Communication Intelligence Corporation
and Subsidiaries
FORM 10-Q
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, 1996
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 (I.R.S. Employer
jurisdiction of
incorporation or Identification No.)
organization)
275 Shoreline Drive, Suite 520, Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 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
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Number of shares outstanding of the issuer's Common Stock, as of May 9, 1996:
40,584,399.
This Quarterly Report on Form 10-Q contains 11 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, 1996 and
December 31, 1995.............................................3
Condensed Consolidated Statements of Operations for the
three-month periods ended March 31, 1996 and 1995.............4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 1996 and 1995.............5
Notes to Condensed Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits..............................................10
(b) Reports on Form 8-K...................................10
Signatures...............................................................11
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(In Thousands)
Mar. 31, Dec. 31,
Assets 1996 1995 (A)
-------- --------
Current assets:
Cash and cash equivalents $ 2,400 $ 5,924
Short-term investments 2,502 1,535
Note receivable from officer -- 210
Accounts receivable, net 192 381
Inventories 323 249
Other current assets 333 400
-------- --------
Total current assets 5,750 8,699
Note receivable from officer 210 --
Property and equipment, net 371 336
Capitalized software development costs, net 66 88
Other assets 690 653
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Total assets $ 7,087 $ 9,776
======== ========
Liabilities and stockholders' equity Current liabilities:
Short-term debt $ -- $ 30
Accounts payable 93 437
Pre-petition liabilities - current 882 822
Accrued compensation 377 282
Other accrued liabilities 592 761
Deferred revenue 2,474 2,570
Obligations under capital leases - current 25 34
-------- --------
Total current liabilities 4,443 4,936
Obligations under capital leases - noncurrent 8 8
Pre-petition liabilities - noncurrent -- 822
Commitments
Stockholders' equity:
Common stock 403 400
Additional paid-in capital 51,804 51,687
Accumulated deficit (49,439) (47,991)
Cum. foreign currency translation adjustment (132) (86)
-------- --------
Total stockholders' equity 2,636 4,010
======== ========
Total liabilities and stockholders' equity $ 7,087 $ 9,776
======== ========
A.The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date (see Note 1).
See accompanying notes.
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
Three Months Ended
March 31,
--------------------
1996 1995
-------- --------
Revenues:
Product $ 141 $ 176
License and royalty 131 33
Development contract 367 285
-------- --------
639 494
Operating costs and expenses:
Cost of sales 432 210
Research and development 448 525
Sales and marketing 714 583
General and administrative 494 347
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Total operating costs and expenses 2,088 1,665
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Loss from operations (1,449) (1,171)
Interest and other income 80 55
Interest expense (79) (40)
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Net loss $ (1,448) $ (1,156)
======== ========
Net loss per common share $ (0.04) $ (0.03)
======== ========
Weighted average common shares outstanding 40,140 33,739
======== ========
See accompanying notes.
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Three Months Ended
March 31,
------------------
1996 1995
------- -------
Cash flows from operating activities:
Net loss $(1,448) $(1,156)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 74 99
Net (increase) decrease in operating
assets and liabilities:
Accounts receivable 189 (69)
Inventories (74) (146)
Prepaid expenses and other current assets 67 42
Accounts payable and accrued compensation (249) (114)
Deferred revenues (96) (20)
Pre-petition liabilities (762) (993)
Other accrued liabilities (169) (68)
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Net cash used in operating activities (2,468) (2,425)
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Cash flows from investing activities:
Sale of short-term investments 2,062 --
Purchase of short-term investments (3,029) --
Acquisition of property and equipment (70) (35)
Increase in capitalized software costs -- (10)
Increase in other assets (54) (3)
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Net cash used in investing activities (1,091) (48)
------- -------
Cash flows from financing activities:
Principal payments on short-term debt (30) (118)
Principal payments on capital lease obligations (9) (20)
Proceeds from issuance of common stock 120 72
------- -------
Net cash (used in) provided by financing
activities 81 (66)
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Effect of exchange rate changes on cash (46) 1
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Net decrease in cash and cash equivalents (3,524) (2,538)
Cash and cash equivalents at beginning of quarter 5,924 4,088
------- -------
Cash and cash equivalents at end of quarter (See note 2) $ 2,400 $ 1,550
======= =======
See accompanying notes.
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Three Months Ended
March 31,
------------------
1996 1995
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Schedule of non-cash transactions:
Reclassification of current note receivable from
officer to non-current $ 210 $ --
======= =======
See accompanying notes.
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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 report reflect all adjustments (consisting only of normal
recurring adjustments) which Communication Intelligence Corporation (the
"Company" or "CIC") considers necessary for a fair presentation of its
financial position at the dates and its results of operations and cash
flows for the periods presented. The interim results are not necessarily
indicative of the results to be expected for the entire year.
This financial information 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, 1995.
Certain prior period amounts in the financial statements have been
reclassified to conform with the current period presentation.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Short-term investments are classified as "available-for-sale" and are
stated at fair value. Any unrealized gains or losses are reported as a
separate component of stockholders' equity, but, to date, have not been
significant.
Cash and cash equivalents included certain highly liquid investments with
original maturities of up to 90 days as follows:
March 31, December 31,
1996 1995
-----------------------------
(In thousands)
Cash in bank $ 772 $ 441
U.S. Corporate Securities - 5,483
Other Debt Securities 1,678 -
=============================
$ 2,400 $ 5,924
=============================
Short-term investments consisted of the following available-for-sale
securities as follows:
March 31, Dec. 31,
1996 1995
------------------------
(In thousands)
U.S. Corporate Securities $ -- $ 998
Other Debt Securities 2,502 537
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$2,502 $1,535
======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues for the quarter ended March 31, 1996 increased 29% to $639,000 from the
comparable three month period of the prior year and are comprised of product,
license and royalty, and development contract revenues. This increase is due to
a increases in license and royalty, and development contract revenues as
discussed below.
Three months ended
March 31,
-------------------------------
1996 1995
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(in thousands)
Revenues:
Product $ 141 $ 176
License and royalty 131 33
Development contract 367 285
============= =============
$ 639 $ 494
============= =============
Product sales decreased to $141,000 for the three month period ended March 31,
1996 from $176,000 in the comparable prior year period. The decline in sales was
due to reductions in the MacHandwriter II unit sales by the Company's Japanese
subsidiary. Since the second quarter of 1994, the Company has concentrated its
domestic sales effort on distributors and catalog resellers. In 1995, the
Company began a limited entry into the retail market with its domestic
Handwriter products. The Company plans to expand its retail market sales efforts
during 1996. There can be no assurance that the Company will be successful in
its efforts to broaden retail market distribution.
Revenues from license and royalty fees for the three month period ended March
31, 1996 increased to $131,000 from $33,000 in the comparable prior year period.
This increase is primarily the result of higher shipment volumes by the
Company's licensees.
Development contract revenues for the three month period ended March 31, 1996
increased 29% to $367,000 from $285,000 in the comparable prior year period.
This increase is due to increased operational and marketing activities by the
Company's 79% owned joint venture in The Peoples Republic of China (the "Joint
Venture"), compared to the same period last year. This increase was offset in
part by a decrease in the first quarter of 1996 in revenues attributable to a
grant from the US Government's National Institute of Standards and Technology
("NIST") to $91,000, compared to $202,000 in the comparable period of the prior
year. The NIST grant was awarded in December 1993 to supplement the Company's
development of a recognition system for the Chinese language The NIST grant
expires in April 1996.
Cost of sales includes the costs of materials, procurement, warehousing, and
related personnel in connection with the sales of the Company's products as well
as the amortization of capitalized software development costs. Costs incurred in
connection with the NIST grant, included in development contract revenue, are
expensed as incurred and are included in research and development expenses. Cost
of sales increased to $432,000 for the three month period ended March 31, 1996
as compared to $210,000 for the comparable period of the prior year. This
increase is attributable to a shift in the revenue mix to lower margin
Development contract revenues generated by the Joint Venture, and increases in
the costs of procurement, warehousing, and related personnel. Amortization of
software development costs declined to $22,000 for the three month period ended
March 31, 1996 as compared to $49,000 for the comparable period of the prior
year.
Research and development expenses for the three month period ended March 31,
1996 decreased by 15% to $448,000 as compared to $525,000 in the comparable
period of the prior year. This decrease was primarily attributable to decreases
in the purchase of outside development services, and the reduction of other
overhead costs. The Company did not capitalize any software development costs in
the three month period ended March 31, 1996. In the three month period ended
March 31, 1995, the Company capitalized $10,000 of software development costs.
Sales and marketing expenses for the three month period ended March 31, 1996
increased 22% to $714,000 as compared to $583,000 in the comparable period of
the prior year. This increase is primarily due to additions in staffing and
related costs and advertising in support of heightened sales activities both in
the U. S. and China.
General and administrative expenses for the three month period ended March 31,
1996 increased 42% to $494,000 as compared to $347,000 in the comparable period
of the prior year. The increase reflected increased costs of professional
services, insurance and personnel and related costs.
Liquidity and Capital Resources
At March 31, 1996, cash, cash equivalents, and short-term investments totaled
$4,902,000 compared to cash, cash equivalents and short-term investments of
$7,459,000 at December 31, 1995. This decrease was primarily the result of
$2,468,000 used in operating activities. Total current assets were $5,750,000 at
March 31, 1996 compared to $8,699,000 at December 31, 1995.
Current liabilities, which include deferred revenue, were $4,443,000 at March
31, 1996. Deferred revenue, totaling $2,474,000 at March 31, 1996, primarily
reflects nonrefundable advance royalty fees received from 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.
Under the terms of the Company's agreement with IBM, the Company is obligated to
share certain royalties from third parties with IBM when earned.
In 1993, the Company formed the Joint Venture with The Ministry of Electronic
Industries of Jiangsu Province (the "Government") of The People's Republic of
China. The Joint Venture, Communication Intelligence Computer Corporation, Ltd.
("CICC"), is 79% owned by the Company. Under the provisions of the joint venture
agreement, in exchange for 79% ownership, the Company is to contribute up to
$5.4 million in cash, and the Company will provide non-exclusive licenses to
technology and certain distribution rights. The Government will contribute
certain land use rights and provide other services for the joint venture. As of
March 31, 1996, the Company had contributed $900,000 in cash and had provided
non-exclusive licenses to technology and certain distribution rights, while the
Government had contributed certain land use rights. In February, 1996, CICC
repaid borrowings of approximately $30,000 denominated in Chinese currency to a
local bank.
As of March 31, 1996, the Company's principal source of liquidity was its cash,
cash equivalents and short-term investments of $4,902,000. The Company believes
that the above mentioned funds, together with anticipated revenues, are adequate
to meet projected working capital and other cash requirements through the end of
1996.
Future Results and Stock Price
The Company's future earnings and stock price may be subject to significant
volatility. The public stock markets have exhibited extreme volatility in stock
prices in recent years. The stock prices of high technology companies have
experienced particularly high volatility, including at times severe price
changes that are unrelated or disproportional to the operating performance of
these specific companies. The trading price of the Company's Common Stock could
be subject to wide fluctuation 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. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the period covered
by this report.
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
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Registrant
May 9, 1996 /s/ Francis V. Dane
- - ------------------------- -------------------------------------
Date Francis V. Dane
Vice President, Secretary and
Treasurer