UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
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 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
----- ------
Number of shares outstanding of the issuer's Common Stock, as of
August 8, 1997: 45,080,138
This Quarterly Report on Form 10-Q/A contains 17 pages of which this is page 1.
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996 (Unaudited)...................................3
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1997 and 1996
(Unaudited).....................................................4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1997 and 1996 (Unaudited)..........5
Notes to Condensed Consolidated Financial Statements
(Unaudited).....................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits........................................16
(b) Reports on Form 8-K.............................16
Signatures........................................................17
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
Unaudited
(In Thousands)
June 30, Dec. 31,
Assets 1997 1996
-------- --------
Current assets: (Restated)
Cash and cash equivalents ......................... $ 2,472 $ 10,573
Short-term investments ............................ 2,102 752
Accounts receivable, net .......................... 722 376
Inventories ....................................... 1,235 529
Other current assets .............................. 241 190
-------- --------
Total current assets .......................... 6,772 12,420
Notes receivable from officers and employees ........... 360 210
Property and equipment, net ............................ 884 537
Other assets ........................................... 317 336
-------- --------
Total assets .................................. $ 8,333 $ 13,503
======== ========
Liabilities and stockholders' equity Current liabilities:
Accounts payable .................................. $ 585 $ 367
Accrued compensation .............................. 381 339
Short-term debt (Note 4) .......................... 109 --
Other accrued liabilities ......................... 738 578
Deferred revenue .................................. 1,497 2,006
Pre-petition liabilities .......................... -- 878
-------- --------
Total current liabilities ..................... 3,310 4,168
Redeemable convertible preferred stock (Note 5) ........ -- 9,417
Convertible preferred stock (Note 5) ................... 5 --
Common stock ........................................... 449 419
Additional paid-in capital ............................. 63,989 54,015
Accumulated deficit .................................... (59,332) (54,347)
Cumulative foreign currency translation adjustment ..... (88) (169)
Commitments (Note 5)
-------- --------
Total liabilities, redeemable securities,
convertible preferred and common stockholders'
equity (Note 5) ............................... $ 8,333 $ 13,503
======== ========
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues: (Restated) (Restated)
Product ........................ $ 995 $ 467 $ 1,760 $ 884
License and royalty ............ 318 162 590 293
Development contracts .......... 84 49 245 140
-------- -------- -------- --------
Total revenues ........ 1,397 678 2,595 1,317
Operating costs and expenses:
Cost of sales:
Product ..................... 786 329 1,421 687
License, royalty and other
costs .................... 250 111 419 214
Development contracts ....... 84 49 181 140
Research and development ....... 595 459 1,071 787
Sales and marketing ............ 1,580 803 2,980 1,517
General and administrative ..... 690 535 1,119 1,029
-------- -------- -------- --------
Total operating costs
and expenses ......... 3,985 2,286 7,191 4,374
-------- -------- -------- --------
Loss from operations ................ (2,588) (1,608) (4,596) (3,057)
Interest income and other income
(expense) net, (Note 5) ........... 53 75 (368) 155
Interest expense .................... (4) (18) (21) (97)
-------- -------- -------- --------
Net loss ................... (2,539) (1,551) (4,985) (2,999)
Embedded yield on
preferred stock ......... (2,188) -- (4,376) --
Preferred stock dividend ... (141) -- (282) --
-------- -------- -------- --------
Net loss applicable to
common stockholders ..... $ (4,868) $ (1,551) $ (9,643) $ (2,999)
======== ======== ======== ========
Net loss per common share .. $ (0.11) $ (0.04) $ (0.22) $ (0.07)
======== ======== ======== ========
Weighted average common
shares outstanding .... 44,871 40,925 44,713 40,533
======== ======== ======== ========
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Six Months Ended
June 30,
--------------------
1997 1996
-------- --------
Cash flows used in operating activities: (Restated)
Net loss ............................................ $ (4,985) $ (2,999)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................. 113 144
Warrant issuance ............................... 484 --
Stock options issued for services .............. 46 --
Changes in operating assets and liabilities:
Accounts receivable ........................ (346) 31
Inventories ................................ (717) (242)
Other current assets ....................... (201) 17
Other assets ............................... (62) (20)
Accounts payable and accrued compensation .. 259 (176)
Other accrued liabilities .................. 164 (236)
Deferred revenue ........................... (509) (286)
Pre-petition liabilities ................... (878) (771)
-------- --------
Net cash used in operating activities ...... (6,632) (4,538)
-------- --------
Cash flows used in investing activities:
Proceeds from sale of short-term investments ... 4,954 6,065
Purchase of short-term investments ............. (6,304) (6,629)
Acquisition of property and equipment .......... (383) (146)
-------- --------
Net cash used in investing activities ...... (1,733) (710)
-------- --------
Cash flows from financing activities:
Principal payments on short-term debt .......... -- (30)
Principal payments on capital lease obligations (5) (18)
Proceeds from issuance of short-term debt ...... 109 100
Proceeds from issuance of common stock ......... 194 3,207
-------- --------
Net cash provided by financing activities .. 298 3,259
-------- --------
Effect of exchange rate changes on cash ............. (34) (62)
-------- --------
Net decrease in cash and cash equivalents ........... (8,101) (2,051)
Cash and cash equivalents at beginning of period .... 10,573 5,924
======== ========
Cash and cash equivalents at end of period .......... $ 2,472 $ 3,873
======== ========
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Six Months Ended
June 30,
----------------------
1997 1996
--------- ---------
Schedule of non-cash transactions: (Restated)
Embedded yield on preferred stock $ (4,376) $ -
========= =========
Preferred stock dividend $ (282) $ -
========= =========
Reclassification of current note receivable from
officer to non-current $ - $ 210
========= =========
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q/A
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
of Communication Intelligence Corporation (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 report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of its financial position and
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.
The corporate mission of CIC is to develop and market natural, pen
input, computer interfaces and handwriting recognition-based security
technologies and products to satisfy the emerging markets for
pen-based computing and electronic commerce. These emerging markets
include all areas of personal computing as well as electronic commerce
and communications.
The Company's research and development activities have given rise to
numerous technologies and products including: two pen-based operating
environments (PenDOS(R) and PenMAC(R)), its multi-lingual
Handwriter(R) Recognition System, and three desktop computing
products, Handwriter(R) for Windows(R), MacHandwriter(R), and its
recently released Handwriter Manta. Additionally, CIC has developed
products for dynamic signature verification, electronic ink data
compression and encryption and a suite of development tools and
applications which the Company believes could increase the
functionality of its core products and could facilitate their
integration into original equipment manufacturers' ("OEM") hardware
products and computer systems and networks.
In June 1997, the Company contributed licensed technology and $900,000
in cash to the Company's joint venture in the People's Republic of
China (the "Joint Venture"), Communication Intelligence Computer
Corporation, Ltd. ("CICC"), which increased the Company's ownership of
CICC from 79% to 90%.
As of June 30, 1997, the Company's principal source of liquidity was
its cash, cash equivalents and short-term investments of $4,574,000.
The Company believes that the above mentioned funds, are adequate to
meet projected working capital and other cash requirements for the
next six months. However the Company may be required to obtain
additional financing earlier, and, there can be no assurance that such
financing is available, or if available, that such financing will be
on favorable terms.
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, 1996.
Certain prior period amounts in the accompanying financial statements
have been reclassified to conform with the current period
presentation.
Financial statement restatement
The Company's Form 10-Q for the quarter ended June 30, 1997 has
been restated to reflect the non-cash charge for the embedded yield on
the convertible preferred stock resulting from the discounted
conversion feature provided on such stock and the cumulative dividends
of $1.25 per share , per annum, on outstanding shares of convertible
preferred stock. The Company beleives the restatement of the June 30,
1997 three and six month results are in accordance with the accounting
treatment of the embedded discount on convertible preferred stock as
announced by the Securities and Exchange Commission at the March 13,
1997 meeting of the Financial Accounting Standards Board's Emerging
Issues Task Force. The effect of this restatement on the results of
operations originally reported in the Company's Form 10-Q for the
three months ended June 30, 1997 was an increase in the net loss
applicable to common stockholders of $2,329,000 from $2,539,000 to
4,868,000 and an increase net loss per common share by $.05 from $.06
to $0.11. The effect of this restatement on the results of operations
originally reported in the Company's Form 10-Q for the six months
ended June 30, 1997 was an increase in the net loss applicable to
common stockholders of $4,658,000 from $4,985,000 to $9,643,000 and an
increase in net loss per common share of $0.11 from $0.11 to $0.22.
The restatement has no effect on the Company's cash position at June
30, 1997.
2. Cash, cash equivalents and short-term investments
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 their fair value. Any unrealized gains or losses are
reported as a separate component of stockholders' equity, but, to
date, have not been significant. The cost of securities sold is
determined based on the specific identification method.
Cash and cash equivalents consist of the following:
June 30, Dec. 31,
1997 1996
-------- --------
(In Thousands)
Cash in bank .................................. $ 414 $ 9,483
Commercial paper .............................. 1,984 1,088
Money markets .......... ...................... 74 2
======= =======
$ 2,472 $10,573
======= =======
Short-term investments consist of the following available-for-sale
securities:
June 30, Dec. 31,
1997 1996
-------- --------
(In Thousands)
U.S. Corporate securities ...................... $ 603 $ 252
Other debt securities .......................... 1,499 500
------- -------
$ 2,102 $ 752
======= =======
Corporate debt securities at June 30, 1997 mature in less than one
year. Other debt securities at June 30, 1997 consist of securities not
due at a single maturity date.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. At June 30, 1997, inventory is comprised primarily of finished
goods.
4. Short-term debt
In May 1997 the Company purchased office furniture and a security
system with an approximate value of $209,000 from a third party. The
Company paid $100,000 in cash and signed an unsecured note for
$109,000. The note bears interest at a rate of 10% per annum and is
due on June 1, 1998.
5. Convertible preferred stock
On December 31, 1996, the Company completed a private placement of
450,000 shares of redeemable convertible preferred stock (the
"December Private Placement") at $25.00 per share to certain
institutional and other investors. Of the aggregate 450,000 shares
sold, 70,200 shares of redeemable convertible preferred stock (the
"Preferred Stock") were issued in exchange for 390,000 shares of
common stock, originally issued in a private placement of common stock
consummated in June 1996.
The holders of the convertible preferred stock may convert their
shares into shares of Common Stock at between 72% and 85% of the
effective market price of the Common Stock at the date of conversion.
The convertible preferred stock may be converted by the holders into
shares of Common Stock at any time beginning July 1, 1997.
The convertible preferred stock entitles the holders thereof to
receive cumulative dividends on each shares are the rate of $1.25 per
share per annum, compounded semi-annually, when payable, whether or
not declared. Dividends may be paid at the Company's option in cash or
additional shares of convertible preferred stock.
The Company agreed to register the common stock issuable upon
conversion of the Preferred Stock by filing a Registration Statement
on Form S-3 by March 31, 1997 and by using its best efforts to cause
such Registration Statement to be declared effective within 180 days
from December 31, 1996 (the "Declaration Date"). In the event that the
Registration Statement was not declared effective within 180 days from
December 31, 1996, the Company was required to pay to each holder a
default payment (the "Default Payment") in an amount equal to 3% of
the liquidation preference for the Preferred Stock held for any part
of each 30-day period subsequent to the Declaration Date that the
Registration Statement was not declared effective. The Registration
Statement was declared effective in April 1997. A similar Default
Payment must be made by the Company to the holders of the Preferred
Stock in the event that (i) the Company fails, refuses or is unable to
cause the securities covered by the Registration Statement to be
listed on the exchange on which the Company's common stock is traded,
(ii) any holder's ability to sell the securities covered by the
Registration Statement is suspended for more than 60 days, or at any
time during the twelfth or thirteenth fiscal month following December
31, 1996, or (iii) the Company does not have a sufficient number of
shares of common stock available to effect conversion of the Preferred
Stock
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding Preferred Stock
executed a waiver to certain provisions of the Registration Rights
Agreement (the "Agreement") entered into in connection with the
December Private Placement, which irrevocably waived such holders'
rights to any redemption in exchange for the issuance to the holders
of 300,000 warrants to purchase the Company's common stock, allocated
amongst the holders on a pro-rata basis. The warrants expire five
years from the date of issuance and have an exercise price of $2.00
per share, subject to adjustments for antidilution. The Company
ascribed a value of $484,000 to these warrants, which was recorded as
an expense in the Company's statement of operations for the quarter
ended March 31, 1997. 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
6.60%; expected life of 5 years; expected volatility of 104%; and
expected dividend yield of 0%. As a result of the waiver, the shares
of Preferred Stock were reclassified as convertible preferred stock
after December 31, 1996 and, as such, are included in stockholders'
equity for such periods subsequent to December 31, 1996.
6. Recent accounting pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". This Statement is effective for the Company's year ending
December 31, 1997 and redefines earnings per share under generally
accepted accounting principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced with diluted earnings per
share. If the Company had adopted this statement for the quarter and
six months ended June 30, 1997 and for the comparable periods in the
prior year, the Company's loss per share would have been as follows:
Three Months Ended Six months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Restated) (Restated)
Basic loss per share . $ (0.11) $ (0.04) $ (0.22) $ (0.07)
Diluted loss per share $ (0.11) $ (0.04) $ (0.22) $ (0.07)
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
the reporting of comprehensive income and its components in a full set
of general-purpose financial statements for periods beginning after
December 15, 1997. Reclassification of financial statements for
earlier periods for comparative purposes is required. The Company will
adopt SFAS 130 in 1998 and does not expect such adoption to have a
material effect on the consolidated financial statements.
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 is 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 will adopt SFAS 131 beginning in 1998 and does
not expect such adoption to have a material effect on the consolidated
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company has restated the previously issued financial results for the three
and six months ended June 30, 1997. The Company's financial results have been
restated to reflect the non-cash charge for the embedded yield on convertible
preferred stock resulting from the discount conversion feature provided on such
stock and cumulative dividends on the convertible preferred stock. The Company
beleives the restatement of the June 30, 1997 three and six month results is in
accordance with the accounting treatment of the embedded discount on convertible
preferred stock as announced by the Securities and Exchange Commission at the
March 13, 1997 meeting of the Financial Accounting Standards Board's Emerging
Issues Task Force. The following discussion and analysis should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto included in Part I- Item 1 of this Form 10-Q/A and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth in the Company's 1996 Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Results of Operations
Revenues. Revenues for the three and six months ended June 30, 1997 increased by
106% and 97% to $1,397,000 and $2,595,000, respectively, from the comparable
three and six month periods of the prior year. Revenues are comprised of product
sales, license and royalty fees, and development contract revenues. The
increases are principally due to higher product sales and license and royalty
fees as discussed in more detail below.
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
(In Thousands)
1997 1996 1997 1996
------ ------ ------ -------
Revenues:
Product sales .......... $ 995 $ 467 $ 1,760 $ 884
License and royalty fees 318 162 590 293
Development contracts .. 84 49 245 140
====== ====== ====== ======
Total Revenues ... $ 1,397 $ 678 $ 2,595 $ 1,317
====== ====== ====== ======
Product sales increased to $995,000 and $1,760,000, respectively, for the three
and six month periods ended June 30, 1997 from $467,000 and $884,000,
respectively, in the comparable prior year periods. This increase was due
primarily to the introduction of Handwriter products into the retail channel
through CompUSA and an increase in Handwriter sales to the corporate market.
Handwriter product sales increased $533,000 and $881,000, respectively, to
$581,000 and $1,069,000, respectively, during the three and six month periods
ended June 30, 1997 compared to $48,000 and $188,000, respectively, in the
comparable periods in 1996. Product sales by the Company's 90% owned Joint
Venture were $414,000 and $691,000, respectively, for the three and six month
periods ended June 30, 1997 compared to $419,000 and $696,000, respectively,
during the same periods last year.
Revenues from license and royalty fees for the three and six month periods ended
June 30, 1997 increased to $318,000 and $590,000, respectively, from $162,000
and $293,000, respectively, in the comparable prior periods in 1996. This
increase was due to of higher shipment volumes of licensed products by the
Company's licensees and to royalty revenues of approximately $164,000 and
$383,000, respectively, for the three and six month periods ended June 30, 1997,
recognized on licensing agreements for which the Company had no further
obligation to deliver additional software or services. In the comparable prior
year periods, licensees and royalty revenues of approximately $26,000 and
$88,000,respectivly, was recognized on licensing agreements for which the
Company have no further obligation to deliver additional software or services.
Development contract revenues for the three and six month periods ended June 30,
1997 increased 71% and 75% to $84,000 and $245,000, respectively, compared to
$49,000 and $140,000, respectively, in the comparable prior year periods. This
increase was due in part to $168,000 in grant revenues received during the six
months ended June 30, 1997 from The National Science Foundation ("NSF") for
basic research, compared to $50,000 received from NSF during the comparable
periods of the prior year. The increase was offset in part by the loss in April
1996 of development contract revenues attributable to a grant from the US
Government's National Institute of Standards and Technology ("NIST"). 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 expired in April
1996.
Cost of Sales. Cost of sales comprises costs from product sales, licensing,
royalty and other costs and costs from development contracts. Cost of product
sales for the three and six months ended June 30, 1997, consists primarily of
cost of materials, approximately $323,000 and $558,000, respectively, of which
is related to the hardware and software components involved in the system
integration activities of the Joint Venture, compared to approximately $334,000
and $567,000, respectively, in the comparable prior year periods, with the
remainder being related to costs of Handwriter product sales. Handwriter product
cost of materials was approximately $542,000 and $942,000, respectively, for the
three and six months ended June 30, 1997 compared to approximately $39,000 and
$134,000, respectively, in the prior year periods. Handwriter products gross
margin increased to 25% during the three months ended June 30, 1997 from 20% in
the comparable period of the prior year. This increase resulted from an increase
in corporate sales of the Company's new higher margin Handwriter Manta product
which was not available in 1996. For the six month period ended June 30, 1997,
Handwriter products gross margin decreased to 22% from 28% in the comparable
period of the prior year. The decrease is due to the lower margins experienced
on Handwriter products in the retail channel. Gross margin on product sales
activities of the Joint Venture was 22% and 19%, respectively, during the three
and six months ended June 30, 1997 compared to 20% and 19%, respectively, in the
prior year. License, royalties and other costs, which include procurement,
warehousing, and related personnel in connection with sales of the Company's
products, increased to $250,000 and $419,000, respectively, for the three and
six months ended June 30, 1997 compared to $111,000 and $214,000, respectively,
for the comparable 1996 periods. This increase in other costs for the three and
six months ended June 30, 1997 related primarily to additional personnel costs
of $75,000 and $117,000, respectively, and product fulfillment and other costs
of $82,000 and $127,000, respectively, in connection with the launch of the
Company's Handwriter(R) for Windows(R) product in the retail market in 1997.
There were no comparable activities in the prior year.. Costs incurred in
connection with development contract revenue are expensed as incurred and
increased 71% and 29% during the three and six months ended June 30, 1997 as
compared to the comparable periods of the prior year, commensurate with the
increase in contract development revenues in the first and second quarters of
1997.
Research and development. Research and development expenses for the three and
six month periods ended June 30, 1997 increased by 30% and 36% to $595,000 and
$1,071,000, respectively, as compared to $459,000 and $787,000, respectively, in
the comparable periods of the prior year. The increases were primarily
attributable to increases of approximately $118,000 and $213,000, respectively,
in payroll and related costs, and $9,000 and $46,000, respectively, in
professional services compared to the prior year. These increases are due to the
continued development of the Chinese recognizer and the development of the soon
to be released MX and FX Handwriter products. This increase was commensurate
with the increase in personnel. The Company did not capitalize any software
development costs in the three and six month periods ended June 30, 1997 or
1996, respectively.
Sales and marketing. Sales and marketing expenses for the three and six month
periods ended June 30, 1997 increased 97% and 96% to $1,580,000 and $2,980,000,
respectively, as compared to $803,000 and $1,517,000, respectively, in the
comparable periods of the prior year. The increases were primarily due to
increases of $377,000 and $740,000 respectively, in advertising and related
expenses, and $261,000 and $481,000, respectively, in payroll and related
expenses. Other costs including facilities and related expenses increased
$139,000 and $242,000, respectively, during the three and six month periods
ended June 30, 1997 commensurate with additions in staffing. The increases in
staffing and advertising expenses were primarily due to the introduction and
ongoing support of the Company's Handwriter products in the retail channel
during the first and second quarters of 1997, and continued marketing and sales
efforts in the corporate channel.
General and administrative. General and administrative expenses for the three
and six month periods ended June 30, 1997 increased 29% and 9%, respectively, to
$690,000 and $1,119,000, respectively, as compared to $535,000 and $1,029,000,
respectively, in the comparable periods of the prior year. The increases were
primarily attributable to increases of approximately $198,000 and $213,000,
respectively, in professional fees and services related to corporate filings
including the annual report and the preparation and filing of the Company's Form
S-3. These increases were partially offset by reductions in payroll and related
costs of $70,000 and $112,000, respectively, during the three and six month
periods ended June 30, 1997 compared to the same periods in the prior year.
These reductions were associated with the transfers of general and
administrative staff to sales and marketing activities.
Interest income and other income (expense). Interest income and other income
(expense) increased for the six months ended June 30, 1997 due to a one time
non-cash charge to expense of $484,000 for 300,000 warrants issued on March 28,
1997, and effective as of December 31, 1996, to holders constituting 100% of the
issued and outstanding redeemable convertible preferred stock in exchange for
the execution of a waiver to certain provisions of the registration rights
agreement entered into in connection with the private placement of Preferred
Stock in December 1996(Note 5).
Interest expense. Interest expense decreased for the three and six month periods
ended June 30, 1997 compared to the prior year due to the pay-off of the
pre-petition liabilities in the first quarter of 1997.
Embedded yield on preferred stock. The embedded yield on preferred stock results
from the discount feature provided on conversion of the convertible preferred
stock into Common Stock. The embedded yield totaling $4,376,000 will be
recognized from the issuance date through July 1, 1997, the date upon which the
preferred stock becomes convertible.
Preferred stock dividend. The preferred stock dividend relates to cumulative
dividends of $1.25 per share per annum, compounded semi-annually, when payable,
whether or not declared, on the convertible preferred stock.
Liquidity and Capital Resources
At June 30, 1997, cash, cash equivalents and short-term investments totaled
$4,574,000 compared to cash, cash equivalents and short-term investments of
$11,325,000 at December 31, 1996. This decrease was primarily the result of
$6,632,000 used in operating activities which included the final payment of
$878,000 to pre-petition creditors during the first quarter of 1997. Total
current assets were $6,772,000 at June 30, 1997 compared to $12,420,000 at
December 31, 1996.
As of June 30, 1997, the Company's principal source of liquidity was its cash,
cash equivalents and short-term investments of $4,574,000. The Company believes
that the above mentioned funds, are adequate to meet projected working capital
and other cash requirements for the next six months. However the Company may be
required to obtain additional financing earlier, and, there can be no assurance
that such financing is available, or if available, that such financing will be
on favorable terms.
Current liabilities, which include deferred revenue, were $3,310,000 at June 30,
1997. Deferred revenue, totaling $1,497,000 at June 30, 1997, 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 or for which the Company has no further obligation to deliver additional
software or services. 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.
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 90% owned by the Company at June 30, 1997. Under the provisions of
the joint venture agreement, the Company may be required to contribute up to
$5.4 million in cash to the Joint Venture and is required to provide it with
nonexclusive licenses to technologies and certain distribution rights. The
Ministry is required to contribute certain land use rights and provide other
services to the Joint Venture.. As of June 30, 1997, the Company had contributed
$1,800,000 in cash and had provided non-exclusive licenses to technology and
certain distribution rights, while the Government had contributed certain land
use rights and equipment.
During the second quarter of 1997 the Company contributed technology licenses
and $900,000 in cash. This contribution will help fund CICC's new Software
Development Division. This division was formed to create pencentric applications
initially for the Chinese market. CICC also plans to introduce the Chinese
Handwriter during the third quarter of 1997. There can be no assurance that the
Company will be able to fund the balance of any required cash contributions to
the Joint Venture, that the Joint Venture will be successful in developing or
selling integrated computer systems or other Company products to the Chinese
market or that the Company will realize any significant benefits from its
contributions to the Joint Venture.
Convertible Preferred Financing. In December 1996, the Company completed a
private placement of 450,000 shares of Preferred Stock at $25.00 per share for
$11,250,000. In connection with the transaction, the Company received $9,495,000
in cash and accepted for exchange, in lieu of cash, 390,000 shares of Common
Stock for 70,200 shares of Preferred Stock. Each share of Preferred Stock is
convertible by the holder into shares of Common Stock at any time beginning July
1, 1997, or earlier in the event of a change in control transaction, pursuant to
a conversion formula based upon a discount from the effective market price of
the Common Stock. In addition, all outstanding shares of Preferred Stock will
automatically convert into shares of Common Stock on December 31, 1999, subject
to the satisfaction of certain conditions, or later under certain circumstances.
There is no limitation on the number of shares of Common Stock that the Company
may be required to issue in connection with the Convertible Preferred.
The exact number of shares of Common Stock issuable upon conversion of all of
the Preferred Stock cannot currently be determined but, generally, such
issuance's of Common Stock will vary inversely with the market price of the
Common Stock. On August 8, 1997, the last reported sales price of the Common
Stock on the Nasdaq SmallCap Market was $1.56 per share. If the effective market
price of the Common Stock on August 8, 1997 of $ 1.52 per share (as determined
pursuant to the terms of the Convertible Preferred) were used to determine the
number of shares of Common Stock issuable as of the first date on which the
Preferred Stock may be converted, the Company would be obligated to issue a
total of approximately 8,672,000 shares of Common Stock assuming all such shares
were converted at such time. To the extent the effective market price per share
of the Common Stock is lower or higher than $ 1.52 as of any date on which
shares of Preferred Stock are converted, the Company would issue more or less
shares of Common Stock than reflected in such estimate, and such difference
could be material.
Restrictions in Investor Agreement. In connection with the private placement in
December 1996, the Company entered into an investor agreement with the
purchasers of the Preferred Stock (the "Investor Agreement"). Subject to certain
exceptions, until the Restrictive Covenant Termination Date (as defined below),
the Investor Agreement prohibits or restricts the Company from, among other
things, declaring or paying dividends or making distributions to holders of the
Common Stock, repurchasing any Common Stock or other equity junior or on parity
with the Convertible Preferred, authorizing or issuing other equity securities
senior to the Preferred Stock and incurring indebtedness other than for trade
payables or a working capital facility not exceeding $10 million. In addition,
until the Restrictive Covenant Termination Date, the Company is prohibited from
offering or selling debt, shares of Common Stock or other equity securities
(including convertible securities) other than in a bona-fide underwritten public
offering, or from obtaining any financing from a third party, unless such
transaction has been first offered to the holders of the Convertible Preferred.
The term "Restrictive Covenant Termination Date" means, generally, the date
which is the earlier of (a) January 31, 1998 or (b) the date on which all of the
Preferred Stock has been converted.
Registration Rights; Default Payments. In connection with the Company's December
1996 private placement, the Company entered into a registration rights agreement
with the holders of the Preferred Stock (the "Registration Rights Agreement")
pursuant to which the Company agreed to file a Registration Statement on Form
S-3 relating to the shares of Common Stock issuable upon conversion of the
Preferred Stock by filing a registration statement on Form S-3 by March 31, 1997
(the "1997 Registration Statement") and to use its best efforts to cause the
1997 Registration Statement to be declared effective by June 29, 1997 (the
"Declaration Date"). In April 1997, the Company's 1997 Registration Statement on
Form S-3 for the offering by selling security holders of shares of common stock
issuable upon conversion of or otherwise in respect to 450,000 shares of the
Company's Preferred Stock and the exercise of warrants to purchase an aggregate
of 637,000 shares of common stock was declared effective by the Securities and
Exchange Commission. The Preferred Stock may be converted by the holders into
shares of common stock at any time beginning July 1, 1997.
In the event the 1997 Registration Statement was not declared effective by the
Declaration Date, the Company has agreed to pay to each holder of Preferred
Stock a default payment in cash (the "Default Payment") in an amount equal to 3%
of the liquidation preference for the Preferred Stock held for any part of each
30-day period subsequent to the Declaration Date until the 1997 Registration
Statement was declared effective. The Company has also agreed to make a similar
Default Payment to the holders of Preferred Stock in the event that (i) the
Company fails, refuses or is unable to cause the securities covered by the 1997
Registration Statement to be listed on the exchange on which the Common Stock is
then traded, (ii) any holder's ability to sell the securities covered by the
1997 Registration Statement is suspended for more than 60 days in the aggregate,
or at any time during the months of December 1997 or January 1998, or (iii) the
Company does not have a sufficient number of shares of Common Stock available to
effect conversion of the Convertible Preferred. The Default Payments must be
made each month until the condition or event causing the payment to be made no
longer exists.
Dividends. The Preferred Stock entitles the holders thereof to receive
cumulative dividends on each share at the rate of $1.25 per share per annum,
compounded semi-annually, when payable, whether or not declared. Dividends may
be paid at the Company's option in cash or additional shares of Convertible
Preferred.
Waiver; Additional Warrant Issuance. In March 1997, the Company and all of the
holders of the Preferred Stock executed a waiver (the "Waiver") in connection
with the Company's obligations to comply with redemption provisions contained in
the Registration Rights Agreement. Pursuant to the Waiver, each holder of the
Preferred Stock irrevocably waived the Company's obligations to comply with
provisions in the Registration Rights Agreement which would have obligated the
Company to redeem the Preferred Stock (or shares of Common Stock issuable upon
conversion of, or otherwise in respect to, the Convertible Preferred) and, in
consideration therefor, the Company (a) issued to the holders (on a pro rata
basis) in accordance with the terms thereof, Warrants to purchase 300,000 shares
of Common Stock (subject to adjustments), with an exercise price of $2.00 per
share, (b) waived its rights to request that the holders of the Preferred Stock
receive any Default Payments in additional shares of Preferred Stock and (c)
agreed that the holders of Preferred Stock may convert their shares into shares
of Common Stock at approximately 72% of the effective market price of the Common
Stock in the event a change in control transaction occurs prior to February
1998, or later under certain circumstances. As a result of the Waiver, the
shares of Preferred Stock which were classified as redeemable securities at
December 31, 1996 were reclassified as Preferred Stock commencing as of March
31, 1997 and, as such, were included in stockholders' equity commencing as of
March 31, 1997.
The Company has ascribed a value of $484,000 to these warrants, which
was recorded as an expense in the Company's statement of operations for the
quarter ended March 31, 1997. 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 6.60%; expected life of 5
years; expected volatility of 104%; and expected dividend yield of 0%. As a
result of the waiver, the shares of redeemable convertible preferred stock have
been reclassified as convertible preferred stock and, as such, are included in
stockholders' equity.
Future Results and Stock Price
The Company's future earnings and 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 disproportional to the operating performance of
such 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.
Certain statements contained in this Form 10-Q/A, include 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 Company results 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 the Company's products; (2) economic, business, market and
competitive conditions in the software industry and technological innovations
which could affect the Company's business; and (3) the Company's inability to
protect its trade secrets or other proprietary rights, operate with out
infringing upon the proprietary rights of others and prevent others from
infringing on the proprietary rights of the company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 19, 1997. The number
of shares of common stock with voting rights as of the record date represented
at the meeting either in person or by proxy was 40,021,312 shares or 87 % of the
eligible outstanding common stock of the Company. Three proposals were voted
upon by the stockholders. The proposals and the voting results follow:
Proposal 1
Each of the six persons listed below were re-elected as directors to serve until
the next Annual Meeting or until his successor is elected or appointed. The
number of votes for and withheld for each individual is listed next to his name.
Broker
Name For Withheld Non-votes Abstain
- ----------------------- ---------- -------- ----------- --------
George P. Clayson, III 39,602,768 418,544 None None
James Dao ............ 39,566,568 454,744 None None
L. Michael McFarland . 39,511,013 510,299 None None
Philip Sassower ...... 39,595,568 425,744 None None
Dr. Donald R. Scheuch 39,587,118 434,194 None None
C. B. Sung ........... 39,579,068 442,244 None None
Proposal 2
It was resolved to increase the number of shares of Common Stock available for
issuance under the Company's 1994 Stock Option Plan from 5,000,000 to 6,000,000.
The number of votes for, against and abstaining on this proposal follows:
Broker
For Against Abstain Non-votes Abstain
-------------- ----------- --------- --------- ---------
38,393,045 1,444,591 183,676 None None
Proposal 3
It was resolved to ratify the appointment of Price Waterhouse LLP as independent
accounts of the Company for the fiscal year ending December 31, 1997. The number
of votes for, against and abstaining on this proposal follows:
Broker
For Against Abstain Non-votes Abstain
--------------- ----------- ---------- ---------- ---------
38,393,045 1,444,591 183,676 None None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
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
January 6, 1998 /s/ Craig M. Hutchison
- ---------------------- ---------------------------------------------
Date Craig M. Hutchison
(Principal Financial Officer and Officer Duly
authorized to Sign on Behalf of the Registrant)