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, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as
of May 14,2002: 91,460,777.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001.........................................3
Condensed Consolidated Statements of Operations for the
Three-Month Period Ended March 31, 2002 and 2001 (unaudited)..............4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three-Month Period Ended March 31, 2002 (unaudited)........5
Condensed Consolidated Statements of Cash Flows for the
Three-Month Period Ended March 31, 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.............................11
-----------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk......15
----------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................15
-----------------
Item 2. Change in Securities............................................15
--------------------
Item 3. Defaults Upon Senior Securities.................................15
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.............15
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Item 5. Other Information...............................................16
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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,
2002 2001
---------- ------------
Unaudited
Assets
Current assets:
Cash and cash equivalents........................... $ 2,145 $ 2,588
Accounts receivable, net....................... 1,117 1,043
Inventories.................................... 169 129
Prepaid expenses and other
current assets................................. 173 106
--------- ---------
Total current assets....................... 3,604 3,866
Property and equipment, net......................... 148 161
Capitalized software costs.......................... 22 26
Patents and trademarks.............................. 5,704 5,799
Other assets........................................ 87 220
--------- ---------
Total assets............................... $ 9,565 $ 10,072
========= =========
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt................................ $ 60 $ 181
Accounts payable............................... 341 206
Accrued compensation................................ 238 208
Other accrued liabilities...................... 179 196
Deferred revenue............................... 131 88
Capital Lease Obligations...................... 1 3
--------- ---------
Total current liabilities.................. 950 882
Notes payable - noncurrent.......................... 3,000 3,000
Minority interest................................... 130 130
Commitments
Stockholders' equity:
Common stock................................... 910 909
Additional paid-in capital..................... 81,714 81,605
Accumulated deficit............................ (76,946) (76,258)
Cumulative translation adjustment.............. (193) (196)
---------- ----------
Total stockholders' equity.................... 5,485 6,060
---------- ----------
Total liabilities and stockholders' equity.... $ 9,965 $ 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
March 31,
------------------------
2002 2001
----------- ----------
Revenues:
Online.................................... $ 124 $ 350
Corporate................................. 698 521
Nonrecurring maintenance fees -M10
(previously PenOp Inc).................. - 352
China 335 395
-------- --------
Total revenues........................ 1,157 1,618
Operating costs and expenses:
Cost of sales:
Online................................ 163 269
OEM................................... 1 11
Corporate ............................ 56 64
China................................. 221 278
Research and development.................. 412 477
Sales and marketing....................... 387 561
General and administrative................ 540 643
--------- ---------
Total operating costs and expenses.... 1,780 2,303
--------- ---------
Loss from operations........................... (623) (685)
Interest and other income (expense), net....... (13) 5
Interest expense............................... (52) (61)
Minority interest.............................. - -
---------- ---------
Net loss ............................. $ (688) $ (741)
========== =========
Basic loss per share........................... $(0.01) $(0.01)
========== =========
Diluted loss per share......................... $(0.01) $(0.01)
========== =========
Weighted average common shares outstanding..... 90,946 90,222
========== ==========
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 Accumulated Comprehen.
Stock Capital Deficit Loss Total
Balances as of
December 31, 2001........ $ 909 $ 81,605 $(76,258) $ (196) $ 6,060
----------------------------------------------------
Exercise of options
for 683 sharesof
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
====================================================
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31,
------------------------
2002 2001
---------- ---------
Cash flows from operating activities:
Net loss...............................................$ (688) $ (741)
Adjustments to reconcile net loss to net cash
(used) in operating activities:
Depreciation....................................... 19 34
Patent amortization................................ 98 94
Loan discount amortization......................... - 17
Non-cash compensation.............................. - 17
Disposal of fixed assets........................... 5
Changes in operating assets and liabilities:
Accounts receivable, net........................ (74) 84
Inventories..................................... (40) 31
Prepaid expenses and other current assets....... (67) (135)
Other assets.................................... 137 (20)
Accounts payable................................ 135 46
Accrued compensation............................ 30 (302)
Other accrued liabilities....................... (17) 8
Deferred revenue................................ 43 (4)
--------- ---------
Net cash (used in) operating activities........... (419) (871)
--------- ---------
Cash flows from investing activity:
Acquisition of property and equipment................. (11) (49)
--------- ---------
Net cash used in investing activity................ (11) (49)
--------- ---------
Cash flows from financing activities:
Payments on long-term debt............................. (121) (120)
Proceeds from acquisition of short term debt........... - 181
Proceeds from exercise of stock options and warrants... 110 568
Principal payments on capital lease obligations........ (2) (2)
--------- ---------
Net cash provided by financing activities.......... (13) 627
--------- ---------
Effect of exchange rate changes on cash................. - 1
--------- ---------
Net increase (decrease) in cash and cash equivalents.... (443) (292)
Cash and cash equivalents at beginning of period........ 2,588 2,349
--------- ---------
Cash and cash equivalents at end of period..............$ 2,145 $ 2,057
========= =========
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 biometric electronic signature
verification and natural input software solutions aimed at emerging, fast
growth, 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, biometric signature
verification, cryptography, electronic ink capture 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.
For the three months ended March 31, 2002, the Company's cash and cash
equivalents decreased by $443 from $2,588 at the beginning of the period to
$2,145. The decrease was due primarily to cash used in operating activities
of $419, cash used in investing activities of $11, and cash used in
financing activities of $13. The $13 used by financing activities consists
primarily of the repayment of the notes by the Joint Venture of $121 and by
payments of capital lease obligations of $2 . The payments were offset by
$110 in proceeds from the exercise of stock options by the Company's
employees. As of March 31, 2002, the Company's principal source of funds
were its cash and cash equivalents aggregating $2,145. The Company
anticipates that it will have adequate capital to fund its planned
operations for the near future. 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
-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
----------------------------
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, 2001.
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,
2002 2001
--------------------- -- -------------------
Cash in bank $ 1,422 $ 1,621
Commercial paper - 26
Money market 723 941
--------------------- -------------------
$ 2,145 $ 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 March 31, 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 bears 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
reducing the note to an equivalent of $60 denominated in Chinese currency.
5. Related Party Transactions:
--------------------------
A. Short-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
March 31, 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
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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.
B. 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 $877 was
recorded (net). The Company previously entered into a separate transaction,
to acquire the intellectual property rights from PenOp. At March 31, 2001
the Company recognized $325 of this contract revenue net of related
expenses of $48.
6. Revenue recognition
--------------------
Online Revenue - 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.
Corporate Revenue - Corporate Revenue - License and product revenues are
recognized when the software has been delivered and when all significant
obligations have been met in accordance with the American Institute of
Certified Public Accountants Statement of Position Number 97-2, "Software
Revenue Recognition." The Company also follows the interpretive guidance of
SAB 101 issued by the Securities and Exchange Commission and EITF issue
00-21 of the AICPA Emerging Issues Task Force. Royalty revenues are
recognized as products are licensed/sold by licensees. Development
contracts revenue is generated primarily from non-recurring engineering
activities. Revenue is recognized in accordance with the terms of the
agreements, generally when collection is probable and related costs have
been incurred.
China Revenue - Revenue from system integration activities and product
sales are recognized upon shipment provided that no significant obligations
remain and the collection of the resulting receivable is probable.
7. 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 months
ended March 31, 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 7,095, and 7,486, respectively, of
equivalent shares and warrants of 470 equivalent shares at March 31, 2001.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Comprehensive income
--------------------
Total comprehensive income (loss) was as follows:
Three Months Ended March 31,
------------- ----- --------------
2002 2001
------------- --------------
Net loss $ (688) $ (741)
Other comprehensive income:
Cumulative translation adjustment 3 1
------------- --------------
Total comprehensive loss $ (685) $ (740)
============= ==============
9. Segment Information
-------------------
The Company's segment information under the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of An Enterprise and Related Information" ("SFAS 131"), is
comprised of 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.
The table below presents information about reporting segments for the
periods indicated:
Three Months ended March 31,
2002 2001
------------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ------- ----------- ----------- -----
Revenues $ 859 $ 298 $ 1,157 $ 1,223 $ 395 $ 1,618
Loss from Operations $(586) $ (37) $ (623) $ (684) $ (1) $ (685)
Significant change
in Total assets
from Year End $ - $ (35) $ - $ - $ - $ -
10. Change in Chairman and Directors
--------------------------------
In February 2002, Mr. Guido DiGregorio, President & CEO was appointed
Chairman, President & CEO. Prior to Mr. DiGregorio's appointment, Mr.
Philip Sassower resigned his Chairmanship and board position and Mr.
Jeffrey Steiner also resigned from the board.
-10-
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, 2001.
Results of Operations
Revenues. For the three months ended March 31, 2002, total revenues
decreased by 28% to $1,157 from $1,618 for the comparable three month period
ended March 31, 2001 as discussed below:
Three Months Ended
March 31,
-----------------------------------------------
2002 2001
------------------ ---------------------
Revenues:
Online $ 124 $ 350
Corporate 698 521
M10(previously PenOp Inc.) - 352
China 335 395
------------------ ---------------------
Total revenues $ 1,157 $ 1,618
================== =====================
Online revenues decreased 65% or $226 to $124 for the three months ended
March 31, 2002 as compared to $350 in the prior year period. This decrease was
primarily due to a decrease in names available for use in the Company's direct
mail campaign compared to the same period last year.
Corporate sales, which includes Enterprise and OEM revenues, increased 34%
or $177 to $698 for the three months ended March 31, 2001 as compared to $521 in
the prior year period. Sales to software providers decreased 87% or $91 to $14
for the three months ended March 31, 2002 compared to $105 in the prior year
period. This decrease was primarily due to one large order received in the first
quarter of 2001. OEM revenues included in corporate sales at March 31, 2002
decreased 72% or $239 to $92 from $331 in the prior period. This decrease was
due to a decrease in the amount of royalty and development contract revenues
recognized from OEMs compared to the prior year. Revenues from enterprise
customers included in corporate sales at March 31, 2002 increased 596% or $507
to $592 from $85 for the prior period due primarily to increases in revenue
generated from the Company's enterprise solutions software sold to end-users as
compared to the same three month period last year. During the fourth quarter of
2000, the Company engaged in a transaction with M10 (previously PenOp Inc.) to
provide nonrecurring maintenance services from pre-existing M10 contracts in the
aggregate amount of $1.5 million. The Company previously entered into a separate
transaction, to acquire the intellectual property rights from M10 (see note 5).
During the three months ended March 31, 2001, $352 was recorded as revenue
(net). No such nonrecurring maintenance service revenues were recorded in 2002.
China sales decreased 15% or $60 to $335 for the three months ended March
31, 2002 as compared to $395 in the prior year period. This decrease was due to
a general decrease in sales activity in 2001 and not related to any one large
sale to a single customer.
Cost of Sales. Cost of sales decreased $166 or 27% to $456 for the three
months ended March 31, 2002 as compared to $622 in the prior year period.
Online cost of sales decreased $106 to $163 for the three months ended
March 31, 2002 as compared to $269 in the prior year period. This decrease is
due to the reduction in names available from Palm and the associated reduction
in mailing costs during the three months ended March 31, 2002 as compared to the
prior year period.
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Corporate sales costs decreased $18 or 24% to $57 from $75 in the prior
year period. Costs associated with the Company's enterprise software solutions
decreased $8 and was primarily due to lower third party hardware costs sold with
the Company's corporate signature software solution products. OEM costs
decreased $10 or 91% to $1 in the three month period ended March 31, 2002 as
compared to $11 in the three month period in the prior year. The decrease was
due to a decrease in revenues and the associated technology import tax from the
Company's Japanese OEM customers.
China cost of sales decreased $57 or 21% to $221 in the three month period
ended March 31, 2002 as compared to $278 in the three month period of the prior
year. The decrease was due primarily to the decrease in sales activity in the
three month period ended March 31, 2002 as compared to the three month period of
the prior year.
Gross Margin. Gross margin decreased $280 or 28% to $716 in the three
months ended March 31, 2002 as compared to $996 in the prior year period.
Online gross margin decreased $120 or 148% resulting in a negative gross
margin of $39 in the three months ended March 31, 2002 as compared to a gross
margin of $81 in the three month period of the prior year. This decrease was due
to the less than anticipated close rate on fewer names available from Palm as
discussed above. Online gross margins was negative for the three months ended
March 31, 2002 compared to 23% of revenues in the comparable three month period
of the prior year.
Corporate sales gross margin increased $195 or 44% to $641 in 2002 from
$446 in the prior year period. This increase was primarily due to the increase
in Corporate sales other than OEM and the lower hardware costs associated with
the sale of the Company's enterprise solution software in the comparable three
month period of the prior year. Corporate sales gross margin as a percentage of
sales was 91% for the three months ended March 31, 2002 compared to 86% for the
three month period of the prior year. During the three months ended March 31,
2001, $352 nonrecurring maintenance service revenue and gross margin was
recorded as revenue (net). No such nonrecurring maintenance service revenues and
gross margins were recorded in 2002.
China sales gross margin decreased $3 or 3% to $114 in the three months
ended March 31, 2002 from $117 in the three month period of the prior year. This
decrease is primarily due to the 15% decrease in sales as discussed above. The
decrease in gross margins was minimal due to lower cost of third party hardware
and an increase in the sale of software for system integration. China gross
margin as a percentage of sales increased to 34% for the three months ended
March 31, 2002 compared to 30% for the three month period of the prior year.
Research and development expenses. Research and development expenses for
the three months ended March 31, 2002 decreased by $65 or 14% to $412 as
compared to $477 in the comparable three month period of the prior year. This
decrease was due primarily to approximately $131 of nonrecouring outside
engineering costs associated with the assimilation of the PenOp intellectual
property into the Company's products and continued support for new engineering
projects incurred in the prior year. Payroll and related costs decreased $42 or
14% due to the reduction in staff resulting from actions taken to control
expenses consistent with the slowdown in the economy. These decreases were
offset by increases of approximately $39 in allocated facilities costs
attributable to the over all reductions in the number of personnel. Costs
transferred to cost of sales decreases 77% to $15 in 2002 as compared to $64 in
the comparable quarter of the prior year. This decrease resulted from fewer
development contracts during the comparable three month periods. The Company did
not capitalize any software development costs in the three months ending March
31, 2002 compared to $20 in software development costs associated with new
products and enhancements capitalized during the three months ended March 31,
2001.
Sales and marketing expenses. Sales and marketing expenses for the three
months ended March 31, 2002 decreased $174 or 31% to $387 as compared to $561 in
the comparable period of the prior year. Recruiting and advertising expenses
decreased $44 and $97, respectively. These decreases were due primarily to the
reduction in recruiting and the elimination of banner advertising and resource
publications associated with sales via CIC's website during the three months
ended March 31, 2002 as compared to the prior year period. Other costs,
including travel expenses, decreased $33 due to the slowdown in sales activity
brought about by the current economic conditions.
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
General and administrative expenses. General and administrative expenses
for the three months ended March 31, 2002 decreased $108 or 17% to $535 as
compared to $643 in the comparable period of the prior year. This decrease was
attributable primarily to a decrease in professional services and investor
relations of $73 and $31, respectively. Other costs, including insurance and
facilities and related costs, decreased $10 over the comparable three month
period of the prior year. The decrease was due primarily to lower insurance
expenses during the three months ended March 31, 2002 as compared to the prior
year period. Salaries expense increase $6 for the three months ended March 31,
2002 compared to the same period last year due to salary increases.
Interest and other income (expense), net. Interest and other income
(expense), net decreased by $18 and to an expense of $13 for the three months
ended March 31, 2002 compared to an income of $5 in the comparable period of the
prior year. Interest income from cash and cash equivalents decreased $7 to $5
compared to $12 in the prior year. The decrease is due to lower cash balances
and decrease in the interest rates paid by the banking institutions. Interest
income at March 31, 2002 was offset by $18 of other costs for the three months
ended March 31, 2002 compared to $7 in the comparable prior year period.
Interest expense increased $10 to $51 for the three month period ended
March 31, 2002 compared to $44 in the prior year period. Interest expense
associated with the Company's long term debt increased $17 to $51 at March 31,
2002 as compared to $44 in the same three month period in the prior year. Loan
discount amortization associated with the refinanced debt was $17 for the three
months ended March 31, 2001. There was no loan discount amortization for the
three months ended March 31, 2002.
Liquidity and Capital Resources
At March 31, 2002, cash and cash equivalents totaled $2,145 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 $419, cash used in investing
activities of $11, and cash used in financing activities of $13. The $13 used by
financing activities consists primarily of the repayment of the notes by the
Joint Venture of $121 and by payments of capital lease obligations of $2 . The
payments were offset by $110 in proceeds from the exercise of stock options by
the Company's employees. Total current assets were $3,604 at March 31, 2002
compared to $3,866 at December 31, 2001.
As of March 31, 2002, the Company's principal source of liquidity was its
cash and cash equivalents of $2,145. 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 the
near future. 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 $950 at March 31,
2002. Deferred revenue, totaling $131 at March 31, 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.
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
On October 2, 2001 the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores
California for approximately 9,634 square feet. The lease commenced November 1,
2001 with a first year lease costs of approximately $347,000. The cost of the
lease will increase approximately 3% per annum over the term of the lease which
expires October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase, if any, in operating cost incurred by the landlord
in such year over the operating expenses incurred by the landlord in the base
year. The Company believes the offices will be adequate for its needs over the
term of the lease.
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 bears 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 reducing the note to an
equivalent of $60 denominated in Chinese currency.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which a 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
March 31, 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.
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, but are not limited to, the
following:
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.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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.
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.
Part II-Other Information..
Item 1. Legal Proceedings
None
Item 2. Change in Securities
During the three months ended March 31, 2002, the Company granted stock
options to five employees and one director as follows:
-------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
-------------------------------------------------------------------------------
2 Employee 02/11/02 150 $ 0.62 Quarterly over 02/11/09
three years
1 Employee 02/14/02 100 $ 0.61 Quarterly over 02/14/09
three years
2 Employees 02/22/02 350 $ 0.79 Quarterly over 02/22/09
three years
1 Director 02/11/02 50 $ 0.62 Immediately 02/11/09
-------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Part II-Other Information (continued)
- -------------------------------------
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
-16-
Communication Intelligence Corporation
and Subsidiary
(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 14, 2002 /s/ Francis V. Dane
- ------------------------------- ----------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-17-