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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000 Commission File No. 0-19301
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Communication Intelligence Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500
Redwood Shores, California (650) 802-7888 94065
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(Address of principal (Registrant's telephone (Zip Code)
executive offices) number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of March 28, 2001 was approximately
$101,645,435 based on the closing sale price of $1.125 on such date, as reported
by the Nasdaq SmallCap Market.
The number of shares of Common Stock outstanding as of March 28, 2001
was 90,351,498.
A list of Exhibits to this Annual Report on Form 10-K begins on page 23 .
COMMUNICATION INTELLIGENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
PART I............................................................... 3
Item 1. Business..................................................... 3
Item 2. Properties................................................... 12
Item 3. Legal Proceedings............................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
PART II.............................................................. 13
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters.......................................... 13
Item 6. Selected Financial Data...................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and results of Operations.................................... 15
Item 8. Financial Statements and Supplementary Data.................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
PART III............................................................. 22
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 22
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV.............................................................. 23
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................... 23
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CIC(R) and its logo, Handwriter(R), Jot(R), InkTools(R), Sign-it(R),
WordComplete(R) and INKshrINK(R) are registered trademarks of the Company.
HRS(TM), InkSnap(TM), PenX(TM), QuickNotes(TM), RecoEcho(TM), Sign-On(TM),
Speller(TM) and iSign(TM) are trademarks of the Company. Applications for
registration of various trademarks are pending in the United States, France,
Germany, Italy, Japan, Spain and the United Kingdom. The Company intends to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable future.
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following: (1) technological,
engineering, quality control or other circumstances which could delay the sale
or shipment of products; (2) economic, business, market and competitive
conditions in the software industry and technological innovations which could
affect the Company's business; (3) the Company's ability to protect its trade
secrets or other proprietary rights, operate without infringing upon the
proprietary rights of others or prevent others from infringing on the
proprietary rights of the Company; and (4) general economic and business
conditions and the availability of sufficient financing.
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PART 1
Item 1. Business
General
Communication Intelligence Corporation (the "Company" or "CIC") is the
global leader in biometric electronic signature verification and a leading
supplier of natural input software solutions aimed at emerging, fast growth,
large potential markets such as e-commerce, corporate security, mobile
voice/Internet devices including smartphones/communicators, PDAs, webpads and
the Palm OS aftermarket. CIC is headquartered in Redwood Shores, California and
has a joint venture, Communication Intelligence Computer Corporation, Ltd.
("CICC" or the "Joint Venture"), in Nanjing, China. Industry leaders who have
chosen to license CIC's technologies include; Charles Schwab & Co., Compaq,
Ericsson, EDS, Fujitsu, Legend, Microsoft, Mitsubishi, National Semiconductor,
Siebel Systems, and Symbian.
The Company's core software technologies include multilingual hand writing
recognition systems (Jot(R) and the Handwriter Recognition System, referred to
as HRS(TM)), electronic signature, biometric signature verification,
cryptography, electronic ink capture tools (InkTools(TM), Sign-it(R), iSign(TM)
and Sign-on(TM)), and operating system extensions that enable pen input
(PenX(TM)). Other consumer and original equipment manufacturer ("OEM") products
include electronic notetaking (QuickNotes(TM), and InkSnap(TM)) and predictive
text input (WordComplete(R)). CIC's products are designed to increase the ease
of use, functionality and security of electronic devices with a primary focus on
wireless Internet and information devices such as smartphones, electronic
organizers ("PDAs") and portable web browsers.
In 2000, the Company's fourth quarter revenue increased 25% to $2.3 million
compared to $1.8 million for the fourth quarter of the prior year, and revenue
increased 12% for the year 2000 to $7.3 million as compared to $6.5 million for
1999. CIC achieved profitability for the first time in its history with back to
back quarterly profitability for the third and fourth quarters of 2000.
These results reflect CIC's objective of profitable growth and a strategy
that focuses its biometric signature verification and natural input technology
on emerging, rapid growth applications for e-commerce, and mobile voice/Internet
devices such as smartphones/communicators, PDAs, webpads and the Palm
aftermarket.
Enterprise Revenues
Triggered by the signing of the E-Sign Bill in 2000 and the passage of
similar legislation making electronic signatures legally binding, in virtually
every major economy in the world, the revolution towards automating transactions
in signature intensive industries began. The Company's Enterprise related
revenue increased over the prior year, $1.7 million versus $38,000. The above
growth reflects focused direct CIC sales efforts leveraging the Company's
biometric electronic signature software products, and in some cases working
closely with its strategic and channel partners, on signature dependent market
segments including financial services, insurance, government and healthcare.
Mitigating the legal risk associated with electronic signatures, combined with
the socially acceptable/non-intrusive nature of biometric handwritten
e-signature solutions, has allowed the benefits of this technology to become a
business reality; doing transactions at the speed of the Internet with a
estimated tenfold reduction in cost at a higher level of security than the
traditional handwritten signature.
Enterprises that chose to license our technology include the following:
Licensee Product(s) licensed Application of Products
- -------------------- --------------------- -------------------------
Assurant Group Sign-it Sales Force Automation, New
Account Openings
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Licensee Product(s) licensed Application of Products
- -------------------- --------------------- -------------------------
Audata, Limited Multiple Multiple applications focused
on paperless environment and
Security
Charles Schwab & Co., Inc. Sign-it New Account Openings,
Administrative Changes
Dade County, Florida InkTools Eliminate numerous court
related signature intensive
documents and storage
E-Com Asia Pacific Pty Multiple Regional Reseller, multiple
applications
EDS InkTools Information Assurance for
Network & Application Level
Integrate Online InkTools Mortgage Closings
Mbrane Software InkTools Mobile/Remote Sales Force
Automation
Old Republic National Sign-it Title processing applications
Orange County, California Sign-it Automate Building Permit
process
PHT Corporation Sign-it Clinical Trial
Physician WebLink Sign-it Automate Patient
Enrollment/Records/Billing
RecordsCenter.com InkTools Legal Contracts & Other
Significant Documents
Siebel Multiple Sample Delivery of Regulated
Drugs
These implemented applications, together with others, are the basis for the
more than ten fold increase in revenue from 1999 to 2000, and provide the
foundation for significant rollout potential in 2001 and beyond. A recent market
study by IDC forecasts the biometric signature verification market at $230
million by 2004. With the acquisition of PenOp, CIC has emerged as the global
leader with an IDC estimated 47% market share in biometric signature
verification, the fastest growing segment, with an IDC estimated compound annual
growth rate of 77% ("CAGR"), of the total electronic signature market.
OEM Revenue
Industry leaders such as Ericsson, Fujitsu, Xybernaut and Xplore
Technologies were among a dozen companies contributing to the $2.0 million in
OEM revenue for the year ended December 31, 2000. A key event in 1999 was a
breakthrough order/license agreement from Ericsson for both natural input and
electronic signature solutions for its smartphones/communicators. One of these
products, the R380, began shipment on a world wide basis in the fourth quarter
of 2000. Ericsson joined forces with Nokia, Motorola, Matsushita and Psion, to
form the Symbian Alliance in 1998. The objective was to establish the EPOC
operating system as the standard for smartphones and all wireless devices. The
Symbian members together with other EPOC licensees represent approximately 70%
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of the worlds mobile phone shipments (IDC). In 1999, CIC and Symbian announced a
license agreement making CIC's software products available for evaluation to
other Symbian member OEMs and other EPOC licensees
Industry forecasts for smartphones and communicators, which combine the
functions of voice, PDA and wireless Internet access, have been fueled by the
potential of these devices to enable mobile commerce. Projections for these
devices are 60 million units in 2001 growing to 150 million units in 2002 (Nokia
& Dataquest). In addition to smartphones and communicators, CIC's current
licensees include PDA, webpad, and digitizer tablet manufacturers. According to
IDC, the number of smart handheld devices of this type are projected to grow to
over 20 million annual shipments by 2004, representing a CAGR of 139%. The
Company believes significant royalty revenues will be generated in 2001 and
beyond based on its present and potential OEM agreements.
Key OEM Licensees include:
Licensee Product(s) licensed Application of product
- ------------------- -------------------- ----------------------------
Compaq Speller & QuickNotes Handheld PC Pro
Ericsson Jot, QuickNotes, Sign-it & Smart Cellular Phone
Fujitsu HRS, PenX & InkTools Windows & Windows CE Pen
Computers
Interlink Sign-it Digitizer tablet
Intermec/Norand HRS & PenX Windows Pen Computers
Legend Chinese Jot Palm Sized PC operating
system
Microsoft Jot Palm-size PC operating
system
Mitsubishi PenX Windows Pen Computers
National Semiconductor Jot Wireless Internet Access
Device
Topaz InkTools Digitizer tablet
Vtech Jot Electronic Organizer
Wacom Chinese Handwriter & Sign-it Digitizer tablet
Walkabout HRS & PenX Windows Pen Computers
Xplore HRS & PenX Ruggedized Mobile
Computers
Xybernaut Jot Wearable Computers
Online Revenue
Revenue from the Company's software sold via its website, (www.cic.com) was
$1.3 million in 2000. The Company believes web sales represent a significant and
virtually untapped revenue potential. Currently, Online sales are generated
primarily through direct mail sent to Palm PDA owners whose name/address are
acquired from Palm. Most of CIC software products are available for the Palm
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operating system ("OS") which includes Handspring, IBM, Symbol and Sony
products. The Company expects meaningful growth in Online sales in 2001 and
beyond. This will be driven by the large and growing installed base of Palm OS
PDA devices (estimated at 9 million units in 2001 and forecasted to grow to over
15 million units by the end of 2001), and through targeted marketing programs
aimed at significantly increasing exposure and awareness within that market
segment. Based upon recent intensive efforts by Palm to increase the capture
rate of new Palm owner information, CIC expects to more than double direct mail
solicitations in 2001. In addition, the Company commissioned market
research/focus groups in 2000 that confirmed that its software products
significantly enhance the usability and productivity of Palm PDAs and further
suggests high adoption rates through a TV media campaign aimed at the entire
installed base. The Company is currently developing a TV media campaign focused
on generating high levels of awareness for its software products among Palm OS
current and new owners thereby significantly increasing potential customer
traffic to its website. At the present average Online sales price for its
software products of $36, even a modest increase in awareness and close rate can
achieve significant increases in website revenue from this large and growing
installed base of Palm OS devices. The potential for Online revenue generation
is further enhanced by the proliferation of smartphone and communicators capable
of mobile commerce ("m-commerce"). The mobile phone manufactures and the service
providers are already laying the foundation, on a global basis, for m-commerce
to be transacted from handheld devices through the wireless Internet. The
Company believes that the potential of its software being downloaded to millions
of smartphones and communicators in addition to the large and growing Palm PDA
installed base provides meaningful revenue potential for 2001 and beyond.
China
Revenue from CICC, the Company's 90% owned Chinese Joint Venture, increased
18% for the year ended December 31, 2000, to $1.9 million versus $1.6 million
for 1999. China represents a major opportunity for the Company. The Joint
Venture was established almost eight years ago. The Company believes the 10%
ownership position of the Information Industries Bureau provides considerable
stability and legitimacy. China is the world's third largest economy and the
recent U.S. China Trade Bill and the expected accession of China to the World
Trade Organization is fueling economic growth and individual buying power in
that country of 1.2 billion people. The Company believes the need for, and
benefits associated with, its electronic signature technology for applications
including e-commerce, automating signature dependent document processes, and
corporate security is impacting China more intensely than the U.S. and Europe as
the Chinese prepare to compete on a world wide basis. Panda, NEU-APLINE, Hongtu
High-Tech, Hu Nan Mobile Communications Bureau, Ministry of Agriculture, and the
Ministry of Aviation are among a dozen Chinese companies and government agencies
who have ordered and implemented CIC e-signature and Chinese natural input
technology in the last half of 2000. Last October, Hongtu High-Tech, an
acknowledged leader in systems integration throughout China, chose CICC as their
strategic alliance partner to develop and rollout total e-signature based
solutions for the Chinese healthcare and financial services industries. In
addition, the launching last year of China's wireless infrastructure enabling
mobile commerce represents significant revenue potential for the Company. China
has over 60 million mobile phone subscribers growing at 2.5 million per month
and over 20 million Internet users, double that of only six months ago,
forecasted to double every six months (BDA China, Ltd.). The Company believes
the lack of a credit card and wired infrastructure has been a real impediment to
commerce in China. This vast nation's economy has suffered both from the lack of
infrastructure for wired computer and communications oriented devices (wired
telephones, desktop computers, wired Internet) and from the lack of an
effective, widely available banking credit card system. Mobile phones provide
the potential of m-commerce to those possessing purchasing power with direct
charges to their phone bills. The Company believes China's launching of the
wireless infrastructure last year, which bypasses the need for a nationwide
wired system and leap-frogs to wireless, fuels the reality of mobile e-commerce
and provides the foundation for both CICC enterprise and OEM smart handheld
device related revenue growth.
Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revised information
required regarding the reporting of operating segments and was required to be
adopted in periods beginning after December 15, 1997. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS 131 for the year ended December
6
31, 1998, and the Company's information has been Stratified into two Segments -
Handwriting recognition software and Systems integration. For further
information see Note 9 to the Company's Consolidated Financial Statements.
The Company identifies reportable segments by classifying revenues into two
categories Handwriting recognition and system integration. Handwriting
recognition software is an aggregate of three revenue categories, OEM,
Enterprise and Online sales. All Handwriting recognition software is developed
around the Company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize the
Company's products.
Core Technologies
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies".
Natural Input Technologies. CIC's natural input technologies are designed
to allow users to interact with a computer or handheld device by using an
electronic pen or "stylus" as the primary input device or in conjunction with a
keyboard. CIC's natural input offerings include multilingual handwriting
recognition systems, software keyboards, predictive text entry, and electronic
ink capture technologies. Many small handheld devices such as electronic
organizers, pagers and smart cellular phones do not have a keyboard. For such
devices, handwriting recognition and software keyboards offer the most viable
solutions for performing text entry and editing. CIC's predictive text entry
technology simplifies data entry even further by reducing the number of actual
letters required to be entered. The Company's ink capture technologies
facilitate the capture of electronic ink for notetaking, drawings or short
handwritten messages.
Transaction and Communication Enabling Technologies. The Company's
transaction and communication enabling technologies are designed to provide a
cost-effective means for securing electronic transactions, providing network and
device access control, and enabling workflow automation of traditional paper
form processing. CIC believes that these technologies offer more efficient
methods for conducting electronic transactions while providing more functional
user authentication and heightened data security. The Company's transaction and
communication enabling technologies have been fundamental in its development of
software for electronic signatures, biometric signature verification, data
security, and data compression.
Products
Key CIC products include the following:
Handwriter and Jot Handwriting recognition software
WordComplete? Predictive text entry software
QuickNotes Electronic handwritten notetaking software
Sign-it Electronic signatures for MS Word and Adobe Acrobat(R)
Sign-On Biometric signature verification software
for device access
InkTools A suite of application development tools for
electronic signature, biometric signature
verification and cryptography
iSign Web based development tools for electronic signature
and biometric signature verification
Products that were introduced and first shipped in 2000 include the following:
InkTools 1.5 for Windows CE 3.0 or later
InkTools 1.0 for Linux
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InkTools 1.1 for Palm
InkTools 2.5 for Windows
Chinese Handwriter 1.0 for Palm
PenX 2.0 for Windows 32 bit operating systems
WordComplete? 2.0 for Palm
Sign-On 2.0 for Palm
Jot for EPOC
ISign for Java v1.0
Sign-it? EX for Adobe(R) Acrobat(R) 4.0
Sign-it 2.1 for MS Word
Handwriting recognition software analyzes the individual strokes of
characters written with a pen/stylus and converts these stokes into an "ASCII"
text character. This software is especially useful for portable electronic
devices that are too small to employ a keyboard, and for the input of
ideographic script characters such as those used in written Chinese and
Japanese. The Company currently has two recognition system offerings, Handwriter
and Jot.
CIC's Handwriter Recognition System ("HRS(TM)") is an award-winning
software solution for recognizing handwritten input on Windows and Windows CE
based pen computers and desktop PCs. HRS accurately recognizes handwritten
characters with no recognizer training required, so the user can write
naturally. HRS is a full-context recognizer that offers some unique features
such as automatic spacing between words and automatic capitalization of the
first letter of new sentences. HRS is also an integral component of the
Companies PenX software that is currently shipping on many of the leading
Windows based pen computers. Key vertical market licensees of HRS include such
companies as; Fujitsu, Intermec, Xplore, Mitsubishi and Walkabout.
Jot is a print-based recognizer that is specifically designed for small
form factor devices. Unlike many recognizers that compete in the market for
handheld data input solutions, Jot offers a patented user interface that allows
for the input of natural upper and lowercase letters, standard punctuation and
European languages without requiring the user to memorize unique characters or
symbols. This recognizer offers rapid and accurate recognition without requiring
the consumer to spend time training the system. Jot has been licensed to such
key OEMs as: Microsoft, Ericsson, Symbian, National Semiconductor and Vtech. Jot
has been ported to many operating systems including the Palm OS, Windows,
Windows CE, VT-OS, EPOC, QNX, Linux and OS/9 and is currently under development
for others. The standard version of Jot, which is available through OEM,
enterprise and Online product offerings, recognizes and supports input of
Roman-based Western European languages.
InkTools is an electronic signature and biometric signature verification
software developers kit that captures and analyzes the image, speed, stroke
sequence and acceleration of a person's handwritten electronic signature.
InkTools provides an extremely effective and inexpensive biometric security
check for real-time authentication. It also stores the forensic elements of a
signature for use in post signing non-repudiation and authentication. Commercial
applications for this type of software include document approval, verification
of the identity of users participating in electronic transactions, and, securing
log-in access to computer systems or protected networks. This software toolkit
is used internally by CIC as the underlying technology in its Sign-On and
Sign-it products and has been licensed to several key development partners
including EDS, Bionetrix, Dade County, Orange County, and Topaz Systems.
Sign-On is a product offering that utilizes the Company's biometric
signature verification technology to provide access security on portable
devices. This provides the additional level of security needed for devices that
are increasingly being used in business and generally contain sensitive data.
Currently available for the Palm 3.x and Windows CE 3.x operating systems, the
product is also being ported to EPOC and other platforms to meet the
specifications of new licensees and customers.
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Sign-it is a family of electronic signature products for enabling the real
time capture, binding and verification of electronic signatures within standard
consumer applications. These products combine the strengths of biometric
signatures and cryptography to process, transact and create electronic documents
with the same legal standing as a traditional wet signature on paper.
Organizations wishing to process electronic forms requiring varying levels of
security can reduce the need for paper forms by adding electronic signature
technologies to their workflow solution. Currently, Sign-it is available for MS
Word and Adobe(R) Acrobat(R).
iSign is a new product offering that provides functionality similar to
InkTools but was specifically designed for web based architectures. The current
product supports either a Windows implementation with Internet Information
Server and Internet Explorer or Java. The Java implementation was designed to
meet the needs of the higher-end server products that support Java 2 and a broad
base of client systems, which can range from Windows devices to PDAs.
Marketing
The Company's products are marketed through three sales approaches: OEM
Sales, Enterprise and Online Sales. OEM sales efforts are aimed at license
revenues derived from primarily smart handheld device manufacturers. Enterprise
sales efforts are directed at both software providers and end-users. Online
sales represent revenues generated from the Company's software sold via its
website, www.cic.com.
OEM Licensed Products. CIC currently licenses software products for
Windows(R)3.x, Windows(R)'95, Windows'98, WindowsNT, WindowsCE, EPOC, QNX,
VT-OS, Palm and Linux. CIC also ports its products to other platforms to meet
the specifications of licensees. The Company's PenX, Sign-it , and Handwriter
Recognition System are licensed for portable PCs utilizing the Windows(R)'95,
Windows(R)'98, Windows(R)NT, and WindowsCE operating systems and is primarily
used for field force automation and in pen-input PC peripherals for desktop use.
Jot, QuickNotes, Sign-On, WordComplete and the CIC software keyboard are
licensed primarily for the new, smaller classes of Handheld PCs and Pocket PCs
such as those that utilize the Windows(R)CE operating systems and handheld
communicators such as smartphones and PDAs that use the Palm or EPOC operating
system.
Enterprise Solution Products. CIC offers several products targeted at the
broad enterprise market. This could benefit from workflow automation solutions
using electronic signatures or biometric authentication such as new account
openings, regulated document submissions and device/network security. For these
markets, CIC offers several products including InkTools, a high performance
software developer's kit for implementing systems using electronic ink and
electronic signatures which is available for almost all major operating systems,
iSign which provides the same functionality as InkTools but is specifically
designed for distributed application architectures and Sign-it which is designed
to provide this functionality within the framework of the most common word
processing applications and electronic form publishing environments.
Online Product Offerings. The Company's Online Sales department is charged
with the sale of the Company's shrink-wrapped software applications and tools.
This currently includes almost all CIC products and include everyone from
consumers to software developers and corporations. These products are sold over
the Internet on CIC's own website and by other Internet-based electronic
resellers. Consumer versions of these products are being sold for users of the
Palm connected organizers and Windows(R) CE devices. Much of the growth in
Online sales since 1998 was attributable to sales of these products to users of
Palm OS devices.
History
The Company was initially incorporated in Delaware in October 1986 as a
wholly owned subsidiary of a predecessor corporation with the same name. The
Company has a 90%-owned Joint Venture, Communication Intelligence Computer
Corporation, Ltd., with the Information Industry Bureau, a provincial agency of
the People's Republic of China. The Joint Venture was formed in September 1993.
In each year since its inception, the Company has incurred losses. In July
1994, the Company filed a voluntary petition for reorganization and protection
under Chapter 11 of the United States Bankruptcy Code in the United States
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Bankruptcy Court for the District of San Francisco to restructure the Company
and its debt. On November 14, 1994, the Company's pre-petition creditors
approved, and the United States Bankruptcy Court confirmed, the Company's Plan
of Reorganization (the "Plan"), and the Company emerged from bankruptcy. The
Plan provided for the payment in full, in cash, of all allowed unsecured claims
of creditors while leaving secured creditors unimpaired by providing for their
payment in compliance with the original terms and conditions of their loans.
Creditors were paid in three approximately equal installments in February 1995,
1996, and 1997, respectively. In addition, under the Plan each holder of the
Company's then outstanding shares of Common Stock and Convertible Preferred
Stock received one unit, which consisted of two shares of Common Stock and one
Common Stock purchase warrant, with an exercise price of $0.50 per share, in
exchange for two shares of Convertible Preferred Stock or Common Stock. All
unexercised warrants issued pursuant to the Plan expired in December 1994. Since
July 1994, the Company has consummated a number of debt and equity financings.
For further information concerning these transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources".
In October, 2000, a wholly-owned subsidiary of the Company, acquired
certain assets of PenOp Limited ("PenOp") and its subsidiary PenOp Inc. ("PenOp
USA" and together with PenOp, the "Sellers"), pursuant to an asset purchase
agreement, dated as of September 29, 2000, by and among the Company and the
Sellers (the "Acquisition"), in exchange for 4.7 million shares of common stock
of the Company (the "Transaction Shares"). Out of the 4.7 million Transaction
Shares issued to the Sellers in connection with the Acquisition, approximately
940,000 shares are being held in escrow to cover potential indemnification
claims.
Copyrights, Patents and Trademarks
The Company relies on a combination of patents, copyrights, trademarks,
trade secrecy and contractual provisions to protect its software offerings and
technologies. There can be no assurance, however, that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. In addition, the laws of certain countries in which the Company's
products are licensed may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. Because of
the rapid evolution of technology and uncertainties in intellectual property law
in the United States and internationally, there can be no assurance that the
Company's current or future products or technologies will not be subject to
infringement by others. The Company's licensees and distributors have access to
proprietary information of the Company. In addition a substantial portion of the
Company's technology and know-how are maintained as trade secrets, and are not
protected by patent, trademark or copyright laws. The Company has a policy of
requiring its employees and contractors to respect proprietary information
through written agreements. The Company also has a policy of requiring
prospective business partners to enter into non-disclosure agreements before any
of the Company's proprietary information is revealed to them. There can be no
assurance that the measures taken by the Company to protect its technologies,
products and other proprietary rights will adequately protect it against
improper use.
Certain technological processes originally implemented in the Company's
software offerings were developed and patented by Stanford Research Institute
("SRI") and SRI assigned those patents, which subsequently expired, to the
Company. The Company has made significant improvements to the original
technologies and additional patents relating to such technological improvements
have been applied for or issued. Therefore, the Company does not believe that
the expiration of the SRI patents has had or will have a significant effect on
its operations. Other major elements of the Company's software offerings and
technologies were developed by the Company and have been patented. As a result
of the PenOp transaction, the Company acquired all the intellectual property
rights of that company adding that full range of patents, copyrights and
trademarks to its portfolio. Certain of the Company's existing patents expire
between the years 2002 and 2017. The Company is unable to predict at this time
the impact to its business, if any, from such expiration.
CIC has an extensive list of registered and unregistered trademarks and
applications in the United States and other countries. The Company intends to
register its trademarks generally in those jurisdictions significant marketing
of its products will be in the foreseeable future.
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The Company may be required or elect to take various forms of legal action
from time to time to protect its proprietary rights. Any litigation regarding
claims against the Company or claims made by the Company against others could
result in significant expense to the Company, divert the efforts of its
technical and management personnel and have a material adverse effect on the
Company, whether or not such litigation is ultimately resolved in favor of the
Company. In the event of an adverse result in any such litigation, the Company
may be required to expend significant resources to develop non-infringing
technology or obtain licenses from third parties. There can be no assurance that
the Company would be successful in such development or that any such licenses
would be available on commercially reasonable terms, if at all.
Seasonality of Business
Historically, the Company has not experienced seasonal trends affecting
sales of its products or the development or licensing of its technologies.
Material Customers
Historically, the Company's Handwriting recognition segment revenues have
been derived from a limited number of customers. One customer accounted for 16%
and two customers accounted for 11% of revenues in 2000. One customer accounted
for 27% and 7% of the Company's Handwriting recognition segment revenues in 1999
and 1998, respectively. The loss of any significant customer or other source of
revenue could have a material adverse effect on the Company.
Backlog
At December 31, 2000, backlog approximated $61,000 representing advanced
royalty and service maintenance agreements which are expected to be recognized
over the next twelve months. At December 31, 1999, backlog approximated $35,000
representing NRE associated with the Middlesoft and National Semiconductor
agreements. At December 31, 1998, backlog approximated $782,000 representing NRE
and pre-paid royalties associated with the Ericsson agreement.
Competition
The markets for CIC's offerings are competitive, and have attracted a
number of competitors within certain product markets. The Company intends to be
responsive to emerging market demands as well as competitive threats. While
competitors may pose a threat to the Company's efforts to gain market share
within certain markets, the Company believes these competitors also help bring
attention to and build awareness for pen-input solutions. Certain competitors of
the Company have substantially greater financial and other resources than that
of the Company. The Company faces competition at different levels. Certain
competitors have developed or are developing software offerings, which may
compete directly with the Company's offerings. Most of the direct competitors of
CIC have focused only on one element of such offerings, such as handwriting
recognition technology, signature capture/verification or pen-based operating
environments or other pen-based applications. While the Company believes that it
has a competitive advantage in some cases due to its range of product offerings,
there can be no assurance that competitors will not succeed in developing
products or technologies that are more effective, easier to use or less
expensive than the Company's products or technologies or that would render the
Company's products or technologies obsolete or non-competitive. Competitors of
the Company include certain of the Company's current and potential strategic
partners and customers who are developing or acquiring alternative products and
technologies to those offered by the Company. There can be no assurance that
companies with which the Company has established or will establish distribution,
license, product development or other strategic relationships will not choose to
market competitive technologies or products developed internally or acquired
from third parties.
11
Joint Venture in the People's Republic of China
The Company currently owns 90% of the Joint Venture with the Information
Industries Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). As of December 31, 2000, the Company had
contributed an aggregate of $1.8 million in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights, and the Agency had contributed certain land use rights. In 1998, the
registered capital of the Joint Venture was reduced, and as a result, pursuant
to the terms and provisions of the Joint Venture agreement, neither party is
required to make further contributions. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Joint Venture in the People's Republic of China".
Employees
As of March 28, 2001, the Company and the Joint Venture employed an
aggregate of 73 full-time employees, 28 of which are in the United States and 45
of which are in China. From time to time, the Company also engages additional
personnel on an as needed basis. The Company believes it has good relations with
its employees. None of the Company's employees is a party to a collective
bargaining agreement.
Geographic Areas
For the years ended December 31, 2000, 1999, and 1998, the Company's export
sales as a percentage of total revenues were approximately 24%, 36%, and 16%,
respectively. The decrease in export sales in 2000 is due to the reduction in
licensing revenues from Ericsson compared to the prior year period. The increase
in export sales in 1999 is due to the recognition of licensing revenues from
Ericsson. The Company maintains certain agreements with Japanese customers;
however the revenues are derived from the Company's U.S. operations. Due to the
volume of the Company's sales on its website, and the selling price of the
products offered, it is not economically feasible to track product sales by
individual country.
The Company is subject to various risks in connection with the Joint
Venture in the People's Republic of China, including the risks commonly
associated with doing business abroad. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 9 to the Company's Consolidated Financial
Statements.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following: (1) technological,
engineering, quality control or other circumstances which could delay the sale
or shipment of products; (2) economic, business, market and competitive
conditions in the software industry and technological innovations which could
affect the Company's business; (3) the Company's ability to protect its trade
secrets or other proprietary rights, operate without infringing upon the
proprietary rights of others or prevent others from infringing on the
proprietary rights of the Company; and (4) general economic and business
conditions and the availability of sufficient financing.
Item 2. Properties
The Company currently leases its principal facilities (the "Principal
Offices"), consisting of approximately 11,700 square feet, in Redwood Shores,
California, pursuant to a sub-lease that expires in 2001. In addition, the
Company sub-leases to a third party approximately 3,200 square feet of space
adjacent to the Principal Offices. The sub-lease expires in 2001. The Joint
Venture leases approximately 1,000 square feet in Nanjing, China. The Company
anticipates that its existing leases will be renegotiated as they expire or that
alternative properties can be leased on acceptable terms. The Company also
believes that its current facilities will be suitable for it to continue
operations in the foreseeable future.
12
Item 3. Legal Proceedings
As of March 28, 2001, the Company was not a party to any legal proceeding,
which, if adversely determined, would have a material adverse effect on its
business. In July 1994, the Company filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in order to restructure the
Company and its debt. In November 1994, the Plan was approved and confirmed, and
the Company emerged from bankruptcy. See "Item 1. Business-History".
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market under the trading symbol CICI. The following table sets forth the high
and low sale prices of the Common Stock for the periods noted.
Sale Price
Per Share
Year Period High Low
1999 First Quarter..................................... $ 2.50 $ 0.69
Second Quarter.................................... $ 2.59 $ 0.97
Third Quarter..................................... $ 1.47 $ 1.00
Fourth Quarter.................................... $ 8.25 $ 0.88
2000 First Quarter..................................... $12.03 $ 5.31
Second Quarter.................................... $ 5.22 $ 1.84
Third Quarter..................................... $ 4.25 $ 2.25
Fourth Quarter.................................... $ 3.06 $ 1.00
2001 First Quarter (through March 28, 2001)............ $ 2.06 $ 1.00
As of March 28, 2001, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $1.12 per share and there were approximately 669
registered holders of the Common Stock.
To date, the Company has not paid any dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future. The declaration
and payment of dividends on the Common Stock is at the discretion of the Board
of Directors and will depend on, among other things, the Company's operating
results, financial condition, capital requirements, contractual restrictions or
such other factors as the Board of Directors may deem relevant.
During the three months ended December 31, 2000, the Company granted stock
options to employees and directors for services rendered as follows:
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
- --------------------------------------------------------------------------------
One Director 10/30/00 50,000 $ 3.00 Immediately(1) 10/30/07
Thirty Employees 12/19/00 121,000 $ 1.19 Quarterly over 12/19/06
three years
(1) Any shares of common stock issued pursuant to this option are subject to
buyback provisions that expire prorata over four quarters commencing on the
date of grant.
13
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of December 31,
2000, 1999, 1998, 1997, and 1996 and for each of the years in the five-year
period ended December 31, 2000 are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000, are included in Item 8 of this Form 10-K. The selected
consolidated financial data should be read in conjunction with the Company's
audited financial statements and the notes thereto and other portions of this
Form 10-K including "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Year Ended December 31,
----------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues...................... $ 7,312 $ 6,518 $ 4,581 $ 5,516 $ 2,887
Research and development
expenses(1).................. 1,603 1,363 1,989 2,360 1,672
Sales and marketing expenses.. 2,239 1,877 2,015 6,257 3,282
General and administrative
expenses..................... 2,181 1,683 1,889 2,663 2,037
Loss from operations.......... (1,607) (1,722) (3,285) (11,627) (6,535)
Net loss available to
common stockholders(2)....... (1,799) (1,740) (3,592) (16,940) (6,356)
Basic and diluted loss
per common share............. ( 0.02) ( 0.02) ( 0.06) ( 0.37) ( 0.15)
As of December 31,
------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash.............. $ 2,349 $ 2,374 $ 1,045 $ 5,485 $ 11,325
Working capital(3)............ 3,109 3,054 346 2,721 8,284
Total assets.................. 11,302 4,963 3,354 7,491 13,503
Deferred revenue.............. 61 35 651 440 2,006
Long-term obligations......... 1,427 1,338 - 8 32
Redeemable securities......... - - - - 9,417
Stockholders' equity
(deficit)(4)................. 8,307 2,349 1,332 3,989 (82)
- -----------
(1) Excludes software development costs capitalized in accordance with
Statement of Financial Accounting Standards No. 86 of $20, $9, and $17,
for the years ended December 31, 2000, 1999, and 1998, respectively. No
software development costs were capitalized in the years ended December
31, 1997 and 1996, respectively.
(2) The Company's 1997 net loss applicable to common stockholders includes
a one-time, non-cash charge of $4.9 million related to the embedded
yield on the Company's Series A Preferred Stock issued in December 1996
due to the discounted conversion provisions of such stock and the
cumulative dividends of $1.25 per share, per annum on Series A
Preferred Stock. Includes dividends on Series A Preferred Stock and
Series B Preferred Stock of $435 and $564 for the years ended December
31, 1998 and 1997, respectively.
(3) Current liabilities used to calculate working capital at December 31,
2000, 1999, 1998, 1997, and 1996 include deferred revenue of $61, $35,
$651, $440, and $2,006, respectively.
(4) The Company has never paid dividends to the holders of its common stock
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
History. The Company was initially incorporated in Delaware in October
1986. In each year since its inception, the Company has incurred losses. For the
five-year period ended December 31, 2000, losses aggregated approximately $30
million and at December 31, 2000, the Company's accumulated deficit was
approximately $73 million. In July 1994, the Company filed a petition for
reorganization and protection under Chapter 11 of the United States Bankruptcy
Code in order to restructure the Company and its debt. In November 1994, the
Company's pre-petition creditors approved, and the United States Bankruptcy
Court confirmed, the Company's Plan of Reorganization and the Company emerged
from bankruptcy. See "Item 1. Business - History."
Revenue Recognition. In October 1997, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for
transactions entered into during the fiscal year beginning January 1, 1998. SOP
97-2 provides guidance for recognizing revenue on software transactions and
supersedes Statement of Position No. 91-1, "Software Revenue Recognition". In
March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4"). SOP 98-4 defers, for one year, the application of certain passages in
SOP 97-2 which limit what is considered vendor-specific objective evidence
("VSOE") necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. In December 1998,
the AICPA issued Statement of Position No. 98-9 ("SOP 98-9") "Modifications of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions."
SOP 98-9 extends the effective date of SOP 98-4 and provides additional
interpretative guidance. SOP 98-9 is effective for fiscal years beginning after
March 15, 1999. The Company determine that the impact of SOP 98-9 and the
remaining provisions of SOP 97-2 on current revenue recognition practices did
not have a material impact on revenue recognition during 2000. The Company also
has adopted revenue recognition under SAB 101.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment, provided that no
significant obligations remain and that collection of the resulting receivable
is likely. The Company provides for estimated sales returns at the time of
shipment. License revenues are recognized when the software has been delivered
and all significant obligations have been met. Royalty revenues are recognized
as products are licensed and sold by licensees. Revenues from development
contracts are primarily generated from non-recurring engineering fees and
research grants. Revenue is recognized in accordance with the terms of the
grants and agreements, generally when collection is probable and related costs
have been incurred.
Sources of Revenues. To date, the Company's revenues have been derived
principally from end-users, manufacturers, retailers and distributors of
computer products in North America, Europe and the Pacific Rim. The Company
performs periodic credit evaluations of its customers and does not require
collateral. The Company maintains reserves for potential credit losses.
Historically, such losses have been insignificant and within management's
expectations.
Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
completion of a working model, and generally ends upon the release of the
product. As of December 31, 2000, 1999 and 1998, such costs were insignificant.
Significant Customers. Three customers accounted for 16%, 6% and 5%,
respectively, of revenues in 2000. One customer accounted for 27% of the
Company's revenues in 1999. No one customer accounted for more than 10% of total
revenues in 1998.
Research and Development. Research and development costs are charged to
expense as incurred.
15
Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and losses from the translation of the local foreign currency financial
statements are included as a component of "accumulated other comprehensive loss"
in the Company's consolidated balance sheets included in this Annual Report on
Form 10-K. Foreign currency assets and liabilities are translated into U.S.
dollars at exchange rates prevailing at the end of the period except for
non-monetary assets and liabilities which are translated at historical exchange
rates. Revenues and expenses are translated at the average exchange rates in
effect during each period, except for those expenses included in balance sheet
accounts which are translated at historical exchange rates.
Net foreign currency transaction gains and losses are included as
components of "interest income and other income (expense), net" in the Company's
consolidated statements of operations included in this Annual Report on Form
10-K. Due to the stability of the currency in China, net foreign currency
transaction gains and losses were not material for the year ended December 31,
2000. The Company recorded a net foreign currency transaction gain of $59,000
and $55,000 for the years ended December 31, 1999 and 1998, respectively.
Net Operating Loss Carryforwards. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets at December 31,
2000 of 21,600 based upon the Company's history of losses.
The Company reports in two segments, handwriting recognition and system
integration. For purposes of Management Discussion and Analysis, handwriting
recognition includes Online revenues and Corporate sales, including OEM and
Enterprise revenues, and system integration is referred to as China sales.
Results of Operations
Years Ended December 31, 2000 and December 31, 1999
Revenues. Revenues increased $794,000 or 12% to $7,312,000 for the year
ended December 31, 2000 as compared to $6,518,000 in the prior year.
Online revenues declined $426,000 or 24% to 1,327,000 in 2000 as
compared to $1,753,000 in the prior year period. In 1999, the Company was able
to draw on a large number of previously unsolicited names during the first year
of the direct mail campaign. In 2000, the number of names was reduced to newly
registered palm users, and is the primary reason for the decline in revenues.
Sales of the Company's Handwriter products for the years ended December 31, 2000
and 1999 were insignificant. The Company discontinued the Handwriter products in
1998 and sold the remaining inventory over the web through the second quarter of
1999.
Corporate sales, which includes Enterprise and OEM revenue increased
$929,000 or 30% to $4,074,000 (including the nonrecurring maintenance fees from
M10, previously PenOp) for the year ended December 31, 2000 compared to
$3,145,000 in the prior year period. Sales of the Company's software solutions
and maintenance to end users increased $1,754,000 to $1,792,000 in 2000 compared
to $38,000 in the prior year period. The increase is due primarily to
Nonrecurring maintenance fees, from M10 and the sale of software solutions and
maintenance revenues to Charles Schwab, Assurant, Orange County, E-Com, and
others in 2000. During the fourth quarter of 2000 the Company engaged in a
transaction with PenOp to provide nonrecurring maintenance services from
pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which
$877 was recorded (net). The Company had previously entered into a separate
transaction, to acquire the intellectual property rights from PenOp (see note
1.) OEM revenues included in corporate sales decreased $574,000 or 22% to
$2,067,000 from $2,641,000 in the prior year period. This decrease is due to a
reduction in the amount of revenues recognized from Ericsson and other OEM's
compared to the prior year. Revenues from development contracts included in
corporate sales decreased $251,000 or 54% to $215,000 from $466,000 for the
prior year due primarily to decreases in non-recurring engineering ("NRE")
revenues. Revenues from development contracts in 2000 and 1999 were primarily
attributable to porting of the Company's software to third party products such
as smartphones and web browsers.
China sales increased $291,000 or 18% to $1,911,000 for the year ended
December 31, 2000 as compared to $1,620,000 in the prior year. The increase is
due to increased sales activity in 2000 and not related to any one time large
sale to a single customer.
Cost of Sales. Cost of sales decreased $421,000 or 13% to $2,896,000 for
the year ended December 31, 2000 as compared to $3,317,000 in the prior year
period.
16
Online cost of sales decreased $745,000 or 41% to $1,087,000 in 2000 as
compared to $1,832,000 in the prior year. This decrease is due to the reduced
number of new names available in 2000 as compared to 1999, and the elimination
of mailing costs associated with follow-up mailers sent after initial contact.
Corporate sales costs increased $91,000 or 28% to $416,000 from $325,000
in the prior year. Costs associated with the Company's signature software
solutions increased to $167,000 and was due to $155,000 in third party hardware
costs sold with the Company's corporate signature software solution products,
and $12,000 in amortization of capitalized software costs. The Company had no
significant costs associated with its off the shelf signature solution products
sold in 1999 due to the low volume of revenues generated compared to 2000. Costs
of development contract revenues included in corporate sales decreased $71,000
or 27% to $190,000 in 2000 as compared to $261,000 in the prior year. The
decrease in development contract cost is due to the reduction in NRE projects
during 2000 as compared to the prior year period. OEM costs decreased $5,000 or
8% to $59,000 as compared to $64,000 in the prior year. The decrease is due to a
decrease in revenues and the associated technology import tax from the Company's
Japanese OEM customers.
China cost of sales increased $233,000 or 20% to $1,393,000 in 2000 as
compared to $1,160,000 in the prior year period. The increase was due to the
increase in sales activity in 2000 as compared to the prior year.
Gross Margin. Gross margin increased $1,215,000 or 38% to $4,416,000 in
2000 as compared to $3,201,000 in the prior year.
Online gross margin increased $319,000 to $240,000 in 2000 as compared
to a gross margin loss of $79,000 in the prior year period. The increase is due
to the change in the mix of names from new and long time users of palm products
to names new to the palm products. The change in the mix of names has allowed
the Company to eliminate the follow-up mailers, primarily used to attempt to
convert long time users of PDA's to the Company's more natural input products.
Online gross margins were 18% of sales for the year ended December 31, 2000.
Corporate sales gross margin increased $838,000 or 30% to $3,658,000 in
2000 from $2,820,000 in the prior year period. This increase is primarily due to
the 30% increase in Corporate sales discussed above. Corporate sales gross
margin as a percentage of sales was 90% for the years ended 2000 and 1999,
respectively.
China sales gross margin increased $58,000 or 13% to $518,000 in 2000
from $460,000 in the prior year. This increase is primarily due to the 18%
increase in sales in 2000 as discussed above. China gross margin as a percentage
of sales declined 1% to 27% as compared to 28% in the prior year.
Research and Development Expenses. Research and development expenses
increased $240,000 or 18% to $1,603,000 for the twelve months ended December 31,
2000 as compared to $1,363,000 for the prior year. Salaries and related costs
increased $46,000 or 4% to $1,181,000 in 2000 compared to $1,135,000 in 1999.
This increase is due to additional headcount during 2000 compared 1999. Other
costs, including shared development costs with the Joint Venture, facility and
other costs increased $122,000 in 2000 compared to the prior year. In addition
costs, associated with development contracts and charged to cost of sales
decreased $72,000. This decrease was due to a lower number of revenue generating
nonrecurring engineering projects in 2000 compared to the prior year.
Sales and Marketing Expenses. Sales and marketing expenses for the year
ended December 31, 2000 increased $362,000 or 19% compared to the prior year.
Payroll and related costs in 2000 increased 16% or $110,000 due primarily to
increased head count during the year. Travel and related expenses increased
$77,000 or 64% in 2000 compared to the prior year. The increase was due to
increases in travel related to sales and marketing activities over and above
those incurred in the comparable prior year. Advertising and promotion expense
increased $210,000 or 112% to $398,000 in 2000 from $188,000 in the prior year.
The increase was due to a $76,000 or 90% increase in media placement costs and
$134,000 or 107% increase in trade show and printed marketing materials expenses
in 2000 compared to the prior year. Other costs, such as facilities and
miscellaneous expenses, decreased $35,000 or 4% in 2000 to $866,000 from
$901,000 in the prior year.
17
General and Administrative Expenses. General and administrative expenses
increased 30% or $498,000 to $2,181,000 for the year ended December 31, 2000
from $1,683,000 for the prior year. Payroll and related costs in 2000 increased
13% or $132,000 due to the addition of key management in late 1999 and the third
quarter of 2000. Investor relations expenses increased $218,000 or 102% to
$432,000 in 2000 as compared to $214,000 in the comparable prior year. This
increase was due to additional NASDAQ listing fees and increased costs of
related to the dissemination of investor information due to the increased
interest in the Company late in the fourth quarter of 1999 and the first quarter
of 2000. Director and Officers insurance increased $44,000 in 2000 due to the
increased activity in the Company's stock. Patent amortization due to the
capitalization of the intellectual property from the PenOp acquisition increased
$28,000 over the prior year. Other expenses including travel, professional
services, facilities cost and provision for uncollectable accounts increased
$76,000 in 2000 as compared to the prior year.
Interest Income and Other Income (Expense), Net. Interest income and
other income (expense) net, increased $21,000 or 38% to $76,000 in 2000 from
$55,000 in the prior year. This increase resulted from an increase in interest
income due to higher cash balances during the year. The increase in interest
income was offset by fees associated with credit card sales from the Company's
website of approximately $49,000 in 2000 compared to $59,000 in the prior year.
Interest Expense. Interest expense increased $193,000 or 264% in 2000 to
$266,000 compared to $73,000 in the prior year. This increase is due to
long-term debt outstanding for the full year and the amortization of the loan
discount associated with warrants issued in connection with the long term debt.
Years Ended December 31, 1999 and December 31, 1998
Revenues. Revenues increased $1,937,000 or 42% to $6,518,000 in 1999 as
compared to $4,581,000 in the prior year.
Online revenues increased $1,053,000 or 150% to $1,753,000 in 1999 as
compared to $700,000 in the prior year period. Online software revenues
increased $1,376,000 or 402% to 1,718,000 in 1999 as compared to $342,000 in the
prior year. This increase was due to increased direct mail campaigns and
acceptance of the Company's new software product offerings, sold over the
Internet and aimed at the handheld computer market. Handwriter sales decreased
$323,000 or 90% to $35,000 for the year ended December 31, 1999 compared to
$358,000 in the prior year. This reduction in hardware sales resulted from the
Company's transition from a combined hardware and software company to a company
focused primarily on software.
Corporate sales, which includes Enterprise and OEM revenue increased
$1,143,000 or 57% to $3,145,000 compared to $2,002,000 in the prior year.
Enterprise sales of the Company's Handwriter and other products not sold on the
web declined $366,000 to $38,000 for the year ended December 31, 1999 as
compared to $404,000 in the prior year. The decrease was due to the Company's
transition from a combined hardware and software company to a company focused
primarily on software. OEM revenues included in corporate sales for the year
ended December 31, 1999 increased $1,341,000 or 103% to $2,641,000 from
$1,300,000 for the prior year. The increase was primarily attributable to the
recognition of $1,500,000 of license fees for the Company's Jot software product
to be sold on Ericsson mobile smartphones. Revenues from development contracts
in 1999 increased $168,000 or 56% to $466,000 from $298,000 for the prior year
due primarily to increases in non-recurring engineering projects. Revenues from
development contracts in 1999 were primarily attributable to porting of the
Company's software to third party products such as smartphones and web browsers.
Revenues from development contracts in 1998 were primarily attributable to
grants awarded by the National Institute of Standards and Technology and the
National Science Foundation.
Sales by the Company's Joint Venture in China decreased $259,000, or
14%, in 1999 to $1,620,000 compared to $1,879,000 in 1998. This decrease is due
to two major contracts recorded in the second and third quarters of 1998 which
were not repeated in 1999.
Cost of Sales. Cost of sales increased $1,344,000 or 68% to $3,317,000 in
1999 as compared to $1,973,000 in the prior year.
18
Online cost of sales increased $1,559,000 to $1,832,000 in 1999 as
compared to $273,000 in the prior year. Online software cost of sales increased
$1,814,000 to $1,818,000 as compared to $4,000 in the prior year. The increase
was due to the Company's direct mail activities associated with the sale of
software products via its website. The cost of the Handwriter(R) sold via the
internet declined $255,000 or 95% to $14,000 in 1999 compared to $269,000 in the
prior year. This decrease was due to the volume of tablets sold on the web
during the year ended December 31, 1999 as compared to the prior year.
Corporate cost of sales decreased $7,000 or 2% to $325,000 in 1999 as
compared to $332,000 in the prior year. Product costs related the Company's
discontinued Handwriter(R) product sales in 1999 decreased $61,000 or 100% to $0
compared to $61,000 in 1998. The decrease was due to the Company's transition
from a combined hardware and software company to a company focused primarily on
software. OEM costs remained unchanged and amounted to approximately $63,000 in
1999 and 1998, respectively. Costs incurred in connection with development
contracts revenue are expensed as incurred, and increased $54,000 or 26% to
$262,000 in 1999 as compared to $208,000 in the prior year. This increase in
development contract revenue is commensurate with the increase in development
contracts revenue compared to the prior year.
China sales costs decreased $208,000 or 15% to $1,160,000 as compared to
$1,368,000 in the prior year. The decrease is due to the decrease in sales
between the comparable twelve month periods.
Gross Margin. Gross margin increased $593,000 or 23% to $3,201,000 in 1999
as compared to $2,608,000 in the prior year.
Online gross margin declined $506,000 to a negative $79,000 in 1999 as
compared to a gross margin of $427,000 in the prior year period. This decrease
was due primarily to the costs of direct mail campaigns associated with the
Company's sales via its website.
Corporate sales gross margin increased $1,150,000 or 69% to $2,820,000
in 1999 from $1,670,000 in the prior year period. This increase was primarily
due to the 57% increase in Corporate sales discussed above. Corporate Handwriter
gross margins declined $305,000 due to no sales in 1999 as compared to 1998. OEM
gross margins increased $1,341,000 or 108% to $2,578,000 in 1999 from $1,237,000
in the prior year. This increase was due to the increase in OEM revenues
discussed above. Development contract gross margins increased $114,000 or 126%
to $204,000 in 1999 compared to $90,000 in the prior year. This increase was
commensurate with the increase in development contract revenues. Corporate sales
gross margins as a percentage of sales was 90% and 83% for the years ended 1999
and 1998, respectively.
China sales gross margin decreased $51,000 or 1% to $460,000 in 1999
from $511,000 in the prior year period. This increase is primarily due to the
decrease in sales as discussed above. China gross margin as a percentage of
sales for the year ended December 31, 1999 increased 1% to 28% as compared to
27% in the prior year.
Research and Development Expenses. Research and development expenses
decreased 31% or $626,000 to $1,363,000 in 1999 from $1,989,000 in the prior
year. Salaries and related costs decreased 12% in 1999 or $151,000 to $1,134,000
from $1,285,000 in the prior year. This decrease resulted from reductions in
U.S. based personnel and transfer of engineering development work to the Joint
Venture in China. Other expenses including facilities and related costs, service
and support costs, and other costs decreased $457,000 or 52% in 1999 to $419,000
from $876,000 in the prior year. The reductions were due to the transfer of
engineering development work to the Joint Venture in China where labor and other
costs are less expensive and the reduced support of hardware products sold in
prior years. These decreases were offset by increases in 1999 for travel and
related expenses, training fees and software developers dues and subscriptions
of $31,000. In addition, overhead costs associated with development contracts
transferred to cost of goods sold increased 24% to $262,000 in 1999 compared to
$212,000 in the prior year. This increase is commensurate with the increase in
development contract revenue.
Sales and Marketing Expenses. Sales and marketing expense for the year
ended December 31, 1999 decreased 7% or $138,000 compared to the prior year.
Payroll and related costs in 1999 decreased 19% or $165,000 due primarily to
reductions in U.S. personnel related to the Joint Venture operations in China in
the second quarter of 1998. Other costs associated with the reduction in
19
personnel, such as facilities and miscellaneous expenses, decreased $161,000 or
20% in 1999 to $641,000 from $802,000 in the prior year. Advertising and
promotion expense decreased $49,000 or 21% to $188,000 in 1999 from $237,000 in
the prior year. This decrease was due to the Company's efforts in direct mail
campaigns, which costs are a component of cost of goods sold. These reductions
were offset by increases in professional services associated with marketing
studies, recruiting and other expenses of $112,000. Commission expenses
increased $110,000 commensurate with the increase in sales as compared to the
prior year.
General and Administrative Expenses. General and administrative expenses
decreased 11% or $206,000 to $1,683,000 for the year ended December 31, 1999
from $1,889,000 for the prior year. Payroll and related costs in 1999 decreased
12% or $62,000 due to reductions in U.S. personnel related to the Joint Venture
operations in China in the second quarter of 1998. Other costs related to the
reduction in personnel, including travel and facilities costs were reduced
$102,000. Other expenses including provisions for bad debts, patent amortization
and other costs decreased $164,000 in 1999 compared to the prior year. These
reductions were partially offset by increases in recruiting and other
professional services, insurance, and investor relation expenses of $122,000
compared to the prior year.
Interest Income and Other Income (Expense), Net. Interest income and
other income (expense) net, declined 63% to $55,000 in 1999 from $147,000 in the
prior year. This decrease resulted from a decrease in interest income due to
lower cash balances during the year, and the fees associated with credit card
sales from the Company's website of approximately $59,000.
Interest Expense. Interest expense increased to $73,000 in 1999 compared
to $19,000 in the prior year due to bridge loans and the subsequent conversion
to long-term debt. In addition the amortization of the loan discount on warrant
associated with the long-term debt was approximately $20,000. Interest expense
in 1998 related to an accounts receivable financing arrangement and an equipment
loan which were paid off in January and June 1998, respectively.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2000 totaled $2,349,000 compared
to cash and cash equivalents of $2,374,000 at December 31, 1999. This decrease
was primarily attributable to $1,467,000 used in operations and $634,000 of cash
used in investing activities in 2000. This was offset by $2,076,000 of cash
provided by financing activities in 2000. In 2000, the effect of exchange rate
changes on cash was immaterial.
At December 31, 2000, current liabilities, which include deferred revenue,
were $1,441,000. Deferred revenue, totaling $61,000 at December 31, 2000,
primarily reflects advance service contract fees received from the Company's
licensees which are generally recognized as revenue by the Company in the period
in which the service work is completed.
As of December 31, 2000, the Company's principal source of liquidity was
its cash and cash equivalents of $2,349,000. In each year since its inception,
the Company has incurred losses. Although there can be no assurance, the Company
believes that its current cash and resources, together with the expected revenue
levels, will provide sufficient funds for planned operations for at least the
next twelve months. However, if the Company is unable to generate adequate cash
flow from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. There can be no assurance that additional funds will be
available when needed, or if available will be on favorable terms or in the
amounts required by the Company. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some or
all of its marketing and development efforts or other operations, which could
have a material adverse effect on the Company's business, results of operations
and prospects.
Financing. On September 1, and September 19, 2000, respectively, the
Company's 90% owned Joint Venture borrowed, in two transactions the aggregate
equivalent of $120,000 denominated in Chinese currency, from a Chinese bank. The
loans bear interest at 5.12% and were due on March 2, and March 19, 2001,
respectively. The borrowings did not require a compensating balance. The notes
were paid in March 2001.
20
In June 1999, the Company obtained a bridge loan (the "Bridge Loan") in the
amount of $500,000 from a charitable remainder annuity trust, of which a
director and officer of the Company is a trustee. The Bridge Loan was increased
by $150,000 and $100,000 in August and September 1999, respectively. Amounts
outstanding under the Bridge Loan bore interest at the prime rate plus 2%. The
loan was secured by the Company's cash, accounts receivable and other
receivables as then owned or thereafter acquired by the Company. The Bridge Loan
plus accrued interest was due December 31, 1999.
In October 1999, the Company entered into a loan agreement with the same
charitable remainder annuity trust, whereby the then existing Bridge Loan of
$750,000 was converted into a long-term loan in the amount of $1,500,000 (the
"1999 Loan"). The 1999 Loan is secured by a first priority security interest in
all of the Company's assets as now owned or hereafter acquired by the Company.
The 1999 Loan bears interest at the rate of 2% over the prime rate as published
by Citibank from time to time, and is due January 31, 2002. Interest on the
principal amount under the 1999 Loan is payable quarterly. The 1999 Loan can be
re-paid in whole or in part at any time without penalty. Any partial payment
must be in the principal amount of $100,000 or a multiple thereof. The interest
rate at December 31, 2000 was 11.5%.
In October 1999, in connection with the 1999 Loan, the Company issued to
the charitable remainder annuity trust warrants to purchase 300,000 shares of
the Company's common stock. The Company ascribed a value of $179,000 to these
warrants, which will be amortized to the Company's results of operations over
the life of the warrant. The fair value ascribed to the warrants was estimated
on the date of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 5.50%; expected life of 2 years;
expected volatility of 99%; and expected dividend yield of 0%. The warrants were
due to expire October 20, 2001, and had an exercise price of $1.09 per share. On
January 20, 2000, the charitable remainder trust, of which a director and
officer of the Company is a trustee, exercised all 300,000 warrants issued in
connection with the $1,500,000 long-term debt. The warrants were exercised under
the cashless exercise provision in the warrant agreement. The Company issued
approximately 255,000 shares of common stock in exchange for the 300,000
warrants.
Operating Lease Commitments. The Company leases facilities in the United
States and China. The Company's rental expense for the years ended December 31,
2000, and 1999 was approximately $390,000 and $376,000, respectively. Sublease
income was approximately $105,000 and $209,000 for the years ended December 31,
2000 and 1999, respectively. Future minimum lease payments under non-cancelable
operating leases are expected to be approximately $431,000, excluding sub-lease
income, for the years ending December 31, 2001. The Company's rent expense is
expected to be reduced by approximately $82,000 in 2001, in connection with the
subleases.
Volatility of Stock Price
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to, among other factors, quarter to quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Item 8. Financial Statements and Supplementary Data
The Company's audited consolidated financial statements for the years ended
December 31, 2000, 1999 and 1998 begin on page F-1 of this Annual Report on Form
10-K.
21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 8, 1999, the Board dismissed PricewaterhouseCoopers LLP
("Pricewaterhouse") as its independent accountants.
In connection with the audits conducted and during the subsequent period
through December 8, 1999, there were no disagreements between the Company and
Pricewaterhouse on any matter of accounting principles or practice, financial
statement disclosure, auditing scope or procedures, which disagreements, if not
resolved to their satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement. In
addition, the audit report of Pricewaterhouse on the consolidated financial
statements of the Company as of and for the year ended December 31, 1998 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
On December 13, 1999, the Company retained Stonefield Josephson, Inc.
("Stonefield Josephson") as its independent accountants to audit the Company's
financial statements. During the two years ended December 31, 1998 and during
the subsequent period ended December 13, 1999, neither the Company nor anyone on
its behalf consulted Stonefield Josephson regarding (i) the application of
accounting principles to any transaction either completed or proposed, or (ii)
the type of audit opinion that might be rendered by Stonefield Josephson on the
Company's financial statements.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 18, 2001.
Item 11. Executive Compensation
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 18, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 18, 2001.
Item 13. Certain Relationships and Related Transactions
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 18, 2001.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
Page
(a)(1) Financial Statements
Report of Stonefield Josephson, Inc., Independent Accountants.... F-1
Report of PricewaterhouseCoopers LLP, Independent Accountants.... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999........ F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998................................ F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years December 31, 2000, 1999, and 1998. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................. F-6
Notes to Consolidated Financial Statements....................... F-7
(a)(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves....... S-1
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 6, 2000, regarding the Company's
acquisition of certain assets of PenOp Limited and PenOp Inc.
Current Report on Form 8-K/A dated October 6, 2000, describing the
acquisition of the assets of PenOp in more detail
Current Report on Form 8-K dated October 31, 2000, regarding (i)
appointment of Louis Panetta to the Board of Directors, (ii) the resignation of
Jess Ravich from the Board of Directors and (iii) the announcement of the
Company's third quarter results.
(c) Exhibits
Exhibit Document
Number
2.0 Second Amended Plan of Reorganization of the Company, incorporated
herein by reference to the Company's Form 8-K filed October 24, 1994.
2.1 Orderly Liquidation Valuation, Exhibit F to the Second Amended Plan of
Reorganization, incorporated herein by reference to the Company's Form
8-K filed October 19, 1994.
2.2 Order Confirming Plan of Reorganization, incorporated herein by
reference to the Company's Form 8-K filed November 14, 1994.
3.1 Certificate of Incorporation of the Company, as amended, incorporated
herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's
Registration Statement on Form 10 (File No. 0-19301).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation (authorizing the reclassification of the Class A
Common Stock and Class B Common Stock into one class of Common Stock)
as filed with the Delaware Secretary of State's Office on November 1,
1991, incorporated herein by reference to Exhibit 3 to Amendment 1 on
Form 8 to the Company's Form 8-A (File No. 0-19301).
3.3 By-laws of the Company adopted on October 6, 1986, incorporated herein
by reference to Exhibit 3.5 to the Company's Registration Statement on
Form 10 (File No. 0-19301).
23
4.1 1984 Stock Option Plan of the Company, as amended and restated as of
October 15, 1987 and as amended by resolutions of the stockholders of the
Company passed on August 15, 1989 and October 8, 1990 to increase the
aggregate shares covered thereby to 1,000,000, incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on Form
10 (File No. 0-19301).
4.2 Form of Stock Option Grant under 1984 Stock Option Plan, incorporated
herein by reference to Exhibit 4.5 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
4.3 1991 Stock Option Plan of the Company, incorporated herein by reference
to Exhibit 4.5 of the Company's Form S-1 dated December 23, 1991
(Registration No. 33-43879).
4.4 1991 Non-Discretionary Stock Option Plan, incorporated herein by
reference to Exhibit 4.6 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
4.5 Form of Incentive Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.7 of the Company's Form
S-1 dated December 23, 1991 (Registration No. 33-43879).
4.6 Form of Non-Qualified Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.8 of the Company's Form
S-1 dated December 23, 1991 (Registration No. 33-43879).
4.7 Form of Stock Option Grant under 1991 Non-Discretionary Stock Option
Plan, incorporated herein by reference to Exhibit 4.9 of the Company's
Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.8 1994 Stock Option Plan, incorporated herein by reference to Exhibit G of
the Company's Second Amended Disclosure Statement filed on Form 8-K dated
October 19, 1994 and approved by shareholders on November 14, 1994.
4.9 Form of Warrant of the Company dated March 28, 1997 issued in connection
with the Waiver by and among the Company and the signatories thereto,
incorporated herein by reference to Exhibit 4.9 of the Company's 1996
Form 10-K (File No. 0-19301).
4.10 1999 Stock Option Plan, incorporated herein by reference to Exhibit A of
the Company's Definitive Proxy Statement filed on May 4, 1999 and
approved by shareholders on June 7, 1999. .
+10.1 Licensing and Development Agreement for Use and Marketing of Program
Materials dated September 25, 1992 between the Company and International
Business Machines Corporation, incorporated herein by reference to
Exhibit 10.13 of the Company's 1992 Form 10-K (File No. 0-19301)
10.2 Standby Stock Purchase Agreement between the Company and Philip Sassower
dated October 3, 1994, incorporated herein by reference to Exhibit 10.13
of the Company's 1994 Form 10-K (File No. 0-19301)
10.3 Form of Subscription Agreement between the Company and the Purchasers,
dated November 28, 1995, incorporated herein by reference to Exhibit 1 of
the Company's Form 8-K dated November 28, 1995.
10.4 Form of Registration Rights Agreement between the Company and the
Purchasers, dated November 28, 1995, incorporated herein by reference to
Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.5 Form of Warrant of the Company issued to Libra Investments, Inc. on
November 28, 1995, incorporated herein by reference to
Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.6 Form of Registration Rights Agreement between the Company and Libra
Investments, Inc., dated November 28, 1995, incorporated
herein by reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
10.7 Form of Subscription Agreement between the Company and various investors,
dated June 13, 1996, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated June 27, 1996.
10.8 Form of Registration Rights Agreement between the Company and various
investors, dated June 13, 1996, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated June 27, 1996.
24
10.9 Form of Preferred Stock Investment Agreement, dated as of December 31,
1996, between the Company and the investors listed on Schedule 1 thereto,
incorporated herein by reference to Exhibit 1 of the Company's Form 8-K
dated December 31, 1996.
10.10 Form of Registration Rights Agreement between the Company and the
Investors Listed on Schedule 1 thereto, incorporated herein by reference
to Exhibit 2 of the Company's Form 8-K dated December 31, 1996.
10.11 Form of Certificate of Designation of the Company with respect to the 5%
Cumulative Convertible Preferred Stock, incorporated herein by reference
to Exhibit 3 of the Company's Form 8-K dated December 31, 1996.
10.12 Waiver, dated March 26, 1997, effective December 31, 1996, by and among
the Company and the signatories thereto, incorporated herein by reference
to Exhibit 10.19 of the Company's 1996 Form 10-K (File No. 0-19301).
10.13 Form of Subscription Agreement between the Company and each subscriber,
dated as of November 25, 1997, incorporated herein by reference to
Exhibit 10.1 of the Company's Form 8-K dated December 3, 1997.
10.14 Certificate of Designations of the Company with respect to the Series B
5% Cumulative Convertible Preferred Stock, incorporated herein by
reference to Exhibit 10.2 of the Company's Form 8-K dated November 13,
1997.
10.15 Form of Registration Rights Agreement, by and among the Company and the
signatories thereto, dated as of November 25, 1997, incorporated herein
by reference to Exhibit 10.3 to the Company's Form 8-K dated November 13,
1997.
10.16 Amendment to the Company's Certificate of Designation with respect to the
5% Cumulative Convertible Preferred Stock dated June 12, 1998,
incorporated herein by reference to Exhibit 10.23 of the Company's 1998
Form 10-K (File No. 0-19301).
10.17 Amendment to the Company's Amended and Restated Certificate of
Incorporation dated June 12, 1998, incorporated herein by reference to
Exhibit 10.24 of the Company's 1998 Form 10-K (File No. 0-19301).
10.18 Employment Agreement dated August 14, 1998 between James Dao and the
Company, incorporated herein by reference to Exhibit 10.25 of the
Company's 1998 Form 10-K (File No. 0-19301).
- -10.19 Software Development and License Agreement dated December 4, 1998 between
Ericsson Mobile Communications AB and the Company, incorporated herein by
reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No.
0-19301).
10.20 Loan and Warrant Agreement dated October 20, 1999 between the Company and
the Philip S. Sassower 1996 Charitable Remainder Annuity Trust.
10.21 Asset Purchase Agreement between the Company and PenOp Ltd and PenOp
Inc., incorporated herein by reference to the Company's Form 8-K dated
October 6, 2000.
*21.1 Schedule of Subsidiaries.
*23.1 Consent of Stonefield Josephson, Accountancy Corporation, Independent
Accountants.
*23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
+ Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated
March 29, 1993, filed pursuant to the Securities Exchange Act of 1934.
* Filed herewith.
- - Confidential treatment of certain portions of this exhibit have been
requested from the SEC pursuant to a request for confidentiality dated
March 30, 1999, filed pursuant to the Securities and Exchange Act of
1934.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 28, 2001.
COMMUNICATION INTELLIGENCE CORP.
By:
/s/ Guido DiGregorio
------------------------
Guido DiGregorio
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on March 28, 2001.
Signature Title
/s/ Guido DiGregorio Director, President and Chief Executive Officer
---------------------- (Principal Executive Officer)
Guido DiGregorio
/s/ Marjorie L. Bailey Vice President and Chief Financial Officer
---------------------- (Principal Financial and Accounting Officer)
Marjorie L. Bailey
/s/ Louis Panetta Director
----------------------
Louis Panetta
/s/ Philip S. Sassower Director, Chairman of the Board, and Secretary
----------------------
Philip S. Sassower
/s/ Jeffrey Steiner Director
----------------------
Jeffrey Steiner
/s/ Chien Bor Sung Director
----------------------
Chien Bor Sung
26
Board of Directors and Stockholders of
Communication Intelligence Corporation
Redwood Shores, California
We have audited the accompanying consolidated balance sheets of Communication
Intelligence Corporation and its subsidiary as of December 31, 2000 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity (deficit), cash flows and financial statement schedule for the years then
ended, as listed in the index appearing under Item 14(a)(1) and (2) of this
Annual Report on Form 10-K. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion the consolidated financial statements and financial statements
schedule listed in the index appearing under Item 14(a)(1) and (2) of this
Annual Report on Form 10-K present fairly, in all material respects, the
financial position of Communication Intelligence Corporation and its
subsidiaries ("the Company") at December 31, 2000 and 1999 and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
STONEFIELD JOSEPHSON INC.
Certified Public Accountants
San Francisco, California
February 9, 2001
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
Communication Intelligence Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) of this Annual Report on Form 10-K present
fairly, in all material respects, the financial position of Communication
Intelligence Corporation and its subsidiaries ("the Company") at December 31,
1998, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)2 presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, CA
March 29, 1999
F-2
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
December 31,
---------------------------
2000 1999
---------------------------
Assets
Current assets:
Current Assets:
Cash and cash equivalents..................... $ 2,349 $ 2,374
Accounts receivable,including $350 from M10
(Previously PenOp), net of allowances of
$118 and $13 at............................... 1,760 1,575
Inventories................................... 171 81
Prepaid expenses and other current assets..... 270 175
----------- -----------
Total current assets.................... 4,550 4,205
Note receivable from officer.................... 46 135
Property and equipment, net..................... 262 344
Patents and trademarks.......................... 6,234 8
Other assets.................................... 210 271
----------- -----------
Total assets............................. $ 11,302 $ 4,963
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................... $ 679 $ 288
Short-term debt................................ 120 60
Accrued compensation........................... 263 268
Other accrued liabilities...................... 318 500
Deferred revenue............................... 61 35
----------- -----------
Total current liabilities................ 1,441 1,151
Long-term debt - related party................... 1,427 1,338
Minority interest................................ 127 125
Commitments......................................
Stockholders' equity:
Common stock, $.01 par value; 100,000
shares authorized; 89,668.................... 897 822
Additional paid-in capital...................... 80,656 72,983
Accumulated deficit............................. (73,043) (71,244)
Accumulated other comprehensive loss............ (203) (212)
------------ ----------
Total stockholders' equity........................ 8,307 2,349
------------ ----------
Total liabilities and stockholders' equity..... $ 11,302 $ 4,963
=========== ===========
See accompanying Notes to Consolidated Financial Statements
F-3
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
--------------------------------
2000 1999 1998
--------------------------------
Revenues:
Online................................. $ 1,327 $ 1,753 $ 700
Corporate.............................. 3,197 3,145 2,002
Nonrecurring maintenance
fees - M10 (Previously PenOp)........ 877 - -
China.................................. 1,911 1,620 1,879
--------- --------- ---------
7,312 6,518 4,581
--------- --------- ---------
Operating costs and expenses:
Cost of sales:
Online.............................. 1,087 1,832 273
Corporate........................... 416 325 332
China............................... 1,393 1,160 1,368
Research and development.............. 1,603 1,363 1,989
Sales and marketing................... 2,239 1,877 2,015
General and administrative............ 2,181 1,683 1,889
--------- --------- ---------
8,919 8,240 7,866
--------- --------- ---------
Loss from operations..................... (1,607) (1,722) (3,285)
Interest income and other
income (expense), net.................. 76 55 147
Interest expense......................... (266) (73) (19)
Minority interest........................ (2) - -
---------- --------- --------
Net loss................................. (1,799) (1,740) (3,157)
Preferred stock dividends................ - - (435)
---------- --------- --------
Net loss available to common stockholders. $ (1,799) $ (1,740) $(3,592)
========== ======== ========
Basic and diluted loss per common share... $ (0.02) $ (0.02) $ (0.06)
=========== ========= ========
Weighted average common shares............ 85,324 79,625 56,233
=========== ========= ========
See accompanying Notes to Consolidated Financial Statements
F-4
Communication Intelligence Corporation
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(In thousands)
Series Series
A B Accum.
Convert. Convert. Additional Other
Preferred Preferred Common Paid-In Accum Compre.
Stock Stock Stock Capital Deficit Loss Total
Balances as of
December 31, 1997.. $ 4 $ 2 $ 474 $ 69,955 $(66,347)$(99) $3,989
------------------------------------------------------
Conversion of 329
shares of SeriesA
Preferred Stock into
18,598 shares of
Common Stock....... (4) - 186 (182) - - -
Conversion of 240
shares of Series B
Preferred Stock into
11,384 shares of
Common Stock....... - (2) 114 (112) - - -
Exercise of options
1,126 shares of
Common Stock....... - - 11 511 - - 522
Accelerated vesting
of 40 options to
consultants for
services........... - - - 33 - - 33
Foreign currency
translation adj. - - - - - (55) (55)
Net loss............ - - - - (3,157) - 3,157)
--------------------------------------------------------
Balances as of
December 31, 1998.. - - 785 70,205 (69,504 (154) 1,332
Issuance of 300
warrants in
connection with
Long-term debt.... - - - 179 - - 179
Exercise of options
for 3,421 of
Common Stock...... - - 34 1,802 - - 1,836
Exercise of 329
warrants for 329
shares od Common
Stock............ - - 3 797 - - 800
Foreign currency
translation adj... - - - - - (58) (58)
Net loss........... - - - - (1,740) - (1,740)
---------------------------------------------------------
Balances as of
December 31, 1999.. - - 822 72,983 (71,244)(212) 2,349
Exercise of 2,352
options for 2,352
shares of Common
Stock............. - - 24 1,559 - - 1,583
Exercise of 406
warrants for 361
shares of Common
Stock............. - - 4 433 - - 437
Issuance of 4,700
shares of Common
Stock in exchange
for intellectual
property of PenOp
Ltd............... - - 47 5,681 - - 5,728
Foreign currency
translation adj... - - - - - 9 9
Net loss........... - - - - (1,799) - (1,799)
----------------------------------------------------------
Balances as of
December 31, 2000. $ - $ - $ 897 $ 80,656 $(73,043) $(203) $8,307
==========================================================
See accompanying Notes to Consolidated Financial Statements
F-5
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
---------------------------------
2000 1999 1998
---------------------------------
Cash flows from operating activities
Net loss...................................... $ (1,799) $ (1,740) $ (3,157)
Adjustments to reconcile net loss
to net cash used in operating
Depreciation and amortization............... 328 334 327
Equity securities issued for services....... - - 33
Non-cash compensation....................... 89 - -
(Gain) loss on disposal of property
and equipment............................... - (1) (2)
Changes in operating assets and liabilities.
Accounts receivable, net.................. (185) (429) (784)
Inventories............................... (90) (7) 119
Prepaid expenses and other current assets. (95) (72) 72
Other assets.............................. 48 (49) (12)
Accounts payable.......................... 390 (184) (586)
Accrued compensation...................... (3) 38 (217)
Other accrued liabilities................. (176) 70 (595)
Deferred revenue.......................... 26 (616) 211
--------- --------- --------
Net cash used in operating activities......... (1,467) (2,656) (4,591)
--------- --------- ---------
Cash flows from investing activities
Acquisition of property and equipment......... (636) (78) (45)
Acquisition of property through
capital leases............................... 2 17 -
Proceeds from the sale of property
and equipment................................ - - 25
--------- --------- --------
Net cash used in investing activities......... (634) (61) (20)
--------- --------- --------
Cash flows from financing activities
Proceeds from issuance of short-term debt...... 120 96 145
Proceeds from issuance of long-term
debt - related party......................... - 1,500 -
Restricted cash related to short-term debt..... - 250 (250)
Principal payments on short-term debt.......... (60) (181) (490)
Principal payments on capital lease obligations ( 4) ( 5) ( 6)
Proceeds from exercise of warrants............. 437 800 -
Proceeds from exercise of stock options........ 1,583 1,836 522
--------- -------- --------
Net cash provided by (used in)
financing activities.......................... 2,076 4,296 (79)
--------- -------- --------
Effect of exchange rate changes on cash........ - - -
Net increase (decrease) in cash and
cash equivalents............................... (25) 1,579 (4,690)
Cash and cash equivalents at
beginning of year.............................. 2,374 795 5,485
--------- -------- --------
Cash and cash equivalents at end of year....... $ 2,349 $ 2,374 $ 795
========= ========= ========
See accompanying Notes to Consolidated Financial Statements
F-6
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies
The Company
Communication Intelligence Corporation (the "Company" or "CIC") develops
and markets natural input and biometric electronic signature solutions aimed at
the emerging markets such as, e-commerce, wireless Internet/information devices,
and corporate security. These emerging markets for CIC's products include all
areas of personal computing, as well as electronic commerce and communications.
The Company's research and development activities have given rise to
numerous technologies and products. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies". CIC's natural input
technologies are designed to allow users to interact with a computer or handheld
device through the use of an electronic pen or "stylus". Such products include
the Company's multi-lingual Handwriter(R) Recognition System, and its
Handwriter(R) for Windows(R) family of desktop computing products. CIC's
transaction and communication enabling technologies provide a means for
protecting electronic transactions and discretionary communications. CIC has
developed products for dynamic signature verification, electronic ink data
compression and encryption and a suite of development tools and applications
which the Company believes could increase the functionality of its core products
and facilitate their integration into original equipment manufacturers' ("OEM")
hardware products and computer systems and networks.
Through its 90% owned joint venture in China (the "Joint Venture"), the
Company provides system integration services and markets its pen-based business
computer systems to Chinese businesses, government users and other joint
ventures.
For the five-year period ended December 31, 2000, the Company incurred
aggregate losses of $30 million, and, at December 31, 2000, the Company's
accumulated deficit was approximately $73 million. The Company has primarily
funded these losses through the sale of debt and equity securities.
As of December 31, 2000, the Company's principal source of liquidity was
its cash and cash equivalents of $2,349. Although there can be no assurance, the
Company believes that its current resources, together with expected revenues,
will provide sufficient funds for planned operations for at least the next
twelve months. However, if the Company is unable to generate adequate cash flow
from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. Management believes that it will be able to reduce
discretionary spending if required.
Basis of Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles, and include the
accounts of CIC and its 90% owned Joint Venture in the People's Republic of
China. All inter-company accounts and transactions have been eliminated. All
amounts shown in the accompanying financial statement are in thousands of
dollars except per share amounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The Company has reclassified revenue for 1999 and 1998 to conform with the
current year presentation.
F-7
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, restricted cash, and short-term debt, approximate fair
value due to their short maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity at the
date of purchase of three months or less to be cash equivalents.
Short-term investments are classified as "available-for-sale." For all
periods presented, cost of investments approximated fair market value. The cost
of securities sold is based on the specific identification method. The Company
had no short-term investments as of December 31, 2000 or 1999.
The Company's cash and cash equivalents, at December 31, consisted of
the following:
2000 1999
----------- ------------
Cash in bank.......................... $ 1,332 $ 2,359
Commercial paper...................... 687 11
Money markets......................... 330 4
----------- ------------
Cash and cash equivalents............ $ 2,349 $ 2,374
=========== ============
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
restricted cash, short-term investments and accounts receivable. The Company
maintains its cash, cash equivalents and short-term investments with various
financial institutions. This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate against risk of loss as to principal.
Although such amounts may exceed the F. D. I. C. limits, the Company limits the
amount of credit exposure with any one financial institution and believes that
no significant concentration of credit risk exists with respect to cash and cash
equivalents.
At December 31, 2000, the Joint Venture had approximately $567 in cash
accounts held by a financial institution in the People's Republic of China. The
Joint Venture deposits are not covered by any federal deposit insurance program
that is comparable to the programs applicable to U.S. deposits.
To date, accounts receivable have been derived principally from revenues
earned from end users, manufacturers, retailers and distributors of computer
products in North America, Europe and the Pacific Rim. The Company performs
periodic credit evaluations of its customers, and does not require collateral.
The Company maintains reserves for potential credit losses; historically, such
losses have been insignificant and within management's expectations.
Eleven customers accounted for approximately 72% of accounts receivable at
December 31, 2000. One customer accounted for approximately 95% of accounts
receivable at December 31, 1999.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in first-out ("FIFO") method. Cost principally
includes direct materials. At December 31, 2000 and 1999, inventories consisted
of finished goods.
F-8
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred.
Property and equipment, net at December 31, consists of the following:
2000 1999
----------- ------------
Machinery and equipment............................ $ 1,191 $ 1,127
Office furniture and fixtures...................... 448 438
Leasehold improvements............................. 84 84
Purchased software................................. 174 146
----------- ------------
1,897 1,795
Less accumulated depreciation and amortization..... (1,635) (1,451)
------------ ------------
$ 262 $ 344
============ ============
Included in property and equipment as of December 31, 2000 and 1999 is $42
and $39, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $32 and $25 at December 31, 2000 and 1999,
respectively.
Patents
On October 6, 2000, a wholly-owned subsidiary of the Company, acquired
certain assets of PenOp Limited ("PenOp") and its subsidiary PenOp Inc. pursuant
to an asset purchase agreement dated as of September 29, 2000. Patents are
stated at fair market value. Amortization is computed using the straight-line
method over the estimated lives of the related assets, ranging from five to
seventeen years.
Patents, net at December 31, consists of the following:
Expiration Life 2000 1999
---------- ---- ---- ----
Patent................... Various 5 $ 9 $ -
Various.................. Various 7 476 476
Patent................... 2013 13 93 -
Patent................... 2014 14 187 -
Patent................... 2015 15 373 -
Patent................... 2017 17 5,607 -
------------ ------------
6,745 476
Less accumulated amortization........................ (511) (468)
------------ ------------
$ 6,234 $ 8
============ ============
F-9
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever
circumstances or events indicate such assets might be impaired. The Company
would recognize an impairment reserve in the event the net book value of such
assets exceeded the future undercounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 2000.
Software Development Costs
The Company capitalizes software development costs upon the establishment
of technological feasibility, subject to net realizable value considerations.
Capitalization commences upon the completion of a working model and ends on
general product release. As of December 31, 2000 and 1999, such costs were
insignificant and are included as a component of "other assets" in the
accompanying consolidated balance sheets. Amortization expense related to
capitalized software development costs in 2000, 1999 and 1998 amounted to $12,
$1 and $7, respectively.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted for transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes
Statement of Position No. 91-1, "Software Revenue Recognition". In March 1998,
the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4
defers, for one year, the application of certain passages in SOP 97-2 which
limit what is considered vendor-specific objective evidence ("VSOE") necessary
to recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. In December 1998, the AICPA issued Statement of
Position No. 98-9 ("SOP 98-9") Modifications of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 extends the
effective date of SOP 98-4 and provides additional interpretative guidance. SOP
98-9 is effective for fiscal years beginning after March 15, 2000. The Company
determine that the impact of SOP 98-9 and the remaining provisions of SOP 97-2
on current revenue recognition practices did not have a material impact on
revenue recognition during 2000 and 1999.
Online Revenue
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided that no
significant obligations remain and the collection of the resulting receivable is
probable. The Company provides for estimated sales returns at the time of
shipment.
Corporate Revenue
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are recognized
as products are licensed/sold by licensees. Deferred revenue in the accompanying
balance sheets reflects service contract fees received from the Company's
licensees in advance of revenue being earned.
F-10
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Corporate Revenue (continued)
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from licensees and government
agencies. Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collection is probable and related costs have been
incurred.
China Joint Venture Revenue
Revenue from system integration activities and product sales are recognized
upon shipment provided that no significant obligations remain and the collection
of the resulting receivable is probable.
Three customers accounted for 16%, 6% and 5%, respectively, of revenues in
2000. One customer accounted for 27% of revenues in 1999. No other customers
accounted for greater than 10% of revenues in 2000, 1999 and 1998.
Research and Development
Research and development costs are charged to expense as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
for the year ended December 31, 2000, 1999, and 1998 was $399, $140, and $162,
respectively.
Net Loss Per Share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the disclosure of both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares and dilutive potential common shares outstanding. All prior year
earnings per share data have been restated to reflect the provisions of SFAS
128. Potential common shares, including outstanding convertible preferred stock,
stock options and warrants, have been excluded from the calculation of diluted
earnings per share for all periods presented as their effect is anti-dilutive.
For the year ended December 31, 1998, the per share results of operations is
reduced by the cumulative dividend requirements earned by the preferred
stockholders.
Foreign Currency Translation
The Company considers the functional currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency financial statements are included as a component
of "accumulated other comprehensive loss" in the accompanying consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the end-of-period exchange rates except for non-monetary assets and
liabilities, which are translated at historical exchange rates. Revenues and
expenses are translated at the average exchange rates in effect during each
period except for those expenses related to balance sheet amounts which are
translated at historical exchange rates.
Net foreign currency transaction gains and losses are included in "interest
income and other income (expense), net" in the accompanying consolidated
statements of operations. The Company recorded a net foreign currency
transaction gain of $59, and $58, for the years ended December 31, 1999, and
1998, respectively. Foreign currency transaction gains in 2000 were
insignificant.
F-11
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss and
credit carryforwards. A valuation allowance is provided against deferred tax
assets for when it is determined to be more likely than not that the asset will
not be realized.
Acquisition of Assets From PenOp
On October 6, 2000, a wholly-owned subsidiary of the Company, (the
"Buyer"), acquired certain assets of PenOp Limited ("PenOp") and its subsidiary
PenOp Inc., (collectively, the "Sellers") pursuant to an asset purchase
agreement dated as of September 29, 2000, by and among Buyer and the Sellers for
4.7 million shares of common stock of the Company (the "Acquisition"). Out of
the 4.7 million shares issued to Sellers in connection with the Acquisition,
approximately 940,000 shares are being held in escrow to cover indemnification
of Buyer. The Company ascribed a value of $5,728 to the assets which will be
charged to income over the estimated lives of the assets, five to seventeen
years.
Pursuant to the asset purchase agreement, the Company agreed to use
reasonable efforts to file a Registration Statement under the Securities Act of
1933, as amended (the "Act"), covering the sale of the Transaction Shares no
later than thirty (30) days from closing and to use reasonable efforts to have
the Registration Statement declared effective as soon as practicable thereafter.
The registration statement was declared effective on November 22, 2000.
Subsequent to the closing, an officer and Chairman of the Board of the
Company, and his designees, purchased in a private transaction an aggregate of
1,713,728 shares of common stock received by Sellers in connection with the
Acquisition for $3.3 million.
2. Chinese Joint Venture
The Company currently owns 90% of a joint venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). In June 1998, the registered capital of the
Joint Venture was reduced from $10,000 to $2,550. As of December 31, 1999, the
Company had contributed an aggregate of $1,800 in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had contributed certain land use rights. Following the
reduction in registered capital of the Joint Venture, neither the Company nor
the Agency are required to make further contributions to the Joint Venture.
Prior to the reduction in the amount of registered capital, the Joint Venture
was subject to the annual licensing requirements of the Chinese government.
Concurrent with the reduction in registered capital, the Joint Venture's
business license has been renewed through October 18, 2043.
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Annual financial statements for prior periods have been
reclassified, as required.
The accumulated other comprehensive loss at December 31, 2000 and 1999
consisted of cumulative foreign currency translation adjustments.
F-12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
4. Debt
On September 1, and September 19, 2000, respectively, the Company's 90%
owned Joint Venture borrowed, in two transactions, the aggregate equivalent of
$121, denominated in Chinese currency, from a Chinese bank. The loans bear
interest at 5.12%. The borrowings did not require a compensating balance. The
loans were paid in March 2001.
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank. The
loan bore interest at 5.12% and was due on March 2, 2000. The borrowings did not
require a compensating balance. The note was repaid in full in January, 2000.
Interest expense for the years ending December 31, 2000, 1999, and 1998 was
$266, $53, and $19, respectively. Interest expense associated with related party
debt was $266 and $53 for the years ended December 31, 2000 and 1999,
respectively. There was no related party debt in the year ended December 31,
1998.
5. Stockholders' Equity
Convertible Preferred Stock
In December 1996, the Company completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A Preferred Stock") at $25.00 per share to certain institutional and
other investors. On March 28, 1997, and effective as of December 31, 1996,
holders of 100% of the then issued and outstanding Series A Preferred Stock
executed a waiver of certain provisions of the Registration Rights Agreement
(the "Agreement") entered into in connection with the December Private
Placement. Under the waiver, these holders irrevocably waived any redemption
obligations of the Company with respect to the Series A Preferred Stock in
exchange for the issuance to such holders of 300 warrants to purchase the
Company's Common Stock, allocated amongst the holders on a pro-rata basis. The
warrants expire five years from the effective date of issuance and have an
exercise price of $2.00 per share, subject to adjustments for anti-dilution. On
November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series B
Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually and quarterly, respectively, when payable
(whether or not declared). The dividends could have been paid in cash or
additional shares of preferred stock (with each additional share valued at
$25.00 per share), at the Company's option. The Company paid the required
dividends in additional shares of preferred stock.
Each share of Series A Preferred Stock and Series B Preferred Stock was
convertible by the holders into shares of the Company's Common Stock. All of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock were
converted into shares of common stock by November 1998.
Common Stock Options
The Company adopted two stock option plans in 1991 (the 1991 Stock Option
Plan and the 1991 Non-discretionary Plan, collectively, the "1991 Plans").
Incentive and non-qualified options under the 1991 Plans may be granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans. At December
31, 2000, 163 options are available for grant.
In conjunction with the approval of the Company's plan of reorganization,
the Company adopted the 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan
allows directors, officers and employees to be eligible for grants of incentive
and non-qualified stock options. In May 1997, the stockholders approved an
increase of 1,000 shares to the number of shares authorized for issuance under
the 1994 Plan. Accordingly, a total of 6,000 shares of Common Stock
F-13
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
Stockholders' Equity (continued)
Common Stock Options
are authorized for issuance under the 1994 Plan. The exercise prices of options
under the 1994 Plan are determined by a committee of the Board of Directors,
but, in the case of an incentive stock option, the exercise price may not be
less than 100% of the fair market value of the underlying Common Stock on the
date of grant. Non-qualified options may not have an exercise price of less than
85% of the fair market value of the underlying Common Stock on the date of
grant. Options under the 1994 Plan generally vest over four years. For those
options which vest over four years, 20% of the total options granted vest on the
first anniversary of the date of grant, and an additional 20%, 20%, and 40% of
the total options granted vest on the second, third, and fourth anniversaries of
the date of grant, respectively. Options under the 1994 Plan are generally
exercisable over a period not to exceed seven years. At December 31, 2000, there
are 315 options available for grant under the 1994 Plan.
In December 1994, for services rendered prior to and during the Company's
Chapter 11 proceedings, options to purchase 180 shares of Common Stock at $0.50
per share were granted to three directors of the Company under non-plan option
agreements. In addition, a non-plan option to purchase 100 shares of Common
Stock at $0.50 per share was granted on December 28, 1994 to a newly elected
director and Chairman of the Finance Committee. The newly elected director also
received an option, vesting one year from date of grant, to purchase 50 shares
of Common Stock at an exercise price of $0.50 per share pursuant to the
Company's 1991 Non-discretionary Plan. The non-plan options generally vest over
four years. For those non-plan options which vest over four years, 20% of the
total non-plan options granted vest on the first anniversary of the date of
grant and an additional 20%, 20%, and 40% of the total non-plan options granted
vest on the second, third, and fourth anniversaries of the date of grant,
respectively. Non-plan options under the 1994 Plan are generally exercisable
over a period not to exceed seven years. As of December 31, 1999, 4,887 non-plan
options were outstanding with a weighted average exercise price of $0.84 per
share. Of such non-plan options, 2,228 were exercisable at December 31, 2000
with a weighted average exercise price of $0.77 per share.
On June 1, 1994, the Company negotiated with employees to reduce their
salaries through August 31, 1994. Those employees who agreed to continue their
employment at the reduced wage were granted certain option rights to purchase
Common Stock (the "Options"). Options to purchase 2,210 shares of Common Stock
were granted at an average exercise price of $0.57 per share under this
arrangement, of which 377 Options were granted to officers under the 1991 Plan,
with the remaining Options granted outside of the plans. The Options were
immediately exercisable and have a term of seven years from the date of grant.
As of December 31, 2000, 1,259 Options had been exercised at a weighted average
exercise price of $0.50 per share and 573 Options with a weighted average
exercise price of $0.77 per share had been forfeited. The following table
summarizes information about the Options outstanding and exercisable at December
31, 2000 which were granted outside of the Plans:
Weighted Average
Range of Exercise Prices Options Remaining
Outstanding and Contractual
Exercisable Life (Years) Exercise Price
------------------------------------------------------
$0.30 - $1.05.......... 1 .5 $1.14
In June 1999, the Company adopted and the shareholders approved a stock
option plan (the "1999 Plan"). Incentive and non-qualified options under the
1999 Plan may be granted to employees, officers, and consultants of the Company.
There are 2,000 shares of Common Stock authorized for issuance under the 1999
Plan. The options have a ten year life and generally vest quarterly over three
years. At December 31, 2000, there were 721 shares available for future grants.
F-14
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Common Stock Options
Information with respect to the Company's 1991 Plans the 1994 Plan and the
1999 Plan is summarized below:
Year Ended December 31,
-----------------------------------------
2000 1999
--------------------- ------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
----------------------------------------
Outstanding at beginning of period...... 3,544 $1.02 4,540 $0.82
Granted................................. 947 $3.19 3,745 $0.94
Exercised............................... (757) $0.85 (2,723) $0.55
Forfeited............................... (477) $2.07 (2,018) $1.61
------- --------
Outstanding at period end............... 3,257 $1.54 3,544 $1.02
======= ========
Options exercisable at period end....... 1,150 $1.27 784 $1.04
======= ========
Weighted average grant-date
fair value of options granted
during the period..... $1.54 $1.02
======== ========
The following table summarizes information about stock options outstanding under
the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2000:
Weighted Average
--------------------------------
Remaining
Options Contractual Life
(Years)
Range of Exercise Prices Outstanding xercise Price
---------------------------------------------------------------------------
$0.50.......................... 47 3.1 $0.50
$0.51 - $2.00.................. 2,444 5.9 $1.03
$2.01 - $2.99.................. 58 8.8 $2.32
$3.00 - $7.50.................. 708 9.3 $3.32
----------
3,257
==========
The following table summarizes information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2000:
Weighted
Options Average
Range of Exercise Prices Exercisable Exercise Price
$0.50.............................. 28 $0.50
$0.51 - $2.00...................... 975 $1.01
$2.01 - $2.99...................... 28 $2.31
$3.00.............................. 119 $3.32
----------
1,150
==========
F-15
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Common Stock Options
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Had compensation cost for the Company's option plans been determined based
on the fair value of the options at the date of grant, as prescribed by SFAS
123, the Company's net loss available to common stockholders and basic and
diluted net loss per share available to common stockholders would have been as
follows for the year ended December 31,:
2000 1999 1998
----------------------------------
Net loss available to common stockholders:
As reported.............................. $ (1,799) $ (1,740) $ (3,592)
Pro forma................................ $ (3,937) $ (3,316) $ (4,863)
Basic and diluted net loss per
share available to common
As reported.............................. $ (0.02) $ (0.02) $ (0.06)
Pro forma................................ $ (0.05) $ (0.04) $ (0.09)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods: risk-free interest
rate of 4.7% for 2000, 5.4% for 1999, and 4.5% for 1998, an expected life of 3.5
years for 2000, 4 years for 1999 and 1998, respectively; expected volatility of
100% all periods and dividend yield of 0% for all periods.
Stock options generally vest over three years and the Company expects to
make additional option grants each year. The Company believes the above pro
forma disclosures are not representative of the pro forma effects on reported
results of operations to be expected in future periods.
Warrants
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the then issued and outstanding shares of Series A
Preferred Stock executed a waiver to certain provisions of the registration
rights agreement (the "Agreement") entered into in connection with the December
Private Placement. Under the waiver, these holders irrevocably waived any
redemption obligation of the Company with respect to its Series A Preferred
Stock in exchange for the issuance to the holders of warrants to purchase the
300 shares of the Company's Common Stock, allocated amongst the holders on a
pro-rata basis. The warrants expire five years from the date of issuance and
have an exercise price of $2.00 per share, subject to adjustment for
anti-dilution. The Company has ascribed a value of $484 to these warrants, which
was recorded as an expense in the Company's statement of operations during the
first quarter of 1997. The fair value ascribed to the warrants was estimated on
the date of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 6.60%; expected life of 5 years;
expected volatility of 104%; and expected dividend yield of 0%.
On October 20, 1999, in connection with the 1999 Loan (as defined below)
the Company issued to the charitable remainder annuity trust warrants to
purchase 300 shares of the Company's common stock. The warrants expire two years
from the effective date of issuance and have an exercise price of $1.09 per
share. The Company ascribed a value of $179 to these warrants, which will be
amortized to the Company's results of operations over the life of the warrant.
The fair value ascribed to the warrants was estimated on the date of issuance
using the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 5.50%; expected life of 2 years; expected volatility of 99%;
and expected dividend yield of 0%.
F-16
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Warrants to purchase a total of 470 shares of Common Stock were outstanding
as of December 31, 2000, and have a weighted average remaining contractual life
of 1.2 years and a weighted average exercise price of $2.38 per share.
As of December 31, 2000, 8,614 shares of Common Stock were reserved for
issuance upon exercise of outstanding options and warrants.
6. Related Party Transactions
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the Company's
Common Stock, bearing interest at the lesser of the highest marginal rate per
annum applicable to the Company's borrowings or the highest rate allowable by
law (10% per annum at December 31, 1997). On August 14, 1998, the Company
entered into an employment agreement (the "Employment Agreement") with the
aforementioned former officer. Under the Employment Agreement, the former
officer will provide consulting services to the Company through December 15,
2001. In exchange for these services, $110 of the note receivable from the
officer shall be forgiven on a monthly basis over the period commencing August
15, 1998 and ending December 15, 2001. The remaining $100 of the note receivable
from the officer will be forgiven on December 15, 2001 if the officer has
performed all the required services under the Agreement. The Agreement will
terminate on December 15, 2001.
On June 16, 1999, the Company obtained a bridge loan (the "Bridge Loan") in
the amount of $500 from a charitable remainder annuity trust, of which a
director and officer of the Company is a trustee. The Bridge Loan was increased
by $150 and $100 in August and September 1999, respectively. Amounts outstanding
under the Bridge Loan bore interest at the prime rate plus 2%. The loan was
secured by the Company's cash, accounts receivable and other receivables as then
owned or thereafter acquired by the Company. The Bridge Loan plus accrued
interest was due December 31, 1999. In October 1999, the Bridge Loan was
converted to long-term debt as discussed below.
On October 20, 1999, the Company entered into a loan agreement with the
same charitable remainder annuity trust, whereby the then existing Bridge Loan
of $750 was converted into a long term loan in the amount of $1,500 (the "1999
Loan"). The 1999 Loan is secured by a first priority security interest in all of
the Company's assets as now owned or hereafter acquired by the Company. The 1999
Loan bears interest at the rate of 2% over the prime rate as published by
Citibank from time to time, 11.25% at December 31, 2000. The note is due January
31, 2002. Interest on the principal amount under the 1999 Loan is payable
quarterly. The 1999 Loan can be re-paid in whole at any time or in part at any
time without penalty The interest rate at December 31, 2000 was 11.25%.
On October 20, 1999, in connection with the 1999 Loan the Company issued to
the charitable remainder annuity trust warrants to purchase 300 shares of the
Company's common stock. The warrants expire October 20, 2001 and have an
exercise price of $1.09 per share. The Company ascribed a value of $179 to these
warrants, which will be amortized to the Company's results of operations over
the life of the debt. The fair value ascribed to the warrants was estimated on
the date of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 5.50%; expected life of 2 years;
expected volatility of 99%; and expected dividend yield of 0%.
On January 20, 2000, the charitable remainder trust, of which a director
and officer of the Company is a trustee, exercised all 300 warrants issued in
connection with the $1,500 long-term debt. The warrants were exercised under the
cashless exercise provision in the warrant agreement. The Company issued 255
shares of common stock in exchange for the 300 warrants.
A director received $150 in 2000, 1999 and 1998, for consulting fees
including office expenses.
F-17
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
6. Related Party Transactions (continued)
Subsequent to the closing of the Acquisition, an officer and Chairman of
the Board of the Company, and his designees, purchased in a private transaction
an aggregate of 1,713,728 shares of common stock received by Sellers in
connection with the Acquisition for $3.3 million.
During the fourth quarter of 2000 the Company engaged in a transaction with
PenOp to provide nonrecurring maintenance services from pre-existing PenOp
contracts in the aggregate amount of $1.5 million, of which $877 was recorded
(net). The Company had previously entered into a separate transaction to acquire
the intellectual property rights from PenOp (see note 1).
7. Commitments
Operating Lease Commitments
The Company currently leases its principal facilities (the "Principal
Offices) in Redwood Shores, California, pursuant to a sublease that expires in
2001. In addition, the Company subleases to third parties certain space adjacent
to the Principal Offices. The Joint Venture leases approximately 1,000 square
feet in Nanjing, China. In addition to monthly rent, the U.S. facilities are
subject to additional rental payments for utilities and other costs above the
base amount. Facilities rent expense was approximately $390, $376, and $420 in
2000, 1999, and 1998, respectively. Sublease income was approximately $104,
$209, and $128 for the years ended December 31, 2000, 1999, and 1998,
respectively.
Future minimum lease payments under noncancelable operating leases are
approximately, $431 for the year ending December 31, 2001. The Company's rent
expense is expected to be reduced by approximately $82 in 2001 in connection
with the subleases described above. Future minimum payments required under
capital leases, which expire in 2001, were insignificant at December 31, 2000.
8. Income Taxes
As of December 31, 2000, the Company had federal net operating loss
carryforwards available to reduce taxable income through 2012 of approximately
$51,230. The Company also had federal research and investment tax credit
carryforwards of approximately $315 which expire at various dates through 2010.
Deferred tax assets and liabilities at December 31, consist of the
following:
2000 1999
--------- ----------
Deferred tax assets:
Net operating loss carryforwards........... $ 20,192 $ 20,977
Credit carryforwards....................... 315 315
Deferred income............................ 13 13
Other, net................................. 782 844
--------- ----------
Total deferred tax assets.................. 21,602 22,149
--------- ----------
21,602 22,149
Valuation allowance........................ (21,602) (22,149)
--------- ----------
Net deferred tax assets.................... $ - $ -
========= ==========
A full valuation allowance has been established for the Company's net
deferred tax assets since the realization of such assets through the generation
of future taxable income is uncertain.
F-18
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
8. Income Taxes (continued)
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating losses and tax credit carryforwards may be impaired or limited in
certain circumstances. These circumstances include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a three
year period. During 1997, the Company experienced stock ownership changes which
could limit the utilization of its net operating loss and research and
investment tax credit carryforwards in future periods.
9. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments and was required to be adopted in
periods beginning after December 15, 1997. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's information has been stratified into two Segments - Handwriting
recognition software and Systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs charged to
each of the operating segments.
The Company identifies reportable segments by classifying revenues into two
categories Handwriting recognition and system integration. Handwriting
recognition software is an aggregate of three revenue categories, OEM,
Enterprise and Online sales. All Handwriting recognition software is developed
around the Company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize the
Company's products. All sales above represent sales to external customers.
The table below presents information about reporting segments for the years
ended December 31,:
Handwriting Systems
Recognition Integration Total
---------------- ---------------- ---------------
2000
Revenues $ 5,401 $ 1,911 $ 7,312
Loss from Operations $ (1,594) $ (13) $ (1,607)
Total assets $ 4,367 $ 1,405 5,772
Depreciation and
1999
Revenues $ 4,898 $ 1,620 $ 6,518
Loss from Operations $ (1,078) $ (44) $ (1,722)
Total assets $ 3,523 $ 1,440 $ 4,963
Depreciation and
1998
Revenues $ 2,702 $ 1,879 $ 4,581
Loss from Operations $ (2,561) $ (684) $ (3,285)
Total assets $ 2,160 $ 1,194 $ 3,354
Depreciation and
amortization $ 283 $ 44 $ 327
F-19
Communication Int22222elligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
9. Segment Information (continued)
The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31,:
Revenues Long Lived Assets
--------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
------ ------- ------- -------- --------- ----------
U.S. $ 5,401 $ 4,898 $ 2,702 $ 6,430 $ 261 $ 416
China 1,911 1,620 1,879 66 83 123
------- ------- ------- -------- --------- -----------
Total $ 7,312 $ 6,518 $ 4,581 $ 6,496 $ 344 $ 539
======= ======= ======= ======== ========= ===========
The Company's export sales from U.S. operations were 26%, 36%, and 16%, of
total revenues in 2000, 1999, and 1998, respectively.
10. Statement of Cash Flows Data
December 31,
-------------------------------------
2000 1999 1998
---------- --------- -----------
Schedule of non-cash transactions:
Intellectual property acquired
in exchange for 4,700 shares of the
Company's common stock............... $ 5,728 $ - $ -
Fair market value of warrants
in connection with long-term debt-
related party........................ $ - $ 176 $ -
Supplemental disclosure of cash flow information:
Interest paid in 2000, 1999, and 1998 was $187, $4, and $19, respectively.
11. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution plan covering all
employees meeting certain eligibility requirements. Contributions made by the
Company are determined annually by the Board of Directors. To date, the Company
has made no contributions to this plan.
F-20
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts and Reserves
(In thousands)
Years Ended December 31, 1998, 1999, 2000
Balance
At Charged to Balance
Beginning Costs and At End
Of Period Expense Deductions Of Period
--------- ---------- ---------- ---------
Year ended December 31, 1998:
Accounts receivable reserves...... $46 $236 $(108) $174
Year ended December 31, 1999:
Accounts receivable reserves..... $174 $39 $(200) $13
Year ended December 31, 2000:
Accounts receivable reserves.... $12 $108 $(2) $118
S-1