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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
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, 2002
Commission File No. 0-19301
___________
Communication Intelligence Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500 (650) 802-7888
Redwood Shores, California (Registrant's telephone 94065
(Address of principal executive number, including area code) (Zip Code)
offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(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
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 27, 2003 was approximately
$12,858,739 based on the closing sale price of $0.14 on such date, as reported
by the Nasdaq Over the Counter Market.
The number of shares of Common Stock outstanding as
of March 27, 2003 was 92,480,777.
A list of Exhibits to this Annual Report on Form 10-K begins on page 27.
COMMUNICATION INTELLIGENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
PART I................................................................ 3
Item 1. Business..................................................... 3
Item 2. Properties................................................... 13
Item 3. Legal Proceedings............................................ 13
Item 4. Submission of Matters to a Vote
of Security Holders.......................................... 14
PART II............................................................... 14
Item 5. Market For Registrant's Common
Equity and Related Stockholder Matters....................... 14
Item 6. Selected Financial Data...................................... 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 16
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk................................ 25
Item 8. Financial Statements and Supplementary Data.................. 26
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure........... 26
PART III.............................................................. 26
Item 10. Directors and Executive Officers of the Registrant........... 26
Item 11. Executive Compensation....................................... 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................ 26
Item 13. Certain Relationships and Related Transactions............... 26
Item 14. Controls and Procedures...................................... 26
PART IV............................................................... 27
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................... 27
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.
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PART I
Item 1. Business
Unless otherwise stated all amounts in Parts I through Part IV are rendered in
thousands ("000s").
General
Communication Intelligence Corporation (the "Company" or "CIC") is the global
leader in biometric signature verification and natural input software solutions
and a leading supplier of electronic signature software focused on emerging,
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, Fujitsu, Handspring, IBM, Legend,
Oracle, Palm Source, Palm Solutions, Prudential, Siebel Systems, Sony-Ericsson,
and The Tennessee Valley Authority.
Revenues for the year ended December 31, 2002 decreased 44% to $3.3 million as
compared to $5.9 million for the prior year. The decrease in revenue reflects
the continuing weak economy and uncertainty of the geopolitical climate
throughout 2002 that continues to negatively impact corporate confidence and IT
spending.
Segments
The Company's information is presented in two segments-handwriting recognition
software and systems integration. The handwriting recognition segment is
comprised of three revenue categories: OEM, enterprise and online sales. All
handwriting recognition software is developed around the Company's core
technology. Systems integration represents the sale and installation of third
party computer equipment and systems that use the Company's software products.
All systems integration revenue is generated through the Company's Joint
Venture.
Core Technologies
The Company's core technologies are classified into two broad categories:
"natural input technologies" and "transaction and communication enabling
technologies." These technologies include multilingual handwriting recognition
systems (Jot(R) and the Handwriter(R) Recognition System, referred to as
HRS(TM)), electronic signature, handwritten biometric signature verification,
cryptography, electronic ink recording tools (InkTools(TM), Sign-it(R),
iSign(TM), SignatureWallet(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 software that can predict text input (WordComplete(R)).
The Company offers a wide range of multi-platform software products that enable
or enhance pen-based computing.
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 morefunctional user authentication and
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heightened data security. The Company's transaction and communication enabling
technologies have been fundamental in its development of software for electronic
signatures, handwritten biometric signature verification, data security, and
data compression.
Handwriting recognition segment products
Key Handwriting recognition segment products include the following:
Handwriter, Chinese Multi-lingual handwriting recognition software
Handwriter and Jot
Inktools A suite of application development tools for electronic
signatures, biometric signature verification and
cryptography
iSign Web based development tools for electronic signature and
biometric signature verification
PenX Operating systems extensions for the Windows operating
system that enables pen-based functionality and
handwriting
QuickNotes and InkSnap Electronic handwritten notetaking software
Sign-it and Sign-it Electronic signatures for the enterprise market
Server
Sign-On and Biometric Signature verification software for device
SignatureWallet access and data protection
WordComplete Predictive text entry software
Products and upgrades that were introduced and first shipped in 2002 include the
following:
iSign for Windows v2.1
InkTools for Windows v2.63
Jot for Palm OS v2.0
RecoEcho Plus v1.1
Sign-it for Acrobat v3.2
Sign-it for Word v4.03
Sign-it EX for Acrobat v1.23
Sign-it Tools v1.0
Sign-On Plus for Pocket PC v2.02
Sign-On for Tablet PC v1.0
Sign-it for AutoCAD v1.0
Signature Wallet for Palm OS v1.0
WordComplete v2.1
Chinese Sign-it for AutoCAD v1.0
Handwriting recognition software analyzes the individual strokes of characters
written with a pen/stylus and converts these stokes into machine-readable text
characters. 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)") recognizes handwritten input on
Windows and Windows CE based pen computers and desktop PCs for either English or
simplified and traditional Chinese characters. 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
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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
Company's 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 Limited, Intermec Corporation, Xplore Technologies, Inc.,
Mitsubishi Electric Corporation and Walkabout Computers, Inc.
Jot recognizes handwritten input and is specifically designed for small 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, Sony Ericsson, Symbian, Palm Solutions Group, Palm Source, 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 handwritten 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 effective and inexpensive handwriting security check for
immediate authentication. It also stores certain forensic elements of a
signature for use resolving whether a person actually electronically signed a
document. The kit also includes software libraries for industry standard
encryption and hashing to protect the sensitive nature of a user signature.
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, iSign, SignatureWallet and Sign-it products as well as the integrated
solutions provided by the Systems Integration operation of the JV in China. It
has been licensed to numerous key development partners and end-users, including
EDS, Bionetrix, Siebel Systems and Topaz Systems.
Sign-On and SignatureWallet are product offerings that utilize the Company's
handwritten biometric signature verification technology to provide access and
data 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 other
platforms, including Palm 5.x to meet the specifications of new licensees and
customers.
Sign-it is a family of electronic signature products for recording electronic
signatures as they are being written as well as binding and verifying electronic
signatures within standard consumer applications. These products combine the
strengths of handwritten signatures and cryptography to process, transact and
create electronic documents with the same legal standing as a traditional wet
signature on paper in accordance with the Electronic Signature in Natural and
Global Commerce act. 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, AutoCAD 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.
Enterprise Revenues
With the recent passage of legislation making electronic signatures legally
binding in virtually every major economy in the world, the transition began
toward automating transactions in industries dependent on signatures in order to
complete transactions. 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
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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 decreased 14% over the prior year, to
$1.3 million from $1.7 million, reflecting the uncertainty of the economic and
geopolitical climate throughout 2002 which did, and continues to, weigh heavily
on business confidence negatively impacting IT expenditures. Even companies
fully committed to the benefits of the paperless environment repeatedly delayed
eSignature program expenditures throughout 2002.
Enterprises that have license the Company's technology include the following:
Licensee Product(s) licensed Application of Products
- ------------- -------------------- -------------------------------------------
Accelio Inktools E-Signature for mobile forms
Agricultural
Bank of China InkTools E-signature for document automation
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
China Ministry
of Railways InkTools E-signature for document automation
Decade Software PenX & InkTools Windows pen computer upgrades
E-Com Asia Pacific
Pty Ltd. Multiple Regional reseller, multiple 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
First Command
Financial Sign-It E-signature for document automation
IA Systems InkTools E-signature for loan organization
ILI Technologies InkTools
& iSign Various e-signature applications for the
vertical markets in Israel
Industrial &
Commercial Bank
of China InkTools E-signature for document automation
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Licensee Product(s) licensed Application of Products
- ------------------- -------------------- ---------------------------------------
Integrate Online InkTools Mortgage closing
Nanjing Agricultural Bureau InkTools E-signature for document automation
National Healthcare Sign-It E-signature for document automation
Nationwide Building Society InkTools E-signature for document automation
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
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
Prudential Insurance Co. Sign-It EX E-Signature for mobile forms
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
St. Vincent's Hospital Multiple E-signature for document automation
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 Authority Multiple E-signature for approval of internal
documents
Turner Construction/Oracle iSign E-signature for document automation
Wisconsin Electric Power Sign-On Biometric mobile device; access
company security
Recent industry surveys indicate that IT spending will increase in 2003, despite
economic uncertainties and cost reduction pressures, because companies believe
the benefits far outweigh the expenditure (UBS Warburg, Celent). The Company is
optimistic that CIC's installed base of 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 2002 declined 68% versus the prior year, to $360 from $1.1
million, reflecting both declining shipments of handheld computers in general
and significant cutbacks in planned shipments of specific CIC OEM customers.
Handheld computer shipments for 2002 were 9% below the prior year (Dataquest).
Despite that harsh reality, OEM sales efforts in 2002 resulted in CIC emerging
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as the leading supplier of natural input software going into 2003. In November
of last year, Palm Source replaced Graffiti with CIC's Jot as the standard and
only handwriting software on all Palm OS based devices. Palm based handheld
computers and smartphones remain the global leader with approximately 56% of the
worldwide device market. PalmSource shipments are forecasted by IDC to reach
some 12 million annually by 2005 with a projected installed base of 55 million
worldwide. Palm OS based devices manufactures include Palm Solutions,
Handspring, IBM, Kyocera, Samsung, Sony and Symbol. In addition, CIC's Jot
product was chosen as the natural input software for Sony Ericsson's new Symbian
OS based P800 multi media smartphone. Sony Ericsson, together with Nokia,
Motorola, Siemens and Psion form the Symbian Alliance. The objective of the
Symbian Alliance is to establish the Symbian OS as the standard for wireless
devices. CIC has a license agreement with Symbian making the Company's Jot and
other software products available for evaluation to Symbian OEM members.
IDC projects the total handheld computer and smartphone market will grow to over
26 million shipments by 2005. With CIC's Jot embedded on all Palm OS based
devices and on both Ericsson R380 and Sony Ericsson P800 smartphones, the
Company believes it is well positioned to sustain its current leadership
position and benefit from the continuous and increasing flow of royalty revenue.
Key OEM Licensees include:
Licensee Product(s) licensed Application of Products
- -------------- ---------------------------------- ------------------------------
AirSpeak Jot Handheld PC Pro
Sony Ericsson Jot, QuickNotes, Sign-On & Smart cellular phone
WordComplete
Fujitsu HRS, PenX, Sign-On Plus & Windows and Windows CE
InkTools pen computers
GSC Mobile Solutions Inktools Windows pen computers
Handspring, Inc. Reco Echo Electronic organizer
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 mathematicalnotation
Misys Healthcare InkTools Handwriting recognition
and security
Motion Computing SignOn E-signature products
National Semiconductor Jot Wireless Internet access
device
Pacific Star PenX Windows pen computers
Palm Solutions Group Jot Electronic organizer
PalmSource Jot Electronic organizer
Telos Corp. PenX Windows pen computers
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Licensee Product(s) licensed Application of Products
- ---------------- ---------------------------------- ----------------------------
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/Retail Revenues
Online revenues have been generated primarily through direct mail sent to Palm
handheld computer (PDAs) owners utilizing names and addresses acquired from
Palm. Retails sales are generated through an agreement with Elibrium Inc. that
positions CIC's Palm OS based software offerings directly at the point of sale
at retailers including Comp USA, Staples, and Office Max.
Revenues from the Company's software sold directly through it's website,
(www.cic.com) and at the retail point of sale totaled $351 in 2002, 62% below
the $913 for the prior year, reflecting both the decline in handheld computer
shipments in 2002 (9% below 2001; Datquest) as well as the overall decrease in
consumer spending both online and at retail due to the continuing weak economy
over the past two years.
Recent events, however, have provided the basis for what the Company believes is
significant aftermarket revenue potential both near and longer term. PalmSource
recently replaced Graffiti with Jot as the standard and only text entry software
for their Palm operating system (OS). Palm OS based handheld computers and
smartphones are the global leader with about 56% of the worldwide wireless
device market. Palm OS based devices represent an installed base of over 25
million devices that IDC projects will grow to over 55 million by 2005.
CIC recently launched a marketing program targeted at the 25 million existing
Palm OS based device owners to easily upgrade their text entry from Graffiti to
CIC's Jot and gain the benefits of the advanced text entry software that
PalmSource chose to replace Graffiti on all new shipments. The marketing
programs leverage the marketing efforts of device manufactures and channel
partners including Palm Solutions Group-the leading provider of Palm handheld
computers, Handspring, Handango- the leading online Palm software supplier and
Elibrium-a leading retail software publisher/supplier.
China Revenues
CIC China ("CICC"), 90% owned by CIC, was established over nine years ago and is
headquartered in Nanjing China. The Joint Venture is 10% owned by Jiangsu Hongtu
Electronics Group, the leading DVD supplier in the US with its APEX brand, and a
leading supplier of other high technology products and systems.
Revenue from CICC was $1.3 million in 2002, a decline of 24% over the $1.7
million in the prior year. This decrease reflects primarily the need to expand
sales coverage from a traditional focus on the local Nanjing and Jiangsu
Province market. Despite the economic slowdown in the US and western markets and
the negative impact on corporate IT spending, China is enjoying a robust economy
and its IT expenditures are increasing three to four times faster than the rest
of the world. China is the world's third largest economy and its recent
accession into the World Trade Organization is fueling its economic growth, in
this vast nation of 1.3 billion people, as it prepares to compete on a worldwide
basis. The benefits of CIC's electronic signature technology for applications
including eCommerce, automation of signature dependent electronic forms for the
paperless environment and corporate security are impacting the demand in China
more intensely than in the US and European markets.
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Recently, the Company implemented an overall strategy aimed at accelerating CICC
sales growth by focusing sales resources on expanding the rollout and further
deployments of CICC's installed base of showcase enterprise and government
installations while rapidly implementing a channel strategy that leverages this
installed base of reference accounts to attract major channel partners who can
rapidly establish China-wide market coverage and penetration for CIC's
technology.
The Company believes that CICC is well positioned to participate in this
explosive growth. CICC's installed base of both Chinese corporate and government
deployments include the Agricultural Bank of China, Hu Nan Mobile
Communications, International Construction Bank of China (China's largest
commercial bank), Ministry of Agriculture, Nanjing Civic Bureau, Nanjing
Municipal Government, Panda, and the Ministry of Railways.
Over the past two years, CICC has 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 including Symbol, Handspring and Palm. CICC's
offering includes the integration of enterprise software solutions for the
server side / backend management of these mobile systems and captured data. The
systems integration business affords CICC the opportunity to include the sale of
its core software by integrating electronic signature and Chinese handwriting
recognition into its turn-key solutions.
The Company believes that the emerging market for electronic signature based
applications and handheld receipt/delivery based systems, acceptance of CICC
products by leading Chinese enterprises and government agencies, the legitimacy
and credibility afforded CICC by joint venture status and the explosive growth
potential of the China market, now driven by accession to the WTO, provide CICC
significant growth potential in 2003 and beyond.
Marketing
Handwriting Recognition Segment
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 primarily from smart handheld device manufacturers. Enterprise
sales efforts are directed at both software providers and end-users.
Online/retail sales represent revenues generated from the Company's software
sold through its website and retail outlets.
OEM Licensed Products. The Company currently licenses software products for
Windows(r)3.x, Windows(R)'95, Windows'98, WindowsNT, WindowsCE, EPOC, QNX,
VT-OS, Palm and Linux. The Company 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
are primarily used for field force automation and in pen-input PC peripherals
for desktop use. Jot, QuickNotes, Sign-On, WordComplete and the Company's
software keyboard are licensed primarily for the new, smaller classes of
personal computers 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. The Company offers several products targeted at
the broad enterprise market. The Company believes that this market could benefit
from workflow automation solutions using electronic signatures or handwriting
authentication such as new account openings, regulated document submissions and
device/network security. For these markets, the Company 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 its shrink-wrapped software applications and tools. This currently
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includes most of the Company'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 the Company'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.
Systems Integration Segment
The Company's systems integration activity is confined to CIC China where
services are provided to Chinese enterprises and government users and other
joint ventures in the Peoples Republic of China involving the re-sale of desktop
computers, monitors, servers and other computer related products together with
customized software in mostly office automation and materials replenishment
planning applications. See China Revenue segment.
Copyrights, Patents and Trademarks
Handwriting Recognition Segment
The Company relies on a combination of patents, copyrights, trademarks, trade
secrecy and contractual provisions to protect its software offerings and
technologies. 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 disclosure of any of its proprietary
information.
Over the years, the Company has developed and patented major elements of its
software offerings and technologies. In addition, in October 2000 the Company
acquired from PenOp, Inc., and its subsidiary, a significant patent portfolio
relevant to the markets in which the Company sells its products. The Company's
material patents and the years in which they each expire are as follows:
Patent No. Expiration
----------------- -------------------
----------------- -------------------
5544255 2013
5647017 2014
5818955 2015
6064751 2017
6091835 2017
The Company believes that these patents provide a competitive advantage in the
electronic signature and handwriting recognition markets. The Company believes
the technology covered by the patents is unique and allows us to produce
superior products. The Company also believes these patents are very broad in
their coverage. The technology goes beyond the simple handwritten signature and
includes measuring electronically the manner in which the person signs to ensure
tamper resistance and security of the resultant documents and the use of other
systems for identifying an individual and using that information to close a
transaction. The Company believes that the patents are sufficiently broad in
coverage that any product with substantially similar functionality will infringe
its patents. Moreover, because these patents do not expire for between 10 and 14
years from the date hereof, the Company believes that it has sufficient time to
develop new related technology, which may be patentable, and to establish CIC as
market leader in these product areas. Accordingly, the Company believes that for
a significant period of time the patents will deter competitors from introducing
competing products without creating substantially different technology or
licensing its technology.
The Company 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.
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Systems Integration Segment
Systems integration does not rely to any material degree on the Company's
products and, therefore, its patents and their ultimate expiration do not
significantly impact the systems integration segment.
Material Customers
Handwriting Recognition Segment
Historically, the Company's handwriting recognition segment revenues have been
derived from a limited number of customers. One customer, Nationwide Building
Society, accounted for 11% of total segment revenues for the year ended December
31, 2002. One customer, The Prudential Insurance Company of America accounted
for 16% of total segment revenues for the year ended 2001. One customer,
Ericsson Mobile Communications AB, accounted for 16% of total segment revenues
for the year ended 2000.
Systems Integration Segment
One customer, Fujitsu Ltd. accounted for 30% of total system integration revenue
for the year ended December 31, 2002. This same customer accounted for 16% of
total segment revenues in the twelve months ended December 31, 2001and 2000,
respectively.
Seasonality of Business
The Company believes that neither of its segments is subject to seasonal
fluctuations.
Backlog
Handwriting Recognition Segment
At December 31, 2002, backlog approximated $165, representing advanced payments
on service maintenance agreements and non-recurring engineering projects that
are expected to be recognized over the next twelve months. At December 31, 2001,
backlog approximated $88, representing advanced payments on service maintenance
agreements and non-recurring engineering projects that are expected to be
recognized over the next twelve months. At December 31, 2000, backlog
approximated $61, representing advanced royalty and service maintenance
agreements.
Systems Integration Segment
At December 31, 2002 backlog was approximately $34. At December 31, 2001,
backlog was approximately $178. There was no significant backlog at December 31,
2000.
Competition
Handwriting Recognition Segment
The Company faces competition at different levels. Certain competitors, e.g.,
PenPower Group, and Palm Inc., have developed or are developing software
offerings, which may compete directly with the Company's offerings. Most of the
Company's direct competitors, e.g., Microsoft Corporation, Silanis Technology,
Inc., and Advanced Recognition Technology, Inc., have focused on only one
element of such offerings, such as handwriting recognition technology, signature
capture/verification or pen-based operating environments or other pen-based
applications. The Company believes that it has a competitive advantage in some
cases due to its range of product offerings. There can be no assurance, however,
that competitors, including some with greater financial or other resources, 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 that
would render its products or technologies obsolete or non-competitive.
-12-
Systems Integration Segment
The Company's Joint Venture competes with other systems integrators of similar
size (less than 100 employees) in China for small to mid-size enterprise
opportunities. The Company primarily competes on price and quality and breadth
of services for these opportunities. The Company believes that it is competitive
in its pricing and has been consistently recognized by its customers for its
high quality of service.
Employees
As of December 31, 2002, the Company employed an aggregate of 55 full-time
employees. The Company's handwriting recognition segment consisted of 40
employees, 20 of which are in the United States and 20 of which are in China.
The Company employed 15 full-time employees in its systems integration segment
in China. From time to time, the Company also utilizes additional personnel on
an as needed basis. The Company believes it has good relations with its
employees. None of the Company's employees are a party to a collective
bargaining agreement.
Geographic Areas
For the years ended December 31, 2002, 2001, and 2000, the Company's sales in
China as a percentage of total sales were 38%, 29% and 26%, respectively. For
the year ended December 31, 2002 and the years ended December 31, 2001, 2000,
the Company's sales in the United States as a percentage of total sales were
62%, 71% and 74%, respectively. Included in the U.S. sales are export sales. For
the years ended December 31, 2002, 2001, and 2000, the Company's export sales as
a percentage of total revenues were approximately 12%, 16%, and 36%,
respectively.
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 that 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, 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 believes that its current facilities
will be suitable for us to continue operations in the foreseeable future.
Item 3. Legal Proceedings
The Company was named as a defendant in a suit brought in U.S. District Court
for the Southern District of New York, filed on August 5, 2002. The plaintiffs,
Richard M. Ross and Jane Spaulder Ross, brought claims for breach of contract,
conversion, negligence and statutory violations, alleging that the Company
provided incorrect or false information to their stock broker, thereby delaying
the sale of plaintiffs' shares in the Company and causing a loss in excess of
$500 due to a drop in the value of the shares. While the litigation is in an
early stage, based on the available information, the Company believes that the
action is without merit and, even if plaintiffs succeed, the Company believes
their damages will not have a material financial impact on us. The Company
intends to vigorously defend against the claims.
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In a separate arbitration proceeding the plaintiffs have brought similar claims
for relief against Charles Schwab & Co., Inc., their broker during the period in
question, based upon other legal theories.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
As of March 14, 2003 the Company's common stock was listed on the NASDAQ Over
the Counter Bulletin Board ("OTC") under the trading symbol CICI. Prior to that
it was listed on the Nasdaq SmallCap Market under the same symbol. 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
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...................................... $ 1.18 $ 0.56
Second Quarter..................................... $ 1.15 $ 0.63
Third Quarter...................................... $ 0.66 $ 0.24
Fourth Quarter..................................... $ 0.50 $ 0.21
2003 First Quarter (through March 27, 2003)............. $ 0.50 $ 0.14
As of March 27, 2003, the closing sale price of the Common Stock on the Nasdaq
OTC was $0.15 per share and there were approximately 831 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, 2002, the Company did not grant any
stock options.
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Item 6. Selected Financial Data
The selected consolidated financial data presented below as of December 31,
2002, 2001, 2000, 1999, and 1998 and for each of the years in the five-year
period ended December 31, 2002 are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2002 and 2001, and for each of the years in the three-year period
ended December 31, 2002, 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,
---------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations
Data:
Revenues..................... $ 3,272 $ 5,947 $ 7,312 $ 6,518 $ 4,581
Research and
development expenses(1).... 1,485 1,808 1,603 1,363 1,989
Sales and marketing
expenses................... 1,543 2,054 2,239 1,877 2,015
General and administrative
expenses................... 2,424 2,791 2,181 1,683 1,889
Loss from operations......... (3,337) (2,946) (1,607) (1,722) (3,285)
Net loss available to
common stockholders......... (3,561) (3,215) (1,799) (1,740) (3,592)
Basic and diluted loss
per share................... (0.04) (0.04) ( 0.02) ( 0.02) ( 0.06)
As of December 31,
-------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents
and restricted cash........ $ 711 $ 2,588 $ 2,349 $ 2,374 $ 1,045
Working capital(2).......... 443 3,017 3,109 3,054 346
Total assets................ 7,168 10,072 11,302 4,963 3,354
Deferred revenue............ 165 88 61 35 651
Long-term obligations....... 3,000 3,000 1,427 1,338 -
Stockholders' equity (3).... 2,934 6,060 8,307 2,349 1,332
___________
(1) Excludes software development costs capitalized in accordance with
Statement of Financial Accounting Standards No. 86 of $20, $20, and $9, for
the years ended December 31, 2001, 2000, and 1999 respectively. No software
development costs were capitalized in the year ended December 31, 2002.
(2) Current liabilities used to calculate working capital at December 31, 2002,
2001, 2000, 1999, and 1998 include deferred revenue of $165, $88, $61, $35,
and $651, respectively.
(3) The Company has never paid dividends to the holders of its common stock.
-14-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Unless otherwise stated herein, all figures in this MD& A section are rendered
in thousands ("000s").
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, 2002, operating losses aggregated
approximately $13 million and at December 31, 2002, the Company's accumulated
deficit was approximately $80 million.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Company's consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in its
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions which are used for,
but not limited to, the accounting for the product returns, allowance for
doubtful accounts, intangible asset impairments, and inventory. Actual results
may differ from these estimates. The following critical accounting policies are
significantly affected by judgments, assumptions and estimates used by the
Company's management in the preparation of the consolidated financial
statements.
Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive guidance issued by the Securities and Exchange Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. The Company recognizes
revenues from sales of software products upon shipment, provided that persuasive
evidence of an arrangement exists, collection is determined to be probable, all
nonrecurring engineering work necessary to enable the Company products to
function within the customer's application has been completed and The Company's
product has been delivered according to specifications. Revenue from service
subscriptions is recognized as costs are incurred or over the service period.
Software license agreements may contain multiple elements, including upgrades
and enhancements, products deliverable on a when and if available basis and post
contract support.
Revenue from software license agreements is recognized upon delivery of the
software provided that persuasive evidence of an arrangement exists, collection
is determined to be probable, all nonrecurring engineering work necessary to
enable the Company's products to function within the customer's application has
been completed and the Company has delivered its product according to contract
specifications. Deferred revenue is recorded for upgrades, enhancements and post
contract support, which is paid for in addition to license fees, and is
recognized as costs are incurred or over the support period. Vendor specific
objective evidence of the fair value for multiple element software license
agreements is determined by the price charged for the same element when sold
separately or the price determined by management having the relevant authority
when the element is not yet sold separately. The price established by management
for the element not yet sold separately will not change prior to separate
introduction of that element into the marketplace.
Revenue from system integration activities, which represents the sale and
installation of third party computer equipment and limited related consulting
services, is recognized upon installation of the third party hardware and/or
software as projects are short term in nature, provided that a contract exists,
collectibility of the receivable is reasonably assured and the system is
functioning according to specifications. Service subscription revenues
associated with the system integration activities are recognized as costs are
incurred or over the service period.
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable. If
there is a change in actual defaults from the Company's historical experience,
-16-
the Company's estimates of recoverability of amounts due it could be affected
and the Company will adjust the allowance accordingly.
The Company performs intangible asset impairment analyses on a quarterly basis
in accordance with the guidance in Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") and Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets ("SFAS No. 144"). The Company uses SFAS 144 in response to changes
in industry and market conditions that affects its patents, the Company then
determine if an impairment of its assets has occurred. The Company reassess the
lives of its patents and test for impairment quarterly in order to determine
whether the book value of each patent exceeds the fair value of each patent.
Fair value is determined by estimating future cash flows from the products that
are and will be protected by the patents and considering the following
additional factors:
o whether there are legal, regulatory or contractual provisions known to us
that limit the useful life of each patent to less than the assigned useful
life;
o whether the Company needs to incur material costs or make modifications in
order for it to continue to be able to realize the protection afforded by
the patents;
o whether any effects of obsolescence or significant competitive pressure on
the Company's current or future products are expected to reduce the
anticipated cash flow from the products covered by the patents;
o whether demand for products utilizing the patented technology will
diminish, remain stable or increase; and
o whether the current markets for the products based on the patented
technology will remain constant or will grow over the useful lives assigned
to the patents.
Customer Base. 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. The costs capitalized include the coding and testing of
the product after the technological feasibility has been established and ends
upon the release of the product. The capitalized costs are amortized to cost of
sales on a straight-line basis over the estimated life of the product, generally
three years. As of December 31, 2002, 2001 and 2000, such costs were
insignificant.
Research and Development Costs. 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. Foreign currency assets and
liabilities are translated into U.S. dollars at exchange rates prevailing at the
end of the period, except for long-term assets and liabilities that 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. 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, 2002, 2001 and 2000, respectively.
-17-
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,
2002 of $23 million based upon the Company's history of losses.
Segments
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
enterprise and original equipment manufacturers ("OEM") revenues. All
handwriting recognition software is developed around the Company's core
technology. Handwriting recognition product revenues are generated through the
Company's web site and a direct sales force to individual or enterprise end
users. The Company also licenses a version of its handwriting recognition
software to OEM's. The handwriting recognition software is included as part of
the OEM's product offering. From time to time, the Company is required to
develop an interface (port) for its software to run on a new customer's hardware
platform or within the customer's software operating system. The development
contract revenues are included in the handwriting recognition segment. System
integration represents the sale and installation of third party computer
equipment and systems that utilize the Company's products. System integration
sales are derived through a direct sales force that then develops a system to
utilize the Company's software based on the customer's requirements. Systems
integration sales are accomplished solely through the Company's Joint Venture.
Results of Operations
The following table provides unaudited financial information for each of the
Company's two segments.
Years Ended December 31,
2002 2001 2000
--------- --------- --------
Handwriting recognition
Online/retail $ 351 $ 913 $ 1,198
Corporate 1,667 2,958 3,326
Nonrecurring Maintenance
fees (net)-M10 (previously PenOp) - 352 877
China 196 323 308
--------- --------- ---------
Total Handwriting recognition $ 2,214 $ 4,546 $ 5,709
Systems integration
China Total Systems integration $ 1,058 $ 1,401 $ 1,603
--------- --------- ---------
Total revenues $ 3,272 $ 5,947 $ 7,312
--------- --------- ---------
Cost of Sales
Handwriting recognition $ 423 $ 1,149 $ 1,549
Systems integration 734 1,091 1,347
--------- ---------- --------
Total cost of sales $ 1,157 $ 2,240 $ 2,896
--------- ---------- --------
Operating cost and expenses
Research and development $ 1,485 $ 1,808 $ 1,603
Sales and Marketing 1,543 2,054 2,239
General and administrative 2,424 2,791 2,181
--------- ---------- --------
Total operating costs and expenses $ 5,452 $ 6,653 $ 6,023
--------- ---------- --------
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Years Ended December 31,
2002 2001 2000
---------- ------------ ------------
Interest and other income
(expense) net $ (224) $ (269) $ (192)
---------- ------------ ------------
Net loss $ (3,561) $ (3,215) $ (1,799)
========== ============ ============
Amortization of intangible assets
Cost of sales $ 14 $ 12 $ 12
General and administrative 378 440 43
----------- ------------ ------------
Total amortization of
intangible assets (See note 9) $ 392 $ 452 $ 55
=========== ============ ============
Years Ended December 31, 2002 and December 31, 2001
Revenues
Handwriting recognition segment. Handwriting recognition segment revenues
include online/retail, corporate and China software sales. Handwriting
recognition segment revenues declined 51% or $2,332 to $2,214 for the twelve
months ended December 31, 2002 as compared to $4,546 in the comparable prior
year.
Online/retail revenues declined 62% or $562 for the twelve months ended
December 2002 compared to the prior year. This decrease was primarily due to the
curtailment of the direct mail campaign at the end of the second quarter 2002,
due to the reduced availability of new names and poor sales close rate compared
to the prior year. In November of 2002, PalmSource replaced Graffiti(R) with
CIC's Jot as the standard and only handwriting software on all new Palm
PoweredTM devices. The Company believes future online/retail revenues will
increase due to the Palm license agreement as Palm operating system users are
expected to upgrade the software on their devices to the Company's Jot product.
Due to the current economic conditions and poor consumer spending the timing and
amount of the anticipated increase in online/retail revenues are difficult to
predict.
Corporate revenues decreased 44% or $1,291 over the twelve months ended
December 31, 2002 compared to the prior year. OEM revenues included in corporate
sales decreased 68% or $782 over the twelve months ended December 31, 2002
compared to the prior year. This decrease was primarily due to a decrease in the
amount of royalty reported by two of the Company's licensees located in the
Pacific Rim and reduced development contract revenue recognized as compared to
the prior year. The Company believes OEM revenues will increase in 2003 due to
Palm Source's replacement of Graffiti(R) with the Company's Jot product as the
standard and only handwriting software on all new Palm PoweredTM devices. The
poor economy and Palm's prediction of declines in projected shipments of its
products may limit or defer the Company's anticipated increases in OEM revenues
to later in 2003. Enterprise sales included in corporate sales decreased 28% or
$509during the twelve months ended December 31, 2002 compared to the prior year.
The Company believes the decrease was due to the reduced IT spending
resulting from the weak economy. The Company previously engaged in a transaction
with PenOp to provide nonrecurring maintenance services from pre-existing PenOp
contracts in the aggregate amount of $1.5 million, of which $877 was recorded
(net) in the three months ended December 31, 2000. During the twelve months
ended December 31, 2001, the Company recognized $352 in nonrecurring maintenance
fees net of expenses of $48.
Software sales in China declined 39% or $127 over the twelve months ended
December 31, 2002 compared to the prior year. The decrease resulted from
competitive pressures from local Chinese companies with similar types of
software offerings. See Competition Handwriting Recognition Segment.
Systems integration Segment. System integration segment revenue declined
24% or $343 during the twelve months ended December 31, 2002 compared to the
-19-
prior year. The decrease was primarily due to a decrease in sales to two
customers compared to the prior year and an increase in competition from small
local Chinese companies. See Competition System Integration Segment.
Cost of Sales.
Handwriting recognition segment. Handwriting recognition segment cost of
sales include online/retail, corporate and China software sales costs. Such
costs are made up of royalty and import tax payments, third party hardware
costs, direct mail costs, amortization of intangible assets excluding patents
and engineering direct costs. Cost of sales for the handwriting recognition
segment decreased 63% or $726 during the twelve months ended December 31, 2002
compared to the prior year.
Online/retail cost of sales decreases 68% or $546 during the current year
compared to the twelve months ended December 31, 2001. The decrease was due to
the elimination of direct mailing campaign and related costs as a result of
reductions in the number of names available and a poor sales close rate.
Enterprise and OEM cost of sales decreased 67% or $193 during the twelve
months ended December 31, 2002 compared to the prior year. The decrease was due
to the lower sales volumes of products requiring third party hardware and
reduction in OEM technology import tax and engineering development costs over
the twelve months ended December 31, 2002 as compared to the prior year.
China handwriting recognition segment cost of sales increased 24% or $13
during the twelve months ended December 31, 2002 compared to the prior year. The
increase is due primarily to third party hardware costs associated with the sale
of the software compared to the prior year.
Systems integration segment.
China Systems integration segment cost of sales declined 33% or $357 over
the twelve months ended December 31, 2002 as compared to the prior year. The
decrease was due primarily to the 24% decline in revenues between the
twelve-month comparable periods as discussed above.
Operating expenses
Research and Development Expenses. Research and development expenses
decreased 18% or $323 to $1,485 for the year ended December 31, 2002 as compared
to $1,808 in the prior year. Engineering expenses consist primarily of salaries
and related costs, outside engineering, maintenance items, and allocated
facilities expenses. These expenses are offset by the capitalization of software
development costs and direct costs associated with nonrecurring engineering
contracts charged to cost of sales. The decrease was due primarily due to the
71% or $245 reduction in outside engineering costs associated with the
assimilation of the PenOp intellectual property into the Company's products. In
addition, salaries and related expenses decreased $123, or 11%, due to the
reduction in head count of a total of 3 engineers compared to the twelve-month
period of the prior year. Software development costs capitalized in 2002
declined 100% or $20 compared to 2001. Direct costs associated with nonrecurring
engineering contracts charged to cost of sales declined 64% or $68 during the
twelve months ended December 31, 2002 as compared to the twelve months in the
prior year. Travel, maintenance and allocated facilities expenses declined $43
in 2002 as compared to the twelve months in 2001. These decreases were due to
reduced activity and spending resulting from lower sales experienced in 2002,
compared to the twelve months in 2001.
Sales and Marketing Expenses. Sales and marketing expenses declined 25% or
$511 to $1,543 for the twelve months ended December 31, 2002 compared to $2,054
for the twelve months in 2001. Sales and marketing expenses consist of salaries,
commissions and related expenses, professional services, advertising and
promotion, general office and allocated facilities expenses. The decrease was
primarily due to 57% or $245 decrease in professional services and advertising
expenses over the twelve months ended December 31, 2002 compared to the prior
year period. The decrease was due to non-recurring expense of a marketing study
completed in the prior year and the reduction in resource guide advertisements
included in the box that accompanies third party handheld devices. Salaries,
commissions and related expenses declined 10% or $85 in 2002 compared to the
-20-
twelve months ended December 31, 2001. The decrease was due to a reduction in
personal of 2 sales persons in the third quarter of 2002 as the Company
attempted to trim expenses in response to a weakening economy. Allocated
facilities and general office expenses decreased 23% or $180 during the twelve
months ended December 31, 2002 as compared to the prior year. The decrease was
primarily due to the one time charge in 2001 in recruiting costs and a decrease
in the allocated facilities expenses compared to the twelve months ended
December 31, 2001. The Company's sales efforts have been directed towards
customers that have previously purchased products and currently have pilot
programs in process utilizing the Company's software. These customers are
expected to purchase additional software products once they have completed their
studies and implement their software solutions. The Company believes that an
improving economy and the current number of customer pilot programs nearing
completion will provide future revenues over a period of time sufficient to
allow us to timely expand the Company's sales efforts to generate the potential
new demand.
General and Administrative Expenses. General and administrative expenses
decreased 13% or $368 to $2,424 for the twelve months ended December 31, 2002,
compared to $2,791 in the prior year. General and administrative expense
consists of salaries, professional fees, investor relations expenses, patent
amortization and office and allocated facilities costs. The decrease was
primarily due to lower professional service fees resulting from the resignation
of the former Chairman of the Board and the elimination of $159 in related
salary and office fees and $51 in other professional fees. In addition investor
relations expenses decreased 47% or $172 compared to the twelve months ended
December 31, 2001. The decrease was due to nonrecouring expenses in 2001 related
to an aborted financing and reductions in the costs associated with shareholder
communications. Other office expenses and allocated facilities expenses
decreased 5% or $53 over the twelve months ended December 31, 2002 compared to
the prior year. These reductions were offset by an 11% or $67 increase in
payroll and related cost associated with salary increases.
Interest Income and Other Income (Expense), Net
Interest and other income (expense) net decreased 16% or $45 over the
twelve months ended December 31, 2002 compared to the prior year. The decrease
was primarily due to the decrease in the interest rate paid on the Company's
$3,000 debt over the year.
Years Ended December 31, 2001 and December 31, 2000
Revenues
Handwriting recognition segment. Revenues declined $1,163, or 20%, to
$4,546 during the twelve months ended December 31, 2001, as compared to $5,709
for the twelve months ended December 31, 2000 as described below.
Online revenues declined $285, or 24%, to $913 for the twelve months ended
December 31, 2001, as compared to $1,198 for the twelve months ended December
31, 2000. This reduction is primarily attributable to the smaller target
population of Palm Users available for the Company's direct mail campaign. This
population was smaller than the available population in the year 2000 due to the
decline in Palm operating system shipments during 2001. Future Online revenues
are expected to remain weak until the number of shipments of the Palm operating
system increase or a more cost effective way to further penetrate the installed
base is devised.
Corporate sales, which includes enterprise sales and OEM revenues,
decreased $893 or 21%, to $3,310 (including the nonrecurring maintenance fees
from M10, previously PenOp) for the year ended December 31, 2001, compared to
$4,203 in the prior year period. Sales of the Company's software solutions and
maintenance to end users included in corporate sales increased $155 to $2,076 in
2001 compared to $1,921 in the prior year period. The decrease was due primarily
to a $524 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 and $877 was
-21-
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 to the audited consolidated financial statements). OEM
revenues included in corporate sales decreased $989 or 48% to $1,078 from $2,067
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 or
27% to $156 from $215 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 handwriting recognition segment sales increased $15, or 5% to $323
for the twelve months ended December 31, 2001, as compared to $308 for the
twelve months ended December 31, 2000. The changes in revenues are not related
to any single customer.
Systems integration segment. China systems integration segment sales
decreased $202, or 13%, to $1,401 for the twelve months ended December 31, 2001
as compared to $1,603 for the twelve months ended December 31, 2000. The
decrease is due to lower sales activity and is not related to any single
customer.
Cost of Sales.
Handwriting recognition segment. Cost of sales decreased $400, or 26% to
$1,149 for the year ended December 31, 2001, as compared to $1,549 for the
twelve month period ended December 31, 2000, as described below.
Online cost of sales decreased $282, or 26%, to $805 in 2001, as compared
to $1,087 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, or 30%, to $290 from $416 in the
prior year.
Costs associated with the Company's signature software solutions decreased
$36, or 21%, to $135, compared to $171 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 in 2001 and 2000, respectively. Costs of development contract
revenues included in corporate sales decreased $85, or 45%, to $105 in 2001, as
compared to $190 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 included in corporate sales
decreased $5, or 12%, to $38 as compared to $43 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 handwriting recognition cost of sales increased $8, or 17%, to $54 in
the twelve months ended December 31, 2001, as compared to $46 for the twelve
months ended December 31, 2000. The increase was due to the increase in software
sales in 2001 as compared to the prior year.
Systems integration segment. Cost of sales decreased $256 or 19% to $1,091
as compared to $1,347 in the prior year. The decrease is due to the lower system
integration segment sales realized in 2001 as compared to the prior year.
Operating expenses
Research and Development Expenses. Research and development expenses
increased $205, or 13%, to $1,808 for the twelve months ended December 31, 2001,
as compared to $1,603 for the prior year. Salaries and related costs decreased
$104, or 9%, to $1,077 in 2001, compared to $1,181 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 to $342 in 2001, compared to $87 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, as compared to the
prior year period. In addition, costs associated with development contracts and
charged to cost of sales decreased $84 or 44% to $106 from $190 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.
-22-
Sales and Marketing Expenses. Sales and marketing expenses for the year
ended December 31, 2001 decreased $185, or 8%, to $2,054, as compared to $2,239
in the prior year. Payroll and related costs decreased 12%, or $93, to $696 in
2001 from $789 due primarily to a decrease in headcount during the year. Travel
and related expenses decreased $58, or 29%, to $140 in 2001, compared to $198 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, or 49%, to $203 in 2001, from $398 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 On-line sales via
CIC's website. Professional services expense increased $128, or 129%, to $227
from $99 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, or 5%, in 2001 as compared to the prior
year.
General and Administrative Expenses. General and administrative expenses
increased 28%, or $610, to $2,791 for the year ended December 31, 2001, from
$2,181 for the prior year. The increase was primarily due to an increase in
patent amortization expense of $393, or 914%, to $436 in 2001 from $43 in the
prior year. In addition, professional fees increased $274, or 105%, to $535 from
$261 in the comparable prior year period. Investor relation's expenses decreased
$66, or 15%, to $366 in 2001, as compared to $432 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 uncollectible accounts increased $9 in
2001 as compared to the prior year.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense) net, decreased $60, or 79%, to $16 in 2001, from $76 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 in 2001,
compared to $49 in the prior year.
Interest Expense. Interest expense increased $16, or 6%, in 2001, to $282
from $266 in the prior year. This increase was due to the increase in long-term
debt outstanding since June of 2001.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2002 totaled $711, compared to
cash and cash equivalents of $2,588 at December 31, 2001. This decrease was
primarily attributable to $2,087 of cash used in operations, and $30 of cash
used in investing activities. These cash outflows were offset by $240 provided
by financing activities, the effect of exchange rate changes on cash was
immaterial. The cash used in operations was primarily due to the loss of $3,094
net of depreciation and amortization of $467, an increase in prepaid expenses of
$105 and a reduction in accounts payable of $46, offset by a decrease in
accounts receivable and other assets of $566 and $156, respectively, and
increases in other accrued liabilities of $295. The cash used in investing
activities of $30 was to purchase computer equipment and third party software
for internal use. The $240 provided by financing activities consisted primarily
of $426 in proceeded from the exercise of stock options offset by the repayment
of $181 in short-term debt by the Joint Venture. Prepaid expenses increased $105
due to professional fees associated with the S1 registration statement and
payments for certain maintenance contracts associated with third party software
used in the Company's operations. Accounts receivable decreased $566 due
primarily to lower sales during the fourth.
Financing.
In July 2002, the Company negotiated a Line of Credit Agreement expiring
two years from the date of an effective registration statement with Cornell
Capital Partners, LP ("Line of Credit")(see Note 1, to the Financial Statements
"Equity Line of Credit Agreement"). The Company may periodically issue and sell
shares of its common stock for a total purchase price of $15 million, subject to
the number of shares available for issuance and the purchase price of such
shares. The maximum amount of each advance is $1 million in any 30-day period.
The Company must pay to Cornell Capital Partners, L.P. an advance fee equal to
6.5% of the amount of each advance. The Company filed a Registration Statement
on Form S1 covering approximately 24 million shares for use under the equity
-23-
line of credit. On February 13, 2003 the Form S1 was declared effective. The
Company intends to use the proceeds from the equity line to repay short and long
term debt and for working capital purposes to the extent that future cash flows
from operations fall short of the Company's expectations.
The Company has entered into a Registration Rights Agreement with Cornell
Capital Partners, LP. The Company cannot sell any shares of its common stock
under the Line of Credit until a registration statement is declared effective by
the Securities and Exchange Commission (See note 13 to the Financial
Statements). The Company is required to keep the registration statement
effective until the earlier of when the investor has sold all of the shares
acquired under the Line of Credit or the investor is able to resell the shares
under Rule 144 without regard to the volume limitations set forth in that rule.
At all times, the registration statement must cover, at a minimum, the number of
shares issued under the Line of Credit. The Company is required to fulfill its
reporting obligations under the Securities Exchange Act of 1934, as amended, and
otherwise take whatever steps are necessary to enable the investor to resell the
shares acquired under the Line of Credit without restriction. Finally, the
Company has agreed to indemnify the investor for any damages the investor may
suffer as a result of misstatements or omissions, other than misstatements or
omissions attributable to the investor. Subsequent to December 31, 2002, the
Company borrowed $1 million dollars less a 6.5% financing fee from Cornell
Capital Partners, LP. The loan will be paid back over a ten-week period through
draws on the equity line of credit on a prorata basis.
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 bore interest at 5.37% per annum and was due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
In February 2002, the Joint Venture repaid $121 and in August 2002, paid the
remaining equivalent of $60 denominated in Chinese currency.
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 is a
former director and former 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 bears interest at the rate of 2% over the
prime rate publicly announced by Citibank N. A. from time to time, which was
6.75% per annum at December 31, 2002, 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.
-24-
Contractual Obligations.
The Company had the following material commitments as of December 31, 2002
Payments due by periods
- ------------------------------ -----------------------------------------------
Less One to Four to After
than three five five
Contractual obligations Total One year years years years
- ----------------------------- ------- -------- ------- ------- -------
Long term debt (1) $ 3,000 $ - $ 3,000 $ - $ -
Capital Lease Obligations 38 6 23 9 -
Operating lease commitments (2) 1,663 407 1,256 - -
-------- ------ --------- ------ -------
Total contractual
cash obligations $ 4,701 $ 413 $ 4,279 $ 9 $ -
======== ====== ========= ====== =======
1. The long-term debt may be pre-paid by us in whole or in part at any time
without penalty, subject to the right to convert the outstanding principal
amount into shares of common stock at a conversion price of $2.00 per
share, subject to adjustment upon the occurrence of certain events.
2. The operating lease commenced on November 1, 2002. The cost of the lease
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2006.
The Company leases facilities in the United States and China totaling
approximately 11,100 square feet. The Company's rental expense for the years
ended December 31, 2002, 2001 and 2000 was approximately $418, $443, and 390,
respectively. Sublease income was approximately $35 and $104 for the years ended
December 2001 and 2000, respectively. In addition to the base rent in the United
States, the Company pays 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 leased offices will be
adequate for the Company's needs over the term of the lease.
As of December 31, 2002, the Company's principal source of liquidity was
its cash and cash equivalents of $711. Subsequent to December 31, 2002, the
Company filed a Registration Statement on Form S1 as discussed above In each
year since the Company's 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 achieving 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 the Company
may required. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company has an investment portfolio of fixed income
securities that are classified as cash equivalents. These securities, like all
fixed income instruments, are subject to interest rate risk and will fall in
value if the market interest rates increase. The Company attempts to limit this
exposure by investing primarily in short-term securities. The Company has not
entered into any short-term security investments during the year ended December
31, 2002. Foreign Currency Risk. The Company operates a subsidiary in China and
from time to time makes certain capital equipment or other purchases denominated
in foreign currencies. As a result, the Company's cash flows and earnings are
exposed to fluctuations in interest rates and foreign currency exchange rates.
The Company attempts to limit these exposures through operational strategies and
generally has not hedged currency exposures.
-25-
Future Results and Stock Price Risk. 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, 2002, 2001, and 2000 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 to be held on June 23, 2003.
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 to be held on June 23, 2003.
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 to be held on June 23, 2003.
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 to be held on June 23, 2003.
Item 14. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to applicable rules under the
Securities Exchange Act of 1934, as amended, within 90 days of the date of this
report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
-26-
PART IV
Item 15. 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 Auditor............................................ F-1
Consolidated Balance Sheets at December31,
2002 and 2001.................................................. F-2
Consolidated Statements of Operations for the
years ended December31, 2002, 2001, and 2000.................. F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended
December31, 2002, 2001 and 2000............................... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000.. 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).
-27-
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).
-28-
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).
**810.19 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 Agreement dated June 19, 2001 between the Company and the Philip S.
Sassower 1996 Charitable Remainder Annuity Trust.
10-23Equity Line of Credit Agreement between the Company and Cornell Capital
Partners, LP, incorporated by reference to the Company's Registration
Statement on Form S1 dated February 13, 2003 (File No. 333-103157)
*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.
-29-
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, 2003.
Communication Intelligence Corp.
By: /s/ Francis V. Dane
Francis V. Dane
(Principal Financial Officer and Officer
Duly Authorized to Sign on Behalf of the Registrant)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Communication Intelligence Corporation
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Francis V. Dane, Principal Financial Officer, certify, pursuant to 18 U.S.C.
1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Francis V. Dane
Principal Financial Officer
In connection with the annual report of Communication Intelligence Corporation
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Guido DiGregorio, Chairman and Chief Executive Officer, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of 2002, that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Guido DiGregorio
Chairman and Chief Executive Officer
-30-
SIGNATURES
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, 2003.
Signature Title
/s/ Guido DiGregorio Chairman, President and Chief Executive Officer
Guido DiGregorio (Principal Executive Officer)
/s/ Francis V. Dane Chief Legal Officer and Chief Financial Officer
Francis V. Dane (Principal Financial and Accounting Officer)
/s/ Michael Farese Director
Michael Farese
/s/ Louis Panetta Director
Louis Panetta
/s/ Chien Bor Sung Director
Chien Bor Sung
-31-
CERTIFICATION
I, Francis V. Dane, certify that:
1. I have reviewed this Annual Report on Form 10-K of Communication
Intelligence Corporation;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
By: /s/ Francis V. Dane
Principal Financial Officer
-32-
CERTIFICATION
I, Guido DiGregorio, certify that:
1. I have reviewed this annual report on Form 10-K of Communication
Intelligence Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
By: /s/ Guido DiGregorio
Chairman
Chief Executive Officer
-33-
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, 2002 and 2001 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, 2002, as listed in the index
appearing under Item 15(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
in the United States of America. 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 15(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, 2002, and 2001 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations and has
accumulated losses of $79,819,000. This factor raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
STONEFIELD JOSEPHSON INC.
Certified Public Accountants
San Francisco, California
February 14, 2003
F-1
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
December 31,
------------------------------
2002 2001
------------------------------
Assets
Current assets:
Cash and cash equivalents..................... $ 711 $ 2,588
Accounts receivable, net of allowances of
$243 and $278 at December 31, 2002
and 2001, respectively........................ 477 1,043
Inventories................................... 113 129
Prepaid expenses and other current assets..... 244 139
------------- -------------
Total current assets.................... 1,545 3,899
Property and equipment, net..................... 159 161
Patents and trademarks.......................... 5,421 5,799
Other assets.................................... 43 213
------------- -------------
Total assets........................... $ 7,168 $ 10,072
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 160 $ 206
Short-term debt............................... - 181
Accrued compensation.......................... 250 208
Other accrued liabilities..................... 527 199
Deferred revenue.............................. 165 88
------------ ------------
Total current liabilities............... 1,102 882
Long-term debt - related party................... 3,000 3,000
Minority interest................................ 132 130
Commitments
Stockholders' equity:
Common stock, $.01 par value; 125,000
shares authorized; 92,481 and
90,912 shares issued and outstanding
at December 31, 2002 and
2001,respectively.............................. 915 909
Additional paid-in capital..................... 82,025 81,605
Accumulated deficit............................ (79,819) (76,258)
Accumulated other comprehensive loss........... (187) (196)
------------ -------------
Total stockholders' equity...................... 2,934 6,060
------------ -------------
Total liabilities and stockholders' equity.... $ 7,168 $ 10,072
============ ===============
The accompanying notes form an integral part of these Financial Statements
F-2
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
----------------------------------------
2002 2001 2000
----------------------------------------
Revenues:
Online............................. $ 351 $ 913 $ 1,198
Corporate.......................... 1,667 2,958 3,326
Nonrecurring maintenance
fees - M10 (Previously PenOp)..... - 352 877
China.............................. 1,254 1,724 1,911
-------------- -------------- ----------
3,272 5,947 7,312
-------------- -------------- ----------
Operating costs and expenses:
Cost of sales:
Online.......................... 259 805 1,087
Corporate....................... 96 290 416
China........................... 802 1,145 1,393
Research and development.......... 1,485 1,808 1,603
Sales and marketing............... 1,543 2,054 2,239
General and administrative........ 2,424 2,791 2,181
------------- ------------- ------------
6,609 8,893 8,919
------------- ------------- ------------
Loss from operations................. (3,337) (2,946) (1,607)
Interest income and other
income (expense), net............... (17) 16 76
Interest expense..................... (205) (282) (266)
Minority interest.................... (2) (3) (2)
------------- ------------- ------------
Net loss............................. $ (3,561) $ (3,215) $ (1,799)
============= ============== ============
Basic and diluted loss per share..... $ (0.04) $ (0.04) $ (0.02)
============= ============== ============
Weighted average shares.............. 91,298 90,571 85,324
============= ============== ============
The accompanying notes form an integral part of these 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,
2000....................... $ 897 $ 80,656 $(73,043) $ (203) $ 8,307
--------------------------------------------------
Exercise of options for
1,176 shares of Common $ 11 $ 892 $ - $ - $ 903
Stock......................
Issuance of 68 shares of
Common Stock in exchange 1 57 - - 58
for services...............
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
--------------------------------------------------
Exercise of options for 420
shares of Common Stock..... $ 6 $ 420 $ $ $ 426
Foreign currency translation
adjustment................. 9 9
Net loss..................... (3,561) (3,561)
--------------------------------------------------
Balances as of December 31,
2002....................... $ 915 $ 82,025 $(79,819) $ (187) $ 2,934
--------------------------------------------------
Total shares outstanding as of December 31, 2002 was 91,481; as of December
31,2001was 90,912, and as of December 31, 2000 was 89,668.
The accompanying notes form an integral part of these Financial Statements
F-4
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
---------------------------------------
2002 2001 2000
---------------------------------------
Cash flows from operating activities
Net loss................................. $ (3,561) $ (3,215) $ (1,799)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.......... 467 687 328
Equity securities issued for services.. - 58 -
Non-cash compensation.................. - 46 89
(Gain) loss on disposal of property
and equipment.......................... 6 - -
Changes in operating assets and liabilities
Accounts receivable, net............. 566 717 (185)
Inventories.......................... 16 42 (90)
Prepaid expenses and other current
assets.............................. (105) 135 (95)
Other assets......................... 156 (14) 48
Accounts payable..................... (46) (469) 390
Accrued compensation................. 42 (55) (3)
Other accrued liabilities............ 295 (117) (176)
Deferred revenue..................... 77 26 26
------------ ----------- -----------
Net cash used in operating activities.... (2,087) (2,159) (1,467)
------------ ----------- -----------
Cash flows from investing activities
Acquisition of property and equipment.... (30) (58) (634)
------------ ----------- -----------
Net cash used in investing activities.... (30) (58) (634)
------------ ------------ -----------
Cash flows from financing activities
Proceeds from issuance of short-term
debt.................................... - 181 120
Proceeds from issuance of long-term
debt - related party.................... - 3,000 -
Principal payments on short-term debt.... (181) (1,620) (60)
Principal payments on capital
lease obligations........................ (5) (8) ( 4)
Proceeds from exercise of warrants....... - - 437
Proceeds from exercise of stock options.. 426 903 1,583
----------- ------------- ----------
Net cash provided by (used in)
financing activities................... 240 2,456 2,076
----------- ------------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (1,877) 239 (25)
Cash and cash equivalents at
beginning of year...................... 2,588 2,349 2,374
------------- ------------ -----------
Cash and cash equivalents at end of year. $ 711 $ 2,588 $ 2,349
============= ============ ===========
The accompanying notes form an integral part of these 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, 2002, the Company incurred
aggregate losses of $13.9 and, at December 31, 2002, the Company's accumulated
deficit was approximately $79.8. The Company has primarily funded these losses
through the sale of debt and equity securities.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations that raise a doubt about its ability to continue as a
going concern. The Company is in the process of filing a registration statement
with the Securities and Exchange Commission in order to obtain funding from
equity financing (See Note 13). However, there can be no assurance that the
Company will have adequate capital resources to fund planned operations or that
any additional funds will be available to the Company when needed, or if
available, will be available on favorable terms or in amounts required by the
Company. If the Company is unable to obtain adequate capital resources to fund
operations, it may be required to delay, scale back or eliminate some or all of
its operations, which may have a material adverse effect on the Company's
business, results of operations and ability to operate as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis of Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States of
America, 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.
F-6
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, 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, 2002 or 2001.
The Company's cash and cash equivalents, at December 31, consisted of the
following:
2002 2001
----------- ------------
Cash in bank.......................... $ 260 $ 1,621
Commercial paper...................... - 26
Money markets......................... 451 941
----------- ------------
Cash and cash equivalents............... $ 711 $ 2,588
=========== ============
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, 2002, the Joint Venture had approximately $271 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.
The allowance for doubtful accounts is based on the Company's assessment of
the collectibility of specific customer accounts and an assessment of
international, political and economic risk as well as the aging of the accounts
receivable. If there is a change in actual defaults from the Company's
historical experience, the Company's estimates of recoverability of amounts due
it could be affected and the Company will adjust the allowance accordingly.
F-7
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
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, 2002 and 2001, inventories consisted
of finished goods.
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 $75, $163 and $185
for the year ended December 31, 2002, 2001 and 2000, respectively. The Chinese
joint venture disposed of certain assets and accumulated depreciation amounting
to $30 in 2002.
Property and equipment, net at December 31, consists of the following:
2002 2001
----------- ----------
Machinery and equipment................................. $1,273 $1,224
Office furniture and fixtures........................... 432 448
Leasehold improvements.................................. 84 84
Purchased software...................................... 216 206
----------- ----------
2,005 1,962
Less accumulated depreciation and amortization.......... (1,846) (1,801)
----------- ----------
$ 159 $ 161
=========== ==========
Included in property and equipment, as of December 31, 2002 and 2001, are
$82 and $42, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $44 and $38 at December 31, 2002 and 2001,
respectively.
Patents
On October 6, 2000, 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 Management's opinion represents 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
$378, $440 and $43 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The nature of the underlying technology of each material patent is as follows:
o Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the
electronic capture of a handwritten signature utilizing an electronic
tablet device on a standard computer system within an electronic document,
(b) the verification of the identity of the person providing the electronic
signature through comparison of stored signature measurements, and (c) a
system to determine whether an electronic document has been modified after
signature
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)
Patents (continued)
o Patent number 6091835 involves all of the foregoing and the recording of
the electronic execution of a document regardless of whether execution
occurs through a handwritten signature, voice pattern, fingerprint or other
identifiable means.
Patents, net at December 31, consists of the following:
Expiration Life 2002 2001
------------ ------------
Patent (Various)............. Various 5 $ 9 $ 9
Patent (Various)............. Various 7 476 476
5544255...................... 2013 13 93 93
5647017...................... 2014 14 187 187
5818955...................... 2015 15 373 373
6064751...................... 2017 17 1,213 1,213
6091835...................... 2017 17 4,394 4,394
------------ ------------
6,745 6,745
Less accumulated amortization.. (1,324) (946)
------------ ------------
$ 5,421 $ 5,799
============ ============
Amortization expense for the years ending December 31, 2003, 2004, 2005,
2006 and 2007 are estimated to be $379, $379, $379, $379 and $379, respectively.
The patents identified, as "various" are technically narrow or dated
patents that the company believes are not material. The useful lives assigned to
the patents are based upon the following assumptions and conclusions:
o The estimated cash flow from products based upon each patent are expected
to exceed the value assigned to each patent
o There are no legal, regulatory or contractual provisions known to the
company that limits the useful life of each patent to less than the
assigned useful life
o The company does not foresee any effects of obsolescence or significant
competitive pressure on its current or future products, anticipates
increasing demand for products utilizing the patented technology, and
believes that the current markets for its products based on the patented
technology will remain constant or will grow over the useful lives assigned
to the patents because of a legal, regulatory and business environment
encouraging the use of electronic signatures.
The Company performs intangible asset impairment analyses on a quarterly
basis in accordance with the guidance in Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") and
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long Lived Assets ("SFAS No. 144"). The Company uses SFAS 144 in response to
changes in industry and market conditions that affects its patents, the Company
then determine if an impairment of its assets has occurred. The Company reassess
the lives of its patents and test for impairment quarterly in order to determine
whether the book value of each patent exceeds the fair value of each patent.
Fair value is determined by estimating future cash flows from the products that
are and will be protected by the patents and considering the additional factors
listed in Critical Accounting Policies in Item 7 of this Form 10-K.
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)
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, 2002.
Software Development Costs
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. The costs capitalized include the coding and testing of
the product after the technological feasibility has been established and ends
upon the release of the product. The capitalized costs are amortized to cost of
sales on a straight-line basis over the estimated life of the product, generally
three years. As of December 31, 2002, 2001, and 2000, such costs were
insignificant.
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
Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive guidance issued by the Securities and Exchange Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. The Company recognize
revenues from sales of software products upon shipment, provided that persuasive
evidence of an arrangement exists, collection is determined to be probable, all
non-recurring engineering work necessary to enable the Company's product to
function within the customer's application has been completed and the Company's
product has been delivered according to specifications. Revenue from service
subscriptions is recognized as costs are incurred or over the service period.
Software license agreements may contain multiple elements including
upgrades and enhancements, products deliverable on a when and if available basis
and post contract support. Revenue from software license agreements is
recognized upon delivery of the software provided that persuasive evidence of an
arrangement exists, and collection is determined to be probable, all
nonrecurring engineering work necessary to enable the Company's products to
function within the customer's application has been completed and the Company
has delivered its product according to specifications. Deferred revenue is
recorded for upgrades, enhancements and post contract support, which is paid for
in addition to license fees, and is recognized as costs are incurred or over the
support period. Vendor specific objective evidence of the fair value for
multiple element software license agreements is determined by the price charged
for the same element when sold separately or the price determined by management
having the relevant authority when an element is not yet sold separately. The
price established by management for the element not yet sold separately will not
change prior to separate introduction of that element into the marketplace.
Revenue from system integration activities, which represents the sale and
installation of third party computer equipment and limited related consulting
services which requires little modification or customization to the software, is
recognized upon installation as projects are short term in nature, provided
persuasive evidence of an arrangement
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)
Revenue Recognition (continued)
exists, the collection of the resulting receivable is probable and the system is
functioning according to specifications. Service subscription revenues
associated with the system integration activities are recognized as costs are
incurred or over the service period.
The online/retail sales category includes sales of software made directly
from the Company's website, which are downloaded by the end user. Revenues from
software product sales through the Company's website are recognized upon
shipment (download). The Company provides for estimated sales returns at the
time of shipment.
The online/retail sales category includes sales of software made directly
from the Company's website, which are downloaded either directly by a reseller
or to a customer of such reseller. In both cases, the reseller reports the
number of units sold each month by submitting payment and a royalty report. The
reseller receives a percentage of each sale. The Company allows the on-line
resellers a right of return or right of offset. The number of units reported is
net of any product returns from prior months. The Company recognizes revenues on
the net amount reported by the resellers each month on a cash basis. The Company
has a limited number of resellers for its software available through the
Company's website.
The online/retail sales category also includes sales made through retail
establishments under the Elibrium agreement. Revenue from software product sales
through retail are recognized upon notification from Elibrium of the number of
units sold through Elibrium's retail customers provided collection of the
resulting receivable is reasonably assured.
Major Customers
Handwriting Recognition Segment. Historically, the Company's handwriting
recognition segment revenues have been derived from a limited number of
customers. One customer, Nationwide Building Society, accounted for 11% of total
segment revenues for the year ended December 31, 2002. One customer, The
Prudential Insurance Company of America accounted for 16% of total segment
revenues for the year ended 2001. One customer, Ericsson Mobile Communications
AB, accounted for 16% of total segment revenues for the year ended 2000.
Systems Integration Segment. One customer, Fujitsu Ltd. accounted for 30%
of total system integration revenue for the year ended December 31, 2002. This
same customer accounted for 16%, and 16% of total segment revenues in the twelve
months ended December 31, 2001and 2000, respectively.
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, 2002, 2001, and 2000 was $112, $203 and $399,
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
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)
Net Loss Per Share (continued)
on the weighted average number of shares and dilutive potential shares
outstanding. For the year ended December 31, 2002, 2001 and 2000 potential
equivalent shares excluded from the calculation of diluted earnings per share,
as their effect is not dilutive, include stock options of 6,452, 7,027 and 8,145
of equivalent shares. There were no warrants outstanding at December 31, 2002.
Warrants excluded from the calculation in 2001 and 2000 were 237, 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 long-term 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. Foreign currency transaction gains in 2002 ,2001 and
2000 were insignificant.
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"). 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.
F-12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Equity Line of Credit Agreement
In July 2002, the Company negotiated a Line of Credit agreement expiring in
two years from the effective date of the related registration statement with
Cornell Capital Partners, LP. The Company may periodically issue and sell shares
of its common stock for a total purchase price of $15 million, subject to the
number of shares available for issuance and the purchase price of such shares.
As of December 31, 2002 there was approximately 24 million shares available. If
the Company request an advance under the Line of Credit, Cornell Capital
Partners, L.P. will purchase shares of common stock of the Company for 100% of
the "Market Price" of its stock (less a 6.5% advance fee). Market Price is
defined as the lowest volume weighted average price of the Company's common
stock as reported by Bloomberg, LP, calculated over four of the five trading
days after the Company request an advance. The maximum amount of each advance is
equal to $1 million in any 30-day period. In addition, in no event shall the
number of shares issuable to Cornell Capital Partners, LP cause Cornell to own
in excess of 9.9% of the then outstanding shares of the Company's common stock.
On each advance date, the Company must pay to Cornell Capital Partners, L.P. an
Advance fee equal to 6.5% of the amount of each advance. A closing will be held
six (6) trading days after such written notice, at which time the Company will
deliver shares of common stock and Cornell Capital Partners, L.P. will pay the
advance amount. Cornell Capital Partners, L.P. cannot transfer its interest in
the Equity Line of Credit to any other person and cannot engage in sales of
shares of common stock acquired under the Line of Credit.
Recent Pronouncements
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 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. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. The adoption of FASB 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" did not have a material
impact to the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee
F-13
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent Pronouncements
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity is recognized when the
liability is incurred. EITF 94-3 allowed for an exit cost liability to be
recognized at the date of an entity's commitment to an exit plan. SFAS 146 also
requires that liabilities recorded in connection with exit plans be initially
measured at fair value. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption encouraged.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
2. Chinese Joint Venture
The Company currently owns 90% of a joint venture with the Jiangsu Hongtu
Electronics Group, 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, 2002, 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 is
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 financialstatement. 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.
The accumulated other comprehensive loss at December 31, 2002 and 2001
consisted of cumulative foreign currency translation adjustments.
F-14
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
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 bore interest at 5.37% per annum and was due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
In February 2002, the Joint Venture repaid $121 and in August 2002, paid the
remaining equivalent of $60 denominated in Chinese currency.
Interest expense for the years ending December 31, 2002, 2001, and 2000 was
$205, $281, and $266, respectively. Interest expense associated with related
party debt was $200, $274 and $258 for the years ended December 31, 2002, 2001
and 2000, respectively.
5. Related Party Transactions
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 6.75% per
annum at December 31, 2002, 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 2002, $16 and in 2001 and 2000, $150 in consulting fees, including
office expenses, were paid to a party who, at that time, was a director and
Chairman of the Company.
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.
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, 2002, 69 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
F-15
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
6. Stockholders' Equity
Common Stock Options (continued)
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, 2002, there were 683 options available for
grant under the 1994 Plan.
The Company has issued non-plan options to its employees and directors. The
non-plan options vest over four years or prorata quarterly over three 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, 2002, 3,115 non-plan options were outstanding and
exercisable with a weighted average exercise price of $0.84 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 4,000 shares of Common Stock authorized for issuance under the 1999
Plan. The options have a seven year life and generally vest quarterly over three
years. At December 31, 2002, there were 1,715 shares available for future
grants.
F-16
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,
---------------------------------------
2002 2001
------------------- -----------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
---------------------------------------
Outstanding at beginning of period...... 3,442 $1.48 3,257 $1.54
Granted................................. 1,108 $0.60 1,367 $1.21
Exercised............................... (169) $0.75 (384) $0.90
Forfeited............................... (1,044) $1.34 (798) $1.53
--------- --------
Outstanding at period end............... 3,337 $1.27 3,442 $1.48
========= ========
Options exercisable at period end....... 2,422 $1.36 2,208 $1.35
========= ========
Weighted average grant-date fair value of
options granted during the period..... $0.60 $0.98
========= ========
The following table summarizes information about stock options outstanding
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2002:
Weighted Average
--------------------------------------------
Remaining
Options Contractual
Range of Exercise Prices Outstanding Life (Years) Exercise Price
- --------------------------------------------------------------------------------
$0.00 - $0.50.................. 294 7.0 $0.29
$0.51 - $2.00.................. 2,493 6.3 $0.94
$2.01 - $2.99.................. 8 1.1 $2.75
$3.00 - $7.50.................. 542 7.3 $3.35
--------------
3,337
==============
The following table summarizes information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2002:
Weighted
Options Average
Range of Exercise Prices Exercisable Exercise Price
------------------------------------
$0.00 - $0.50..................... 42 $0.36
$0.51 - $2.00..................... 1,919 $0.91
$2.01 - $2.99..................... 8 $2.75
$3.00 - $7.50..................... 453 $3.35
---------
2,422
=========
F-17
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
6. Stockholders' Equity (continued)
Common Stock Options
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") as amended by Financial Accounting Standards Board Statement No.
148. The Company has elected to continue to use the intrinsic value based method
of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, to
account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Had compensation cost for the Company's option plans been determined based
on the fair value of the options at the date of grant, as prescribed by SFAS
123, the Company's net loss available to common stockholders and basic and
diluted net loss per share available to stockholders would have been as follows
for the year ended December 31:
2002 2001 2000
----------------------------------------
Net loss available to stockholders:
As reported........................... $ (3,561) $ (3,215) $ (1,799)
Pro forma............................. $ (4,356) $ (4,743) $ (3,937)
Basic and diluted net loss per
share available to stockholders:
As reported........................... $ (0.04) $ (0.04) $ (0.02)
Pro forma............................. $ (0.05) $ (0.05) $ (0.05)
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 2.26% for 2002, 4.1% for 2001, and 4.7% for 2000, an expected life of
8.6 years for 2002, 6.0 years for 2001, and 3.5 years for 2000, 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
At December 31, 2002 there were no warrants outstanding. As of December 31,
2002, 6,452 shares of Common Stock were reserved for issuance upon exercise of
outstanding options.
7. Commitments
Operating Lease Commitments
The Company currently leases 9,634 square feet, 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 1,500 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 $418, $443, and $390 in 2002, 2001, and 2000, respectively.
Sublease income was approximately $35, and $104 for the years ended December 31,
2001, and 2000, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately, $407, $419, $430, and $407 for the years ending December 31,
2003, 2004, 2005 and 2006, respectively. The Company's rent expense was
F-18
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
7. Commitments
Operating Lease Commitments (continued)
reduced by approximately $35 in 2001 in connection with the subleases described
above. Future minimum payments required under capital leases, which expire in
2007, were insignificant at December 31, 2002.
8. Income Taxes
As of December 31, 2002, the Company had federal net operating loss
carryforwards available to reduce taxable income through 2012 of approximately
$54,190. The Company also had federal research and investment tax credit
carryforwards of approximately $315 that expire at various dates through 2010.
Deferred tax assets and liabilities at December 31, consist of the
following:
2002 2001
----------------------------
Deferred tax assets:
Net operating loss carryforwards............... $ 26,857 $ 21,272
Credit carryforwards........................... 315 315
Deferred income................................ 40 13
Other, net..................................... 945 775
----------------------------
Total deferred tax assets...................... 28,157 22,375
----------------------------
Valuation allowance............................ (28,157) (22,375)
----------------------------
Net deferred tax assets........................ $ - $ -
============================
Income tax (benefit) differs from the expected statutory rate as follows:
2002 2001 2000
-------- -------- --------
Expected income tax benefit $ (1,211) $ (1,093) $ (612)
State income tax net of Federal benefit (214) (193) (108)
Loss on write off from foreign investment (4,357) - -
Change in valuation allowance 5,782 1,286 720
--------- ---------- ----------
Income tax benefit $ - $ - $ -
========== ========== ==========
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
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.
F-19
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
9. Segment Information (continued)
The table below presents information about reporting segments for the years
ended December 31:
Handwriting Systems
Recognition Integration Total
----------------- ---------------- ------------
2002 Revenues $ 2,214 $ 1,058 $ 3,272
Loss from Operations $ (3,307) $ (30) $ (3,337)
Total assets $ 6,181 $ 1,005 $ 7186
Depreciation and
amortization $ 450 $ 17 $ 467
2001 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 Revenues $ 5,709 $ 1,603 $ 7,312
Loss from Operations $ (1,594) $ (13) $ (1,607)
Total assets $ 9,896 $ 1,405 11,301
Depreciation and
amortization $ 310 $ 18 $ 328
The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31:
Revenues Long Lived Assets
-------------------------------- ----------------------------
2002 2001 2000 2002 2001 2000
-------- -------- ------- -------- ------- -------
U.S. $ 2,018 $ 4,223 $ 5,401 $ 5,555 $ 6,113 $ 6,430
China 1,254 1,724 1,911 37 44 66
---------- --------- ---------- ---------- --------- --------
Total $ 3,272 $ 5,947 $ 7,312 $ 5,592 $ 6,157 $ 6,496
========== ========= ========== ========== ========= ========
The Company's export sales from U.S. operations were 12%, 16%, and 36%, of
total revenues in 2002, 2001, and 2000, respectively.
10. Statement of Cash Flows Data
December 31,
------------------------------------
2002 2001 2000
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............................ $ - $ - $ -
F-20
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
10. Statement of Cash Flows Data (continued)
Supplemental disclosure of cash flow information:
Interest paid in 2002, 2001, and 2000 was $212, $196, and $187,
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
------- ------- ------- ------- -------
2002 Unaudited
Net Sales $ 1,157 $1,111 $ 525 $ 479 $ 3,272
Gross profit $ 716 $ 808 $ 321 $ 270 $ 2,115
Income (loss) before
income taxes, and
minority interest $(688) $(670) $(1,068) $ (1,133) $(3,559)
Net income (loss) $(688) $(671) $(1,070) $ (1,132) $(3,561)
Basic and diluted
income (loss) per share
$(0.01) $(0.01) $(0.01) $ (0.01) $(0.04)
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-21
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)
13. Subsequent events
Registration Statement. The Company's Registration Statement on Form S1
filed with the Securities and Exchange Commission in connection with the $15
million equity line of credit agreement, subject to the number of shares
available and the market price of the such stock, with Cornell Capital Partners,
LP was declared effective on February 13, 2003. The Company has approximately 24
million shares available for sale under this line of credit agreement.
Listing of the Company's Common Stock. As of March 14, 2003, the Company's
common stock has been listed on the NASDAQ Over the Counter Bulletin Board
("OTC") under the trading symbol CICI. Prior to that it was listed on the Nasdaq
SmallCap Market under the same symbol. The Company's stock was removed from the
Nasdaq SmallCap Market due to noncompliance with the NASDAQ continued listing
requirements of a minimum bid price of $1.00 and total stockholder's equity
requirements of $5 million.
Equity line of Credit. On February 20, 2003, the Company borrowed $1
million dollars less a 6.5% financing fee from Cornell Capital Partners, LP. The
loan will be paid back over a ten-week period through draws on the equity line
of credit on a prorata basis.
F-22
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts and Reserves
(In thousands)
Years Ended December 31, 2000, 2001, 2002
Balance Charged to Balance
At Beginning Costs and At End
Of Period Expense Deductions Of Period
------------ ---------- ---------- ---------
Year ended December 31, 2000:
Accounts receivable reserves...... $13 $108 $ (3) $118
Year ended December 31, 2001:
Accounts receivable reserves...... $118 $160 $ - $278
Year ended December 31, 2002:
Accounts receivable reserves....... $278 $129 $(164) $243
S-1