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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, 2001 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 25, 2002 was approximately
$97,923,618 based on the closing sale price of $1.08 on such date, as reported
by the Nasdaq SmallCap Market.
The number of shares of Common Stock outstanding as
of March 25, 2002 was 91,060,436.
A list of Exhibits to this Annual Report on Form 10-K begins on page 25.
COMMUNICATION INTELLIGENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page
PART I................................................................ 3
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
PART II............................................................... 15
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters........................................... 15
Item 6. Selected Financial Data....................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 17
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 24
PART III.............................................................. 24
Item 10. Directors and Executive Officers of the Registrant........... 24
Item 11. Executive Compensation....................................... 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................ 24
Item 13. Certain Relationships and Related Transactions............... 24
PART IV............................................................... 25
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 25
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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, Europe and
Asia. 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.
-2-
PART 1
Item 1. Business
General
Communication Intelligence Corporation (the "Company" or "CIC") is the
global leader in biometric signature verification and a leading supplier of
electronic signature and natural input software solutions focused on emerging,
fast growth, large potential markets such as document automation, corporate
security, handheld computers, smartphones, 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, Compaq, EDS, Ericsson, Fujitsu, IBM,
Legend, Microsoft, Mitsubishi, National Semiconductor, Prudential, Siebel
Systems, and The Tennessee Valley Authority .
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R) and the Handwriter(R) 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 smart handheld devices with a primary
focus on smartphones, handheld computers ("PDAs") and portable web browsers.
As a result of the economic slowdown in 2001, which was further exacerbated
by the tragic events of September 11th, revenues for the fourth quarter ending
December 31, 2001 decreased 35% to $1.5 million as compared to $2.3 million for
the corresponding quarter of the prior year and revenue decreased 19% for the
year ended December 31, 2001 to $5.9 million as compared to $7.3 million for the
prior year. Despite the external factors, which negatively impacted purchasing
decisions and expenditures in the company's market segments throughout 2001,
fourth quarter 2001 revenues were up over third quarter 2001 revenues by 65%. We
believe this reflects the increasing awareness and demand for CIC technologies
in our target market segments and applications.
Enterprise Revenues
Triggered by the signing of the E-Sign Bill in October 2000 and the passage
of similar legislation making electronic signatures legally binding, in
virtually every major economy in the world, the transition began toward
automating transactions in signature dependent industries. CIC's handwritten
electronic signature solutions and electronic forms provide the basis for
significant expense reduction through document automation by eliminating paper
documents and related labor, mailing and storage expense. The billions of signed
original documents created in today's global economy demand the utmost in user
identification and document integrity. The inherent risks, logistical
difficulties and staggering financial costs associated with creating,
processing, storing and retrieving paper records are driving the demand for
legally binding and, secure electronic documents.
The Company's Enterprise related revenue increased 21% over the prior year,
to $1.7 million from $1.4 million . This growth, we believe, reflects increasing
awareness and demand for our electronic signature technology despite the
economic environment that negatively impacted last year's IT expenditures.
Countless paper documents were lost or destroyed in the September 11th tragedy
and the many resulting business failures and disruptions could have been avoided
if electronic documents had been utilized. CIC's biometrics handwritten
signature technology provides the benefits of the paperless environment with the
social acceptance of a non-intrusive handwritten signature (versus a finger
print, iris/facial scan, or DNA) and a much higher level of security than the
traditional "wet ink" signature. We believe that combining our technology with
electronic documents will reduce dependency on mail and business travel while
enabling business transactions at Internet speed.
-3-
Enterprises that chose to license our technology include the following:
Licensee Product(s) licensed Application of Products
- ------------------- --------------------- ------------------------
Accelio Inktools E-Signature for mobile forms
Al-Faris Multiple Reseller and integrator in the
Middle East focused on
E-Signatures
Allergan Sales Sign-it Clinical regulatory
applications
Ameridial Inktools E-Signature for internal use
documents
Assurant Group Sign-it Sales force automation, new
account openings
Audata, Limited Multiple Multiple applications focused
on paperless environment and
security
Baptist Health Inktools E-Signature for patient records
BF Goodrich, Aircraft Sign-it E-Signature for internal use
Sensor Division documents
Canada Customs Sign-it E-Signature for internal use
documents
Charles Schwab Sign-it New account openings
Decade Software PenX & Inktools Windows pen computer upgrades
E-Com Asia Pacific Pty Multiple Regional reseller, multiple
Ltd. applications
EDS InkTools Information assurance for
network and application
security
Federal Reserve Bank Sign-On Biometric mobile device access
security
FMC Corp. Sign-it E-Signature for internal use
documents
First American Bank Sign-it E-Signature for various
financial and internal
documents
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Licensee Product(s) licensed Application of product
- ------------------- -------------------- ----------------------
IA Systems Inktools E-Signature for loan
organization
ILI Technologies(P,Ltd. Inktools & iSign Various E-Signature
applications for the vertical
markets in Israel
Integrate Online InkTools Mortgage closing
Naval Surface Warfare Inktools E-Signature for material
Center receipts
Novabase Sign-it Systems integrator for various
vertical market applications
Old Republic National Sign-it Title processing applications
Title
Orange County, CA Sign-it Automate building permit
process
PHT Corporation Sign-it Clinical trial documents
Physician WebLink Sign-it Automate patent
enrollment/records/billing
Proware Inktools E-Signature for judicial orders
PSC Communications Multiple Reseller and OEM Partner in
the UK focused on E-Signature
PureEdge Sign-it E-Signature for financial
documents
RecordsCenter.com InkTools Legal contracts and other
significant documents
Siebel Multiple Sample delivery of regulated
drugs
Siemens Medical Solutions Multiple E-Signature for healthcare
Symbol Technologies Multiple Reseller for all major products
Tennessee Valley Multiple E-Signature for approval of
Authority internal documents
Wisconsin Electric Power Sign-On Biometric mobile device access
Company security
-5-
A 2001 IDC study projects the biometrics handwritten signature verification
market, for network authentication alone, will grow from $14 million in 2002 to
approximately $32 million by 2005. A 2001 QDI Strategies, Inc market analysis
estimated the signature verification software market, in document automation and
mobile device security applications, will grow from $15 million in 2002 to over
$82 million by 2005. The total market potential reflected in the IDC and QDI
studies, for electronic signature software is in excess of $110 million by 2005.
IDC further identified CIC as the undisputed global leader in biometric
handwritten signature verification with 82% market share.
We are optimistic that CIC's installed base and pilot programs which are
nearing rollout, some of which are included above, will provide the basis for
increasing revenue growth in both the near term and beyond.
OEM Revenues
OEM revenue for 2001 declined 37% over the prior year, to $1.2 million from
$1.9 million reflecting significant cutbacks in planned shipments of smart
handheld devices including handheld computers (PDAs) and smartphones. For
instance, handheld computer shipments in 2001 were approximately 10% below the
prior year and mobile phone shipments have been virtually flat in 2001 after a
compound annual growth rate of 60% from 1996 through 2000.
In 1999, CIC won a breakthrough order/license agreement from Ericsson for
both natural input and electronic signature solutions for its R380 smartphone
which began shipment, on a worldwide basis, in the fourth quarter of 2000. R380
shipments, however, have been significantly behind expectations because of the
economic environment as well as Ericsson's own market related difficulties which
ultimately led to a mobile communications merger last year with Sony. The
combined strength of Ericsson's mobile technology and Sony's consumer
electronics and retail distribution know-how has resulted in rave reviews for
both their potential competitiveness and for their new multi-media smartphone,
the P800, (Smartphones combine the function of voice PDA and wireless internet
access). The P800 debuted at CeBit in March and we are optimistic that the
planned introduction of this new smartphone, together with other Sony-Ericsson
related activity, affords CIC the opportunity to participate in Sony-Ericsson
smartphone shipments consistent with our initial expectations.
Despite the fact that industry forecasts for smartphones have been reduced,
by as much as 75% from previous estimates, current IDC projections still provide
the Company with solid revenue growth potential of 5 million units in 2002
growing to 23 million units by 2004. In addition to smartphones, CIC's current
licensees include PDA, webpad, and digitizer tablet manufacturers. According to
IDC, sales of these smart handheld devices are projected to grow to over 47
million units annually by 2004.
Market activity since the events of September 11th reflects growing
awareness and demand for both CIC's handwriting recognition products and for
biometric handwritten signature verification, utilized as a security utility,
across the entire smart handheld device market. The Company believes that
significant royalty potential exists for 2002 and beyond based on its present
and potential OEM agreements.
Key OEM Licensees include:
Licensee Product(s) licensed Application of product
- --------------- ------------------------ ---------------------------------
AirSpeak Jot Handheld PC Pro
Sony Ericsson Jot, QuickNotes, Smart cellular phone
Sign-On &
WordComplete
Fujitsu HRS, PenX, Sign-On Windows and Windows CE pen
Plus &InkTools computers
GSC Mobile Solutions Inktools Windows pen computers
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Licensee Product(s) licensed Application of product
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HP Jot Linux based PDA
IA Systems Jot Wireless Internet access device
IBM Sign-it Windows pen notebook
Inteliworxx HRS & PenX Windows pen computers
Interlink Sign-it E-Signature retail bundle
Intermec/Norand HRS & PenX Windows pen computers
Mathsoft Math Recognizer Handwriting recognition for
mathematical notation
National Semiconductor Jot Wireless Internet access device
Pacific Star PenX Windows pen computers
Telos Corp. PenX Windows pen computers
Topaz InkTools E-Signature bundle
Vtech Jot Electronic organizer
Wacom Chinese Handwriter Digitizer tablet and
& Sign-it E-Signature
Walkabout HRS & PenX Windows pen computers
Xplore HRS & PenX Ruggedized mobile computers
Xybernaut HRS, PenX & Jot Wearable computers
Online Revenues
Revenue from the Company's software sold through its website, (www.cic.com)
was $.9 million in 2001 as compared to $1.2 million in 2000, a decline of 25%.
Online sales are generated primarily through direct mail sent to Palm PDA owners
whose names and addresses are acquired from Palm. Most of CIC's software
products are available for the Palm operating system ("OS") which includes
Handspring, IBM, Symbol, Kyocera, Samsung and Sony devices. Exposure is limited
to a capture rate of about 25% of new Palm owners. Palm OS shipments in 2001
were 10% less than the prior year as a result of the economic slowdown that
affected the entire smart handheld device market. Online revenues for CIC in
2001 reflect both the lower Palm OS shipments as well as a decrease in the
direct mail close rate attributed to Palm shipments of lower cost devices such
as the m100 and m105. These devices, priced at $99 and $149 respectively, are
targeted at children and college students who are not as inclined to
purchase/add software upgrades as professional consumers.
In the third quarter of 2001, CIC entered into an agreement with Elibrium
that positions the company's Palm OS based offerings directly at the retail
point of sale next to Palm OS devices. This provides a significant increase in
exposure through up to 10,000 retail stores including Comp USA, Staples, Office
Max and other leading retailers. This retail distribution will expose CIC's
software upgrade products to a much larger base of potential buyers than through
direct mail only. 70% of new buyers of Palm OS based handheld computers purchase
at retail and CIC software products will also gain exposure to additional
potential buyers who already own Palm devices.
-7-
Palm OS based handheld computers, despite the market decline in 2001,
remain the global leader with almost 63% of the handheld computer market
worldwide. The 2001 year end installed base is estimated at 13 million in the US
alone and is estimated to grow to over 47 million domestically by 2005. The
Company believes that positioning its Palm aftermarket products directly at the
point of sale, together with CIC's direct mail programs, will optimize Online
revenue growth in the near term and generate meaningful sales growth longer
term.
China
Revenue from CICC, the Company's 90% owned Chinese Joint Venture, decreased
10% for the year ended December 31, 2001, from $1,911 in 2000 to $1.7 million.
CICC represents a major opportunity for the Company. China is the world's third
largest economy and its recent accession into the World Trade Organization
("WTO") is fueling economic growth and individual buying power in this vast
nation of 1.3 billion people. The Joint Venture was established almost nine
years ago and the Company believes that the 10% ownership position by the
Jiangsu Hongtu Electronics Group provides considerable stability and
credibility. The company believes that CICC's electronic signature and Chinese
handwriting recognition software applications, including automating signature
dependent document processes and corporate security, will be in increasing
demand as China prepares to compete on a world wide basis through its WTO
membership. The China Ministry of Railways, Hu Nan Mobile Communications,
Agricultural Bank of China, and the Nanjing Civic Bureau are among the Chinese
companies and government agencies who chose and implemented CICC software
solutions in 2001. This adds to an installed base including Panda, Neu-Alpine,
Hongtu High-Tech, Ministry of Agriculture, and the Ministry of Aviation.
Last year, CICC emerged as the leading supplier in Jiangsu Province of a
fast growing mobile industry application for regulated goods with an estimated
70% market share. This turn-key offering provides hardware and software systems
for the receipt and delivery of taxed, measured and monitored goods using
handheld devices from companies including Symbol Technologies, Palm and
Handspring. CICC's offering includes the integration of enterprise software
solutions for the server side or back-end management of these mobile systems and
captured data. This offering further affords CICC the opportunity to integrate
electronic signature and Chinese handwriting recognition technology into its
turn-key solutions.
The Company believes that the emerging markets for electronic signature
based applications and handheld receipt/input based systems, acceptance of CICC
products by leading Chinese enterprises and government agencies, the legitimacy
and credibility afforded CICC by the Joint Venture and the explosive growth
potential of the China market, now driven by accession to the World Trade
Organization, provide CICC significant growth potential in 2002 and beyond.
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
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.
-8-
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
InkTools A suite of application development tools for
electronicsignatures, biometric signature
verification and cryptography
iSign Web based development tools for electronic
signature and biometric signature verification
PenX Operating systems extensions for the Windows
recognition environment that enables pen based
functionality and handwriting
QuickNotes and InkSnap Electronic handwritten notetaking software
Sign-it and Sign-it Server Electronic signatures for the enterprise market
Sign-On Biometric signature verification software for
device access
WordComplete? Predictive text entry software
Products and upgrades that were introduced and first shipped in 2001 include the
following:
Sign-it for Word 3.2
Sign-it for Acrobat v 3.2
Sign-it Server 2.0
Sign-it EX v 1.14
Sign-On for Windows 1.0
-9-
Sign-On for Pocket PC 2.01
WordComplete for Palm v 2.01
WordComplete v 2.0 UK English Dictionary
WordComplete v 2.0 Spanish Dictionary
WordComplete v 2.0 French Dictionary
WordComplete v 2.0 Italian Dictionary
WordComplete v 2.0 German Dictionary
iSign for Windows v 2.0
iSign for Java v 1.1
PenX v 2.02
Jot for Windows CE v 2.2
Handwriter for CE v2.2
InkTools for CE v 1.6
InkTools for Windows v 2.52
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 certain 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, Siebel 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 or later 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.
-10-
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) while support for additional application
environments are in development.
iSign 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/retail 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 Symbian
operating system.
Enterprise Solution Products. CIC offers several products targeted at the
broad enterprise market. This market 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 most of CIC's products and everyone from consumers to
software developers and corporations are customers. These products are sold
through retail outlets and 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. In each
year since its inception, the Company has incurred losses. The Company has a
90%-owned Joint Venture, Communication Intelligence Computer Corporation, Ltd.,
with the Jiangsu Hongtu Electronics Group, LTD. The Joint Venture was formed in
September 1993.
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
-11-
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 where significant
marketing of its products will be undertaken in the foreseeable future.
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%
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and one customer accounted for 13% of revenues in 2001. One customer accounted
for 16% and two customers accounted for 11% of revenues in 2000. One customer
accounted for 27% of the Company's handwriting recognition segment revenues in
1999. The loss of any significant customer or other source of revenue could have
a material adverse effect on the Company.
Backlog
At December 31, 2001, backlog approximated $88,000, representing advanced
payments on service maintenance agreements and non recurring engineering
projects which are expected to be recognized over the next twelve months. At
December 31, 2000, backlog approximated $61,000, representing advanced royalty
and service maintenance agreements. At December 31, 1999, backlog approximated
$35,000.
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.
Joint Venture in the People's Republic of China
The Company currently owns 90% of the Joint Venture with the Jiangsu Hongtu
Electronics Group LTD, formerly the Information Industries Bureau of the Jiangsu
Province, a provincial agency of the People's Republic of China (the "Agency").
As of December 31, 2001, 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 25, 2002, the Company and the Joint Venture employed an
aggregate of 60 full-time employees, 23 of which are in the United States and 37
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, 2001, 2000, and 1999, the Company's export
sales as a percentage of total revenues were approximately 17%, 24%, and 36%,
respectively. The decrease in export sales in 2001, is due to the reduction in
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licensing revenues from Ericsson compared to the prior year period. 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 9,634 square feet, in Redwood Shores,
California, pursuant to a sub-lease that expires in 2006. The Joint Venture
leases approximately 1,500 square feet in Nanjing, China. The Company also
believes that its current facilities will be suitable for it to continue
operations in the foreseeable future.
Item 3. Legal Proceedings
As of March 25, 2002, the Company was not a party to any legal proceeding,
which, if adversely determined, would have a material adverse effect on its
business.
Item 4. Submission of Matters to a Vote of Security Holders
None
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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
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............................... $ 2.28 $ 0.97
Second Quarter.............................. $ 1.63 $ 0.76
Third Quarter............................... $ 1.13 $ 0.64
Fourth Quarter.............................. $ 0.91 $ 0.60
2002 First Quarter (through March 25, 2001)...... $ 1.18 $ 0.56
As of March 25, 2002, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $1.08 per share and there were approximately 660
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, 2001, 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
------------------------------------------------------------------------------
1 employee 10/01/2001 25,000 $0.69 3 year quarterly 10/01/2012
1 Consultant 12/06/2001 29,421 $0.68 immediately 12/06/2012
1 employee 12/07/2001 95,000 $0.66 25% immediately, 12/07/2012
balance 3 year
quarterly
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Item 6. Selected Financial Data
The selected consolidated financial data presented below as of December 31,
2001, 2000, 1999, 1998, and 1997 and for each of the years in the five-year
period ended December 31, 2001 are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2001 and 2000, and for each of the years in the three-year period
ended December 31, 2001, 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,
-------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues..................... $5,947 $7,312 $6,518 $4,581 $5,516
Research and development
expenses(1)................. 1,808 1,603 1,363 1,989 2,360
Sales and marketing expenses. 2,054 2,239 1,877 2,015 6,257
General and administrative
expenses.................... 2,791 2,181 1,683 1,889 2,663
Loss from operations........ (2,946) (1,607) (1,722) (3,285) (11,627)
Net loss available to common
stockholders(2)..... (3,215) (1,799) (1,740) (3,592) (16,940)
Basic and diluted loss per
common share................ (0.04) ( 0.02) ( 0.02) ( 0.06) ( 0.37)
As of December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash........... $2,588 $2,349 $2,374 $1,045 $5,485
Working capital(3)........... 3,017 3,109 3,054 346 2,721
Total assets................. 10,072 11,302 4,963 3,354 7,491
Deferred revenue............. 88 61 35 651 440
Long-term obligations........ 3,000 1,427 1,338 - 8
Stockholders' equity (4)..... 6,060 8,307 2,349 1,332 3,989
- -----------
(1) Excludes software development costs capitalized in accordance with
Statement of Financial Accounting Standards No. 86 of $20, $20, $9 and
$17, for the years ended December 31, 2001, 2000, 1999, and 1998
respectively. No software development costs were capitalized in the
year ended December 31, 1997.
(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,
2001, 2000, 1999, 1998, and 1997 include deferred revenue of $88, $61,
$35, $651, and $440, respectively.
(4) The Company has never paid dividends to the holders of its common
stock.
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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, 2001, operating losses aggregated
approximately $21 million and at December 31, 2001, the Company's accumulated
deficit was approximately $76 million.
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 also follows the interpretive guidance of SAB 101
issued by The Securities and Exchange Commission and EITF issue 00-21 of the
AICPA Emerging Issues Task Force.
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, 2001, 2000, and 1999, such costs were insignificant.
Significant Customers. Two customers accounted for 16% and 13%,
respectively, of revenues in 2001. One customers accounted for 16% of revenues
in 2000. One customer accounted for 27% of the Company's revenues in 1999.
Research and Development. Research and development costs are charged to
expense as incurred.
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
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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,
2001 and 2000, respectively. The Company recorded a net foreign currency
transaction gain of $59,000 for the year ended December 31, 1999.
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,
2001 of $22 million based upon the Company's history of losses.
The Company reports in two segments, handwriting recognition and systems
integration. For purposes of Management Discussion and Analysis, handwriting
recognition includes Online/Retail revenues and Corporate sales, including OEM
and Enterprise revenues, and systems integration is referred to as China sales.
Results of Operations
Years Ended December 31, 2001 and December 31, 2000
Revenues. Revenues decreased $1,365,000, or 19%, to $5,947,000 for the year
ended December 31, 2001, as compared to $7,312,000 in the prior year.
Online revenues declined $285,000, or 24%, to 913,000 in 2001, as compared
to $1,198,000 in the prior year period. The number of names available for use in
the Company's direct mail campaign has been reduced to newly registered palm
users, and was the primary reason for the decline in revenues. In the prior
years the Company's direct mail campaigns also targeted the installed base of
Palm users.
Corporate sales, which includes Enterprise and OEM revenue decreased
$893,000, or 21%, to $3,310,000 (including the nonrecurring maintenance fees
from M10, previously PenOp) for the year ended December 31, 2001, compared to
$4,203,000 in the prior year period. Sales of the Company's software solutions
and maintenance to end users increased $155,000 to $2,076,000 in 2001 compared
to $1,921,000 in the prior year period. The decrease was due primarily to a
$524,000 decrease in the nonrecurring maintenance fees, from M10 in 2001
compared to the prior year. This decrease was offset by sales to Prudential and
TVA. 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 $352,000 and
$877,000 was recorded (net) in 2001 and 2000, respectively. The Company
previously entered into a separate transaction, to acquire the intellectual
property rights from PenOp (see note 1). OEM revenues included in corporate
sales decreased $989,000 or 48% to $1,078,000 from $2,067,000 in the prior year
period. This decrease was 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 $59,000 or 27%
to $156,000 from $215,000 for the prior year due primarily to decreases in
non-recurring engineering revenues. Revenues from development contracts in 2001
and 2000 were primarily attributable to porting of the Company's software to
third party products such as smartphones and web browsers.
China sales decreased $187,000, or 10%, to $1,724,000 for the year ended
December 31, 2001, as compared to $1,911,000 in the prior year. The decrease was
due to a decrease in system integration sales of $202,000, or 13%, to $1,401,000
in 2001, as compared to $1,603,000 in the prior year. The decrease in system
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integration sales was offset by an increase in software sales of $15,000, or 5%,
to $323,000 in 2001 as compared to $308,000 in the prior year. The changes in
revenues are not related to any single customer.
Cost of Sales. Cost of sales decreased $656,000, or 23%, to $2,240,000 for
the year ended December 31, 2001, as compared to $2,896,000 in the prior year
period.
Online cost of sales decreased $282,000, or 26%, to $805,000 in 2001, as
compared to $1,087,000 in the prior year. This decrease was due to lower mailing
costs brought about by the reduced number of new names available in 2001 as
compared to 2000.
Corporate sales costs decreased $126,000, or 30%, to $290,000 from $416,000
in the prior year. Costs associated with the Company's signature software
solutions decreased $36,000, or 21%, to $135,000, compared to $171,000 in the
prior year period. The decrease in the cost of software solutions was due to a
decrease in amount of third party hardware costs sold with the Company's
corporate signature software products during 2001 as compared to 2000.
Amortization of capitalized software costs was approximately $12,000 in 2001 and
2000, respectively. Costs of development contract revenues included in corporate
sales decreased $85,000, or 45%, to $105,000 in 2001, as compared to $190,000 in
the prior year. The decrease in development contract cost was due to the
reduction in non-recurring engineering projects during 2001 as compared to the
prior year period. OEM costs decreased $5,000, or 37%, to $38,000 as compared to
$43,000 in the prior year. The decrease was due to a decrease in revenues and
the associated technology import tax from the Company's Japanese OEM customers.
China cost of sales decreased $247,000, or 18%, to $1,145,000 in 2001 as
compared to $1,393,000 in the prior year period. The decrease was due to the
decrease in systems integration sales in 2001 as compared to the prior year.
Gross Margin. Gross margin decreased $709,000, or 16%, to $3,707,000 in
2001, as compared to $4,416,000 in the prior year.
Online gross margin decreased $3,000, or 3%, to $108,000 in 2001, as
compared to gross margins of $111,000 in the prior year period. The decrease was
due to the lower sales volumes as compared to the prior year offset by the
elimination of the follow-up mailer costs, which were primarily used to convert
long-time users of PDA's to the Company's more natural input products. Online
gross margins were 12% of sales for the year ended December 31, 2001.
Corporate sales gross margin decreased $767,000, or 20%, to $3,020,000 in
2001, from $3,787,000 in the prior year period. This decrease was primarily due
to the 21% decrease in Corporate sales as discussed above. Corporate sales gross
margin as a percentage of sales was 91% and 90% of revenues for the years ended
December 31, 2001 and 2000, respectively.
China sales gross margin increased $61,000, or 12%, to $579,000 in 2001,
from $518,000 in the prior year. This increase was primarily due to the increase
in software sales in 2001 as discussed above. China sales gross margin as a
percentage of sales increased 7% to 34% as compared to 27% in the prior year.
Research and Development Expenses. Research and development expenses
increased $205,000, or 11%, to $1,808,000 for the twelve months ended December
31, 2001, as compared to $1,603,000 for the prior year. Salaries and related
costs decreased $104,000, or 9%, to $1,077,000 in 2001, compared to $1,181,000
in 2000. This decrease was due to reductions in headcount during 2001 as
compared to 2000. Other costs, including shared development costs with the Joint
Venture, facility and other costs increased $255,000 to $342,000 in 2001,
compared to $87,000 in the prior year. The increase was due primarily to outside
engineering costs associated with the assimilation of the PenOp intellectual
property into the Company's products and continued support for new engineering
projects. Other expenses including travel and related expenses and depreciation
decreased 6%, or $30,000, as compared to the prior year period. In addition
costs, associated with development contracts and charged to cost of sales
decreased $84,000 or 44% to $106,000 from $190,000 in the comparable prior year
period. This decrease was due to a lower number of revenue generating
nonrecurring engineering projects in 2001 compared to the prior year.
Sales and Marketing Expenses. Sales and marketing expenses for the year
ended December 31, 2001 decreased $185,000, or 10%, to $2,054,000, as compared
to $2,239,000 in the prior year. Payroll and related costs decreased 12%, or
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$93,000, to $2,054,000 in 2001 from $2,239,000 due primarily to a decrease in
headcount during the year. Travel and related expenses decreased $58,000, or
29%, to $140,000 in 2001, compared to $198,000 in the prior year. The decrease
was due to decreases in travel related to the reduction in headcount from the
comparable prior year. Advertising and promotion expense decreased $195,000, or
49%, to $203,000 in 2001, from $398,000 in the prior year. The decrease was due
primarily to the one-time cost of the development of a media campaign in the
prior year related to the Company's Online sales via CIC's website. Professional
services expense increases $128,000, or 129%, to $227,000 from $99,000 in the
comparable prior year period. The increase was due to marketing studies
undertaken by the Company to assess the markets with the greatest potential for
the Company's products. Other costs, such as facilities and miscellaneous
expenses, increased $33,000, or 5%, in 2001 as compared to the prior year.
General and Administrative Expenses. General and administrative expenses
increased 34%, or $610,000, to $2,791,000 for the year ended December 31, 2001,
from $2,181,000 for the prior year. The increase was primarily due to a increase
in patent amortization expense of $393,000, or 914%, to $436,000 in 2001 from
$43,000 in the prior year. In addition professional fees increased $274,000, or
105%, to $535,000 from $261,000 in the comparable prior year period.Investor
relations expenses decreased $66,000, or 15%, to $366,000 in 2001, as compared
to $432,000 in the comparable prior year. The decrease was due primarily to a
reduction in costs associated with information disseminated through the wire
services. Other expenses including travel, facilities cost and provision for
uncollectable accounts increased $9,000 in 2001 as compared to the prior year.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense) net, decreased $60,000, or 79%, to $16,000 in 2001, from
$76,000 in the prior year. This decrease resulted from a decrease in cash
balances and interest rates during the year. The interest income was offset by
fees associated with credit card sales from the Company's website of
approximately $37,000 in 2001, compared to $49,000 in the prior year.
Interest Expense. Interest expense increased $16,000, or 6%, in 2001, to
$282,000 from $266,000 in the prior year. This increase was due to the increase
in long-term debt outstanding since June of 2001.
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 $477,000, or 28%, to 1,198,000 in 2000, as
compared to $1,675,000 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 was the primary reason for the decline in revenues.
Sales of the Company's Handwriter products for the years ended December 31, 2000
and 1999, respectively, 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
$980,000, or 30%, to $4,203,000 (including the nonrecurring maintenance fees
from M10, previously PenOp) for the year ended December 31, 2000 compared to
$3,223,000 in the prior year period. Sales of the Company's software solutions
and maintenance to end users increased $1,805,000 to $1,921,000 in 2000,
compared to $116,000 in the prior year period. The increase was 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
$877,000 was recorded (net). The Company 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 was 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")
-20-
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.
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
non-recurring engineering 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 $268,000 to $111,000 in 2000, as compared to
a gross margin loss of $157,000 in the prior year period. The increase was due
to the change in the mix of names from new and long time users of Palm products
to newly registered Palm users. 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 91% of sales for the year ended December 31, 2000.
Corporate sales gross margin increased $889,000, or 31%, to $3,787,000 in
2000, from $2,898,000 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 reduced revenue from
non-recurring engineering projects in 2000 as 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.
-21-
Payroll and related costs in 2000 increased 16%, or $110,000, due primarily to
increased headcount 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 compared to the
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 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.
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 prior year. This increase
was due to additional NASDAQ listing fees, and the increased costs of
disseminating information due to the increased interest in the Company in the
fourth quarter of 1999 and the first quarter of 2000. Director and officers
insurance expense 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.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2001 totaled $2,588,000, compared
to cash and cash equivalents of $2,349,000 at December 31, 2000. This increase
was primarily attributable to $2,456,000 of cash provided by financing
activities, offset by $2,159,000 used in operations and $58,000 of cash used in
investing activities in 2001. In 2001, the effect of exchange rate changes on
cash was immaterial.
At December 31, 2001, current liabilities, which include deferred revenue,
were $882,000. Deferred revenue, totaling $88,000 at December 31, 2001,
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, 2001, the Company's principal source of liquidity was
its cash and cash equivalents of $2,588,000. 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.
-22-
Financing.On August 23, 2001, the Company's 90% owned Joint Venture
borrowed the aggregate equivalent of $181,000 denominated in Chinese currency,
from a Chinese bank. The loan bears interest at 5.37% per annum and is due
August 23, 2002. The borrowing did not require the Joint Venture to deposit a
compensating balance.
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 bore
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.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which the trustee was
a former director and officer of the Company (the "Trust"). The proceeds of the
Loan were used to refinance $1,500,000 of indebtedness outstanding to the Trust
pursuant to a loan made by the Trust to the Company in October 1999(see below),
and for working capital purposes. The Loan bears interest at the rate of 2% over
the prime rate publicly announced by Citibank N. A. from time to time, which was
8.00% per annum at September 30, 2001, and is due June 18, 2004. The Loan may be
pre-paid by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert the outstanding principal amount of the
Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust
has the option, at any time prior to maturity, to convert all or any portion of
the outstanding principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence of certain events. If, prior to maturity of the Loan, the Company
consummates one or more financings providing $5 million or more in gross
proceeds, the Company is required to apply 50% of the proceeds in excess of $5
million to the then outstanding principal amount of the Loan. The Loan is
secured by a first priority security interest in and lien on all of the
Company's assets as now owned or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of the
shares of the Company's common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its reasonable
best efforts to cause such registration statement to become effective.
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 was 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 bore interest at the rate of 2% over the prime rate as published
by Citibank from time to time. In , 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 was 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 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,
2001, and 2000 was approximately $443,000 and $390,000, respectively. Sublease
-23-
income was approximately $35,000 and $105,000 for the years ended December 31,
2001 and 2000, respectively. Future minimum lease payments under non-cancelable
operating leases are expected to be approximately $397,000 for the years ending
December 31, 2002.
On October 2, 2001 the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores
California for approximately 9,634 square feet. The lease commenced on November
1, 2001, with first year lease costs of approximately $347,000. The cost of the
lease will increase approximately 3% per annum over the term of the lease which
expires on October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase, if any, in operating cost incurred by the landlord
in such year over the operating expenses incurred by the landlord in the base
year. The Company believes the offices will be adequate for its needs over the
term of the lease.
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, 2001, 2000, and 1999 begin on page F-1 of this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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 24, 2002.
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 24, 2002.
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 24, 2002.
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 24, 2002.
-24-
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 Auditors.......... F-1
Consolidated Balance Sheets at December 31, 2001 and 2000........... F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999................................. F-3
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 2000, 1999 and 1998..... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998............................ F-5
Notes to Consolidated Financial Statements.......................... F-6
(a)(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves.......... S-1
(b) Reports on Form 8-K
None
(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).
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).
-25-
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.
.
+10.1Licensing 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.
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.
10.10Form 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.
10.11Form 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.
10.12Waiver, 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).
-26-
10.13Form 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.
10.14Certificate 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.
10.15Form 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.
10.16Amendment 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).
10.17Amendment 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).
10.18Employment 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).
10.20Loan and Warrant Agreement dated October 20, 1999 between the Company
and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust.
10-21Asset 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.
10-22Loan dated June 19, 2001 between the Company and the Philip S.
Sassower 1996 Charitable Remainder Annuity Trust.
*21.1 Schedule of Subsidiaries.
*23.1Consent of Stonefield Josephson, Accountancy Corporation, 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.
-27-
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 and
Chairman of the Board
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 Chairman, President and Chief Executive Officer
___________________________ (Principal Executive Officer)
Guido DiGregorio
/s/ Francis V. Dane Chief Legal Officer and Acting Chief Financial
___________________________ Officer(Principal Financial and Accounting Officer)
Francis V. Dane
/s/ Michael Farese Director
___________________________
Michael Farese
/s/ Louis Panetta Director
___________________________
Louis Panetta
/s/ Chien Bor Sung Director
___________________________
Chien Bor Sung
-28-
Independent Auditors Report
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, 2001 and 2000 and
the related consolidated statements of operations, changes in stockholders'
equity (deficit), cash flows and financial statement schedule for each of the
three years in the period ended December 31, 2001, 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 the 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") as of December 31, 2001, and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
STONEFIELD JOSEPHSON INC.
Certified Public Accountants
San Francisco, California
February 18, 2002
F-1
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
December 31,
---------------------------------
2001 2000
---------------------------------
Assets
Current assets:
Cash and cash equivalents.................. $ 2,588 $ 2,349
Accounts receivable, including
$350 from M10 (Previously PenOp) at
December31, 2000 net of allowances of $278
and $118 at December 31, 2001 and
2000,respectively.......................... 1,043 1,760
Inventories................................ 129 171
Prepaid expenses and other current assets.. 139 270
--------------- ---------------
Total current assets................. 3,899 4,550
Note receivable from officer................. - 46
Property and equipment, net.................. 161 262
Patents and trademarks....................... 5,799 6,234
Other assets................................. 213 210
--------------- ---------------
Total assets......................... $ 10,072 $ 11,302
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................... $ 206 $ 679
Short-term debt............................ 181 120
Accrued compensation....................... 208 263
Other accrued liabilities.................. 199 318
Deferred revenue........................... 88 61
--------------- ---------------
Total current liabilities............ 882 1,441
Long-term debt - related party............... 3,000 1,427
Minority interest............................ 130 127
Commitments
Stockholders' equity:
Common stock, $.01 par value; 100,000
shares authorized; 90,912 and 89,668 shares
issued and outstanding at December 31, 2001
and 2000, respectively..................... 909 897
Additional paid-in capital................. 81,605 80,656
Accumulated deficit........................ (76,258) (73,043)
Accumulated other comprehensive loss....... (196) (203)
--------------- ---------------
Total stockholders' equity................... 6,060 8,307
--------------- ---------------
Total liabilities and stockholders' equity.. $ 10,072 $ 11,302
=============== ===============
See accompanying Notes to Consolidated Financial Statements
F-2
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
-------------------------------------------
2001 2000 1999
-------------------------------------------
Revenues:
Online.......................... $ 913 $ 1,198 $ 1,675
Corporate....................... 2,958 3,326 3,223
Nonrecurring maintenance
fees - M10 (Previously PenOp).. 352 877 -
China........................... 1,724 1,911 1,620
-------------- ----------------------------
5,947 7,312 6,518
-------------- ----------------------------
Operating costs and expenses:
Cost of sales:
Online........................ 805 1,087 1,832
Corporate..................... 290 416 325
China......................... 1,145 1,393 1,160
Research and development........ 1,808 1,603 1,363
Sales and marketing............. 2,054 2,239 1,877
General and administrative...... 2,791 2,181 1,683
-------------- ----------------------------
8,893 8,919 8,240
-------------- ----------------------------
Loss from operations.............. (2,946) (1,607) (1,722)
Interest income and other income
(expense), net.................... 16 76 55
Interest expense.................. (282) (266) (73)
Minority interest................. (3) (2) -
-------------- ----------------------------
Net loss......................... $ (3,215) $ (1,799) $ (1,740)
============== ============================
Basic and diluted loss per
share............................ $ (0.04) $ (0.02) $ (0.02)
============== ============================
Weighted average shares.......... 90,571 85,324 79,625
============== ============================
See accompanying Notes to Consolidated Financial Statements
F-3
Communication Intelligence Corporation
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(In thousands)
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Loss Total
--------------------------------------------------------------------
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 shares of Common
Stock...................... 34 1,802 - - 1,836
Exercise of 329 warrants for
329 shares of Common Stock. 3 797 - - 800
Foreign currency translation
adjustment................. - - - (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
adjustment................. - - - 9 9
Net loss..................... - - (1,799) - (1,799)
--------------------------------------------------
Balances as of December 31,
2000....................... $897 $80,656 $(73,043) $(203) $8,307
--------------------------------------------------
Exercise of options for
1,176 shares of Common
Stock...................... $11 $892 - - $903
Issuance of 68 shares of
Common Stock in exchange
for services............... 1 57 - - 58
Foreign currency translation
adjustment................. - - - 7 7
Net loss..................... - - (3,215) - (3,215)
--------------------------------------------------
Balances as of December 31,
2001....................... $909 $81,605 $(76,258) $(196) $6,060
---------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-4
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Cash flows from operating activities
Net loss............................ $ (3,215) $ (1,799) $ (1,740)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 687 328 334
Equity securities issued for
services.......................... 58 - -
Non-cash compensation............. 46 89 -
(Gain) loss on disposal of property
and equipment................. - - (1)
Changes in operating assets and
liabilities
Accounts receivable, net......... 717 (185) (429)
Inventories...................... 42 (90) (7)
Prepaid expenses and other current
assets........................... 135 (95) (72)
Other assets..................... (14) 48 (49)
Accounts payable................. (469) 390 (184)
Accrued compensation............. (55) (3) 38
Other accrued liabilities........ (117) (176) 70
Deferred revenue................. 26 26 (616)
------------- ------------- -------------
Net cash used in operating activities. (2,159) (1,467) (2,656)
------------- ------------- -------------
Cash flows from investing activities
Acquisition of property and equipment. (58) (636) (78)
Acquisition of property through
capital leases...................... - 2 17
------------- ------------- -------------
Net cash used in investing activities. (58) (634) (61)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from issuance of short-term
debt................................. 181 120 96
Proceeds from issuance of long-term
debt - related party................. 3,000 - 1,500
Restricted cash related to short-term
debt................................. - - 250
Principal payments on short-term debt (120) (60) (181)
Principal payments on short-term debt (1,500) - -
Principal payments on capital lease
obligations......................... (8) (4) (5)
Proceeds from exercise of warrants... - 437 800
Proceeds from exercise of stock options 903 1,583 1,836
------------- ------------- -------------
Net cash provided by (used in)
financing activities................. 2,456 2,076 4,296
------------- ------------- -------------
Effect of exchange rate changes on
cash............................. - - -
Net increase (decrease) in cash and
cash equivalents.................... 239 (25) 1,579
Cash and cash equivalents at
beginning of year................... 2,349 2,374 795
------------- ------------- -------------
Cash and cash equivalents at end
of year............................ $ 2,588 $ 2,349 $ 2,374
============= ============= =============
See accompanying Notes to Consolidated Financial Statements
F-5
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, 2001, the Company incurred
aggregate losses of $27,286, and, at December 31, 2001, the Company's
accumulated deficit was approximately $76,258. The Company has primarily funded
these losses through the sale of debt and equity securities.
As of December 31, 2001, the Company's principal source of liquidity was
its cash and cash equivalents of $2,588. 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.
Reclassification
The revenues have been reclassified to conform with the current
year presentation.
F-6
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of
SignificantAccounting 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 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, 2001 or 2000.
The Company's cash and cash equivalents,
at December 31, consisted of the following:
2001 2000
----------- ------------
Cash in bank.............................. ......... $ 1,621 $ 1,332
Commercial paper.................................... 26 687
Money markets....................................... 941 330
----------- ------------
Cash and cash equivalents........................ $ 2,588 $ 2,349
=========== ============
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, 2001, the Joint Venture had approximately $802 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.
Six customers accounted for approximately 62% of gross accounts receivable
at December 31, 2001. Eleven customers accounted for approximately 72% of gross
accounts receivable at December 31, 2000.
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, 2001 and 2000, inventories consisted
of finished goods.
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)
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. Depreciation expense was $140, $166 and $190
for the year ended December 31, 2001, 2000 and 1999, respectively.
Property and equipment, net at December 31, consists of the following:
2001 2000
------------ ------------
Machinery and equipment............................... $1,224 $1,191
Office furniture and fixtures......................... 448 448
Leasehold improvements................................ 84 84
Purchased software.................................... 206 174
------------ ------------
1,962 1,897
Less accumulated depreciation and amortization........ (1,801) (1,635)
------------ ------------
$ 161 $ 262
============ ============
Included in property and equipment as of December 31, 2001, and 2000 is $42
and $42, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $38 and $32 at December 31, 2001 and 2000,
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 cost less accumulated amortization which in Managements opinion is
less than fair value. Amortization is computed using the straight-line method
over the estimated lives of the related assets, ranging from five to seventeen
years. Amortization expense was $436, $43 and $15 for the years ended December
31, 2001, 2000 and 1999, respectively.
Patents, net at December 31, consists of the following:
Expiration Life 2001 2000
---------- ---- ------------ ------------
Patent...................... Various 5 $ 9 $ 9
Patent...................... Various 7 476 476
Patent...................... 2013 13 93 93
Patent...................... 2014 14 187 187
Patent...................... 2015 15 373 373
Patent...................... 2017 17 5607 5,607
------------ ------------
6745 6,745
Less accumulated amortization.......... (946) (511)
------------ ------------
$ 5,799 $ 6,234
============ ============
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)
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 undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 2001.
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, 2001 and 2000, 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 2001, 2000 and 1999 amounted to $12,
$12 and $1, 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
also follows the interpretive guidance of SAB 101 issued by The Securities and
Exchange Commission and EITF issue 00-21 of the AICPA Emerging Issues Task
Force.
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-9
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 13%, 9% and 7%, respectively, of revenues in
2001. 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 2001, 2000 and 1999.
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, 2001, 2000, and 1999 was $203, $399 and $140,
respectively.
Net Loss Per Share
The Company calculates earnings per share under 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 shares outstanding, and diluted earnings
per share, which is based on the weighted average number of shares and dilutive
potential shares outstanding. For the year ended December 31, 2001, 2000 and
1999 potential equivalent shares excluded from the calculation of diluted
earnings per share, as their effect is not dilutive, include stock options of
7,027, 8,145 and 9,956 of equivalent shares and of warrants of 237, 237 and 876
equivalent shares, respectively.
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 for the year ended December 31, 1999. Foreign currency
transaction gains in 2001 and 2000 were insignificant.
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)
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 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 at that time, 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.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS No. 141 supersedes Accounting Principles
Board ("APB") No. 16 and requires that business combinations entered into after
June 20, 2001 be accounted for as using the purchase method, eliminating the
pooling-of-interest method defined in APB 16. The statement is effective for
business combinations initiated after June 30, 2001 and shall apply to all
business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company believes that adoption of FASB
No. 141 will not have a material impact on its current financial position or
results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles". SFAS No. 142 addresses the initial recognition, measurement and
amortization of intangible assets acquired individually or in a group of other
assets (not acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets or intangibles assets
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
The Company is evaluating the effect, if any, on its financial position and
results of operations arising from the issuance of SFAS No. 142, "Goodwill and
Other Intangibles."
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets. " SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. SFAS No. 144 also focuses on reporting the effects of a disposal
of a segment of a business. Statement SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company does not expect SFAS No. 144 will
have a material impact on the Company's financial position or results of
operations at this time.
In January 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) issued EITF Issue No. 00-27 effective for convertible debt
F-11
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
instruments issued after November 16, 2000. This pronouncement requires the use
of the intrinsic value method for recognition of the detachable and imbedded
equity features included with indebtedness, and requires amortization of the
amount associated with the convertibility feature over the life of the debt
instrument rather than the period for which the instrument first became
convertible. The Company does not expect EITF Issue No. 00-27 will have a
material impact on the Company's financial position or results of operations at
this time.
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, 2001, 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, 2001 and 2000
consisted of cumulative foreign currency translation adjustments.
4. Short-term Debt
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a Chinese
bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
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.
Interest expense for the years ending December 31, 2001, 2000, and 1999 was
$281, $266, and $53, respectively. Interest expense associated with related
party debt was $274, $258 and $53 for the years ended December 31, 2001, 2000
and 1999, respectively.
5. 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
F-12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Related Party Transactions (continued)
aforementioned former officer. Under the Employment Agreement, the former
officer provided consulting services to the Company through December 15, 2001.
In exchange for these services, $110 of the note receivable from the officer was
forgiven on a monthly basis over the period commencing August 15, 1998 and
ending December 15, 2001. Per the terms of the employment agreement, the
remaining $100 of the note receivable from the officer was forgiven 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, a trustee of which
was then a director and officer of the Company. 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 bore interest at the rate of 2% over the prime rate as published by
Citibank from time to time. The note had a due date of January 31, 2002. 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 had an exercise price of $1.09 per share. The Company ascribed a value
of $179 to these warrants, which was 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 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. The 1999 Loan was paid
off June 19, 2001 as discussed below.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with the charitable remainder annuity trust, a trustee of which was
then a director and officer of the Company (the "Trust"). The proceeds of the
Loan were used to refinance $1,500 of indebtedness outstanding to the Trust
pursuant to a loan made by the Trust to the Company in October 1999 and for
working capital purposes. The 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 Loan bears interest at the rate of 2% over the prime rate
publicly announced by Citibank N. A. from time to time, which was 8.00% per
annum at September 30, 2001, and is due June 18, 2004. The Loan may be pre-paid
by the Company in whole or in part at any time without penalty, subject to the
right of the Trust to convert the outstanding principal amount of the Loan into
shares of common stock. Pursuant to the terms of the Loan, the Trust has the
option, at any time prior to maturity, to convert all or any portion of the
outstanding principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence of certain events. If, prior to maturity of the Loan, the Company
consummates one or more financings providing $5 million or more in gross
proceeds, the Company is required to apply 50% of the proceeds in excess of $5
million to the then outstanding principal amount of the Loan.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of the
shares of the Company's common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its reasonable
best efforts to cause such registration statement to become effective.
In 2001, 2000, and 1999, $150 in consulting fees, including office
expenses, were paid to a party who, at that time, was a director of the Company.
F-13
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Related Party Transactions (continued)
During the fourth quarter of 2000 the Company engaged in a transaction with
PenOp (See Note 1) to provide nonrecurring maintenance services from
pre-existing PenOp contracts in the aggregate amount of $1.5 million. The
Company recorded $877 and $352 in nonrecurring maintenance services during the
fourth quarter of 2000 and the first quarter of 2001, respectively, (net). The
Company previously entered into a separate transaction, to acquire the
intellectual property rights from PenOp.
Subsequent to the closing of the Acquisition (See Note 1), an officer and
Chairman of the Board of the Company at that time, 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.
6. Stockholders' Equity
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, 2001, 63 options are available for grant. In late 1994 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 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, 2001, there were 433 options available for
grant under the 1994 Plan.
In December 1994, for services rendered 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. 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 are generally exercisable over a period not to exceed seven
years. As of December 31, 2001, 3,585 non-plan options were outstanding with a
weighted average exercise price of $0.88 per share. Of such non-plan options,
3,167 were exercisable at December 31, 2001 with a weighted average exercise
price of $0.89 per share.
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 lifeand generally vest quarterly over three
years. At December 31, 2001, there were 1,035 shares available for future
grants.
F-14
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
6. 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,
------------------------------------------------------
2001 2000
------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------------------------------------------------
Outstanding at
beginning of period.. 3,257 $1.54 3,544 $1.02
Granted.............. 1,367 $1.21 947 $3.19
Exercised............ (384) $0.90 (757) $0.85
Forfeited............ (798) $1.53 (477) $2.07
------- -------
Outstanding at period end.. 3,442 $1.48 3,257 $1.54
======= =======
Options exercisable at
period end....... 2,208 $1.35 1,150 $1.27
======= =======
Weighted average grant-date
fair value of options
granted during the period... $0.98 $1.54
======= =======
The following table summarizes information about stock options outstanding
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:
Weighted Average
-------------------------------------
Remaining
Options Contractual Life (Years)
Range of Exercise Prices Outstanding Exercise Price
- --------------------------------------------------------------------------------
$0.00 - $0.50............... 24 3.8 $0.47
$0.51 - $2.00............... 2,812 6.2 $1.11
$2.01 - $2.99............... 58 7.8 $2.32
$3.00 - $7.50............... 548 8.3 $3.35
--------------
3,442
==============
The following table summarizes information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:
Weighted
Options Average
Range of Exercise Prices Exercisable Exercise Price
------------------------------------------
$0.00 - $0.50..................... 12 $0.47
$0.51 - $2.00..................... 1,862 $1.03
$2.01 - $2.99..................... 56 $2.30
$3.00 - $7.50..................... 278 $3.35
-------------------
2,208
===================
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.
F-15
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
6. Stockholders' Equity (continued)
Common Stock Options
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 stockholders and basic and diluted net
loss per share available to stockholders would have been as follows for the year
ended December 31:
2001 2000 1999
-------------------------------------------
Net loss available to
stockholders:
As reported........................ $ (3,215) $ (1,799) $ (1,740)
Pro forma.......................... $ (4,743) $ (3,937) $ (3,316)
Basic and diluted net loss per share
available to
stockholders:
As reported........................ $ (0.04) $ (0.02) $ (0.02)
Pro forma.......................... $ (0.05) $ (0.05) $ (0.04)
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 4.1% for 2001, 4.7% for 2000, and 5.4% for 1999, an expected life of 6
years for 2001, 3.5 years for 2000, and 4 years for 1999, respectively; expected
volatility of 100% all periods and dividend yield of 0% for all periods.
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 in
Note 6) the Company issued to a 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 were
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%.
Warrants to purchase a total of 237 shares of Common Stock were outstanding
as of December 31, 2001, and have a weighted average remaining contractual life
of 3 months and a weighted average exercise price of $2.00 per share.
As of December 31, 2001, 7,264 shares of Common Stock were reserved for
issuance upon exercise of outstanding options and warrants.
F-16
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
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
2006. In addition, the Company subleased to third parties certain space adjacent
to the Principal Offices through August 2001. 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
$443, $390, and $376 in 2001, 2000, and 1999, respectively. Sublease income was
approximately $35, $104, and $209 for the years ended December 31, 2001, 2000,
and 1999, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately, $397,$408 ,$419, $430, and $407 for the years ending December 31,
2002, 2003, 2004, 2005 and 2006, respectively. The Company's rent expense was
reduced by approximately $35 in 2001 in connection with the subleases described
above. Future minimum payments required under capital leases, which expire in
2002, were insignificant at December 31, 2001.
8. Income Taxes
As of December 31, 2001, the Company had federal net operating loss
carryforwards available to reduce taxable income through 2012 of approximately
$53,179. 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:
2001 2000
----------------------------
Deferred tax assets:
Net operating loss carryforwards................ $ 21,272 $20,192
Credit carryforwards............................ 315 315
Deferred income................................. 13 13
Other, net...................................... 775 782
----------------------------
Total deferred tax assets....................... 22,375 21,602
----------------------------
Valuation allowance.............................. (22,375) (21,602)
----------------------------
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.
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
F-17
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
9. Segment Information (continued)
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
----------------- ---------------- -----------------
2001 (Unaudited)
Revenues $ 4,546 $ 1,401 $ 5,947
Loss from Operations $(2,842) $ (104) $ (2,946)
Total assets $ 8,662 $ 1,410 $ 10,072
Depreciation and
amortization $ 662 $ 25 $ 687
2000 (Unaudited)
Revenues $ 5,401 $ 1,911 $ 7,312
Loss from Operations $(1,594) $ (13) $ (1,607)
Total assets $ 9,896 $ 1,405 $ 11,301
Depreciation and
amortization $ 310 $ 18 $ 328
1999 (Unaudited)
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
amortization $ 289 $ 45 $ 334
The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31:
Revenues Long Lived Assets
------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
------------------------------------------------------------------
U.S. $ 4,223 $ 5,401 $ 4,898 $ 6,113 $ 6,430 $ 261
China 1,724 1,911 1,620 44 66 83
------------------------------------------------------------------
Total $ 5,947 $ 7,312 $ 6,518 $ 6,157 $ 6,496 $ 344
=====================================================================
The Company's export sales from U.S. operations were 16%, 36%, and 16%, of
total revenues in 2001, 2000, and 1999, respectively.
F-18
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
10. Statement of Cash Flows Data
December 31,
-----------------------------------------
2001 2000 1999
Schedule of non-cash transactions:
Non-cash compensation................ $ 46 $ 89 $ -
Equity securities issued for
services............................. $ 58 $ - $ -
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
10. Statement of Cash Flows Data (continued)
Supplemental disclosure of cash flow information:
Interest paid in 2001, 2000, and 1999 was $196, $187, and $4, 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.
12. Quarterly information (Unaudited)
The summarized quarterly financial data presented below, in the opinion of
Management, reflects all adjustments which are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
2001 Unaudited
Net Sales $ 1,618 $1,903 $ 915 $1,511 $ 5,947
Gross profit $ 996 $1,201 $ 459 $1,051 $ 3,707
Income (loss) before
income taxes, and
minority interest $ (741) $ (691) $(1,228) $ (552) $(3,212)
Net income (loss) $ (741) $ (693) $(1,229) $ (552) $(3,215)
Basic and diluted
income (loss) per share $ (0.01) $(0.01) $ (0.01) $(0.01) $ (0.04)
F-19
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
12. Quarterly information (Unaudited)(continued)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
2000 Unaudited
Net Sales $ 1,377 $ 1,250 $2,346 $2,339 $ 7,312
Gross profit $ 648 $ 442 $1,649 $1,677 $ 4,416
Income (loss) before
income taxes, and
minority interest $ (889) $(1,127) $ 107 $ 112 $(1,797)
Net income (loss) $ (888) $(1,127) $ 106 $ 110 $(1,799)
Basic and diluted
income (loss) per share $ (0.01) $ (0.01) $(0.00) $(0.00) $ (0.02)
1999 Unaudited
Net Sales $ 1,247 $1,436 $1,966 $1,869 $ 6,518
Gross profit $ 617 $ 903 $ 831 $ 850 $ 3,201
Income (loss) before
income taxes, and
minority interest $ (448) $ (380) $ (430) $ (482) $(1,740)
Net income (loss) $ (448) $ (380) $ (430) $ (482) $(1,740)
Basic and diluted
income (loss) per share $ (0.01) $(0.01) $(0.01) $(0.01) $ (0.02)
13. Subsequent event
In February 2002, Mr. Guido DiGregorio, President & CEO was appointed
Chairman, President & CEO. Prior to Mr. DiGregorio's appointment, Mr.
Philip Sassower resigned his Chairmanship and board position and Mr.
Jeffrey Steiner also resigned from the board.
F-20
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts and Reserves
(In thousands)
Years Ended December 31, 1999, 2000, 2001
Balance Charged to Balance
At Beginning Costs and At End
Of Period Expense Deductions Of Period
Year ended December 31, 1999:
Accounts receivable reserves.......$174 $ 39 $(200) $ 13
Year ended December 31, 2000:
Accounts receivable reserves.......$ 13 $108 $ (3) $118
Year ended December 31, 2001:
Accounts receivable reserves.......$118 $ 78 $ - $196
S-1