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Non-Tech : Auric Goldfinger's Short List

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To: Francois Goelo who wrote (10156)8/17/2005 12:37:29 PM
From: StockDung   of 19419
Zi excited about future, mum about pending board battle

2005-08-17 09:16 ET - Street Wire

Also Street Wire (U-ZICA) Zi Corp

by Lee M. Webb

Zi Corp., a Calgary-based technology company again headed by its founder Michael Lobsinger, is still excited about its future. Indeed, the company, which has never lacked professions of enthusiasm on the way to ringing up an accumulated deficit of more than $93.6-million, is "more energized and enthusiastic than ever," according to Mr. Lobsinger. (All amounts are in U.S. dollars unless otherwise noted.)

The latest professions of energy, enthusiasm and ubiquitous excitement were delivered in an Aug. 12 news release and early morning conference call to discuss the company's performance during its most recent money-losing quarter.

The Aug. 12 conference call was led by Mr. Lobsinger, who, in addition to his role as chairman of the board of directors, is at least temporarily back in the saddle as president and chief executive officer following the abrupt departure of Mike Donnell on May 26. Citing personal reasons, Mr. Donnell pulled the plug the day after Zi's annual general meeting.

The hush

In his opening remarks, Mr. Lobsinger successfully forestalled any questions about a dispute with Zi's largest shareholder Marty Steinberg, the court-appointed receiver for the allegedly fraudulent Lancer Group of hedge funds formerly headed by Michael Lauer.

Mr. Steinberg now controls more than 18.7 million Zi shares or 41 per cent of the company's stock that was sponged up by Mr. Lauer's Lancer funds before the U.S. Securities and Exchange Commission (SEC) stepped in to shutter his operation in July of 2003.

It appears that Mr. Steinberg has become dissatisfied with Zi's board of directors and, by extension, at least some of its senior officers.

After publicly musing about ousting the board of directors in a July 7 SEC filing, Mr. Steinberg disclosed in a July 29 filing that he had formally asked Zi to call a special meeting of shareholders no later than Sept. 27 for the purpose of electing a new slate of directors with the exception of his representative Donald Moore.

If Mr. Steinberg has his way, Mr. Lobsinger will be among those getting the boot.

Among the high profile directors on Mr. Steinberg's ouster list is Howard Balloch, a former Canadian ambassador to China and current director of two of promoter Robert Friedland's companies, Vancouver-based Ivanhoe Mines Ltd. and Ivanhoe Energy Inc., as well as Methanex Corp.

Along with Mr. Lobsinger and other Zi directors, Mr. Balloch also served a stint as a director of Magic Lantern Group Inc., a Zi affiliate in which Mr. Steinberg controls a 41-per-cent stake thanks again to the allegedly fraudulent Lancer funds. Richard Geist, a Lancer director and self-styled stock guru more commonly known as a tout, also sat on Magic Lantern's board of directors.

Lancer acquired its stake in Magic Lantern from Zi in a convoluted deal facilitated by Mr. Lauer's alleged right-hand man Bruce Cowen, who will begin serving a two-year prison term for fraud involving another Lancer holding next August in connection with a 2002 Operation Bermuda Short indictment and subsequent guilty plea.

Mr. Balloch resigned as chairman of Magic Lantern's board of directors on April 13, just two months before the company was rather ignominiously booted off the American Stock Exchange (AMEX).

Mr. Steinberg would like to replace the well-connected Thompson MacDonald, too. Mr. MacDonald, a Zi director since 1993, spent 20 years in broadcast journalism in Alberta before opening his own strategic communications consulting firm.

During his time in broadcast journalism, Mr. MacDonald spent 11 years as vice-president of news and public affairs for a Calgary television station where Ralph Klein spent a decade as a reporter before turning to politics and moving on to become Alberta's premier in 1992, a post he still holds.

Interestingly, Mr. Klein's political career was very nearly twice nipped in the bud over a brouhaha involving Zi. Among other things, some of Mr. Klein's associates and relatives, including his wife, were early Zi shareholders and the premier took some heat for allegedly promoting the stock.

Indeed, Alberta's ethics commissioner twice investigated the premier regarding allegations of inappropriate conduct related to Zi, both times clearing Mr. Klein of any wrongdoing.

The politically resilient, if gaffe-prone, Mr. Klein is currently enjoying his fourth mandate as Alberta's premier.

Mr. MacDonald's connections go well beyond Alberta's provincial politics. Among other notable achievements, Mr. MacDonald received a prime ministerial appointment to the Canadian Broadcasting Corp.'s (CBC) board of directors in 1993. During his stint there, which ended in 1998, Mr. MacDonald spent three years as chairman of the CBC Pension Board of Trustees.

Arguably much less of a notable achievement, Mr. MacDonald also served on the board of directors of Solv-Ex Corp., coincidentally a frequent stock pick of guru Mr. Geist even as the company imploded in a massive scandal that led to SEC lawsuits against senior executives.

The Lancer receiver also wants to boot securities lawyer Derrick Armstrong, founding partner of Armstrong Perkins Hudson LLP and a Zi director since 1993. Among other things, Mr. Armstrong has served on a number of committees of the Alberta Securities Commission.

Michael Mackenzie and Donald Hyde, who both bailed out of directorships with Magic Lantern just shortly ahead of its AMEX delisting, evidently do not pass muster with Mr. Steinberg, either. Similarly, Mr. Steinberg wants to replace relative newcomer Richard Tingle, the senior partner of Tingle Merret LLP, a Calgary-based law firm.

At this point, it is not at all clear what prompted Mr. Steinberg's apparent dissatisfaction with Zi's board of directors; nor is it clear whether the Lancer receiver will be able to press the matter any time soon.

A day ahead of its Aug. 12 conference call, Zi issued a news release disclosing that the company had obtained an interim court order from the Court of Queen's Bench of Alberta relieving it of its obligation to provide shareholder data or call a special shareholders meeting as requested by Mr. Steinberg.

The interim court order also stops the Lancer receiver from calling a shareholders meeting.

According to Zi's Aug. 11 news release, parroted by Mr. Lobsinger at the outset of the Aug. 12 conference call, "the receiver's actions with respect to its share position in Zi is detrimental to the company's interests."

"The board of directors of Zi Corp. intends to vigorously resist attempts by the receiver to take control of Zi through the receiver's share position in Zi and the circumstances surrounding the receiver's ownership of those shares," Mr. Lobsinger said, echoing the news release.

The exact circumstances surrounding the receiver's ownership of more than 18.7 million shares or, more precisely, just how Mr. Lauer and his Lancer funds managed to sponge up what at one point amounted to more than half of Zi's shares without the company's management and directors having so much as a clue remains a mystery.

In any event, Mr. Lobsinger went on to quell any further discussion of the matter during the conference call.

"Because this matter is now before the courts and the sensitivities and complexities associated with the matter, we will be making no further comments other than what we have said herein," Mr. Lobsinger said.

Stockwatch will review some of the sensitivities and complexities of the matter currently before the courts, including Zi's unmentioned lawsuit against the Lancer receiver, in a future article.

The enthusiasm

With the dispute involving Zi's largest shareholder neatly tucked away, at least for the remainder of the conference call, Mr. Lobsinger turned to a scripted overview of the company, emphasizing the "renewed sense of enthusiasm and optimism."

"Today, we are energized, upbeat and more committed than ever," Mr. Lobsinger said.

According to Zi's chairman, interim president and chief executive officer, the company's management "has adopted a 'back-to-basics' approach" and is "singularly focused on revenue growth and profitability."

During a "busy and enlightening" second quarter, Zi reportedly revisited its products and marketing strategies, finding significant opportunities.

Among other things, Mr. Lobsinger said that Zi "increased traction" with its clients through offering a suite of products for the wireless market.

In addition to its eZiText and eZiTap products, the company offers Decuma, a natural handwriting recognition software product. Evidently generating much of the excitement and enthusiasm, however, is Qix.

"In simple terms, Qix is to mobile phone users what Google is to the Internet -- a search engine," Mr. Lobsinger said.

In perhaps even simpler terms, Qix searches out mobile phone applications such as e-mail, text messaging and so on.

"There is no question that Qix, for which we coined the slogan 'Know more, do more,' is helping drive our enthusiasms," Mr. Lobsinger said. "Qix simply makes a new and more complex generation of mobile phones richer and easier to use.

"All the marketing hoopla aside, people are more often intimidated, not excited, by the bevy of extraordinary new applications attached to their mobile phones.

"People have neither the time nor the inclination to figure out how to relieve their anxieties.

"Remarkably, less than 3 per cent of the world's mobile phone users ever bother to read their new instructional manuals.

"Qix was designed to make the new world of mobile phones much less daunting."

Qix was also designed to drive revenues for potential customers for Zi's new product. In knowing more and doing more, mobile phone users will be paying more.

Zi currently has Qix in an initial trial run with Virgin Mobile in the United Kingdom and has accelerated its go-to-market strategy for the product, though it is not likely to generate much in the way of revenue, if any, until next year.

Following the enthusiastic overview, Mr. Lobsinger handed off to Zi's chief financial officer Dale Kearns for a review of the financial results.

The numbers

For the three months ending June 30, Zi posted a rather modest loss of approximately $181,000 on revenues of $3.15-million, nudging its loss through the first six months of the year to approximately $1.7-million and its accumulated deficit to more than $93.6-million.

Zi's quarterly revenue dropped approximately 8 per cent from the same period last year, due in part to a continued decline in revenue from two large customers generating 57 per cent less money than last year.

Setting aside the decline from the two unidentified large customers, Mr. Kearns reported that Zi's royalty revenue from its other customers increased by 32 per cent over the previous year.

At least part of Zi's quarterly loss is attributable to a $250,000 impairment charge for a loan made in April to Magic Lantern. The impaired loan to Magic Lantern was made after Zi took a $2.2-million charge in 2004 on another Magic Lantern note.

The relatively modest $181,000 loss for the quarter would have been closer to $1.6-million, if not for a gain of $1.4-million recorded as a result of the settlement of litigation with Zi's former legal counsel.

At the end of the second quarter, Zi reported cash and cash equivalents of approximately $13.1-million. According to Mr. Kearns, that amount had increased to approximately $14-million as of Aug. 12.

After running through the numbers, Mr. Kearns passed the baton to Zi's chief operating officer, Milos Djokovic.

The optimism

Mr. Djokovic, who was recruited by former president and chief executive officer Mr. Donnell, is responsible for sales, marketing, engineering and business development.

Upon his introduction, Mr. Djokovic underscored that he shared the sense of optimism expressed by both Mr. Lobsinger and Mr. Kearns.

"I'm bringing that sense to my focus here at Zi, which is now entirely on product strategy, sales and marketing," Mr. Djokovic said.

"Our basic challenge is to continue to expand our portfolio of products and provide a larger suite of software to phone manufacturers," he continued. "We have a vision to become a multiproduct company to win the kind of global deals we are pursuing and we are well on our way towards that goal."

According to Mr. Djokovic, the acquisition of Decuma during the first quarter was an important step, with the handwriting recognition product differentiating Zi from its competitors.

Mr. Djokovic is also enthusiastic about Qix and Zi's accelerated market strategy for the product.

Among other things, Mr. Djokovic says that Zi will be working to expand and deepen its relationships with the top phone manufacturers.

"The contracts we enjoy today are important first steps and we believe that we are moving towards more global contracts that will translate into significant increases in revenue," Mr. Djokovic said. "That's where I'm focused and we're already making progress towards this goal."

While not identified, Mr. Djokovic now has a new head of European sales, a new North American sales leader and a new head of carrier development to help Zi meet its objectives.

"These are all people who are knowledgeable experts in our industry and are excited and motivated about the opportunities before us," Mr. Djokovic said.

The wrap

Before opening the conference call up to questions, Mr. Lobsinger remarked that there had been significant changes within the company since the last quarterly call.

"I would like to take this opportunity to thank Mike Donnell for his contribution to Zi," Mr. Lobsinger said, offering the company's first belated public farewell to its former president and chief executive officer. "Mike spent almost two years at Zi and fostered a spirit of innovation."

A short time later, the Zi executives took questions from several callers.

In contrast to some of the love-ins of yesteryear that featured callers like Mr. Lauer and Mr. Cowen who prefaced their gentle lobs with upbeat prattle, several of the Aug. 12 callers posed some very specific questions regarding the financial results, most of which were aptly fielded by Mr. Kearns. Mr. Djokovic picked up a number of questions relating to product development and marketing.

Following the questions, Mr. Lobsinger provided the wrap.

"Before we sign off, I'd like to thank our entire team at Zi for their enthusiastic commitment to building Zi into a growing and profitable company," Mr. Lobsinger said. "We remain confident that with our current financial resources, existing market-leading suite of products and the exciting array of new products about to enter the market, Zi will exit 2005 with year-over-year increases in revenue and profitability and that over time our shareholders will be rewarded for their ongoing commitment to Zi."

Since the conference call and the release of the second-quarter results on Aug. 12, Zi has shed 39 cents in U.S. trading, closing at $2.57 on Aug. 16.

In trading on the Toronto Stock Exchange, Zi is similarly off 39 Canadian cents since Aug. 12, closing at $3.06 (Canadian) on Aug. 16.

Comments regarding this article may be sent to

(More information regarding Zi Corp. is available in Stockwatch articles published on Aug. 6, 11, 12, 13, 18 and 22; Sept. 5, 8, 11, 12, 15, 17 and 26; Oct. 8, 2003; June 14, 2004; June 8, 16, and 28; July 8 and 11; and Aug. 2, 2005. Additional information regarding the Lancer Group and associated companies is available in Stockwatch articles under the symbol *SEC published on July, 15; Aug. 11, 12, and 22; Sept. 3, 8, 11 and 12, 2003; Jan. 7 and 30; and June 11, 2004.)


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