iSign Solutions Inc. - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-K
X
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Fiscal Year Ended December 31, 2005
___
Transition report pursuant to Section 13 of 15(d) of the Securities Exchange
Act
of 1934 For the transition period from ___ to ___
Commission
File No. 0-19301
Communication
Intelligence Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
94-2790442
(I.R.S.
Employer
Identification
No.)
|
|
275
Shoreline Drive, Suite 500
Redwood
Shores, California
(Address
of principal executive offices)
|
94065
(Zip
Code)
|
Registrant’s
telephone number, including area code: 650-802-7888
Securities
registered under Section 12(b) of the Securities Exchange Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act of 1933. Yes[ ] No. [ X
].
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes
[ ] No. [X ].
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. [ X
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the securities Exchange act
of 1934 (check one): Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ X ]
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)
Yes
[ ]
No [ X ]
The
aggregate market value of the voting stock (Common Stock) held by non-affiliates
of the registrant as of March 15, 2006 was approximately $47,657,361 based
on
the closing sale price of $0.45 on such date, as reported by the Nasdaq
Over-the-Counter Market. The
number of shares of Common Stock outstanding as of the close of business
on
March 15, 2006 was 107,473,297.
COMMUNICATION
INTELLIGENCE CORPORATION
TABLE
OF CONTENTS
|
Page
|
|
|
PART
I
|
3
|
|
Item
1. Business
|
11
|
|
Item
1A. Risk Factors
|
13
|
|
Item
1B. Unresolved Staff Comments
|
13
|
|
Item
2. Properties
|
13
|
|
Item
3. Legal Proceedings
|
13
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
14
|
|
PART
II
|
14
|
|
Item
5. Market For Registrant's Common Equity and Related Stockholder
Matters
and Issuer Purchases of Equity Securities
|
14
|
|
Item
6. Selected Financial Data
|
15
|
|
Item
7. Management's Discussion and Analysis of Financial
Condition
and
Results of Operations
|
16
|
|
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
|
28
|
|
Item
8. Consolidated Financial Statements and Supplementary
Data
|
29
|
|
Item
9. Changes in and Disagreements with Accountants on
Accounting
and
Financial Disclosures
|
29
|
|
Item
9A. Controls and Procedures
|
30
|
|
Item
9B. Other Information
|
|
|
PART
III
|
30
|
|
Item
10. Directors and Executive Officers of the Registrant
|
30
|
|
Item
11. Executive Compensation
|
32
|
|
Item
12. Security Ownership of Certain Beneficial Owners and
Management
|
33
|
|
Item
13. Certain Relationships and Related Transactions
|
35
|
|
Item
14. Principal
Accounting Fees and Services
|
35
|
|
PART
IV
|
37
|
|
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
|
37
|
___________
CIC®
and its
logo, Handwriter®,
Jot®,
iSign®,
InkSnap®, InkTools®,
RecoEcho®, Sigo-On®, QuickNotes®,Sign-it®,
WordComplete®,
INKshrINK®
and The
Power To Sign Online®
are
registered trademarks of the Company. HRS’,
PenX’,
SignatureOne’
and
Speller’ are
trademarks of the Company. Applications for registration of various trademarks
are pending in the United States, Europe and Asia. The Company intends to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable
future.
2
PART
I
Item
1. Business
Unless
otherwise stated all amounts in Parts I through Part IV are stated in thousands
(“000s”).
General
Communication
Intelligence Corporation (the “Company” or “CIC”) is a leading supplier of
electronic signature solutions for business process automation in the financial
industry as well as the recognized leader in biometric signature verification.
CIC’s products enable companies to achieve truly paperless business transactions
with multiple signature technologies across virtually all applications and
hardware platforms. To date, CIC has delivered biometric and electronic
signature solutions to over 300 companies worldwide. These deployments are
primarily in the financial industry and include AIG, Charles Schwab, JP Morgan
Chase, Prudential Financial, State Farm Insurance and Wells Fargo. CIC provides
the most comprehensive and scaleable electronic signature solution suite
based
on 20 years of electronic signature development experience and significant
input
from our valued financial industry client installed base. CIC is also a leading
supplier of natural input/text entry software for handheld computers and
smartphones. Major customers for natural input software are PalmSource and
Sony
Ericsson. CIC sells directly to enterprises and through system integrators,
channel partners and OEMs. CIC is headquartered in Redwood Shores, California
and has a joint venture, CICC, in Nanjing, China.
Revenue
for the year ended December 31, 2005 was $3.1 million as compared to $7.3
million for the prior year. In
2004,
revenue was driven by two major eSignature orders, Wells Fargo and State
Farm,
representing 76% of total revenues and 88% of total eSignature revenue.
Revenue
in 2005 was primarily attributable to American General Life Insurance Company,
Charles Schwab & Co., Inc., Everypath Inc., Duncan Management Solution Ltd.,
IA Systems Inc., IntegraSys, Misys Healthcare Systems, PalmSource Inc.,
Prudential Financial Inc., Seton Healthcare Corporation., Software House
International Inc., SnapOn Credit LLC, State Farm Insurance Co., Sony Ericsson
Corporation, Wells Fargo Bank NA, and the Tennessee Valley
Authority.
In
2004,
the company set an eSignature revenue growth record and achieved annual
profitability for the first time in its history. As stated above, 2004 revenue
was driven by two major eSignature orders representing 88% of the total
eSignature revenue of $6.3 million attributable to over seventy customers
worldwide. Although continued revenue momentum was anticipated in 2005, the
large multi-million dollar rollout-type deployments from our installed base
of
proof-of-concepts and pilot installations did not materialize, decreasing
2005
eSignature revenue to $2.1 million.
The
net
loss for 2005 was $4,031, which included $2,275 in non-cash charges to interest
expense for prepaid financing costs and loan discount amortization related
to
the convertible notes, compared with a net income of $1,620 in the prior
year.
Net operating expenses of $4,557, decreased 8%, or $419, compared to 2004
net
operating expenses of $4,976. This
was
accomplished despite an increase in 2005 of $198 in legal expense associated
with successfully defending CIC intelligence property against allegations
of
invalidity and unenforceability, for a second time. The decrease in operating
expense primarily reflects decreases in commissions due to lower sales, reduced
administrative expenses and capitalized software development cost.
Segments
The
Company’s financial information is presented in two segments—handwriting
recognition software and systems integration.
The
handwriting recognition segment is comprised of two revenue categories:
eSignature, and Natural Input sales. All handwriting recognition software
is
developed around the Company’s core technology.
Systems
integration represents the sale and installation of third party computer
equipment and systems that use the Company’s software products. All systems
integration revenue has been generated through the Company’s joint venture. The
Company made the decision in late 2003 not to continue in or expand this
low
margin, labor intensive business, which would require significant increases
in
base costs to provide turn-key capabilities. The system integration business
has
become highly competitive with a low barrier to entry. It is increasingly
comprised of small local Chinese-owned businesses with virtually no
differentiation in service offerings and primarily competing on price and
relationships. Our focus in China is the emerging high potential business
process automation/workflow market, leveraging our eSignature technology
and our
strategic channel partner.
3
Core
Technologies
The
Company's core technologies are classified into two broad categories: "natural
input technologies" and "transaction and communication enabling technologies".
These technologies include multilingual handwriting recognition software
(Jot),
multi-modal electronic signature, handwritten biometric signature verification,
and cryptography (Sign-it, iSign, and SignatureOne).
Natural
Input Technologies.
CIC's
natural input technologies are designed to allow users to interact with a
computer or handheld device by using an electronic pen or stylus as the primary
input device or in conjunction with a keyboard. CIC's natural input offering
includes multilingual handwriting recognition software for such devices as:
electronic organizers, pagers and smart cellular phones that do not have
a
keyboard. For such devices, handwriting recognition offers the most viable
solutions for performing text entry and editing.
Transaction
and Communication Enabling Technologies.
The
Company's transaction and communication enabling technologies are designed
to
provide a cost-effective means for securing electronic transactions, providing
network and device access control and enabling workflow automation of
traditional paper form processing. The Company believes that these technologies
offer more efficient methods for conducting electronic transactions while
providing more functional user authentication and heightened data security.
The
Company's transaction and communication enabling technologies have been
fundamental to its development of software for multi-modal electronic
signatures, handwritten biometric signature verification, data security,
and
data compression.
Handwriting
recognition segment products
Key
handwriting recognition segment products include the following:
|
Jot
|
Multi-lingual
handwriting recognition software
|
||
|
SignatureOne
|
SignatureOne
Profile Server is the server compliment to CIC's Sign-it software,
which
enables the real-time capture of electronic and digital signatures
in
various application environments. All user enrollment, authentication
and
transaction tracking in SignatureOne is based on data from the
Sign-it
client software.
|
||
|
iSign
|
A
suite of application development tools for electronic signatures,
biometric signature verification and cryptography for custom developed
applications and web based development. Includes the Company’s traditional
Inktools software development tools.
|
||
|
Sign-it
|
Multi-modal
electronic signature software for common applications including;
Microsoft
Word, Adobe Acrobat, AutoDesk AutoCAD, and web based applications
using
HTML, XML, & XHTML for the enterprise market
|
4
Products
and upgrades for the handwriting recognition products that were introduced
and
first shipped in 2005 include the following:
iSign
SDK
3.1 (March 2005)
iSign
SDK
3.11 (July 2005)
Sign-it
Word 6.0 (December 2005)
Sign-it
Word 5.0 (July 2005)
Sign-it
Acrobat 5.1 (December 2005)
Sign-it
Acrobat 5.0 (July 2005)
Sign-it
AutoCad 2.0 (April 2005)
Sony-Ericsson
Jot Upgrade Alpha (December 2005)
Jot
for
Palm (June 2005)
Handwriting
recognition software analyzes the individual strokes of characters written
with
a pen/stylus and converts these strokes into machine-readable text characters.
Jot recognizes handwritten input and is specifically designed for small devices.
Unlike many recognizers that compete in the market for handheld data input
solutions, Jot offers a user interface that allows for the input of natural
upper and lowercase letters, standard punctuation and European languages
without
requiring the user to memorize unique characters or symbols. This recognizer
offers rapid and accurate recognition without requiring the consumer to spend
time training the system. Jot has been licensed to such key OEMs as: Microsoft,
Sony Ericsson, Symbian, palmOne, PalmSource, National Semiconductor and Vtech.
Jot has been ported to numerous operating systems, including Palm OS, Windows,
Windows CE, VT-OS, EPOC, QNX, Linux and OS/9. The standard version of Jot,
which
is available through OEM customers, recognizes and supports input of Roman-based
Western European languages.
iSign
is
an electronic signature and handwritten signature verification software
developer’s kit for custom applications or Web based processes. It captures and
analyzes the image, speed, stroke sequence and acceleration of a person's
handwritten electronic signature. iSign provides an effective and inexpensive
handwriting security check for immediate authentication. It also stores certain
forensic elements of a signature for use in determining whether a person
actually electronically signed a document. The iSign kit also includes software
libraries for industry standard encryption and hashing to protect the sensitive
nature of a user signature and the data captured in association with that
signature. The current version of the toolkit includes the Company’s traditional
InkTools software components that have been consolidated into this broader
suite
of tools. Commercial applications for this type of software include document
approval, verification of the identity of users participating in electronic
transactions and securing log-in access to computer systems or protected
networks. This software toolkit is used internally by the Company as the
underlying technology in its SignatureOne and Sign-it products. It has been
licensed to numerous key development partners and end-users, including Chase
Manhattan Bank, EDS, BNX, Siebel Systems and Nationwide (UK).
Sign-it
is a family of electronic signature products for recording multi-modal
electronic signatures as they are being captured as well as binding and
verifying electronic signatures within standard consumer applications. These
products combine the strengths of biometrics, handwritten signatures and
cryptography with a patented process to insure legally compliant electronic
signatures to process, transact and create electronic documents that have
the
same legal standing as a traditional wet signature on paper in accordance
with
the Electronic Signature in National and Global Commerce Act, and other related
legislation and regulations. Organizations wishing to process electronic
forms,
requiring varying levels of security, can reduce the need for paper forms
by
adding electronic signature technologies to their workflow solution. Currently,
Sign-it is available for MS Word, AutoCAD, Adobe Acrobat, and Web based
transactions using XHTML, while support for additional application environments
is in development.
The
SignatureOne Profile Server provides server based enterprise administration
and
authentication of user eSignatures, and maintenance of signature transaction
logs for eSigned documents. The SignatureOne architecture implements a common
process and methodology that provides a uniform program interface for multiple
signature methods and multiple capture devices, simplifying enterprise wide
integration of business process automation tasks requiring eSignature.
eSignature
Revenues
eSignature
revenues in 2005 totaled $2.1 million compared to eSignature revenue of $6.3
million in the prior year. In
2004,
CIC set an eSignature revenue growth record and achieved annual profitability
for the first time in its history. In that year revenue was driven by two
major
eSignature orders, Wells Fargo and State Farm, representing 88% of the total
eSignature revenue of $6.3 million, attributable to over seventy customers
worldwide. Although we anticipated continued revenue momentum in 2005, large
multi-million dollar rollout-type deployments from our installed base of
proof-of-concept and pilot installations did not materialize. Revenue in
2005
was
primarily attributable to AIG, Charles Schwab, Everypath, Duncan Management,
IA
Systems Inc., Integrasis, Misys Healthcare, PalmSource, Prudential, Seaton
Healthcare, Software House International, Snap-On Credit, State Farm, Sony
Ericsson, Wells Fargo, and TVA ( Tennessee Valley Authority).
5
China
eSignature Revenue
CIC
China
(“CICC”), a joint venture 90% owned by CIC, was established over ten years ago
and is headquartered in Nanjing China. The Joint Venture is 10% owned by
the
Jiangsu Hongtu Electronics Group.
Revenue
from CICC’s eSignature software, included above, was $230 in 2005, increasing
92% from $120 in the prior year. The increase in China eSignature sales was
due
to a new agreement with eCom Asia Pacific Pty Ltd (“eCom”). The new agreement
appoints eCom as exclusive master reseller for CIC products to end users
and
resellers with the authority and responsibility to create optimal distribution
channels within the People’s Republic of China. This agreement provides for
guaranteed minimum quarterly royalties over a two-year period. eCom is one
of
the world’s most experienced eSignature solutions providers and has been a
proven reseller and integrator of CIC eSignature products in the Asia Pacific
region for over six years. eCom has highly visible deployments, including
Prudential Plc in Singapore, Malaysia and Hong Kong. The partnership with
eCom
is achieving the targeted objective of establishing enhanced sales coverage
in
China by leveraging our new SignatureOne™
technology
with a trusted and proven partner. The Company expects this channel partner
strategy to continue to deliver increasing and sustained sales
growth.
End
users
and resellers that have licensed the Company’s technology include the
following:
|
Licensee
|
Product(s)
licensed
|
Application
of Products
|
|
|
Accelio
|
Inktools
|
Mobile
forms
|
|
|
Agricultural
Bank of China
|
InkTools
|
Document
automation
|
|
|
Al-Faris
|
Multiple
|
Reseller
and integrator in the Middle East focused on e-Signatures
|
|
|
American
General Life & Assurance (AGLA)
|
Sign-it
|
Mobile
forms
|
|
|
Assurant
Group
|
Sign-It
|
Sales
force automation, new account openings
|
|
|
Baptist
Health
|
Inktools
|
Patient
records
|
|
|
Boston
Medical Center
|
iSign
|
Patient
records
|
|
|
Cablevision
|
Ink
Tools
|
Document
automation
|
|
|
Cellular
One
|
iSign
|
Document
automation
|
|
|
Charles
Schwab
|
Sign-It
|
New
account openings
|
|
|
China
Ministry of Railways
|
InkTools
|
Document
automation
|
|
|
County
of Marin
|
Sign-It
|
Document
automation
|
|
|
County
of Dade
|
Sign-It
|
Document
automation
|
|
|
Duncan
Management
|
Ink
Tools
|
Document
automation
|
|
|
E-Com
Asia Pacific Pty Ltd.
|
Multiple
|
Regional
reseller, multiple applications
|
6
|
Licensee
|
Product(s)
licensed
|
Application
of Products
|
|
|
EDS
|
InkTools
|
Information
assurance for network and application security
|
|
|
First
American Bank
|
Sign-It
|
Various
financial and internal documents
|
|
|
First
Command Financial
|
Sign-It
|
Document
automation
|
|
|
Franklin
Mint
|
Sign-It
|
Document
automation
|
|
|
GE
Power Systems
|
Sign-It
|
Document
automation
|
|
|
IA
Systems
|
InkTools
|
Loan
organization
|
|
|
ILI
Technologies, Ltd.
|
InkTools
& iSign
|
Various
e-Signature applications for the vertical markets in Israel
|
|
|
Industrial
& Commercial Bank of China
|
InkTools
|
Document
automation
|
|
|
Integrate
Online
|
InkTools
|
Mortgage
closing
|
|
|
Interlink
Electronics
|
Sign-It
|
OEM
for multiple products
|
|
|
Missouri
State Lottery
|
Sign-It
|
Document
automation
|
|
|
Motion
Computing
|
Sign-On
|
Tablet
PC logon
|
|
|
Nanjing
Agricultural Bureau
|
InkTools
|
Document
automation
|
|
|
National
Healthcare
|
Sign-It
|
Document
automation
|
|
|
Nationwide
Building Society
|
InkTools
|
Document
automation
|
|
|
Naval
Surface Warfare
|
InkTools
|
Material
center receipts
|
|
|
Old
Republic National
|
Sign-It
|
Title
processing applications
|
|
|
Orange
County, CA
|
Sign-It
|
Automate
building permit process
|
|
|
Prudential
Insurance Co.
|
Sign-It
EX
|
Mobile
forms
|
|
|
RecordsCenter.com
|
InkTools
|
Legal
contracts and other significant documents
|
|
|
Saytek
|
Sign-It
|
Document
automation
|
|
|
State
Farm Insurance Company
|
Sign-It
|
Mobile
forms
|
|
|
St.
Vincent’s Hospital
|
Multiple
|
Document
automation
|
|
|
Siebel
Systems
|
Multiple
|
Sample
delivery of regulated drugs
|
|
|
Siemens
Medical Solutions
|
Multiple
|
Healthcare
|
|
|
Symbol
Technologies
|
Multiple
|
Reseller
for multiple products
|
|
|
Tennessee
Valley Authority
|
Multiple
|
Approval
of internal documents
|
|
|
Topaz
Systems, Inc.
|
Multiple
|
OEM
for multiple products
|
|
|
Turner
Construction/Oracle
|
iSign
|
Document
automation
|
|
|
University
of Virginia
|
iSign
|
Document
automation
|
|
|
Varity
|
InkTools
|
Reseller
of application software
|
7
|
Licensee
|
Product(s)
licensed
|
Application
of Products
|
|
|
Washington
County Hospital
|
Sign-It
|
Patient
records
|
|
|
Wells
Fargo Bank
|
Sign-It
|
Document
automation
|
Natural
Input Revenue
Natural
input revenue for 2005 of $1,054 increased 9% compared to $969 for the prior
year. The revenue increase is due primarily to sales to Sony Ericsson and
additional royalties from Fossil Inc. These increases were offset by a 11%
decrease in royalties received from PalmSource compared to the prior year.
Online/Retail
Revenues
Revenues
from the Company’s software sold directly through its website (www.cic.com)
and at
the retail point of sale totaled $27 in 2005, 79% below the $130 for the
prior
year. In early 2003, PalmSource announced that it had licensed CIC’s Jot®
handwriting recognition software to replace Graffiti® as the standard and only
handwriting software on all new Palm Powered® devices. The embedding of Jot on
Palm related devices had a negative impact on the online/retail sales by
limiting the number of older units that would be upgraded. The transition
to Jot
based PalmSource operating systems by OEM’s was completed in the third quarter
of 2004 and the Company no longer offers its products through online/retail
outlets. CIC has phased out the consumer offering of its Palm OS products.
Jot
continues to be embedded in the PalmSource OS that is used by many leading
handheld computer and smartphones suppliers.
China
System Integration Revenue
CICC
systems integration revenue declined to $0 from $37 in the prior year. The
decline in system integration revenue reflects the Company’s decision, made in
late 2003, not to continue in or expand this low margin, labor intensive
business, which would require significant increases in base costs to provide
turn-key capabilities. The system integration business has become highly
competitive, with a low barrier to entry. It is increasingly comprised of
small
local Chinese owned businesses with virtually no differentiation in service
offerings and primarily competing on price and relationships. Our focus in
China
is on the emerging high potential workflow/office automation market leveraging
our eSignature technology and our strategic channel partner eCom Asia Pacific
LTD.
Copyrights,
Patents and Trademarks
Handwriting
Recognition Segment - eSignature
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its software offerings and
technologies. The Company has a policy of requiring its employees and
contractors to respect proprietary information through written agreements.
The
Company also has a policy of requiring prospective business partners to enter
into non-disclosure agreements before disclosure of any of its proprietary
information.
Over
the
years, the Company has developed and patented major elements of its software
offerings and technologies. In addition, in October 2000 the Company acquired,
from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant
to
the markets in which the Company sells its products. The Company’s material
patents and the years in which they each expire are as follows:
|
Patent
No.
|
Expiration
|
||
|
4718102
|
2005
|
||
|
5049862
|
2008
|
||
|
5544255
|
2013
|
||
|
5647017
|
2014
|
8
|
Patent
No.
|
Expiration
|
||
|
5818955
|
2015
|
||
|
5933514
|
2016
|
||
|
6064751
|
2017
|
||
|
6091835
|
2017
|
||
|
6212295
|
2018
|
||
|
6381344
|
2019
|
||
|
6487310
|
2019
|
The
Company believes that these patents provide a competitive advantage in the
electronic signature and biometric signature verification markets. The Company
believes the technologies covered by the patents are unique and allow it
to
produce superior products. The Company also believes these patents are very
broad in their coverage. The technologies go beyond the simple handwritten
signature and include measuring electronically the manner in which a person
signs to ensure tamper resistance and security of the resultant documents
and
the use of other systems for identifying an individual and using that
information to close a transaction. The Company believes that the patents
are
sufficiently broad in coverage that products with substantially similar
functionality would infringe its patents. Moreover, because the majority
of
these patents do not expire for the next 7 to 15 years from the date hereof,
the
Company believes that it has sufficient time to develop new related
technologies, which may be patentable, and to establish CIC as market leader
in
these product areas. Accordingly, the Company believes that for a significant
period of time its patents will deter competitors from introducing competing
products without creating substantially different technology or licensing
or
infringing its technology.
The
Company has an extensive list of registered and unregistered trademarks and
applications in the United States and other countries. The Company intends
to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable
future.
Systems
Integration Segment
Systems
integration does not rely to any material degree on the Company’s products and,
therefore, its patents and their ultimate expiration do not significantly
impact
the systems integration segment.
Material
Customers
Handwriting
Recognition Segment
Historically,
the Company’s handwriting recognition segment revenues have been derived from a
limited number of customers. Two customers accounted for 16% and 23% of total
segment revenues in 2005. One customer, a national insurance company, accounted
for 46 % and 19% of total segment revenues for the years ended December 31,
2004
and 2003, respectively.
Systems
Integration Segment
The
system integration business has become highly competitive with a low barrier
to
entry. It is increasingly comprised of small Chinese owned businesses with
virtually no differentiation in service offerings and primarily competing
on
price and relationships. The Company made the decision in late 2003 not to
continue in or expand this low margin, labor intensive business, which would
have required significant increases in base costs to provide turn-key
capabilities. There were no system integration sales for the year ended December
31, 2005. One customer, Nanjing Minze, accounted for 40% of total system
integration revenue for the year ended December 31, 2004. One customer, Fujitsu
Ltd., accounted for 21% of total system integration revenue for the year
ended
December 31, 2003.
Seasonality
of Business
The
Company believes that neither of its segments is subject to seasonal
fluctuations.
9
Backlog
Handwriting
Recognition Segment
Backlog
approximated $557 and $458 at December 31, 2005 and 2004, respectively,
representing advanced payments on service maintenance agreements that are
expected to be recognized over the next twelve months.
Systems
Integration Segment
There
was
no backlog at December 31, 2005.
Competition
Handwriting
Recognition Segment
The
Company faces competition at different levels. Certain competitors, e.g.,
PenPower Group, and Decuma AB, have developed or are developing software
offerings which may compete directly with the Company's offerings. Most of
the
Company’s direct competitors, e.g., Microsoft Corporation, Silanis Technology,
Inc., and Advanced Recognition Technology, Inc., have focused on only one
element of such offerings, such as handwriting recognition technology, signature
capture/verification or pen-based operating environments or other pen-based
applications. The Company believes that it has a competitive advantage in
some
cases due to its range of product offerings. There can be no assurance, however,
that competitors, including some with greater financial or other resources,
will
not succeed in developing products or technologies that are more effective,
easier to use or less expensive than the Company’s products or technologies that
would render its products or technologies obsolete or
non-competitive.
Systems
Integration Segment
The
Company’s Joint Venture competes with other systems integrators of similar size
(less than 100 employees) in China for small to mid-size enterprise
opportunities. The Company primarily competes on price and quality and breadth
of services for these opportunities. The Company believes that it is competitive
in its pricing and has been consistently recognized by its customers for
its
high quality of service. However, as previously discussed under System
Integration Revenue, the Company has shifted its focus in China away from
the
system integration business to the emerging high potential work flow/office
automation market leveraging its eSignature technology and strategic channel
partners.
Employees
As
of
December 31, 2005, the Company employed an aggregate of 24 full-time, and
three
part-time employees. The Company’s handwriting recognition segment consisted of
27 employees, 25 of which are in the United States and 2 of which are in
China.
The Company had no full-time employees in its systems integration segment
in
China at December 31, 2005. From time to time, the Company also utilizes
additional personnel on an as needed basis. The Company believes it has good
relations with its employees. None of the Company’s employees are a party to a
collective bargaining agreement.
Geographic
Areas
For
the
years ended December 31, 2005, 2004, and 2003, the Company’s sales in China as a
percentage of total sales were 7%, 1% and 34%, respectively. For the years
ended
December 31, 2005, 2004, and 2003, the Company’s sales in the United States as a
percentage of total sales were 85%, 99%, and 66%, respectively. For the years
ended December 31, 2005, 2004, and 2003, the Company’s export sales as a
percentage of total revenues were approximately 15%, 1%, and 34%,
respectively.
10
Forward
Looking Statements
Certain
statements contained in this Annual Report on Form 10-K, including without
limitation, statements containing the words “believes”, “anticipates”, “hopes”,
“intends”, “expects”, and other words of similar import, constitute “forward
looking” statements within the meaning of the Private Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and
other
factors that may cause actual events to differ materially from expectations.
Such factors include the following: (1) technological, engineering, quality
control or other circumstances which could delay the sale or shipment of
products; (2) economic, business, market and competitive conditions in the
software industry and technological innovations which could affect the Company’s
business; (3) the Company’s ability to protect its trade secrets or other
proprietary rights, operate without infringing upon the proprietary rights
of
others or prevent others from infringing on the proprietary rights of the
Company; and (4) general economic and business conditions and the availability
of sufficient financing.
Item
1A. Risk
Factors
Operating
losses may continue, which could adversely affect financial results from
operations and stockholder value.
In
each
year since its inception, except for the year ended December 31, 2004, the
Company incurred operating losses, which were significant in certain periods.
For the five-year period ended December 31, 2005, those losses aggregated
approximately $7,769. At December 31, 2005, the accumulated deficit is
approximately $84,575. While a profit was recorded for the year ended December
31, 2004 there is no guarantee that the Company will be profitable in future
years and it may incur substantial losses in the future, which could adversely
affect financial results from operations and stockholder value.
We
have experienced significant declines in revenues in recent periods which,
if
continued, could adversely affect stockholder value.
Revenues
decreased 57% for the year ended December 31, 2005, compared to the year
ended
December 31, 2004. The Company believes the increases and decreases in
prior years reflected significant fluctuation in information technology spending
due primarily to the weak economy, both of which had a positive and negative
impact on our revenues. The Company believes that a strengthening economy
and
projected increases in information technology spending as well as improvements
in its sales and marketing efforts and cost-cutting measures that have reduced
its expenses will reverse the current trend. However, The Company cannot
predict
with any degree of certainty whether the economy will continue to strengthen
or
whether information technology spending will continue to show signs of
strengthening.
We
may
need additional financing and, if we are unable to get additional financing
when
needed, we may be required to materially change our operations, which could
adversely affect our results from operations and shareholder value.
As
of
December 31, 2005, the Company’s working capital is approximately $2,258. With
the exception of 2004, the Company has suffered recurring losses from operations
that raised a substantial doubt about its ability to continue as a going
concern. The Company cannot assure you that it will have adequate capital
resources to fund planned operations or that any additional funds will be
available to it when needed, or if available, will be available on favorable
terms or in amounts the Company may require. If the Company is unable to
obtain
adequate capital resources to fund its operations, the Company may be required
to delay, scale back or eliminate some or all of its operations, which may
have
a material adverse effect on its business, results of operations and ability
to
operate as a going concern.
11
Our
competitors could develop products or technologies that could make our products
or technologies non-competitive, which would adversely affect sales, financial
results from operations and stockholder value.
Although
the Company believes that its patent portfolio provides a barrier to entry
to
the electronic signature verification market, there can be no assurance that
it
will not face significant competition in this and other aspects of its business.
Some
of
the Company’s competitors, such as PenPower Group, and Palm Inc., have developed
or are developing complete pen-based hardware and software systems. Others,
such
as Microsoft Corporation, Silanis Technology, Inc., and Advanced Recognition
Technology, Inc., have focused on different elements of those systems, such
as
character recognition technology, pen-based operating systems and environments,
and pen-based applications. Some of its competitors, including more established
companies or those with greater financial or other resources, could develop
products or technologies that are more effective, easier to use or less
expensive than the Company’s. This could make the Company’s products and
technologies obsolete or non-competitive, which would adversely affect sales,
financial results from operations and stockholder value.
If
we are unable to adequately protect our intellectual property, third parties
may
be able to use our technology, which could adversely affect our ability to
compete in the market, our financial results from operations and stockholder
value.
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its proprietary rights in its
products and technologies. These protections may not adequately protect it
for a
number of reasons. First, the Company’s competitors may independently develop
technologies that are substantially equivalent or superior to ours. Second,
the
laws of some of the countries in which the Company’s products are licensed do
not protect those products and its intellectual property rights to the same
extent as do the laws of the United States. Third, because of the rapid
evolution of technology and uncertainties in intellectual property law in
the
United States and internationally, the Company’s current and future products and
technologies could be subject to infringement claims by others. Fourth, a
substantial portion of its technology and know-how are trade secrets and
are not
protected by patent, trademark or copyright laws. The Company requires its
employees, contractors and customers to execute written agreements that seek
to
protect its proprietary information. We also have a policy of requiring
prospective business partners to enter into non-disclosure agreements before
any
of its proprietary information is revealed to them. However, the measures
taken
by the Company to protect our technology, products and other proprietary
rights
might not adequately protect it against improper use.
The
Company may be required to take legal action to protect or defend its
proprietary rights. Litigation of third-party claims of intellectual property
infringement during 2004 and 2005, have require the Company to spend substantial
time and money to protect its proprietary rights. If the result of any
litigation is adverse to the Company, it may be required to expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. If the Company is not successful in those efforts or if it is required
to pay any substantial litigation costs, its business would be materially
and
adversely affected.
A
significant portion of our sales are derived from a limited number of customers,
and results from operations could be adversely affected and shareholder value
harmed if we lost any of these customers.
The
Company’s revenues historically have been derived from a limited number of
customers. Therefore, the success of its business depends on its ability
to
obtain customers and maintain satisfactory relationships with them in the
future. The Company may not be able to continue to maintain satisfactory
relationships with its customers in the future. Our top customer accounted
for
23% and 46% of revenues in the years ended December 31, 2005 and December
31,
2004, respectively. The loss of any significant customer or other revenue
source
would have a material adverse effect on the Company’s revenues and
profitability.
12
Risks
Related to our Capital Structure
The
market price of our stock can be volatile, which could result in losses for
investors.
The
Company’s common stock is listed on the OTC. Stock prices of technology
companies in recent years have experienced significant volatility, including
price fluctuations that are unrelated or not proportional to the operating
performance of these companies. Volatility on the OTC is typically higher
than
the volatility of stocks traded on Nasdaq or the exchanges. The market price
of
the Company’s common stock has been and could be subject to significant
fluctuations as a result of variations in its operating results, announcements
of technological innovations or new products by it or our competitors,
announcements of new strategic relationships by the Company or our competitors,
general conditions in the technology industry or market conditions unrelated
to
its business and operating results.
Statutory
provisions and provisions in our charter may delay or frustrate transactions
that may be beneficial to our stockholders.
Certain
provisions of the Delaware General Corporation Act and our charter may delay
or
prevent a merger, tender offer or proxy contest that is not approved by the
Company’s Board of Directors, even if such events may be beneficial to the
interests of stockholders. For example, the Company’s Board, without shareholder
approval, has the authority and power to issue all authorized and unissued
shares of common stock and preferred stock which have not otherwise been
reserved for issuance. In addition, the Delaware General Corporation Law
contains provisions that may have the effect of making it more difficult
or
delaying attempts by others to obtain control of the Company. See "Description
and Price Range of Common Stock—Anti-Takeover Provisions."
Resale
by the holder of the Notes and Warrants could adversely affect the market
price
of our stock.
The
holders of the remaining Notes and Warrants may immediately sell the shares
issued upon conversion and exercise of the Notes and Warrants, respectively.
In
light of the Company’s historically low trading volume, such sales may adversely
affect the price of the shares of its stock.
Item
1B. Unresolved
Staff Comments
As
of the
date of this report, the Company does not have any unresolved comments on
our
reports filed under the 1934 Act from staff of the Securities and Exchange
Commission.
Item
2. Properties
The
Company leases its principal facilities, consisting of approximately 9,600
square feet, in Redwood Shores, California, pursuant to a sub-lease that
expires
in 2011. The Joint Venture leases approximately 392 square feet in Nanjing,
China. The Company believes that its current facilities will be suitable
to
continue operations in the foreseeable future.
Item
3. Legal
Proceedings
In
February of 2005, Valyd, Inc. filed a complaint against the Company seeking
a
declaratory judgment that Valyd is not infringing certain of the Company’s
patents, that such patents are invalid or unenforceable, that the Company
is
equitably estopped from asserting infringement of such patents against Valyd,
Inc., that the Company tortiously interfered with a contract between Valyd,
Inc.
and Interlink Electronics, Inc. by delivering an infringement notice to
Interlink Electronics, Inc., and that the Company engaged in unfair competition
under California law. No specific monetary claim was set forth in the complaint.
On March 3, 2005, the Company responded to the complaint, denying all
allegations, and filed counterclaims against Valyd, Inc. The counterclaims
asserted that Valyd, Inc. is infringing certain of the Company’s patents and
asked for treble damages, alleging that the infringement was willful, deliberate
and in conscious disregard of the Company’s rights. Valyd, Inc. has withdrawn
its allegation that certain of the Company's patents are unenforceable.
On
January 13, 2006, the Company entered
into a Settlement Agreement with Valyd, Inc. The Settlement Agreement resolves
all claims and counterclaims between the parties with respect to allegations
set
forth in the previously announced litigation without payment of damages by
either party.
13
Item
4. Submission
of Matters to a Vote of Security Holders
None
PART
II
Item
5. Market
For Registrant's Common Equity and Related Stockholder Matters and issuer
Purchases of Equity Securities
The
Company’s common stock is listed on the Over-the-Counter Bulletin Board (“OTC”)
under the trading symbol CICI.OB. Prior to March 14, 2003 it was listed on
the
Nasdaq Capital Market (formerly known as the SmallCap Market) under the symbol
CICI. The following table sets forth the high and low sale prices of the
common
stock for the periods noted.
|
Sale
Price
Per
Share
|
|||
|
Year
|
Period
|
High
|
Low
|
|
2004
|
First
Quarter
|
$
1.10
|
$ 0.35
|
|
Second
Quarter
|
$
0.90
|
$
0.42
|
|
|
Third
Quarter
|
$
0.80
|
$ 0.31
|
|
|
Fourth
Quarter
|
$
0.71
|
$ 0.35
|
|
|
2005
|
First
Quarter
|
$
0.63
|
$ 0.38
|
|
Second
Quarter
|
$
0.59
|
$
0.23
|
|
|
Third
Quarter
|
$
0.61
|
$ 0.39
|
|
|
Fourth
Quarter
|
$
0.55
|
$ 0.37
|
|
|
2006
|
First
Quarter (through March 15, 2006)
|
$
0.53
|
$ 0.40
|
As
of
March 15, 2006, the closing sale price of the Common Stock on the Nasdaq
OTC was
$0.45 per share and there were approximately 947 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.
All
securities sold during 2005 by the Company were either previously reported
on
Form 10-Qs filed with the Securities and Exchange Commission or sold pursuant
to
registration statements filed under the Securities Act of 1933, as
amended.
During
the three months ended December 31, 2005, the Company granted 2,743 stock
options to 11 employees, with a weighted average exercise price of $0.65
per
share, under the Company’s 1999 Stock Option Plan and non-plan options. During
the years ended December 31, 2005, 2004, and 2003, respectively, the Company
granted the following options to purchase Common Stock to employees at the
prices per share indicated below:
|
Year
|
Number
of Shares
|
Approximate
Exercise Price Per Share
|
||
|
2005
|
4,142
|
$0.79
|
||
|
2004
|
1,334
|
$0.53
|
||
|
2003
|
858
|
$0.32
|
The
information required by Item 201(d) of Regulation S-K is incorporated by
reference to Note 7 (“Stockholders Equity”) of Notes to Consolidated Financial
Statements for the Year Ended December 31, 2005, page F-22.
14
Item
6. Selected
Financial Data
The
selected consolidated financial data presented below as of December 31, 2005,
2004, 2003, 2002, and 2001 and for each of the years in the five-year period
ended December 31, 2005 are derived from the audited consolidated financial
statements of the Company. The consolidated financial statements as of December
31, 2005 and 2004, and for each of the years in the three-year period ended
December 31, 2005, 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.”
|
Years
Ended December 31,
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||||||
|
(In
thousands, except per share amounts)
|
|||||||||||||||||||
|
Statement
of Operations Data:
|
|||||||||||||||||||
|
Revenues
|
$
|
3,121
|
$
|
7,284
|
$
|
3,034
|
$
|
3,272
|
$
|
5,947
|
|||||||||
|
Research
and development expenses(1)
|
1,144
|
1,187
|
1,302
|
1,485
|
1,808
|
||||||||||||||
|
Sales
and marketing expenses
|
1,240
|
1,306
|
905
|
1,543
|
2,054
|
||||||||||||||
|
General
and administrative expenses
|
2,173
|
2,483
|
2,219
|
2,424
|
2,791
|
||||||||||||||
|
Income
(loss) from operations
|
(1,584
|
)
|
2,255
|
(2,157
|
)
|
(3,337
|
)
|
(2,946
|
)
|
||||||||||
|
Net
income (loss) available to common stockholders
|
$
|
(4,031
|
)
|
$
|
1,620
|
$
|
(2,345
|
)
|
$
|
(3,561
|
)
|
$
|
(3,215
|
)
|
|||||
|
Basic
and diluted income (loss) per share
|
$
|
(0.04
|
)
|
$
|
0.02
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
|||||
|
As
of December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash,
cash equivalents and restricted cash
|
$
|
2,849
|
$
|
4,736
|
$
|
1,039
|
$
|
711
|
$
|
2,588
|
||||||
|
Working
capital(2)
|
2,258
|
4,068
|
(2,895
|
)
|
443
|
3,017
|
||||||||||
|
Total
assets
|
8,466
|
10,819
|
7,215
|
7,168
|
10,072
|
|||||||||||
|
Deferred
revenue
|
557
|
458
|
165
|
165
|
88
|
|||||||||||
|
Long-term
obligations
|
1,169
|
1,790
|
13
|
3,000
|
3,000
|
|||||||||||
|
Stockholders'
equity (3)
|
5,856
|
7,531
|
2,187
|
2,934
|
6,060
|
|||||||||||
___________
| (1) |
Excludes
software development costs capitalized in accordance with Statement
of
Financial Accounting Standards No. 86 of $299 at December 31, 2005,
$32 at
December 31, 2004 and $20 at December 31, 2001 respectively. No
software
development costs were capitalized in the years ended December
31, 2003
and 2002.
|
| (2) |
Current
liabilities used to calculate working capital at December 31, 2005,
2004,
2003, 2002, and 2001 include deferred revenue of $557, $458, $165,
$165,
and $88, respectively.
|
| (3) |
The
Company has never paid dividends to the holders of its common stock.
|
15
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Unless
otherwise stated herein, all figures in this MD& A section are stated in
thousands (“000s”).
Overview
The
Company was initially incorporated in Delaware in October 1986. Except for
the
year ended December 31, 2004, in each year since its inception the Company
has
incurred losses. For the five-year period ended December 31, 2005, operating
losses aggregated approximately $8,000 and at December 31, 2005, the Company's
accumulated deficit was approximately $85,000.
Total
revenue of $3,121 for the year ended December 31, 2005 decreased 57% compared
to
revenues of $7,284 in the prior year. Total
eSignature revenue, of $2,067 for the year ended December 31, 2005 decreased
67%
compared to total eSignature revenue of $6,278 in the prior year. However,
$5,250 of the corresponding prior year period’s eSignature revenue was
attributable to two large orders (Wells Fargo and State Farm), the remaining
$1,028 is attributable to other eSignature accounts closed during 2004 .
It is
important to note that the $2,067 of eSignature revenue for year ended December
31, 2005 is double (200%) the $1,028 eSignature revenue reported in the prior
year not applicable to the two large orders noted above. This represents
both an
increase in the quantity and average price of orders over the corresponding
twelve month period of the prior year.
Sales
for
the year ended December 31, 2005 do not reflect any significant follow-on
deployment revenue from our eSignature worldwide installed base of hundreds
of
pilot and proof of concept stage installations. These installations, over
the
past five years, accounted for revenues in excess of $13 million.
At
the
end of 2004 we anticipated, and still expect to benefit from, further full
deployments from within our installed base of handwritten signature verification
products initially supplied to early adopters. However, our experience suggests
that some full follow-on deployments from our established customer base,
as well
as future orders from new financial services accounts, will require SignatureOne
technology and other CIC product offerings that we have already shared with
key
customers. SignatureOne addresses the growing market demand for an architecture
that embraces multiple eSignature methods, including handwritten signature
verification. This customer demand for, and evaluation of, our newer products
is
causing the expected delays inherent within such a transition.
We
believe our SignatureOne product is enhancing our leadership position by
accelerating acceptance in the financial services market, opening up new
markets, extending our product differentiation and playing to our maximum
intellectual property strength.
In
addition to strengthening our leadership position, we further believe this
transition heightens pent-up demand, driving our market towards accelerated
eSignature adoption and into market takeoff, thereby providing excellent
potential for sustained sales growth in the future.
The
net
loss for the twelve months ended December 31, 2005 was $4,031, which included
$2,275 in non-cash charges to interest expense for prepaid financing costs
and
loan discount amortization related to the convertible notes, compared with
a net
income of $1,620 in the prior year. Operating expenses, including capitalized
software development costs, decreased approximately 3%, or $165, from $5,029
to
$4,705 for the year ended December 31, 2005, compared to the prior year.
The
decrease in operating expense primarily reflects the decrease in commissions
due
to lower sales and reduced administrative expenses.
New
Accounting Pronouncements
See
note
1, Notes to Consolidated Financial Statements included under Part IV. Item
15.
16
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity
with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the
amounts reported in the Company’s consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in its
balance sheets and the amounts of revenues and expenses reported for each
period
presented are affected by these estimates and assumptions which are used
for,
but not limited to, revenue recognition, allowance for doubtful accounts,
intangible asset impairments, inventory, fair value of financial instruments,
customer base, software development costs research and development costs,
foreign currency translation and net operating loss carryforwards. Actual
results may differ from these estimates. The following critical accounting
policies are significantly affected by judgments, assumptions and estimates
used
by the Company’s management in the preparation of the consolidated financial
statements.
Revenue
is recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition, as amended, Staff Accounting Bulletins 104 ("SAB 104") and the
interpretive guidance issued by the Securities and Exchange Commission and
EITF
issue 00-21 of the FASB’s Emerging Issues Task Force. The Company recognizes
revenues from sales of software products upon shipment, provided that persuasive
evidence of an arrangement exists, collection is determined to be probable,
all
nonrecurring engineering work necessary to enable the Company products to
function within the customer's application has been completed and the Company’s
product has been delivered according to specifications. Revenue from service
subscriptions is recognized as costs are incurred or over the service period.
Software license agreements may contain multiple elements, including upgrades
and enhancements, products deliverable on a when and if available basis and
post
contract support.
Revenue
from software license agreements is recognized upon delivery of the software,
provided that persuasive evidence of an arrangement exists, collection is
determined to be probable, all nonrecurring engineering work necessary to
enable
the Company’s products to function within the customer's application has been
completed and the Company has delivered its product according to contract
specifications. Deferred revenue is recorded for upgrades, enhancements and
post-contract support, which is paid for in addition to license fees, and
is
recognized as costs are incurred or over the support period. Vendor specific
objective evidence of the fair value for multiple element software license
agreements is determined by the price charged for the same element when sold
separately or the price determined by management having the relevant authority
when the element is not yet sold separately. The price established by management
for the element not yet sold separately will not change prior to separate
introduction of that element into the marketplace.
Revenue
from system integration activities, which represents the sale and installation
of third party computer equipment and limited related consulting services,
is
recognized upon installation of the third party hardware and/or software
as
projects are short term in nature, provided that a contract exists,
collectibility of the receivable is reasonably assured and the system is
functioning according to specifications. Service subscription revenues
associated with the system integration activities are recognized as costs
are
incurred or over the service period which ever is longer.
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable.
If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due it could be affected
and, the Company would adjust the allowance accordingly.
17
The
Company performs intangible asset impairment analyses on a quarterly basis
in
accordance with the guidance in Statement of Financial Accounting Standard
No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142") and Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long
Lived Assets ("SFAS No. 144"). The Company uses SFAS 144 in response to changes
in industry and market conditions that affects its patents, the Company then
determines if an impairment of its assets has occurred. The Company reassesses
the lives of its patents and tests for impairment quarterly in order to
determine whether the book value of each patent exceeds the fair value of
each
patent. Fair value is determined by estimating future cash flows from the
products that are and will be protected by the patents and considering the
following additional factors:
| · |
whether
there are legal, regulatory or contractual provisions known to
it that
limit the useful life of each patent to less than the assigned
useful
life;
|
| · |
whether
the Company needs to incur material costs or make modifications
in order
for it to continue to be able to realize the protection afforded
by the
patents;
|
| · |
whether
any effects of obsolescence or significant competitive pressure
on the
Company’s current or future products are expected to reduce the
anticipated cash flow from the products covered by the
patents;
|
| · |
whether
demand for products utilizing the patented technology will diminish,
remain stable or increase; and
|
| · |
whether
the current markets for the products based on the patented technology
will
remain constant or will change over the useful lives assigned to
the
patents.
|
The Company’s revenues decreased in 2005 when compared to 2004. Management decided to obtain an independent valuation to support its assertion that no impairment of the carrying value of the patents existed at December 31, 2005.
Customer
Base. To date, the Company's revenues have been derived principally from
end-users, manufacturers, retailers and distributors of computer products
in
North America, Europe and the Pacific Rim. The Company performs periodic
credit
evaluations of its customers and does not require collateral. The Company
maintains reserves for potential credit losses. Historically, such losses
have
been within management's expectations.
Software
Development Costs. Software development costs are accounted for in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for
the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
86"). Under SFAS 86, capitalization of software development costs begins
upon
the establishment of technological feasibility, subject to net realizable
value
considerations. The costs capitalized include the coding and testing of the
product after technological feasibility has been established and ends upon
the
release of the product. The capitalized costs are amortized to cost of sales
on
a straight-line basis over the estimated life of the product, generally three
years. The Company capitalized $299 and $45 for the years ended December
31,
2005 and 2004. As of December 31, 2003 such costs were
insignificant.
Research
and Development Costs. Research and development costs are charged to expense
as
incurred.
Foreign
Currency Translation. The Company considers the functional currency of the
Joint
Venture to be the respective local currency and, accordingly, gains and losses
from the translation of the local foreign currency financial statements are
included as a component of "accumulated other comprehensive loss" in the
Company’s consolidated balance sheets. Foreign currency assets and liabilities
are translated into U.S. dollars at exchange rates prevailing at the end
of the
period, except for long-term assets and liabilities that are translated at
historical exchange rates. Revenue and expense accounts are translated at
the
average exchange rates in effect during each period, except balance sheet
accounts, which are translated at historical exchange rates. Net foreign
currency transaction gains and losses are included as components of "interest
income and other income (expense), net" in the Company's consolidated statements
of operations. Due to the stability of the currency in China, net foreign
currency transaction gains and losses were not material for the year ended
December 31, 2005, 2004 and 2003, 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, 2005 of $28 million
based upon the Company's history of losses.
18
Segments
The
Company reports its financial results in two segments: handwriting recognition
and systems integration. Handwriting recognition includes natural input and
eSignature revenues. All handwriting recognition software is developed around
the Company’s core technology. Handwriting recognition product revenues are
generated, through a direct sales force, from individual or enterprise end
users
and, until the first quarter of 2005, by web based application resellers.
The
Company also licenses a version of its handwriting recognition software to
OEM's. The handwriting recognition software is included as part of the OEM's
product offering. From time to time, the Company is required to develop an
interface (port) for its software to operate on a customer's hardware platform
or within the customer's software operating system. Development contract
revenues are included in the handwriting recognition segment.
System
integration represents the sale and installation of third party computer
equipment and systems that utilize the Company’s products. System integration
sales are derived through a direct sales force that then develops a system
to
utilize the Company’s software based on the customer’s requirements. Systems
integration sales are accomplished solely through the Company’s Joint Venture.
However, as previously discussed under System Integration Revenue, the Company
has shifted its focus in China away from the system integration business
to the
emerging high potential work flow/office automation market leveraging its
eSignature technology and strategic channel partners.
Results
of Operations
The
following table provides unaudited financial information for each of the
Company’s two segments.
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Handwriting
recognition
|
||||||||||
|
eSignature
|
$
|
1,837
|
$
|
6,158
|
$
|
1,530
|
||||
|
eSignature
China
|
230
|
120
|
319
|
|||||||
|
Natural
input
|
1,054
|
969
|
518
|
|||||||
|
Total
Handwriting recognition
|
$
|
3,121
|
$
|
7,247
|
$
|
2,367
|
||||
|
Systems
integration China
|
−
|
37
|
667
|
|||||||
|
Total
revenues
|
$
|
3,121
|
$
|
7,284
|
$
|
3,034
|
||||
|
Cost
of Sales
|
||||||||||
|
Handwriting
recognition
|
||||||||||
|
eSignature
|
$
|
105
|
$
|
22
|
$
|
124
|
||||
|
Natural
input
|
43
|
−
|
17
|
|||||||
|
Systems
integration
|
−
|
31
|
624
|
|||||||
|
Total
cost of sales
|
$
|
148
|
$
|
53
|
$
|
765
|
||||
|
Operating
cost and expenses
|
||||||||||
|
Research
and development
|
$
|
1,144
|
$
|
1,187
|
$
|
1,302
|
||||
|
Sales
and Marketing
|
1,240
|
1,306
|
905
|
|||||||
|
General
and administrative
|
2,173
|
2,483
|
2,219
|
|||||||
|
Total
operating costs and expenses
|
$
|
4,557
|
$
|
4,976
|
$
|
4,426
|
||||
|
Interest
and other income (expense) net, and Minority interest
|
$
|
(172
|
)
|
$
|
(635
|
)
|
$
|
(188
|
)
|
|
|
Amortization
of loan discount and deferred financing cost
|
(2,275
|
)
|
−
|
−
|
||||||
|
Net
income (loss)
|
$
|
(4,031
|
)
|
$
|
1,620
|
$
|
(2,345
|
)
|
19
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Amortization
of intangible assets
|
||||||||||
|
Cost
of sales
|
$
|
49
|
$
|
12
|
$
|
14
|
||||
|
General
and administrative
|
378
|
379
|
379
|
|||||||
|
Total
amortization of intangible assets (See note 1)
|
$
|
427
|
$
|
391
|
$
|
393
|
||||
Years
Ended December 31, 2005 and December 31, 2004
Revenues
Handwriting
Recognition Segment. Handwriting
recognition segment revenues include eSignature and natural input
revenues.
eSignature
revenue. eSignature
revenues are derived from channel partners and end users. eSignature revenues
declined 67%, or $4,211, to $2,067 for the year ended December 31, 2005,
compared to $6,278 in the prior year as discussed below.
eSignature
revenues through channel partners increased 28%, or $74, to $338 for the
year
ended December 31, 2005, compared to $264 in the prior year. The increase
is due
primarily to orders in the second and third quarters of 2005 from one of
the
Company’s resellers for its Sign-it® for Acrobat product for use by a major
telecommunications company.
eSignature
revenues from sales to end users decreased 75%, or $4,396, to $1,498, for
the
year ended December 31, 2005, compared to $5,894 in the prior year period.
The
decrease in eSignature sales to end users was due primarily to the sale of
the
Company’s eSignature products to Wells Fargo Bank and a large national insurance
company in the first and third quarters in 2004.
eSignature
revenues in China increased 92%, or $110, to $230, for the year ended December
31, 2005, as compared to $120 in the prior year period. The increase in China
eSignature revenues was due to a new agreement with eCom Asia Pacific Pty
Ltd
(“eCom”). The new agreement appoints eCom as exclusive master reseller for CIC
products to end users and resellers with the authority and responsibility
to
create optimal distribution channels within the People’s Republic of China. This
agreement provides for guaranteed minimum quarterly royalties over a two-year
period. eCom is one of the world’s most experienced eSignature solutions
providers and has been a proven reseller and integrator of CIC eSignature
products in the Asia Pacific region for over six years. eCom has highly visible
deployments including Prudential Plc in Singapore, Malaysia and Hong Kong.
The
partnership with eCom is targeted to achieve our objective of establishing
enhanced sales coverage in China leveraging our new SignatureOne™
technology
with a trusted and proven partner. The Company believes that the channel
partner
strategy will deliver increasing and sustained revenue growth.
The
Company made an investment in new sales personal during 2005. The Company
believes that this investment will increase corporate eSignature revenues
in the
near term through a stronger focus and presence in its target markets. In
addition, the Company believes that the sales of smaller pilot deployments
of
its products to customers will lead to greater sales in future periods as
the
customers roll out their applications on wider scales. However, the timing
of
customer product roll outs is difficult to project due to many factors beyond
the Company’s control. The Company views eSignature as a high potential revenue
market and intends to continue to place increasing focus on this
market.
Natural
Input revenues.
Natural
Input revenues are derived from OEM’s and web-based sales.
Revenue
from the sales of the Company’s natural input products, which include Jot,
increased 9%, or $85, to $1,054 for the year ended December 31, 2005, compared
to $969 in the prior year as discussed below.
20
Natural
input product revenues through OEM’s increased 22%, or $187, to $1,027 for the
year ended December 31, 2005, compared to $840 in the prior year. The increase
is due primarily to new product upgrades of the Company’s Jot® product purchased
by Sony Ericsson and additional royalties from Fossil Inc. These increases
were
offset by a 8% decrease in royalties received from Palm Source compared to
the
prior year.
Online/retail
revenues decreased 79%, or $102, to $27 for the year ended December 31, 2005,
as
compared to $129 in the prior year period. In early 2003, PalmSource announced
that it had licensed CIC’s Jot® handwriting recognition software to replace
Graffiti® as the standard and only handwriting software on all new Palm Powered®
devices. The embedding of Jot on Palm related devices had a negative impact
on
the online/retail sales by limiting the number of older units that would
be
upgraded. The transition to Jot based PalmSource operating systems by OEM’s was
completed in the third quarter of 2004 and the Company no longer offers its
products through online/retail outlets. CIC has phased out the consumer offering
of its Palm OS products. Jot continues to be embedded in the PalmSource OS
that
is used by leading handheld computer and smartphones suppliers.
Systems
Integration revenues.
There
were no system integration segment revenues for the year ended December 31,
2005. System integration segment revenue declined 100%, or $37, to $0, as
compared to $37 in the prior year period. The decline in system integration
revenue reflects the decision made in late 2003 not to continue in or expand
this low margin, labor intensive business, which would require significant
increases in base costs to provide turn-key capabilities. The system integration
business has become highly competitive with a low barrier to entry. It is
increasingly comprised of small Chinese-owned businesses with virtually no
differentiation in service offerings and primarily competing on price and
relationships. Our focus in China is on the emerging high potential
workflow/office automation market leveraging our eSignature technology and
strategic channel partners.
Cost
of Sales.
Handwriting
recognition.
eSignature.
eSignature
cost of sales increased 425%, or $85, to $105 for the twelve months ended
December 31, 2005, as compared to $20 in the prior year. The increase is
primarily due to increases in capital software amortization of $27 and
engineering costs amounting to $77 associated with development contracts.
eSignature costs of sales will fluctuate in the future depending on the volume
of revenue generating development contracts and increases in capital software
amortization related to upgrades and enhancements made to the eSignature
products.
Natural
input.
Natural
input cost of sales increased $43, to $43 for the year ended December 31,
2005,
as compared to $0 in the prior year. This increase is primarily due to
capitalized software development amortization resulting from upgrades and
enhancements made to the Jot product in 2005 and to $8 in engineering costs
associated with development contracts. Natural input cost of sales will
fluctuate for the same reasons mentioned above,
System
integration
System
integration cost of sales declined $33, to $0 for the year ended December
31,
2005, as compared to $33 in the prior year. The decline in system integration
revenue reflects the decision made in late 2003 not to continue in or expand
this low margin, labor intensive business, which would require significant
increases in base costs to provide turn-key capabilities. The system integration
business has become highly competitive with a low barrier to entry. It is
increasingly comprised of small Chinese-owned businesses with virtually no
differentiation in service offerings and primarily competing on price and
relationships. Our focus in China is on the emerging high potential
workflow/office automation market leveraging our eSignature technology and
strategic channel partners.
21
Operating
expenses
Research
and Development Expenses.
Research and Development expense decreased 4%, or $43, to $1,144 for the
year
ended December 31, 2005, as compared to $1,187 in the prior year period.
Engineering expenses consist primarily of salaries and related costs, outside
engineering, maintenance items, and allocated facilities expenses. Salaries
and
related expense increased 33%, or $290, to $1,171 for the year ended December
31, 2005, as compared to $881 in the prior year period, due primarily to
the
addition of two engineers and three part-time test engineers. Outside
engineering cost and expenses increased 1229%, or $86, to $93 for the year
ended
December 31, 2005, compared to $7 in the prior year period. The increase
was due
primarily to the use of outside engineering services to complete a joint
development project. The Company maintains a relationship with an outside
engineering group familiar with its products and may draw on their services,
as
required, which could have a material effect on the amount of outside
engineering expense reported. Capitalized software development costs increased
564%, or $254, to $299 for the year ended December 31, 2005, compared to
$45 in
the prior year period. The increase in capitalized software development cost
was
due to new product development and significant upgrades and enhancements
made to
the Company’s natural input and eSignature products. Capitalization of software
development costs are expected to remain at increased amounts for the
foreseeable future. Engineering costs charged to cost of sales increased
$85
compared to $0 in the prior year periods. The increase is primarily due to
customer paid development orders completed in 2005. Other engineering expenses
decreased 23%, or $80, to $264 for the twelve months ended December 31, 2004
as
compared to $344 in the prior year period. The decrease was primarily due
to an
increase in allocated sales engineering support costs, offset by higher
facilities and depreciation expense.
Sales
and Marketing Expenses.
Sales
and marketing expenses decreased 5%, or $66, to $1,240 for the year ended
December 31, 2005, compared to $1,306 in the prior year period. Sales and
marketing expenses consist of salaries, commissions and related expenses,
professional services, advertising and promotion, general office and allocated
facilities expenses. Salaries and related expenses increased 21%, or $109,
to
$626 for the year ended December 31, 2005, compared to $517 in the prior
year
period. The increase in salaries and related expense was due primarily to
the
increase in headcount of two sales persons. Commission expense decreased
54%, or
$170, to $144 for the year ended December 31, 2005, compared to $314 in the
prior year period. The decrease in commission expense was due primarily to
a
decrease in revenues. Travel and entertainment decreased 47%, or $40, to
$45 for
the year ended December 31, 2005, compared to $85 in the prior year period.
This
decrease was due to the changes in geographic location of the new sales staff
that required less travel expense to potential customer locations. Recruiting
expense increased 138%, or $47, to $81 for the year ended December 31, 2005,
compared to $34 in the prior year period. The increase was due to the hiring
of
additional sales staff utilizing professional search firms. Other expense,
including general office and allocated facilities expenses declined 3%, or
$11,
to $344 for the year ended December 31, 2005, compared to $355 in the prior
year
period. The Company anticipates that sales and marketing expenses, net of
commissions, will continue to increase in the near term as it strengthen
its
sales staff and efforts in pursuit of new opportunities in the eSignature
market
space. The Company continues to pursue a channel strategy for its eSignature
products. The Company believes the channel strategy, along with its current
and
potential partners, will produce increasing revenues in the near
term.
General
and Administrative Expenses.
General
and administrative expenses decreased 12%, or $310, to $2,173, for the year
ended December 31, 2005, compared to $2,483 in the prior year period. General
and administrative expense consists of salaries, professional fees, investor
relations expenses, patent amortization and office and allocated facilities
costs. Salaries and wages increased 3%, or $26, to $770 for the year ended
December 31, 2005, compared to $744 in the prior year period. The increase
was
due primarily to increases in employee salaries. Professional service expense,
which include consulting, legal and outside accounting fees, increased 6%,
or
$32, to $574 for the year ended December 31, 2004, compared to $542 in the
prior
year period. The increase was due primarily to an increases in legal fees
associated with the infringement litigation related to the enforcement of
its
patents by the Company. The Company’s bad debt expense decreased 97%, or $144,
to $4 for the year ended December 31, 2005, compared to $148 in the prior
year
period. The decrease was primarily due to providing a reserve for the channel
partner receivables of the Joint Venture. At this time, the Company believes
that its provision for bad debts is adequate. Other administrative expenses
decreased 21%, or $224, to $825 for the year ended December 31, 2005, compared
to $1,049 in the prior year period. The decrease was due primarily to spending
reductions. The Company believes that its General and Administrative expenses
will remain stable for the near term.
22
Interest
income and other income (expense), net
Interest
income and other income (expense), net decreased 64%, or $30, to $17 for
the
year ended December 31, 2005, compared to $47 in the prior year period. The
decrease is primarily due to the disposal of fixed assets by the joint
venture.
Interest
expense
Interest
expense decreased 60%, or $306, to $208 for the year ended December 31, 2005,
compared to $514 in the prior year period. The decrease was primarily due
to
reductions in the amount of debt as the result of conversions of the notes
into
shares of common stock (See Note 6 in the Consolidated Financial Statements
of
this Form 10-K).
Amortization
of loan discount, which includes warrant and beneficial conversion feature
costs, and deferred financing costs, associated with the convertible notes
increased 1117%, or $2,088, to $2,275 for the year ended December 31, 2005,
compared to $187 in the prior year. The increase was due to the amortization
of
the loan discount and deferred financing costs related the conversion of
$2,322
of the convertible notes during the twelve months ended December 31, 2005
(See
Note 6 in the Consolidated Financial Statements of this Form 10-K). The Company
will be required to amortize an additional $895 to interest expense over
the
life of the convertible notes or sooner if the notes are converted before
the
due date.
Years
Ended December 31, 2004 and December 31, 2003
Revenues
Handwriting
Recognition Segment. Handwriting
recognition segment revenues include eSignature and natural input
revenues.
eSignature
revenue. eSignature
revenues are derived from channel partners and end users. eSignature revenues
increased 240%, or $4,429, to $6,278 for the year ended December 31, 2004,
compared to $1,849 in the prior year as discussed below.
eSignature
revenues through channel partners decreased 49%, or $253, to $264 for the
year
ended December 31, 2004, compared to $517 in the prior year. The decrease
is due
primarily to a large order in the second quarter of 2003 from one of its
resellers .
eSignature
revenues to end users increased 482%, or $4,881, to $5,894, for the year
ended
December 31, 2004, compared to $1,013 in the prior year period. The increase
in
eSignature revenues was due primarily to sales to large national customers
in
the insurance and banking industries. The Company believes that the sales
of
smaller pilot deployments to large national eSignature customers will lead
to
greater sales in future periods as the customers roll out their applications
on
a wider scale. However the timing of customer product roll out is difficult
to
project due to many factors beyond the Company’s control. The Company views
eSignature as a high potential revenue market and intends to continue to
place
increasing focus on this market.
eSignature
revenues in China decreased 62% or $199, to $120, for the year ended December
31, 2004, as compared to $319 in the prior year period. This decline represents
both the impact of delays in rolling out CICC’s channel strategy as well as the
passage of China’s E-Sign Law in August of 2004. Achieving accelerated and
sustained revenue growth in China by leveraging resellers to provide China
wide
market coverage requires investment in both time and resources. Training
resellers’ sales forces and committing the upfront engineering resources
required to embed our eSignature software into partners’ total solutions was
anticipated and fundamental to achieving China-wide sales coverage. The
anticipation and final passage of China’s E Sign Law, however, significantly
dampened sales results, especially in the last half of 2004, as both resellers
and end user customers awaited the implications of the law on product
functionality. However, passage of this Law is an overall positive event
in that
it provides the framework for product functionality and standards required
to
accelerate acceptance and growth for our technology in China. It does, however,
require new market validation studies and considerable engineering effort
to
localize our newer technologies to meet the China market requirements. This
has
led to our current strategy of identifying and focusing on fewer strategic
partners/resellers in China. Specifically, those capable of both market
validation and possessing a high level of engineering competence and effective
selling to target market applications.
23
Natural
Input revenues.
Natural
Input revenues are derived from OEM’s and web-based sales.
Revenues
from the sales of the Company’s natural input products, which include Jot,
increased 87%, or $451, to $969 for the year ended December 31, 2004, compared
to $518 in the prior year.
Natural
input OEM revenues increased 285%, or $621, to $839 for the year ended December
31, 2004, compared to $218 in the prior year period. The increase in natural
input OEM revenues was due primarily to royalties from the shipment by
PalmSource of its operating system containing the Company’ Jot software. The
Company expects natural input channel partner and OEM revenues to increase
in
the future as new customers are identified and new agreements are
signed.
Online/retail
revenues for the Company’s natural input products decreased 57% or $170, to $130
for the year ended December 31, 2004, compared to $300 in the prior year
period.
In early 2003, PalmSource announced that it had licensed CIC’s Jot® handwriting
recognition software to replace Graffiti® as the standard and only handwriting
software on all new Palm Powered® devices. The embedding of Jot on Palm related
devices had a negative impact on the online/retail revenues. The transition
to
Jot based PalmSource operating systems by OEM’s was completed in the third
quarter of 2004 and the Company believes that the online/retail revenues
have
stabilized for the near term.
Systems
Integration.
System
integration segment revenue declined 95%, or $630, to $37 for the year ended
December 31, 2004, compared to $667 in the prior year period. The decline
in
system integration revenue reflects the decision made in late 2003 not to
continue in or expand this low margin, labor intensive business, which would
require significant increases in base costs to provide turn-key capabilities.
The SI business has become highly competitive, with a low barrier to entry.
It
is increasingly comprised of small Chinese owned businesses with virtually
no
differentiation in service offerings and primarily competing on price and
relationships. Our focus in China is on the emerging high potential
workflow/office automation market leveraging our eSignature technology and
strategic channel partners.
Cost
of Sales.
Handwriting
recognition.
Handwriting
recognition segment cost of sales includes eSignature, Natural input and
China
software sales costs. Such costs are comprised of royalty and import tax
payments, third party hardware costs, direct mail costs, engineering direct
costs and amortization of intangible assets excluding patents.
eSignature.
eSignature
cost of sales decreased 82%, or $102, to $22 for the year ended December
31,
2004, as compared to $124 in the prior year. The decline was primarily due
to
the sale of less third party hardware along with the Company’s software
products. Cost of sales may increase in the future depending on the customers
decision to purchase from the Company its software solution and third party
hardware as a complete package rather than buying individual components from
separate vendors.
Natural
input.
Natural
input cost of sales decreased 100%, or $17, to $0 for the year ended December
31, 2004, compared to $17 in the prior year period. The decrease was due
to the
use of software reseller web sites to move its products rather than maintaining
an internal online store. The Company does not anticipate a material increase
in
costs associated with the online/retail sales.
24
Systems
Integration.
China
Systems integration segment cost of sales decreased 95%, or $593, to $31
for the
twelve months ended December 31, 2004, compared to $624 in the prior year
period. The decrease in costs was due primarily to the reduction in sales
during
the twelve months ended December 31, 2004 as compared to the prior year.
The
Company expects that system integration cost of sales will decrease over
time as
the Company has decided not to pursue system integration revenues beyond
2004
but to continue to increase its focus on the emerging high potential
eSignature/office automation market in China.
Operating
expenses
Research
and Development Expenses.
Research and Development expense decreased 9%, or $115, to $1,187 for the
year
ended December 31, 2004, as compared to $1,302 in the prior year period.
Engineering expenses consist primarily of salaries and related costs, outside
engineering, maintenance items, and allocated facilities expenses. Salaries
and
related expense increased 6%, or $53, to $881 for the year ended December
31,
2004, as compared to $828 in the prior year period, due primarily to increases
in salaries and related expenses. Outside engineering cost and expenses declined
77%, or $24, to $7 for the year ended December 31, 2004, compared to $31
in the
prior year period. The decline was due primarily to a reduction in the use
of
outside engineering services compared to the prior year. The Company maintains
a
relationship with an outside engineering group familiar with its products
and
may draw on their services, as required, which could have a material effect
on
the amount of outside engineering expense reported. Capitalized software
development costs increased 100%, or $45, as compared to $0 in the prior
year
period. The increase in capitalized software development was due to new product
development and significant upgrades and enhancements being made to the
Company’s natural input and eSignature products. Capitalization of software
development costs are expected to remain at increased amounts for the
foreseeable future. Other engineering expenses decreased 22%, or $99, to
$344
for the twelve months ended December 31, 2004 as compared to $443 in the
prior
year period. The decrease was primarily due to lower maintenance and
depreciation expense compared to the prior year periods. The Company believes
that the reductions in engineering expenses will not have an adverse effect
on
its product engineering and development efforts due to its ability to call
on
outside engineering services as required.
Sales
and Marketing Expenses.
Sales
and marketing expenses increased 44%, or $401, to $1,306 for the year ended
December 31, 2004, compared to $905 in the prior year period. Sales and
marketing expenses consist of salaries, commissions and related expenses,
professional services, advertising and promotion, general office and allocated
facilities expenses. Salaries and related expenses increased 51%, or $175,
to
$517 for the year ended December 31, 2004, compared to $342 in the prior
year
period. The increase in salaries and related expense was due primarily to
the
increase in headcount of one executive level employee and, to a lesser extent,
increases in employee salaries. Commission expense increased 214%, or $214,
to
$314 for the year ended December 31, 2004, compared to $100 in the prior
year
period. The increase in commission expense was due primarily to an increase
in
revenues compared to the prior year. Travel and entertainment increased 102%,
or
$43, to $85 for the year ended December 31, 2004, compared to $42 in the
prior
year period. This increase was due to the increase in the sales employee
headcount, and an increased amount of travel. Recruiting expense increased
75%,
or $15, to $35 for the year ended December 31, 2004, compared to $20 in the
prior year period. The increase was due to the hiring of an executive level
employee through an executive level search firm. Other expense, including
general office and allocated facilities expenses declined $46, or 11%, to
$355
for the year ended December 31, 2004, compared to $401 in the prior year
period.
The Company anticipates that sales and marketing expenses will continue to
increase in the near term as we strengthen our sales efforts through increasing
headcount to pursue new opportunities in the eSignature market space. The
Company continues to pursue a channel strategy for its eSignature products.
The
Company believes the channel strategy, along with its current and potential
partners, will produce increasing revenues in the near term.
General
and Administrative Expenses.
General
and administrative expenses increased 12%, or $264, to $2,483, for the year
ended December 31, 2004, compared to $2,219 in the prior year period. General
and administrative expense consists of salaries, professional fees, investor
relations expenses, patent amortization and office and allocated facilities
costs. Salaries and wages increased 5%, or $34, to $744 for the year ended
December 31, 2004, compared to $710 in the prior year period. The increase
was
due primarily to increases in employee salaries. Professional service expense,
which include consulting, legal and outside accounting fees, increased 16%,
or
$74, to $542 for the year ended December 31, 2004, compared to $468 in the
prior
year period. The increase was due primarily to an increases in legal fees
associated the infringement litigation of Company’s patent during the twelve
months ended December 31, 2004, compared to the prior year. The Company
increased its expense for bad debts 300%, or $111, to $148, for the year
ended
December 31, 2004, compared to $37 in the prior year period. The increase
was to
cover the slow payment cycle of channel partner receivables of the Joint
Venture. At this time, the Company believes that its provision for bad debts
is
adequate. Other administrative expenses decreased 3%, or $29, to $975 for
the
year ended December 31, 2004, compared to $1,004 in the prior year period.
The
decrease was due primarily to spending reductions. The Company believes that
its
General and Administrative expenses will remain fairly stable for the near
term.
25
Interest
income and other income (expense), net
Interest
income and other income (expense), net, increased 460%, or $46, to $47 for
the
year ended December 31, 2004, compared to $1 in the prior year period. The
increase was due to an increase in interest income due to larger cash balances
and to a refund of value added tax related to the tax year 2003 received
by the
Joint Venture in 2004.
Interest
expense
Interest
expense increased 242%, or $496, to $701 for the year ended December 31,
2004,
compared to $205 in the prior year period. The increase in interest expense
was
due to the amortization of fees to Cornell Capital Partners, LP associated
with
the $750 in short-term debt, the $3,500 loan from Cornell Capital Partners,
LP,
(See Note 4 of the condensed consolidated financial statements) and interest
on
the long term debt. In addition the Company is amortizing through interest
expense the deferred financing costs and debt discount associated with its
long
term debt (See Note 6 of the condensed consolidated financial statements).
Liquidity
and Capital Resources
Cash
and
cash equivalents at December 31, 2005 totaled $2,849, compared to cash and
cash
equivalents of $4,736 at December 31, 2004. This decrease is primarily
attributable to $1,428 used by operations, $406 used in investing activities
and
$53 used in financing activities. The effect of exchange rate changes on
cash
was immaterial.
The
cash
used by operations was primarily due to a net loss of $4,031, an increase
in
accounts receivable of $131, an increase in prepaid expenses of $63 and
reductions in accrued compensation and other accrued liabilities of $23 and
$108, respectively. The cash used in operations was offset by depreciation
and
amortization of $466, amortization of the loan discount and deferred financing
costs of $1,706 and $553, respectively, an increase in deferred revenue of
$99,
and $43 from the disposal of fixed assets. In addition, cash outflows were
offset by a $47 increase in accounts payable, stock issued for services of
$10
and reductions to the provision for bad debts of $4.
The
cash
used in investing activities of $406 was due to the purchase of computer
equipment and third party software for internal use of $107 and for capitalized
software of $299.
The
$53
used in financing activities consisted primarily of the payment of short-term
and long-term debt of $49 and $9 in payments on capital lease
obligations.
Accounts
receivable increased 36%, or $127, to $483, net of $387 provided for potentially
uncollectable accounts, for the year ended December 31, 2005 compared to
$356 at
December 31, 2004. The increase is due to a $170 increase in the Company’s
fourth quarter 2005 sales compared to the prior year. The Company expects
that
the fluctuations in accounts receivable will continue in the foreseeable
future
due to volumes and timing of revenues from quarter to quarter.
Deferred
financing cost decreased 71%, or $553, to $221 at December 31, 2005, compared
to
$774 at December 31, 2004. The deferred financing costs are associated with
the
November 2004 financing (See “Financing” below). The non-cash deferred financing
costs will be amortized to interest expense over 22 months or, the life of
the
convertible notes, whichever is shorter.
26
Prepaid
expenses and other current assets increased 60%, or $63, to $168 at December
31,
2005, compared to $105 at December 31, 2003. The increase is primarily due
the
timing of the billings of annual maintenance and other prepaid contracts.
Prepaid expenses generally fluctuate due to the timing of annual insurance
premiums and maintenance and support fees, which are prepaid in December
and
June of each year.
Current
liabilities, which include deferred revenue, are $1,363 at December 31, 2005,
compared to $1,401 at December 31, 2004, a decline of $38. Payment of the
Company’s $44 short-term and related party debt in June 2005 is the primary
reason for the decline. Deferred revenue was $557 at December 31, 2005, compared
to $458 at December 31, 2004. The increase primarily reflects advance payments
for products and maintenance fees from the Company's licensees, which are
generally recognized as revenue by the Company when all obligations are met
or
over the term of the maintenance agreement.
Financing.
In
2004,
the Company entered into a unsecured Note and Warrant Purchase Agreement
(the
“Purchase Agreement”) and a Registration Rights Agreement (the “Registration
Rights Agreement”), each dated as of October 28, 2004. The financing, a
combination of debt and equity, closed November 2, 2004. The proceeds to
the
Company were approximately $3,885, net of $310 in commissions and legal
expenses. H.C. Wainwright & Co., Inc. (“Wainwright”), acted as placement
agent. As placement agent for the Company, at closing Wainwright received
$731
in commissions, legal fees and warrants. The commissions of approximately
$285,
and legal fees of $25, mentioned above, were paid in cash. The Company issued
warrants to Wainewright to acquire 1,218 shares of the Company’s common stock.
Of the warrants issued, 870 are exercisable at $0.46 and 348 are exercisable
at
$0.51. The Company has ascribed the value of $421 to the Wainwright warrants
which was recorded as deferred financing costs in the balance sheet at December
31, 2004. The fair value ascribed to the Wainwright warrants was estimated
on
the commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 3.21%; expected life of 3 years;
expected volatility of 100%; and expected dividend yield of 0%. The Company
has
used and expects to continue to use the proceeds of the financing for additional
working capital.
Under
the
terms of the financing, the Company issued to certain accredited investors
convertible promissory notes in the aggregate principal amount of
$4,195 and
warrants to acquire 3,632 shares of the Company’s common stock at an exercise
price of $0.508 per share.
The
notes
accrue interest at the rate of 7% per annum, payable semi-annually, and are
convertible into shares of the Company’s common stock at the rate of $0.462 per
share. The Company has ascribed a value of $982 to the investor warrants,
which
is recorded as a discount to notes payable in the balance sheet at December
31,
2004. The fair value ascribed to the warrants was estimated on the commitment
date using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 3.21%; expected life of 3 years; expected volatility
of 100%; and expected dividend yield of 0%. In addition to the fair value
ascribed to the warrants, the Company had ascribed $1,569 to the beneficial
conversion feature in the convertible notes, which was recorded as a discount
to
notes payable in the balance sheet at December 31, 2004. The values ascribe
to
the warrants and beneficial conversion feature follow the guidance of the
EITF
Issue No. 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios”, and ETIF
Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments” of the FASB’s Emerging Issues Task Force. The fair value of the
warrants and beneficial conversion feature is amortized to expense over the
life
of the convertible notes or upon earlier conversion using the effective interest
method. As of December 31, 2005, the Company had amortized to interest expense
approximately $2,462 of the loan discount and deferred financing costs. The
balance due under the convertible notes is shown net of the remaining $674
unamortized discount on the accompanying consolidated balance sheet. During
twelve months ended December 31, 2005, the investors converted $2,322 of
the
notes in exchange for 5,091 shares of the Company’s common stock. If the
remaining aggregate principal amount owing under the notes is converted,
the
Company will issue 3,989, shares
of
its common stock. If the notes are not converted, all remaining principal
and
accrued but unpaid interest will be due October 28, 2007. The Company may
pay
accrued interest in cash or in shares of Company common stock, issued at
the
market price for the common stock calculated prior to the interest payment.
The
Company does not currently intend to pay accrued interest with shares of
its
common stock.
27
The
above
warrants expire on October 28, 2009. The Company may call the warrants if
the
Company’s common stock trades at $1.00 or above for 20 consecutive trading days.
Wainwright will be paid approximately $28 in
the
aggregate if all of the investor warrants are exercised. The Company will
receive proceeds of approximately $1,845 if all of the investor warrants
are
exercised.
On
April
20, 2004, the Joint Venture borrowed the aggregate equivalent of $36,
denominated in Chinese currency, from a Chinese bank. The proceeds of the
loan
are to be used for working capital purposes until the channel sales strategy
is
fully implemented and sales increase. The loan bore interest at 5.3% per
annum
and was paid in April 2005.
In
June
2003, the Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, Ltd., (the “Joint Venture’) borrowed from one of its directors
approximately $24 denominated in U. S. dollars to purchase equipment used
in the
Company’s operations. The note bore interest at the rate of 5% per annum, and
was due in June 2006. In June 2005, the equipment was sold and the remaining
principal balance was paid off. Principal payments on related party debt
for the
year ended December 31, 2005 totaled $13.
Contractual
Obligations.
The
Company had the following material commitments as of December 31,
2005:
|
Payments
due by period
|
||||||||
| Contractual obligations |
Total
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|
|
Long-term
debt (1)
|
$ 1,169
|
$
-
|
$ 1,169
|
$ -
|
$
-
|
$-
|
$ -
|
|
|
Operating
lease commitments (2)
|
1,601
|
309
|
236
|
264
|
272
|
280
|
240
|
|
|
Total
contractual cash obligations
|
$ 2,770
|
$
309
|
$ 1,405
|
$264
|
$ 272
|
$280
|
$240
|
|
| 1. |
Long-term
debt is net of approximately $674 in discounts representing the
fair value
of warrants issued to the investors and the beneficial conversion
feature
associated with the convertible
notes.
|
| 2. |
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended for an additional 60 months. The
base rent
will increase approximately 3% per annum over the term of the lease,
which
expires on October 31, 2011.
|
As
of
December 31, 2005, the Company leased facilities in the United States and
China
totaling approximately 10,100 square feet. The Company’s rental expense for the
years ended December 31, 2005, 2004, and 2003 was approximately $401, $443,
and
$450, respectively. In December 2005 the Company extended its existing lease
in
Redwood Shores an additional 60 months. The extended lease term reduced the
rent
cost per square foot thus saving $156 in rent payments over the next 17 months.
In addition to the base rent in the United States, the Company pays a percentage
of the increase, if any, in operating cost incurred by the landlord in such
year
over the operating expenses incurred by the landlord in the base year. The
Company believes the leased offices in the United States will be adequate
for
the Company’s needs over the term of the lease.
As
of
December 31, 2005, the Company's principal source of liquidity was its cash
and cash equivalents of $2,849. With the exception of 2004, in each year
since
the Company’s inception the Company has incurred losses. The Company believes
that its current cash and resources, together with the expected revenue levels,
will provide sufficient funds for planned operations for at least the next
twelve months. However, if the Company is unable to generate adequate cash
flow
from sales or if expenditures required to achieve the Company’s plans are
greater than expected the Company may need to obtain additional funds or
reduce
discretionary spending. There can be no assurance that additional funds will
be
available when needed or, if available, will be on favorable terms or in
the
amounts the Company may require. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some
or
all of its marketing and development efforts or other operations, which could
have a material adverse effect on the Company's business, results of operations
and prospects.
Interest
Rate Risk. The Company has an investment portfolio of fixed income securities
that are classified as cash equivalents. These securities, like all fixed
income
instruments, are subject to interest rate risk and will fall in value if
the
market interest rates increase. The Company attempts to limit this exposure
by
investing primarily in short-term securities. The Company did not enter into
any
short-term security investments during the twelve months ended December 31,
2005.
28
Foreign
Currency Risk. The Company operates a subsidiary in China and from time to
time
makes certain capital equipment or other purchases denominated in foreign
currencies. As a result, the Company's cash flows and earnings are exposed
to
fluctuations in interest rates and foreign currency exchange rates. The Company
attempts to limit these exposures through operational strategies and generally
has not hedged currency exposures.
Future
Results and Stock Price Risk. The Company's stock price may be subject to
significant volatility. The public stock markets have experienced significant
volatility in stock prices in recent years. The stock prices of technology
companies have experienced particularly high volatility, including, at times,
severe price changes that are unrelated or disproportionate to the operating
performance of such companies. The trading price of the Company's common
stock
could be subject to wide fluctuations in response to, among other factors,
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally,
or
market volatility unrelated to the Company's business and operating
results.
Item
8. Consolidated Financial Statements and Supplementary
Data
The
Company's audited consolidated financial statements for the years ended
December 31, 2005, 2004, and 2003 begin on page F-1 of this Annual Report
on Form 10-K, and is incorporated into this item by reference.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
None
Item
9A.
Controls
and Procedures
Disclosure
Controls
Under
the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to applicable rules under the Securities
Exchange Act of 1934, as amended, as of December 31, 2005. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective.
The
Company does not expect that its disclosure controls and procedures will
prevent
all error and all fraud. A control procedure, no matter how well conceived
and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent limitations
in all control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can
occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people,
or
by management override of the control. The Company considered these limitations
during the development of its disclosure controls and procedures, and will
continually reevaluate them to ensure they provide reasonable assurance that
such controls and procedures are effective.
Internal
Controls and Procedures
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the
Exchange Act) during the Company’s fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
29
Item
9B. Other
Information
None.
PART
III
Item
10. Directors
and Executive Officers of the Registrant
Directors
The
following table sets forth certain information concerning the Directors:
|
Name
|
Age
|
Year
First Elected
or
Appointed
|
|
Guido
D. DiGregorio
|
67
|
1997
|
|
Michael
Farese (1), (2), (3), (4)
|
58
|
2002
|
|
Louis
P. Panetta (1), (2), (3), (4)
|
56
|
2000
|
|
C.
B. Sung (1), (2), (3), (4)
|
80
|
1986
|
|
David
E. Welch (1), (4)
|
58
|
2004
|
1. Member
of
the Audit Committee
2. Member
of
the Finance Committee
3. Member
of
the Compensation Committee
4. Member
of
the Nominating Committee
The
business experience of each of the directors for at least the past five years
includes the following:
Guido
D. DiGregorio
was
elected Chairman of the Board in February 2002, Chief Executive Officer in
June
1999 and President in November 1997. From November 1997 to June 1999, he
was also the Company's Chief Operating Officer. He was a partner in DH Partners,
Inc. (a management consultant firm) from 1996 to 1997. Prior to that Mr.
DiGregorio was recruited by a number of companies to reverse trends 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,
Maxitron 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.
Mike
Farese was elected a director of the Company in February 2002. Mr. Farese
has over thirty years of broad based telecommunications industry experience
including an extensive background in cellular and wireless subscriber equipment.
Mr. Farese has been Senior Vice President of engineering at Palm, Inc.
from
September 2005 to present. He was the President & CEO of WJ Communications,
a Silicon Valley-based manufacturer of innovative broadband communications
products for current and next generation wireless communications networks
from
March 2002 to March 2005. Prior to joining WJ Communications, Mr. Farese
was
President & CEO, Tropian Inc. from 1999 to 2002. Prior to that he held
numerous senior management positions including Vice President & General
Manager-Global Personal Networks, Motorola, Vice President & General
Manager-American Business Group, Ericsson, Vice President, Product Planning
& Strategy, Nokia, Executive Director-Business Systems, ITT and Division
Manger-Networks Business Systems, AT&T.
Louis
P. Panetta was
elected a director of the Company in October 2000. From November 2001 to
September 2003 Mr. Panetta was a member of the Board of Directors of Active
Link. Mr. Panetta was Vice President of Marketing and Investor Relations
with
Mobility Concepts, Inc. (a wireless Systems Integrator), a subsidiary of
Active
Link Communications from February 2001 to April 2003. Mr. Panetta was President
and Chief Operating Officer of PortableLife.com (e-commerce products provider)
from September 1999 to October 2000 and President and Chief Executive Officer
of
Fujitsu Personal Systems (a manufacturer of computer hardware) from December
1992 to September 1999. From 1995 to 1999, Mr. Panetta served on the Board
of
Directors of Fujitsu Personal Systems.
30
C.B.
Sung
was
elected 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, international investment and
trade)
since 1986 and Unison Pacific Corporation since 1979. He also serves on the
Board of Directors of several private companies and non-profit organizations.
David
E.
Welchwas
elected a director in March 2004 and serves as the financial expert on
the Audit
Committee. From July 2002 to present Mr. Welch has been the principal of
David
E. Welch Consulting, a financial consulting firm, . Mr.
Welch
has also been Vice President and Chief Financial Officer of American Millennium
Corporation, Inc., a provider of satellite based asset tracking and reporting
equipment, from April 2004 to present.
Mr.
Welch was Vice President and Chief Financial Officer of Active Link
Communications, a manufacturer of telecommunications equipment, from 1999
to
2002. Mr. Welch has held positions as Director of Management Information
Systems
and Chief information Officer with Micromedex, Inc and Language Management
International from 1995 through 1998. Mr. Welch is a member of the Board
of
Directors of Advanced Neutraceuticals, Inc. and AspenBio, Inc. Mr. Welch
is a
Certified Public Accountant licensed in the state of
Colorado.
EXECUTIVE
OFFICERS
The
following table sets forth the name and age of each executive officer of
the
Company, and all positions and offices of the Company presently held by each
of
them.
|
Name
|
Age
|
Positions
Currently Held
|
||
|
Guido
D. DiGregorio
|
67
|
Chairman
of the Board,
Chief
Executive Officer and President,
|
||
|
Francis
V. Dane
|
55
|
Chief
Legal Officer,
Secretary
and Chief Financial Officer
|
||
|
Russel
L. Davis
|
41
|
Chief
Product Officer
|
The
business experience of each of the executive officers for at least the past
five
years includes the following:
Guido
D. DiGregorio
- see
above.
Francis
V. Danewas
appointed the Company's Secretary in February of 2002, its Chief Financial
Officer in October 2001, its Human Resources Executive in September 1998
and he
assumed the position of Chief Legal Officer in December of 1997. From
1991 to
1997 he served as a Vice President and Secretary of the Company, and
from 1988
to 1992 as its Chief Financial Officer and Treasurer. Since July of 2000,
Mr.
Dane has also been the Secretary and Treasurer of Genyous Biomed International
Inc. (including its predecessors and affiliates). a biotechnology venture
capital and incubation company. From October 2000 to April 2004, Mr.
Dane served
as a director of Perceptronix Medical, Inc. and SpectraVu Medical Inc.,
two
companies focused on developing improved methods for the early detection
of
cancer. From October 2000 to June 2003. Mr. Dane was a director of CPC
Cancer
Prevention Centers Inc., a company that is developing a comprehensive
cancer
prevention program based upon the detection of early stage, non-invasive
cancer.
Prior to this Mr. Dane spent over a decade with PricewaterhouseCoopers,
his last
position was that of Senior Manager, Entrepreneurial Services Division.
Mr. Dane
is a member of the State Bar of California and has earned a CPA certificate
from
the states of Connecticut and California.
Russell
L. Davisrejoined
the Company as Chief Product Officer in August of 2005. He served as CTO
of
SiVault Systems, from November of 2004 to August of 2005. Mr. Davis originally
joined CIC in May of 1997 and was appointed Vice President of Product
Development & Support in October of 1998. Prior to this, Mr. Davis served in
a number of technical management roles including; Director of Service for
Everex
Systems, Inc., a Silicon Valley based PC manufacturer and member of the
Formosa
Plastics Group, managing regional field engineering operations for Centel
Information Systems, which was acquired by Sprint. He also served in the
United
States Navy supervising shipboard Electronic Warfare operations.
31
CODE
OF BUSINESS CONDUCT AND ETHICS
We
have
adopted a written code of business conduct and ethics, known as our Code
of
Business Conduct and Ethics, which applies to all of our directors, officers,
and employees, including our principal executive officer, our principal
financial and accounting officer, and our Chief product officer. A copy of
the
Code of Business Conduct and Ethics is posted on the Company’s web site, at
www.cic.com.
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, 2005 whose
total annual salary and bonus for 2005 exceeded $100,000 (collectively, the
"Named Executive Officers").
Summary
Compensation Table
|
Annual
Compensation
|
Long-Term
Compensation
|
||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Other
Annual
Compensation
|
Securities
Underlying
Options
|
|||||||||
|
Guido
DiGregorio
Chairman,
President and Chief Executive Officer
|
2005
2004
2003
|
$
$
$
|
322,875(1
259,371(1
206,250(1
|
)
)
)
|
-
-
-
|
1,700,000
-
-
|
|||||||
|
Francis
V. Dane
Chief
Legal Officer, Secretary and
Chief
Financial Officer
|
2005
2004
2003
|
$
$
$
|
146,643
138,125
128,500
|
-
-
-
|
143,943
100,000
100,000
|
||||||||
|
Russel
L. Davis
Chief
Product Officer
|
2005
|
$
|
48,303(2
|
)
|
-
|
500,000
|
|||||||
___________
(1)
Mr.
DiGregorio's salary was increased in February 2002 to $250,000. Mr. DiGregorio
deferred approximately $70,000 in salary payments to ease cash flow
requirements. Mr. DiGregorio may resume payment of his full salary at any
time,
and payment of deferred amounts may be demanded by Mr. DiGregorio at any
time
after December 31, 2002 and 2003, respectively. Mr. DiGregorio was paid his
deferred salary from 2002 and 2003 of approximately $64, and $70 in January
2003
and 2004, respectively.
(2)
Mr.
Davis was named as an executive officer as of August 31, 2005.
Option
Grants in 2005
In
late
1998, the Company assessed the option position of each of its employees,
considering factors including, job descriptions and responsibilities, potential
for future contributions and current option positions and salaries in relation
to competitive employment opportunities that might be available to individual
employees. As a result of this assessment, on January 12, 1999, the Company
issued options to virtually all of its employees. Such options were issued
with
a seven year life and as such unexercised options from those grants will
expire
on January 12, 2006. To acknowledge the past seven years (and in many cases
more) of service and to motivate employees to remain with the Company, on
December 19, 2005, the Company granted options to employees in an amount
equal
to their options expiring on January 12, 2006. Such options were granted
with
immediate vesting, a seven year life and with an exercise price for 25% of
the
options at market value and the remaining 75% at $0.75 (the exercise price
of
the January 12, 1999 option grants). Accordingly, on
December 19, 2005, Francis V. Dane and Guido DiGregorio were granted options
to
purchase 143,943 and 1,700,000 shares of the Company’s common stock
respectively.
32
In
August
2005 Mr. Davis was hired as Chief Product Officer and was granted options
to
purchase 500,000 shares of the Company’s common stock. The shares vested
immediately. Such
options were granted with immediate vesting, a seven year life and with an
exercise price for 25% of the options at $0.57 (market value on the date
of
grant) and the remaining 75% at $0.75.
Aggregate
Option Exercises in 2003 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 2004, the number of shares
covered by exercisable and unexercisable stock options at December 31, 2004
and the aggregate value of exercisable and unexercisable "in-the-money" options
at December 31, 2004.
|
Name
|
Shares
Acquired
On
Exercise
|
Value
Realized
|
Number
of Securities
Underlying
Unexercised
Options
at Fiscal
Year-End
Exercisable(E)/
Unexercisable(U)
|
Value
of Unexercised
In-The-Money
Options
at
Fiscal Year-End(1)
Exercisable(E)/
Unexercisable(U)
|
|
Guido
DiGregorio
|
-
|
$ -
|
3,650,000
(E)
|
$
42,500
(E)(1)
|
|
Francis
V. Dane
|
-
|
$ -
|
309,852
(E)
|
$
12,916
(E)(1)
|
|
134,091
(U)
|
682 (U)(1)
|
|||
|
Russel
L. Davis
|
-
|
$ -
|
500,000
(E)
|
$
-
(E)(1)
|
__________
___________
| (1) |
The
value of unexercised in-the-money options was determined by using
the
difference between the closing sale price of the common stock on
the
Nasdaq Over the Counter Market as of December 31, 2005 ($0.43) and
the exercise price of such options.
|
Item
12. Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information 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 and director
nominee of the Company, (iii) each of the current executive officers of the
Company named in the Summary Compensation Table under the heading "Executive
Compensation" and (iv) all directors and executive officers of the Company
as a group.
|
Common
Stock
|
|||
|
Name
of Beneficial Owner
|
Number
of
Shares
|
Percent
of
Class
|
|
|
Guido
DiGregorio (1)
|
3,650,000
|
3.43%
|
|
|
C.
B. Sung (2)
|
1,807,610
|
1.70%
|
|
|
Louis
P. Panetta (3)
|
203,125
|
*
|
|
|
Michael
Farese (4)
|
150,000
|
*
|
|
33
|
Common
Stock
|
|||
|
Name
of Beneficial Owner
|
Number
of
Shares
|
Percent
of
Class
|
|
|
David
E. Welch(5)
|
100,000
|
*
|
|
|
Francis
V. Dane (6)
|
529,788
|
*
|
|
|
Russel
L. Davis (7)
|
500,000
|
*
|
|
|
All
directors and executive officers as a group (6 persons)
|
6,940,523
|
6.51%
|
|
|
Michael
W. Engmann (8)
|
7,947,714
|
7.46%
|
|
___________
|
*
|
Less
than 1%.
|
| (1) |
Represents
3,650,000 shares, issuable upon the exercise of stock options exercisable
within 60 days here of. The business address of Mr. DiGregorio is 275
Shoreline Drive, Suite 500, Redwood Shores, California 94065. See
“Executive Compensation; Option Grants in
2005.”
|
| (2) |
Includes
(a) 1,568,051 shares held by the Sung Family Trust, of which Mr. Sung
is a trustee, (b) 3,369 shares held by the Sung-Kwok Foundation,
of which
Mr. Sung is the Chairman, and (c) 236,190 shares of common stock
issuable
upon the exercise of stock options , exercisable within 60 days
here of.
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, UNISON Group, 1001 Bayhill Dr., 2nd
Floor, San Bruno, California 94066. See
“Certain Relationships and Related
Transactions.”
|
| (3) |
Represents
203,125 shares issuable upon the exercise of options exercisable
within 60
days here of. Mr. Panetta’s business address is 827 Via Mirada,
Monterey, California 93940. See
“Certain Relationships and Related
Transactions.”
|
| (4) |
Represents
150,000 shares issuable upon the exercise of stock options exercisable
within 60 days hereof. The business address of Mr. Farese
is 275
Shoreline Drive, suite 500, Redwood City, CA94065. See
“Certain Relationships and Related
Transactions.”
|
| (5) |
Represents
100,000 shares issuable upon the exercise of stock options exercisable
with in 60 days here of. The business address of Mr. Welch is 1729
East
Otero Avenue, Littleton, CO 80122. See “Certain Relationships and Related
Transactions.”
|
| (6) |
Represents
(a) 212 shares held by Mr. Dane and (b) 529,576 shares issuable
upon the
exercise of stock options exercisable within 60 days here of. The
business
address of Mr. Dane is 275 Shoreline Drive, Suite 500, Redwood
Shores, California 94065. See “Executive Compensation; Option Grants in
2005.”
|
| (7) |
Represents
500,000 shares issuable upon the exercise of stock options within
60 days
here of. The business address of Mr. Davis is 275 Shoreline Drive,
Suite 500, Redwood Shores, California 94065. See “Executive
Compensation; Option Grants in
2005.”
|
| (8) |
Represents
(a) 2,622,907 shares held by MDNH
Partners, L.P. of which Mr. Engmann is a partner and (b) 5,324,807held
by Mr. Engmann. Such shares were reported on Schedule 13G dated
December
28, 2005. Mr. Engmann may
be deemed to beneficially own the 2,622,907 shares held by MDNH
Partners,
L.P.
|
34
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), 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 with the Securities and Exchange Commission (the "SEC")
regarding ownership of, and transactions in, the Company's securities. 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, 2005 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.
Item
13. Certain
Relationships and Related Transactions
Director
Compensation
For
their
services as directors of the Company, all non-employee directors receive
a fee
of $1,000 for each Board of Directors meeting attended and all directors
are
reimbursed for all reasonable out-of-pocket expenses incurred in connection
with
attending such meetings. Directors are also eligible to receive stock options.
In June 2005, Michael Farese, Louis Panetta, C. B. Sung and David Welch were
each granted immediately exercisable non-qualified options to purchase 25,000
shares of common stock at an exercise price of $0.46, which options expire
on
June 27, 2012.
In
December 2005, C. B. Sung was granted 10,000 options. Such
options were granted with immediate vesting, a seven year life and with an
exercise price for 25% of the options at market value and the remaining 75%
at
$0.75.
In
June
2003, the Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, Ltd., (the “Joint Venture’) borrowed from one of its directors
approximately $24 denominated in U. S. dollars to purchase equipment used
in the
Company’s operations. The note bore interest at the rate of 5% per annum, and
was due in June 2006. In June 2005, the equipment was sold and the remaining
principal balance was paid off.
Item
14. Principal
Accounting Fees and Services
In
December 1999, the Company retained Stonefield Josephson, Inc. as its
independent auditors. Prior to the retention of Stonefield Josephson, Inc.,
neither the Company nor any person on its behalf consulted with Stonefield
Josephson, Inc. regarding the application of accounting principles to any
transaction or the types of audit opinion that might be rendered on the
Company’s financial statements.
The
aggregate fees billed for professional services by Stonefield Josephson,
Inc. in
2005 were $183, and in 2004 were $294, for the following services:
Audit
Fees: Stonefield Josephson, Inc.’s fees in connection with its quarterly reviews
and year end audits for 2005 were $169, and were approximately $245, in 2004,
which represented approximately 93% and 83% of the aggregate fees billed
by
Stonefield Josephson, Inc. in 2005 and 2004, respectively.
Audit-Related
Fees. Stonefield Josephson, Inc. did not bill the Company for any assurance
and
related work in fiscal year 2005 or 2004.
Tax
fees:
Fees in connection with the 2004 federal and state tax returns were
approximately $6, or 3% of the aggregate fees billed in 2005 for professional
services by Stonefield Josephson, Inc.. Fees in connection with the 2003
federal
and state tax returns were approximately $6, or 2% of the aggregate fees
billed
in 2004 for professional services by Stonefield Josephson, Inc.
35
Financial
Information Systems Design and Implementation Fees: There were no fees incurred
in fiscal year 2005 or 2004 for financial information systems design and
implementation services.
All
other
Fees: Fees
for
all other services provided totaled approximately $7, or 4% of the aggregate
fees billed by Stonefield
Josephson, Inc. in 2005 and
related primarily to guidance in the application of new accounting
pronouncements. Stonefield Josephson, Inc’s fees for all other services provided
in 2004 totaled approximately $43, or 15% of the aggregate fees billed by
Stonefield
Josephson, Inc. in 2004 and
related primarily to preparation of the company’s 2004 proxy and a Registration
statement on Form S-1.
Pre-Approval
Policies. It is the policy of the Company not to enter into any agreement
for
Stonefield Josephson, Inc. to provide any non-audit services unless (a) the
agreement is approved in advance by the Audit Committee or (b) (i) the aggregate
amount of all such non-audit services constitutes no more than 5% of the
total
amount we pay to Stonefield Josephson, Inc. during the fiscal year in which
such
services are rendered, (ii) such services were not recognized by the Company
as
constituting non-audit services at the time of the engagement of the non-audit
services and (iii) such services are promptly brought to the attention of
the
Audit Committee and prior to the completion of the audit were approved by
the
Audit Committee or by one or more members of the Audit Committee who are
members
of the Board of Directors to whom authority to grant such approvals has been
delegated by the Audit Committee. The Audit Committee will not approve any
agreement in advance for non-audit services unless (x) the procedures and
policies are detailed in advance as to such services, (y) the Audit Committee
is
informed of such services prior to commencement and (z) such policies and
procedures do not constitute delegation of the Audit Committee’s
responsibilities to management under the Securities Exchange Act of 1934,
as
amended.
The
Audit
Committee has considered whether the provision of non-audit services has
impaired the independence of Stonefield Josephson, Inc. and has concluded
that
Stonefield Josephson, Inc. is independent under applicable SEC and Nasdaq
rules
and regulations.
36
PART
IV
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index
to Financial Statements
|
Page
|
||
|
(a)(1)
|
Financial
Statements
|
|
|
Report
of Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm
|
F-1
|
|
|
Consolidated
Balance Sheets at December 31, 2005 and 2004
|
F-2
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2005, 2004,
and 2003
|
F-3
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2004
and 2003
|
F-5
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
(a)(2)
|
Financial
Statement Schedule
|
|
|
Schedule
II Valuation and Qualifying Accounts and Reserves
|
S-1
|
(b)
Reports on Form 8-K
| 1. |
Current
Report on Form 8-K, Item 1.01 dated September 21,2005, with respect
to the
increases in officers salaries.
|
| 2. |
Current
Report on Form 8-K, Item 1.01 dated December 19, 2005, with respect
to
stock option grants to officers and
directors.
|
(c)
Exhibits
|
Exhibit
Number
|
Document
|
|
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).
|
37
|
4.3
|
1991
Stock Option Plan of the Company, incorporated herein by reference
to
Exhibit 4.5 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
|
|
4.4
|
1991
Non-Discretionary Stock Option Plan, incorporated herein by reference
to
Exhibit 4.6 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
|
|
4.5
|
Form
of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated
herein by reference to Exhibit 4.7 of the Company's Form S-1
dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.6
|
Form
of Non-Qualified Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.8 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.7
|
Form
of Stock Option Grant under 1991 Non-Discretionary Stock Option
Plan,
incorporated herein by reference to Exhibit 4.9 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.8
|
1994
Stock Option Plan, incorporated herein by reference to Exhibit
G of the
Company's Second Amended Disclosure Statement filed on Form 8-K dated
October 19, 1994 and approved by shareholders on November 14,
1994.
|
|
4.9
|
Form
of Warrant of the Company dated March 28, 1997 issued in connection
with the Waiver by and among the Company and the signatories thereto,
incorporated herein by reference to Exhibit 4.9 of the Company's 1996
Form 10-K (File No. 0-19301).
|
|
4.10
|
1999
Stock Option Plan, incorporated herein by reference to Exhibit
A of the
Company's Definitive Proxy Statement filed on May 4, 1999 and approved
by
shareholders on June 7, 1999. .
|
|
4.11
|
Form
of Convertible Promissory Note issued by Communication Intelligence
Corporation, incorporated herein by reference to Exhibit 10.3 to
the
Company's Form 8-K dated November 3, 2004.
|
|
4.12
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.4 to the Company's Form 8-K dated
November 3, 2004.
|
|
4.13
|
Form
of Stock Option Grant under Non-Plan Stock Options, incorporated
herein by
reference to the Company's Form S-8 dated March 30, 2006
(Registration No. 33- ).
|
|
†10.1
|
Licensing
and Development Agreement for Use and Marketing of Program Materials
dated
September 25, 1992 between the Company and International Business
Machines Corporation, incorporated herein by reference to
Exhibit 10.13 of the Company's 1992 Form 10-K
(File No. 0-19301)
|
|
10.2
|
Standby
Stock Purchase Agreement between the Company and Philip Sassower
dated
October 3, 1994, incorporated herein by reference to
Exhibit 10.13 of the Company's 1994 Form 10-K (File
No. 0-19301)
|
|
10.3
|
Form
of Subscription Agreement between the Company and the Purchasers,
dated
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.4
|
Form
of Registration Rights Agreement between the Company and the Purchasers,
dated November 28, 1995, incorporated herein by reference to
Exhibit 1 of the Company's Form 8-K dated November 28,
1995.
|
|
10.5
|
Form
of Warrant of the Company issued to Libra Investments, Inc. on
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.6
|
Form
of Registration Rights Agreement between the Company and Libra
Investments, Inc., dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
|
|
10.7
|
Form
of Subscription Agreement between the Company and various investors,
dated
June 13, 1996, incorporated herein by reference to Exhibit 1 of
the Company's Form 8-K dated June 27, 1996.
|
|
10.8
|
Form
of Registration Rights Agreement between the Company and various
investors, dated June 13, 1996, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated June 27,
1996.
|
|
10.9
|
Form
of Preferred Stock Investment Agreement, dated as of December 31,
1996, between the Company and the investors listed on Schedule 1
thereto, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated December 31,
1996.
|
38
|
10.10
|
Form
of Registration Rights Agreement between the Company and the
Investors
Listed on Schedule 1 thereto, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated December 31,
1996.
|
|
10.11
|
Form
of Certificate of Designation of the Company with respect to
the 5%
Cumulative Convertible Preferred Stock, incorporated herein by
reference
to Exhibit 3 of the Company's Form 8-K dated December 31,
1996.
|
|
10.12
|
Waiver,
dated March 26, 1997, effective December 31, 1996, by and among
the Company and the signatories thereto, incorporated herein
by reference
to Exhibit 10.19 of the Company's 1996 Form 10-K (File
No. 0-19301).
|
|
10.13
|
Form
of Subscription Agreement between the Company and each subscriber,
dated
as of November 25, 1997, incorporated herein by reference to Exhibit
10.1 of the Company's Form 8-K dated December 3,
1997.
|
|
10.14
|
Certificate
of Designations of the Company with respect to the Series B 5%
Cumulative
Convertible Preferred Stock, incorporated herein by reference
to Exhibit
10.2 of the Company's Form 8-K dated November 13,
1997.
|
|
10.15
|
Form
of Registration Rights Agreement, by and among the Company and
the
signatories thereto, dated as of November 25, 1997, incorporated
herein by reference to Exhibit 10.3 to the Company's Form 8-K
dated
November 13, 1997.
|
|
10.16
|
Amendment
to the Company’s Certificate of Designation with respect to the 5%
Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated
herein by reference to Exhibit 10.23 of the Company's 1998
Form 10-K (File No. 0-19301).
|
|
10.17
|
Amendment
to the Company’s Amended and Restated Certificate of Incorporation dated
June 12, 1998 incorporated herein by reference to Exhibit 10.24 of
the Company's 1998 Form 10-K (File
No. 0-19301).
|
|
10.18
|
Employment
Agreement dated August 14, 1998 between James Dao and the Company
incorporated herein by reference to Exhibit 10.25 of the Company's
1998 Form 10-K (File No. 0-19301).
|
|
††10.19
|
Software
Development and License Agreement dated December 4, 1998 between
Ericsson
Mobile Communications AB and the Company incorporated herein
by reference
to Exhibit 10.26 of the Company's 1998 Form 10-K (File
No. 0-19301).
|
|
10.20
|
Loan
and Warrant Agreement dated October 20, 1999 between the Company
and the
Philip S. Sassower 1996 Charitable Remainder Annuity
Trust.
|
|
10.21
|
Asset
Purchase Agreement between the Company and PenOp Ltd and PenOp
Inc.
incorporated herein by reference to the Company’s Form 8-K dated October
6, 2000.
|
|
10.22
|
Loan
Agreement dated June 19, 2001 between the Company and the Philip
S.
Sassower 1996 Charitable Remainder Annuity Trust.
|
|
10.23
|
Equity
Line of Credit Agreement between the Company and Cornell Capital
Partners,
LP, incorporated by reference to the Company’s Registration Statement on
Form S1 dated February 13, 2003 (File No. 333-103157)
|
|
10.24
|
Form
of Note and Warrant Purchase Agreement dated October 28, 2004,
among
Communication Intelligence Corporation and the Purchasers identified
there
in,
incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K
dated November 3, 2004.
|
|
10.25
|
Form
of Registration Rights Agreement dated October 28, 2004, among
Communication Intelligence Corporation and the parties identified
there
in,
incorporated herein by reference to Exhibit 10.2 to the Company's
Form 8-K
dated November 3, 2004.
|
|
Xx
10.26
|
Amendment
dated May 31, 2005 to the License agreement dated December
22, 2000
between the Company and eCom Asia Pacific, Ltd. filed as Exhibit
10.26
here in.
|
|
Xx
10.27
|
License
agreement dated June 2, 2005 between the Company and SnapOn
Credit L. L
C.. filed as Exhibit 10.27 here in.
|
|
10.28
|
Amendment
to employment agreement with Guido DiGregorio, incorporated herein
by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.29
|
Amendment
to employment agreement with Frank V. Dane, , incorporated herein
by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.30
|
Form
of stock option agreement dated August 31, 2005 with Russel L.
Davis filed
as Exhibit 10.30 here in.
|
|
10.31
|
Form
of stock option agreement dated December 19, 2005 with Guido
DiGregorio
filed as Exhibit 30 here in.
|
|
10.32
|
Form
of stock option agreement dated August 31, 2005 with Francis
V. Dane as
filed Exhibit 10.30 here in.
|
|
10.33
|
Form
of stock option agreement dated August 31, 2005 with C. B. Sung
as filed
Exhibit 10.30 here in.
|
|
14.00
|
Code
of Ethics -Incorporated by reference to the registrant’s Annual Report on
Form 10-K (file no. 0-19301) filed with the Commission on March
30,
2004.
|
|
21.1
|
Schedule
of Subsidiaries.
|
|
23.1
|
Consent
of Stonefield Josephson, Inc, Independent Registered Public Accounting
Firm.
|
|
31.1
|
Certification
of Company’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certificate
of Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 USC Section 1750, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 USC Section 1750, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
39
|
31.2
|
Certificate
of Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 USC Section 1750, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 USC Section 1750, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
†
|
Confidential
treatment of certain portions of this exhibit have been previously
granted
pursuant to a request for confidentiality dated March 29, 1993, filed
pursuant to the Securities Exchange Act of 1934.
|
|
*
|
Filed
herewith.
|
|
††
|
Confidential
treatment of certain portions of this exhibit have been requested
from the
SEC pursuant to a request for confidentiality dated March 30, 1999,
filed
pursuant to the Securities and Exchange Act of
1934.
|
|
Xx
|
Confidential
treatment of certain portions of this exhibit have been requested
from the
SEC pursuant to a request for confidentiality dated March 30,
2006 filed
pursuant to the Securities and Exchange Act of
1934.
|
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, 2006.
|
Communication
Intelligence Corp.
|
||
|
By:
|
/s/
Francis V. Dane
Francis
V. Dane
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf
of the
Registrant)
|
|
40
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of Registrant and in the
capacities indicated on March 30, 2006.
|
Signature
|
Title
|
|
/s/
Guido DiGregorio
Guido DiGregorio |
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/
Francis V. Dane
Francis V. Dane |
Chief
Legal Officer and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
/s/
Michael Farese
Michael Farese |
Director
|
|
/s/
Louis P. Panetta
Louis P. Panetta |
Director
|
|
/s/
Chien Bor Sung
Chien Bor Sung |
Director
|
|
/s/
David Welch
David Welch |
Director
|
41
Report
of
Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders of
Communication
Intelligence Corporation
Redwood
Shores, California
We
have
audited the accompanying consolidated balance sheets of Communication
Intelligence Corporation and its subsidiary (“the Company”) as of December 31,
2005 and 2004 and the related consolidated statements of operations, changes
in
stockholders’ equity, cash flows and financial statement schedule for each of
the three years in the period ended December 31, 2005, as listed in the index
appearing under Item 15(a)(1) and (2) of this Annual Report on Form 10-K.
These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a
basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also 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,
as
well as evaluating the overall financial statement presentation. We believe
that
our audits provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Communication
Intelligence Corporation and its subsidiary as of December 31, 2005, and
2004
and the results of their operations and their cash flows for each of the
three
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company’s significant recurring operating
losses and accumulated deficit raise substantial doubt about its ability
to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/S/
STONEFIELD JOSEPHSON, INC.
San
Francisco, California
February
17, 2006
F-1
Communication
Intelligence Corporation
Consolidated
Balance Sheets
(In
thousands, except par value amounts)
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,849
|
$
|
4,736
|
|||
|
Accounts
receivable, net of allowances of $387 and $404 at December 31,
2005 and
2004, respectively
|
483
|
356
|
|||||
|
Deferred
financing costs - current portion
|
121
|
272
|
|||||
|
Prepaid
expenses and other current assets
|
168
|
105
|
|||||
|
Total
current assets
|
3,621
|
5,469
|
|||||
|
Property
and equipment, net
|
147
|
123
|
|||||
|
Patents
|
4,285
|
4,663
|
|||||
|
Capitalized
software development costs
|
283
|
32
|
|||||
|
Deferred
financing costs - long-term
|
100
|
502
|
|||||
|
Other
assets
|
30
|
30
|
|||||
|
Total
assets
|
$
|
8,466
|
$
|
10,819
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Short-term
debt - related party
|
$
|
−
|
$
|
8
|
|||
|
Short-term
debt - other
|
−
|
36
|
|||||
|
Accounts
payable
|
288
|
241
|
|||||
|
Accrued
compensation
|
235
|
258
|
|||||
|
Other
accrued liabilities
|
283
|
400
|
|||||
|
Deferred
revenue
|
557
|
458
|
|||||
|
Total
current liabilities
|
1,363
|
1,401
|
|||||
|
Long-term
debt - related party
|
−
|
5
|
|||||
|
Convertible
notes, net of unamortized fair value assigned to beneficial conversion
feature and warrants of $674 and $2,410 at December 31, 2005
and 2004,
respectively.
|
1,169
|
1,785
|
|||||
|
Minority
interest
|
78
|
97
|
|||||
|
Commitments
and contingencies (Note 8)
|
-
|
-
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
Stock, $.01 par value, 10,000 shares authorized, 0 outstanding
at December
31, 2005 and 2004, respectively
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 125,000 shares authorized; 106,542 and
101,412
shares issued and outstanding at December 31, 2005 and 2004,
respectively
|
1,065
|
1,014
|
|||||
|
Additional
paid-in capital
|
89,517
|
87,231
|
|||||
|
Accumulated
deficit
|
(84,575
|
)
|
(80,544
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(151
|
)
|
(170
|
)
|
|||
|
Total
stockholders' equity
|
5,856
|
7,531
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
8,466
|
$
|
10,819
|
|||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-2
Communication
Intelligence Corporation
Consolidated
Statements of Operations
(In
thousands, except per share amounts)
|
Years
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Revenues:
|
||||||||||
|
eSignature
|
$
|
2,067
|
$
|
6,278
|
$
|
1,849
|
||||
|
Natural
input
|
1,054
|
969
|
518
|
|||||||
|
China
system integration
|
−
|
37
|
667
|
|||||||
|
3,121
|
7,284
|
3,034
|
||||||||
|
Operating
costs and expenses:
|
||||||||||
|
Cost
of sales:
|
||||||||||
|
eSignature
|
105
|
22
|
124
|
|||||||
|
Natural
Input
|
43
|
-
|
17
|
|||||||
|
China
system integration
|
-
|
31
|
624
|
|||||||
|
Research
and development
|
1,144
|
1,187
|
1,302
|
|||||||
|
Sales
and marketing
|
1,240
|
1,306
|
905
|
|||||||
|
General
and administrative
|
2,173
|
2,483
|
2,219
|
|||||||
|
4,705
|
5,029
|
5,191
|
||||||||
|
Income
(loss) from operations
|
(1,584
|
)
|
2,255
|
(2,157
|
)
|
|||||
|
Interest
income and other income, net
|
17
|
47
|
1
|
|||||||
|
Interest
expense
|
(208
|
)
|
(514
|
)
|
(205
|
)
|
||||
|
Amortization
of loan discount and deferred financing cost (Note 6)
|
(2,275
|
)
|
(187
|
)
|
−
|
|||||
|
Minority
interest
|
19
|
19
|
16
|
|||||||
|
Net
income (loss)
|
$
|
(4,031
|
)
|
$
|
1,620
|
$
|
(2,345
|
)
|
||
|
Basic
and diluted income (loss) per share
|
$
|
(0.04
|
)
|
$
|
0.02
|
$
|
(0.02
|
)
|
||
|
Basic
weighted average shares
|
104,189
|
100,909
|
97,436
|
|||||||
|
Diluted
weighted average shares
|
104,189
|
107,572
|
97,436
|
|||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-3
Communication
Intelligence Corporation
Consolidated
Statements of Changes in Stockholders' Equity
(In
thousands)
|
Common
Shares
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||
|
Balances
as of December 31, 2002
|
91,481
|
$
|
915
|
$
|
82,025
|
$
|
(79,819
|
)
|
$
|
(187
|
)
|
$
|
2,934
|
||||||
|
Sale
of Common 8,621 shares through Cornell Capital net of
expenses
|
8,621
|
$
|
86
|
$
|
1,503
|
$
|
$
|
|
$
|
1,589
|
|||||||||
|
Comprehensive
income (loss):
Net
(loss)
|
(2,345
|
)
|
(2,345
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
9
|
9
|
|||||||||||||||||
|
Total
comprehensive income (loss)
|
(2,336
|
)
|
|||||||||||||||||
|
Balances
as of December 31, 2003
|
100,102
|
$
|
1,001
|
$
|
83,528
|
$
|
(82,164
|
)
|
$
|
(178
|
)
|
$
|
2,187
|
||||||
|
Sale
of shares of Common stock through Cornell Capital net of
expenses
|
1,133
|
|
11
|
|
680
|
|
|
|
691
|
||||||||||
|
Exercise
of options for shares of common stock
|
177
|
2
|
51
|
53
|
|||||||||||||||
|
Fair
value of warrants issued to the agent in connection with convertible
notes
|
421
|
421
|
|||||||||||||||||
|
Fair
value of warrants issued to the investors in connection with convertible
notes
|
982
|
982
|
|||||||||||||||||
|
Fair
value of beneficial conversion feature associated with the convertible
notes
|
1,569
|
1,569
|
|||||||||||||||||
|
Comprehensive
income:
Net
income
|
1,620
|
1,620
|
|||||||||||||||||
|
Foreign
currency translation adjustment
|
8
|
8
|
|||||||||||||||||
|
Total
comprehensive income
|
1,628
|
||||||||||||||||||
|
Balances
as of December 31, 2004
|
101,412
|
$
|
1,014
|
$
|
87,231
|
$
|
(80,544
|
)
|
$
|
(170
|
)
|
$
|
7,531
|
||||||
|
Shares
of Common Stock issued on conversion of long-term notes
|
5,092
|
$
|
51
|
$
|
2,271
|
$
|
2,322
|
||||||||||||
|
Shares
issued for services
|
24
|
10
|
10
|
||||||||||||||||
|
Shares
issued on exercise of stock options
|
14
|
5
|
5
|
||||||||||||||||
|
Comprehensive
(loss):
Net
loss
|
(4,031
|
)
|
(4,031
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
19
|
19
|
|||||||||||||||||
|
Total
comprehensive loss
|
$
|
(4,012
|
)
|
||||||||||||||||
|
Balances
as of December 31, 2005
|
106,542
|
$ |
1,065
|
$ |
89,517
|
$ |
(84,575
|
)
|
$ |
(151
|
)
|
$ |
5,856
|
||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-4
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
|
Years
ended December 31,
|
|||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||
|
Cash
flows from operating activities
|
|||||||||||||
|
Net
income (loss)
|
$
|
(4,031
|
)
|
$
|
1,620
|
$
|
(2,345
|
)
|
|||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|||||||||||||
|
Depreciation
and amortization
|
466
|
425
|
456
|
||||||||||
|
Amortization
of convertible note discount
|
1,706
|
142
|
-
|
||||||||||
|
Deferred
financing costs
|
553
|
-
|
−
|
||||||||||
|
Loss
on disposal of property and equipment
|
43
|
8
|
8
|
||||||||||
|
Provision
for inventory obsolescence
|
-
|
-
|
38
|
||||||||||
|
Provision
for doubtful accounts
|
4
|
148
|
13
|
||||||||||
|
Stock
issued for services
|
10
|
-
|
-
|
||||||||||
|
Changes
in operating assets and liabilities
|
|||||||||||||
|
Accounts
receivable,
|
(131
|
)
|
238
|
(278
|
)
|
||||||||
|
Inventories
|
-
|
47
|
28
|
||||||||||
|
Prepaid
expenses and other current assets
|
(63
|
)
|
(12
|
)
|
67
|
||||||||
|
Other
assets
|
-
|
-
|
13
|
||||||||||
|
Accounts
payable
|
47
|
(2
|
)
|
83
|
|||||||||
|
Accrued
compensation
|
(23
|
)
|
(1
|
)
|
9
|
||||||||
|
Other
accrued liabilities
|
(108
|
)
|
(85
|
)
|
(87
|
)
|
|||||||
|
Deferred
revenue
|
99
|
293
|
-
|
||||||||||
|
Net
cash provided by (used in)operating activities
|
(1,428
|
)
|
2,821
|
(1,995
|
)
|
||||||||
|
Cash
flows from investing activities
|
|||||||||||||
|
Acquisition
of property and equipment
|
(107
|
)
|
(37
|
)
|
(30
|
)
|
|||||||
|
Capitalization
of software development costs
|
(299
|
)
|
(45
|
)
|
-
|
||||||||
|
Net
cash used in investing activities
|
(406
|
)
|
(82
|
)
|
(30
|
)
|
|||||||
|
Cash
flows from financing activities
|
|||||||||||||
|
Proceeds
from issuance of short-term debt
|
-
|
36
|
750
|
||||||||||
|
Proceeds
from issuance of long-term debt - related party
|
-
|
-
|
24
|
||||||||||
|
Proceeds
from issuance of convertible notes, net
|
-
|
3,885
|
-
|
||||||||||
|
Principal
payments on short-term debt
|
(36
|
)
|
(3,008
|
)
|
-
|
||||||||
|
Principal
payments on long-term debt - related party
|
(13
|
)
|
-
|
(3
|
)
|
||||||||
|
Principal
payments on capital lease obligations
|
(9
|
)
|
(8
|
)
|
(7
|
)
|
|||||||
|
Proceeds
from issuance of common stock
|
-
|
-
|
2,000
|
||||||||||
|
Offering
costs
|
-
|
-
|
(411
|
)
|
|||||||||
|
Proceeds
from exercise of stock options
|
5
|
53
|
-
|
||||||||||
|
Net
cash provided by (used in) financing activities
|
(53
|
)
|
958
|
2,353
|
|||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(1,887
|
)
|
3,697
|
328
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
4,736
|
1,039
|
711
|
||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
2,849
|
$
|
4,736
|
$
|
1,039
|
|||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-5
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
Supplemental
disclosure of cash flow information:
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Interest
paid
|
$
|
237
|
$
|
509
|
$
|
209
|
||||
|
Income
tax paid
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Schedule
of non-cash transactions:
|
||||||||||
|
Inventory
reserve provision
|
$
|
-
|
$
|
-
|
$
|
38
|
||||
|
Non-cash
compensation
|
$
|
-
|
$
|
70
|
$
|
70
|
||||
|
Common
stock issued upon the conversion of short term debt net
|
$
|
-
|
$
|
691
|
$
|
-
|
||||
|
Common
stock issued upon the conversion of long term debt net
|
$
|
2,322
|
$
|
-
|
$
|
-
|
||||
|
Deferred
financing costs associated with convertible notes
|
$
|
-
|
$
|
714
|
$
|
-
|
||||
|
Loan
discount associated with convertible notes net of
amortization
|
$
|
-
|
$
|
2,409
|
$
|
-
|
||||
|
Issuance
of common stock for services
|
$
|
10
|
$
|
-
|
$
|
-
|
||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-6
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies
The
Company
Communication
Intelligence Corporation and its joint venture (the "Company" or "CIC") develops
and markets natural input and biometric electronic signature solutions aimed
at
the emerging markets such as, e-commerce, wireless Internet/information devices,
and corporate security. These markets include all areas of personal computing,
as well as electronic commerce and communications.
The
Company's research and development activities have given rise to numerous
technologies and products. The Company's core technologies are classified
into
two broad categories: "natural input technologies" and "transaction and
communication enabling technologies". CIC's natural input technologies are
designed to allow users to interact with a computer or handheld device through
the use of an electronic pen or “stylus”. Such products include the Company's
multi-lingual Handwriterâ
Recognition System, and its Handwriterâ
for
Windowsâ
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.
The
Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, in China (the "Joint Venture"), has licensed eCom
Asia
Pacific Pty Ltd (“eCom”)
as
their
master
reseller for CIC products to end users and resellers with the authority and
responsibility to create optimal distribution channels within the People’s
Republic of China. eCom is one of the world’s most experienced eSignature
solutions providers and has been a proven reseller and integrator of CIC
eSignature products in the Asia Pacific region for over six years.
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. Except for 2004, the Company has incurred
significant losses since its inception and, at December 31, 2005, the Company’s
accumulated deficit was approximately $84,575. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The Company
has primarily funded these losses through the sale of debt and equity
securities.
In
November 2004, the Company consummated a financing in the form of convertible
notes aggregating $3,885, net of expenses (See Note 6). However, there can
be no
assurance that the Company will have adequate capital resources to fund planned
operations or that any additional funds will be available to the Company
when
needed, or if available, will be available on favorable terms or in amounts
required by the Company. If the Company is unable to obtain adequate capital
resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which may have a material adverse
effect on the Company's business, results of operations and ability to operate
as a going concern. The consolidated financial statements do not include
any
adjustments that might result from the outcome of this uncertainty.
Basis
of Consolidation
The
accompanying consolidated financial statements are prepared in accordance
with
generally accepted accounting principles in the United States of America,
and
include the accounts of CIC and its 90% owned Joint Venture in the People's
Republic of China. All inter-company accounts and transactions have been
eliminated. All amounts shown in the accompanying consolidated financial
statements are in thousands of dollars except per share
amounts.
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)
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, revenue recognition,
allowance for doubtful accounts, long lived assets impairment, inventory,
fair
value of financial instruments, 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 periods. Actual results
could differ from these estimates.
Fair
Value of Financial Instruments
The
carrying amounts of the Company's financial instruments, including cash and
cash
equivalents, accounts receivable, accounts payable, short-term debt and
long-term debt approximate fair value due to their relatively short maturities.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities at the date
of
purchase of three months or less to be cash equivalents.
The
Company's cash and cash equivalents, at December 31, consisted of the following:
|
2005
|
2004
|
|||||||||
|
Cash
in bank
|
$
|
213
|
$
|
1,734
|
||||||
|
Money
market funds
|
2,636
|
3,002
|
||||||||
|
Cash
and cash equivalents
|
$
|
2,849
|
$
|
4,736
|
||||||
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents with various
financial institutions. This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate against risk of loss as to principal.
Although such amounts may exceed the F. D. I. C. limits, the Company limits
the
amount of credit exposure with any one financial institution and believes
that
no significant concentration of credit risk exists with respect to cash and
cash
equivalents.
At
December31, 2005, the Joint Venture had approximately $17 in cash accounts
held
by a financial institution in the People's Republic of China. The Joint Venture
deposits are not covered by any federal deposit insurance program that is
comparable to the programs applicable to U.S. deposits.
To
date,
accounts receivable have been derived principally from revenues earned from
end
users, manufacturers, retailers and distributors of computer products in
North
America, Europe and the Pacific Rim. The Company performs periodic credit
evaluations of its customers, and does not require collateral. The Company
maintains reserves for potential credit losses; historically, such losses
have
been within management's expectations.
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable.
If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due it could be affected
and the Company will adjust the allowance accordingly (See Schedule
II).
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)
Deferred
Financing Costs
Deferred
financing costs are stated at fair value and include costs paid in cash,
such as
professional fees and commissions, and warrant costs . The
fair
value ascribed to the warrants was estimated on the commitment date using
the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 3.21%; expected life of 3 years; expected volatility of 100%; and
expected dividend yield of 0% (See Note 6). The
costs
are amortized
to interest expense over the life of the convertible notes or upon earlier
conversion using the effective interest method.
The
costs amortized to interest expense amounted to $568, $46, and $0 for the
years
ended December 31, 2005, 2004, and 2003, respectively. Accumulated amortization
amounted to $606, $46 and $0 at December 31, 2005, 2004 and 2003, respectively
Amortization expense expected for the years ending December 31, 2006, and
2007
is $121, and $100, respectively.
Property
and Equipment, Net
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease.
The
cost of additions and improvements is capitalized, while maintenance and
repairs
are charged to expense as incurred. Depreciation expense was $40, $31, and
$63
for the years ended December 31, 2005, 2004 and 2003, respectively. The Chinese
Joint Venture disposed of certain assets at cost of $119, $34, and $76 in
2005,
2004 and 2003, respectively.
Property
and equipment, net at December 31, consists of the following:
|
2005
|
2004
|
||||||
|
Machinery
and equipment
|
$
|
1,198
|
$
|
1,283
|
|||
|
Office
furniture and fixtures
|
459
|
432
|
|||||
|
Leasehold
improvements
|
84
|
84
|
|||||
|
Purchased
software
|
270
|
218
|
|||||
|
2,011
|
2,017
|
||||||
|
Less
accumulated depreciation and amortization
|
(1,864
|
)
|
(1,894
|
)
|
|||
|
$
|
147
|
$
|
123
|
||||
Included
in property and equipment, as of December 31, 2005 and 2004, are $82 and
$82, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $69 and $61 at December 31, 2005 and
2004,
respectively.
Patents
On
October 6, 2000, the Company acquired certain assets of PenOp Limited (“PenOp”)
and its subsidiary PenOp Inc. pursuant to an asset purchase agreement dated
as
of September 29, 2000.
Patents
are stated at cost less accumulated amortization which in Management’s opinion
represents fair value. Amortization is computed using the straight-line method
over the estimated lives of the related assets, ranging from five to seventeen
years. Amortization expense was $378, $379, and $379 for the years ended
December 31, 2005, 2004 and 2003, respectively.
The
nature of the underlying technology of each material patent is as
follows:
| · |
Patent
numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic
capture of a handwritten signature utilizing an electronic tablet
device
on a standard computer system within an electronic document, (b)
the
verification of the identity of the person providing the electronic
signature through comparison of stored signature measurements,
and (c) a
system to determine whether an electronic document has been modified
after
signature.
|
F-9
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
| · |
Patent
number 6091835 involves all of the foregoing and the recording
of the
electronic execution of a document regardless of whether execution
occurs
through a handwritten signature, voice pattern, fingerprint or
other
identifiable means.
|
| · |
Patent
numbers 5933514, 6212295, 6381344, and 6487310 involve methods
and
processes related to handwriting recognition developed by the Company
over
the years. Legal fees associated with these patents was immaterial
and
expensed as the fees were incurred.
|
Patents,
net at December 31, consists of the following:
|
Expiration
|
Estimated
Original
Life
|
2005
|
2004
|
||||||||||
|
Patent
(Various)
|
Various
|
5
|
$
|
9
|
$
|
9
|
|||||||
|
Patent
(Various)
|
Various
|
7
|
476
|
476
|
|||||||||
|
5544255
|
2013
|
13
|
93
|
93
|
|||||||||
|
5647017
|
2014
|
14
|
187
|
187
|
|||||||||
|
5818955
|
2015
|
15
|
373
|
373
|
|||||||||
|
6064751
|
2017
|
17
|
1,213
|
1,213
|
|||||||||
|
6091835
|
2017
|
17
|
4,394
|
4,394
|
|||||||||
|
6,745
|
6,745
|
||||||||||||
|
Less
accumulated amortization
|
(2,460
|
)
|
(2,082
|
)
|
|||||||||
|
$
|
4,285
|
$
|
4,663
|
||||||||||
Amortization
expense for the years ending December 31, 2006, 2007, 2008, 2009, and 2010
are
estimated to be $379, $379, $379, $379 and $379, respectively. The patents
identified, as "various" are technically narrow or dated patents that the
Company believes the expiration of which will not be material to its
operations.
The
estimated remaining weighted average useful lives of the patents is 11
years.
The
useful lives assigned to the patents are based upon the following assumptions
and conclusions:
| · |
The
estimated cash flow from products based upon each patent are expected
to
exceed the value assigned to each
patent;
|
| · |
There
are no legal, regulatory or contractual provisions known to the
Company
that limit the useful life of each patent to less than the assigned
useful
life;
|
| · |
No
additional material costs need to be incurred or modifications
made in
order for the Company to continue to be able to realize the protection
afforded by the patents; and
|
| · |
The
Company does not foresee any effects of obsolescence or significant
competitive pressure on its current or future products, anticipates
increasing demand for products utilizing the patented technology,
and
believes that the current markets for its products based on the
patented
technology will remain constant or will grow over the useful lives
assigned to the patents because of a legal, regulatory and business
environment encouraging the use of electronic
signatures.
|
F-10
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Patents
(continued)
The
Company performs intangible asset impairment analyses on a quarterly basis
in
accordance with the guidance in Statement of Financial Accounting Standards
No.
142, “Goodwill and Other Intangible Assets” ("SFAS 142") and Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long Lived Assets” ("SFAS 144"). The Company uses SFAS 144 in
response to changes in industry and market conditions that affects its patents;
the Company then determines if an impairment of its assets has occurred.
The
Company reassesses the lives of its patents and tests for impairment quarterly
in order to determine whether the book value of each patent exceeds the fair
value of each patent. Fair value is determined by estimating future cash
flows
from the products that are and will be protected by the patents and considering
the additional factors listed in Critical Accounting Policies in Item 7 of
this
Form 10-K.
The
Company’s revenues decreased in 2005 when compared to 2004. Management decided
to obtain an independent valuation to support its assertion that no impairment
of the carrying value of the patents existed at December 31,
2005.
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 charge in the event the net book value of such
assets exceeded the future undiscounted cash flows attributable to such assets.
No such impairment charges have been recorded in the three years ended December
31, 2005.
Software
Development Costs
Software
development costs are accounted for in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to
be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86,
capitalization of software development costs begins upon the establishment
of
technological feasibility, subject to net realizable value considerations.
The
costs capitalized include the coding and testing of the product after the
technological feasibility has been established and ends upon the release
of the
product. The capitalized costs are amortized to cost of sales on a straight-line
basis over the estimated life of the product, generally three years. At December
31, 2005, and 2004 the Company had capitalized approximately $299 and $45
of
software development costs, respectively. As of December 31, 2003, such costs
were insignificant. Amortization of capitalized software development costs
for
the years ended December 31, 2005, 2004 and 2003 was $39, $13, and $14,
respectively.
Other
Current Liabilities
The
Company records liabilities based on reasonable estimates for expenses, or
payables that are known but actual amounts must be estimated such as deposits,
taxes, rents and services. The estimates are for current liabilities that
should
extinguished within one year.
F-11
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Other
Current Liabilities (continued)
The
Company had the following accrued liabilities at December 31:
|
2005
|
2004
|
||||||
|
Accrued
professional services
|
$
|
104
|
$
|
154
|
|||
|
Refundable
deposits
|
115
|
115
|
|||||
|
Other
|
64
|
131
|
|||||
|
Total
|
$
|
283
|
$
|
400
|
|||
Material
commitments:
The
Company had the following commitments at December 31:
|
Payments
due by period
|
||||||||||
| Contractual obligations |
|
Total
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
||
|
Long-term
debt (1)
|
$ 1,169
|
$ -
|
$ 1,169
|
$ -
|
$ -
|
$ -
|
$ -
|
|||
|
Operating
lease commitments (2)
|
1,601
|
309
|
236
|
264
|
272
|
280
|
240
|
|||
|
Total
contractual cash obligations
|
$ 2,770
|
$ 309
|
$ 1,405
|
$ 264
|
$ 272
|
$280
|
$240
|
|||
| 1. |
Long-term
debt is net of approximately $674 in discounts representing the
fair value
of warrants issued to the investors and the beneficial conversion
feature
associated with the convertible
notes.
|
| 2. |
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended an additional 60 months. The base
rent will
increase approximately 3% per annum over the term of the lease,
which
expires on October 31, 2011.
|
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,”Accounting for Stock Issued to Employees”, as allowed under
SFAS 123, to account for its employee stock-based compensation plans. The
Company complies with the disclosure provisions of SFAS 123.
Revenue
Recognition
Revenue
is recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue
Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition”
("SAB 104"), and the interpretive guidance issued by the Securities and Exchange
Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements
with Multiple Elements”, of the FASB’s Emerging Issues Task Force. The Company
recognizes revenues from sales of software products upon shipment, provided
that
persuasive evidence of an arrangement exists, collection is determined to
be
probable, all non-recurring engineering work necessary to enable the Company's
product to function within the customer's application has been completed
and the
Company's product has been delivered according to specifications. Revenue
from
service subscriptions is recognized as costs are incurred or over the service
period which-ever is longer.
F-12
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Revenue
Recognition (continued)
Software
license agreements may contain multiple elements,
including upgrades and enhancements, products deliverable on a when and if
available basis and post contract support. Revenue from software license
agreements is recognized upon delivery of the software, provided that persuasive
evidence of an arrangement exists, collection is determined to be probable,
all
nonrecurring engineering work necessary to enable the Company's products to
function within the customer's application has been completed, and the Company
has delivered its product according to specifications. Deferred revenue is
recorded for upgrades, enhancements and post contract support, which is paid
for
in addition to license fees, and is recognized as costs are incurred or over
the
support period which-ever is longer. Vendor specific objective evidence of
the
fair value for multiple element software license agreements is determined by
the
price charged for the same element when sold separately or the price determined
by management having the relevant authority when an element is not yet sold
separately. The price established by management for the element not yet sold
separately will not change prior to separate introduction of that element into
the marketplace.
Revenue
from system integration activities, which represents the sale and installation
of third party computer equipment and limited related consulting services which
requires little modification or customization to the software, is recognized
upon installation as projects are short term in nature, provided persuasive
evidence of an arrangement exists, collection of the resulting receivable is
probable and the system is functioning according to specifications. Service
subscription revenues associated with the system integration activities are
recognized as costs are incurred or over the service period which-ever is
longer.
The
online/retail sales category includes sales of software made directly from
the
Company's website, which are downloaded either directly by a reseller or to
a
customer of such reseller. In both cases, the reseller reports the number of
units sold each month by submitting payment and a royalty report. The reseller
receives a percentage of each sale. The Company allows the on-line resellers
a
right of return or right of offset. The number of units reported is net of
any
product returns from prior months. The Company recognizes revenues on the net
amount reported by the resellers each month. The Company has a limited number
of
resellers for its software available through the Company's website.
Major
Customers
Handwriting
Recognition Segment.
Historically, the Company’s handwriting recognition segment revenues have been
derived from a limited number of customers. One customer accounted for 15%
and
one customer accounted for 23% of total segment revenue for the year ended
December 31, 2005. One customer, a major insurance company, accounted for 46%
and one customer, a major banking institution, accounted for 28% of total
segment revenues for the year ended December 31, 2004. One customer accounted
for 19% of total segment revenue for the year ended December 31, 2003.
Systems
Integration Segment.
There
was no revenue for this segment recorded for the year ended December 31, 2005.
One customer, Nanjing Nimze accounted for 40% of total system integration
revenue for the year ended December 31, 2004. One customer, Fujitsu Ltd.,
accounted for 21% of total system integration revenue for the year ended
December 31, 2003.
Two
customers accounted for 38% of total revenues for the year ended December 31,
2005. Two customers accounted for 76% of total revenues for the year ended
December 31, 2004. One customer accounted for 14% of total revenues for the
year
ended December 31, 2003.
Three
customers accounted for 11%, 21%, and 42% of accounts receivable at December
31,
2005. Two customers accounted for 19% and 51% of accounts receivable at December
31, 2004.
Research
and Development
Research
and development costs are charged to expense as incurred.
F-13
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Advertising
The
Company expenses advertising costs as incurred. Advertising expense for the
years ended December 31, 2005, 2004, and 2003 was $0, respectively.
Net
Income (Loss) Per Share
The
Company calculates net income (loss) per share under the provisions of Statement
of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”).
SFAS 128 requires the disclosure of both basic net income (loss) per share,
which is based on the weighted average number of shares outstanding, and diluted
income (loss) per share, which is based on the weighted average number of shares
and dilutive potential shares outstanding. For the year ended December 31,
2005,
8,190 shares of common stock subject to outstanding options, 3,989 shares
issuable upon the conversion of the convertible notes and 4,850 warrants were
excluded from the calculation of dilutive earnings per share because the
exercise or conversion of such options and warrants would be anti-dilutive.
For
the
year ended December 31, 2004, 3,902 potential equivalent shares were
excluded from the calculation of dilutive earnings per share due to the exercise
price of such options was greater than the average market price of the Company’s
common stock. At
December 31, 2004, there were 4,850 in the money warrants outstanding and
included in the calculation of diluted income (loss) per share. For the year
ended December 31, 2003, potential equivalent shares excluded from the
calculation of diluted earnings per share, as their effect is not dilutive,
include stock options of 5,911 of equivalent shares. . There were no warrants
outstanding at December 31, 2003.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
Net
Loss
|
Weighted
Average Shares
Outstanding
|
Per-Share
Amount
|
Net
Income
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
||||||||||||||||||||
|
Basic
income (loss):
|
||||||||||||||||||||||||||||
|
Income
(loss) available to stockholders
|
$(4,031)
|
104,189
|
$(0.04)
|
$1,620
|
100,909
|
$
0.02
|
$(2,345)
|
97,436
|
$
(0.02)
|
|||||||||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||||||||||||||
|
Stock
options
|
-
|
-
|
1,813
|
-
|
-
|
|||||||||||||||||||||||
|
Warrants
|
-
|
-
|
4,850
|
-
|
-
|
|||||||||||||||||||||||
|
Diluted
income (loss)
|
$(4,031)
|
104,189
|
$
(0.04)
|
$1,620
|
107,572
|
$
0.02
|
$(2,345)
|
97,436
|
$
(0.02)
|
|||||||||||||||||||
Foreign
Currency Translation
The
Company considers the functional currency of the Joint Venture to be the local
currency and, accordingly, gains and losses from the translation of the local
foreign currency financial statements are included as a component of
"accumulated other comprehensive loss" in the accompanying consolidated balance
sheets. Foreign currency assets and liabilities are translated into U.S. dollars
at the end-of-period exchange rates except for long-term assets and liabilities,
which are translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rates in effect during each period except
for
those expenses related to balance sheet amounts which are translated at
historical exchange rates.
F-14
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Net
foreign currency transaction gains and losses are included in "Interest income
and other income (expense), net" in the accompanying consolidated statements
of
operations. Foreign currency transaction gains in 2005, 2004 and 2003 were
insignificant.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the expected tax consequences
of
temporary differences between the tax bases of assets and liabilities and their
financial statement reported amounts and for tax loss and credit carryforwards.
A valuation allowance is provided against deferred tax assets when it is
determined to be more likely than not that the deferred tax asset will not
be
realized.
Recent
Pronouncements
In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities” (FIN 46). FIN 46 changes the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. FIN 46 requires
a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns
or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
During
October 2003, the FASB deferred the effective date for applying the provisions
of FIN 46 until the end of the first interim or annual period ending after
December 31, 2003 if the variable interest was created prior to February 1,
2003
and the public entity has not issued financial statements reporting that
variable interest entity in accordance with FIN 46.
In
December 2003 the FASB concluded to revise certain elements of FIN 46, primarily
to clarify the required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46, that was issued in January 2003.
FIN-46R exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as
of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. In general, for all entities that were previously considered special
purpose entities, FIN 46R should be applied in periods ending after December
15,
2003. Otherwise, FIN 46R is to be applied for registrants who file under
Regulation SX
in
periods ending after March 15, 2004, and for registrants who file under
Regulation SB, in periods ending after December 15, 2004. The Company has
adopted FIN 46R and the effect of the adoption did not have a significant impact
on the Company’s financial position or results of operations.
In
December 2003, the Staff of the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which supersedes
SAB No. 101, “Revenue Recognition in Financial Statements.” The primary purpose
of SAB No. 104 is to rescind accounting guidance contained in SAB No. 101 and
the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" related to multiple element revenue arrangements. The
adoption of SAB No. 104 did not significantly impact the Company’s revenue
recognition policies.
In
November 2004, the EITF issued an abstract for EITF Issue No. 04-08, “The Effect
of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”).
EITF 04-08 reflects the Task Force's tentative conclusion that contingently
convertible debt should be included in diluted earnings per share computations
regardless of whether the market price trigger has been met. If adopted, the
consensus reached by the Task Force in this Issue will be effective for
reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. The Company has determined that implementation of this new standard
did not have a material impact on its historical nor is it expected to have
a
material impact on its future computations of diluted earnings per share.
F-15
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4”. The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact of
the
adoption of SFAS 151, and does not believe the impact will be significant to
the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant to
the
Company's overall results of operations or financial position.
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.
SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change
in
accounting principle be limited to the direct effects of the change Indirect
effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle.
SFAS
No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning
after the date this Statement is issued. Management does not expect the
implementation of this new standard to have a material impact on the Company’s
financial position, results of operations and cash flows.
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment”. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements.
F-16
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Recent
Pronouncements
That
cost
will be measured based on the fair value of the equity or liability instruments
issued. Statement 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. Statement
123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions
with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing
as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005.
In
March
2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment”
(“SAB 107”), which provides interpretive guidance related to the interaction
between SFAS 123(R) and certain SEC rules and regulations. It also provides
the
SEC staff's views regarding valuation of share-based payment arrangements.
In
April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow
companies to implement the standard at the beginning of their next fiscal year,
instead of the next reporting period beginning after June 15, 2005.
On
August
31, 2005, the FASB issued FASB Staff Position FSP FAS 123R-1, "Classification
and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FASB Statement No. 123R."
In
this
FSP, the FASB decided to defer the requirements in FASB Statement No. 123
(Revised 2004), Share-Based Payment, that make a freestanding financial
instrument subject to the recognition and measurement requirements of other
GAAP
when the rights conveyed by the instrument are no longer dependent on the holder
being an employee. The guidance in this FSP should be applied upon initial
adoption of Statement 123R. The FSP includes transition guidance for those
entities that have already adopted Statement 123R in their financial
statements.
The
Company has determined that the adoption of SFAS 123R will result in the Company
having to recognize additional compensation expense related to the options
or
warrants granted to employees, and it will have an impact on the Company’s net
earnings in the future. This standard requires expensing the fair value of
stock
option grants and stock purchases under employee stock purchase
plan.
In
February 2006, the FASB issued SFAS 155 “Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140”. This Statement
amends FASB Statements No. 133, “Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application
of
Statement 133 to Beneficial Interests in Securitized Financial Assets. This
Statement:
a.
Permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation
b.
Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133
c.
Establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation
d.
Clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives.
e.
Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial
instrument.
F-17
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
This
Statement is effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The fair value election provided for in paragraph 4(c) of this Statement
may also be applied upon adoption of this Statement for hybrid financial
instruments that had been bifurcated under paragraph 12 of Statement 133 prior
to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity’s fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period
for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis. The Company is in the process of evaluating the impact of SFAS 155.
In
December 2004 the Financial Accounting Standards Board issued two FASB Staff
Positions - FSP FAS 109-1, Application of FASB Statement No. 109 "Accounting
for
Income Taxes" to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004, and FSP FAS 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the
American Jobs Creation Act of 2004. Neither of these affected the Company as
it
does not participate in the related activities.
2.
Chinese Joint Venture
The
Company currently owns 90% of a joint venture (the “Joint Venture”) with the
Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic
of China (the "Agency"). In June 1998, the registered capital of the Joint
Venture was reduced from $10,000 to $2,550. As of December 31, 2005, the Company
had contributed an aggregate of $1,800 in cash to the Joint Venture and provided
it with non-exclusive licenses to technologies and certain distribution rights
and the Agency had contributed certain land use rights. Following the reduction
in registered capital of the Joint Venture, neither the Company nor the Agency
is required to make further contributions to the Joint Venture. Prior to the
reduction in the amount of registered capital, the Joint Venture was subject
to
the annual licensing requirements of the Chinese government. Concurrent with
the
reduction in registered capital, the Joint Venture's business license has been
renewed through October 18, 2043.
3.
Comprehensive Income
In
June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”). The
Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires that
all
items recognized under accounting standards as components of comprehensive
earnings be reported in an annual statement that is displayed with the same
prominence as other annual financial statements. SFAS 130 also requires that
an
entity classify items as other comprehensive earnings by their nature in an
annual 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.
4.
Short-term Debt - Other
On
April
20, 2004, the Company’s Joint Venture borrowed the aggregate equivalent of $36,
denominated in Chinese currency, from a Chinese bank. The unsecured loan bore
interest at 5.3% per annum. The note was paid in April 2005.
5.
Short-term and Long-term Debt - Related Party
In
June
2003, the Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, Ltd., (the “Joint Venture’) borrowed from one of its directors
approximately $24 denominated in U. S. dollars to purchase equipment used in
the
Company’s operations. The note bore interest at the rate of 5% per annum, and
was due in June 2006. In June 2005, the equipment was sold and the remaining
principal balance was paid off.
F-18
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
5.
Short-term and Long-term Debt - Related Party (continued)
Interest
expense related to notes 4 and 5 above for the years ended December 31, 2005,
2004, and 2003 was $3, $7 and $7, respectively. Interest expense associated
with
related party debt was $2, $2, and $1 for the years ended December 31, 2005,
2004, and 2003, respectively.
6.
Convertible Notes
In
November 2004, the Company entered into a unsecured Note and Warrant Purchase
Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the
“Registration Rights Agreement, each dated as of October 28, 2004). The
financing, a combination of debt and equity, closed November 2, 2004. The
proceeds to the Company were approximately $3,885, net of $310 in commissions
and legal expenses. H.C. Wainwright & Co., Inc. (“Wainwright”) acted as
placement agent. As placement agent for the Company, at closing Wainwright
received $731 in commissions, legal fees and warrants. The commissions of
approximately $285 and legal fees of $25, mentioned above, were paid in cash.
The Company issued warrants to Wainwright to acquire 1,218 shares of the
Company’s common stock. Of the warrants issued, 870 are exercisable at $0.462
and 348 are exercisable at $0.508. The Company has ascribed the value of $421
to
the Wainwright warrants, which is recorded as deferred financing costs in the
balance sheet at December 31, 2004. The fair value ascribed to the Wainwright
warrants was estimated on the commitment date using the Black-Scholes pricing
model with the following assumptions: risk-free interest rate of 3.21%; expected
life of 3 years; expected volatility of 100%; and expected dividend yield of
0%.
The Company expects to use the proceeds of the financing for additional working
capital.
Under
the
terms of the financing, the Company issued to certain accredited investors
convertible promissory notes in the aggregate principal amount of $4,195 and
warrants to acquire 3,632 shares of the Company’s common stock at an exercise
price of $0.508 per share. The notes accrue interest at the rate of 7% per
annum, payable semi-annually, and are convertible into shares of the Company’s
common stock at the rate of $0.462 per share. The Company has ascribed a value
of $982 to the investor warrants, which is recorded as a discount to notes
payable in the balance sheet. The fair value ascribed to the warrants was
estimated on the commitment date using the Black-Scholes pricing model with
the
following assumptions: risk-free interest rate of 3.21%; expected life of 3
years; expected volatility of 100%; and expected dividend yield of 0%. In
addition to the fair value ascribed to the warrants, the Company has ascribed
$1,569 to the beneficial conversion feature in the convertible notes, which
is
recorded as a discount to notes payable in the balance sheet. The values
ascribed to the warrants and beneficial conversion feature follow the guidance
of the EITF Issue No. 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”,
and ETIF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments” of the FASB’s Emerging Issues Task Force. The fair value of the
warrants and beneficial conversion feature is amortized to expense over the
life
of the convertible notes or upon earlier conversion using the effective interest
method. During the three and twelve months ended December 31, 2005, the Company
had amortized to interest expense approximately $165 and $2,274, respectively,
of the loan discount and deferred financing costs. The balance due under the
convertible notes is shown net of the remaining $674 unamortized discount on
the
accompanying consolidated balance sheet. During the three and twelve months
ended December 31, 2005, the investors converted $75 and $2,322, respectively,
of the notes in exchange for 162 and 5,092, respectively, shares of the
Company’s common stock. If the remaining aggregate principal amount owing under
the notes is converted, the Company will issue 3,989 shares of its common stock.
If the notes are not converted, all remaining principal and accrued but unpaid
interest will be due October 28, 2007. The Company may pay accrued interest
in
cash or in shares of Company common stock, issued at the market price for the
common stock calculated prior to the interest payment. The Company does not
currently intend to pay accrued interest with shares of its common stock. The
Company paid approximately $142 and $91 of accrued interest associated with
the
convertible notes in May and November 2005, respectively.
F-19
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
6.
Convertible Notes (continued)
The
above
warrants expire on October 28, 2009. The Company may call the warrants if the
Company’s common stock trades at $1.00 or above for 20 consecutive trading days
after the date that is 20 days following the effectiveness of a registration
statement providing for the resale of the shares issued upon the conversion
of
the notes and exercise of the warrants. Wainwright will be paid approximately
$28 in
the
aggregate if all of the investor warrants are exercised. The Company will
receive proceeds of approximately $1,845 if all of the investor warrants are
exercised.
The
Company also was required to file a registration statement providing for the
resale of the shares that are issuable upon the conversion of the notes and
the
exercise of the warrants. The registration statement was filed on December
22,
2004 and was declared effective on January 26, 2005.
Interest
expense related to convertible debt for the years ended December 31, 2005,
2004,
was $2,478 and $238, respectively, including $2,274 and $187 related to
amortization of debt discount, respectively.
7.
Stockholders' Equity
Common
Stock Options
In
1994,
the Company adopted the 1994 Stock Option Plan (the "1994 Plan"). Under the
1994
Plan, directors, officers and employees are eligible for grants of incentive
and
non-qualified stock options. In May 1997, the stockholders approved an
increase of 1,000 shares to the number of shares authorized for issuance under
the 1994 Plan. Accordingly, a total of 6,000 shares of Common Stock are
authorized for issuance under the 1994 Plan. The exercise prices of options
under the 1994 Plan are determined by a committee of the Board of Directors,
but, in the case of an incentive stock option, the exercise price may not be
less than 100% of the fair market value of the underlying Common Stock on the
date of grant. Non-qualified options may not have an exercise price of less
than
85% of the fair market value of the underlying Common Stock on the date of
grant. Options under the 1994 Plan are generally exercisable over a period
not
to exceed seven years and vest quarterly over three years. At December 31,
2005,
there were no options available for grant under the 1994 Plan. As of December
31, 2005, 732 plan options were outstanding and exercisable with a weighted
average exercise price of $0.83 per share.
The
Company has issued non-plan options to its employees and directors. The non-plan
options vest over four years or prorata quarterly over three years. In late
1998, the Company assessed the option position of each of its employees,
considering factors including, job descriptions and responsibilities, potential
for future contributions and current option positions and salaries in relation
to competitive employment opportunities that might be available to individual
employees. As a result of this assessment, on January 12, 1999, the Company
issued options to virtually all of its employees. Such options were issued
with
a seven year life and as such unexercised options from those grants will expire
on January 12, 2006. To acknowledge the past seven years (and in many cases
more) of service and to motivate employees to remain with the Company, on
December 19, 2005, the Company granted options to employees in an amount equal
to their options expiring on January 12, 2006. Such options were granted with
immediate vesting, a seven year life and with an exercise price for 25% of
the
options at market value and the remaining 75% at $0.75 (the exercise price
of
the January 12, 1999 option grants). Non-plan options are generally exercisable
over a period not to exceed seven years. As of December 31, 2005, 4,329 non-plan
options were outstanding and exercisable with a weighted average exercise price
of $0.75 per share.
In
June
1999, the Company adopted and the shareholders approved a stock option plan
(the
"1999 Plan"). Incentive and non-qualified options under the 1999 Plan may be
granted to employees, officers, and consultants of the Company. There are 4,000
shares of Common Stock authorized for issuance under the 1999 Plan. The options
generally have a seven year life and generally vest quarterly over three years.
At December 31, 2005, there were 733 shares available for future grants. As
of
December 31, 2005, 3,530 plan options were outstanding and 3,133 plan options
were exercisable with a weighted average exercise price of $0.77 per
share.
F-20
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
7.
Stockholders' Equity (continued)
Common
Stock Options (continued)
Information
with respect to the Company's 1994 Plan and the 1999 Plan is summarized below:
|
Year
Ended December 31,
|
||||||||
|
2005
|
2004
|
|||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||
|
Outstanding
at beginning of period
|
3,227
|
$0.67
|
2,796
|
$0.70
|
||||
|
Granted
|
2,028
|
$0.85
|
1,334
|
$0.53
|
||||
|
Exercised
|
(24)
|
$0.41
|
(70)
|
$0.33
|
||||
|
Forfeited
|
(969)
|
$0.67
|
(833)
|
$0.36
|
||||
|
Outstanding
at period end
|
4,262
|
$0.76
|
3,227
|
$0.67
|
||||
|
Options
exercisable at period end
|
3,865
|
$0.78
|
2,127
|
$0.75
|
||||
|
Weighted
average grant-date fair value of options granted during the
period
|
$0.36
|
$0.29
|
||||||
The
following table summarizes information about stock options outstanding under
the
1994 Plan and the 1999 Plan at December 31, 2005:
|
Weighted
Average
|
||||||||||
|
Range
of Exercise Prices
|
Options
Outstanding
|
Remaining
Contractual
Life (Years)
|
Exercise
Price
|
|||||||
|
$0.00
- $0.50
|
1,042
|
5.3
|
$
|
0.40
|
||||||
|
$0.51
- $2.00
|
3,203
|
4.4
|
$
|
0.86
|
||||||
|
$2.01
- $2.99
|
-
|
-
|
$
|
-
|
||||||
|
$3.00
- $7.50
|
17
|
4.2
|
$
|
3.54
|
||||||
|
4,262
|
||||||||||
The
following table summarizes information about stock options exercisable under
the
1994 Plan and the 1999 Plan at December 31, 2005:
|
Range
of Exercise Prices
|
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||
|
$0.00
- $0.50
|
844
|
$
|
0.40
|
||||
|
$0.51
- $2.00
|
3,004
|
$
|
0.88
|
||||
|
$2.01
- $2.99
|
-
|
$
|
-
|
||||
|
$3.00
- $7.50
|
17
|
$
|
3.54
|
||||
|
3,865
|
|||||||
Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") as amended by Statement of Financial Accounting Standards No.
148, “Accounting for Stock-Based Compensation-Transition and Disclosures-an
Amendment of FASB Statement No. 123”. The Company has elected to continue to use
the intrinsic value based method of Accounting Principles Board Opinion.
F-21
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
7.
Stockholders' Equity (continued)
Common
Stock Options
No. 25,
as allowed under SFAS 123, to account for its employee stock-based
compensation plans through
December 31, 2005.
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 income (loss) available to common stockholders and basic and
diluted net income (loss) per share available to stockholders would have been
as
follows for the year ended December 31:
|
2005
|
2004
|
2003
|
||||||||
|
Net
income (loss) as reported
|
$
|
(4,031
|
)
|
$
|
1,620
|
$
|
(2,345
|
)
|
||
|
Add:
Stock-based employee compensation expense included in reported results
of
operations, net of related tax effects
|
-
|
-
|
-
|
|||||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value-based method for all awards, net of related tax
effects
|
(1,298
|
)
|
(248
|
)
|
(380
|
)
|
||||
|
Pro
forma net income (loss)
|
$
|
(5,329
|
)
|
$
|
1,372
|
$
|
(2,725
|
)
|
||
|
Basic
and diluted net income (loss) per share available to
stockholders:
|
||||||||||
|
As
reported
|
$
|
(0.04
|
)
|
$
|
0.02
|
$
|
(0.02
|
)
|
||
|
Pro
forma
|
$
|
(0.05
|
)
|
$
|
0.01
|
$
|
(0.03
|
)
|
||
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods: risk-free interest
rate of 4.34 for 2005, 3.65% for 2004, and 2.37% for 2003, an expected life
of
6.84 years for 2005, 5.61 years for 2004, and 6.65 years for 2003; expected
volatility of 94.1 for 2005, 51.6% for 2004 and 100% for 2003, and a dividend
yield of 0% for all periods.
The
Company expects to make additional option grants. Effective
January 1, 2006, any options issued to employees will be subject to the
provisions of FASB Statement 123(R) which require that an expense be calculated
and recognized in the financial statements for all such options. The
Company believes the above pro forma disclosures may not be representative
of
the effects on reported results of operations to be expected in future periods
due to changes in interest rates, expected lives of current and future option
grants and changes in the volatility of the price of the Company’s common stock
in the market.
As
of
December 31, 2005, 8,591 shares of Common Stock were reserved for issuance
upon exercise of outstanding options.
Warrants
At
December 31, 2005, 4,850 shares of Common stock were reserved for issuance
upon
exercise of outstanding warrants.
8.
Commitments
Off
balance sheet Arrangements
The
Company had no off balance sheet arrangements as of December 31, 2005 and
2004.
F-22
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
8.
Commitments (continued)
Lease
Commitments
The
Company currently leases 9,634 square feet, its principal facilities, (the
"Principal Offices) in Redwood Shores, California, pursuant to a sublease that
expires in 2011. The Joint Venture leases approximately 932 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 $401, $443, and $450, in 2005, 2004,
and 2003, respectively.
Future
minimum lease payments under noncancelable operating leases are approximately
$309, $237, $264, $272, $280and $240 for the years ending December 31,
2006, 2007, 2008, 2009, 2010 and 2011, respectively.
Future
minimum payments required under capital leases, which expire in 2007, were
insignificant at December 31, 2005.
9.
Income Taxes
As
of
December 31, 2005, the Company had federal net operating loss carryforwards
available to reduce taxable income through 2014 of approximately $70,373. The
Company also had federal research and investment tax credit carryforwards of
approximately $315 that expire at various dates through 2012.
Deferred
tax assets and liabilities at December 31, consist of the following:
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
24,585
|
$
|
26,853
|
|||
|
Credit
carryforwards
|
396
|
356
|
|||||
|
Deferred
income
|
223
|
183
|
|||||
|
Other,
net
|
215
|
875
|
|||||
|
Total
deferred tax assets
|
25,419
|
28,267
|
|||||
|
Valuation
allowance
|
(25,419
|
)
|
(28,267
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
Income
tax (benefit) differs from the expected statutory rate as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Expected
income tax cost (benefit)
|
$
|
(1,327
|
)
|
$
|
668
|
$
|
(799
|
)
|
||
|
State
income tax net of Federal benefit
|
234
|
(89
|
)
|
(144
|
)
|
|||||
|
Loss
write off of foreign investment
|
-
|
-
|
-
|
|||||||
|
Expired
net operating loss
|
2,268
|
254
|
-
|
|||||||
|
Change
in valuation allowance
|
(2,848
|
)
|
(833
|
)
|
943
|
|||||
|
Other
|
1,673
|
-
|
-
|
|||||||
|
Income
tax expense (benefit)
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
A
full
valuation allowance has been established for the Company's net deferred tax
assets since the realization of such assets through the generation of future
taxable income is uncertain.
Under
the
Tax Reform Act of 1986, the amounts of, and the benefit from, net operating
losses and tax credit carryforwards may be impaired or limited in certain
circumstances. These circumstances include, but are not limited to, a cumulative
stock ownership change of greater than 50%, as defined, over a three-year
period. During 1997, the Company experienced stock ownership changes which
could
limit the utilization of its net operating loss and research and investment
tax
credit carryforwards in future periods.
F-23
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
10.
Segment Information
Statement
of Financial Accounting Standards No. 131, “Disclosures About Segments of an
Enterprise and Related Information” (“SFAS 131”) establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company’s information has been stratified into two segments -
Handwriting Recognition Software and Systems Integration.
The
accounting policies followed by the segments are the same as those described
in
the “Summary of Significant Accounting Policies.” Segment data includes
revenues, as well as allocated corporate-headquarter costs charged to each
of
the operating segments.
The
Company identifies reportable segments by classifying revenues into two
categories: Handwriting Recognition and System Integration. Handwriting
recognition software is an aggregate of three revenue categories, OEM,
Enterprise and Online sales. All handwriting recognition software is developed
around the Company’s core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize the
Company’s products. All sales below represent sales to external
customers.
The
table
below presents information about reporting segments for the years ended December
31:
|
Handwriting
Recognition
|
Systems
Integration
|
Total
|
|||||||||||
|
2005
|
Revenues
|
$
|
3,121
|
$
|
−
|
$
|
3,121
|
||||||
|
Loss
from operations
|
$
|
(1,584
|
)
|
$
|
−
|
$
|
(1,584
|
)
|
|||||
|
Total
assets
|
$
|
8,466
|
$
|
−
|
$
|
8,466
|
|||||||
|
Depreciation
and amortization
|
$
|
466
|
$
|
−
|
$
|
466
|
|||||||
|
2004
|
Revenues
|
$
|
7,247
|
$
|
37
|
$
|
7,284
|
||||||
|
Income
(loss) from operations
|
$
|
2,600
|
$
|
(345
|
)
|
$
|
2,255
|
||||||
|
Total
assets
|
$
|
9,899
|
$
|
920
|
$
|
10,819
|
|||||||
|
Depreciation
and amortization
|
$
|
407
|
$
|
18
|
$
|
425
|
|||||||
|
2003
|
Revenues
|
$
|
2,322
|
$
|
712
|
$
|
3,034
|
||||||
|
Loss
from operations
|
$
|
(2,106
|
)
|
$
|
(51
|
)
|
$
|
(2,157
|
)
|
||||
|
Total
assets
|
$
|
6,294
|
$
|
921
|
$
|
7,215
|
|||||||
|
Depreciation
and amortization
|
$
|
438
|
$
|
18
|
$
|
456
|
|||||||
The
following table represents revenues and long-lived asset information by
geographic location for the period ended December 31:
|
Revenues
|
Long
Lived Assets
|
||||||||||||||||||
|
2005
|
2004
|
2003
|
2005
|
2004
|
2003
|
||||||||||||||
|
U.S.
|
$
|
2,891
|
$
|
7,127
|
$
|
2,003
|
$
|
4,699
|
$
|
4,773
|
$
|
5109
|
|||||||
|
China
|
230
|
157
|
1,031
|
16
|
45
|
71
|
|||||||||||||
|
Total
|
$
|
3,121
|
$
|
7,284
|
$
|
3,034
|
$
|
4,715
|
$
|
4,818
|
$
|
5,180
|
|||||||
F-24
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
10.
Segment Information (continued)
Interest
expense is related solely to Handwriting recognition segment and was $2,483,
$701, and $205, for the years ended December 31, 2005, 2004, and 2003,
respectively. Included in interest expense for the year ended December 31,
2005
and 2004 is approximately $2,275 and $187, respectively, in warrant and
beneficial conversion feature expense and amortization of deferred financing
costs associated with the convertible notes.
The
Company's export sales from U.S. operations were 7% of total revenues in 2005.
Export sales from U.S. operations were less than one percent in 2004. The
Company's export sales from U.S. operations were 14%, of revenues in 2003.
11.
Employee Benefit Plans
The
Company sponsors a 401(k) defined contribution plan covering all employees
meeting certain eligibility requirements. Contributions made by the Company
are
determined annually by the Board of Directors. To date, the Company has made
no
contributions to this plan.
12.
Quarterly information (Unaudited)
The
summarized quarterly financial data presented below, in the opinion of
Management, reflects all adjustments which are of a normal and recurring nature
necessary to present fairly the results of operations for the periods
presented.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||
|
2005
Unaudited
|
||||||||||||||||
|
Net sales
|
$
|
579
|
$
|
1,209
|
$
|
607
|
$
|
726
|
$
|
3,121
|
||||||
|
Gross profit
|
$
|
557
|
$
|
1,180
|
$
|
579
|
$
|
657
|
$
|
2,973
|
||||||
|
Loss before income taxes, and minority interest
|
$
|
(1,095
|
)
|
$
|
(840
|
)
|
$
|
(1,575
|
)
|
$
|
(540
|
)
|
$
|
(4,050
|
)
|
|
|
Net loss
|
$
|
(1,088
|
)
|
$
|
(834
|
)
|
$
|
(1,569
|
)
|
$
|
(540
|
)
|
$
|
(4,031
|
)
|
|
|
Basic and diluted loss per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
|
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||
|
2004
Unaudited
|
||||||||||||||||
|
Net
sales
|
$
|
2,429
|
$
|
630
|
$
|
3,669
|
$
|
556
|
$
|
7,284
|
||||||
|
Gross
profit
|
$
|
2,396
|
$
|
619
|
$
|
3,663
|
$
|
553
|
$
|
7,231
|
||||||
|
Income
(loss) before income taxes, and minority interest
|
$
|
1,167
|
$
|
(678
|
)
|
$
|
2,138
|
$
|
(1,026
|
)
|
$
|
1,601
|
||||
|
Net
income (loss)
|
$
|
1,167
|
$
|
(678
|
)
|
$
|
2,145
|
$
|
(1,014
|
)
|
$
|
1,620
|
||||
|
Basic
and diluted income (loss) per share
|
$
|
0.01
|
$
|
(0.01
|
)
|
$
|
0.02
|
$
|
(0.01
|
)
|
$
|
0.02
|
||||
F-25
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
12.
Quarterly information (Unaudited) (continued)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||
|
2003
Unaudited
|
||||||||||||||||
|
Net
sales
|
$
|
1,108
|
$
|
572
|
$
|
936
|
$
|
418
|
$
|
3,034
|
||||||
|
Gross
profit
|
$
|
875
|
$
|
450
|
$
|
704
|
$
|
240
|
$
|
2,269
|
||||||
|
Loss
before income taxes, and minority interest
|
$
|
(310
|
)
|
$
|
(693
|
)
|
$
|
(470
|
)
|
$
|
(888
|
)
|
$
|
(2,361
|
)
|
|
|
Net
loss
|
$
|
(310
|
)
|
$
|
(690
|
)
|
$
|
(472
|
)
|
$
|
(873
|
)
|
$
|
(2,345
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
13.
Subsequent
Events
Legal
Proceedings
On
January 13, 2006, the Company entered
into a Settlement Agreement with Valyd, Inc. The Settlement Agreement resolves
all claims and counterclaims between the parties with respect to allegations
set
forth in the previously announced litigation without payment of damages by
either party.
F-26
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
SCHEDULE
II
Communication
Intelligence Corporation
Valuation
and Qualifying Accounts and Reserves
(In
thousands)
Years
Ended December 31, 2003, 2004, and 2005
|
Balance
At
Beginning
Of
Period
|
Charged
to
Costs
and
Expense
|
Deductions
|
Balance
At
End
Of
Period
|
||||||||||
|
Year
ended December 31, 2003:
|
|||||||||||||
|
Accounts
receivable reserves
|
$
|
243
|
$
|
25
|
$
|
(12
|
)
|
$
|
256
|
||||
|
Year
ended December 31, 2004:
|
|||||||||||||
|
Accounts
receivable reserves
|
$
|
256
|
$
|
234
|
$
|
(86
|
)
|
$
|
404
|
||||
|
Year
ended December 31, 2005:
|
|||||||||||||
|
Accounts
receivable reserves
|
$
|
404
|
$
|
4
|
$
|
(21
|
)
|
$
|
387
|
||||
S-1