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: March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock,
as of May 1, 2000: 84,493,921.
This Quarterly Report on Form 10-Q contains 18 pages of which this is page 1.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at March 31, 2000
(unaudited) and December 31,1999.........................................3
Condensed Consolidated Statements of Operations for the
Three-Month Period Ended March 31, 2000 and 1999 (unaudited)............4
Condensed Consolidated Statements of Stockholders' Equity for the
Three-Month Period Ended March 31, 2000 (unaudited).....................5
Condensed Consolidated Statements of Cash Flows for the
Three-Month Period Ended March 31, 2000 and 1999 (unaudited)............6
Notes to 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......16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................16
Item 2. Change in Securities............................................16
Item 3. Defaults Upon Senior Securities.................................16
Item 4. Submission of Matters to a Vote of Security Holders.............16
Item 5. Other Information...............................................16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits...............................................16
(b) Reports on Form 8-K....................................16
Signatures...............................................................17
2
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2000 1999
------------- -------------
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 3,315 $ 2,374
Accounts receivable, net 2,248 1,575
Inventories 35 81
Prepaid expenses and other current assets 227 175
------------- -------------
Total current assets 5,847 4,205
Note receivable from officer 113 135
Property and equipment, net 315 344
Other assets 254 279
------------- -------------
Total assets $ 6,507 $ 4,963
============= =============
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ - $ 60
Accounts payable 503 288
Accrued compensation 226 268
Other accrued liabilities 323 500
Deferred revenue 1,051 35
------------- -------------
Total current liabilities 2,103 1,151
Long-term debt - related party 1,358 1,338
Minority interest 124 125
Commitments
Stockholders' equity:
Common stock 842 822
Additional paid-in capital 74,422 72,983
Accumulated deficit (72,132) (71,244)
Cumulative translation adjustment (210) (212)
------------- -------------
Total stockholders' equity 2,922 2,349
============= =============
Total liabilities and
stockholders' equity $ 6,507 $ 4,963
============= =============
See accompanying notes.
3
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended
March 31,
-------------------------------------
2000 1999
------------- -------------
Revenues:
Product $ 1,097 $ 773
License and royalty 184 218
Development contracts 96 256
------------- -------------
Total revenues 1,377 1,247
Operating costs and expenses:
Cost of sales:
Product 654 471
License and royalty 21 17
Development contracts 54 142
Research and development 429 297
Sales and marketing 592 391
General and administrative 470 417
------------- -------------
Total operating costs and expenses 2,220 1,735
------------- -------------
Loss from operations (843) (488)
Interest and other income (expense), net (7) 2
Interest expense (39) -
Minority interest 1 2
------------- -------------
Net loss $ (888) $ (484)
============= =============
Basic loss per common share $ (0.01) $ (0.01)
============= =============
Diluted loss per common share $ (0.01) $ (0.01)
============= =============
Weighted average common
shares outstanding 83,005 79,111
============= =============
See accompanying notes.
4
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accum.
Additional Other
Common Paid-In Accum. Comp.
Stock Capital Deficit Loss Total
Balances as of December 31, 1999.. $ 822 $ 72,983 $(71,244) $ (212) $2,349
---------------------------------------------
Cashless Exercise of 300 warrants
for 255 shares of Common Stock.. 3 - - - 3
Exercise of options for 1,596
shares of Common Stock.......... 16 1,439 - - 1,455
Exercise of 106 warrants for 106
shares of Common Stock.......... 1 - - - 1
Foreign currency translation
adjustment...................... - - - 2 2
Net loss.......................... - - (888) - (888)
---------------------------------------------
Balances as of March 31, 2000..... $ 842 $ 74,422 $(72,132) $ (210) $2,922
=============================================
See accompanying notes.
5
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31,
--------------------------------
2000 1999
------------- --------------
Cash flows from operating activities:
Net loss $ (888) $ (484)
Adjustments to reconcile net loss
to net cash provided by (used)
in operating activities:
Depreciation and amortization 68 63
Non-cash compensation 21 20
Changes in operating assets
and liabilities:
Accounts receivable (673) 519
Inventories 46 1
Prepaid expenses and other current
assets (52) (57)
Other assets 22 -
Accounts payable 215 (79)
Accrued compensation (39) (2)
Other accrued liabilities (182) 162
Deferred revenue 1,016 (129)
------------- -------------
Net cash provided by (used in)
operating activities (446) 14
------------- -------------
Cash flows from investing activity:
Acquisition of property and equipment (14) (16)
------------- -------------
Net cash used in investing activity (14) (16)
------------- -------------
Cash flows from financing activities:
Principal payments on short-term debt (60) (145)
Proceeds from exercise of stock
options and warrants 1,460 507
Principal payments on capital
lease obligations (2) -
Restricted cash related
to short-term debt - 250
------------- -------------
Net cash provided by
financing activities 1,398 612
------------- -------------
Effect of exchange rate changes on cash 3 -
------------- -------------
Net increase in cash and
cash equivalents 941 610
Cash and cash equivalents
at beginning of period 2,374 795
------------- -------------
Cash and cash equivalents at end
of period $ 3,315 $ 1,405
============= =============
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 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 natural input and electronic signature
solutions for wireless internet information devices and enterprise
applications including e-commerce, document automation and corporate
security. The Company's core software technologies include multilingual
handwriting recognition systems (Jot(R) and the Handwriter(R) Recognition
System, referred to as HR(TM)), dynamic signature verification and capture
tools (InkTool(TM), Sign-it(TM), and Sign-On(TM), ink compression
(INKshrINK(R)) and operating system extensions that enable pen input
(PenX(TM) and PenX(TM) VC). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM)
and InkSnap(TM)) and predictive text input, (WordComplete(TM)). 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 the most viable solutions for performing text
entry and editing. CIC's predictive text entry technology simplifies data
entry even further by reducing the number of actual letters required to be
entered. The Company's ink capture technologies facilitate the capture of
electronic ink for notetaking, drawings or short handwritten messages. 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.
For the three months ended March 31, 2000, the Company's cash and cash
equivalents increased by $941 from $2,374 at the beginning of the period to
$3,315. The increase is due primarily to cash of $1,398 provided by
financing activities. This increase was offset by cash used in operating
activities of $446 and cash used in investing activities of $14. The $1,398
provided by financing activities consists primarily of $1,460 in proceeds
from the exercise of stock options and warrants by the Company's employees
and others, offset by principal payments of short-term debt and capital
lease obligations of $62. As of March 31, 2000, the Company's principal
source of funds were its cash and cash equivalents aggregating $3,315. The
Company anticipates that it will have adequate capital to fund its planned
operations in the forseeable future. However, there can be
7
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 (continued)
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 prospects.
The financial information contained herein should be read in conjunction
with the Company's audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 1999.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
March 31, December 31,
2000 1999
--------------------------------------------
Cash in bank $ 2,767 $ 2,359
Commercial paper 541 11
Money market 7 4
===================== ===================
$ 3,315 $ 2,374
===================== ===================
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At March 31, 2000,
inventories consisted primarily of finished goods.
4. Note receivable from officer
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the
Company's Common Stock. The note bore interest at the lesser of the highest
marginal rate per annum applicable to the Company's borrowings or the
highest rate allowable by law. On August 14, 1998, the Company entered into
an agreement (the "Agreement") with the former Chief Executive Officer.
Under the Agreement, the former officer has agreed to provide consulting
services to the Company through December 15, 2001. In exchange for these
services, $110 of the note receivable from the officer will be forgiven on
a monthly basis over the period commencing August 15, 1998 and ending
December 15, 2001. The remaining $100 of the note receivable from the
officer will be forgiven on December 15, 2001 if the officer has performed
all the required services under the Agreement. The Agreement will terminate
on December 15, 2001.
8
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank.
The loan bore interest at 5.12% and was due on March 2, 2000. The
borrowings did not require a compensating balance. The note was repaid in
full in January, 2000.
6. Long-term debt related party
On October 20, 1999, the Company entered into a loan agreement with a
charitable remainder annuity trust, of which a director and officer of the
Company is a trustee, in the amount of $1,500 (the "1999 Loan"). The 1999
Loan is secured by a first priority security interest in all of the
Company's assets as now owned or hereafter acquired by the Company. The
1999 Loan bears interest at the rate of 2% over the prime rate as published
by Citibank from time to time, 10.25% at March 31, 2000. The note is due
January 31, 2002. Interest on the principal amount under the 1999 Loan is
payable quarterly. The 1999 Loan can be re-paid in whole at any time or in
part at any time without penalty. Any partial payment must be in the
principal amount of $100 or a multiple thereof.
On October 20, 1999, in connection with the 1999 Loan the Company issued to
the charitable remainder annuity trust warrants to purchase 300 shares of
the Company's common stock. The warrants expire October 20, 2001 and have
an exercise price of $1.09 per share. The Company ascribed a value of $179
to these warrants, which will be amortized to the Company's results of
operations over the life of the debt. The fair value ascribed to the
warrants was estimated on the date of issuance using the Black-Scholes
pricing model with the following assumptions: risk-free interest rate of
5.50%; expected life of 2 years; expected volatility of 99%; and expected
dividend yield of 0%.
On January 20, 2000, the charitable remainder trust, of which a director
and officer of the Company is a trustee, exercised all 300 warrants issued
in connection with the 1999 Loan. The warrants were exercised under the
cashless exercise provision in the warrant agreement. The Company issued
255 shares of common stock in exchange for the 300 warrants.
7. Revenue recognition
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided that
no significant obligations remain and the collection of the resulting
receivable is probable. The Company provides for estimated sales returns at
the time of shipment.
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are
recognized as products are licensed/sold by licensees. Deferred revenue in
the accompanying balance sheets reflects advance royalty fees received from
the Company's licensees in advance of revenue recognition.
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies.
Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collection is probable and related costs have
been incurred.
8. Net loss per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic
9
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Net loss per share (continued)
earnings per share, which is based on the weighted average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares and dilutive potential common
shares outstanding. All prior year earnings per share data have been
restated to reflect the provisions of SFAS 128. Potential common shares,
including stock, stock options and warrants, have been excluded from the
calculation of diluted earnings per share for all periods presented as
their effect is anti-dilutive.
9. Comprehensive income
Total comprehensive income (loss) was as follows:
Three Months Ended March 31,
-------------------------------------
2000 1999
------------- -------------
Net loss $ (888) $ (484)
Other comprehensive income:
Cumulative translation adjustment 2 (22)
============= =============
Total comprehensive loss $ (886) $ (506)
============= =============
10. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information regarding the reporting of operating segments and was required
to be adopted in periods beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted SFAS 131 for the
year ended December 31, 1998 and the Company's information has been broken
down into two Segments - Handwriting recognition software and Systems
integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues into two
categories: Handwriting recognition and system integration. Handwriting
recognition software is an aggregate of five 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 above represent sales to external customers.
10
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
10. Segment Information (continued)
The table below presents information about reporting segments for the
periods indicated:
Three Months ended March 31,
2000 1999
-------------------------- ----------------------------
Systems Systems
Handwriting Integra- Handwriting Integra-
Recognition tion Total Recognition tion Total
----------- -------- ----- ----------- -------- -------
Revenues $ 1,012 $ 365 $ 1,377 $ 943 $ 304 $ 1,247
Loss from Operations $ (828) $ (15) $ (843) $ (463) $ (25) $ (488)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
11
Communication Intelligence Corporation
and Subsidiary
(In thousands, except 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, 1999.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license
and royalty revenues and development contracts. For the three months ended March
31, 2000, total revenues increased by 10% to $1,377 from $1,247 for the
comparable three month period ended March 31, 1999 as discussed below:
Three Months Ended
March 31,
-----------------------------------------------
2000 1999
------------------- ---------------------
Revenues:
Product $ 1,097 $ 773
License and royalty 184 218
Development contracts 96 256
================== =====================
Total revenues $ 1,377 $ 1,247
================== =====================
Product sales increased to $1,097 or by 42% for the three month period ended
March 31, 2000 from $773 in the comparable prior year period. This increase was
due to the increase of $415 in product sales to $433 from $18 in the prior year.
The Product revenue increase reflects a breakthrough order for electronic
signature solution technology from Charles Schwab & Co. Product sales by the
Company's 90% owned joint venture in the People's Republic of China (the "Joint
Venture") increased 20% to $364 for the period ended March 31, 2000 compared to
$304 during the same period last year. Aftermarket product consumer software
sales via the Company's website declined 30% to $295, compared to $419 in the
prior year period. The decrease in aftermarket consumer software sales resulted
from a decrease in the availability of new names used for Direct Mail campaigns
as compared to the 1999 comparable quarter. Handwriter(R) and other product
sales decreased by 87% to $5 during the period ended March 31, 2000 compared to
$38 in the prior year period. The decline in Handwriter(R) sales resulted from
the Company's decision in 1997 to focus on software sales and discontinue
hardware sales.
Revenues from license and royalty revenue for the three month period ended March
31, 2000 decreased by 16% to $184 from $218 in the comparable prior year period.
This decrease was primarily the result of a large one time order of products
bundled with the Company's software in 1999 which did not reoccur in the first
quarter ended March 31, 2000
Development contract revenues for the three month period ended March 31, 2000
decreased 63% to $96 from $256 in the comparable prior year period. This
decrease resulted primarily from a decrease in non-recurring engineering fees
primarily associated with smartphone development of $73 and a decrease of $80 in
grant revenue recognized from the National Science Foundation compared to the
prior year period.
Cost of sales. Cost of sales for the three months ended March 31, 2000 increased
16% to $729 from $630 in the comparable prior year period. This increase is due
primarily to product costs associated with the Charles Schwab order of
approximately $128. Costs associated with the system integration activities of
the Joint Venture increased $38 to $256 compared to approximately $218 in the
prior year period. The increase in systems integration cost of product sales is
due to the increase in sales. Aftermarket cost of sales increased 7% to $270
compared to $253 in the prior year period. The increase is due to the increase
in cost of Direct Mail programs and banner advertising associated with the
12
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
aftermarket consumer software sales. In addition, license and royalty cost of
sales increased by 23% to $21 for the three months ended March 31, 1999 compared
to $17 for the comparable 1999 period. These increases were offset by lower
costs incurred in connection with development contract revenues. Development
contract costs decreased 62% for the three months ended March 31, 2000 to $54 as
compared to $142 in the prior year period, as a result of the decrease in
contract development revenues in the first quarter of 2000.
Gross profit. Gross profit increased to $648 compared to $617 for the comparable
period in the prior year. This increase was due primarily to an increase in
revenues compared to the prior year. Product gross margins increased to $443
compared to $302 in the prior year. This increase was due to the breakthrough
order of the Company's electronic signature solution technology to Charles
Schwab. License and royalty gross profit declined to $163 for the three month
period ended March 31, 2000 compared to $201 for the same period last year. The
decrease is the result of lower shipments by the Company's licensees as
discussed above. Development contract gross profit decreased to $42 for the
three months ended March 31, 2000 compared to $114 for the same period last
year. The decrease is due to lower revenues as discussed above.
Research and development expenses. Research and development expenses for the
three month period ended March 31, 2000 increased by $132 or 44% to $429 as
compared to $297 in the comparable period of the prior year. This increase was
primarily due to a $88 decrease in the amount of engineering costs associated
with development contract revenues and transferred to cost of sales. During the
three months ended March 31, 2000, $54 in engineering costs were transferred to
cost of sales compared to $142 in the comparable period of the prior year. This
decrease is the result of a decrease in development contract revenues. In
addition, there was an increase of approximately $37 in payroll and related
costs attributable to an increase in the number of personnel in the US compared
to the same period last year. Other costs including facilities expense increased
$7 compared to the same period last year. The Company did not capitalize any
software development costs during the three months ended March 31, 2000 or 1999,
respectively.
Sales and marketing expenses. Sales and marketing expenses for the three month
period ended March 31, 2000 increased $201 or 51% to $592 as compared to $391 in
the comparable period of the prior year. Professional services and advertising
expenses increased $58 and $98, respectively. This increase was due primarily to
the one-time cost of development of a media campaign aimed at significantly
increasing aftermarket software sales via CIC's website. In addition, salary and
related costs increased $26 due to increases in personnel associated with
Enterprise sales. Other costs, including travel and facilities and related
expenses, increased $19 commensurate with increase in staffing.
General and administrative expenses. General and administrative expenses for the
three month period ended March 31, 2000 increased $53 or 13% to $470 as compared
to $417 in the comparable period of the prior year. This increase was primarily
attributable to an increase in payroll and related costs of approximately $24
due to an increase in personnel during the fourth quarter of 1999. Investor
related expenses increased $46 due to the renewed investor interest in the
Company and the expense associated with providing information to the investment
community. Other costs, including professional services and facilities and
related costs, decreased $17 over the comparable period of the prior year. The
decrease is due to lower expenses for services provided by third parties.
Interest and other income (expense), net. Interest and other income (expense),
net decreased to an expense of $7 for the three months ended March 31, 2000
compared to income of $2 in the comparable period of the prior year. Interest
income from cash and cash equivalents was $25 compared to $14 in the prior year.
The increase in interest income was offset by $13 of credit card processing and
other fees compared to $12 in the prior year related to sales via the Company's
website. In addition, loan discount amortization associated with the Company's
long term debt was $19 for the three months ended March 31, 2000. There was no
loan discount amortization during the comparable period of the prior year.
Interest expense increased $39 for the three month period ended March 31, 2000
compared to the comparable prior year period. The increase is due to interest
expense related to long term debt.
13
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Liquidity and Capital Resources
At March 31, 2000, cash and cash equivalents totaled $3,315 compared to cash and
cash equivalents of $2,374 at December 31, 1999. The increase is due primarily
to cash of $1,398 provided by financing activities. This increase was offset by
cash used in operating activities of $446 and cash used in investing activities
of $14. The $1,398 provided by financing activities consists primarily of $1,460
in proceeds from the exercise of stock options and warrants by the Company's
employees and others, offset by principal payments of short-term debt and
capital lease obligations of $60 and $2, respectively. Total current assets were
$5,847 at March 31, 2000 compared to $4,205 at December 31, 1999.
As of March 31, 2000, the Company's principal source of liquidity was its cash
and cash equivalents of $3,315. Although there can be no assurance, the Company
believes that its cash and cash equivalents together with cash provided from
projected revenues will be sufficient to fund planned operations for at least
the next twelve months. However, if the Company is unable to generate adequate
cash flows from sales, or if expenditures required to achieve the Company's
plans are greater than expected, the Company may need to obtain additional funds
or reduce discretionary spending. There can be no assurance that additional
funds will be available when needed, or if available, will be available on
favorable terms or in the amounts required by the Company. If adequate funds are
not available when needed, the Company may be required to delay, scale back or
eliminate some or all of its operations, which will have a material adverse
effect on the Company's business, results of operations and prospects.
Current liabilities, which include deferred revenue, were $2,103 at March 31,
2000. Deferred revenue, totaling $1,051 at March 31, 2000, primarily reflects
nonrefundable advance royalty fees for the Company's licensees which are
generally recognized as revenue by the Company in the period in which licensees
report that products incorporating the Company's software have been shipped. As
such, the period over which such deferred revenue will be recognized as revenue
is uncertain because the Company cannot presently determine either the timing or
volume of future shipments by its licensees.
The Company currently owns 90% of a joint venture with the Information Industry
Bureau, 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, 1999, the Company had contributed an aggregate of
$1,800 in cash to the Joint Venture and provided it with both non-exclusive
licenses to technologies and certain distribution rights. The Agency had
contributed certain land use rights. Following the reduction in registered
capital of the Joint Venture, neither the Company nor the Agency are required to
make further contributions to the Joint Venture. Prior to the reduction in the
amount of registered capital, the Joint Venture was subject to the annual
licensing requirements of the Chinese government. Concurrent with the reduction
in registered capital, the Joint Venture's business license has been renewed
through October 18, 2043. The Company's investment in the Joint Venture is
subject to risks of doing business abroad, including fluctuations in the value
of currencies, export duties, import controls and trade barriers (including
quotas), restrictions on the transfer of funds, longer payment cycles, greater
difficulty in accounts receivable collections, burdens of complying with foreign
laws and political and economic instability.
On October 20, 1999, the Company entered into a loan agreement with a charitable
remainder annuity trust, of which a director and officer of the Company is a
trustee, in the amount of $1,500 (the "1999 Loan"). The 1999 Loan is secured by
a first priority security interest in all of the Company's assets as now owned
or hereafter acquired by the Company. The 1999 Loan bears interest at the rate
of 2% over the prime rate as published by Citibank from time to time, and is due
January 31, 2002. Interest on the principal amount under the 1999 Loan is
payable quarterly. The 1999 Loan can be re-paid in whole at any time or in part
at any time without penalty. Any partial payment must be in the principal amount
of $100 or a multiple thereof. The interest rate at March 31, 2000 was 10.25%.
14
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
In October 1999, in connection with the 1999 Loan, the Company issued to the
charitable remainder annuity trust warrants to purchase 300 shares of the
Company's common stock. The Company ascribed a value of $179 to these warrants,
which will be amortized to the Company's results of operations over the life of
the warrant. The fair value ascribed to the warrants was estimated on the date
of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 5.50%; expected life of 2 years;
expected volatility of 99%; and expected dividend yield of 0%. The warrants were
due to expire October 20, 2001 and had an exercise price of $1.09 per share. On
January 20, 2000, the charitable remainder trust, of which a director and
officer of the Company is a trustee, exercised all 300 warrants issued in
connection with the $1,500 long-term debt. The warrants were exercised under the
cashless exercise provision in the warrant agreement. The Company issued
approximately 255 shares of common stock in exchange for the 300 warrants.
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank. The
loan bears interest at 5.12% and was due on March 2, 2000. The borrowings do not
require a compensating balance. The note was repaid in January, 2000.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $517, and $431 excluding sub-lease income for the years ending
December 31, 2000, and 2001, respectively. The Company's rent expense is
expected to be reduced by approximately $98 in 2000 in connection with the
subleases on excess office space in the United States.
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.
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.
Year 2000
Year 2000 issues arose because most computer systems and programs were designed
to handle only a two-digit date code for the year, not a four-digit code. Thus,
the Year 2000 could be interpreted as the year 1900 by such computer systems and
programs, resulting in the incorrect processing of data. CIC's software products
as developed and distributed by CIC are not date sensitive, and therefore Year
2000 issues are not applicable to such products.
Management as a whole is responsible for issues arising from Year 2000 problems.
The Company has evaluated its internal software programs and equipment to
ascertain the readiness of computer software and operating systems for the Year
2000. Management of the Company believes that its internal software programs are
Year 2000 compliant. The Company has not received any reports of malfunctions or
errors in any of its products related to the change to the Year 2000. The
Company does not anticipate that it will experience any material difficulties
with Year 2000 issues in the future, and therefore has not formalized any
contingency plan. The Company has been informed by third parties which it does
significant business with that they are Year 2000 compatible, and has not
experienced any major interruptions or difficulties with its third party
relationships.
Future Results and Stock Price
The Company's stock price may be subject to significant volatility. The public
stock markets have experienced significant volatility in stock prices in recent
years. The stock prices of technology companies have experienced particularly
high volatility, including, at times, severe price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, announcements of new strategic relationships by the
Company or its competitors, general conditions in the computer industry or the
global economy generally, or market volatility unrelated to the Company's
business and operating results.
15
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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 Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following (1) technological, engineering,
manufacturing, 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 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 (4) general economic and business
conditions and the availability of sufficient financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
During the three months ended March 31, 2000, the Company has granted
stock options to employees as follows:
-----------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
-----------------------------------------------------------------------------
Employee (1) March 15,2000 75,000 $ 8.06 Quarterly March 15, 2007
over three
years
-----------------------------------------------------------------------------
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
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
None
16
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except 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
May 2, 2000 /s/ Guido DiGregorio
- ------------------------ ---------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
17