UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
--------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500,
Redwood Shores, CA 94065-1413
(Address of principal executiveoffices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
October 24,2002: 91,480,777.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at September 30, 2002
(unaudited) and December 31, 2001................................. 3
Condensed Consolidated Statements of Operations for the Three
and Nine-Month Periods Ended September 30, 2002
and 2001 (unaudited)............................................... 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Nine-Month Periods Ended September 30,
2002 and 2001 (unaudited).......................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Period Ended September 30, 2002 and 2001 (unaudited)............... 6
Notes to Unaudited Condensed Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations .................................. 12
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 18
------------------------------------------------------------
Item 4. Controls and Procedures ...........................................20
-----------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 20
-----------------
Item 2. Change in Securities................................ 21
--------------------
Item 3. Defaults Upon Senior Securities..................... 21
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. 21
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Item 5. Other Information................................... 21
-----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits................................... 21
(b) Reports on Form 8-K........................ 20
Signatures...................................................... 22
Certifications.................................................. 22
Certification of Principal Financial Officer.................... 23
Certificate of Chairman and Chief Executive Officer............. 24
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2002 2001
-------------- ------------
Unaudited
Assets
Current assets:
Cash and cash equivalents..................... $ 1,246 $ 2,588
Accounts receivable, net...................... 748 1,043
Inventories................................... 149 129
Prepaid expenses and other current assets..... 229 139
-------- ----------
Total current assets...................... 2,372 3,899
Property and equipment, net........................ 156 161
Capitalized software costs......................... 16 26
Patents and trademarks............................. 5,515 5,799
Other assets....................................... 88 187
-------- ----------
Total assets.............................. $ 8,147 $ 10,072
======== ==========
Liabilities and Stockholders' equity Current
liabilities:
Short-term debt............................... $ - $ 181
Accounts payable.............................. 109 206
Accrued compensation............................... 211 208
Other accrued liabilities..................... 470 196
Deferred revenue.............................. 123 88
Capital Lease Obligations..................... 40 3
--------- ----------
Total current liabilities................. 953 882
Notes payable - noncurrent......................... 3,000 3,000
Minority interest.................................. 133 130
Commitments
Stockholders' equity:
Common stock.................................. 914 909
Additional paid-in capital.................... 82,026 81,605
Accumulated deficit........................... (78,687) (76,258)
Cumulative translation adjustment............. (192) (196)
--------- ----------
Total stockholders' equity................ 4,061 6,060
--------- ----------
Total liabilities and stockholders'
equity ................................... $ 8,147 $ 10,072
========= ==========
See accompanying notes.
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
2002 2001 2002 2001
------- ------ ------ ------
Revenues:
Online................................. $ 83 $ 237 $ 287 $ 977
Corporate.............................. 132 222 1,538 1,884
Nonrecurring maintenance
fees(net)-M10 (previously
PenOp Inc.) - - - 352
China 310 456 968 1,223
------- ------- ------ -------
Total revenues ..................... 525 915 2,793 4,436
Operating costs and expenses:
Cost of sales:
Online ................................ 13 132 198 707
Corporate ............................. 15 12 148 244
China ................................. 176 312 602 829
Research and development ................ 367 428 1,145 1,399
Sales and marketing ..................... 367 470 1,181 1,604
General and administrative .............. 583 728 1,762 2,107
------- ------- ------- -------
Total operating costs and
expenses .......................... 1,521 2,082 5,036 6,890
------- ------- ------- -------
(Loss) from operations................... (996) (1,167) (2,243) (2,454)
Interest and other income
(expense), net ......................... (19) 5 (28) 19
Interest expense ....................... (53) (66) (155) (225)
Minority interest ...................... (2) (1) (3) (3)
-------- ------- -------- -------
Net (loss) .................... (1,070) (1,229) (2,429) (2,663)
======== ======== ======== ========
Basic and diluted (loss) per common share $(0.01) $(0.01) $(0.03) $(0.03)
======== ======== ======== ========
Weighted average common
shares outstanding ................ 91,481 90,715 91,237 90,495
======== ======== ======== ========
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Common Paid-In Accum. Comprehensive
Stock Capital Deficit Gain (Loss) Total
Balances as of December 31, 2001.. $ 909 $81,605 $(76,258) $ (196) $ 6,060
--------------------------------------------
Exercise of options for 148 shares
of Common Stock................. 1 109 - - 110
Foreign currency translation
adjustment...................... - - - 3 3
Net loss.......................... - - (688) - (688)
-------------------------------------------
Balances as of March 31, 2002..... $ 910 $81,714 $(76,946) $(193) $ 5,485
-------------------------------------------
Exercise of options for 420 shares
of Common Stock................. 4 312 - - 316
Foreign currency translation
adjustment ..................... - - - (1) (1)
Net loss.......................... - - (671) (671)
-------------------------------------------
Balances as of June 30, 2002...... $ 914 $82,026 $(77,617) $(194) $ 5,129
-------------------------------------------
Foreign currency translation
adjustment - - - 2 2
Net loss.......................... - (1,070) - (1,070)
-------------------------------------------
Balances as of September 30, 2002. $ 914 $82,026 $(78,687) $ (192) $4,061
============================================
Total shares outstanding as of: December 31, 2001,90,911 March 31, 2002, 91,060
June 30, 2002, 91,471 and September 30, 2002, 91,481.
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
September 30,
------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net loss.............................................. $ (2,429) $ (2,663)
Adjustments to reconcile net loss to net
cash(used) in operating activities:
Depreciation......................................... 69 125
Patent amortization.................................. 284 322
Loan discount amortization........................... - 74
Non-cash compensation................................ - 46
Disposal of fixed assets............................. 6 -
Changes in operating assets and
liabilities:
Accounts receivable, net........................... 295 1,018
Inventories........................................ (19) (44)
Prepaid expenses and other current assets.......... (87) 24
Other assets....................................... 99 (12)
Accounts payable................................... (66) (541)
Accrued compensation............................... 3 (43)
Other accrued liabilities.......................... 241 (11)
Deferred revenue................................... 35 91
--------- ---------
Net cash used in operating activities (1,569) (1,614)
--------- ---------
Cash flows from investing activity:
Acquisition of property and equipment................ (54) (53)
--------- ---------
Net cash used in investing activity.............. (54) (53)
--------- ----------
Cash flows from financing activities:
Payments on short-term debt......................... (181) (1,802)
Acquisition of property under capital lease......... 40 -
Proceeds from acquisition of short-term debt........ - 362
Proceeds from acquisition of long-term debt......... - 3,000
Proceeds from exercise of stock options
and warrants........................................ 426 817
Principal payments on capital lease obligations..... (4) (6)
--------- ----------
Net cash provided by financing activities 281 2,371
--------- ----------
Effect of exchange rate changes on cash................ - -
---------- ----------
Net increase (decrease) in cash and cash equivalents... (1,342) 704
Cash and cash equivalents at beginning of period....... 2,588 2,349
---------- ----------
Cash and cash equivalents at end of period.............$ 1,246 $ 3,053
========== ==========
See accompanying notes.
-6-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
The financial information contained herein should be read in conjunction
with the Company's audited financial statements and notes thereto
included in its Annual Report on Form 10-K for the year ended December
31, 2001.
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the "Company"
or "CIC") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements
included in this quarterly report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company's results of operations and cash flows for the
periods presented. The Company's interim results are not necessarily
indicative of the results to be expected for the entire year.
The Company develops and markets software that can verify handwritten
signatures delivered wirelessly and electronic signature and handwritten
data entry software solutions aimed at emerging, large potential markets
such as e-commerce, corporate security, mobile voice/Internet devices
including smartphones/communicators, PDAs, webpads and the Palm OS
aftermarket.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R)) and the Handwriter Recognition System,
referred to as HRS(TM), electronic signature, handwritten signature
verification, writing with the aid of symbols, electronic ink recording
tools (InkTools(R)), Sign-it(R), iSign(TM) and Sign-On(TM), and operating
systems extensions that enable pen input (PenX(TM)).
Other consumer and original equipment manufacturer ("OEM") products
include electronic notetaking (QuickNotes(TM) and InkSnap(TM)) and
predictive text input, (WordComplete(R)). CIC's products are designed to
increase the ease of use, functionality and security of electronic
devices with a primary focus on wireless internet and information devices
such as smartphones, electronic organizers ("PDA's") and portable web
browsers.
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies
are classified into two broad categories: "natural input technologies"
and "transaction and communication enabling technologies". Natural input
technologies are designed to allow users to interact with a computer or
handheld device by using an electronic pen or "stylus" as the primary
input device or in conjunction with a keyboard. CIC's natural input
offerings include multilingual handwriting recognition systems, software
keyboards, predictive text entry, and electronic ink capture
technologies. Many small handheld devices such as electronic organizers,
pagers and smart cellular phones do not have a keyboard. For such
devices, handwriting recognition and software keyboards offer viable
solutions for performing text entry and editing. CIC's predictive text
entry technology simplifies data entry even further by reducing the
number of actual letters required to be entered. The Company's ink
capture technologies facilitate the capture of electronic ink for
notetaking, drawings or short handwritten messages. The Company's
transaction and communication enabling technologies are designed to
provide a cost-effective means for securing electronic transactions,
providing network and device access control, and enabling workflow
automation of traditional paper form processing. CIC believes that these
technologies offer more efficient methods for conducting electronic
transactions and provide more functional user authentication and
heightened data security. The Company's transaction and communication
enabling technologies have been fundamental in its development of
software for signature verification, data security, and data compression.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
The Company was incorporated in Delaware in 1986 and the accompanying
financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses
from operations that raise a doubt about its ability to continue as a
going concern. The Company is in the process of filing a registration
statement with the Securities and Exchange Commission in order to obtain
funding from equity financing. However, there can be no assurance that
the Company will have adequate capital resources to fund planned
operations or that any additional funds will be available to the Company
when needed, or if available, will be available on favorable terms or in
amounts required by the Company. If the Company is unable to obtain
adequate capital resources to fund operations, it may be required to
delay, scale back or eliminate some or all of its operations, which may
have a material adverse effect on the Company's business, results of
operations and ability to operate as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Equity Line of Credit Agreement
In September 2002, the Company negotiated a Line of Credit agreement
expiring in two years with Cornell Capital Partners, LP. The Company may
periodically issue and sell shares of its common stock for a total
purchase price of $15 million, subject to the number of shares available
for issuance and the purchase price of such shares. If the Company
request an advance under the Line of Credit, Cornell Capital Partners,
L.P. will purchase shares of common stock of the Company for 100% of the
"Market Price" of its stock. Market Price is defined as the lowest volume
weighted average price of the Company's common stock as reported by
Bloomberg, LP, calculated over four of the five trading days after the
Company request an advance. The maximum amount of each advance is equal
to $1 million in any 30-day period. In addition, in no event shall the
number of shares issuable to Cornell Capital Partners, LP cause Cornell
to own in excess of 9.9% of the then outstanding shares of our common
stock. On each advance date, the Company must pay to Cornell Capital
Partners, L.P. an Advance fee equal to 6.5% of the amount of each
advance. At the Company's option, Cornell Capital Partners, L.P. may
withhold from the advance the fee described above. A closing will be held
six (6) trading days after such written notice, at which time the Company
will deliver shares of common stock and Cornell Capital Partners, L.P.
will pay the advance amount. Cornell Capital Partners, L.P. intends to
sell any shares purchased under the Equity Line of Credit at the market
price. Cornell Capital Partners, L.P. cannot transfer its interest in the
Equity Line of Credit to any other person and cannot engage in sales of
shares of common stock acquired under the Line of Credit. The
effectiveness of the sale of the shares under the Equity Line of Credit
is conditioned upon the Company registering the shares of common stock
with the Securities and Exchange Commission.
Recent Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when
the liability is incurred. EITF 94-3 allowed for an exit cost liability
to be recognized at the date of an entity's commitment to an exit plan.
SFAS 146 also requires that liabilities recorded in connection with exit
plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption encouraged.
2.Cash and cash equivalents
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
September 30, December 31,
2002 2001
--------------------- -- -------------------
Cash in bank $ 1,135 $ 1,621
Commercial paper - 26
Money market 111 941
--------------------- -------------------
$ 1,246 $ 2,588
===================== ===================
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At September 30,
2002, inventories consisted primarily of finished goods.
4. Short-term debt
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a
Chinese bank. The loan bore interest at 5.37% per annum and was due
August 23, 2002. The borrowing did not require the Joint Venture to
deposit a compensating balance. In February 2002, the Joint Venture
repaid $121 and in August 2002, paid the remaining equivalent of $60
denominated in Chinese currency.
5. Related Party Transactions:
A. Long-term debt related party
On June 19, 2001, the Company consummated a three-year $3 million
financing (the "Loan") with a charitable remainder annuity trust of which
a former director and officer of the Company is a trustee (the "Trust").
The proceeds of the Loan were used to refinance $1,500 of indebtedness
outstanding to the Trust pursuant to a loan made by the Trust to the
Company in October 1999 and for working capital purposes.
The Loan bears interest at the rate of 2% over the prime rate publicly
announced by Citibank N.A. from time to time, which was 6.75% per annum
at September 30, 2002, and is due June 18, 2004. The Loan may be pre-paid
by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert the outstanding principal amount of
the Loan into shares of common stock. Pursuant to the terms of the Loan,
the Trust has the option, at any time prior to maturity, to convert all
or any portion of the outstanding principal amount of the Loan into
shares of common stock of the Company at a conversion price of $2.00 per
share, subject to adjustment upon the occurrence of certain events. If,
prior to maturity of the Loan, the Company consummates one or more
financings providing $5 million or more in gross proceeds, the Company is
required to apply 50% of the proceeds in excess of $5 million to the then
outstanding principal amount of the Loan. The Loan is secured by a first
priority security interest in and lien on all of the Company's assets as
now owned or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration
rights agreement with the Trust which obligates the Company to file a
registration statement with the Securities and Exchange Commission
covering the sale of the shares of the Company's common stock issuable
upon conversion of the Loan if it receives a demand by the holder of the
Loan to do so, and to use its reasonable best efforts to cause such
registration statement to become effective.
Interest paid during the nine months ended September 30, 2002 and 2001
was $160 and $137, respectively.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Related Party Transactions (continued):
B. Transactions with PenOp Ltd. ("PenOp")
During the fourth quarter of 2000, the Company engaged in a transaction
with PenOp to provide nonrecurring maintenance services from pre-existing
PenOp contracts in the aggregate amount of $1.5 million, of which a net
amount of $877 was recorded as revenue during that quarter. At September
30, 2001, the Company recognized $325 of this contract revenue net of
related expenses of $48. The Company previously entered into a separate
transaction, to acquire certain intellectual property rights from PenOp.
6. Net loss per share
The Company calculates earnings per share under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per
share, which is based on the weighted average number of shares
outstanding, and diluted earnings per share, which is based on the
weighted average number of shares and dilutive potential shares
outstanding. For the three and nine month periods ended September 30,
2002 and 2001, potential equivalent shares excluded from the calculation
of diluted earnings per share, as their effect is not dilutive, include
stock options of 6,688, and 7,443, respectively, of equivalent shares and
warrants of 470 equivalent shares at September 30, 2001.
7. Comprehensive income
Total comprehensive (loss) was as follows:
Nine month Ended September 30,
------------ ------ --------------
2002 2001
------------ --------------
Net loss $ (2,429) $ (2,663)
Other comprehensive income:
Cumulative translation adjustment 4 5
------------- --------------
Total comprehensive loss $ (2,425) $ (2,658)
============= ==============
8. Segment Information
The Company identifies reportable segments by classifying revenues into
two categories: handwriting recognition and system integration.
Handwriting recognition software is an aggregate of three revenue
categories. All handwriting recognition software is developed around the
Company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize
the Company's products. All sales represent sales to external customers.
The accounting policies followed by the segments are the same as those
described in the "Critical Accounting Policies." Segment data includes
revenues, as well as allocated costs charged to each of the operating
segments.
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Segment Information (continued)
The table below presents information about reporting segments for the
periods indicated:
Nine month ended September 30,
- 2002 2001
---------------------------------------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------------------- ------- ------------ ----------- -----
Revenues $ 2,016 $ 777 $ 2,793 $ 3,439 $ 997 $ 4,436
Loss from
Operations $(2,273) $ 30 $ (2,243) $ (2,368) $ (86) $(2,454)
Significant change
in Total assets
from Year End
$ - $ (35) $ (35) $ - $ - $ -
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this quarterly report on Form 10-Q and
"Management`s Discussion and Analysis of Financial Condition and Results of
Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
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 our
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions which are used for,
but not limited to, the accounting for the product returns, allowance for
doubtful accounts, intangible asset impairments, and inventory. Actual results
may differ from these estimates. The following critical accounting policies are
significantly affected by judgments, assumptions and estimates used by the
Company's management in the preparation of the consolidated financial
statements.
Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended, Staff Accounting Bulletins 101 (`SAB 101') and
the interpretive guidance issued by the Securities and Exchange Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. We recognize revenues
from sales of software products upon shipment, provided that collection is
determined to be probable and no significant obligations remain. Actual results
could differ from these estimates. Revenue from service subscriptions is
recognized as costs are incurred or over the service period.
Revenue from software license agreements with end-users is recognized upon
delivery of the software provided that persuasive evidence of an arrangement
exists, collection is determined to be probable and no significant obligations
remain. Deferred revenue is recorded for post contract support, and is
recognized as costs are incurred or over the support period. Vendor specific
objective evidence of the fair value of the elements contained in these software
license agreements is based on the price determined by management having the
relevant authority when the element is not yet sold separately.
Revenue from system integration activities is recognized upon installation
provided that no significant obligations remain and the collection of the
resulting receivable is probable.
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 our historical experience, the
Company's estimates of recoverability of amounts due us could be affected.
We perform intangible asset impairment analysis on a quarterly basis in
accordance with the guidance in Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142"). In response to
changes in industry and market conditions, the Company may determine that an
impairment of our patents has occurred.
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 non-monetary assets and liabilities that are
translated at historical
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
exchange rates. Revenues and expenses are translated at
the average exchange rates in effect during each period, except for those
expenses included in balance sheet accounts, which are translated at historical
exchange rates.
Research and Development
Research and development costs are charged to expense as incurred. The Company
capitalizes certain software development costs associated with new product
development once the product design detail has been competed and technological
feasibility has been established. The costs capitalized include the coding and
testing of the product after the technological feasibility has been established.
The capitalized costs are amortized to cost of sales on a straight line basis
over the estimated life of the product, generally three years.
Segments
The Company reports in two segments, handwriting recognition and systems
integration. For purposes of Management Discussion and Analysis, handwriting
recognition includes Online/Retail revenues and Corporate sales, including
Enterprise and Original Equipment Manufacturers ("OEM") revenues. All
handwriting recognition software is developed around the Company's core
technology. Handwriting recognition product revenues are generated via the
Company's web site and the through a direct sales force to individual or
enterprise end users. The Company's sales force also licenses 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 the Company's software to run on
a new customers hardware platform or within the customers software operating
system. The development contract revenues are included in the handwriting
recognition segment. System integration represents the sale and installation of
third party computer equipment and systems that utilize the Company's products.
System integration sales are derived through a direct sales force which then
develops a system to utilize the Company's software based on the customers
requirements. Systems integration sales are solely accomplished in our China
Operation.
Historically, the Company's handwriting recognition segment revenues have been
derived from a limited number of customers. One customer, Nationwide Building
Society, accounted for 12% of total revenues for the first nine months of 2002.
One customer, The Prudential Insurance Company of America accounted for20% of
total revenue for the first nine months of 2001.
In the Company's system integration segment one customer, Fujitsu Ltd. accounted
for 28% of total revenue for the first nine months of 2002 and 37% for the first
nine months of 2001.
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Segment revenues:
Handwriting recognition
Online $ 83 $ 237 $ 287 $ 977
Corporate 132 222 1,538 1,884
Nonrecurring
Maintenance fees
(net)--M10
previously PenOp) -- -- -- 352
China 90 67 191 223
-------- -------- -------- --------
Total Handwriting recognition $ 305 $ 526 $2,016 $3,436
Systems integration
China $ 220 $ 389 $ 777 $1,000
-------- --------- -------- --------
Total revenues $ 525 $ 915 $2,793 $4,436
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Cost of Sales
Handwriting recognition $ 64 $ 154 $ 443 $ 999
Systems integration 140 302 505 781
-------- -------- -------- --------
Total cost of sales $ 204 $ 456 $ 948 $1,780
-------- -------- -------- --------
Operating cost and expenses
Research and development $ 367 $ 428 $1,145 $1,399
Sales and Marketing 367 470 1,181 1,604
General and administrative 583 728 1,762 2,107
-------- -------- -------- --------
Total operating costs and expenses $1,317 $1,626 $4,088 $5,110
-------- -------- -------- --------
Interest and other
income (expense) net $ (74) $ (62) $ (186) $ (209)
-------- -------- -------- --------
Net loss $(1,070) $(1,229) $(2,429) $(2,663)
======== ======== ======== ========
Amortization of intangible assets
Cost of sales $ 3 $ 4 $ 10 $ 9
General and administrative 57 113 284 321
--------- -------- -------- --------
Total amortization of
intangible assets $ 60 $ 117 $ 294 $ 330
========= ======== ======== ========
Revenues
Handwriting recognition - Revenues declined 42% or $221 for the three
months ended September 30, 2002 as compared to $526 for the comparable three
month period in the prior year. For the nine month period handwriting
recognition revenues declined 41% to $2,016 as compared to $3,436 during the
same nine month period in the prior year. A detailed discussion of the segment
revenues follows.
Online revenues decreased $154 or 65% to $83 for the three months ended
September 30, 2002 as compared to $237 in the prior year period. This decrease
was primarily due to the curtailment of the direct mail campaign during the
three months ended September 30, 2002 due to the reduced availability of new
names and poor sales close rate compared to the same period last year. For the
nine months ended September 30, 2002, Online revenues decreased $690 or 71% to
$287 from $977 in the same nine month period last year. This decrease was due
primarily to the same reasons discussed above.
Corporate sales - Enterprise sales, included in corporate sales,
increased for the three months ended September 30, 2002, $40 or 44% to $130 as
compared to $90 in the prior year. The increase in enterprise sales for the
three months ended September 30, 2002 was primarily due to a sale to a major
construction company in the current quarter . For the nine months ended
September 30, 2002, enterprise sales increased 44% or $367 to $1,199 compared to
$832 in the prior year period. This increase was primarily due to the increase
in the number of sales of the Company's software signature products over the
nine months as compared to the prior year period. OEM revenues, included in
corporate sales, for the three months ended September 30, 2002 decreased 98% or
$130 to $2 from $132 in the prior period. This decrease was due to a decrease in
the amount of royalty reported by one of the Company's licensees located in
Japan and reduced development contract revenue recognized compared to the prior
year. OEM revenues for the nine months ended September 30, 2002 decreased 68%,
or $713, to $339 from $1,052 in the prior period. The decrease in OEM revenues
for the nine months ended September 30, 2002 was due primarily to the same
factors discussed for the current three month period. During the nine months
ended September 30, 2001, the Company recognized $352 in nonrecurring
maintenance fees net of expenses of $48. The Company engaged in a transaction
with PenOp to provide nonrecurring maintenance services from pre-existing PenOp
contracts in the aggregate amount of $1.5 million, of which $877 was recorded
(net) in the fourth quarter of 2000. As stated earlier, on October 6, 2000 the
Company completed a separate transaction to acquire certain intellectual
property rights from PenOp.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Handwriting recognition segment sales in China increased $23 or 34% to
$90 during the three months ended September 30, 2002 compared to $67 in the
comparable period of the prior year. Handwriting segment revenues for the nine
month period declined 14% to $191 as compared to $223 in the prior year period.
The decline in revenue is due to closing fewer order during the nine months
ended September 30, 2002 as compared to the prior year. The Company does not
believe there is a declining revenue trend developing in China and expects that
handwriting software sales will increase as the China market matures.
Systems Integration - China systems integration sales for the three
months ended September 30, 2002 decreased $169, or 43%, to $220 from $389 in the
same prior year period. For the nine months ended September 30, 2002, China
revenues decreased 22% or $223 to $777 from $1,000 in the same prior year
period. This decrease was due to a large sale to a single customer in the
comparable period in the prior year.
Cost of Sales
Handwriting recognition . Cost of sales decreased for the three and nine
months ended September 30, 2002 $79 and $595, respectively, or 51% and 59%,
respectively, to $75 and $404, respectively compared to $154 and $999,
respectively, in the same prior year periods as discussed below.
Online cost of sales for the three and nine months ended September 30,
2002 decreased $119 and $509, respectively, or 90% and 72%, respectively, to $13
and $198, respectively, compared to $132 and $707, respectively, in the same
prior year periods. The decrease during the three and nine month periods ended
September 30, 2002 was due to the elimination of direct mailing campaign and
related costs as a result of reductions in the number of names available and a
poor sales close rate experienced early in the current nine months as compared
to the same periods in the prior year.
Corporate sales costs for the three months ended September 30, 2002
increased $3 to $15 from $12 in the comparable period of the prior year The
increase was due to an increase in third party hardware sold with the Company's
signature software solution products. For the nine months ended September 30,
2002, corporate cost of sales decreased $96, or 39%, to $148 from $244 in the
comparable prior year period. The decrease was due to the lower sales volumes of
products requiring third party hardware and a reduction in OEM and development
contract revenues and the associated technology import tax and engineering costs
as compared to the same period of the prior year.
China handwriting recognition segment cost of sales for the three and
nine months ended September 30, 2002 increased $26 and $12, respectively, or
260% and 23%, to $36 and $60, respectively, compared to $10 and $48,
respectively, in the same prior year periods. The increase is due to an increase
in third party hardware costs.
Systems Integration - Cost of sales decreased for the three and nine
months ended September 30, 2002 $162 and $239 for the three and nine months
ended September 30, 2002 compared to the prior year periods. The decrease is due
to the decrease in system integration revenues over the three and nine months
ended September 30, 2002 compared to the same prior year period.
Gross Margin
Handwriting recognition segment -. Gross margin for the three and nine
months ended September 30, 2002 decreased $138 and $459, respectively, or 30%
and 20%, respectively, to $321 and $1,845, respectively, from $459 and $2,304,
respectively, in the same prior year periods.
Online gross margin for the three and nine months ended September 30,
2002 decreased $35 and $181, respectively, or 33% and 67%, respectively, to $70
and $89, respectively, from $105 and $270, respectively, in the same prior year
periods. This decrease was due to lower sales during the comparable three and
nine month periods offset by the elimination of the mailer program and the
associated costs. Online gross margins were 84% and 31%, respectively,
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
of sales
for the three and nine months ended September 30, 2002 compared to 44% and 28%,
respectively, in the same prior year periods.
Corporate sales gross margin for the three and nine months ended
September 30, 2002 decreased $93 and $250, respectively, or 44% and 15%,
respectively, to $117 and $1,390, respectively, compared to $210 and $1,640,
respectively, in the same prior year periods. This decrease was primarily due to
the decrease in corporate sales. Corporate sales gross margin as a percentage of
sales was 89% and 90% for the three and nine month periods ended September 30,
2002 compared to 94% and 87%, respectively, for the same three and nine month
periods of the prior year. Gross margins related to nonrecurring maintenance
fees from M10 decreased for the nine months ended September 30, 2002 to $0,
compared to $352 in the prior year period. This decrease was due to the Company
not recognizing nonrecurring maintenance fees during the current three and nine
month ended September 30, 2002, compared to the same periods in the prior year.
China handwriting recognition segment gross margin for the three and
nine month period ended September 30, 2002 decreased to $54 and $132,
respectively, from $57 and $175 in the same prior year periods. The decrease in
gross margin for the three and nine months ended September 30, 2002, resulted
from lower sales volumes and increased third party hardware costs.
Systems Integration -China systems integration segment gross margin for
the three month period ended September 30, 2002 decreased to $80 as compared to
$87 in the same three month period of the prior year. The decrease is due to the
reduction in revenue during the comparable periods. For the nine months ended
September 30, 2002 systems integration gross margins increased to $272 from $219
in the same prior year periods. The increase in gross margin for the three and
nine months ended September 30, 2002, is due to the increase in the higher
margin software components in the systems integration projects compared to the
prior year period.
Operating expenses
Research and development expenses. Research and development expenses
for the three and nine months ended September 30, 2002 decreased by $61 and
$254, respectively, to $367 and $1,145, respectively, as compared to $428 and
$1,399, respectively, in the comparable three and nine month periods of the
prior year. The decrease was due primarily to the reduction of approximately $12
and $224, respectively, in outside engineering costs associated with the
assimilation of the PenOp intellectual property into the Company's products. In
addition, payroll and related costs decreased approximately $44 and $110,
respectively, for the three and nine months ended September 30, 2002, compared
to the prior year. The reduction in payroll and related expenses was due to
actions taken in the fourth quarter of last year to trim expenses in response to
a weakening economy. Other costs including facilities and shared engineering
costs with the Joint Venture decreased $5 for the three months ended September
30, 2002 compared to the prior year and increased $80 over the nine months ended
September 30, 2002. The increase over the nine month period was due to increases
in facility expenses. Expenses transferred to cost of sales for the nine months
ended September 30 2002 decreased $40 compared to the prior year. The
fluctuations in expenses for the three and nine month periods are due to the
changes in the number of revenue generating nonrecouring engineering projects
being worked on during a given period. The Company capitalized $20 in software
development costs associated with new products and enhancements during the nine
months ended September, 2001. The Company did not capitalize any new product
software development costs in the nine month period ending September 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the
three and nine months ended September 30, 2002 decreased $103 and $423,
respectively, to $367 and $1,181, respectively, as compared to $470 and $1,604,
respectively, in the comparable periods of the prior year. Professional services
and advertising expenses decreased $50 to $42 from $92 for the three month ended
September 30, 2002, as compared with the same period last year. The decrease was
due the reduction in resource guide advertisements included in the box that
accompanies the handheld devices. For the nine month period ended September 30,
2002, professional services and advertising fees decreased $160 to $149 from
$309, as compared with the same period last year. This decrease was due
primarily to the reduction in resource guide advertisements discussed above and
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
to nonrecouring expenses of a marketing study completed in the prior year. Other
costs, including salaries and related expenses and travel and recruiting
expenses, decreased $53 for the three months ended September 30, 2002, compared
to the same period in the prior year. For the nine months ended September 30,
2002, other costs, including salaries and related expenses and travel and
recruiting expenses decreased $263 as compared to the same nine month period
last year. The reduction in other expenses was due to actions taken in the
fourth quarter of last year and again in the third quarter of the current year
to trim expenses in response to a weakening economy. The sales efforts have been
directed towards customers that have previously purchased products and currently
have pilot programs in process utilizing the Company's software. These customers
are expected to purchase additional software once they have completed their
studies and implement their software solution. The Company believes that an
improving economy and the number of current customer pilot programs nearing
completion will provide future revenues over a period of time sufficient to
allow the Company to timely expand its sales efforts to generate potential new
demand.
General and administrative expenses. General and administrative
expenses for the three and nine months ended September 30, 2002 decreased $145
and $345 to $583 and $1,762, respectively, from $728 and $2,107, respectively,
in the comparable periods of the prior year. Professional services decreased $64
and $243, respectively, due to the reduction in legal fees and in financial
service fees paid to the former chairman of the Company. Payroll and related
costs decreased approximately $12 due to reductions in head count in the three
months ended September 30, 2002. Salaries and related expense increased
approximately $8 over the nine months ended September 30, 2002, due to salary
increases. Other costs, including investor relations and facilities and related
costs, decreased $63 and $96, respectively, over the comparable three and nine
month periods of the prior year. The reduction in other expenses was due to
actions taken in the fourth quarter of last year and again in the third quarter
of the current year to trim expenses in response to a weakening economy.
Interest and other income (expense), net. Interest and other income
(expense), net for the three and nine months ended September 30, 2002 decreased
$24 and $47, respectively, to an expense of $19 and $28, respectively, compared
to income of $5 and $19, respectively, in the comparable periods of the prior
year. Interest income from cash and cash equivalents decreased $15 and $31,
respectively, to $2 and $9 for the three and nine months ended September 30,
2002 compared to $17 and $40 in the same periods of the prior year. This
decrease was due to lower cash balances and reduction in interest rates during
the three and nine month periods ended September 30, 2002. The interest income
was offset by $3 and $15, respectively, of credit card processing fees related
to Online sales and other expenses for the three and nine month periods ended
September 30, 2002, compared to $9 and $30, respectively, in the same periods of
the prior year.
Interest expense. Interest expense decreased $13 to $53 for the three
month period ended September 30, 2002, compared to $66 in the same prior year
period. The decrease was due to the reduction in the prime rate as compared to
the prior year. For the nine months ended September 30, 2002, interest expense
decreased $70 to $155, compared to $225 in the same prior year period. The
decrease was primarily due to the write off in June 2001 of the loan discount as
a result of the payment of the $1,500 note.
Liquidity and Capital Resources
The Company was incorporated in Delaware in 1986 and the accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has suffered recurring losses from operations
that raise a doubt about its ability to continue as a going concern. The Company
is in the process of filing a registration statement with the Securities and
Exchange Commission in order to obtain funding from equity financing. However,
there can be no assurance that the Company will have adequate capital resources
to fund planned operations or that any additional funds will be available to the
Company when needed, or if available, will be available on favorable terms or in
amounts required by the Company. If the Company is unable to obtain adequate
capital resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which may have a material adverse
effect on the Company's business, results of operations and ability to operate
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
At September 30, 2002, cash and cash equivalents totaled $1,246
compared to cash and cash equivalents of $2,588 at December 31, 2001. The
decrease was due primarily to cash used in operating activities of $1,569, cash
used in investing activities of $54. Cash provided by financing activities was
$281, net. The $281 provided by financing activities consists of $426 in
proceeds from the exercise of stock options by the Company's employees and
former chairman, the acquisition of capital equipment under capital lease of
$40, reduced by the repayment of the note by the Joint Venture of $181, and by
payments of capital lease obligations of $4. Total current assets were $2,372 at
September 30, 2002, compared to $3,899 at December 31, 2001.
As of September 30, 2002, the Company's principal source of funds was
its cash and cash equivalents aggregating $1,246.
Accounts receivable declined $295 over the nine months ended September
30, 2002 due primarily to the lower sales during the period. The Company
believes that the lower sales volumes are due to the reduced information
technology ("IT") spending in the handwriting segment as the result of the
weakened economy, and does not indicate non acceptance of the Company's
products.
Prepaid expenses increased $90 during the period ended September 30,
2002 due to premiums paid for Directors and Officers liability insurance during
the period.
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a Chinese
bank. The loan bore interest at 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
In February 2002, the Joint Venture repaid $121, and in June 2002 repaid the
remaining balance of $60 denominated in Chinese currency.
Accounts payable declined $97 over the nine months ended September 30,
2002 due to the reduction in operating activities as the result of the slow
economy. Other accrued liabilities increased $274 as of September 30, 2002 due
various accruals which include professional services related to corporate
filings and other legal matters. . Deferred revenue, totaling $123 at September
30, 2002, 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.
The Company currently owns 90% of a joint venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). The Company's investment in the Joint Venture
is subject to risks of doing business abroad, including fluctuations in the
value of currencies, export duties, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, longer payment
cycles, greater difficulty in accounts receivable collections, burdens of
complying with foreign laws and political and economic instability.
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Material commitment are presented below:
Payments Due by Period
One to Four to After
Less than three five five
Contractual Obligations Total one year years years years
---------- --------- -------- --------- -------
Long-term debt (1) $ 3,000 - $ 3,000 $ - $ -
Capital lease
obligations 40 6 23 11 -
Operating lease
commitments (2) 1,763 397 1,256 110 -
----------- --------- -------- --------- -------
Total contractual cash
obligations $ 4,803 $ 403 $ 4,279 $ 121 $ -
=========== ========= ======== ========= =======
1. The Long-term debt may be pre-paid by the Company in whole or in part
at any time without penalty, subject to the right to convert the
outstanding principal amount into shares of common stock at a
conversion price of $2.00 per share, subject to adjustment upon the
occurrence of certain events.
2. The operating lease commenced on November 1, 2001. The cost of the
lease will increase approximately 3% per annum over the term of the
lease, which expires on October 31, 2006.
Forward Looking Statements
Certain statements contained in this quarterly report on Form 10-Q,
including without limitation, statements containing the words "believes",
"anticipates", "hopes", "intends", "expects", and other words of similar import,
constitute "forward looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors which may cause actual events to
differ materially from expectations. Such factors include the following:
Forward Looking Statements(continued)
o Technological, engineering, manufacturing, quality control or other
circumstances which could delay the sale or shipment of products;
o Economic, business, market and competitive conditions in the software
industry and technological innovations which could affect the Company's
business;
o The Company's inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of others
and prevent others from infringing on the proprietary rights of the
Company; and
o General economic and business conditions and the availability of sufficient
financing.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, as a result of new information, future events or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company has an investment portfolio of fixed income securities that
are classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short term securities. The Company has not entered into
any short-term security investments during the three months ended September 30,
2002.
-19-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Foreign Currency Risk
From time to time, the Company 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 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c)
within 90 days of the filing date of this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
Part II-Other Information
Item 1. Legal Proceedings
The Company was named as a defendant in a suit brought in U.S. District
Court for the Southern District of New York, filed on August 5, 2002, case
number 02-CV-6197. The plaintiffs, Richard M. Ross and Jane Spaulder Ross,
brought claims for breach of contract, conversion, negligence and statutory
-20-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 1. Legal Proceedings (continued)
violations, alleging that the Company provided incorrect or false information to
plaintiffs' stock broker, thereby delaying the sale of their shares in the
Company and causing a loss in excess of $500,000. While the litigation is in an
early stage, based on the available information, we do not believe that the
action will ultimately have a material financial impact on the Company. We
believe that the claims are without merit, and we intend to vigorously defend
against them.
In a separate arbitration proceeding the plaintiffs have brought similar
claims for relief against Charles Schwab & Co., Inc., their broker during the
period in question, based upon other legal theories.
Item 2. Change in Securities
During the three months ended September 30, 2002, the Company granted
stock options to employees as follows:
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
Quarterly over
2 Employees 9/25/02 275,000 $0.28 three years 9/25/02
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certification of Chief Executive Officer and Chief Financial Officer
(b) Reports on Form 8-K
None
-21-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
--------------------------------------------
Registrant
October 24 , 2002 /s/ Francis V. Dane
- --------------------- ------------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Communication Intelligence
Corporation (the "Company") on Form 10-Q for the quarterly period ended
September 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Francis V. Dane, Principal Financial Officer,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Francis V. Dane
Principal Financial Officer
In connection with the quarterly report of Communication Intelligence
Corporation (the "Company") on Form 10-Q for the quarterly period ended
September 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Guido DiGregorio, Chairman and Chief Executive
Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Guido DiGregorio
Chairman and Chief Executive Officer
-22-
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
CERTIFICATION
I, Francis V. Dane, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Communication
Intelligence Corporation;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 28, 2002
By: /s/ Francis V. Dane
Principal Financial Officer
-23-
CERTIFICATION
I, Guido DiGregorio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Communication
Intelligence Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 28, 2002
By: /s/ Guido DiGregorio
Chairman
Chief Executive Officer
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