GOING CONCERN BASIS OF PRESENTATION
These consolidated financial statements are prepared on a going
concern basis, which assumes that the Company will be able to
realize its assets at the amounts recorded and discharge its
liabilities in the normal course of business in the foreseeable
future. The Company has incurred operating losses over the past
three years. On December 5, 2002, the Company borrowed US$3.3
million (before fees and expenses) through the issuance of a
note payable, originally due March 5, 2003 and subsequently
extended to April 30, 2003. At present, Zi has not arranged
replacement financing to repay the note and there can be no
assurance that Zi will be successful in its efforts to complete
such refinancing. On December 6, 2002, the Company settled a
judgment in favour of Tegic Communications Inc., a division of
AOL Time Warner. Under the terms of the settlement agreement,
the Company, among other things, is obliged to pay a further
US$1.5 million comprised of three installments between June 2003
and January 2004.
Continuing operations are dependent on the Company being able to
refinance its borrowings due April 30, 2003, pay the remaining
installment payments due under the settlement agreement with
AOL, increase revenue and achieve profitability. These financial
statements do not include any adjustments to the amounts and
classifications of assets and liabilities that may be necessary
should the Company be unable to pay the remaining installment
payments due under the terms of the settlement agreement with
AOL, raise additional capital to meet the repayment of the note
payable, increase revenue and continue as a going concern.
CONTINGENT LIABILITIES
The US$9 million damages judgment awarded to Tegic was settled
pursuant to a written settlement agreement with AOL dated
December 6, 2002 and a consent judgment dated December 20, 2002.
Settlement costs have been included as part of legal and
litigation costs as at December 31, 2002, including US$1.5
million which remains to be paid in scheduled installment
payments beginning in June 2003 and ending on January 2, 2004.
In the event that any of the scheduled Outstanding Balance
payments are not paid as required under the terms of the
settlement agreement, then the amount of US$9 million less all
payments made to AOL to the date of such payment default becomes
immediately due and payable by the Company to AOL (the "Default
Payment Amount"). In the event of any Outstanding Balance
payment default, the Default Payment Amount would range between
US$4.5 million to US$6 million depending upon the date of such
payment default. Security agreements entered into by the Company
with AOL to secure payment of the Default Payment Amount become
enforceable in the event of any Outstanding Balance payment
default. When the Outstanding Balance is paid to AOL in full on
or before the scheduled payment dates, the security agreements
entered into by the Company with AOL are terminated and the
Company is fully released from any obligation to pay the Default
Payment Amount to AOL.
The Default Payment Amount also becomes due and payable by the
Company to AOL if, prior to the payment in full of the
Outstanding Balance to AOL, any of the following circumstances
occurs and are not cured within ten days of occurrence:
(i) the Company advances any claims against AOL or its
affiliates in respect of patent infringement before
July 6, 2003;
(ii) the Company or any other person commences any action to
avoid any payments made by the Company to AOL including
any of the remaining scheduled installment payments;
(iii) the Company violates the terms of the Consent Judgment;
or
(iv) the Company breaches any of the terms of the settlement
agreement. |
