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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-19301
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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, California (650) 802-7888
(Address of principal executive (Registrant's telephone 94065
offices) number, including area code) (Zip Code)
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 29, 1999 was approximately
$131,803,421 based on the closing sale price of $1.93 on such date, as reported
by the Nasdaq SmallCap Market.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
The number of shares of Common Stock outstanding as of
March 29, 1999 was 79,413,954.
A list of Exhibits to this Annual Report on Form
10-K begins on page 31.
COMMUNICATION INTELLIGENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I............................................................... 3
Item 1. Business..................................................... 3
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
PART II.............................................................. 12
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters.......................................... 12
Item 6. Selected Financial Data...................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 14
Item 8. Financial Statements and Supplementary Data.................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................. 21
PART III............................................................. 22
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV.............................................................. 28
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................................... 29
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* CIC(R) and its logo, Handwriter(R), Jot(R), and INKshrINK(R) are
registered trademarks of the Company. CIC Speller(TM), HRS(TM),
InkTools(TM), PenX(TM), QuickNotes(TM) and Sign-it(TM) are trademarks
of the Company. Applications for registration of various trademarks are
pending in the United States, France, Germany, Italy, Japan, Spain and
the United Kingdom. The Company intends to register its trademarks
generally in those jurisdictions where its products are or will be
marketed in the foreseeable future.
2
PART I
Item 1. Business
General
Communication Intelligence Corporation (the "Company" or "CIC") is a
leading supplier of pen enabling software solutions. 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.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R) and the Handwriter(R) Recognition System, referred
to as HRS(TM)), dynamic signature verification and capture tools (InkTools(TM)
and Sign-it(TM)), ink compression (INKshrINK(R)) and operating system extensions
that enable pen input (PenX(TM)). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM)) and
spell checking utilities (CIC Speller(TM)). CIC's products are designed to
increase the ease of use, functionality and security of electronic devices
ranging from PC peripherals to cellular phones.
CIC is a technology leader in the growing market for pen enabling software
solutions. In 1998, industry leaders such as Microsoft, Ericsson, Fujitsu and
Compaq chose to bundle CIC technologies. The Company currently has licensing
agreements with more than twenty hardware and software companies. See "OEM
Revenues".
In the 4th quarter of 1997, CIC's newly hired President, Mr. Guido
DiGregorio, developed and implemented a comprehensive plan that leveraged key
CIC technologies and focused on specific market opportunities with both
near-term sales and significant growth potential. The plan included actions
which have reduced operating costs and expenses (excluding cost of sales) to
approximately $6 million for 1998, 50% of 1997 levels, by focusing primarily on
software products. This "software only" strategy enabled the Company to
eliminate expenses related to hardware products and direct retail sales
including the sales force, advertising, sales promotions, manufacturing,
distribution, inventory and customer support.
The Company's new business strategy involves a three-pronged thrust
domestically:
o Accelerate the growth of license revenue derived from software products
through Handheld PC, smart cellular phone and PC peripheral OEMs.
o Accelerate the sale of aftermarket consumer software offerings via the
Company's website and selected on-line resellers.
o Establish sustainable enterprise related sales growth by leveraging CIC
technologies which enable server-side pen solutions within the Citrix
thin-client environment.
OEM Revenues
The Company's overall OEM revenues in 1998 (new sales versus the recognition
of past years' deferred revenue) almost doubled as compared to 1997. This growth
reflects increased revenues to existing vertical market customers by leveraging
existing and newly introduced products (see list of licensees below) and
breakthrough sales to Handheld PC ("H/PC") and smart cellular phone OEM
manufacturers. A key event in 1998 was the consummation of a licensing agreement
with Ericsson Mobile Communications AB ("Ericsson") including an order for
$782,000 with an initial payment of $641,000, which was received in January
1999. The order covers non-recurring engineering and advanced royalties for
porting several CIC products to two smart cellular phone reference designs that
are expected to be announced in the first half of 1999. The revenue from this
order is expected to be recognized in 1999. Once the porting of these products
to the EPOC operating system is completed, the Company intends to make these
products available to other members of the newly formed Symbian alliance
(Symbian member companies include: Ericsson, Motorola, Nokia, and Psion). The
wireless information device market is expected to be between 40 to 60 million
devices by the end of 2002. (data source: Ericsson, Dataquest and Symbian). The
Company believes that significant
3
royalty revenues from this agreement will be
generated beyond 1999 based on industry forecasted smart phone shipments.
Key OEM licensing customers at December 31, 1998 include:
Licensee Product(s) licensed Application of product
- ---------------- ------------------------ -------------------------
Compaq CIC Speller(TM) & Handheld PC
QuickNotes(TM)
Casio Jot(R) & QuickNotes(TM) Handheld PC
Ericsson Jot(R), QuickNotes(TM) & Smart Cellular Phone
Sign-it(TM)
Fujitsu HRS(TM)& PenX(TM) Various Pen Computers
Hitachi CIC Speller(TM) Handheld PC
Intermec HRS(TM) Windows Pen Computers
Microsoft Jot(R) Palm-size PC operating system
Mitsubishi HRS(TM) Windows Pen Computers
NEC/Philips QuickNotes(TM) Windows Pen Computers
Nortel Jot(R)& INKshrINK(R) Smart Cellular Phone
Symbol HRS(TM) Windows Pen Computers
Aftermarket Consumer Sales
Consumer sales of the Company's software sold over the internet, primarily
via CIC's website, increased approximately 850% in 1998 versus 1997, from
$36,000 in 1997 to $341,000 in 1998. The majority of this increase occurred in
the fourth quarter of 1998. This growth reflects rapid and effective porting of
Jot(R) and QuickNotes(TM) to the Palm(TM) operating system (which runs on the
Palm(TM) III & PalmPilot(TM) handheld organizers) coupled with the creation and
successful implementation of direct mail and e-mail campaigns, pricing
promotions, and website enhancements. This effort included the build-up and
structuring of a viable Electronic Software Distribution ("ESD") system as well
as the completion of distribution agreements with several on-line resellers. A
list of on-line resellers used at December 31, 1998 includes:
Digital River.com Beyond.com
Mobilesoft.com Downloadwarehouse.com
Releasesoft.com Egghead.com
Mobileplanet.com SoftwareBuyLine.com
Techwave.com CompuServ.com
Pilotgear.com
CIC believes that it will continue to generate meaningful growth in
aftermarket consumer sales in 1999 and beyond based on the large and growing
installed base of handheld organizers presently estimated at over 2.6 million
units and projected to more than double by the end of 1999. (Source:
Dataquest/IDC)
Enterprise Sales
The Company believes that the introduction of CIC's 32-bit PenX v. 1.5, pen
extensions for Windows(R) in 1998, and the positioning of this technology as
"enabling" our software products to function on Citrix's Independent Computing
Architecture ("ICA") together with the customer related accomplishments of the
past several months represents significant revenue potential in 1999 and beyond.
Through this technology, users of Windows(R) based pen computers, Windows(R) CE,
DOS and other handheld devices are able to access the same pen enabled program
regardless of operating system. Several products specific to major OEMs have now
been completed and shipped allowing participation in "show case" installations
which the Company believes will result in meaningful sales through both client
and server-side licensing opportunities in 1999.
4
China
The Company owns 90% of the Joint Venture in the People's Republic of China
(the "PRC"). CICC was formed to respond to the large potential market for
pen-computing software in the PRC, particularly Chinese handwriting recognition.
Since the Chinese language has over 7,000 written characters, it is extremely
difficult and inefficient to perform computer input with a keyboard. CICC's
Chinese handwriting recognition software allows characters to be entered into a
computer with an electronic pen, naturally and easily. CICC's 1998 revenues
increased more than 25% from 1997.
Three basic sales strategies have been established for CICC:
o The Systems Integration operation provides services to Chinese businesses,
government users and other joint ventures in the PRC involving the sale of
desktop and other computer products with a focus on office automation and
Material Replenishment Planning ("MRP") software.
o The Handwriter(R) operation focuses on the sale of Handwriter(R) tablets to
both end users and dealers leveraging CIC's Chinese recognizer software.
CICC is a leading supplier of Handwriter(R) products to the Chinese
Government.
o The OEM sales strategy involves the sale and licensing of handwriting
recognition, and other software products to the emerging Chinese computer
and smart phone OEM market.
Management expects continued sales growth for CICC driven by the increasing
market demand for Handwriter(R) tablets and OEM license opportunities.
Core Technologies
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies."
Natural Input Technologies. CIC's natural input technologies are designed
to allow users to interact with a computer or handheld device by using a pen or
"stylus" as the sole input device or in conjunction with a keyboard. CIC's
natural input offerings include multilingual handwriting recognition systems and
ink capture technologies. Many small handheld appliances such as electronic
organizers, pagers and smart cellular phones do not have a keyboard. For such
appliances, handwriting recognition offers one of the most viable solutions for
performing text entry and editing. 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 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, data compression and pen-operating environments.
5
Products
Key CIC products include the following:
Handwriter(R)and Jot(R) Handwriting recognition software
INKshrINK(R) Electronic ink data compression software
InkTools(TM) A suite of application development tools
for electronic signatures
QuickNotes(TM) Electronic notetaking software
Sign-it(TM) Digital signature support for Word '97
and Acrobat 4.0
PenX(TM) Operating system extensions for Windows(R)
'95, '98, NT and CE
CIC Speller(TM) Provides universal spell checking in
Windows(R)CEapplications
Products that were introduced and first shipped in 1998 include:
Sign-it(TM)for Microsoft(R) Word '97
Jot(R) Pro for the Windows(R) CE Palm-size PCs
Jot(R)for Palm(TM)and PalmPilot(TM)connected organizers
PenX(TM) v. 1.5
QuickNotes(TM)for Palm(TM)and PalmPilot(TM)connected organizers
QuickNotes(TM) for Windows(R) CE Palm-size PCs
Handwriting recognition software analyzes the individual strokes of
characters written with a pen/stylus and converts these stokes into an "ASCII"
text character. This software is especially useful for portable electronic
devices that are too small to employ a keyboard, and for the input of
ideographic script characters such as those used in written Chinese and
Japanese. The Company currently has two recognition system offerings.
The Handwriter(R) Recognition System ("HRS(TM)") is an award-winning
software solution for recognizing handwritten input on Windows(R) based pen
computers and desktop PCs. HRS(TM) accurately recognizes handwritten characters
with no training of the recognizer required, so the user can write naturally.
HRS(TM) is a full context recognizer that offers some unique features such as
automatic spacing between words and automatic capitalization of the first letter
of new sentences. HRS(TM) software is currently shipping on many of the leading
Windows(R) based pen computers. Vertical market licensees of HRS(TM) who are
currently shipping the recognizer include Fujitsu, Intermec, Mitsubishi and
NEC/Philips. The Chinese version of the HRS(TM) recognizer is also available for
OEM licensing worldwide.
Jot(R) is a print based recognizer that is specifically designed for small
form factor devices. Unlike many recognizers that compete in the market for
handheld data input solutions, Jot(R) 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(R) is
currently licensed to Microsoft and ships with every Palm-size PC. Consumer
offerings of Jot(R) include versions for Handheld PCs ("H/PCs"), Palm-size PCs
(upgrade to bundled version) and the PalmPilot(TM) and Palm(TM) organizers.
Jot(R) has been ported to many operating platforms including the PalmOS, OS/9
for the Nortel Smart Phone and is currently under development for others. The
standard version of Jot(R), which is available through OEM, enterprise and
consumer product offerings, recognizes and supports input of Roman-based Western
European languages.
InkTools(TM), a dynamic signature verification software tool-kit, analyzes
the image, speed, stroke sequence and acceleration of a person's electronic
signature. InkTools(TM) provides an extremely effective and inexpensive
biometric security check. 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.
Sign-it(TM) is a family of signature products for enabling the capture,
binding and verification of signatures within standard consumer applications.
Organizations wishing to process electronic forms requiring varying levels of
6
security can reduce the need for paper forms by adding signature capture
technologies to their workflow solution. Current signature capture solutions
include Sign-it(TM) for Word '97 and Adobe Acrobat 4.0.
Electronic inking technologies are used to mark-up electronic documents
without printing a hard copy, and to make electronic sketches and drawings.
Electronic ink is a data type that is made up of pixels verses text characters
and, unless compressed, takes up large amounts of computer memory. Electronic
ink may be used to capture signatures or for short handwritten messaging. CIC's
electronic ink compression software, INKshrINK(R), compresses and decompresses
electronic ink quickly and efficiently. This facilitates the storage and
transmission of electronic ink in a compressed state, which reduces transmission
time and the amount of computer memory necessary for storage, thus decreasing
the cost of use. Decompression is almost instantaneous, allowing for accurate
visual presentation on computer display screens without perceptible delays.
The Company's products are marketed through three sales approaches: OEM
Sales, Enterprise Sales and Consumer Sales.
OEM Licensed Products. CIC currently licenses software products for
Windows(R)3.x, Windows(R)'95 and Windows(R)NT operating systems, as well as for
the new Windows(R)CE operating system for Handheld PCs and Palm-size PCs. CIC
also ports its products to other platforms, such as OS/9 and EPOC, to meet the
specifications of new licensees. The Company's Handwriter(R) Recognition System
is licensed for portable PCs utilizing the Windows(R)3.x and Windows(R)'95
operating systems, and is primarily used for field force automation and in
pen-input PC peripherals for desktop use. Jot(R), QuickNotes(TM) and CIC
Speller(TM) are licensed primarily for the new, smaller classes of Handheld PCs
and Palm-size PCs such as those that utilize the Windows(R)CE operating system
and handheld communicators such as smart phones. New OEM licensing growth is
also expected from the licensing of CIC's PenX(TM), pen operating system
extensions. One of the licensees in 1998 for PenX(TM) was Fujitsu.
In December 1997, the Company announced its first OEM license agreement
with Nortel for Jot(R) and INKshrINK(R) to be used in a new wireless
communication device that could be categorized as a "smart phone," a product
that combines the voice communication capability of a digital cellular telephone
with the data capabilities of a Handheld PC. These technologies are also the
basis for the licensing agreement concluded with Ericsson at the end of 1998 for
two new smart phone reference designs.
Enterprise Solution Products. CIC offers several products targeted for
markets in the regulatory and security sensitive industries that require
workflow automation solutions, such as electronic form filing and network
communication. For these markets, CIC offers several products including
InkTools(TM), a high performance Windows(R) (`95 ,`98 and NT) software
developer's kit for implementing systems using electronic ink and handwritten
signatures. InkTools(TM) provides electronic ink capture and display, signature
verification and electronic ink compression. InkTools(TM) is a new release which
incorporates ActiveX technology and enhanced Visual Basic support for CIC's
primary developer's tool kit, allowing signature capture and verification within
computer applications.
New developments on CIC's PenX(TM), pen extensions for Windows(R),
technology have been directed at enabling our Enterprise applications to run in
a distributed network architecture. The primary focus of these efforts has been
in emerging Independent Computing Architecture ("ICA"), in which PenX(TM)
enables the full functionality of pen-based clients including PCs with tablets,
handheld devices, and Windows(R) pen computers.
Consumer Product Offerings. The Company's consumer sales department is
charged with the sale of the Company's aftermarket software offerings. The
consumer product line currently consists of Jot(R), QuickNotes(TM) and
Sign-it(TM). These product are sold over the internet on CIC's own website and
by other internet-based electronic resellers. Consumer versions of Jot(R) and
QuickNotes(TM) are being sold for users of the Palm(TM) III and PalmPilot(TM)
connected organizers in addition to Windows(R) CE based Palm-size PCs and
Handheld PCs. Much of the growth in consumer sales this year was attributable to
sales of Jot(R) and QuickNotes(TM) to users of the Palm(TM) III and
PalmPilot(TM) devices. The Company has also registered two new domain names
(internet website addresses) for use in direct mail campaigns and other special
promotions targeting the PalmPilot(TM) installed base which is currently
estimated to consist of more than 2 million users.
7
History
The Company was initially incorporated in Delaware in October 1986 as a
wholly owned subsidiary of a predecessor corporation with the same name. The
Company has a 90%-owned joint venture (the "Joint Venture"), Communication
Intelligence Computer Corporation, Ltd., with the Ministry of Electronic
Industries of the Jiangsu Province, a provincial agency of the People's Republic
of China. The Joint Venture was formed in September 1993.
In each year since its inception, the Company has incurred losses. In July
1994, the Company filed a voluntary petition for reorganization and protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of San Francisco primarily to restructure the
Company and its debt. On November 14, 1994, the Company's pre-petition creditors
approved, and the United States Bankruptcy Court confirmed, the Company's Plan
of Reorganization (the "Plan"), and the Company emerged from bankruptcy. The
Plan provided for the payment in full, in cash, of all allowed unsecured claims
of creditors while leaving secured creditors unimpaired by providing for their
payment in compliance with the original terms and conditions of their loans.
Creditors were paid in three approximately equal installments in February 1995,
1996, and 1997, respectively. In addition, under the Plan each holder of the
Company's then outstanding shares of Common Stock and Convertible Preferred
Stock received one unit, which consisted of two shares of Common Stock and one
Common Stock purchase warrant with an exercise price of $0.50 per share, in
exchange for two shares of Convertible Preferred Stock or Common Stock. All
unexercised warrants issued pursuant to the Plan expired in December 1994. Since
July 1994, the Company has consummated a number of debt and equity financings.
For further information concerning these transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
Copyrights, Patents and Trademarks
The Company relies on a combination of patents, copyrights, trademarks,
trade secrets and contractual provisions to protect its software offerings and
technologies. There can be no assurance, however, that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. In addition, the laws of certain countries in which the Company's
products are licensed may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. Because of
the rapid evolution of technology and uncertainties in intellectual property law
in the United States and internationally, there can be no assurance that the
Company's current or future products or technologies will not be subject to
infringement by others. The Company's licensees and distributors have access to
proprietary information of the Company. In addition a substantial portion of the
Company's technology and know-how are trade secrets and are not protected by
patent, trademark or copyright laws. The Company has a policy of requiring its
employees and contractors to respect proprietary information through written
agreements. The Company also has a policy of requiring prospective business
partners to enter into non-disclosure agreements before any of the Company's
proprietary information is revealed to them. There can be no assurance that the
measures taken by the Company to protect its technologies, products and other
proprietary rights will adequately protect it against improper use.
Certain technological processes originally implemented in the Company's
software offerings were developed and patented by Stanford Research
International ("SRI") and SRI assigned those patents, which subsequently
expired, to the Company. The Company has made significant improvements to the
original technologies and additional patents relating to such technological
improvements have been applied for or issued. Therefore, the Company does not
believe that the expiration of the SRI patents has had or will have a
significant effect on its operations. Other major elements of the Company's
software offerings and technologies were developed by the Company and have been
patented. Certain of the Company's existing patents expire between the years
2002 and 2005. The Company is unable to predict at this time the impact to its
business, if any, from such expiration.
CIC(R) and its logo, Handwriter(R), Jot(R), and INKshrINK(R) are registered
trademarks of the Company. CIC Speller(TM), HRS(TM), InkTools(TM), PenX(TM),
QuickNotes(TM), and Sign-it(TM) are trademarks of the Company. Applications for
registration of various trademarks are pending in the United States, France,
Germany, Italy, Japan, Spain and the United Kingdom. The Company intends to
register its trademarks generally in those jurisdictions where its products are
or will be marketed in the foreseeable future.
8
The Company may be required or elect to take various forms of legal action
from time to time to protect its proprietary rights. Any litigation regarding
claims against the Company or claims made by the Company against others could
result in significant expense to the Company, divert the efforts of its
technical and management personnel and have a material adverse effect on the
Company, whether or not such litigation is ultimately resolved in favor of the
Company. In the event of an adverse result in any such litigation, the Company
may be required to expend significant resources to develop non-infringing
technology or obtain licenses from third parties. There can be no assurance that
the Company would be successful in such development or that any such licenses
would be available on commercially reasonable terms, if at all.
Seasonality of Business
The Company has not experienced seasonal trends affecting sales of its
products or the development or licensing of its technologies.
Material Customers
Historically the Company's revenues have been derived from a limited number
of customers or other sources. No one customer accounted for more than 10% of
the Company's revenues in 1998. Three customers accounted for approximately 27%,
16%, and 15%, respectively, of the Company's revenues in 1997. Two customers
accounted for approximately 11% and 10%, respectively, of the Company's revenues
in 1996. The loss of any significant customer or other source of revenue could
have a material adverse effect on the Company.
Backlog
At December 31, 1998, backlog approximated $782,000 representing NRE and
pre-paid royalties associated with the Ericsson agreement. The Company had no
significant backlog at December 31, 1997 and a backlog of $195,000 at December
31, 1996. Backlog consists of orders placed for the Company's products that have
not been shipped as of December 31st due to third party shipping and delivery
requirements.
Competition
The markets for CIC's offerings are competitive and have attracted a number
of competitors within certain product markets. The Company intends to be
responsive to emerging market demands as well as competitive threats in those
specific markets where there is competition. While these competitors may pose a
threat to the Company's efforts to gain market share within certain markets,
these competitors also help bring attention to and build awareness for pen-input
solutions. Certain competitors of the Company have substantially greater
financial and other resources than that of the Company. The Company faces
competition at different levels. Certain competitors have developed or are
developing software offerings which may compete directly with the Company's
offerings. Most of the direct competitors of CIC have focused only on one
element of such systems, such as handwriting recognition technology, signature
capture/verification or pen-based operating environments, or other pen-based
applications. While the Company believes that it has a competitive advantage in
some cases due to its range of product offerings, there can be no assurance that
competitors will not succeed in developing products or technologies that are
more effective, easier to use or less expensive than the Company's products or
technologies or that would render the Company's products or technologies
obsolete or non-competitive. Competitors of the Company include certain of the
Company's current and potential strategic partners and customers who are
developing or acquiring alternative products and technologies to those offered
by the Company. There can be no assurance that companies with which the Company
has established or will establish distribution, license, product development or
other strategic relationships will not choose to market competitive technologies
or products developed internally or acquired from third parties. The Company's
strategic partners also have had access to proprietary information of the
Company, and there can be no assurance that the Company's confidentiality
agreements with its strategic partners will adequately protect it against the
improper use of such proprietary information.
9
Joint Venture in the People's Republic of China
The Company currently owns 90% of the Joint Venture with the Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of the
People's Republic of China (the "Agency"). As of December 31, 1998, the Company
had contributed an aggregate of $1.8 million in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had contributed certain land use rights. In 1998, the
registered capital of the Joint Venture was reduced and therefore, pursuant to
the terms and provisions of the Joint Venture agreement, no further
contributions are required by either party. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Joint Venture in the People's Republic of China."
Employees
As of March 24, 1999, the Company and the Joint Venture employed 73
full-time employees, 28 of which are in the United States and 45 of which are in
China. From time to time, the Company also engages additional personnel on an as
needed basis. The Company believes it has good relations with its employees.
None of the Company's employees is a party to a collective bargaining agreement.
Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 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 broken down into two segments - Handwriting
Recognition and Systems Integration. For further information see Note 9 to the
Company's Consolidated Financial Statements.
Geographic Areas
For the years ended December 31, 1998, 1997, and 1996, the Company's export
sales as a percentage of total revenues were approximately 16%, 40%, and 7%,
respectively. The decrease in export sales in 1998 is due to the recognition in
1997 of deferred royalty revenue of approximately $1,424,000 from foreign
customers for which the Company had no further obligation to provide additional
software or services compared to $403,000 in 1998. In conjunction with the
Company's current business strategy, all licensing activities for the Company's
software technologies will be conducted from the United States. Revenues are
attributed either to the U.S. or China based on whether the Company or the Joint
Venture are responsible for fulfilling the contract commitments. In December
1997, the Company closed its sales office in Japan. Although the Company
maintains certain agreements with Japanese customers, the revenues are
attributed to the Company's U.S. operations. Due to the volume of the Company's
sales on its website, and the low selling price of the products offered, it is
not economically feasible to track individual unit sales by country, and
therefore all website sales are attributed to the U.S. operation. The Company is
subject to various risks in connection with the Joint Venture in the People's
Republic of China, including risks commonly associated with doing business
abroad. For further information see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 2 and 9 to the
Company's Consolidated Financial Statements.
Year 2000
Year 2000 issues arise because most computer systems and programs were
designed to handle only a two-digit date code for the year, not a four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and programs, resulting in the incorrect processing of data. CIC's
software products as developed and distributed by CIC are not date sensitive and
therefore Year 2000 issues are not applicable to such products. The Company has
evaluated its internal software programs and equipment to ascertain the
readiness of computer software and operating systems for the Year 2000.
Management of the Company believes that its internal software programs are Year
2000 compliant. The Company is currently in the process of replacing older
desktop PC's which
10
are not, nor cannot be upgraded to be, Year 2000 compliant. The replacement of
such older computer equipment is expected to be completed by April 30, 1999. The
cost of replacing these desktop systems is not expected to be significant The
Company is not aware of any other internal problems.
The Company is in the process of analyzing the readiness of the third
parties with which it does business. The Company believes that the only
potentially significant Year 2000 problems it may experience will result from
Year 2000 issues affecting its website or its banks. The Company generates a
significant percentage of revenues from sales made via its website. If the
Company's website were to go off-line for an extended period of time, income
would be significantly impacted until service was restored. The Company has
received assurances that its website is Year 2000 compliant, however, it has not
received any information regarding the phone carrier that links the website
server to the internet. The Company believes that it is not possible to develop
a contingency plan at this time for dealing with the potential effects of such
an event. If banking systems were to fail due to Year 2000 problems, the Company
may be cut off from access to some of its funds for a period of time. The
Company maintains its cash with various financial institutions so that an
incident at any one bank would not have a severe impact on the Company's cash
availability.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following: (1) technological,
engineering, quality control or other circumstances which could delay the sale
or shipment of the Company's 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 inability to
protect its trade secrets or other proprietary rights, operate without
infringing upon the proprietary rights of others or prevent others from
infringing on the proprietary rights of the Company; and (4) general economic
and business conditions and the availability of sufficient financing.
Item 2. Properties
The Company currently leases its principal facilities (the "Principal
Offices"), consisting of approximately 11,717 square feet, in Redwood Shores,
California, pursuant to a sub-lease that expires in 2001. In addition, the
Company sub-leases to third parties approximately 8,200 square feet of space
near the Principal Offices. The sub-leases expire in 1999. The Company
originally leased the additional space in 1997 in order to accommodate
additional personnel hired by the Company in the last three months of 1996 in
connection with its increased marketing activities at that time. Due to the
Company's current business strategy and other cost reduction programs, the
additional space is not required at this time. The Joint Venture leases
approximately 1,000 square feet in Nanjing, China. The Company anticipates that
its existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. The Company also believes that its
current facilities will be suitable for it to continue operations in the
forseeable future.
Item 3. Legal Proceedings
As of March 29, 1999, the Company was not a party to any legal proceeding,
which, if adversely determined, would have a material adverse effect on its
business. In July 1994, the Company filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in order to restructure the
Company and its debt. In November 1994, the Plan was approved and confirmed and
the Company emerged from bankruptcy. See "Item 1. Business-History."
Item 4. Submission of Matters to a Vote of Security Holders
None
11
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market under the trading symbol "CICI." In September 1991, the Company's Common
Stock was first listed on the Nasdaq SmallCap Market, and in June 1993 it was
listed on the Nasdaq National Market. In July 1994 (during the Company's Chapter
11 reorganization proceedings), the Company's Common Stock was delisted for
failure to meet Nasdaq's continued listing requirements. From July 1994 to July
1996, quotations concerning the Common Stock were reported on the OTC Bulletin
Board. In July 1996, the Company's Common Stock was relisted on The Nasdaq
SmallCap Market. The following table sets forth the high and low sale prices of
the Common for the periods noted.
Sale Price
Per Share
Year Period High Low
1997 First Quarter.............................. $ 3.88 $ 1.81
Second Quarter............................. $ 2.53 $ 1.75
Third Quarter.............................. $ 2.13 $ 1.13
Fourth Quarter............................. $ 2.75 $ 1.06
1998 First Quarter.............................. $ 1.75 $ 1.03
Second Quarter............................. $ 1.22 $ 1.00
Third Quarter.............................. $ 1.19 $ 0.59
Fourth Quarter............................. $ 0.91 $ 0.41
1999 First Quarter (through March 29, 1999)..... $ 0.69 $ 2.46
As of March 29, 1999, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $1.93 per share and there were approximately 650
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.
12
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of December 31,
1998, 1997, 1996, 1995 and 1994 and for each of the years in the five-year
period ended December 31, 1998 are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, 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,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues...................... $ 4,581 $ 5,516 $ 2,887 $ 2,314 $ 3,599
Research and development
expenses(1)................... 1,989 2,360 1,672 1,355 2,062
Sales and marketing
expenses...................... 2,015 6,257 3,282 2,613 4,936
General and administrative
expenses..................... 1,889 2,663 2,037 1,717 2,395
Loss from operations.......... (3,285) (11,627) (6,535) (5,534) 10,935)
Net loss available to common
stockholders(2).............. (3,592) (16,940) (6,356) (5,595) (11,048)
Basic and diluted loss per
common share................. (0.06) (0.37) (0.15) (0.16) (0.53)
As of December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash............... $ 1,045 $ 5,485 $ 11,325 $ 7,459 $ 4,088
Working capital (deficit)(3).. 346 2,721 8,284 3,763 (605)
Total assets.................. 3,354 7,491 13,503 9,776 6,171
Deferred revenue.............. 651 440 2,006 2,570 2,754
Long-term obligations......... - 8 32 830 2,069
Redeemable securities(4)...... - - 9,417 - -
Stockholders' equity (deficit)(5). 1,332 3,989 (82) 4,010 (1,219)
- -----------
(1) Excludes software development costs capitalized in accordance with
Statement of Financial Accounting Standards No. 86 of $17,000, $20,000
and $436,000 for the years ended December 31, 1998, 1995, and 1994,
respectively. There was no capitalization of software development costs
in the years ended December 31, 1997 and 1996, respectively.
(2) The Company's 1997 net loss applicable to common stockholders includes
a one-time, non-cash charge of $4.9 million related to the embedded
yield on the Company's Series A Preferred Stock issued in December 1996
due to the discounted conversion provisions of such stock and the
cumulative dividends of $1.25 per share, per annum on Series A
Preferred Stock. The Company's 1998 net loss applicable to common
stockholders includes dividends on Series A Preferred Stock and Series
B Preferred Stock of $435.
(3) Current liabilities used to calculate working capital at December 31,
1998, 1997, 1996, 1995, and 1994 include deferred revenue of $651,
$440, $2,006, $2,570, and $2,754, respectively.
(4) Refer to Note 5 to of the Company's Consolidated Financial Statements
included in Item 8 of this Form 10-K.
(5) The Company has never paid dividends to the holders of its common
stock. Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
13
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, 1998, losses aggregated approximately $43
million and, at December 31, 1998, the Company's accumulated deficit was
approximately $69 million. In July 1994, the Company filed a petition for
reorganization and protection under Chapter 11 of the United States Bankruptcy
Code in order to restructure the Company and its debt. In November, 1994, the
Company's pre-petition creditors approved, and the United States Bankruptcy
Court confirmed, the Company's Plan of Reorganization and the Company emerged
from bankruptcy. See "Item 1. Business - History."
Revenue Recognition. In October 1997, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for
transactions entered into during the fiscal year beginning January 1, 1998. SOP
97-2 provides guidance for recognizing revenue on software transactions and
supersedes Statement of Position No. 91-1, "Software Revenue Recognition." In
March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4"). SOP 98-4 defers, for one year, the application of certain passages in
SOP 97-2 which limit what is considered vendor-specific objective evidence
necessary to recognize revenue for software licenses in multiple-element
arrangements when undelivered elements exist. In December 1998, the AICPA issued
Statement of Position No. 98-9 ("SOP 98-9") "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 extends the
effective date of SOP 98-4 and provides additional interpretative guidance. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue recognition
practices when adopted. Adoption of the remaining provisions of SOP 97-2 did not
have a material impact on revenue recognition during 1998.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment, provided that no
significant obligations remain and that collection of the resulting receivable
is likely. The Company provides for estimated sales returns at the time of
shipment.
License revenues are recognized when the software has been delivered and
all significant obligations have been met. Royalty revenues are recognized as
products are licensed and sold by licensees. Under the terms of an agreement
with IBM Corporation ("IBM"), the Company is obligated to share with IBM certain
revenues from third parties when earned.
Revenues from development contracts are primarily generated from
non-recurring engineering fees and research grants. Revenue is recognized in
accordance with the terms of the grants and agreements, generally when
collection is probable and related costs have been incurred.
Sources of Revenues. To date, the Company's revenues have been derived
principally from end-users, manufacturers, retailers and distributors of
computer products in North America, Europe and the Pacific Rim. The Company
performs periodic credit evaluations of its customers and does not require
collateral. The Company maintains reserves for potential credit losses.
Historically, such losses have been insignificant and within management's
expectations.
Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
completion of a working model and generally ends upon the release of the
product. As of December 31, 1998, 1997 and 1996, such costs were insignificant.
14
Significant Customers. No one customer accounted for more than 10% of total
revenues in 1998. Three customers accounted for approximately 27%, 16%, and 15%,
respectively, of the Company's revenues in 1997. Two customers accounted for 11%
and 10%, respectively, of revenues in 1996.
Research and Development.
Research and development costs are charged to expense as incurred.
Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and losses from the translation of the local foreign currency financial
statements are included as a component of "accumulated other comprehensive loss"
in the Company's consolidated balance sheets included in this Annual Report on
Form 10-K. Foreign currency assets and liabilities are translated into U.S.
dollars at exchange rates prevailing at the end of the period except for
non-monetary assets and liabilities which are translated at historical exchange
rates. Revenues and expenses are translated at the average exchange rates in
effect during each period, except for those expenses included in balance sheet
accounts which are translated at historical exchange rates.
Net foreign currency transaction gains and losses are included as
components of "interest income and other income (expense), net" in the Company's
consolidated statements of operations included in this Annual Report on Form
10-K. The Company recorded a net foreign currency transaction gain of $55,000, a
loss of $101,000, and a gain of $59,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Net Operating Loss Carryforwards. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets at December 31,
1998 of $17,740 based upon the Company's history of losses.
Restatement of 1997 Quarterly Results. In January 1998, the Company
restated the previously issued financial statements for the first, second and
third quarters of 1997. The display of the net loss per common share applicable
to common stock holders and the components thereof in the Company's unaudited
condensed consolidated statements of operations for each of these quarters was
restated to reflect the non-cash charge for the embedded yield on the
convertible preferred stock due to the discount conversion feature provided on
such stock and cumulative dividends on the convertible preferred stock. The
Company believes that the restatements were in accordance with the accounting
treatment of the embedded discount on convertible preferred stock as announced
by the Securities and Exchange Commission at the March 13, 1997 meeting of the
Financial Accounting Standards Board's Emerging Issues Task Force.
Results of Operations
Years Ended December 31, 1998 and December 31, 1997
Revenues. The Company's product sales for the year ended December 31, 1998
decreased $264,000, or 8%, to $2,982,000 from $3,246,000 in the prior year. The
decrease was due to the Company's transition from a combined hardware and
software company to a Company focused primarily on software. Hardware sales
decreased $1,207,000, or 61%, to $748,000 for the year ended December 31, 1998
compared to $1,955,000 in the prior year. This reduction in hardware sales was
partially offset by an increase of $305,000, or approximately 850%, in software
products sold over the internet via the Company's website for the year ended
December 31, 1998 compared to the prior year. In addition systems integration
activities of the Joint Venture increased $405,000, or 27%, in 1998 to
$1,880,000 compared to $1,475,000 in 1997. Other sales including software
solutions utilizing the Company's software and third party hardware and
replacement and spare hardware and software components for the Company's
installed hardware base not included above amounted to $234,000 for the year
ended December 31, 1998 compared to $92,000 in the prior year.
Revenues from license and royalty fees for the year ended December 31, 1998
decreased by $542,000, or 29%, to $1,300,000 from $1,842,000 for the prior year.
The decrease was primarily attributable to the recognition in the prior year of
approximately $1,424,000 of royalty revenues deferred in prior years that were
recognized on agreements for
15
which the Company had no further obligations to
deliver additional software or services, compared to $402,000 recognized in
1998.
Revenues from development contracts for 1998 decreased 30% to $298,000 from
$428,000 for the prior year due primarily to reductions in non-recurring
engineering revenues. Revenues from development contracts in 1998 and 1997 are
primarily attributable to grants awarded by the National Institute of Standards
and Technology and the National Science Foundation.
Cost of Sales. Cost of sales is composed of costs from product sales,
license and royalty fees and development contracts. Cost of product sales in
1998 consisted primarily of cost of materials, approximately $1,420,000 of which
related to the hardware and software components involved in the systems
integration activities of the Joint Venture and the remainder of which related
to material and other costs of the Company's discontinued Handwriter(R) product
sales. Cost of product sales decreased 69% to $1,698,000 from $5,458,000 in the
prior year. In the fourth quarter of 1997, the Company wrote down its
Handwriter(R) products finished goods inventory by approximately $1,600,000 due
to the intended withdrawal of its Handwriter(R) product from the retail market
in the first quarter of 1998. In addition, the Company charged approximately
$300,000 to product cost of sales in the fourth quarter of 1997, related to
non-cancelable manufacturing license agreements associated with the
Handwriter(R) products entered into in 1997. License and royalty costs decreased
by approximately $69,000, or 52%, to $63,000 in 1998 from $132,000 in 1997. This
decrease in license and royalty costs related primarily to decreases in
capitalized software amortization and software maintenance. Costs incurred in
connection with development contracts revenue are expensed as incurred, and
decreased 22% in 1998 compared to the prior year, commensurate with the
reduction in development contracts revenue in the same period.
Gross Margin. The gross margin increased to $2,608,000 in 1998 from a
negative margin of $347,000 in 1997. This increase was due to a shift from low
margin retail hardware sales to the sales of the Company's higher margin
software products, and there being no write-offs in 1998 similar to the
write-offs in 1997 of Handwriter(R) inventory and non-cancelable manufacturing
licenses as discussed above.
Research and Development Expenses. Research and development expenses
decreased $371,000, or 16%, to $1,989,000 compared to $2,360,000 in the prior
year. Salaries and wages decreased $365,000, or 18%, to $1,535,000 compared to
$2,000,000 in the prior year. This decrease is due to the reduction in domestic
staffing due to moving the development of the Chinese character recognition
system to the Joint Venture which has a lower average salary per person. Outside
engineering costs decreased $155,000, or 99%, to $2,000 from $157,000 in the
prior year. This decrease is due to the elimination of outside development for
the Company's discontinued hardware products. Other overhead costs, including
facilities and related expenses, increased $150,000, or 73%, to $353,000 from
$203,000 in the prior year. This increase is due primarily to the decrease in
applied overhead to cost of sales from the reduction in development contract
revenues and increases in the development effort by the Joint Venture.
Sales and Marketing Expenses. Sales and marketing expenses decreased 68%,
or $4,242,000, to $2,015,000 for the year ended December 31, 1998 compared to
$6,257,000 in the prior year. Salaries, wages, and related costs decreased by
$1,821,000, or 70%, to $774,000 compared to $2,595,000 in the prior year, due to
reductions in staffing as the Company discontinued its sales efforts related to
hardware products in the corporate and retail markets. In addition to the
reductions in the Company's sales force, outside services particular to the
retail market, such as retail site visits and product display, were also
discontinued. The cost reduction related to these services amounted to
approximately $354,000, or 96%, of the amount incurred during the same period
last year. Advertising and promotion expense decreased $1,843,000, or 89%, to
$237,000 compared to $2,080,000 in the prior year. This decrease is due to the
reduction in costs associated with in-store hardware product positioning and
advertising in the retail channel. Other costs, including facilities and related
costs, recruiting and training materials costs associated with the combined
corporate and retail hardware effort decreased $224,000, or 18%, compared to the
prior year.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 were $1,889,000, a decrease of $814,000, or
31%, compared to $2,663,000 in the prior year. Salaries and related expenses
decreased $184,000 to $570,000 from $754,000 during 1997. The decrease in
salaries and related expenses resulted from a decrease in the number of
personnel. Professional services including legal, accounting, and investor
16
relations expenses decreased approximately $479,000 during the year ended
December 31, 1998 to $727,000 from $1,206,000 during the same twelve month
period last year. The decrease is due primarily to the reduction in the number
of registration statements filed with the SEC in 1998 related to financings
compared to 1997, and the shift of investor relations activities from outside
services to internal personnel. Other costs including insurance, telephone,
recruiting, and miscellaneous expenses decreased $151,000 to $551,000 from
$702,000 during the prior year. The reduction in other costs is due primarily to
the reduction in personnel, the number of recruiting efforts, and directors and
officers insurance costs.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense), net was an income amount of $147,000 in 1998 compared to an
expense of $322,000 in 1997. This change is due to a one-time, non-cash charge
of $484,000 in 1997 for 300,000 warrants issued on March 28, 1997, and effective
as of December 31, 1996, to holders of 100% of the then issued and outstanding
shares of Series A Preferred Stock in exchange for the execution of a waiver to
certain provisions of the registration rights agreement entered into in
connection with the private placement of the Series A Preferred Stock in
December 1996. See Note 5 in the Consolidated Financial Statements.
Interest Expense. Interest expense decreased in 1998 compared to the prior
year due to the final payment in February 1997 of the pre-petition liabilities,
the repayment in January 1998 of the amounts outstanding at December 31, 1997
under the accounts receivable financing agreement, and the repayment in June
1998 of the note outstanding at December 31, 1997 for the purchase of equipment.
Embedded Yield on Preferred Stock. The embedded yield on preferred stock
results from the discount feature provided on the conversion price of the Series
A Preferred Stock into Common Stock. The embedded yield totaling $4,376,000 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date on which the Series A Preferred Stock first became convertible.
Preferred Stock Dividends. Preferred stock dividends relate to cumulative
dividends of $1.25 per share, per annum, compounded semi-annually or quarterly,
respectively, whether or not declared, on the Series A and Series B Preferred
Stock. All of the shares of the Company's Series A and Series B Preferred Stock
were converted into Common Stock in November 1998 resulting in a decrease from
the amounts recorded in 1997.
Years Ended December 31, 1997 and December 31, 1996
Revenues. The Company's product sales for the year ended December 31, 1997
increased $1,655,000, or 104%, to $3,246,000 from $1,591,000 for the prior year.
The increase was due to increased sales with respect to the hardware and
software components involved in the systems integration activities of the Joint
Venture ($1,475,000 for 1997 compared to $1,273,000 for 1996), and increases in
sales of the Company's Handwriter(R) product ($1,858,000 in 1997 compared to
$345,000 in 1996). This increase in Handwriter(R) product revenue resulted from
the Company's sales primarily through the retail market. Though significant, the
increase in retail sales was materially less than management's expectations and
the Company changed its strategy during 1998 by licensing the software
technologies used in Handwriter(R) products to third parties.
Revenues from license and royalty fees for the year ended December 31, 1997
increased by $1,026,000, or 126%, to $1,842,000 from $816,000 for the prior
year. The increase was primarily attributable to the recognition of
approximately $1,424,000 (compared to $412,000 in the prior year) of previously
deferred royalty revenues that were recognized on agreements for which the
Company had no further obligations to deliver additional software or services.
Revenues from development contracts for 1997 decreased 11% to $428,000 from
$480,000 for the prior year due primarily to reductions in non-recurring
engineering revenues. The majority of revenues from development contracts are
attributable to grants awarded by the National Institute of Standards and
Technology and The National Science Foundation. Grant revenues increased
slightly to $253,000 in 1997 from $246,000 in 1996.
Cost of Sales. Cost of sales is comprised of costs from product sales,
license and royalty fees and development contracts. Cost of product sales in
1997 consisted primarily of cost of materials, approximately $1,236,000 of which
related to the hardware and software components involved in the systems
integration activities of the Joint Venture and
17
the remainder of which related to material and other costs of the Company's
Handwriter(R) product sales. Cost of product sales increased 188% to $5,458,000
from $1,894,000 in the prior year. In the fourth quarter of 1997, the Company
wrote down its Handwriter(R) products finished goods inventory by approximately
$1,600,000 due to the pending withdrawal of its Handwriter(R) product from the
retail market in the first quarter of 1998. In addition, the Company charged
approximately $300,000 to product cost of sales in the fourth quarter of 1997,
related to non-cancelable manufacturing license agreements entered into in 1997.
License and royalty costs decreased by approximately $50,000, or 27%, to
$132,000 in 1997 from $182,000 in 1996. This decrease in license and royalty
costs related primarily to decreases in capitalized software amortization offset
by increases in personnel and related costs associated with software product
maintenance. Costs incurred in connection with development contracts revenue are
expensed as incurred and decreased 23% in 1997 compared to the prior year,
commensurate with the reduction in development contracts revenue in the same
period.
Gross Margin. The gross margin declined 176% to a negative margin of
$347,000 in 1997 compared to a positive margin of $456,000 in the prior year.
This decrease was primarily due to the write-offs of Handwriter(R) inventory and
non-cancelable manufacturing licenses as discussed above.
Research and Development Expenses. Research and development expenses
increased $688,000, or 41%, to $2,360,000 compared to $1,672,000 in the prior
year. Salaries and wages increased $356,000, or 29%, to $1,596,000 compared to
$1,240,000 during the prior year. This increase was due to additional staffing
required for the development of new products and the continued development of
the Chinese character recognition system. Outside engineering costs increased
$86,000, or 121%, to $157,000 compared to $71,000 in the prior year. This
increase was due to the development of a new pen for the Company's Handwriter(R)
products and enhancements to the digitizer used in the Handwriter(R) Manta
product. Other costs, including facilities and related expenses, increased
$246,000, or 68%, to $607,000 from $361,000 in the prior year. This increase was
due to the increase in staffing required to accommodate the Company's
development programs.
Sales and Marketing Expenses. Sales and marketing expenses increased 91% to
$6,257,000 in 1997 compared to $3,282,000 in the prior year. Salaries, wages and
related costs increased by $850,000, or 58%, to $2,303,000 compared to
$1,453,000 in the prior year, due to increased staffing as the Company pursued
sales efforts in the corporate and retail markets. Travel and related expenses
increased by $72,000, or 18%, to $478,000 compared to $406,000 in the prior
year. This increase was due to the geographic locations and number of corporate
and retail sites serviced by the Company's sales force. In addition to the
Company's sales force, outside services particular to the retail market such as
retail site visits and product display, were used to augment the retail site
visits. The cost of these services increased consulting service expenses by
$93,000, or 32%, to $379,000 compared to $286,000 in the prior year. Advertising
and promotion expense increased $1,362,000, or 178%, to $2,128,000 compared to
$766,000 in the same period in the prior year. This increase was due to the
costs associated with in-store product positioning and advertising in the retail
channel. Other costs (including facilities and related costs, recruiting and
training materials costs) associated with the combined corporate and retail
effort increased $599,000, or 162%, over the prior year.
General and Administrative Expenses. General and administrative expenses
increased $626,000, or 31%, to $2,663,000 compared to $2,037,000 in the prior
year. Professional services increased $345,000, or 295%, to $462,000 compared to
$117,000 in the prior year. This increase was due to services rendered by a
management consulting firm related to a study of the Company's overall method of
operations and allocation of personnel in various capacities within the
organization. Legal fees increased $200,000, or 124%, to $362,000 compared to
$162,000 in the prior year. This increase was primarily due to expenses incurred
with respect to registration statements filed with the SEC during the year
related to prior financings and registration rights agreements. Other costs,
including travel and related expenses, recruiting and facilities allocations,
increased by $206,000, or 21%, to $1,180,000 compared to $974,000 in the prior
year. This increase was primarily due to costs incurred in recruiting a new
President and COO and an increase in investor relations services. These
increases were offset by a decrease in salaries and related costs of $126,000,
or 16%, to $658,000 compared to $784,000 in the prior year. This decrease
resulted from the transfer of personnel to other departments in support of the
marketing efforts.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense), net was an expense of $322,000 in 1997 compared to an income
amount of $278,000 in 1996, due to a one-time, non-cash
18
charge of $484,000 for 300,000 warrants issued on March 28, 1997, and effective
as of December 31, 1996, to holders of 100% of the then issued and outstanding
Series A Preferred Stock in exchange for the execution of a waiver to certain
provisions of the registration rights agreement entered into in connection with
the private placement of the Series A Preferred Stock in December 1996. See Note
5 to the Consolidated Financial Statements.
Interest Expense.
Interest expense decreased in 1997 compared to the prior year due to the
final payment in February 1997 of the pre-petition liabilities.
Embedded Yield on Preferred Stock. The embedded yield on preferred stock
results from the discount feature provided on the conversion price of the Series
A Preferred Stock into Common Stock. The embedded yield totaling $4,376,000 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date on which the Series A Preferred Stock first became convertible.
Preferred Stock Dividends.
Preferred stock dividends in 1997 relate to cumulative dividends of $1.25
per share, per annum, compounded semi-annually or quarterly, respectively,
whether or not declared, on the Series A and Series B Preferred Stock. There
were no such dividends in 1996.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1998 totaled $795,000 compared to
cash and cash equivalents of $5,485,000 at December 31, 1997. This decrease was
primarily attributable to the $4,591,000 of cash used in operations, the $20,000
of cash used in investing activities and the $79,000 of cash used in financing
activities. In 1998, the effect of exchange rate changes on cash was immaterial.
At December 31, 1998, current liabilities, which include deferred revenue,
were $2,022,000. Deferred revenue, totaling $651,000 at December 31, 1998,
primarily reflects advance non-recurring engineering and royalty fees received
from the Company's licensees which are generally recognized as revenue by the
Company in the period in which the engineering work is done or the licensees
report that products incorporating the Company's software have been shipped or
when no significant obligation to provide additional software or services
exists.
As of December 31, 1998, the Company's principal source of liquidity was
its cash and cash equivalents of $795,000. In each year since its inception, the
Company has incurred losses. Although there can be no assurance, the Company
anticipates that 1999 revenues will be significantly greater than 1998 revenues.
Accordingly, 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 flows from sales, or if expenditures required
to achieve the Company's plans are greater than expected, the Company may need
to obtain additional funds or reduce discretionary spending. There can be no
assurance that additional funds will be available when needed, or if available
will be on favorable terms or in the amounts required by the Company. If
adequate funds are not available when needed, the Company may be required to
delay, scale back or eliminate some or all of its operations, which could have a
material adverse effect on the Company's business, results of operations and
prospects.
Joint Venture in the People's Republic of China. The Company currently owns
90% of a joint venture with the Ministry of Electronic Industries of the Jiangsu
Province, a provincial agency of the People's Republic of China (the "Agency").
In June 1998, the registered capital of the Joint Venture was reduced from
$10,000,000 to $2,550,000. As of December 31, 1998, the Company had contributed
an aggregate of $1,800,000 in cash to the Joint Venture and provided it with
non-exclusive licenses to technologies and certain distribution rights and the
Agency had contributed certain land use rights. Following the reduction in
registered capital of the Joint Venture, neither the Company nor the Agency are
required to make further contributions to the Joint Venture. Prior to the
reduction in the amount of registered capital, the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered capital, the Joint Venture's business license has been
renewed through October 18, 2043. The Company's investment in the Joint Venture
is subject to risks of doing business abroad, including fluctuations in the
value of currencies, export duties, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, longer payment
cycles, greater difficulty in accounts receivable collections, burdens of
complying with foreign laws and political and economic instability.
19
Preferred Stock Financings. The Company's authorized shares of preferred
stock may be issued in one or more series, and shares of each series will have
the rights and preferences as determined by the Board of Directors in
authorizing the issuance of that particular series. In designating any series of
preferred stock, the Board of Directors may, without further action by holders
of Common Stock, determine the number of shares constituting that series, the
dividend rights or rates, conversion rights, voting rights (which may be greater
or lesser than the voting rights of the holders of the Common Stock), rights and
terms of redemption (including any sinking fund provisions) and liquidation
preferences of such series. Holders of any series of preferred stock may have
priority claims to dividends and distributions upon liquidation of the Company
and other preferences over the holders of the Common Stock.
In December 1996, the Company completed a private placement of 450,000
shares of redeemable convertible preferred stock (the "December 1996 Private
Placement") at $25.00 per share to certain institutional and other investors. Of
the aggregate 450,000 shares sold, 70,200 shares of redeemable convertible
preferred stock were issued in exchange for 390,000 shares of Common Stock,
originally issued in an earlier private placement. The net proceeds to the
Company from the remaining 379,800 shares of redeemable convertible preferred
stock sold were approximately $7,662,000, net of cash issuance costs of
$1,100,000 and $733,000 of value ascribed to 337,500 warrants to purchase Common
Stock issued to the placement agent. The warrants expire five years from the
date of issuance and have an exercise price of $2.50 per share, subject to
adjustment for anti-dilution. The fair value ascribed to the warrants was
estimated on the date of issuance using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 6.07%; expected life of 5
years; expected volatility of 104%; and expected dividend yield of 0%. See Note
5 to the Company's Consolidated Financial Statements.
On November 26, 1997, the Company completed a private placement of 240,000
shares of Series B Preferred Stock (the "November 1997 Private Placement") at
$25.00 per share to certain investors. The net proceeds to the Company from the
240,000 shares of Series B Preferred Stock sold was approximately $5,859,000,
net of cash issuance costs of $141,000.
As of November 19,1998 all shares of Series A Preferred Stock and Series B
Preferred Stock had been converted into shares of Common Stock.
Accounts Receivable Financing. In October 1997, the Company entered into an
accounts receivable financing agreement whereby the Company has the ability to
factor its accounts receivable in accordance with the terms of the agreement.
The maximum credit that is available to the Company under the agreement was
$1,500,000, with an advance rate of 80% of the eligible accounts receivable
which are less than 90 days old. The term of the agreement is twelve months with
annual renewals and was renewed in October 1998 through October 1999. A
financing fee of 2.1% per month applies to the outstanding balance based on the
face value of each invoice. The line of credit is secured by a blanket first
priority lien on all Company assets with the exception of its intellectual
property. As of December 31, 1997, the Company had financed approximately
$425,000 of accounts receivable under the agreement. The amounts financed on
accounts receivable at December 31, 1997 were repaid in January 1998, and there
are no amounts currently outstanding. It is unlikely that the Company will
finance additional accounts receivable under this agreement due to the Company's
cessation of the sale of hardware products in the retail market.
Operating Lease Commitments. The Company leases facilities in the United
States and China. The Company's rental expense for the year ended December 31,
1998 was approximately $420,000. Sublease income was approximately $188,000 for
the year ended December 31, 1998. Future minimum lease payments under
non-cancelable operating leases are expected to be approximately $603,000,
$620,000, and $558,000, excluding sub-lease income, for the years ending
December 31, 1999, 2000, and 2001, respectively. The Company's rent expense is
expected to be reduced by approximately $129,000 in 1999 in connection with the
subleases.
Year 2000
Year 2000 issues arise because most computer systems and programs were
designed to handle only a two-digit date code for the year, not a four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and programs, resulting in the incorrect processing of data. CIC's
software products as developed
20
and distributed by CIC are not date sensitive and therefore Year 2000 issues are
not applicable to such products. The Company has evaluated its internal software
programs and equipment to ascertain the readiness of computer software and
operating systems for the Year 2000. Management of the Company believes that its
internal software programs are Year 2000 compliant. The Company is currently in
the process of replacing older desktop PC's which are not, nor cannot be
upgraded to be, Year 2000 compliant. The replacement of such older computer
equipment will be completed by April 30, 1999. The cost of replacing these
desktop systems is not expected to be significant The Company is not aware of
any other problems.
The Company is in the process of analyzing the readiness of the third
parties with which it does business. The Company believes that the only
potentially significant Year 2000 problems it may experience will result from
Year 2000 issues affecting its website or its banks. The Company generates a
significant percentage of revenues from sales made via its website. If the
Company's website were to go off-line for an extended period of time, income
would be significantly impacted until service was restored. The Company has
received assurances that its website is Year 2000 compliant, however, it has not
received any information regarding the phone carrier that links the website
server to the internet. The Company believes that it is not possible to develop
a contingency plan at this time for dealing with the potential effects of such
an event. If banking systems were to fail due to Year 2000 problems, the Company
may be cut off from access to some of its funds for a period of time. The
Company maintains its cash with various financial institutions so that an
incident at any one bank would not have a severe impact on the Company's cash
availability.
Volatility of Stock Price
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to, among other factors, quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Item 8. Financial Statements and Supplementary Data
The Company's audited consolidated financial statements for the years ended
December 31, 1998, 1997 and 1996 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
21
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the current1
directors and executive officers of the Company as of March 29, 1999:
Year First
Elected
Name Age Positions Currently Held or Appointed
Guido DiGregorio 60 President, Chief Operating Officer 1997
and Director
Philip S. Sassower 59 Chairman of the Board, and Secretary 1998
Chairman of the Executive Committee 1997
Chairman of the Finance Committee 1995
Director 1994
Jess M. Ravich 41 Director 1998
Jeffrey Steiner 61 Director 1998
C.B. Sung 74 Director 1986
1 James Dao's term as Co-Chief Executive Officer ended on June 1, 1998, and
resigned as a director as of February 1, 1999. Michael Braun was elected as a
director of the Company in June 1998 and resigned in October 1998.
The business experience of each of the above directors for at least the
past five years includes the following:
Guido DiGregorio was appointed as President and Chief Operating Officer and
a Director of the Company in November 1997. He was a partner in DH Partners,
Inc. (a management consultant) from 1996 to 1997. Prior to that, Mr. DiGregorio
was recruited by a number of companies to reverse a trend of financial losses,
serving as President and CEO of each of the following companies: Display
Technologies, Inc. (a manufacturer of video data monitors) from 1994 to 1996,
Superior Engineering Corp. (a producer of factory-built gas fireplaces) from
1991 to 1993, Proxim, Inc. (wireless data communications) from 1989 to 1991,
Maxitrom Corp. (a manufacturer of computer products) from 1986 to 1989 and Exide
Electronics (producer of computer power conditioning products) from 1983 to
1986. From 1966 to 1983, Mr. DiGregorio was employed by General Electric in
various management positions, rising to the position of General Manager of an
industrial automation business.
Philip S. Sassower has been Chairman of the Board and Secretary of the
Company since 1998, Chairman of the Company's Executive Committee since 1997,
and Chairman of the Finance Committee since 1995. From 1997 to 1998 Mr. Sassower
served as Co-Chief Executive Officer of the Company. Mr. Sassower joined the
Company's Board of Directors in 1994. Since its founding in 1996, Mr. Sassower
has been the CEO of Phoenix Enterprises LLC, a company which assists in
restructuring and providing long-term capital to business enterprises. Mr.
Sassower was Chairman of the Board of Newpark Resources, Inc. (an oil field and
environmental services company) from 1987 to 1996 and was Chairman of the
Executive Committee from 1996 to 1997. Mr. Sassower is also a general partner of
CIC Standby Ventures, L.P. and Phoenix Searex Associates L.P., and was general
partner of S&S Newpark Ventures, L.P. and S&S Investments until 1995. Since 1993
Mr. Sassower has been the CEO of BP Acquisition LLC and the individual General
Partner or President of the corporate general partner of BP Restaurants LP. In
July 1998, BP Acquisition LLC and BP Restaurants LP filed petitions under
Chapter 11 of the United States Bankruptcy Code. Since 1997 Mr. Sassower has
been a director of SeaRex, Inc. (a developer and operator of lift boats used for
drilling in offshore waters).
Jess M. Ravich was elected as a Director of the Company in June 1998. Mr.
Ravich has been the Chairman and Chief Executive Officer of the U.S. Bancorp
Libra division of the U.S. Bancorp Investments, Inc., a securities broker dealer
("USBI") since January 1999. From June 1991 to January 1999, he was the Chairman
and Chief Executive Officer of Libra Investments, Inc. ("Libra"), a securities
broker dealer he founded, which merged with USBI in January 1999. Mr. Ravich
also is a director of Cherokee Inc., a licensor and marketer of trademarks and
tradenames.
22
Jeffrey Steiner was elected as a Director of the Company in June 1998. He
has been Chairman of the Board, Chief Executive Officer and a director of The
Fairchild Corporation (a company in the fields of aerospace and high technology)
since 1985 and has been President since 1991. He also serves as Chairman of the
Board, Chief Executive Officer and President of Banner Aerospace (distributor
and lessor of aircraft parts and engines) since September 1993 and as Chairman,
Chief Executive Officer and President of RHI Holdings, Inc. (a holding company
of The Fairchild Corporation) since 1988. From July 1992 through December 1993,
Mr. Steiner was a Vice Chairman of the Board of Rexnord Corporation. Mr. Steiner
was also Vice Chairman of Shared Technologies Fairchild until January 1998, when
that company was acquired by Intermedia. He currently serves as a director of
the Franklin Corporation and the Copley Fund.
C.B. Sung became a Director of the Company in 1986. Mr. Sung has been the
Chairman and Chief Executive Officer of Unison Group, Inc. (a multi-national
corporation involved in manufacturing, computer systems and software
development, international investment and trade) since 1986, and Unison Pacific
Corporation since 1976. He has been a member of the Board of Directors of
Capital Investment of Hawaii, Inc. (real estate, security investing, and
wholesale bakery) since 1985, and serves on the Board of Directors of several
private companies.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file certain reports
regarding ownership of, and transactions in, the Company's securities with the
Securities and Exchange Commission (the "SEC"). These officers, directors and
stockholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) reports that are filed with the SEC. Based solely on a
review of copies of such forms received by the Company, and written
representations received by the Company from certain reporting persons, the
Company believes that for the year ended December 31, 1998 all Section 16(a)
reports required to be filed by the Company's executive officers, directors and
10% stockholders were filed on a timely basis, except that Jeffrey Steiner filed
a Form 4 for the month of July three days late, and Jess Ravich, Guido
DiGregorio and Craig Hutchison did not file Forms 5 with respect to the year
ended December 31, 1998 on time.
23
Item 11. Executive Compensation
The following table sets forth compensation awarded to, earned by or paid
to the Company's President, regardless of the amount of compensation, and each
executive officer of the Company serving as of December 31, 1998 whose total
annual salary and bonus for 1998 exceeded $100,000 (collectively, the "Named
Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Securities
Other Annual Underlying
Name and Principal Position Year Salary Compensation Options
- --------------------------- ---- ------ ------------ -------
Guido DiGregorio(1)............... 1998 $ 180,000 - -
President and Chief 1997 22,375 - 600,000 (2)
Operating Officer
Philip S. Sassower................ 1998 $ 150,000(4) - 15,000 (5)
Chairman of the Board
and Secretary 1997 150,000(4) - -
1996 100,000(4) - -
James Dao(3)...................... 1998 $ 196,329 - -
Former Co-Chief Executive Officer 1997 213,811 $7,477(6) -
1996 199,700 7,305(6) -
- -----------
(1) In November 1997, Mr. DiGregorio was appointed as the Company's
President and Chief Operating Officer, and is currently paid a
salary at the annualrate of $180,000. See "Certain Relationships and
Related Transactions.
(2) Mr. DiGregorio surrendered these options on January 12, 1999 when he
received a new grant of 1,800,000 options.
(3) Mr. Dao's term as Co-Chief Executive Officer ended on June 1, 1998,
and he resigned as a director as of February 1, 1999.
(4) Represents the amount paid to Phoenix Enterprises LLC(`Phoenix"),
which is 100% owned by Mr. Sassower, pursuant to a consulting
agreement entered into in 1996 (See "Item 13. Certain Relationships
and Related Transactions" below). Mr. Sassower has not received a
salary for his services as an officer of the Company in the past. For
1999, $75.000 will be paid to Phoenix and $75,000 will be paid to Mr.
Sassower.
(5) Mr. Sassower received these options in his capacity as a Director of
the Company. See "Certain Relationships and Related Transactions.
(6) Includes the estimated economic benefit received by Mr. James Dao
related to a life insurance policy, the premiums of which were paid by
the Company ($5,857 for 1997 and $5,465 for 1996) and the cost of an
automobile lease.
24
Option Grants in 1998
The following table sets forth certain information concerning the grant of
stock options in 1998 to the Named Executive Officers.
Potential Realizable
Percentage of Value at Assumed
Annual
Total Options Rates of Stock Price
Granted to Appreciation
Options Employees in Exercise Expiration for Option Term(1)
Name Granted 1998 Price Date 5% 10%
- ---- ------- ---- -------- ---- ------------------
Guido DiGregorio... - - - - - -
Philip S.Sassower..15,000 1% $1.09 7/20/05 $5,561 $15,512
James Dao (2)...... - - - - - -
- -----------
(1) On July 20, 1998 (the date of grant), the closing sale price of the
Common Stock on the Nasdaq SmallCap Market was $1.09 per share. Assumes
that such closing price of the Common Stock appreciates in value from the
date of grant to the end of the option term at the annualized rates of 5%
and 10%, respectively.
(2) Mr. Dao's term as Co-Chief Executive Officer ended on June 1, 1998,
and he resigned as a director as of February 1, 1999. ceased to be an
officer of the Company as of June 1, 1998.
Aggregate Option Exercises in 1998 and Year-End Option Values
The following table sets forth certain information concerning the Named
Executive Officers with respect to the exercise of options in 1998, the number
of shares covered by exercisable and unexercisable stock options at December 31,
1998 and the aggregate value of exercisable and unexercisable "in-the-money"
options at December 31, 1998.
Number of Securities
Underlying Unexercised
Options at Fiscal Value of Unexercised
Shares Year-End In-The-Money Options
Acquired Exercisable(E)/ at Fiscal Year-End(1)
On Value Unexercisable(U) Exercisable(E)/
Name Exercise Realized Unexercisable(U)
Guido DiGregorio. - - 216,660(E)/ $-(E)/
383,340(U) -(U)
Philip S. Sassower. - - 175,000(E)/ $37,500(E)/
15,000(U) -(U)
James Dao (2)...... - - 1,320,000(E)/ $330,000(E)/
-(U) -(U)
- -----------
(1) Determined by using the difference between the closing sale price of
the Common Stock on the Nasdaq SmallCap Market as of December 31, 1998
and the exercise price of such options.
(2) Mr. Dao's term as Co-Chief Executive Officer ended on June 1, 1998,
and he resigned as a director as of February 1, 1999. ceased to be an
officer of the Company as of June 1, 1998.
25
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 29, 1999 with
respect to the beneficial ownership of (i) any person known to be the beneficial
owner of more than 5% of any class of voting securities of the Company, (ii)
each director of the Company, (iii) each of the current executive officers of
the Company named in the Summary Compensation Table of this Proxy Statement
under the heading "Executive Compensation" and (iv) all directors and executive
officers of the Company as a group.
Common Stock
Name Number Percent
of Beneficial Owner of Shares of Class
Philip Sassower(1)....................... 11,688,519 14.7
CIC Standby Ventures, L.P.(2)............ 9,000,000 11.3
Guido DiGregorio(3)...................... 150,000 *
C. B. Sung(4)............................ 618,823 *
Jeffrey Steiner(5)....................... 50,000 *
Jess M. Ravich(6)........................ 1,428,773 1.8
All directors and executive officers
as a group (5 persons)................... 16,242,085 19.8
- -----------
* Less than 1%.
(1) The number of shares of Common Stock includes (a) 1,025,253 shares held
by Mr. Sassower, (b) 9,000,000 shares held by CIC Standby Ventures, L.P.,
a Delaware limited partnership of which Mr. Sassower is the sole general
partner ("Standby Ventures"), as reflected in the table, (c) 113,251
shares beneficially owned by the Philip S. Sassower 1996 Grantor Retained
Annuity Trust and 72,804 shares beneficially owned by the Philip S.
Sassower 1998 CIC Standby Ventures, L.P. Grantor Retained Annuity Trust
(together, the "Grantor Trusts"), two trusts in which Mr. Sassower is the
sole trustee, (d) 1,178,515 shares held by the Philip S. Sassower 1996
Charitable Remainder Annuity Trust (the "1996 CRAT"), of which Mr.
Sassower and his wife are co-trustees, (e) 63,000 shares held by the
Susan O. Sassower Trust (the "Spouse's Trust"), of which Mr. Sassower and
his wife are co-trustees, and (f) 308,500 shares issuable upon the
exercise of stock options held by Mr. Sassower which are exercisable
within 60 days of March 31, 1999. Mr. Sassower may be deemed to
beneficially own the shares of Common Stock held by Standby Ventures, the
Grantor Trusts, the 1996 CRAT and the Spouse's Trust. The number excludes
shares owned, directly or indirectly, by Mr. Sassower's wife, Susan O.
Sassower. Mr. Sassower disclaims beneficial ownership of the shares owned
by his wife. The business address of Mr. Sassower is Phoenix Enterprises
LLC, 135 East 57th Street, 12th Floor, New York, New York 10022. Mr.
Sassower is the Chairman of the Board and Secretary of the Company, as
well as Chairman of the Executive and Finance Committees of the Company's
Board of Directors.
(2) Mr. Sassower is the sole general partner of Standby Ventures and may be
deemed to beneficially own the shares of Common Stock held by Standby
Ventures. The business address of Standby Ventures is c/o WinSass
Corporate Services LLC, 314 West Main, Suites 3&5, Lewisville, Texas
75057.
(3) Represents 150,000 shares of Common Stock issuable upon the exercise of
stock options which are exercisable within 60 days of March 31, 1999. The
business address of Mr. DiGregorio is 275 Shoreline Drive, Suite 500,
Redwood Shores, California 94065.
(4) Includes (a) 363,717 shares held by the Sung Family Trust of which Mr.
Sung is a trustee, (b) 10,106 shares held by the Sung-Kwok Foundation of
which Mr. Sung is the Chairman and (c) 245,000 shares of Common Stock
issuable upon the exercise of stock options or warrants which are
exercisable within 60 days of March 31, 1999. Mr. Sung may be deemed to
beneficially own the shares held by the Sung Family Trust and the
Sung-Kwok Foundation. The business address of Mr. Sung is c/o Sandy
Williams, UNISON Group, 651 Gateway Boulevard, #880, South San Francisco,
California 94080.
26
(5) The number of shares of Common Stock represents 50,000 shares issuable
upon the exercise of options which are exercisable within 60 days of
March 31, 1999. Mr. Steiner's business address is c/o The Fairchild
Corporation, P.O. Box 10803, Chantilly, Virginia 20153.
(6) The number of shares of Common Stock includes (a) 1,187,890 shares held
by the Ravich Revocable Trust of 1989 (the "Ravich Trust"), of which Mr.
Ravich is the trustee, (b) 190,883 shares issuable upon the exercise of
warrants which are exercisable within 60 days of March 31, 1999 held by
the Ravich Trust. (c) 50,000 shares issuable upon the exercise of options
which are exercisable within 60 days of March 31, 1999 held by Mr.
Ravich. Mr. Ravich is a Trustee of the Ravich Trust, and may be deemed to
beneficially own the shares held by or issuable to the Ravich Trust. Mr.
Ravich's business address is U.S. Bancorp Investments, Inc., 11766
Wilshire Blvd., Suite 870, Los Angeles, California 90025.
Item 13. Certain Relationships and Related Transactions
Directors, and Executive Officers. In January 1996, the Company retained
Mr. Philip Sassower, then member of the Board of Directors and Chairman of the
Finance Committee, as a financial consultant for financial and investor
relations matters. Pursuant to such consulting arrangement, Phoenix Enterprises,
LLC,("Phoenix"), a company wholly-owned by Mr. Sassower, was paid an aggregate
of $100,000 in 1996 by the Company. In 1997, Mr. Sassower became Chairman of the
Company's Executive Committee and Co-Chief Executive Officer of the Company and
increased his time commitments to the Company. To compensate Mr. Sassower for
his additional time commitments and to reimburse him for certain office
expenses, the Company increased the consulting fees to be paid to Phoenix for
1997 to $150,000. In 1998, the office of Co-Chief Executive Officer was
abolished and Mr. Sassower became Chairman of the Board of Directors and
Secretary. Phoenix was paid a consulting fee of $150,000 for 1998. As of 1999,
$75,000 of the consulting fees will be paid to Phoenix and $75,000 will be paid
to Mr. Sassower, individually.
In April 1994, the Company loaned $210,000 to Mr. James Dao, then an
officer and director of the Company, pursuant to a promissory note due April
1,1996 which bore interest at the highest marginal rate applicable to the
Company's borrowing or the highest rate allowable by law, whichever was lower.
In 1996, the due date of the promissory note was extended to April 1, 1998. On
August 14, 1998, while Mr. Dao was still a director of the Company, the Company
entered into an agreement (the "Agreement") with Mr. Dao. Under the Agreement
the Mr. Dao will provide consulting services to the Company through December 15,
2001. In exchange for his services $110,000 of the note receivable be forgiven
on a monthly basis over the period commencing August 15, 1998 and ending
December 15, 2001. The remaining, $100,000 of the note receivable will be
forgiven on December 15, 2001 if Mr. Dao performs all the required services
under the Agreement. The Agreement will terminate on December 15, 2001. The
promissory note is secured by 103,450 shares of Common Stock owned by Mr. Dao.
On January 12, 1999, for services rendered, the Board of Directors
approved non-qualified stock option grants to Mr. Guido DiGregorio and Mr.
Philip Sassower to purchase 1,800,000 and 1,602,000 shares of common stock,
respectively,. The options price per share is $0.75 and the options will vest
over three years pro rata on a quarterly basis. In connection with this
issuance, Mr.DiGregorio surrendered the 600,000 options granted to him in 1997.
On January 27, 1999, the Board of Directors approved non-qualified stock
option grants to purchase 20,000 shares of the Company's common stock to Mr.
Ravich and Mr. Steiner. In addition Mr. Sung was granted options to purchase
10,000 shares of the Company's common stock. The options vest immediately and
have a seven year life. The option price on the date of grant was $1.03.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
Page
(a)(1) Financial Statements
Report of PricewaterhouseCoopers LLP, Independent Accountants. F-1
Consolidated Balance Sheets at
December 31, 1998 and 1997................................... F-2
Consolidated Statements of Operations for
the years ended December 31, 1998, 1997, and 1996............ F-3
Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996................. F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996.................. 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
28
(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).
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).
10.1 License Agreement effective July 1, 1990 between the Company and
NCR GmbH, incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 10 (File No. 0-19301).
10.2 Description of Termination Agreement with James Dao, incorporated
herein by reference to Exhibit 10.11 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
10.3 License Agreement dated October 1, 1991 between the Company and
Samsung Electronics Co., Ltd., incorporated herein by reference to
Exhibit 10.9 of the Company's Form S-1 dated December 23, 1991
(Registration No. 33-43879).
29
+10.4 License Agreement dated June 16, 1992 between the Company and NEC
Corporation, incorporated herein by reference to Exhibit 10.12 of
the Company's 1992 Form 10-K (File No. 0-19301)
+10.5 Licensing and Development Agreement for Use and Marketing of
Program Materials dated September 25, 1992 between the Company and
International Business Machines Corporation, incorporated herein
by reference to Exhibit 10.13 of the Company's 1992 Form 10-K
(File No. 0-19301)
+10.6 OEM License Agreement dated December 15, 1992 between the Company
and Seiko-Epson Corporation, incorporated herein by reference to
Exhibit 10.14 of the Company's 1992 Form 10-K (File No. 0-19301)
*10.7 OEM Agreement dated August 13, 1993 between CalComp, Inc. and
the Company, incorporated herein by reference to Exhibit 10.13
of the Company's 1993 Form 10-K (File No. 0-19301)
10.8 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)10.9Engagement Letter between the Company and Libra
Investments, Inc. dated November 2, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated November
28, 1995.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 Form of Registration Rights Agreement between the Company and the
Investors Listed on Schedule 1 thereto, incorporated herein by
reference to Exhibit 2 of the Company's Form 8-K dated December
31, 1996.
10.18 Form of Certificate of Designation of the Company with respect to
the 5% Cumulative Convertible Preferred Stock, incorporated herein
by reference to Exhibit 3 of the Company's Form 8-K dated December
31, 1996.
10.19 Waiver, dated March 26, 1997, effective December 31, 1996, by and
among the Company and the signatories thereto, incorporated herein
by reference to Exhibit 10.19 of the Company's 1996 Form 10-K
(File No. 0-19301).
10.20 Form of Subscription Agreement between the Company and each
subscriber, dated as of November 25, 1997, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K dated December
3, 1997.
10.21 Certificate of Designations of the Company with respect to the
Series B 5% Cumulative Convertible Preferred Stock, incorporated
herein by reference to Exhibit 10.2 of the Company's Form 8-K
dated November 13, 1997.
10.22 Form of Registration Rights Agreement, by and among the Company
and the signatories thereto, dated as of November 25, 1997,
incorporated herein by reference to Exhibit 10.3 to the Company's
Form 8-K dated November 13, 1997.
30
**10.23 Amendment to the Company's Certificate of Designation with respect
to the 5% Cumulative Convertible Preferred Stock dated June 12,
1998.
**10.24 Amendment to the Company's Amended and Restated Certificate of
Incorporation dated June 12, 1998.
**10.25 Agreement dated August 14, 1998 between James Dao and the Company.
++**10.26 Software Development and License Agreement dated December 4, 1998
between Ericsson Mobile Communications AB and the Company.
**21.1 Schedule of Subsidiaries.
**23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
**27.1 Financial Data Schedule.
- -----------
+ 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.
* .Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated
March 30, 1994, 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 Exchange Act of 1934.
31
20
Report of Independent Accountants
To the Board of Directors and Stockholders of
Communication Intelligence Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) and (2) of this Annual Report on Form 10-K
present fairly, in all material respects, the financial position of
Communication Intelligence Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 29, 1999
F-1
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
December 31,
---------------------------------
1998 1997
---------------------------------
Assets
Current assets:
Cash and cash equivalents................. $ 795 $ 5,485
Restricted cash........................... 250 -
Accounts receivable, net
of allowances of $174 and $46 at
December 31, 1998 and
1997, respectively....................... 1,146 362
Inventories............................... 74 193
Prepaid expenses and other
current assets........................... 103 175
--------------- ---------------
Total current assets................ 2,368 6,215
Note receivable from officer................ 200 210
Property and equipment, net................. 539 798
Other assets................................ 247 268
--------------- ---------------
Total assets........................ $ 3,354 $ 7,491
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................... $ 473 $ 1,059
Short-term debt........................... 145 490
Accrued compensation...................... 229 446
Other accrued liabilities................. 524 1,059
Deferred revenue.......................... 651 440
--------------- ---------------
Total current liabilities........... 2,022 3,494
Other liabilities........................... - 8
--------------- ---------------
2,022 3,502
--------------- ---------------
Commitments (Note 7)........................
Stockholders' equity:
Convertible preferred stock, $.01 par
value; 10,000 shares authorized;
none and 569 issued and outstanding
at December 31, 1998 and 1997 (Note 5)... - 6
Common stock, $.01 par value; 100,000
shares authorized; 78,459
and 47,430 shares issued and
outstanding at December 31, 1998
and 1997, respectively................... 785 474
Additional paid-in capital................ 70,205 69,955
Accumulated deficit....................... (69,504) (66,347)
Accumulated other comprehensive loss...... (154) (99)
--------------- ---------------
Total stockholders' equity (Note 5)......... 1,332 3,989
--------------- ---------------
Total liabilities and
stockholders' equity (Note 5).......... $ 3,354 $ 7,491
=============== ===============
See accompanying Notes to Consolidated Financial Statements
F-2
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Revenues:
Product.......................... $ 2,982 $ 3,246 $ 1,591
License and royalty.............. 1,300 1,842 816
Development contracts............ 298 428 480
-------------------------------------------
4,581 5,516 2,887
-------------------------------------------
Operating costs and expenses:
Cost of sales:
Product....................... 1,698 5,458 1,894
License and royalty........... 63 132 182
Development contracts......... 212 273 355
Research and development........ 1,989 2,360 1,672
Sales and marketing............. 2,015 6,257 3,282
General and administrative...... 1,889 2,663 2,037
-------------------------------------------
7,866 17,143 9,422
-------------------------------------------
Loss from operations................ (3,285) (11,627) (6,535)
Interest income and other income
(expense), net...................... 147 (322) 278
Interest expense.................... (19) (51) (99)
-------------------------------------------
Net loss............................ (3,157) (12,000) (6,356)
Embedded yield on preferred
stock (Note 5)...................... - (4,376) -
Preferred stock dividends (Note 5).. (435) (564) -
-------------------------------------------
Net loss available to
common stockholders................. $ (3,592) $(16,940) $ (6,356)
===========================================
Basic and diluted loss per
common share ...................... $ (0.06) $ (0.37) $ (0.15)
===========================================
Weighted average common shares..... 56,233 45,370 41,265
===========================================
See accompanying Notes to Consolidated Financial Statements
F-3
Communication Intelligence Corporation
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(In thousands)
Series Series
A B Accum.
Convertible Additional Accum. Other
Preferred Common Paid-In Deficit Comprehen.Comprehen
Stock Stock Stock Capital Loss Loss
Balances as of
December 31, 1995.. $ - $ - $ 400 $51,687 $(47,991) $ (86)
Exercise of options
for 1,403shares
of Common Stock..... - - 14 664 - -
Exercise of warrants
for 100shares
of Common Stock.... - - 1 49 - -
Issuance of 796
shares of Common Stock
to investors for cash,
net of issuance costs
of $292... - - 8 2,400 - -
Exchange of 390 shares
of CommonStock for 70
shares of redeemable
convertible
preferred stock.... - - (4) (1,751) - -
Issuance of warrants
to purchase
Common Stock in
connection with
the June and December
Private
Placements........... - - - 844 - -
Issuance of 100 options
to consultants
for services........ - - - 122 - -
Net loss............. - - - - (6,356) - $ (6,356)
Foreign currency
translationadjustment. - - - - - (83) (83)
----------
Comprehensive Loss $ (6,439)
-------------------------------------------- ==========
Balances as of
December 31, 1996.. - - 419 54,015 (54,347) (169)
Exercise of options
and warrants
for 3,092 shares
of Common Stock - - 31 135 - -
Issuance of 50 options
to consultants
for services........ - - - 75 - -
Conversion of redeemable
convertible
preferred stock
into 450 shares
of Series A
Preferred Stock...... 5 - - 9,412 - -
Issuance of warrants to
purchase 300 shares
of Common Stock in
connection with
the waiver of
redemption rights
on Series A
Preferred Stock.... - - - 484 - -
Conversion of 121 shares
of Series A Preferred
Stock into 2,437 shares
of Common Stock.... (1) - 24 (23) - -
Issuance of 240 Series B
Preferred Stock, net of
issuance costs of $141.. - 2 - 5,857 - -
Net loss.................. - - - - (12,000) - $(12,000)
Foreign currency translation
adjustment.............. - - - - - 70 70
---------
Comprehensive loss $(11,930)
-------------------------------------------- =========
Balances as of
December 31, 1997........ 4 2 474 69,955 (66,347) (99)
Conversion of 329 shares
of Series A
Preferred Stock into
18,598 shares of Common
Stock... (4) - 186 (182) - -
Conversion of 240 shares
of Series B
Preferred Stock into
11,384 shares of
Common Stock... - (2) 114 (112) - -
Exercise of options
for 1,126
shares of Common Stock. - - 11 511 - -
Accelerated vesting
of 40 options
to consultants for
services.............. - - - 33 - -
Net loss................ - - - - (3,157) - $ (3,157)
Foreign currency
translation adjustment.. - - - - - (55) (55)
---------
Comprehensive loss $ (3,212)
-------------------------------------------- =========
Balances as of
December 31, 1998.. $- $ - $ 785 $70,205 $(69,504)$(154)
=======================================================
See accompanying Notes to Consolidated Financial Statements
F-4
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Cash flows from operating activities
Net loss............................... $ (3,157) $ (12,000) $ (6,356)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization........ 327 347 353
Warrant issuance costs............... - 484 -
Equity securities issued for
services............................. 33 75 122
(Gain) loss on disposal of property
and equipment........................ ( 2) 32 -
Changes in operating assets
and liabilities:
Accounts receivable, net........... (784) 15 5
Inventories........................ 119 317 (284)
Prepaid expenses and other
current assets..................... 72 15 209
Other assets....................... (12) (32) 213
Accounts payable................... (586) 692 (67)
Pre-petition liabilities........... - (878) (766)
Accrued compensation............... (217) 107 57
Other accrued liabilities.......... (595) 623 (285)
Deferred revenue................... 211 (1,537) (564)
----------- ------------- -------------
Net cash used in operating activities.. (4,591) (11,740) (7,363)
----------- ------------- -------------
Cash flows from investing activities
Proceeds from sales and maturities
of short-term investments.............. - 8,782 14,276
Purchase of short-term investments..... - (8,035) (13,493)
Acquisition of property and equipment.. (45) (601) (358)
Proceeds from the sale of property
and equipment.......................... 25 - -
----------- ------------- -------------
Net cash provided by (used in)
investing activities................... (20) 146 425
----------- ------------- -------------
Cash flows from financing activities
Proceeds from issuance of short-term
debt.................................... 145 525 -
Restricted cash related to short-term
debt................................... (250) - -
Principal payments on short-term debt.. (490) (35) (30)
Principal payments on capital lease
obligations............................ ( 6) (11) (34)
Proceeds from issuance of redeemable
convertible preferred stock
and warrants, net of cash issuance
costs.................................. - - 8,395
Proceeds from issuance of Series B
Convertible Preferred Stock,
net of cash issuance costs............. - 5,859 -
Proceeds from exercise of
stock options.......................... 522 166 -
Proceeds from issuance of
common stock and warrants, net of cash
issuance costs....................... - - 3,247
----------- ------------- -------------
Net cash provided by (used in)
financing activities................... (79) 6,504 11,578
----------- ------------- -------------
Effect of exchange rate changes
on cash................................ - 2 9
Net increase (decrease) in cash
and cash equivalents.................... (4,690) (5,088) 4,649
Cash and cash equivalents at
beginning of year....................... 5,485 10,573 5,924
----------- ------------- -------------
Cash and cash equivalents at
end of year.............................$ 795 $ 5,485 $ 10,573
=========== ============= =============
See accompanying Notes to Consolidated Financial Statements
F-5
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies
The Company
Communication Intelligence Corporation (the "Company" or "CIC") develops
and markets natural pen-input computer interfaces and handwriting
recognition-based security technologies and products for the emerging markets
for pen-based computing and electronic commerce. 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 use of a pen. 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 majority-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, 1998, the Company incurred
aggregate losses of $43, and, at December 31, 1998, the Company's accumulated
deficit was approximately $69. The Company has primarily funded these losses
through the sale of debt and equity securities.
As of December 31, 1998, the Company's principal source of liquidity was
its cash and cash equivalents of $795. Although there can be no assurance, the
Company believes that its current resources, together with expected revenues,
will provide sufficient funds for planned operations for at least the next
twelve months. However, if the Company is unable to generate adequate cash flows
from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. Management believes that it will be able to reduce
discretionary spending if required.
Basis of Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles, and include the
accounts of CIC and its majority-owned Joint Venture in the People's Republic of
China. All inter-company accounts and transactions have been eliminated.
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)
Plan of Reorganization and Pre-Petition Liabilities
On July 18, 1994, the Company filed a voluntary petition for reorganization
and protection under Chapter 11 of the U. S. Bankruptcy Code in the United
States Bankruptcy Court, San Francisco District. The Joint Venture did not file
a petition for reorganization. On September 28, 1994, the Company filed a
Disclosure Statement and Plan of Reorganization (the "Plan") in the United
States Bankruptcy Court, San Francisco District. The Plan was approved by the
creditors on November 14, 1994, and the Company emerged from Chapter 11
protection on that date.
The Plan provided for the payment in full, in cash, of all allowed
unsecured claims of creditors while leaving secured creditors unimpaired by
providing for their payment in compliance with the original terms and conditions
of their loans. Unsecured creditors were paid in three approximately equal
installments in each of February 1995, 1996 and 1997. Pursuant to the Plan,
amounts outstanding after February 1995 accrued simple interest at 8% per annum
through February 1996 and 10% per annum thereafter through February 1997. The
Plan also approved certain warrant offerings and stock purchase agreements as
described in Note 5.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, restricted cash, and short-term debt, approximate fair
value due to their short maturities.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with a maturity at the
date of purchase of three months or less to be cash equivalents.
Short-term investments are classified as "available-for-sale." For all
periods presented, cost of investments approximated fair market value.
Unrealized gains and losses at December 31, 1997 and realized gains and losses
for the years ended December 31, 1997 and 1996 on such investments were not
material. The cost of securities sold is based on the specific identification
method. The Company had no short-term investments as of December 31, 1998 or
1997.
The Company's cash and cash equivalents at December 31, consist of the
following:
1998 1997
----------- -------------
Cash in bank.................................... $ 668 $ 1,160
Commercial paper................................ 125 2,330
Money markets................................... 2 1,004
Corporate debt securities....................... - 991
-------------------------
Cash and cash equivalents..................... $ 795 $ 5,485
=========================
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 ensure the safety of principal.
F-7
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
At December 31, 1998, the Joint Venture had approximately $724 in cash
accounts held by a financial institution in the People's Republic of China.
Approximately $250 of the Joint Venture's cash was held by a financial
institution as collateral at December 31, 1998 for an outstanding note, and is
restricted for such purpose as long as the note is outstanding. 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.
Two customers accounted for 46% and 24%, respectively, of accounts
receivable at December 31, 1998. One customer accounted for 24% of accounts
receivable at December 31, 1997.
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, 1998 and 1997, inventories consisted
of finished goods.
As of December 31, 1997 the Company believed that a significant portion of
its Handwriter(R) inventory would not be realized in the near term, and,
accordingly, the Company wrote down such inventory by approximately $1,600 at
December 31, 1997.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred.
Property and equipment, net at December 31, consists of the following:
1998 1997
------------ ------------
Machinery and equipment.................. $ 1,121 $ 2,160
Office furniture and fixtures............ 438 535
Leasehold improvements................... 84 99
Purchased software....................... 130 124
-------------------------
1,773 2,918
Less accumulated depreciation
and amortization......................... (1,234) (2,120)
-------------------------
$ 539 $ 798
=========================
Included in property and equipment as of December 31, 1998 and 1997 is $34
and $34, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $27 and $24 at December 31, 1998 and 1997,
respectively.
F-8
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever
circumstances or events indicate such assets might be impaired. The Company
would recognize an impairment reserve in the event the net book value of such
assets exceeded the future undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 1998.
Software Development Costs
The Company capitalizes software development costs upon the establishment
of technological feasibility, subject to net realizable value considerations.
Capitalization commences upon the completion of a working model and ends on
general product release. As of December 31, 1998 and 1997, such costs were
insignificant and are included as a component of "other assets" in the
accompanying consolidated balance sheets. Amortization expense related to
capitalized software development costs in 1998 amounted to $7. There was no
amortization expense related to capitalized software development costs in 1997.
Amortization expense, including amounts written down to net realizable value,
was approximately $98 for 1996.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted for transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes
Statement of Position No. 91-1, "Software Revenue Recognition." In March 1998,
the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4
defers, for one year, the application of certain passages in SOP 97-2 which
limit what is considered vendor-specific objective evidence necessary to
recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. In December 1998, the AICPA issued Statement of
Position No. 98-9 ("SOP 98-9") Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 extends the
effective date of SOP 98-4 and provides additional interpretative guidance. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue recognition
practices when adopted. Adoption of the remaining provisions of SOP 97-2 did not
have a material impact on revenue recognition during 1998.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided that no
significant obligations remain and the collection of the resulting receivable is
probable. The Company provides for estimated sales returns at the time of
shipment.
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)
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are recognized
as products are licensed/sold by licensees. Deferred revenue in the accompanying
balance sheets reflects non-recurring engineering fees and advance royalty fees
received from the Company's licensees in advance of revenue recognition.
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies. Revenue is
recognized in accordance with the terms of the grants and agreements, generally
when collection is probable and related costs have been incurred.
Three customers accounted for 27%, 16% and 15%, respectively, of revenues
in 1997. Two customers accounted for 11% and 10%, respectively, of revenues in
1996. No other customers accounted for greater than 10% of revenues in 1998,
1997 and 1996.
Research and Development
Research and development costs are charged to expense as incurred.
Net Loss Per Share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the disclosure of both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares and dilutive potential common shares outstanding. All prior year
earnings per share data have been restated to reflect the provisions of SFAS
128. Potential common shares, including outstanding convertible preferred stock,
stock options and warrants, have been excluded from the calculation of diluted
earnings per share for all periods presented as their effect is anti-dilutive.
Per share results of operations are reduced by the amortization of the
beneficial conversion rate on the Series A Preferred Stock and the cumulative
dividend requirements earned by the preferred stockholders.
Foreign Currency Translation
The Company considers the functional currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency financial statements are included as a component
of "accumulated other comprehensive loss" in the accompanying consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the end-of-period exchange rates except for non-monetary assets and
liabilities, which are translated at historical exchange rates. Revenues and
expenses are translated at the average exchange rates in effect during each
period except for those expenses related to balance sheet amounts which are
translated at historical exchange rates.
Net foreign currency transaction gains and losses are included in "interest
income and other income (expense), net" in the accompanying consolidated
statements of operations. The Company recorded a net foreign currency
transaction gain of $58, a loss of $101, and a gain of $59 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss and
credit carryforwards. A valuation allowance is provided against deferred tax
assets for which it is more likely than not that the asset will not be realized.
F-10
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
2. Chinese Joint Venture
The Company currently owns 90% of a joint venture with the Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of the
People's Republic of China (the "Agency"). In June 1998, the registered capital
of the Joint Venture was reduced from $10,000 to $2,550. As of December 31,
1998, the Company had contributed an aggregate of $1,800 in cash to the Joint
Venture and provided it with non-exclusive licenses to technologies and certain
distribution rights and the Agency had contributed certain land use rights.
Following the reduction in registered capital of the Joint Venture, neither the
Company nor the Agency are required to make further contributions to the Joint
Venture. Prior to the reduction in the amount of registered capital, the Joint
Venture was subject to the annual licensing requirements of the Chinese
government. Concurrent with the reduction in registered capital, the Joint
Venture's business license has been renewed through October 18, 2043.
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale.
The accumulated other comprehensive loss at December 31, 1998 and 1997
consisted of cumulative translation adjustments.
4. Debt
In June 1998, the Company's 90% owned Joint Venture borrowed the equivalent
of $145, denominated in Chinese currency, from a Chinese bank. The loan bears
interest at 9% and is due on June 30, 1999. The borrowings are secured by a
$250, US dollar denominated deposit held by the bank.
In May 1997, the Company purchased office furniture and a security system
with an approximate value of $209 from a third party. The Company paid $100 in
cash and signed an unsecured note for $109 due in monthly installments through
May 1998. The note bore interest on the unpaid balance at a rate of 10% per
annum. The note was paid in full in May 1998.
In October 1997, the Company entered into an accounts receivable financing
agreement whereby the Company may factor its accounts receivable in accordance
with the terms of the agreement. The maximum credit available to the Company
under the agreement is $1,500 with an advance rate of 80% of eligible accounts
receivable less than 90 days old. The term of the agreement is twelve months
with annual renewals. A financing fee of 2.1% per month applies to the
outstanding balance based on the face value of each invoice. The line of credit
is secured by a blanket first priority lien on all Company assets with the
exception of intellectual property. The amounts financed under the accounts
receivable financing agreement at December 31, 1997 were repaid in January 1998.
5. Stockholders' Equity
Private Placement
In June 1996, the Company completed a private placement (the "June Private
Placement") of 600 shares of the Company's Common Stock, at a price of $4.50 per
share to certain institutional and other investors (collectively, the
"Subscribers"). The net proceeds to the Company were approximately $2,408, net
of cash issuance costs of $181 and $111 of value ascribed to 30 warrants to
purchase Common Stock issued to the placement agent. The warrants expire
F-11
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
five years from the date of issuance and have an exercise price of $4.50 per
share, subject to adjustments for anti-dilution. The fair value ascribed to the
warrants was estimated on the date of issuance using the Black-Scholes pricing
model with the following assumptions: risk-free interest rate of 6.69%; expected
life of 5 years; expected volatility of 102%; and expected dividend yield of 0%.
The Company agreed to register the securities which were issued in conjunction
with the June Private Placement and which may be issued upon exercise of the
placements agent's warrants. The Registration Statement on Form S-3 filed by the
Company to effect the registration of these securities was declared effective on
December 24, 1996 (the "Effective Date").
Pursuant to the June Private Placement agreement, the Company agreed to
issue additional shares (the "Extra Shares") of its Common Stock to the
Subscribers if the average of the daily closing prices of the Company's Common
Stock for the twenty business days prior to two business days before the
Effective Date was less than $4.50 per share. In December 1996, the Company
issued 196 Extra Shares for no additional consideration to the Subscribers who
did not exchange the shares of Common Stock which they purchased in the June
Private Placement for the Company's Series A Preferred Stock (as defined below).
The Registration Statement on Form S-3 filed by the Company in connection with
the June Private Placement also effected the registration of the Extra Shares.
Convertible Preferred Stock
In December 1996, the Company completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A Preferred Stock") at $25.00 per share to certain institutional and
other investors. Of the aggregate 450 shares sold, 70 shares of Series A
Preferred Stock were issued in exchange for 390 shares of Common Stock
originally issued in the June Private Placement. The net proceeds to the Company
from the remaining 380 shares of Series A Preferred Stock sold were
approximately $7,662, net of cash issuance costs of $1,100 and $733 of value
ascribed to 338 warrants to purchase Common Stock issued to the placement agent.
The warrants expire five years from the date of issuance and have an exercise
price of $2.50 per share, subject to adjustment for anti-dilution. The fair
value ascribed to the warrants was estimated on the date of issuance using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 6.07%; expected life of 5 years; expected volatility of 104%; and
expected dividend yield of 0%.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding Series A Preferred Stock
executed a waiver to certain provisions of the Registration Rights Agreement
(the "Agreement") entered into in connection with the December Private
Placement. Under the waiver, these holders irrevocably waived any redemption
obligations of the Company with respect to the Series A Preferred Stock in
exchange for the issuance to such holders of warrants to purchase 300 shares of
the Company's Common Stock, allocated amongst the holders on a pro-rata basis.
The warrants expire five years from the date of issuance and have an exercise
price of $2.00 per share, subject to adjustment for anti-dilution. The Company
has ascribed a value of $484 to these warrants, which was recorded as an expense
in the Company's statement of operations during the first quarter of 1997. The
fair value ascribed to the warrants was estimated on the date of issuance using
the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 6.60%; expected life of 5 years; expected volatility of 104%;
and expected dividend yield of 0%. As a result of the aforementioned waiver, the
shares of Series A Preferred Stock which were classified as redeemable
securities at December 31, 1996 were reclassified as convertible preferred stock
at March 31, 1997 and, as such, were included in stockholders' equity at
December 31, 1997.
On November 26, 1997, the Company completed a private placement of 240
shares of Series B Preferred Stock (the "November Private Placement") at $25.00
per share to certain investors. The net proceeds to the Company from the sale of
the 240 shares of Series B Preferred Stock was approximately $5,859, net of cash
issuance costs of $141.
Optional and Automatic Conversion. All shares of Series A Preferred Stock
and Series B Preferred Stock were Converted in November 1998. Each share of
Series A Preferred Stock and Series B Preferred Stock was convertible by the
holder into shares of the Company's Common Stock at any time. In addition, all
outstanding Series A Preferred
F-12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Stock would have been automatically converted into shares of Common Stock on
December 31, 1999, subject to the satisfaction of certain conditions and events
by the Company, or later under certain circumstances. All outstanding shares of
Series B Preferred Stock would have been automatically converted into shares of
Common Stock on November 25, 2000, or at the Company's option, up to one year
later.
The number of shares of Common Stock to be issued upon conversion of the
Series A Preferred Stock was determined by dividing (i) the sum of $25.00
multiplied by the number of shares being converted, plus accrued and unpaid
dividends and any unpaid default payments thereon, by (ii) a conversion price
which was approximately 72% of the then applicable market price of the Company's
Common Stock (the "Conversion Price"). As a consequence, the effect of this
beneficial conversion rate, determined as being the difference between the
lowest possible conversion rate at December 31, 1996 and the fair value of the
Common Stock at that date, was deemed to be a benefit to the holders of the
Series A Preferred Stock earned over the period from issuance through July 1,
1997, the date on which the Series A Preferred Stock first became convertible.
This deemed benefit was recorded as "embedded yield on preferred stock" in the
1997 statement of operations.
The number of shares of Common Stock to be issued upon conversion of the
Series B Preferred Stock was determined by dividing (i) the sum of $25.00
multiplied by the number of shares being converted, plus accrued and unpaid
dividends and any unpaid default payments thereon, by (ii) a conversion price
equal to the lower of (a) the average market price of the Common Stock, or (b)
$1.59 per share. The average market price was the average of the daily closing
prices of the Common Stock for the three consecutive trading days prior to the
conversion date.
Dividends. Each holder of the shares of Series A Preferred Stock and Series
B Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually and quarterly, respectively, when payable
(whether or not declared). The dividends were payable in cash or additional
shares of preferred stock (with each additional share valued at $25.00 per
share) at the Company's option. Dividends would have been paid on the Series A
Preferred Stock and Series B Preferred Stock prior to any dividends being paid
on any other class of stock ranking junior thereto. If any cash dividend was
declared and paid in cash to the holders of the Series B Preferred Stock, then
the Company was obligated to give notice to the holders of the Series A
Preferred Stock of such fact, and the holders of the Series A Preferred Stock
had the right to elect to receive their next dividend payment in cash. No
dividends on Common Stock were declared or paid by the Board through December
31, 1998.
Common Stock Options
The Company adopted two stock option plans in 1991 (the 1991 Stock Option
Plan and the 1991 Non-discretionary Plan, collectively, the "1991 Plans").
Incentive and non-qualified options under the 1991 Plans may be granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans.
In conjunction with the approval of the Company's plan of reorganization,
the Company adopted the 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan
allows directors, officers and employees to be eligible for grants of incentive
and non-qualified stock options. In May 1997, the stockholders approved an
increase of 1,000 shares to the number of shares authorized for issuance under
the 1994 Plan. Accordingly, a total of 6,000 shares of Common Stock 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 generally vest over four years. For those options which vest over
four years, 20% of the total options
F-13
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
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 are generally
exercisable over a period not to exceed seven years.
In December 1994, for services rendered prior to and during the Company's
Chapter 11 proceedings, options to purchase 180 shares of Common Stock at $0.50
per share were granted to three directors of the Company under non-plan option
agreements. In addition, a non-plan option to purchase 100 shares of Common
Stock at $0.50 per share was granted on December 28, 1994 to a newly elected
director and Chairman of the Finance Committee. The newly elected director also
received an option, vesting one year from date of grant, to purchase 50 shares
of Common Stock at an exercise price of $0.50 per share pursuant to the
Company's 1991 Non-discretionary Plan. The non-plan options generally vest over
four years. For those non-plan options which vest over four years, 20% of the
total non-plan options granted vest on the first anniversary of the date of
grant and an additional 20%, 20%, and 40% of the total non-plan options granted
vest on the second, third, and fourth anniversaries of the date of grant,
respectively. Non-plan options are generally exercisable over a period not to
exceed seven years. As of December 31, 1998, 370 non-plan options were
outstanding with a weighted average exercise price of $0.50 per share. Of such
non-plan options, 370 were exercisable at December 31, 1998 with a weighted
average exercise price of $0.50 per share.
On June 1, 1994, the Company negotiated with employees to reduce their
salaries through August 31, 1994. Those employees who agreed to continue their
employment at the reduced wage were granted certain option rights to purchase
Common Stock (the "Options"). Options to purchase 2,210 shares of Common Stock
were granted at an average exercise price of $0.57 per share under this
arrangement, of which 377 Options were granted to officers under the 1991 Plans,
with the remaining Options granted outside of the plans. The Options were
immediately exercisable and have a term of seven years from the date of grant.
As of December 31, 1998, 914 Options had been exercised at a weighted average
exercise price of $0.48 per share and 552 Options with a weighted average
exercise price of $0.80 per share had been forfeited. The following table
summarizes information about the Options outstanding and exercisable at December
31, 1998 which were granted outside of the plans:
Weighted Average
Range of Exercise Prices Options Remaining
Outstanding and Contractual
Exercisable Life (Years) Exercise Price
$0.30 - $0.45........... 170 2.6 $0.34
$0.70 - $1.05........... 197 2.6 $0.75
---------
367
=========
F-14
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Information with respect to the Company's 1991 Plans and the 1994 Plan is
summarized below:
Year Ended December 31,
---------------------------------------------
1998 1997
---------------------- ----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------
Outstanding at beginning of period..6,016 $1.15 5,022 $0.98
Granted.............................1,021 $1.03 1,540 $1.66
Exercised........................... (804) $0.50 (295) $0.51
Forfeited...........................1,693) $1.62 (251) $1.63
====== =======
Outstanding at period end.......... 4,540 $1.06 6,016 $1.15
====== =======
Options exercisable at period end.. 3,243 $0.82 2,666 $0.79
======= =======
Weighted average grant-date
fair value of options granted
during the period..... $0.73 $1.29
======= =======
The following table summarizes information about stock options outstanding
under the 1991 Plans and the 1994 Plan at December 31, 1998:
Weighted Average
---------------------------------------
Remaining
Options Contractual Life
Range of Exercise Prices Outstanding (Years) Exercise Price
- --------------------------------------------------------------------------------
$0.50....................... 2,487 2.8 $0.50
$0.51 - $2.00............... 1,399 6.0 $1.25
$2.01 - $2.99............... 256 4.9 $2.48
$3.00....................... 398 4.6 $3.00
------------
4,540
============
The following table summarizes information about stock options exercisable
under the 1991 Plans and the 1994 Plan at December 31, 1998:
Weighted
Options Average
Range of Exercise Prices Exercisable Exercise Price
---------------- ------------------
$0.50....................... 2,456 $0.50
$0.51 - $2.00............... 522 $1.29
$2.01 - $2.99............... 80 $2.51
$3.00....................... 185 $3.00
----------------
3,243
================
F-15
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Fair Value Disclosures
Had compensation cost for the Company's option plans been determined based
on the fair value of the options at the date of grant, as prescribed by SFAS
123, the Company's net loss available to common stockholders and basic and
diluted net loss per share available to common stockholders for the year ended
December 31, would have been as follows:
1998 1997 1996
------------ ---------- -------------
Net loss available to common stockholders:
As reported............................. $ (3,157) $(16,940) $ (6,356)
Pro forma............................... $ (4,863) $(18,024) $ (6,840)
Basic and diluted net loss per share
available to common stockholders:
As reported............................. $ (0.06) $ (0.37) $ (0.15)
Pro forma............................... $ (0.09) $ (0.40) $ (0.17)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods: risk-free interest
rate of 4.5% for 1998, 6.2% for 1997 and 6.6 % for 1996; an expected life of 4
years, 5 years and 4 years for 1998, 1997 and 1996, respectively; expected
volatility of 100% for all periods and dividend yield of 0% for all periods.
Because options generally vest over four years and the Company expects to
make additional option grants each year, the Company believes the above pro
forma disclosures are not representative of the pro forma effects on reported
results of operations to be expected in future periods.
Warrants
In September 1994, in connection with a $1,000 bridge loan provided to the
Company by an investor (who became a director), the Company granted to the
investor warrants to purchase 2,000 shares of Common Stock at an exercise price
of $0.50 per share. In January 1997, the Company issued approximately 1,686
shares of Common Stock in connection with the net exercise of the warrants by
the investor's assignee. In June 1995, the Company entered into a financing
agreement with the investor providing for loans to the Company of up to $2,500.
Upon signing the agreement, the Company issued to the investor 625 warrants to
purchase Common Stock, and, in each month in which the loan was available, the
Company was obligated to issue to the investor 156 warrants to purchase shares
of Common Stock. Under the financing agreement, a total of 1,563 warrants to
purchase Common Stock were issued to the investor at an exercise price of $1.00
per share. In January 1997, the Company issued approximately 1,073 shares of
Common Stock in connection with the investor's net exercise of the
aforementioned warrants.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the then issued and outstanding shares of Series A
Preferred Stock executed a waiver to certain provisions of the registration
rights agreement (the "Agreement") entered into in connection with the December
Private Placement. Under the waiver, these holders irrevocably waived any
redemption obligation of the Company with respect to its Series A Preferred
Stock in exchange for the issuance to the holders of warrants to purchase the
300 shares of the Company's Common Stock, allocated amongst the holders on a
pro-rata basis. The warrants expire five years from the date of issuance and
have an exercise price of $2.00 per share, subject to adjustment for
anti-dilution. The Company has ascribed a value of $484 to these warrants, which
was recorded as an expense in the Company's statement of operations during the
first quarter of 1997. The fair value ascribed to the warrants was estimated on
the date of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 6.60%; expected life of 5 years;
expected volatility of 104%; and expected dividend yield of 0%. As a result of
the aforementioned waiver, the shares of Series A Preferred
F-16
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' Equity (continued)
Stock, which were classified as redeemable securities at December 31, 1996, were
reclassified as convertible preferred stock at March 31, 1997 and, as such, are
included in stockholders' equity at December 31, 1997.
Warrants to purchase a total of 905 shares of Common Stock were outstanding
as of December 31, 1998, and have a weighted average remaining contractual life
of 2.8 years and a weighted average exercise price of $2.27 per share.
As of December 31, 1998, 6,182 shares of Common Stock were reserved for
issuance upon exercise of outstanding options and warrants.
6. Related Party Transactions
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the Company's
Common Stock, bearing interest at the lesser of the highest marginal rate per
annum applicable to the Company's borrowings or the highest rate allowable by
law (10% per annum at December 31, 1997).
On August 14, 1998, the Company entered into an employment agreement (the
"Employment Agreement") with the aforementioned former officer. Under the
Employment Agreement the former officer will provide consulting services to the
Company through December 15, 2001. In exchange for these services, $110,000 of
the note receivable from the officer shall be forgiven on a monthly basis over
the period commencing August 15, 1998 and ending December 15, 2001. The
remaining, $100,000 of the note receivable from the officer will be forgiven on
December 15, 2001 if the officer has performed all the required services under
the Agreement. The Agreement will terminate on December 15, 2001.
A director of the Company received consulting fees of $150 in 1998 and
1997, including fees for office expenses. The Company paid the same director
$100 in consulting fees in 1996.
7. Commitments
Operating Lease Commitments
The Company currently leases its principal facilities (the "Principal
Offices) in Redwood Shores, California, pursuant to a sublease that expires in
2001. In addition, the Company subleases to third parties certain space near the
Principal Offices under subleases that expire in 1999. The Joint Venture leases
approximately 1,000 square feet in Nanjing, China. In addition to monthly rent,
the U.S. facilities are subject to additional rental payments for utilities and
other costs above the base amount. Facilities rent expense was approximately
$420, $892, and $346 in 1998, 1997, and 1996, respectively. Sublease income was
approximately $128 and $188 for the years ended December 31, 1998 and 1997,
respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $603, $620, and $558 for the years ending December 31, 1999, 2000,
and 2001, respectively. The Company's rent expense is expected to be reduced by
approximately $129 in 1999 in connection with the subleases described above.
Future minimum payments required under capital leases, which expire in 1999, are
insignificant at December 31, 1998.
F-17
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
8. Income Taxes
As of December 31, 1998, the Company had federal net operating loss
carryforwards available to reduce taxable income through 2012 of approximately
$47,700. The Company also had federal research and investment tax credit
carryforwards of approximately $430 which expire at various dates through 2010.
Deferred tax assets and liabilities at December 31, consist of the
following:
1998 1997
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards......... $ 16,210 $ 15,459
Credit carryforwards..................... 430 323
Deferred income.......................... 221 149
Other, net............................... 877 1,142
-------------- -------------
Total deferred tax assets...................... 17,740 17,073
-------------- -------------
17,740 17,073
Valuation allowance............................ (17,740) (17,073)
-------------- -------------
Net deferred tax assets........................ $ - $ -
============== =============
A full valuation allowance has been established for the Company's net
deferred tax assets since the realization of such assets through the generation
of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating losses and tax credit carryforwards may be impaired or limited in
certain circumstances. These circumstances include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a three
year period. During 1997, the Company experienced stock ownership changes which
could limit the utilization of its net operating loss and research and
investment tax credit carryforwards in future periods.
9. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments and was required to be adopted in
periods beginning after December 15, 1997. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's information has been broken down into two segments - Handwriting
Recognition 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 Systems Integration Handwriting
Recognition represents the sale of hardware and software incorporating the
Company's technology. Systems 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-18
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
---------------- ---------------- -----------------
1998
Revenues $ 2,702 $ 1,879 $ 4,581
Loss from operations $ (2,561) $ (684) $ (3,285)
Total assets $ 2,160 $ 1,194 $ 3,354
Depreciation and
amortization $ 283 $ 44 $ 327
1997
Revenues $ 4,040 $ 1,476 $ 5,516
Loss from operations $ (11,609) $ (18) $ (11,627)
Total assets $ 6,192 $ 1,299 $ 7,491
Depreciation and
amortization $ 314 $ 33 $ 347
1996
Revenues $ 1,548 $ 1,339 $ 2,887
Loss from operations $ (6,379) $ (156) $ (6,535)
Total assets $ 12,052 $ 1,451 $ 13,503
Depreciation and
amortization $ 331 $ 22 $ 353
The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31,:
Revenues Long Lived Assets
-------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
------------ ----------- ------- --------- ---------- ---------
U.S. $ 2,702 $ 4,039 $ 1,537 $ 416 $ 655 $ 367
China 1,879 1,476 1,339 123 143 148
Other - 1 11 - - 22
========= ========= ========== ========= ======== ===========
$ 4,581 $ 5,516 $ 2,887 $ 539 $ 798 $ 537
========= ========= ========== ========= ======== ===========
The Company's export sales from U.S. operations were 16%, 40%, and 7% of
total revenues in 1998, 1997, and 1996, respectively.
F-19
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
10. Statement of Cash Flows Data
December 31,
------------------------------------
1998 1997 1996
----------- ------------ -----------
Schedule of non-cash transactions:
Conversion of redeemable convertible
preferred stock into Series A
Preferred Stock........................ $ - $ 9,417 $ -
Issuance of warrants to purchase
Common Stock in connection with the
June and December Private Placements... $ - $ - $ 844
Common Stock exchanged for redeemable
convertible preferred stock in
the December Private Placement......... $ - $ - $ 1,755
Supplemental disclosure of cash flow information:
Interest paid in 1998, 1997 and 1996 was $19, $106 and $215, respectively.
11. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution plan covering all
employees meeting certain eligibility requirements. Contributions made by the
Company are determined annually by the Board of Directors. To date, the Company
has made no contributions to this plan.
F-20
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 30, 1999.
COMMUNICATION INTELLIGENCE CORP.
/S/ Guido DiGregorio
--------------------------
By: Guido DiGregorio
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on March 30, 1999.
Signature Title
/s/ Guido DiGregorio Director, President
- ----------------------- (Principal Executive Officer)
Guido DiGregorio
/s/ Craig M.Hutchison Treasurer and Controller
- ------------------------ (Acting Principal Financial and Accounting Officer)
Craig M.Hutchison
/s/ Jess M.Ravich Director
- ------------------------
Jess M.Ravich
/s/ Philip S. Sassower Director, Chairman of the Board , and Secretary
- ------------------------
Philip S. Sassower
/s/ Jeffrey Steiner Director
- ------------------------
Jeffrey Steiner
/s/ Chien Bor Sung Director
- ------------------------
Chien Bor Sung
1
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts and Reserves
(In thousands)
Years Ended December 31, 1996, 1997, 1998
Balance Charged to
At Beginning Costs and Balance
Of Period Expense At End
Deductions Of Period
Year ended December 31, 1996:
Accounts receivable allowances.. $76 $74 $(65) $85
Year ended December 31, 1997:
Accounts receivable allowances.. $85 $195 $(243) $46
Year ended December 31, 1998:
Accounts receivable allowances.. $46 $236 $(108) $174
S-1
Exhibit 10.23
AMENDMENT TO THE CERTIFICATE OF DESIGNATIONS
OF
5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
COMMUNICATION INTELLIGENCE CORPORATION
It is hereby certified that:
1. The name of the corporation is Communication Intelligence
Corporation (the "Corporation").
2. The original Certificate of Designations of 5% Cumulative
Convertible Preferred Stock of the Corporation (the
"Certificate of Designations") was filed with the Secretary
of State of the State of Delaware on December 27, 1996.
3. The Certificate of Designations is hereby amended as follows:
The first sentence of Section 1(a) of the Certificate of
Designations shall be amended and restated in its entirety
as follows:
"(a) Cumulative. The holders of the Preferred Shares
shall be entitled to receive out of any assets legally
available therefor cumulative dividends at the rate of $1.25
per share per annum compounded semi-annually when payable
(whether or not declared), payable on the Conversion
Commencement Date (as defined below) and semi-annually every
six (6) months thereafter (each a "Dividend Payment Date"),
when and as declared by the Board of Directors, in preference
and priority to any payment of any dividend on the Common
Stock (as defined below) or any other class or series of stock
of the Corporation other than shares of the Corporation's
Series B Cumulative Convertible Preferred Stock designated by
that certain Certificate of Designations filed with the
Secretary of State of the State of Delaware on November 25,
1997 ("Series B Preferred")."
Section 1(b) of the Certificate of Designations shall be
amended and restated in its entirety as follows:
"(b) Cash or PIK. Any dividend payable on the
outstanding Preferred Shares may be paid, at the option of the
Corporation, either (i) in cash or (ii) in additional
Preferred Shares (with each new Preferred Share valued at $25
per share); provided, however, that if the Corporation shall
fail to pay any dividend on a Dividend Payment Date, the
amount of such dividend shall be added to the Liquidation
Preference (as defined below) for such Preferred Shares, and
further provided that if any dividend on the Series B
Preferred shall be declared to be paid in cash, then (i) the
Corporation shall give the holders of the Preferred Shares
notice of such cash dividend payment not later than 5 days
prior to the date such dividend is to be paid and (ii) each
holder of Preferred Shares shall have the option of receiving
the next dividend payment payable on the Preferred Shares in
cash."
Section 2 of the Certificate of Designations shall be amended
and restated in its entirety as follows:
3. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, either
voluntary or involuntary, the holders of the Preferred
Shares shall be
1
Exhibit 10.23 (continued)
entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders
of any other class or series of shares, other than the
Series B Preferred (which shall be on a pari passu basis
with the Preferred Shares), the amount of $25 per share plus
any accrued but unpaid dividends (with dividends deemed
accrued on a per diem basis through the date of such event
and thereafter even if such event or any distribution is not
on a Dividend Payment Date) (the "Liquidation Preference")."
4. The foregoing amendments to the Certificate of Designations
herein certified have been duly adopted in accordance with
the provisions of Section 151(g), 228 and 242 of the General
Corporation Law of the State of Delaware.
Dated as of June 12, 1998
/s/ Philip S. Sassower
Philip S. Sassower, Chairman of the Board
and Secretary
2
Exhibit 10.24
CERTIFICATE OF AMENDMENT
OF
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COMMUNICATION INTELLIGENCE CORPORATION
It is hereby certified that:
1. The name of the corporation is Communication Intelligence Corporation
(hereinafter called the "Corporation").
2. The amended and restated certificate of incorporation of the
Corporation is hereby amended by striking out paragraph (a) of Article Fourth
thereof and by substituting in lieu of said paragraph the following new
paragraph:
"FOURTH: The total number of shares which the Corporation shall have
authority to issue is 110,000,000 of which 100,000,000 shall be Common
Stock, par value $0.01 per share, and 10,000,000 shares shall be Preferred
Stock, par value $0.01 per share."
The balance of Article Fourth shall remain unchanged.
3. This amendment of the Corporation's certificate of incorporation has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Dated as of June 12, 1998.
/s/ Philip S. Sassower
Philip S. Sassower, Chairman of the
Board and Secretary
1
Exhibit 10.25
SETTLEMENT, GENERAL RELEASE AND PART TIME EMPLOYMENT AGREEMENT
This Settlement, General Release and Part Time Employment Agreement
("Agreement") is made by and between Communication Intelligence Corporation, its
subsidiaries and affiliates (the "Company"), and James Dao ("Employee").
WHEREAS, Employee has been employed by the Company on a full time basis;
WHEREAS, the Company and Employee desire to convert such full time
employment to part time employment;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
A. Effective August 14, 1998 Employee will resign his position as a full time
employee.
1. Employee will be paid his full time compensation up to and
including that date.
2. Benefits, except for stock options that are discussed below, will
be treated in the standard manner as for other employees
separating from fulltime service.
B. Effective August 14, 1998 Employee shall become a part time employee of
the Company.
1. As a part time employee, Employee shall report to the
Company'sPresident.
2. Employee will resign his part time employment with the Company
on December 15, 2001, unless the Company terminates the
Agreement sooner for cause.
3. The following shall constitute cause:
a. Employee is convicted of a felony
b. Employee engages in illegal conduct against or on behalf
of the Company
c. Employee intentionally and knowingly acts contrary to the
substantial interest of the Company
d. Continuous and substantial failure, following written
notice of such failure, by Employee, to perform the
duties and responsibilities accepted by Employee
pursuant to this Agreement or subsequently accepted
by Employee
e. Substantial failure on the part of Employee to comply
with the Company's published ethical standards (see
attachment Corporate Policy A-001-1).
C. Duties
1. From the effective date hereof through November 14, 1998
Employee will attempt to consummate the transaction with IBM
that he is currently, or recently has been, pursuing. Such
time period may be extended by mutual agreement.
a. At Employee's requests and at the Company's sole
discretion, the Company may assist Employee in his
efforts to consummate such transaction.
b. When Employee has an agreed upon term sheet or memorandum of
intent from IBM, he shall present such to Company.
i. Company shall have fifteen (15) days to accept or reject
the transaction as described in such term sheet or
memorandum of intent.
ii. As part of the evaluation process, Company and Employee
shall mutually agree upon what obligations the Company would
be willing to assume if it accepts the transaction.
1
Exhibit 10.25 (continued)
iii. Failure on the part of Employee to present a
transaction to Company or to successfully consummate
a transaction, as contemplated by this Section, shall
not constitute cause for the purpose of terminating
of this Agreement.
2. From the effective date hereof through December 15, 2001,
Employee shall be available to consult with the Company's
President or his designee regarding knowledge and information
he may have acquired about CIC China, including but not
limited to its customers, competitors, employees, technology
and the industry or industries in general in which it
operates. Company will not make unreasonable requests upon
Employee's time and will allow Employee a reasonable amount of
time to respond to its requests.
D. Compensation
1. After August 14, 1998 Employee shall not be entitled to any
compensation except as specifically provide for in Subsections
D2, D3 and D4 below.
2. Employee shall receive a 1% fee of any debt financing and a 5%
fee of any equity financing or product or market development
funding resulting from the consummation of a transaction with
IBM as referred to above. The base to which such percentages
shall be applied for purposes of calculating Employee's
compensation under this subsection shall be the nonrefundable
cash consideration actually received by Company from such
transaction. Company shall pay such fee within thirty (30)
days of receipt of such cash.
a. Employee shall be responsible for his own costs and
expenses associated with his pursuit of the
transaction contemplated by this Section including
but not limited to the cost of consultants and
employees, such as Bill Gould, administrative
assistance, travel and entertainment. Notwithstanding
the above, Company may reimburse Employee for such
expenses if approved in writing by the Company's
President prior to being incurred.
3. Net debt of $296,165 comprised of a $210,000 debt to the
Company, $168,693 of interest and $50,829 in other debt to the
Company, less $100,000 of such debt to be forgiven pursuant to
Subsection (a) hereof, and net of $33,357 of accrued vacation,
and net of approved expense reimbursement requests related to
expenses incurred in pursuit of the Company's business, to be
determined pursuant to Subsection (c) hereof, shall be
forgiven. Such net outstanding debt shall be forgiven pro-rata
on a monthly basis over the period commencing August 15, 1998
and ending December 15, 2001.
a. The $100,000 excluded from the debt forgiveness
pursuant to the immediately preceding paragraph,
shall continue to be due and payable in full upon
termination of Employee's part time employment with
the Company unless, at that time, Employee executes a
general release consistent with the releases
contained in this Agreement.
b. To the extent that the Company is required to
withhold taxes on such debt forgiveness, Employee
will remit to the Company such amounts as may be due
as withholding within ten days of receipt of an
invoice from the Company pertaining thereto. Receipt
shall be deemed to have occurred three days after the
postmarked dates of any such invoices. Company will
invoice Employee on a monthly basis.
c. Expense reports for all amounts for which Employee
seeks or intends to seek reimbursement shall be
submitted to the Company within sixty (60) days of
the effective date hereof. Subsequent to such time,
Employee shall submit no further expense reports
except for expenses incurred subsequent to the
effective date of this Agreement and approved in
writing by the Company's President prior to being
incurred.
2
Exhibit 10.25 (continued)
d. i. The $296,165 net debt referred to above will
be adjusted for any approved expense
reimbursement requests made by Employee,
pursuant to this Subsection, for expenses
incurred prior to June 1, 1998.
ii. For approved expense reimbursement requests
made by Employee, pursuant to this
Subsection, for expenses incurred on or
after June 1, 1998 and through the effective
date hereof, Employee may at his option
apply such amounts to the purchase of
certain of the Company's tangible assets
pursuant to Section F2a hereof or to further
reduce the $296,165 net debt referred to
above.
4. Stock Options. As of the effective date hereof Employee has
vested options to purchase 660,000 shares of the Company's
common stock and options to purchase 660,000 shares of the
Company's common stock, which are scheduled to vest on
December 15, 1998. Such options were issued pursuant to a
stock option agreement between the Company and Employee. Such
agreement shall continue in force until the expiration or
termination of this Agreement, at which time Employee will
have thirty days in which to exercise his then vested options.
E. Sale of Company stock. Employee will give Company five business days
written notice prior to the sales of any of the Company's stock by him
or the sale of any of the Company's stock by a close family member to
whom Employee transferred such stock after July 28, 1998. During such
five day period Company may elect to purchase such stock or find a
buyer therefor on the same terms under which the stock is being offered
to another party or to the public market.
1. These restrictions shall not apply to transfers of stock to
family members where the market value of the transferred
stock is such that the transfer may be accomplished without
generating gift tax under the gift tax provisions of the
Internal Revenue Code.
2. In no event will Employee sell stock in volume in excess of
the volume limitations specified under Rule 144 of the rules
and regulations of the Securities and Exchange Commission.
3. Without obligating itself to purchase or to find a buyer,
upon Employee's request, Company agrees to make reasonable
efforts to assist Employee in selling his Company stock.
F. Confidential Information.
1. Employee shall continue to maintain the confidentiality of all
confidential and proprietary information of the Company and
shall continue to comply with the terms and conditions of the
Proprietary Information and Employee Invention Agreement
between Employee and the Company.
a. Employee shall not represent IBM or assist in the
consummation of a transaction between IBM and a third
party if such actions would conflict with Employees
obligations under this Agreement or with his
obligations under the Proprietary Information and
Employee Invention Agreement referred to above.
b. Employee shall not solicit Company employees or hire
or engage former Company employees within six months
of such former employees' separation from the Company
without the written consent of the Company.
2. Employee shall return all the Company property and
confidential and proprietary information in his possession to
the Company on the Effective Date of this Agreement or on such
other date as may be agreed upon by the Company's President.
3
Exhibit 10.25 (continued)
a. Upon mutual agreement between the Parties, Employee
may purchase certain tangible assets from Company,
which are currently in Employee's possession.
G. Release of Claims. Employee agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to
Employee by the Company. Employee on behalf of himself, and his
respective heirs, family members, executors and assigns, hereby fully
and forever releases Company and its officers, directors, employees,
investors, shareholders, administrators, affiliates, divisions,
subsidiaries, predecessor and successor corporations, and assigns,
from, and agrees not to sue concerning, any claim, duty, obligation or
cause of action relating to any matters of any kind, whether presently
known or unknown, suspected or unsuspected, that he may possess arising
from any omissions, acts or facts that have occurred up until and
including the Effective Date of this Agreement including, without
limitation,
1. any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination
of his full time relationship, including but not limited to
any claims Employee may assert under the August 1, 1988
resolution of the Company's Board of Directors, sometimes
referred to as the "Golden Parachute";
2. any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of
the Company, including, without limitation, any claims for
fraud, misrepresentation, breach of fiduciary duty, breach of
duty under applicable state corporate law, and securities
fraud under any state or federal law;
3. any and all claims for wrongful discharge of employment or
termination of full time employment; termination of full time
employment in violation of public policy; discrimination;
breach of contract, both express and implied; breach of a
covenant of good faith and fair dealing, both express and
implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional
misrepresentation; negligent or intentional interference with
contract or prospective economic advantage; unfair business
practices; defamation; libel; slander; negligence; personal
injury; assault; battery; invasion of privacy; false
imprisonment; and conversion;
4. any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of
the Civil Rights Act of 1964, the Civil Rights Act of 1991,
the Age Discrimination in Employment Act of 1967, the
Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the Employee Retirement Income Security Act of
1974, The Worker Adjustment and Retraining Notification Act,
Older Workers Benefit Protection Act; the California Fair
Employment and Housing Act, and Labor Code section 201, et
seq. and section 970, et seq.;
5. any and all claims for violation of the federal, or any
state, constitution;
6. any and all claims arising out of any other laws and
regulations relating to employment or employment
discrimination; and
7. any and all claims for accountants, or attorneys or
other professional fees and costs.
The Company and Employee agree that the release set forth in this
section shall be and remain in effect in all respects as a complete
general release as to the matters released. This release does not
extend to any obligations incurred under this Agreement.
H. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that
he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver
and release is knowing and voluntary.
Employee and the Company agree that this waiver
4
Exhibit 10.25 (continued)
H. and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Employee acknowledges
that the consideration given for this waiver and release Agreement is in
addition to anything of value to which Employee was already entitled.
Employee further acknowledges that he has been advised by this writing
that (a) he should consult with an attorney prior to executing this
Agreement; (b) he has at least twenty-one (21) days within which to
consider this Agreement; (c) he has at least seven (7) days following the
execution of this Agreement by the parties to revoke the Agreement; and
(d) this Agreement shall not be effective until the revocation period has
expired.
I. Civil Code Section 1542. Employee represents that he is not aware of any
claim other than the claims that are released by this Agreement. Employee
acknowledges that he has been advised by his legal counsel and is
familiar with the provisions of California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Employee being aware of said code section, agrees to expressly waive
any rights he may have thereunder, as well as under any other statute
or common law principles of similar effect.
J. No Pending or Future Lawsuits. Employee represents that he has no
lawsuits, claims, or actions pending in his name, or on behalf of any
other person or entity, against the Company or any other person or
entity referred to herein. Employee also represents that he does not
intend to bring any claims on his own behalf or on behalf of any other
person or entity against the Company or any other person or entity
referred to herein.
K. Application for Employment. Employee understands and agrees that, as a
condition of this Agreement and unless specifically provided for
herein, he shall not be entitled to any employment with the Company,
its subsidiaries, or any successor, and he hereby waives any right, or
alleged right, of employment or re-employment with the Company.
L. Confidentiality. The Parties hereto each agree to use their best
efforts to maintain in confidence the existence of this Agreement, the
contents and terms of this Agreement, and the consideration for this
Agreement (hereinafter collectively referred to as "Settlement
Information"). Each Party hereto agrees to take every reasonable
precaution to prevent disclosure of any Settlement Information to third
parties, and each agrees that there will be no publicity, directly or
indirectly, concerning any Settlement Information. The Parties hereto
agree to take every precaution to disclose Settlement Information only
to those employees, officers, directors, attorneys, accountants,
governmental entities, and family members who have a reasonable need to
know of such Settlement Information.
M. No Cooperation. Employee agrees he will not act in any manner that
might damage the business of the Company. Employee agrees that he will
not counsel or assist any attorneys or their clients in the
presentation or prosecution of any disputes, differences, grievances,
claims, charges, or complaints by any third party against the Company
and/or any officer, director, employee, agent, representative,
shareholder or attorney of the Company, unless under a subpoena or
other court order to do so. Employee will immediately notify Company,
in writing, of the receipt by Employee of any such subpoena or court
order.
N. Non-Disparagement. Each party agrees to refrain from any defamation,
libel or slander of the other, or tortious interference with the
contracts and relationships of the other. All inquiries by potential
future employers of Employee will be directed to the Company's President.
Upon inquiry, the Company shall only state the following: Employee's last
position and dates of employment.
5
Exhibit 10.25 (continued)
O. Costs. The Parties shall each bear their own costs, expert fees, attorneys
fees and other fees incurred in connection with this Agreement.
P. Governing Law. This Agreement shall be governed by the laws of the State
of California.
Q. Authority. The Company represents and warrants that the undersigned has
the authority to act on behalf of the Company and to bind the Company
and all that may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to
act on his own behalf and on behalf of all whom might claim through him
to bind them to the terms and conditions of this Agreement. Each Party
warrants and represents that there are no liens or claims of lien or
assignments in law or equity or otherwise of or against any of the
claims or causes of action released herein.
R. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement.
Neither party has relied upon any representations nor statements made
by the other party hereto which are not specifically set forth in this
Agreement.
S. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
T. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Employee concerning Employee's
separation from the Company, and supersedes and replaces any and all
prior agreements and understandings concerning Employee's relationship
with the Company and his compensation by the Company, except as
otherwise stated herein.
U. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and the President of the Company.
V. Effective Date. This Agreement is effective seven days after it has
been signed by both Parties and shall terminate on December 15, 2001.
W. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original
and shall constitute an effective, binding agreement on the part of
each of theundersigned.
X. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or
behalf of the Parties hereto, with the full intent of releasing all
claims. The Parties acknowledge that:
1. They have read this Agreement;
2. They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such
counsel;
3. They understand the terms and consequences of this Agreement and of
the releases it contains;
4. They are fully aware of the legal and binding effect of this
Agreement.
6
Exhibit 10.25 (continued)
IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective
dates set forth below.
August 7, 1998 For Company: /s/ Guido DiGregorio
--------------------------------------
Guido DiGregorio, President
August 7, 1998 Employee: /s/ James Dao
--------------------------------------
James Dao
7
Exhibit 10.26
SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT
This Software Development and License Agreement ("Agreement") is entered
into this 04 day of December 1998, by and between Ericsson Mobile Communications
AB, a corporation organized and existing under the laws of Sweden (hereinafter
"ERICSSON"), and Communication Intelligence Corporation, a corporation organized
and existing under the laws of the State of Delaware (hereinafter "LICENSOR").
WITNESSETH:
WHEREAS, LICENSOR desires to grant to ERICSSON and ERICSSON desires to
acquire from LICENSOR nonexclusive right(s) and license(s) to use, copy,
reproduce, sell or otherwise distribute certain software programs under the
terms and conditions set forth in this Agreement; and
WHEREAS, ERICSSON is desirous of retaining LICENSOR to perform certain
services as described in this Agreement; and
WHEREAS, LICENSOR desires to provide the rights and licenses and perform
the services described herein in accordance with the terms and conditions of
this Agreement.
NOW, THEREFORE, ERICSSON and LICENSOR hereby agree as follows:
Attachments
Appendix A Description of Licensed Programs
Appendix B License Fee Schedule
Appendix C NRE Specifications
1. Definitions
a. Licensed Programs shall mean:
Jot;
OnScreen Keyboard;
Quick Notes; and
Sign-it software
in Executable Code form, as described in APPENDIX A.
b. Documentation shall mean all instructions and end-user information needed to
fully implement and utilize the Licensed Programs. c. Executable Code shall mean
the electronic machine-readable form of the Licensed Programs.
d. Source Code shall mean the original, human readable
instructions used to produce Executable Code by, compilation
or assembly process.
e. Party shall mean ERICSSON or LICENSOR, as identified above.
f. Project shall mean the performance of services to develop the Licensed
1
Exhibit 10.26 (continued)
g. Programs and Documentation and/or modify the Licensed Programs for operation
on specified ERICSSON hardware platforms.
h. Proprietary Information shall mean information, including data and know-how,
which is:
1) the proprietary property of one of the Parties which is not developed
under this Agreement; and
2) disclosed or transmitted by ERICSSON to LICENSOR or by LICENSOR to
ERICSSON in relation to, or in connection with this Agreement; and
3) not within one of the exceptions of Paragraph c of Section 9 hereof.
2. Term
The initial term of this Agreement shall be for [Confidential Material
provided separately to the SEC] commencing on the date set forth above, and and
[Confidential Material provided separately to the SEC] or any renewal term, of
it's intent not to renew; or until termination pursuant to Sections 3 or 4.
3. Termination
a. In General. This Agreement may be terminated by either Party upon
written notice if the other Party breaches any material term or condition of the
Agreement and such breach remains uncorrected for thirty (30) days following
written notice from the non-breaching party specifying the breach.
b. Failure to Meet Milestone or Delivery. Either party may terminate
this Agreement immediately upon notice to the other party at any time that the
other party fails to meet a mutually agreed upon milestone or deliver an item as
provided by APPENDIX C within ten (10) days of the date set for such milestone
or deliverable item, or at the offended parties option, the party failing to
meet such milestone agrees to pay the offended party a penalty of [Confidential
Material provided separately to the SEC] paid or payable by ERICSSON in
satisfaction of such milestone or deliverable item. To the extent that LICENSOR
is unable to deliver acceptable Licensed Programs and Documentation under this
Agreement to ERICSSON, LICENSOR agrees to [Confidential Material provided
separately to the SEC].
c. Obligations Upon Termination. Upon termination of this Agreement for any
reason, the parties shall have no further obligations pursuant to the terms of
the agreement except Sections 8, 9, 10, 19 and 20 shall survive any termination
or expiration of this Agreement.
d. Continuance of Licenses. All licenses for which ERICSSON has fully paid all
royalties under this Agreement shall continue after any expiration or
termination of this Agreement for any reason.
4. Development of Licensed Programs and Documentation
a. In General. In consideration of the fees described in Section 5 of
this Agreement, LICENSOR will develop and deliver to ERICSSON the Licensed
Programs according to the development specifications set forth in APPENDIX C,
including all necessary Documentation as required by ERICSSON. LICENSOR shall
meet with ERICSSON monthly, or more often if requested by ERICSSON,
2
Exhibit 10.26 (continued)
to discuss and report on the progress on the Project. Time for attending such
meetings shall be billed at [Confidential Material provided separately to the
SEC] plus travel and living expenses.
b. Technical Design. To the extent not specified in APPENDIX C,
LICENSOR shall provide hardware and software specifications, performance
specifications, a narrative description of the Licensed Programs, a description
of all input data (such as type, size, range of expected values, and
relationship to other data), a description and pictures of all screens,
including sequence diagrams, and definitions and descriptions of all outputs and
reports to be generated and the process for generating them.
c. Acceptance. LICENSOR shall deliver the final completed Licensed
Programs and Documentation to ERICSSON no later than the date specified in
APPENDIX C for delivery of the "Golden Master", and ERICSSON shall have
[Confidential Material provided separately to the SEC] thereafter in which to
accept or reject the delivered materials in writing. If ERICSSON rejects the
Licensed Programs and Documentation, ERICSSON shall specify in writing its
grounds for rejection and LICENSOR shall use its best efforts to make the
Licensed Programs and Documentation conform to the specifications provided by
ERICSSON as soon as possible. LICENSOR shall continue to use its best efforts to
make the Licensed Programs and Documentation conform to the specifications until
ERICSSON accepts the Licensed Programs and Documentation or terminates this
Agreement upon written notice to LICENSOR.
d. Training. LICENSOR shall provide ERICSSON with training on use of
the Licensed Programs, as requested by ERICSSON. Such training will be billed
[Confidential Material provided separately to the SEC] plus travel and living
expenses.
e. Integration Support. LICENSOR shall provide ERICSSON with technical
assistance for testing and integration of the Licensed Programs and
Documentation into ERICSSON's end user products. Such assistance shall be
rendered at the request of ERICSSON at ERICSSON's facility in Research Triangle
Park, North Carolina, USA or Manchester, England. Integration support will be
billed at [Confidential Material provided separately to the SEC] plus travel and
living expenses.
f. Maintenance and Support. During the warranty period defined in
Paragraph 19, below, LICENSOR shall perform remedial and preventive maintenance
and support for the Licensed Programs after their acceptance so that the
Licensed Programs continue to perform in accordance with the specification.
LICENSOR shall provide telephone support, including dial-up support, between the
hours of 8:00 a.m. and 5:00 p.m., U.S. Eastern Time, Monday through Friday,
excluding federal holidays or at such other times or time zones as may be
requested by ERICSSON from time to time. LICENSOR shall also provide maintenance
and support as requested by ERICSSON for each product line using the Licensed
Programs. ERICSSON and LICENSOR shall negotiate the terms and price of
maintenance and support services following the conclusion of the warranty
period, provided that such maintenance and support services shall be provided on
at least the following terms:
1) LICENSOR shall provide telephonic, email, fax, phone and onsite support
to ERICSSON on a time and materials basis.
2) At ERICSSON's option, ERICSSON may purchase up to [Confidential
Material provided separately to the SEC] of support for [Confidential
Material provided separately to the SEC] with additional time billed
on an hourly basis at [Confidential Material provided separately to
the SEC] per hour for remote and [Confidential Material provided
separately to the SEC] for onsite support, plus actual reasonable
travel and living expenses.
4) ERICSSON shall have the right to terminate such maintenance and support
services at any time upon thirty (30) days written notice to LICENSOR.
3
Exhibit 10.26 (continued)
5. Fees
a. Development Fees.
1) Amount and Dates. ERICSSON shall pay LICENSOR development fees upon the
events and in the amounts set forth in APPENDIX C.
2) Reports. LICENSOR shall deliver to ERICSSON monthly reports of
LICENSOR's progress on the Project and LICENSOR's expenses incurred in
connection with the Project. Such reports shall be due on the fifteenth day of
each month for the prior month. Each report shall contain a description of the
current status of the Licensed Programs and Documentation, the time spent on the
Project by each employee of LICENSOR, the tasks on which it was spent, the
estimated progress to be made in the next month, and the problems encountered,
the proposed solutions to them and their effect, if any, on the milestones or
Deliverables.
b. License Fees.
1) In General. In consideration of the license granted by
LICENSOR under this Agreement, ERICSSON shall pay LICENSOR a fee as set forth in
APPENDIX B (the "License Fee").
2) Payment Terms. Each installment of the License Fee shall be
due and payable in accordance with the payment schedule set
forth in APPENDIX B.
6. License Grant
In consideration of payment to be made by ERICSSON to LICENSOR of the
License Fee(s) set forth above, LICENSOR hereby grants and agrees to grant to
ERICSSON a worldwide, non-exclusive license to use, copy, incorporate into
products to be sold, sell or otherwise distribute the Licensed Programs together
with the Ericsson product platforms identified on APPENDIX A. No rights are
granted with respect to any Source Code.
The rights granted herein shall extend to all ERICSSON components,
subsidiaries, affiliates and joint-venture partners worldwide, which are
majority controlled by Telefonaktiebolaget LM Ericsson. In particular, but not
by way of limitation, the rights granted herein shall extend to Ericsson Inc., a
Delaware corporation, having an address at 7001 Development Drive, Research
Triangle Park, NC 27709.
7. Change of Scope
At any time during the term of this Agreement, should ERICSSON desire
LICENSOR to provide any additional services in the form of a modification of or
a change to the Project, for example, should ERICSSON
desire to have the Licensed Programs modified for operation with a different
hardware platform, LICENSOR and ERICSSON shall comply with the following:
a. Submission of Request. ERICSSON shall submit to LICENSOR in writing
all requests by ERICSSON for any such additional services which alter, amend,
enhance, add to, or delete from the Project and/or time and/or place of
performance (hereinafter referred to as "Modification/Change Request" or
"Request").
b. Acceptance Procedure. LICENSOR will evaluate such
Modification/Change Request at no additional charge to ERICSSON
as soon as possible but not later than ten (10) working days
following
4
Exhibit 10.26 (continued)
LICENSOR's receipt of the Request. LICENSOR's written response shall include a
statement of the availability of LICENSOR's personnel and resources, the impact,
if any, on the completion date and the change in costs, if any. The Parties
agree to negotiate the charges for any such changes in good faith. Should
ERICSSON elect to authorize such Request, ERICSSON will, as soon as possible but
not later than ten (10) working days, authorize LICENSOR to perform the
requested Modification/Change Request by returning a duly authorized copy of the
Request to LICENSOR.
c. Performance. Upon such authorization by ERICSSON of the
Modification/Change Request, LICENSOR will commence performance in accordance
with such Request immediately. LICENSOR shall not be obligated to perform any
additional services in advance of written authorization from ERICSSON. In the
event that LICENSOR commits resources to the performance of a
Modification/Change Request without such prior written authorization, it shall
be presumed that performance of such Modification/Change Request will have no
effect on the completion date.
d. Binding Agreement. For the purposes of this Agreement, each
Modification/Change Request duly authorized in writing by ERICSSON and agreed to
by LICENSOR shall be deemed incorporated into and part of this Agreement and
each such Request shall constitute a formal amendment to this Agreement
adjusting fees and completion date as finally agreed upon for each authorized
Modification/Change Request. In no event shall the services be deemed altered,
amended, enhanced, or otherwise modified except through written authorization by
ERICSSON of a Modification/Change Request and acceptance by LICENSOR, all in
accordance with this Section 7.
8. Ownership of Licensed Programs and Intellectual Property Rights
LICENSOR shall retain title and ownership of the Licensed Programs and
all Intellectual Property Rights therein except as otherwise provided in this
Agreement or agreed between the Parties.
9. Confidentiality
a. All ERICSSON Proprietary Information and all LICENSOR Proprietary
Information disclosed under this Agreement that is proprietary to one or both
Parties, in tangible form (including, but not limited to, printed matter,
computer software, models, specimens and the like) shall be clearly identified
at the time of disclosure as being Proprietary Information by an appropriate and
conspicuous legend, marking, stamp or other positive identification and if
disclosed in oral or visual form, shall be identified as being Proprietary
Information at the time of disclosure or observation, and shall be confirmed as
such in writing by the disclosing Party to the receiving Party within thirty
(30) days after such oral or visual disclosure.
b. For the term of this Agreement, and for [Confidential Material provided
separately to the SEC] thereafter a Party receiving another Party's Proprietary
Information shall: a) handle, safeguard and protect such Proprietary Information
from unauthorized or accidental disclosure or unauthorized use by the exercise
of the same degree of care, but not less than reasonable care, as it employs
with respect to information of its own of a similar nature which it does not
desire to be published, obtained or disseminated; b) not use such Proprietary
Information for purposes other than those provided for under this Agreement; c)
not reproduce such Proprietary Information, in whole or in part, without
identifying such whole or partial reproduction as being Proprietary Information
of the disclosing Party; and d) not, without
5
Exhibit 10.26 (continued)
the prior written permission of the disclosing Party, furnish or otherwise
disclose such Proprietary Information to any third party, nor to employees of
the receiving Party not having a "need-to-know" of same except in the
furtherance of the purposes of this Agreement or as otherwise provided in this
Agreement.
c. Information shall not be considered to be Proprietary
Information, and the recipient shall not be liable for the use and disclosure
thereof, if such information:
(1) as shown by written records, was known or available to the
receiving Party prior to receipt from the disclosing Party; or
(2) becomes known or available to the receiving Party from sources
other than the disclosing Party without restrictions as to
disclosure or use of the kind provided for by this Agreement and
otherwise than as a consequence of breach of obligations under
this Agreement; or
(3) as shown by written records, is independently developed by the
receiving Party; or
(4) is or becomes part of the general public knowledge or literature
otherwise than as a consequence of breach of obligations under
this Agreement; or
(5) is provided by the disclosing Party to a third party without
restrictions as to disclosure or use of the kind provided for by
this Agreement; or
(6) is disclosed pursuant to judicial action and no suitable
protective order, or equivalent, is available.
d. No information disclosed under this Agreement, other than
Proprietary Information shall be considered to have been
submitted under restriction and the recipient may freely
disclose and use any such information without obligation to
the disclosing Party, except as may be created by valid
patents owned by the disclosing Party.
e. The parties hereto agree that the terms and conditions
contained in this Agreement shall not be disclosed to any
third party, without the concurrence of the other party
hereto.
f. Proprietary Information disclosed by one Party to the other
Party under this Agreement shall remain the property of the
disclosing Party.
g. The disclosing Party agrees to grant and does hereby grant
to the other Party a non-exclusive, royalty-free right to
use Proprietary Information disclosed in conjunction with
this Agreement, and practice any Patents based thereon,
solely within the receiving Party's own facilities and
thefacilities of its Subsidiaries, solely for fulfilling the
purposes of this Agreement and only for the duration of this
Agreement, except as otherwise provided in this Agreement.
10. Indemnification and Limitation of Liability
a. [Confidential Material provided separately to the SEC]
6
Exhibit 10.26 (continued)
b. ERICSSON agrees to hold LICENSOR harmless from and indemnify LICENSOR
against any and all liabilities, demands, expenses or damages arising out of or
resulting from (1) the manufacture, use or sale of any products or services by
ERICSSON other than products containing the Licensed Programs, or (2) any
alteration or modification of the Licensed Programs by ERICSSON without the
consent of LICENSOR.
c. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
d. The provisions of this Section 10 relating to limitation of or
protection against liability shall apply regardless of fault (of whatever
degree) and to the full extent permitted by law.
11. Independent contractor
LICENSOR is and shall at all times be an independent contractor and
shall not be deemed an employee or agent of ERICSSON. Nothing in this Agreement
is intended to constitute, create, give effect to or otherwise imply a
partnership, joint venture or other business organization of any kind between
the parties. Neither Party has any authority to bind the other.
12. Other Agreements
This Agreement, including Appendices, contains the complete agreement
between the parties and shall, as of the effective date hereof, supersede all
other agreements between the parties relating to the Project and development of
the Licensed Programs and Documentation. The parties stipulate that neither of
them has made any representation with respect to the subject matter of this
Agreement or the execution and delivery hereof except such representations as
are specifically set forth herein. Each of the parties hereto acknowledges that
they have relied on their own judgment in entering into this Agreement. The
terms and conditions of the Appendices are incorporated herein by reference. To
the extent that there is any conflict between the terms and conditions of the
Appendices and this Agreement, the provisions of this Agreement shall control
13. Modification of Agreement
No waiver or modification of this Agreement or of any covenant,
condition, or limitation herein contained shall be valid unless in writing and
duly executed by both parties, and no evidence of any waiver or modification
shall be offered or received in evidence in any proceeding, arbitration, or
litigation between the parties hereto arising out of or affecting this
Agreement, or the rights or obligations of the parties hereunder, unless such
waiver or modification is in writing and duly executed by both parties. The
parties further agree that the provisions of this Section may not be waived
except as herein set forth.
14. Forbearance--No Waiver
Any failure by either Party to enforce any of the provisions of this
AGREEMENT or to require at any time performance by the other party of any of the
provisions hereof, shall in no way affect the validity of this AGREEMENT or any
part hereof, or the right of either Party thereafter to enforce each and every
7
Exhibit 10.26 (continued)
such provision.
15. Choice of Law
It is the intention of the parties hereto that this Agreement and the
performance hereunder and all suits and special proceedings hereunder be
construed in accordance with and pursuant to the laws of the State of North
Carolina.
16. Agreement Binding on Successors
This Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the respective parties.
17. Assignment Restricted
LICENSOR may not assign this Agreement in whole or in part without the
written consent of the other party, provided that LICENSOR may contract with
other parties to provide services hereunder subject to ERICSSON's prior written
approval. ERICSSON may not assign this Agreement in whole or in part without the
consent of LICENSOR, except that ERICSSON may assign this agreement to any
parent, subsidiary, affiliate or joint venturer, which is majority controlled by
Telefonaktiebolaget LM Ericsson, with ERICSSON that agrees to assume all
obligations and liabilities of ERICSSON hereunder.
18. Notices
All notices, demands, or requests provided for or permitted to be given pursuant
to this Agreement must be in writing. All notices, demands, and requests to be
sent to a party hereunder pursuant hereto shall be deemed to have been properly
given or served by depositing the same in the United States mail, addressed to
such party, postage prepaid, and certified with return receipt requested, at the
address set forth below or at such other address as any party shall hereafter
furnish to the others in writing:
LICENSOR: Communication Intelligence Corporation
275 Shoreline Drive
Suite 520
Redwood Shores, CA 94065
Attn: Mike Sullivan
With a copy to:
Communication Intelligence Corporation
275 Shoreline Drive
Suite 520
Redwood Shores, CA 94065
Attn: Legal Department
8
Exhibit 10.26 (continued)
ERICSSON: Ericsson Mobile Communications AB
c/o Program Administrator, RTP
Ericsson Inc.
7001 Development Drive
Research Triangle Park NC 27709
Attn: Lynn Canada
with a copy to:
Ericsson Inc.
7001 Development Drive
Research Triangle Park NC 27709
Attn: Legal Department
19. Warranty
a. In General. LICENSOR warrants that the services will be performed in
a workmanlike manner and that for a period of [Confidential Material provided
separately to the SEC] days following ERICSSON's acceptance of the Licensed
Program, the Licensed Programs will perform according to the specifications
agreed upon by LICENSOR and ERICSSON. LICENSOR will repair or replace the
Licensed Programs during such [Confidential Material provided separately to the
SEC] days as soon as possible after ERICSSON informs LICENSOR of any breach of
this warranty.
b. Ownership and Authority. LICENSOR represents and warrants that it is
the sole owner of the Licensed Programs, or has procured the Licensed Programs
under valid licenses from the owners thereof, and LICENSOR further represents
and warrants that it has full power and authority to grant the rights herein
granted without the consent of any other person.
c. Code Integrity. LICENSOR warrants that Licensed Programs contain no "computer
viruses," "time bombs" or "Easter eggs" as those terms are commonly understood
in the information processing industry. Specifically, LICENSOR warrants that the
Licensed Programs contain no code or instructions (including any code or
instructions provided by third parties) that may be used to access, modify,
delete, damage, or disable any computer, associated equipment, computer
programs, data files or other electronically stored information. Except as may
otherwise be expressly provided in this Agreement, LICENSOR hereby expressly
waives and disclaims any right or remedy it may have at law or in equity to
de-install, disable or repossess any Licensed Programs.
d. Documentation. Any Documentation furnished with the Licensed Programs
hereunder will be in form and substance at least equal to comparable materials
generally in use in the industry. If at any time such original Documentation is
revised or supplemented by additional documentation, thereupon LICENSOR shall
deliver to ERICSSON copies of such revised or additional documentation at no
charge in quantity equivalent to the
quantity of such original Documentation then in ERICSSON's possession. ERICSSON
shall have the right to reproduce all documentation supplied hereunder.
e. Exclusions. This warranty excludes any claims based on defects in the License
Programs and Documentation caused by ERICSSON, other parties beyond the control
of LICENSOR, or the hardware. EXCEPT AS PROVIDED IN SUBSECTION 18. ABOVE, THERE
ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, RESPECTING THIS AGREEMENT.
9
Exhibit 10.26 (continued)
f. All Licensed Programs deliverable by LICENSOR hereunder containing or calling
on a calendar function including, without limitation, any function indexed to
the CPU clock, and any function providing specific dates or days, or calculating
spans of dates or days (collectively, "Time-Keyed Software"), shall record,
store, process, provide and, where appropriate, insert, true and accurate dates
and calculations for dates and spans including and following January 1, 2000. As
part of its maintenance obligations, LICENSOR shall consult with ERICSSON to
assure that Licensed Programs will (i) have no lesser functionality with respect
to data containing dates both, or either, before or after January 1, 2000, than
heretofore with respect to dates prior to January 1, 2000 and (ii) be
interoperable with other software used by ERICSSON which may deliver data to,
receive data from or otherwise interact with Licensed Programs.
g. All software heretofore provided or specified to ERICSSON by LICENSOR whether
hereunder or under separate agreement, if not currently capable of using or
rendering date- or time-sensitive data or supporting interoperability in the
manner described in subsection e above, but still under maintenance, shall be
modified or replaced by LICENSOR with software which provides all existing
functionality and is so capable, by a date no later than January 1, 2000,
without incremental charge therefor.
20. Marketing
a. ERICSSON shall have the right to brand one or more of the following with a
trademark or slogan of LICENSOR which is acceptable to ERICSSON:
i) Data Sheets
ii) Advertising
iii) Product Packaging
iv) Owner's Manuals
In any such use, ERICSSON shall clearly indicate LICENSEE's ownership
of its trademarks. ERICSSON shall display LICENSOR's trademarks in conformance
with LICENSOR's reasonable instructions from time to time, provided that the
font type, size, color, placement and other aesthetic aspects shall at all times
be subject to the reasonable approval of ERICSSON. LICENSOR shall indemnify and
hold ERICSSON harmless against and shall handle and defend against any claim,
suit, or other proceeding brought against ERICSSON based on an allegation that
the use of LICENSOR's trademarks constitutes a violation or infringement of any
trademark, service mark, trade name, or other proprietary information right.
b. All press releases of a Party which mention the other Party or this Agreement
must be reviewed and approved by the other Party.
c. ERICSSON shall, at LICENSOR's request, provide samples of literature,
packaging andadvertising materials bearing LICENSOR's trademarks. ERICSSON
agrees to maintain the high level of quality accorded products associated with
and marketed by LICENSOR. ERICSSON shall not remove, obliterate or conceal
copyright or patent notices included in the Licensed Programs and Documentation.
d. Except as expressly provided herein, neither Party is granted any right in or
license to use any trademark or service mark of the other Party.
21. Enforceability
If any term or provision of this Agreement shall be invalid or
unenforceable, the remainder of this Agreement shall not be affected; and the
remainder of this Agreement shall be valid and enforceable to the extent
permitted by
10
Exhibit 10.26 (continued)
applicable law. In addition, the parties shall in good faith endeavor to reach
agreement on a provision to replace the invalid provision which, as nearly as
possible, will reflect the intent of the original provision.
IN WITNESS WHEREOF, each of the Parties hereto has caused this
AGREEMENT to be executed in duplicate originals by their respective duly
authorized officers or representatives.
Ericsson Mobile Communications AB Communication Intelligence Corporation
By: /s/Joakin Ingers By: /s/Guido DiGregorio
Title: Director Data Development Title: President
Print Name: Joakin Ingers Print Name: Guido DiGregorio
Date: November 30, 1998 Date: December 4, 1998
------------------------------- -------------------
11
Exhibit 10.26 (continued)
APPENDIX A
CIC Product Descriptions
1. JOT
a) Jot is a natural character set handwriting recognition system which
supports US English and accented Roman characters. The patented user
interface utilizes a segmented input panel which is divided into two
regions and can be used in a box mode or full screen mode.
b) The Jot trainer allows user tuning of character recognition to improve
recognition accuracy. c) The Jot animated tutorial demonstrates how to
write the full character set. d) The Jot Macro Editor allows the user to
define frequently used phrases or actions for quicker text entry and
editing.
2. On-screen Keyboard
The software on-screen keyboard is an application that emulates a hardware
keyboard on the screen. The user can touch characters on it and the
characters are posted to the application that has focus. The keyboard will
support accented Roman characters currently available in the Jot
recognizer.
3. Quick Notes
QuickNotes is an electronic notetaking and ink capture application.
QuickNotes incorporates CIC's patented INKshrINK compression technology for
reducing the size of the note or drawing to a fraction of the size of
standard graphical file formats (i.e.- bmp, gif or jpg).
4. Sign-It (login)
Sign-it is a dynamic signature verification software which will utilize the
login API so that the users signature can be used for login security.
Sign-it includes CIC's SigCheck(TM) handwritten signature verification and
InkSentry(TM) data encryption algorithms. For use outside the United States
a 40bit version of the encryption algorithms will be included.
12
Exhibit 10.26 (continued)
"Appendix B"
License Fee Schedule
Per unit Royalties shall be as follows:
Jot [Confidential Material supplied separately to the SEC]
On-Screen Keyboard [Confidential Material supplied separately to the SEC]
Quick Notes [Confidential Material supplied separately to the SEC]
Sign-IT Login [Confidential Material supplied separately to the SEC]
Licensee shall pay a non-refundable fee of [Confidential Material supplied
separately to the SEC], due at contract signing, for [Confidential Material
supplied separately to the SEC] Jot & On-Screen Keyboard Units. Ericsson can
debit against these prepaid credit units in accordance with the terms below
and/or any [Confidential Material supplied separately to the SEC] platform as
determined by Ericsson internal management with notice to CIC.
[Confidential Material supplied separately to the SEC]
13
Exhibit 10.26
- --------------------- ------------------ ------------------ --------------------
CIC Confidential November 19, 1998
- --------------------- ------------------ ------------------ --------------------
READ 1998:17429
"Appendix C"
Non-Recurring Engineering (NRE) Specifications
Port CIC Pen Products to Pamela & Roxette Platforms
Rev 2.7
1
Exhibit 10.26
- --------------------- ------------------ ------------------ --------------------
CIC Confidential November 19, 1998
- --------------------- ------------------ ------------------ --------------------
READ 1998:17429
Non-Recurring Engineering (NRE) Effort
I. Introduction
This Scope of Work is intended to provide the framework for porting key CIC
products to Ericsson's Pamela and Roxette platforms. An overview of the
activities are included in the table below.
- -------------------- --------------------- -----------------------
CIC Product Pamela [Confidential Roxette [Confidential
Material supplied Material supplied
separately to the SEC] separately to the SEC]
- -------------------- -------------------- ----------------------
JotTM X X
On-screen Keyboard X X
Word Jot (code name) X
QuickNotes X
SignIt - Login X
- -------------------- -------------------- ---------------------
Porting to the [Confidential Material supplied separately to the SEC] operating
system will be common to both Ericsson products. Final porting and testing of
JotTM will be specific to each platform due the use of different processors,
screen sizes and user interfaces. Further, QuickNotes and SignIt (Login) will be
ported specifically to Pamela.
Under this proposal, CIC will work with Ericsson, and it's partners, to port the
above products to Ericsson's Pamela and Roxette. Smart Phone products, focusing
on user interface, recognition and input mechanisms. Ericsson's responsibility
is the general structure of the product around the [Confidential Material
supplied separately to the SEC] software layering and low level driver elements.
In the case of JotTM, , it will post characters to the application area as a
keyboard would. It is assumed that CIC will work in close connection with
Ericsson, Symbian and its other partners in this effort, in definition, design
and implementation of these elements.
Software objects developed under this agreement, which contain proprietary CIC
technology (i.e. user interface, character recognition and input mechanisms),
will be owned exclusively by CIC and shall be considered part of the Licensed
Programs per Appendix B.
2
- --------------------- ------------------ ------------------ --------------------
CIC Confidential November 19, 1998
- --------------------- ------------------ ------------------ --------------------
READ 1998:17429
II. Core Deliverables from CIC
1. Jot(TM)
a) Provide JotTM recognition engine and patented user interface capability to
the [Confidential Material supplied separately to the SEC] application
environment. Supported character sets are[Confidential Material supplied
separately to the SEC]. The assumed user interface model is [Confidential
Material supplied separately to the SEC] with all Jot user interface
elements (i.e.
mode marks, relevant user interface labels) implemented in software.
b) [Confidential Material supplied separately to the SEC]-based Jot(TM)
trainer application, to allow user tuning of character recognition
optimized for each of Ericsson's Pamela & Roxette products.
c) [Confidential Material supplied separately to the SEC]-based Jot(TM)
animated tutorial, with interface optimized for each of Ericsson's Pamela &
Roxette products.
d) [Confidential Material supplied separately to the SEC]-based Macro Editor,
with interface optimized for each of Ericsson's Pamela & Roxette products.
2. On-screen Keyboard
The software on-screen keyboard is an application that emulates a hardware
keyboard on the screen. The user can touch characters on it and the
characters are posted to the application that is having focus. This
proposal addresses porting of CIC's standard on-screen keyboard.
Customization of user interface and character sets may require additional
development and charges determined by a mutually agreeable functional
specification.
3. [Confidential Material supplied separately to the SEC] Jot (Code name)
Provide same Jot functionality as in "1." above. CIC will provide an
additional mode to the standard Jot interface that will allow it
to[Confidential Material supplied separately to the SEC]. Recognition
and the posting of characters may proceed in parallel. The details of
the metaphor will be mutually defined by CIC and Ericsson, however, it
will essentially provide for a [Confidential Material supplied
separately to the SEC].
4. Quick Notes
CIC will port it's current Palm-size PC note taking application to Pamela
and optimize the user interface. It will link to existing [Confidential
Material supplied separately to the SEC] and email capability. Additional
work may be required to link to the standard [Confidential Material
supplied separately to the SEC] productivity applications. Synchronization
to the CIC QuickNotes Desktop application will be handled separately.
5. Sign-It (login)
CIC will port it's current Sign-It product to Pamela, optimize the user
interface and link to the [Confidential Material supplied separately to the
SEC] login API so that the users signature can be used for login security
to the Pamela device.
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III. Deliverables
This section describes the deliverables for the project. Any changes are to be
mutually agreed upon with appropriate approvals.
IIIa. Deliverables Common to Pamela & Roxette
Alpha 0:
o Jot user interface and recognition engine implemented on[Confidential Material
supplied separately to the SEC].
IIIb. Pamela Specific Deliverables
a.) Functional Specification:
o Design recommendations for Jot and "[Confidential Material supplied separately
to the SEC] Jot" on Pamela. o Testing plan and procedures for each Phase (Alpha,
Beta, & GMC).
o Written CIC deliverable specifications.
b.) Alpha 1:
o Jot with test interface and recognition engine implemented on Pamela EP1.
o Technical support to Ericsson by fax or email for integration support.
c.) Alpha 2:
o Jot & "[Confidential Material supplied separately to the SEC] Jot"
recognition engine implemented on[Confidential Material supplied separately
to the SEC].
o Technical support to Ericsson by fax or email for integration support.
d.) Alpha 3:
o Quick Notes & Sign-It (login) implemented on [Confidential Material
supplied separately to the SEC].
o Technical support to Ericsson by fax or email for integration support.
e.) Beta:
o Jot,[Confidential Material supplied separately to the SEC] Jot", Macro
Editor, Trainer and Tutorial implemented on Final.
o Quick Note Tutorial implemented on Final[Confidential Material supplied
separately to the SEC].
o Sign-It implemented on Final[Confidential Material supplied separately to
the SEC].
o Sample code for testing and integration.
o Technical support to Ericsson by fax or email for integration support.
f.) Final Integration Testing:
o Final integration and testing of Jot, "[Confidential Material supplied
separately to the SEC] Jot", macro editor, and tutorial, trainer on EP2.
o Final integration and testing of Soft Keyboard on EP2.
o Final integration and testing of Quick Notes, Sign-It (login) on EP2.
o Technical support to OEM by fax or email for integration support.
o On site integration testing and support in Ericsson facilities in Raleigh,
NC.
o Sample code for testing and integration.
o Software will be tested in accordance with Ericsson software standards.
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g.) Final Deliverables
o Golden Master Disk (Product-quality software) containing;
o Jot user interface, recognition engine, trainer and macro editor
implemented on EP2.
o On-screen keyboard implemented on EP2.
o "[Confidential Material supplied separately to the SEC] Jot"
implemented on EP2.
o Quick Notes implemented on EP2.
o Sign-It (login) Jot user interface, recognition engine, trainer and
macro editor implemented on EP2.
o Final Documentation including;
o User documentation (per license agreement).
o Final documentation of API's and software structure.
IIIc. Roxette Specific Deliverables
a.) Functional Specification:
o Design recommendations for Jot on Roxette.
o Testing plan and procedures for each Phase (Alpha, Beta, & GMC).
o Written CIC deliverable specifications.
b.) Alpha 1:
o Jot recognition engine implemented on Roxette EP1.
o Technical support to Ericsson by fax or email for integration support.
c.) Beta 1:
o Jot user interface and recognition engine implemented on Roxette EP2
SDK.
o Jot tutorial, macro editor and trainer implemented on Roxette EP2 SDK.
o Soft Keyboard implemented on Roxette EP2 SDK.
o Sample code for testing and integration.
o Documentation of APIs and software structures.
o Technical support to Ericsson by fax or email for integration support.
d.) Final Integration Testing:
o Final integration and testing of Jot, macro editor, trainer and
tutorial on EP2.
o Final integration and testing of Soft Keyboard on EP2.
o Technical support to OEM by fax or email for integration support.
o On site integration testing and support in Ericsson facilities
in Manchester, England.
o Sample code for testing and integration.
o Software will be tested in accordance with Ericsson software standards.
e.) Final Deliverables
o Golden Master Disk (Product-quality software) containing;
o Jot user interface, recognition engine, trainer and macro editor
implemented on Roxette EP2.
o On-screen keyboard implemented on EP2.
o Final Documentation including;
o User documentation (per license agreement).
o Final documentation of API's and software structure.
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IV. Dependencies
Note: These dependencies may affect CIC's ability to deliver a given
deliverable or to meet the agreed schedule milestones.
o Completion of NRE & License Agreements between CIC and Ericsson.
o Ability to get necessary development tools/information from either Ericsson or
key vendors (Operating System, Processor, etc.)
o Ericsson delivery to CIC of necessary components to simulate Pamela & Smart
Phones Roxette (Early Prototypes and SDK's).
o Cooperation and clear definition of User Interface requirements.
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V. Pricing Estimates
(Refer to Section III. Deliverables
Task Description Est Weeks Cost
IIIa. Common
[Confidential Material supplied separately to the SEC]
IIIb. Pamela
[Confidential Material supplied separately to the SEC]
IIIb. Roxette
[Confidential Material supplied separately to the SEC]
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[OBJECT OMITTED]
Material Costs
[Confidential Material supplied separately to the SEC]
On Site Integration and Testing Costs:
[Confidential Material supplied separately to the SEC]
-------------------------------- ------------------------------------------
Item Est. Cost
-------------------------------- ------------------------------------------
-------------------------------- ------------------------------------------
Integration test in Raleigh, NC [Confidential Material supplied separately
to the SEC]
-------------------------------- ------------------------------------------
-------------------------------- ------------------------------------------
Integration test in Manchester [Confidential Material supplied separately
to the SEC]
-------------------------------- ------------------------------------------
-------------------------------- ------------------------------------------
Est. Travel & Living Expenses [Confidential Material supplied separately
to the SEC]
-------------------------------- ------------------------------------------
-------------------------------- ------------------------------------------
Est. Total [Confidential Material supplied separately
to the SEC]
-------------------------------- ------------------------------------------
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Terms of Agreement;
o [Confidential Material supplied separately to the SEC].
o "Other Costs" will be billed as incurred for actual amounts.
VI. Definitions & Acceptance Criteria
Any changes are to be mutually agreed upon with appropriate approvals.
o Alpha Version: Key functionality implemented but contains known bugs that
may cause fatal errors occasionally (i.e. system hanging, loss of
information). Engine is fully implemented and work in OEM OS emulator but
there may be fatal errors. After CIC delivers the software, Ericsson shall
integrate it to development board and verify that it meets the above
performance criteria within [Confidential Material supplied separately to
the SEC] weeks. If there is no written disagreement after [Confidential
Material supplied separately to the SEC] weeks, it is deemed that the
release is done.
o Beta Version: All components are implemented but the software may contain
known bugs of minor severity, no known fatal errors. User Interface,
recognition engine, trainer, macro editor are all implemented and have the
desired UI and functionality. There may be some minor bugs but no fatal
errors that cause system hang or data loss. After CIC delivers the
software, Ericsson shall integrate it to their respective products and
verify it meets the above performance criteria within [Confidential
Material supplied separately to the SEC] weeks. If there is no written
disagreement after [Confidential Material supplied separately to the SEC]
weeks, it is deemed that the release is done.
o Golden Master Candidate: The software is fully functional and contains no
known problems. It is ready for product shipment. After CIC delivers the
software, Ericsson shall integrate it to the respective products and verify
it meets the above performance criteria with [Confidential Material
supplied separately to the SEC] weeks. If there is no written disagreement
after [Confidential Material supplied separately to the SEC] weeks, it is
deemed that the release is done and the version is the final Golden Master
release.
In practice there may be intermediate releases for Alpha, Beta and Golden Master
Candidate versions. For example, CIC may release Alpha1, Alpha2, Beta1, Beta2 or
GMC1, GMC2 etc, and Ericsson may give feedback for each release. CIC continues
to fix problems until both parties agree that a release meets the above criteria
and it is deemed the final Alpha, final Beta or final GMC.
VII. Licensed Deliverables
The following is a description of licensed deliverables to be bundled on the
respective Pamela & Roxette products;
o JotTM Handwriting Recognition engine for Ericsson implementation of
[Confidential Material supplied separately to the SEC] based Smart Phone
o JotTM User Interface for Ericsson implementation of [Confidential Material
supplied separately to the SEC] based Smart Phone.
o JotTM Trainer, Animated Tutorial, and Macro Editor for Ericsson
implementation of [Confidential Material supplied separately to the SEC]
based Smart Phone
o Sign-ItTM
o QuickNotesTM
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Communication Intelligence Corporation Ericsson Commercial
By: /s/Guido DiGregorio By: /s/Del Hanson
---------------------------------- ------------------------------
---------------------------------- ------------------------------
Program Director
Title: President Title: SW Technology Provisioning
------------------------------ ------------------------------
------------------------------ ------------------------------
Date: December 4, 1998 Date: 12/1/98
------------------- ---------------------------------
Ericsson Roxette Technical Manager Ericsson Pamela Technical Manager
By: /s/Joakin Ingers By: /s/Danny Bravo
------------------------------- -------------------------------
------------------------------- -------------------------------
Title: Director Data Development Title: Sr. Project Manager
------------------------------- ---------------------------
------------------------------- ---------------------------
Date: November 30, 1998 Date: 12/1/98
------------------------------- ---------------------------
10
Exhibit 21.1
COMMUNICATION INTELLIGENCE CORPORATION
SCHEDULE OF SUBSIDIARIES
CIC Japan Inc.
1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-04711, No.
333-24257 and No. 333-43855) and the incorporation by reference in the
Registration Statements on Form S-8 (No.33-5521, No. 33-71614 and No. 33-92284)
of Communication Intelligence Corporation of our report dated March 29, 1999
appearing in this Form 10-K. We also consent to the reference to us under the
heading "Experts" in such Prospectuses.
PricewaterhouseCoopers LLP
San Jose, California
March 29, 1999
1