Zi Corporation
NASDAQ : ZICA
TSX : ZIC

Zi Corporation

August 12, 2005 08:08 ET

Zi Corporation Reports 2005 Second Quarter, Six-Month Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 12, 2005) - Zi Corporation (TSX:ZIC)(NASDAQ:ZICA), a leading provider of intelligent interface solutions, today reported results for its second quarter and six months ended June 30, 2005. Revenue in the 2005 second quarter for the Company's Zi Technology business unit increased to $2.9 from $2.7 million in this year's first quarter. Zi Technology revenue in the 2004 second quarter was $3.3 million. (Unless otherwise indicated, all monetary amounts in this news release are in U.S. dollars.)

Chairman and CEO Michael Lobsinger said that thanks to recent progress in expanding the Company's product line and creating new market opportunities, along with a comprehensive review of operations, the entire Zi organization is more energized and enthusiastic than ever.

"The past few months have been busy and enlightening," Lobsinger added. "We have reviewed our product, sales and marketing strategies across all products and all regions and implemented several strategic initiatives to strengthen our organization and increase our focus on growth and profitability going forward."

Zi Corporation total revenue for this year's second quarter was $3.1 million compared to total revenue in the 2004 second quarter of $3.4 million. The net loss for the 2005 second quarter was $181,000, or a loss per basic and diluted share of $0.00, compared to net income of $254,000, or $0.01 per basic and diluted share in the year-earlier period. During the second quarter of this year other product revenue from e-Learning was $207,000 compared to $102,000 a year earlier. Gross margin as a percentage of revenue in the second quarter of this year was unchanged at 96 percent compared to last year's second quarter.

The year-to-year decline in Zi Technology revenue in the 2005 second quarter, as was the case in this year's first quarter, was principally due to year-over-year revenue decreases of more than 57 percent from two large customers who have experienced lower market demand for particular mobile technologies. Excluding those two customers, Zi Technology's royalty revenue from all other customers increased in this year's second quarter by approximately 32 percent year-over-year.

Chief Operating Officer Milos Djokovic noted that Qix™, the Company's innovative user application interface that was introduced at major wireless industry conferences on three continents over the last several months, is a key new product that can help drive significant revenue to the wireless carriers and network operators, who are expected to be important new Zi Corporation customers. As previously announced, Qix is now in its initial carrier trial with Virgin Mobile in the United Kingdom.

"Qix has all of us excited about the future," Djokovic said. "We believe Qix is to mobile phone users what Google is to the Internet-a search engine. Qix makes navigating the many applications on a mobile phone intuitive and simpler, which will ensure greater utilization of those applications, which is great news for the carrier industry, and great news for Zi. We are also very encouraged by the exceptional technical publication and user reviews that Qix is receiving worldwide as these endorsements of our breakthrough technology will be very important.

"We have accelerated our go-to-market strategy for Qix, revamped our sales and marketing organization worldwide, and put in place new strategies to leverage the success of our core products as a result of the recent tier 1 OEM endorsement and our best of breed product features," Djokovic added.

Revenue from the Zi Technology business unit in the first six months of this year was $5.6 million compared to $6.3 million for the same period a year ago. Total revenue for this year's first six months was $6.0 million compared to total revenue of $6.4 million in the first six months of 2004. The net loss for the 2005 first six months was $1.7 million, or a loss per basic and diluted share of $0.04, compared to a net loss of $1.2 million, or a loss per basic and diluted share of $0.03 in the year-earlier period. Gross margin as a percentage of revenue in the first six months of this year was 95 percent compared to 96 percent in the prior year period.

During the second quarter and first six months of 2005, Zi earned royalties from 57 and 59 eZiText® licensees, respectively, compared to a respective 43 and 49 in the same periods a year earlier. There were 70 new handset models embedded with eZiText released into the market in the 2005 second quarter, and for the first six months of 2005 there were 126 new models released into the market, bringing the total at the end of the first half of 2005 to 930 compared to 572 at the end of the 2004 first six months.

The Company's balance sheet as of June 30, 2005 showed cash and equivalents of $13.1 million, total assets of $21.5 million, and shareholders' equity of $16.9 million.

The increases in the year-over-year loss for the 2005 second quarter and first six months were due to the lower revenue and gross margin, higher product research and development expense, impairment of a note receivable, and a tax provision related to a Chinese subsidiary. These increases were offset by a settlement of litigation against prior counsel of $1.4 million.

Selling, general and administrative expense ("SG&A") increased in the second quarter of 2005 to $2.3 million from $2.2 million in the second quarter of 2004, and SG&A expense in the first six months of this year decreased to $5.1 million from $5.5 million in the prior year period. In the first six months of 2004, $1.5 million in non-cash compensation expense was recognized upon issuance of restricted stock units and non-employee stock options. There was no non-cash compensation expense incurred in the first six months of 2005.

Product research and development expense for the 2005 second quarter and first six months were $1.2 million and $2.2 million, respectively, compared to $0.3 million and $1.0 million in the respective year-earlier periods. Gross expenditures on product research and development (before capitalization) increased by $0.1 million to $1.3 million for the second quarter and $0.7 million to $2.6 million for the first six months. The Company has continued to invest in new product features and enhancements to language databases along with new investment in Decuma handwriting recognition software. In the three month period ended June 30, 2005, the Company capitalized $32,000 in software development costs. In the second quarter of 2004, the Company capitalized $0.9 million in software development costs related to developing new and improved language database software. In the six-month period ended June 30, 2004, the Company capitalized $0.9 million in software development costs related to developing dramatically new and improved language database software. In the six-month period ended June 30, 2005, the Company capitalized $0.4 million of software development costs.



Summary of Operating Results
Three Months Six Months
Ended June 30, Ended June 30,
(thousands of US$ except
per share amounts)
(unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------
Revenue $ 3,144 $ 3,414 $ 6,014 $ 6,443
Gross margin 3,008 3,281 5,725 6,194
Net income (loss) (181) 254 (1,695) (1,203)
Total assets $ 21,526 $ 9,745 $ 21,526 $ 9,745
Net income (loss) per
share - basic and
diluted $ (0.00) $ 0.01 $ (0.04) $ (0.03)
Outstanding shares,
weighted average 46,237,322 39,492,560 46,038,432 39,394,876
Outstanding shares,
end of period 46,239,168 39,492,560 46,239,168 39,492,560
---------------------------------------------------------------------

All dollar amounts are in United States dollars and in accordance
with accounting principles generally accepted in the United States of
America. This information should be read in conjunction with the
Company's interim consolidated financial statements and notes.


Conference Call

As previously announced, Zi is conducting a conference call to review its financial results today at 9:00 AM EDT (Eastern). The dial-in number for the call in North America is 1-800-475-3716 and 1-719-457-2728 for overseas callers. A live audio webcast and replay of the call can be accessed for 10 days at the Company's website at www.zicorp.com.

About Zi Corporation

Zi Corporation (www.zicorp.com) is a technology company that delivers intelligent interface solutions to enhance the user experience of wireless and consumer technologies. The company provides device manufacturers and network operators with a full range of intuitive and easy-to-use input solutions, including: eZiText for one-touch predictive text entry; eZiTap™ for intelligent multi-tap entry, Decuma® for natural handwriting recognition and the new Qix™ service delivery engine to enhance the user experience and drive service usage and adoption. Zi's product portfolio dramatically improves the usability of mobile phones, PDAs, gaming devices and set-top boxes and the applications on them including SMS, MMS, e-mail and Internet browsing. Zi supports its strategic partners and customers from offices in Asia, Europe and North America. A publicly traded company, Zi Corporation is listed on the Nasdaq National Market (ZICA) and the Toronto Stock Exchange (ZIC).

This release may be deemed to contain forward-looking statements, which are subject to the safe harbour provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Zi Corporation that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: the growth trends in the input technology industry; new product development; global economic conditions and uncertainties in the geopolitical environment; financial and operating performance of Zi's OEM customers and variations in their customer demand for products and services; the ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; matters affecting Zi Corporation's principal shareholder; litigation involving patents, intellectual property, and other matters; the ability to recruit and retain key personnel; Zi Corporation's ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Zi Corporation's filings with the Securities and Exchange Commission. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Zi Corporation's most recent reports on SEDAR, Form 20-F and Form 6-K, each as it may be amended from time to time. Zi Corporation's results of operations for the second quarter and six months ended June 30, 2005 are not necessarily indicative of Zi Corporation's operating results for any future periods. Any projections in this release are based on limited information currently available to Zi Corporation, which is subject to change. Although any such projections and the factors influencing them will likely change, except to the extent required by law, Zi Corporation will not necessarily update the information. Such information speaks only as of the date of this release.

Zi, Decuma, Qix, eZiTap and eZiText are either trademarks or registered trademarks of Zi Corporation. All other trademarks are the property of their respective owners.

TABLES FOLLOW



ZI CORPORATION
CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2005 2004
---------------------------------------------------------------------
(All amounts in United States of America
dollars except share amounts) (unaudited)
---------------------------------------------------------------------

Assets
Current assets
Cash and cash equivalents $ 13,132,675 $ 12,889,335
Accounts receivable, net of allowance of
$240,802 (2004 - $154,108) 3,563,514 5,570,869
Accounts receivable from related party - 43,629
Prepayments and deposits 589,935 414,994
---------------------------
Total current assets 17,286,124 18,918,827

Capital assets - net 1,080,853 1,087,957
Intangible assets - net 3,083,222 1,692,087
Other deferred costs 75,851 -
Investment in significantly influenced
company - -
---------------------------
$ 21,526,050 $ 21,698,871
---------------------------
---------------------------

Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 2,912,016 $ 3,081,280
Deferred revenue 1,543,962 2,704,105
Current portion of other long-term
liabilities 65,793 71,969
---------------------------
Total current liabilities 4,521,771 5,857,354

Other long-term liabilities 58,597 92,361
---------------------------
4,580,368 5,949,715
---------------------------

Contingent liabilities and guarantees

Shareholders' equity
Share capital
Unlimited number of Class A, 9% convertible,
preferred shares authorized and no shares
issued or outstanding - -
Unlimited number of common shares, no par
value, authorized, 46,239,168 (2004 -
45,225,190) issued and outstanding 109,268,622 106,025,634
Additional paid-in capital 2,114,190 2,114,190
Accumulated deficit (93,621,983) (91,927,031)
Accumulated other comprehensive loss (815,147) (463,637)
---------------------------
16,945,682 15,749,156
---------------------------
$ 21,526,050 $ 21,698,871
---------------------------
---------------------------

See accompanying notes to consolidated financial statements.


ZI CORPORATION
CONSOLIDATED STATEMENTS OF LOSS

Three Months Ended Six Months Ended
June 30, June 30,
(All amounts in
United States of
America dollars
except share
amounts)
(Unaudited) 2005 2004 2005 2004
--------------------------------------------------------------------

Revenue
License and
implementation
fees $ 2,937,341 $ 3,311,669 $ 5,629,728 $ 6,282,280
Other product
revenue 206,922 102,228 384,596 160,914
--------------------------------------------------
3,144,263 3,413,897 6,014,324 6,443,194

Cost of sales
License and
implementation
fees 70,669 110,428 134,040 204,746
Other product
costs 65,691 22,669 155,555 44,408
--------------------------------------------------
136,360 133,097 289,595 249,154

--------------------------------------------------
Gross margin 3,007,903 3,280,800 5,724,729 6,194,040
--------------------------------------------------

Operating expenses

Selling general and
administrative (2,307,285) (2,242,699) (5,144,084) (5,513,736)
Litigation and
legal (264,839) (248,743) (504,227) (389,751)
Gain on settlement
of litigation 1,415,616 - 1,415,616 -
Product research
and development (1,239,041) (289,071) (2,230,542) (1,018,723)
Depreciation and
amortization (284,602) (241,961) (552,456) (461,006)
Impairment of note
receivable (250,000) - (250,000) -

--------------------------------------------------
Operating income
(loss) before
undernoted 77,752 258,326 (1,540,964) (1,189,176)

Interest on capital
lease obligation (2,989) (3,640) (3,924) (3,972)
Other interest
expense - (11,842) (273) (26,767)
Interest income
and other
income 75,202 11,264 181,018 16,969
Equity interest
in loss of
significantly
influenced
company - - - -
--------------------------------------------------
Income (loss)
before income
taxes 149,965 254,108 (1,364,143) (1,202,946)
Income taxes (330,809) - (330,809) -
--------------------------------------------------
Net income (loss) $(180,844) $ 254,108 $(1,694,952) $(1,202,946)
--------------------------------------------------
--------------------------------------------------

Basic and diluted
income (loss)
per share $(0.00) $ 0.01 $(0.04) $(0.03)
--------------------------------------------------
--------------------------------------------------
Weighted average
common shares 46,237,322 39,492,560 46,038,432 39,394,876
Common shares
outstanding,
end of period 46,239,168 39,492,560 46,239,168 39,492,560

See accompanying notes to consolidated financial statements.


ZI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended Six Months Ended
June 30, June 30,
(All amounts in
United States of
America dollars)
(Unaudited) 2005 2004 2005 2004

Net cash flow from
(used in)
operating activities:
Net income (loss) $ (180,844) $ 254,108 $ (1,694,952)$(1,202,946)
Items not
affecting cash:
Loss on
dispositions of
capital assets 1,650 2,638 2,166 2,790
Depreciation
and
amortization 285,296 241,961 562,576 461,006
Non-cash
compensation
expense - 50,593 - 1,017,451
Non-cas
consultant
compensation
expense - 12,715 - 447,872
Decrease (increase)
in non-cash
working capital (2,582,228) (478,485) 531,302 (1,055,688)
-------------------------------------------------
Cash flow from
(used in)
operating
activities (2,476,126) 83,530 (598,908) (329,515)
-------------------------------------------------

Cash flow from
(used in)
financing
activities:
Proceeds from
issuance of
common shares,
net of
issuance costs 39,719 - 2,244,852 202,047
Payment of
capital lease
obligations (3,965) (9,008) (10,057) 10,715
-------------------------------------------------
Cash flow from
(used in)
financing
activities 35,754 (9,008) 2,234,795 212,762
-------------------------------------------------

Cash flow from
(used in) investing
activities:
Purchase of
capital assets (79,630) (12,042) (119,271) (12,896)
Software
development
costs (32,257) (866,804) (357,566) (870,184)
Other deferred
costs (91,068) - (105,734) -
Acquisition of
subsidiary - - (458,466) -
-------------------------------------------------
Cash flow used
in investing
activities (202,955) (878,846) (1,041,037) (883,080)
-------------------------------------------------

Effect of foreign
exchange rate
changes on cash
and cash
equivalents (107,562) (2,943) (351,510) (4,506)
-------------------------------------------------
Net cash inflow
(outflow) (2,750,889) (807,267) 243,340 ( 1,004,339)
Cash and cash
equivalents,
beginning of
period 15,883,564 2,169,813 12,889,335 2,366,885
-------------------------------------------------
Cash and cash
equivalents,
end of period $ 13,132,675 $ 1,362,546 $ 13,132,675 $ 1,362,546
-------------------------------------------------
-------------------------------------------------

Non-cash financing
activity
Equipment acquired
under capital
lease $ - $ - $ - $ 29,188
Components of cash
and cash
equivalents
Cash $ 3,305,843 $ 1,362,546 $ 3,305,843 $ 1,362,546
Cash equivalents $ 9,826,832 $ - $ 9,826,832 $ -
Supplemental cash
flow information
Cash paid for
interest $ 2,989 $ 15,482 $ 4,197 $ 30,739

See accompanying notes to consolidated financial statements.


SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Three- and Six-Month Periods Ended June 30, 2005 (Unaudited)

All amounts expressed in United States of America dollars except share amounts

NATURE OF OPERATIONS

Zi Corporation (the "Company" or "Zi") is incorporated under the Business Corporations Act of Alberta. Zi develops software designed to enhance the usability of mobile and consumer electronic devices. Through its e-Learning business segment which includes Oztime, English Practice and an equity interest in Magic Lantern Group, Inc. ("MLG"), the Company is also involved in e-Learning technology, content and customer service as well as educational content and distribution channels to offer learning management systems, interactive online courses and network education solutions to meet diverse client requirements.

SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements are prepared by management in conformity with accounting principles generally accepted in the United States of America ("US GAAP"), which conforms in all material respects with Canadian generally accepted accounting principles ("Canadian GAAP"), except as disclosed in note 12 to the Company's interim consolidated financial statements. The accounting policies used in preparing these interim consolidated financial statements are consistent with those used in the preparation of the 2004 annual consolidated financial statements, however, they do not include all disclosure normally provided in annual consolidated financial statements and should be read in conjunction with the 2004 annual consolidated financials statements. Prior to December 31, 2003, the primary consolidated financial statements of the Company were prepared in accordance with Canadian GAAP with annual reconciliation of the Company's financial position and results of operations to US GAAP. Management elected to report in conformity with US GAAP as of December 31, 2003 to provide information on a more comparable basis with Zi's industry peers and to better assist with the understanding of the financial statements to the majority of their users, who are primarily in the United States of America. Effective March 31, 2004, the Company initiated reporting its consolidated financial statements in US dollars, with comparative periods restated to US dollars.

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