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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 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, Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
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
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of November 13,
2003: 100,101,428.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at September 30, 2003
(unaudited) and December 31, 2002.......................................3
Condensed Consolidated Statements of Operations for the
Three and Nine-Month Periods Ended September 30, 2003
and 2002 (unaudited)....................................................4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Nine-Month Periods Ended September 30,
2003 and 2002 (unaudited)...............................................5
Condensed Consolidated Statements of Cash Flows for the Three
Month Period Ended September 30, 2003 and 2002 (unaudited)..............6
Notes to Unaudited Condensed Consolidated Financial Statements..........7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....20
Item 4. Controls and Procedures.......................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................21
Item 2. Change in Securities..........................................21
Item 3. Defaults Upon Senior Securities...............................21
Item 4. Submission of Matters to a Vote of Security Holders...........21
Item 5. Other Information.............................................21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.............................................21
(b) Reports on Form 8-K..................................21
Signatures.............................................................22
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2003 2002
------------- ------------
Unaudited
Assets
Current assets:
Cash and cash equivalents........................ $ 747 $ 711
Accounts receivable, net.................... 809 477
Inventories................................. 86 113
Prepaid expenses and other current assets... 199 244
---------- ----------
Total current assets.................... 1,841 1,545
Property and equipment, net...................... 146 159
Capitalized software costs....................... 2 12
Patents and trademarks........................... 5,137 5,421
Other assets..................................... 31 31
---------- ----------
Total assets............................ $ 7,157 $ 7,168
========== ==========
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt - Related party.............. $ 3,000 $ -
Accounts payable............................. 167 160
Accrued compensation.............................. 262 250
Other accrued liabilities.................... 397 489
Deferred revenue............................. 89 165
Capital Lease Obligations.................... 56 38
---------- ----------
Total current liabilities................ 3,971 1,102
Notes payable - Related party..................... - 3,000
Minority interest................................. 130 132
Commitments
Stockholders' equity:
Common stock................................. 1,001 915
Additional paid-in capital................... 83,527 82,025
Accumulated deficit.......................... (81,291) (79,819)
Cumulative translation adjustment............ (181) (187)
----------- ----------
Total stockholders' equity................. 3,056 2,934
----------- ----------
Total liabilities and stockholders' equity. $ 7,157 $ 7,168
=========== ==========
The accompanying notes form an integral part of these financial statements
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
--------- -------- -------- --------
Revenues:
Online........................... $ 54 $ 83 $ 260 $ 287
Corporate........................ 480 132 1,435 1,538
China ........................ 402 310 921 968
-------- -------- -------- --------
Total revenues............... 936 525 2,616 2,793
Operating costs and expenses:
Cost of sales:
Online........................ 2 13 3 198
Corporate..................... 4 15 27 148
China ........................ 226 176 557 602
Research and development......... 324 367 967 1,145
Sales and marketing ............ 233 367 696 1,181
General and administrative ..... 569 583 1,700 1,762
------- ------- -------- --------
Total operating costs and expenses 1,358 1,521 3,950 5,036
------- ------- -------- --------
Loss from operations ............... (422) (996) (1,334) (2,243)
Interest and other income
(expense), net ................... (2) (19) 3 (28)
Interest expense ................... (46) (53) (143) (155)
Minority interest .................. (2) (2) 2 (3)
-------- -------- -------- --------
Net loss .................. (472) (1,070) (1,472) (2,429)
======== ======== ======== ========
Basic and diluted loss per
common share........................ $ (0.01) $(0.01) $ (0.02) $(0.03)
========= ======== ======== ========
Weighted average common
shares outstanding ............ 100,101 91,481 96,537 91,237
========= ======== ======== ========
The accompanying notes form an integral part of these financial statements
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Shares Common Paid-In Accumulated Comprehensive
Outstanding Stock Capital Deficit Loss Total
Balances as of December
31, 2002.............. 91,481 $ 915 $ 82,025 $(79,819) $ (187) $ 2,934
------------------------------------------------------
Sale of shares of Common
Stock net of issuance
costs................. 2,041 20 93 - - 113
Foreign currency
translation adjustment. - - - - 2 2
Net loss................ - - - (310) - (310)
------------------------------------------------------
Balances as of March 31,
2003.................. 93,522 $ 935 $ 82,118 $(80,129) $ (185) $ 2,739
------------------------------------------------------
Sale of shares of Common
Stock net of issuance
costs................. 6,580 66 1,411 - - 1,477
Foreign currency
translation adjustment. - - - - 2 2
Net loss................. - - - (690) - (690)
------------------------------------------------------
Balances as of June 30,
2003..................100,101 $1,001 $ 83,529 $(80,819) $ (183) $ 3,528
-------------------------------------------------------
Foreign currency
translation adjustment. - - - - 2 2
Issuance costs........... - - (2) - - (2)
Net loss................. - - - (472) - $ (472)
------------------------------------------------------
Balances as of September
30, 2003..............100,101 $1,001 $ 83,527 $(81,291) $ (181) $ 3,056
-------------------------------------------------------
The accompanying notes form an integral part of these financial statements
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
September 30,
------------ ------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss.......................................... $ (1,472) $ (2,429)
Adjustments to reconcile net loss to net cash
(used) in operating activities:
Depreciation.................................. 62 69
Patent amortization........................... 284 284
Disposal of fixed assets...................... 8 6
Changes in operating assets and liabilities:
Accounts receivable, net................... (332) 295
Inventories................................ 27 (19)
Prepaid expenses and other current assets.. 45 (87)
Other assets............................... (2) 99
Accounts payable........................... 7 (66)
Accrued compensation....................... 12 3
Other accrued liabilities.................. (92) 241
Deferred revenue........................... (76) 35
------------ ----------
Net cash (used in) operating activities...... (1,529) (1,569)
------------ ----------
Cash flows from investing activity:
Acquisition of property and equipment............. (16) (54)
------------ ----------
Net cash used in investing activity........ (16) (54)
------------ ----------
Cash flows from financing activities:
Payments on short-term debt....................... - (181)
Acquisition of property under capital lease....... - 40
Proceeds from the exercise of stock
options and warrants............................ - 426
Proceeds from the issuance of common stock........ 2,000 -
Offering costs.................................... (412) -
Principal payments on capital lease obligations... (7) (4)
------------ ----------
Net cash provided by financing activities..... 1,581 281
------------ ----------
Effect of exchange rate changes on cash............ - -
------------ ----------
Net increase (decrease) in cash and cash equivalents. 36 (1,342)
Cash and cash equivalents at beginning of period..... 711 2,588
------------ ----------
Cash and cash equivalents at end of period.......... $ 747 $ 1,246
=========== ==========
The accompanying notes form an integral part of these financial statements
-6-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
The financial information contained herein should be read in
conjunction with the Company's audited financial statements and notes
thereto included in its Annual Report on Form 10-K for the year ended
December 31, 2002.
The accompanying unaudited condensed consolidated financial statements
of Communication Intelligence Corporation and its subsidiary (the
"Company" or "CIC") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles ("GAAP") for complete
financial statements. In the opinion of management, the financial
statements included in this quarterly report reflect all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of its financial position
at the dates presented and the Company's results of operations and
cash flows for the periods presented. The Company's interim results
are not necessarily indicative of the results to be expected for the
entire year.
The Company develops and markets software that can verify handwritten
signatures and electronic signature and handwritten data entry
software solutions aimed at emerging, large potential markets such as
e-commerce, workflow automation, corporate security, smart handheld
devices such as handheld computers & smartphones and the Palm OS
aftermarket.
The Company's core software technologies include multilingual
handwriting recognition systems (Jot(R)) and the Handwriter(R)
Recognition System, referred to as HRS(TM), electronic signature,
biometric signature verification, cryptography, electronic ink
recording tools (InkTools(R)), Sign-it(R), iSign(TM) and Sign-On(TM),
and operating systems extensions that enable pen input (PenX(TM)).
Other consumer and original equipment manufacturer ("OEM") products
include electronic notetaking (QuickNotes(TM) and InkSnap(TM)) and
predictive text input, (WordComplete(R)). CIC's products are designed
to increase the ease of use, functionality and security of electronic
devices with a primary focus on smart handheld devices such as
handheld computers and smartphones.
The Company offers a wide range of multi-platform software products
that enable or enhance pen-based computing. The Company's core
technologies are classified into two broad categories: "natural input
technologies" and "transaction and communication enabling
technologies". Natural input technologies are designed to allow users
to interact with a desktop computer or handheld computer 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 PDA's (portable digital assistants),
converged devices (combine voice, PDA functionality and internet
access in a single device) and digitizer tablets do not have a
keyboard. For such devices, handwriting recognition and software
keyboards offer 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. 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 and provide more
functional user authentication and heightened data security. The
Company's transaction and communication enabling technologies have
been fundamental in its development of software for signature
verification, data security, and data compression.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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 substantial doubt about
its ability to continue as a going concern. At September 30, 2003, the
Company's accumulated deficit was approximately $81 million. The
Company filed a registration statement with the Securities and
Exchange Commission that was declared effective February 2003,
pursuant to the line of credit agreement with Cornell Capital
Partners, LP ("Cornell"). However, there can be no assurance that the
Company will have adequate capital resources to fund planned
operations or that 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.
2.Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
September 30, December 31,
2003 2002
--------------- -- --------------
Cash in bank $ 195 $ 260
Money market 552 451
--------------- --------------
$ 747 $ 711
=============== ==============
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At September
30, 2003, inventories consisted primarily of finished goods.
4. Short-term debt - Related Party Transactions
On June 19, 2001, the Company consummated a three-year $3 million
financing (the "Loan") with a charitable remainder annuity trust of
which a former director and officer of the Company is a trustee (the
"Trust"). The proceeds of the Loan were used to refinance $1.5 million
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 6.00% per
annum at September 30, 2003, 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.
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
4. Short-term debt Related Party Transactions (continued)
In the event the Company exceeds $5 million in financing from its
equity line of credit with Cornell Capital, LP, 50% of the proceeds in
excess of $5 million would be required to be used to reduce the 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. As of September 30,
2003, no demand had been made upon the Company to file this
registration statement.
Interest paid during the three and nine months ended September 30,
2003 was $48, and $146, respectively, and for the three and nine
months ended September 30, 2002, $53 and $160, respectively.
5. Net loss per share
The Company calculates earnings per share under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires the disclosure of both basic
earnings per share, which is based on the weighted average number of
shares outstanding, and diluted earnings per share, which is based on
the weighted average number of shares and dilutive potential shares
outstanding. For the three and nine month periods ended September 30,
2003 and 2002, stock options of 5,854 and 6,688, respectively, were
excluded from the calculation of diluted earnings per share as the
effect of these options is not dilutive.
6. Common Stock Options
The Company has adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as
amended by Financial Accounting Standards Board Statement No. 148. The
Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under
SFAS 123, to account for its employee stock-based compensation plans.
No stock based employee compensation expense is reflected in the
consolidated statement of operations as all options granted had an
exercise price equal to the market value of the Company's common stock
on the date of grant. The Company complies with the disclosure
provisions of SFAS 123.
Had compensation cost for the Company's option plans been determined
based on the fair value of the options at the date of grant, as
prescribed by SFAS 123, the Company's net loss available to common
stockholders and basic and diluted net loss per share available to
stockholders would have been as follows for the nine months ended
September 30, 2003:
Nine Months Ended
September 30, September 30,
2003 2002
Net loss available to stockholders:
As reported.............................$ (1,472) $ (2,429)
Total stock based employee compensation
expense determined under fair value
based method net of tax................. (306) (569)
----------- -----------
Pro forma.............................$ (1,778) $ (2,998)
=========== ===========
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
6. Common Stock Options (continued)
Nine Months Ended
September 30, September 30,
2003 2002
Basic and diluted net loss per share
available to stockholders:
As reported.............................. $ (0.016) $ (0.03)
Pro forma................................ $ (0.019) $ (0.03)
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:
o risk-free interest rate of 2.11% and 3.12% for 2003 and 2002,
o an expected life of 6.4 years for 2003, 6.9 years and for 2002;
o expected volatility of 100% all periods, and
o dividend yield of 0% for all periods.
The Company expects to make additional option grants. 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.
7. Comprehensive income (loss)
Total comprehensive (loss) was as follows:
Nine month Ended September 30,
--------------- ------ --------------
2003 2002
--------------- --------------
Net loss $ (1,472) $ (2,429)
Other comprehensive income:
Cumulative translation adjustment 6 4
-------------- --------------
Total comprehensive loss $ (1,466) $ (2,425)
============== ==============
8. Segment Information
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. 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 represent sales to external
customers.
The accounting policies followed by the segments are the same as those
described in the "Critical Accounting Policies." Segment data includes
revenues, as well as allocated costs charged to each of the operating
segments.
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Segment Information (continued)
The table below presents information about reporting segments for the
periods indicated:
Nine months ended September 30,
2003 2002
--------------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ------- ----------- ----------- -----
Revenues $ 2,015 $ 601 $ 2,616 $ 2,016 $ 777 $ 2,793
Loss from
Operations $ (1,325) $ (9) $ (1,334) $ (2,273) $ 30 $ (2,243)
Significant change
in Total long
lived assets from
Year End $ 5 $ - $ - $ - $ (35) $ (35)
For the three months ended September 30, 2003 and 2002, one customer
accounted for 35% and 20% respectively, of total handwriting
recognition segment revenue. For the nine months ended September 30,
2003 and 2002, one customer accounted for 22% and 12% of total
handwriting recognition segment revenue, respectively.
For the three months ended September 30, 2003 and 2002, one customer
accounted for 37% and 29% of system integration revenues,
respectively. For the nine months ended September 30, 2003 and 2002,
one customer accounted for 25% and 31% of system integration revenues,
respectively.
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set fourth in the Company's Annual report on Form 10-K for the
fiscal year ended December 31, 2002.
Overview
History. The Company was incorporated in Delaware in October 1986. The
Company has incurred losses in each year since its inception. For the five-year
period ended December 31, 2002, operating losses aggregated approximately $13.9
million and at December 31, 2002, the Company's accumulated deficit was
approximately $80 million. At September 30, 2003, the Company's accumulative
deficit was approximately $81 million.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in our
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, accounting for 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 our
management in the preparation of the consolidated financial statements.
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. We recognize revenues from sales of software products upon shipment,
provided that persuasive evidence of an arrangement exists, collection is
determined to be probable and no significant obligations remain. Revenue from
service subscriptions is recognized prorata 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 and no significant
obligations remain. Deferred revenue is recorded for post contract support and
is recognized prorata 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 is recognized upon installation
provided that persuasive evidence of an arrangement exists, no significant
obligations remain and the collection of the resulting receivable is probable.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is
based on our 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 our
historical experience, our estimates of recoverability of amounts due us could
be affected and we will adjust the allowance and the related operating expense
accordingly.
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Impairment of intangible assets. We perform intangible asset impairment
analysis 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"). We use SFAS 144 in
response to changes in industry and market conditions that affect our patents,
we then determine if an impairment of our assets has occurred. For the three and
nine months ended September 30, 2003 and 2002, no impairment of intangible
assets was determined to have occurred.
Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
completion of a working model and generally ends upon the release of the
product. 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
September 30, 2003 and 2002, such costs were not material.
Research and Development. Research and development costs are charged to
expense as incurred.
Foreign Currency Translation. The Company currently owns 90% of CIC China,
(the "Joint Venture"), with the Jiangsu Hongtu Electronics Group, a provincial
agency of the People's Republic of China. The Joint Venture provides electronic
signature based applications and handheld receipt/delivery based systems, and
provides systems integration services that affords the Joint Venture the
opportunity to include the sale of its core software by integrating electronic
signature and Chinese handwriting recognition into its turn-key solutions. We
consider 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 our 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 non-monetary
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 three and nine months ended September 30, 2003 and 2002, respectively.
Net Operating Loss Carryforwards. The Internal Revenue Code of 1986 and
similar state provisions may limit utilization of the Company's net operating
losses on an annual basis due to ownership change limitations. 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 $28 million based
upon the Company's history of losses.
Segments
We report in two segments: handwriting recognition and systems integration.
Handwriting recognition includes natural input and biometric signature products,
online/retail revenues and corporate sales, including enterprise and original
equipment manufacturers ("OEM") revenues. All handwriting recognition software
is developed around our core technology. Handwriting recognition product
revenues are generated through our web site and a direct sales force to
individual or enterprise end users. We also license a version of our handwriting
recognition software to OEM's. The handwriting recognition software is included
as part of the OEM's product offering. From time to time, we are required to
develop an interface (port) for our 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
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
systems that utilize our products. System integration sales are
derived through a direct sales force, which then develops a system to utilize
our software based on the customers requirements. Systems integration sales are
accomplished solely through our Joint Venture.
Results of Operations
The following table provides unaudited financial information for each of
our two segments.
Three Months Ended Nine Months Ended
Unaudited Unaudited
September 30, September 30,
2003 2002 2003 2002
Segment revenues:
Handwriting recognition
Online $ 54 $ 83 $ 260 $ 287
Corporate 480 132 1,435 1,538
China 197 90 320 191
-------- -------- -------- --------
Total handwriting recognition $ 731 $ 305 $ 2,015 $ 2,016
Systems integration $ 205 $ 220 $ 601 $ 777
-------- -------- -------- --------
Total revenues $ 936 $ 525 $ 2,616 $ 2,793
-------- -------- -------- --------
Cost of Sales
Handwriting recognition $ 51 $ 64 $ 88 $ 443
Systems integration 181 140 499 505
-------- -------- -------- --------
Total cost of sales $ 232 $ 204 $ 587 $ 948
-------- -------- -------- --------
Operating cost and expenses
Research and development $ 324 $ 367 $ 967 $ 1,145
Sales and Marketing 233 367 696 1,181
General and administrative 569 583 1,700 1,762
-------- -------- -------- --------
Total operating costs and expenses $1,126 $ 1,317 $ 3,363 $ 4,088
-------- -------- -------- --------
Interest and other income
(expense) net $ (50) $ (74) $ (138) $ (186)
-------- -------- --------- --------
Net loss $ (472) $(1,070) $(1,472) $(2,429)
======== ========= ========= ========
Amortization of intangible assets
Cost of sales $ 3 $ 3 $ 10 $ 10
General and administrative 95 57 284 284
-------- -------- --------- --------
Total amortization of
intangible assets $ 98 $ 60 $ 294 $ 294
======== ======== ========= ========
Revenues
Handwriting recognition.
Handwriting recognition segment revenues increased 140%, or $426, to $731
for the three months ended September 30, 2003, as compared to $305 in the
comparable prior year period. For the nine month period ended September 30,
2003, handwriting recognition revenues declined $1 to $2,015 from $2,016 in the
comparable prior year. The changes in the handwriting recognition revenues
between the comparable periods are described below.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Online/retail sales declined 35%, or $29, to $54 for the three months ended
September 30, 2003, compared to $83 in the comparable period of the prior year.
For the nine months ended September 30, 2003, online/retail revenues declined
9%, or $27, to $260 as compared to $287 in the comparable period of the prior
year. The Company believed the January 2003 PalmSource announcement, to replace
Graffiti(R) with CIC's Jot as the standard and only handwriting software on all
new Palm PoweredTM devices, and a multi-channel marketing campaign launched in
March 2003 would sustain online/retail revenues through the third quarter of
2003. The sales momentum from these announcements and campaigns has slowed
sooner than anticipated and is the reason for the decline in sales for the three
and nine month periods ended September 30, 2003. The Company anticipates that
its Palm products will be featured in the current box advertisement with all new
Palm devices shipping beginning in the early fourth quarter of 2003. The Company
hopes that the new advertisement will stimulate the sales of its products to new
palm users in the fourth quarter of 2003 and into the first half of 2004.
Corporate revenues increased 264%, or $348, for the three month period
ended September 30, 2003, compared to the prior year period. OEM revenues
included in corporate sales for the three months ended September 30, 2003,
increased $364 to $367, compared to $3 in the prior year period. This increase
was primarily due to sales made to one customer servicing the Pacific Rim
amounting to $250 and royalties from the Company's other licensees. For the nine
months ended September 30, 2003, OEM revenues increased 60%, or $212, to $568,
as compared to $356 in the prior year period. The increase was due to the
increase for the three month period described above. The Company believes OEM
revenues will increase 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. However, economic conditions may limit or delay the
Company's anticipated increases in OEM revenues to later periods. Enterprise
sales included in corporate sales decreased 12% and 26%, or $16, and $313,
respectively, during the three and six month periods ended September 30, 2003
compared to the prior year period. The number of individual orders has increased
121% and 66% for the three and nine months ended September 30, 2003,
respectively. However the average individual order value declined compared to
the prior year and is the reason for the decline in revenues. The Company
believes that the increased interest in its e-Signature products evidenced by
the increase in "pilot programs " purchases will result in increased future
revenues. The Company also believes enterprise revenues continue to be hampered
by the on-going "wait and see" attitude surrounding IT spending and that IT
spending and economic health will be the major limiting factors related to near
term revenues.
Software sales in China increased 119% and 68%, or $107 and $129,
respectively, over the three and nine month periods ended September 30, 2003
compared to the prior year periods. The increase is due to the continued sales
efforts focused on establishing China-wide channel partners to accelerate sales
growth.
Systems Integration.
System integration segment revenue declined 7% and 23%, or $15 and $176,
respectively, for the three and nine month periods ended September 30, 2003,
compared to the prior year period. The Company believes that the SARS related
health crises in China negatively impacted system integration revenues and
further hampered the implementation of its plans to expand its system
integration sales efforts into other provinces in China during the first half of
2003. The decrease also reflects the need for the Joint Venture to expand sales
coverage from a traditional focus on the local Nanjing and Jiangsu Province
markets to other provinces with in China. System integration revenues increased
75% in the three months ended September 30,2003, compared to the prior quarter.
The Company believes the increase is due to the abatement of the SARS crises
earlier in 2003, which made personal selling in China extremely difficult. The
potential return of SARS during the winter months may again negatively impact
system integration revenues due to customer contact required during the selling
and installation phase of the system integration revenue cycle.
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Cost of Sales
Handwriting recognition segment.
Handwriting recognition segment cost of sales includes royalty and import
tax payments, third party hardware costs, direct mail costs, engineering direct
costs and amortization of intangible assets excluding patents. Cost of sales for
the handwriting recognition segment decreased 20% and 80%, or $13 and $355,
respectively, during the three and nine month periods ended September 30, 2003,
compared to the prior year periods.
Online/retail cost of sales decreases 85% and 98%, or $11 and $195,
respectively, during the three and nine month periods ended September 30, 2003,
compared to the prior year periods. The decrease was due primarily to the
elimination of the direct mail campaign and related costs as a result of
reductions in the number of names available and a poor sales close rate. The
Company does not anticipate a material increase in costs associated with the
multi-channel JotComplete campaign discussed in the online/retail revenue
paragraph above.
Enterprise and OEM cost of sales decreased 73% and 82%, or $11 and $121,
respectively, during the three and nine month periods ended September 30, 2003,
compared to the prior year periods. The decrease was due primarily to the lower
volume of third party hardware sales and engineering development costs
associated with sales compared to the same period last year.
Handwriting recognition segment cost of sales for software sold in China
increased 25%, or $9, during the three month period ended September 30, 2003,
compared to the prior year period. The increase is due primarily to third party
hardware costs and discounts on the sales to channel partners. For the nine
months ended September 30, 2003, handwriting recognition segment cost of sales
for software sold in China decreased 40%, or $39, compared to the prior year
period. The decrease is due to lower third party hardware sales during the first
half of 2003 compared to the first half of 2002.
Systems Integration.
Systems integration segment cost of sales increased 29%, or $41, over the
three month period ended September 30, 2003, as compared to the prior year
period. The increase in costs was due primarily to the higher third party
hardware content of the sales. For the nine months ended September 30, 2003,
systems integration cost of sales decreased 1%, or $6, compared to the prior
year period. The company believes that systems integration cost of sales will
remain at the higher percentage of sales as the Joint Venture expands its sales
territories into other provinces where competition will become a more
significant factor.
Operating expenses
Research and development expenses. Engineering expense decreased 12% and 18%, or
$43 and $178, respectively, for the three and nine months ended September 30,
2003, to $ 324 and $967, as compared to $367 and $1,145 in the prior year
periods. Engineering expenses consist primarily of salaries and related costs,
outside engineering, maintenance items, and allocated facilities expenses.
Salaries and related expense declined 12% and 16%, to $201 and $620,
respectively, for the three and nine months ended September 30, 2003, as
compared to $228 and $734, respectively, in the prior year periods, due
primarily to the reduction in head count of two engineers. Outside engineering
cost and expenses declined 56% and 86%, or $15 and $75, to $12 in both the three
and nine month periods ended September 30, 2003, compared to $27 and $87, in the
prior year periods. Other engineering expenses decreased 6%, or $3, to $51 as
compared to $54 in the prior year period. The decrease is primarily due to lower
maintenance and depreciation expense compared to the prior year periods. For the
nine months ended September 30, 2003, other expenses increased 4% or $6, to
$158, as compared to $152 in the prior year periods. The increase is due to an
increase in data terminal lines for the Company's Web-site. The Company believes
that the reductions in engineering head count and expenses will not have an
adverse effect on its product engineering and
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
development efforts. The Company draws on the engineering capabilities of the
Joint Venture as required and, maintains a relationship with an outside
engineering group familiar with its products. These two resources can be engaged
on an as needed basis to fill future engineering requirements.
Sales and marketing expenses. Sales and marketing expenses declined 37% and
41%, respectively, or $134 and $485, respectively, to $233 and $696 for the
three and nine month periods ended September 30, 2003, compared to $367 and
$1,181, respectively, for the comparable three and nine month periods in 2002.
Sales and marketing expenses consist of salaries, commissions and related
expenses, professional services, advertising and promotion, general office and
allocated facilities expenses. Salaries and related expenses declined 61% and
47%, or $100 and $228, respectively, for the three and nine month periods ended
September 30, 2003, compared to the prior year period. The decline in salaries
and related expense is due primarily to the actions taken in the prior year in
the face of the declining economic environment and reduced IT spending, which
resulted in a reduction of three sales persons during most of the current three
and nine months compared to the prior year periods. The Company continues
rolling out a channel strategy for its handwriting recognition segment that will
increase the amount of market coverage by utilizing the sales force of the
channel partners. The Company continues to sign new partner agreements in both
the US and China. The Company believes these channel partners will produce
increasing revenues in the near term. Professional services declined 67% and
92%, or $12 and $67, respectively, during the three and nine month periods ended
September 30, 2003, compared to the prior year periods. The decline is primarily
due to $37 in outside commission expense and $14 in salaries expense paid to an
outside sales consultant during the nine months ended September 30, 2002 of the
prior year. Advertising expense decreased 100%, or $23 and $76, respectively,
for the three and nine month periods ended September 30, 2003, compared to the
prior year periods. This decrease is due to the discontinuance of in-the-box
advertising during the three and nine month periods ended September 30, 2003, as
compared to the prior year periods. Commission expense increased 193% to $44 for
the three months ended September 30, 2003, compared to $15 in the comparable
period in the prior year. For the nine months ended September 30 2003,
commissions expense decreased 23% or $26 to $88, compared to $114 in the
comparable nine month period of the prior year. The fluctuation in commission
expense is primarily due to the fluctuation in sales over the current three and
nine month periods compared to the prior year.
General and Administrative Expenses. General and administrative expenses
decreased 2% and 4%, or $14 and $62, to $569 and $1,700, respectively, for the
three and nine month periods ended September 30, 2003, compared to $583 and
$1,762, respectively, in the prior year periods. General and administrative
expense consists of salaries, professional fees, investor relations expenses,
patent amortization and office and allocated facilities costs. Salaries and
wages increased 3% and 4%, or $5 and $21, respectively, for the three and six
month periods ended September 30, 2003, compared to the three and nine month
periods last year, due primarily to salary increases. Professional service
expenses which include consulting, legal and outside accounting fees, decreased
14% and 4%, or $20 and $17, respectively, compared to the three and nine month
periods in the prior year. The decrease was due primarily to a decreases in the
fees during the current quarter compared to the same periods in the prior year.
The Company decreased its provision for uncollectable accounts by 60% and 62%,
or $35 and $47, respectively, for the three and nine month periods ended
September 30, 2003, as compared to the prior year periods due primarily to
collection of older accounts receivable. The Company believes its uncollectible
accounts provision is adequate at the present time. Other administrative
expenses increased 17% and 2%, or $36 and $19, respectively, over the three and
nine month periods ended September 30, 2003, compared to the prior year periods.
The increases were due primarily to the increases in investor relation expenses
due to a late billing received for mailing costs associated with the annual
report and printing costs for the second quarter 2003 supplement to the
Company's Form S1. Investor relations expenses are expected to remain less than
those incurred in the prior year for the foreseeable future.
Interest and other income (expense), net
Interest and other income (expense), net Interest and other income
(expense), net increased 89% and 111%, or $17 and $31, respectively, during the
three and nine month periods ended September 30, 2003, compared to the prior
year periods. The increase in income was due to a refund of value added tax from
2002 received by the Joint Venture and the elimination of credit card fees as a
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
result of outsourcing the Company's web store at the end of the first quarter of
2003.
Interest expense
Interest expense Interest expense decreased 13% and 8%, or $7 and $12,
respectively, over the three and nine month periods ended September 30, 2003
compared to the prior year periods. The decrease was due primarily to the
decrease in the bank floating interest rate paid on the Company's $3,000 debt.
Liquidity and Capital Resources
At September 30, 2003, cash and cash equivalents totaled $747 compared to
cash and cash equivalents of $711 at December 31, 2002. The increase in cash was
due primarily to financing activities through Cornell Capital Partners, LP.
During the nine months ended September 30, 2003, the Company received $1,590
from the sale of 8,620,651 shares of stock, net of issuance costs associated
with the preparation and filing and maintenance of the S-1 in February 2003.
This increase was offset by $1,529 used in operating activities and by equipment
purchases of $16 and payments of capital lease obligations of $7. Total current
assets were $1,841 at September 30, 2003, compared to $1,545 at December 31,
2002. As of September 30, 2003, the Company's principal sources of funds
included its cash and cash equivalents aggregating $747 and the Equity Line of
Credit through Cornell Capital Partners LP, under which we may issue up to
$13,000,000 of our common stock over the next 2 years.
Accounts receivable increased 70%, or $332, due to the 96% increase in
third quarter 2003 revenues compared to the revenues realized in the fourth
quarter of 2002. Based on anticipated deployments both domestically and in
China, together with the increasing level of proposal and quotation activity,
the Company anticipates that accounts receivable will increase from quarter to
quarter.
Prepaid expenses declined 18%, or $45, for the nine months ended September
30, 2003, compared to December 31, 2002, due to expensing the appropriate
quarterly prepaid amounts through operations. Generally annual insurance
premiums and maintenance fees are prepaid in December and June of each year.
Accounts payable increased 4%, or $7, for the nine months ended September
30, 2003, compared to December 31, 2002. Accrued compensation increased $12
between December 31, 2002 and September 30, 2003, due primarily to the deferral
of a portion of the President and Chief Executive Officer's salary until the
Company's cash flows improves.
Other accrued liabilities decreased 18%, or $92, due to the realization of
the accrued professional services and import taxes associated with the Joint
venture. Other accrued liabilities are expected to be reduced further in the
future as accrued expenses are billed and paid.
Deferred revenues declined 46%, or $76, due to the recognition of deferred
maintenance costs since December 31, 2002. Deferred revenues will increase over
the next quarter as customers renew their maintenance contracts for the twelve
months subsequent to September 30, 2003, and new maintenance contracts
associated with anticipated orders are entered into in future quarters.
Capital lease obligations increased $18, or 47%, due to the replacement of
the original service vehicle by the Joint Venture in July 2003. The Company
believes that the new vehicle will provide service well past the lease period of
36 months.
The Company has suffered recurring losses from operations that raise a
substantial doubt about its ability to continue as a going concern. At September
30, 2003, the Company's accumulated deficit was approximately $81 million
compared to $80 million at December 31, 2002. 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 it when needed, or if available, will
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
be available on favorable terms or in amounts required by it. 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 its 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.
The Company intends to use the net proceeds from the issuance of the shares
of its common stock under the Equity Line of Credit to repay short term debt and
for working capital purposes. Fifty percent of any such funds in excess of $5
million must be applied to the outstanding principal of the Company's short-term
debt. The Company believes that the proceeds from the Equity Line of Credit,
when combined with cash provided from operations, will be sufficient to meet its
capital requirements for the foreseeable future. If the Company is unable to
secure at least $5 million in funds under the Equity Line of Credit or is unable
to increase substantially funds generated from operations, the Company may not
be able to continue its operations in their current form and may not be a viable
company on a going forward basis without significant changes in its operations.
The Company believes it will be able to raise the necessary funds under the
Equity Line of Credit and from operations. The Company has not formulated
specific plans to change its operations. Possible changes could include reduced
personnel expenses to better match its revenue stream.
Current liabilities, which include deferred revenue, were $3,971 at
September 30, 2003, compared to $1,102 at December 31, 2002. The increase is due
to the inclusion in current liabilities of the $3,000 related party note which
had been classified as long-term as of December 31, 2002 (see material
commitments below). Deferred revenue, totaling $89 at September 30, 2003,
compared to $165 at December 31, 2002, primarily reflects the balance of advance
payments for products and maintenance fees from the Company's licensees that are
generally recognized as revenue by the Company when all obligations are met or
over the term of the maintenance agreement.
We have the following material commitments as of September 30, 2003:
Payments Due by Period
Less than 1 to 3 4 to After
Contractual Obligations Total 1 year years 5 years 5 years
-------- --------- ------- ------- -------
Short-term debt (1) $ 3,000 $ 3,000 $ - $ - $ -
Capital lease obligations 55 14 40 1 -
Operating lease commitments (2) 1,411 407 1,004 - -
--------- --------- ------- ------- -------
Total contractual cash
obligations $ 4,466 $ 3,421 $1,044 $ 1 $ -
========= ========= ======= ======= =======
1. The Short-term debt may be pre-paid by the Company 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, 2001. The cost of the lease
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2006.
Forward Looking Statements
Certain statements contained in this quarterly report on Form 10-Q,
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
Securities 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:
-19-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
o Technological, engineering, manufacturing, quality control or other
circumstances which could delay the sale or shipment of products;
o Economic, business, market and competitive conditions in the software
industry and technological innovations which could affect the Company's
business;
o The Company's inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of others
and prevent others from infringing on the proprietary rights of the
Company; and
o General economic and business conditions and the availability of sufficient
financing.
The Company undertakes no obligation to publicly update or revise any
forward-looking statement, as a result of new information, future events or
otherwise.
Item 3. 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 did not enter into any
short-term security investments during the three months ended September 30,
2003.
Foreign Currency Risk
The Company currently owns 90% of CIC China, (the "Joint Venture"), with
the Jiangsu Hongtu Electronics Group, a provincial agency of the People's
Republic of China. 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.
Future Results and Stock Price Risk
Over the last nine months, the Company's stock price has ranged from a high
of $0.65 to a low of $0.19. The Company's stock price may be subject to
significant volatility in the future as well. 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 4. 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 Exchange Act Rule
13a-14(c) within 90 days of the filing date of this quarterly report. Based on
that evaluation, the 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.
-20-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Part II-Other Information
Item 1. 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, case
number 02-CV-6197 (the "Complaint"). 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 plaintiffs' stockbroker, thereby delaying the sale of their
shares in the Company and causing a loss in excess of $500,000. 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.
The Company filed a motion to dismiss or to stay the proceedings pending
the outcome of the arbitration between the plaintiffs and Charles Schwab. The
court determined that the plaintiffs had not met the burden of establishing that
the amount in controversy, excluding interest and costs, exceeded $75,000.
Therefore the Court dismissed the Complaint for lack of subject matter
jurisdiction.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Page
Exhibit 31.1 Certification 302 of Chief Financial Officer 23
Exhibit 31.2 Certification 302 of Chief Executive Officer 24
Exhibit 32.1 Certification 906 of Chief Financial Officer 25
Exhibit 32.1 Certification 906 of Chief Executive Officer 26
(b) Reports on Form 8-K
Current Report on Form 8-K, incorporated by reference, dated August 8,
2003, with respect to:
1. The Company's financial results for the quarter ended June 30, 2003.
-21-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements 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.
COMMUNICATION INTELLIGENCE CORPORATION
-------------------------------------------------
Registrant
November 5 , 2003 /s/ Francis V. Dane
- ---------------------- ------------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-22-