchase an additional common share at $.75 per share through
July 30, 2004. The units were issued to unaffiliated persons, except that James
Stechyson, a member of the Corporation's board of directors, purchased 50,000 of
the units.
On February 10, 2004, the Corporation issued 4,000,000 common shares to
unaffiliated persons as partial consideration for all of the ordinary shares of
EPL Communications Ltd. and E-Promotions Ltd.
All of these issuances were made in reliance upon the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) of the Securities Act for transactions by an issuer not involving a
public offering.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification by the President and Chief Executive Officer, Dr.
Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer, Ms. Jennifer North,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by the President and Chief Executive Officer, Dr.
Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer, Ms. Jennifer North,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
28
(b) Reports on Form 8-K
The Corporation filed a Current Report on Form 8-K on January 9,
2004 to report that it changed its fiscal year end from May 31 to
March 31, and to report that it issued a press release announcing
the conversion of approximately US $3.8 million in debt held by
the Corporation's CEO and President into common shares of the
Corporation.
The Corporation filed a Current Report on Form 8-K on February 18,
2004 to report its acquisition of all of the ordinary shares of
both EPL Communications Limited, a company incorporated pursuant
to the Companies Act 1985 (United Kingdom) and E-Promotions
Limited, a company incorporated pursuant to the Companies Act 1985
(United Kingdom).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZIM Corporation
- ----------------
Registrant
SIGNATURE TITLE DATE
/s/ Dr. Michael Cowpland President and April 8, 2004
- ------------------------
Michael Cowpland Chief Executive Officer
/s/ Jennifer North Chief Financial Officer April 8, 2004
- ------------------
Jennifer North
29