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: June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
August 12, 1997: 54,221,965.
This Quarterly Report on Form 10-Q contains 21 pages of which this is page 1.
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at June 30, 1998 (unaudited) and
December 31, 1997......................................................3
CondensedConsolidated Statements of Operations for the three and six
month periods ended June 30, 1998 and 1997(unaudited)..................4
CondensedConsolidated Statements of Cash Flows for the six month
periods ended June 30, 1998 and 1997(unaudited)........................5
Notes to Condensed Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................19
Item 2. Change in Securities.............................................19
Item 3. Defaults Upon Senior Securities..................................19
Item 4. Submission of Matters to a Vote of Security Holders..............19
Item 5. Other Information................................................20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits................................................20
(b) Reports on Form 8-K.....................................20
Signatures................................................................21
- 2 -
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1998 1997
---------- ----------
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 1,939 $ 5,485
Accounts receivable, net 860 362
Inventories 245 193
Other current assets 274 175
---------- ----------
Total current assets 3,318 6,215
Note receivable from officer 210 210
Property and equipment, net 691 798
Other assets 262 268
---------- ----------
Total assets $ 4,481 $ 7,491
=========== ==========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 145 $ 490
Accounts payable 227 1,059
Accrued compensation 309 446
Other accrued liabilities 977 1,059
Deferred revenue 55 440
----------- ----------
Total current liabilities 1,713 3,494
Other liabilities - 8
Commitments (Note 6)
Stockholders' equity:
Convertible preferred stock (Note 6) 4 6
Common stock 519 474
Additional paid-in capital 70,179 69,955
Accumulated deficit (67,915) (66,347)
Cumulative translation adjustment (19) (99)
------------ ------------
Total stockholders' equity 2,768 3,989
------------ ------------
Total liabilities and stockholders' equity $ 4,481 $ 7,491
============ ============
See accompanying notes.
- 3 -
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,
------------------ ------------------
1998 1997 1998 1997
-------- ------- -------- --------
Revenues:
Product $ 803 $ 995 $ 1,478 $ 1,760
License and royalty 295 318 888 590
Development contracts 102 84 200 245
-------- ------- -------- --------
Total revenues 1,200 1,397 2,566 2,595
Operating costs and expenses:
Cost of sales:
Product 447 1,014 776 1,799
License and royalty 7 22 22 41
Development contracts 53 84 110 181
Research and development 486 595 1,065 1,071
Sales and marketing 734 1,580 1,281 2,980
General and administrative 466 690 966 1,119
-------- ------- ------- --------
Total operating costs
and expenses 2,193 3,985 4,220 7,191
-------- ------- ------- --------
Loss from operations (993) (2,588) (1,654) (4,596)
Interest income and other income
(expense), net (Note 6) 38 53 102 (368)
Interest expense (2) (4) (16) (21)
-------- ------- ------- --------
Net loss (957) (2,539) (1,568) (4,985)
Embedded yield on preferred
stock (Note 1) - (2,188) - (4,376)
Preferred stock dividend (143) (141) (310) (282)
-------- ------- ------- --------
Net loss applicable to common
stockholders $ (1,100) $(4,868) $(1,878) $ (9,643)
======== ======= ======= ========
Basic loss percommon share(Note 7) $ (0.02) $ (0.11) $ (0.04) $ (0.22)
======== ======= ======== ========
Diluted loss per common
share(Note 7) $ (0.02) $ (0.11) $ (0.04) $ (0.22)
======== ======== ======= ========
Weighted average common
shares outstanding 50,884 44,871 49,649 44,713
======== ======== ======= ========
See accompanying notes.
- 4 -
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30,
---------------------------------
1998 1997
------------ -------------
Cash flows from operating activities:
Net loss $ (1,568) $ (4,985)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 164 113
Warrant issuance costs - 484
Stock options issued for services 32 46
Changes in operating assets
and liabilities:
Accounts receivable (499) (346)
Inventories (52) (717)
Other current assets (99) (201)
Other assets (17) (62)
Accounts payable and accrued
compensation (673) 259
Other accrued liabilities (273) 164
Deferred revenue (414) (509)
Pre-petition liabilities - (878)
------------ ------------
Net cash used in operating activities (3,399) (6,632)
------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities
of short-term investments - 4,954
Purchase of short-term investments - (6,304)
Acquisition of property and equipment (35) (383)
----------- ------------
Net cash used in investing activities (35) (1,733)
----------- ------------
Cash flows from financing activities:
Principal payments on short-term debt (490) -
Principal payments on capital
lease obligations (3) (5)
Proceeds from issuance of short-term debt 145 109
Proceeds from issuance of common stock 236 194
Net cash provided by (used in) ----------- ------------
financing activities (112) 298
----------- ------------
Effect of exchange rate changes on cash - (34)
----------- ------------
Net decrease in cash and cash equivalents (3,546) (8,101)
Cash and cash equivalents at beginning
of period 5,485 10,573
----------- ------------
Cash and cash equivalents at end of period $ 1,939 $ 2,472
=========== ============
See accompanying notes.
- 5 -
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30,
------------------------------------
1998 1997
--------------- --------------
Schedule of non-cash transactions:
Conversion of redeemable
convertible preferred stock into
Series A Preferred Stock $ - $ 9,417
============== ==============
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 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 interim results are not
necessarily indicative of the results to be expected for the entire
year.
The Company develops, markets and licenses pen-input and biometric
security software and technologies for the computer, consumer
electronics and communication markets. The Company's products include
multi-lingual character recognition software (JOT(TM) and Handwriter
Recognition System), signature verification software and biometric
security development tools (SigCheck(TM) and InkTools(TM)), and
electronic ink compression and electronic note-taking software
(INKshrINK and QuickNotes(TM)). CIC's products are designed to increase
the ease of use, functionality and security of a variety of electronic
devices from desktop PCs to "smart" cellular phones.
The Company offers a wide range of software products for pen-based
computing, based on the Company's core handwriting recognition and
related technologies. 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 as the sole input device or
in conjunction with a keyboard. The pen eliminates the need for a mouse
as a navigational device. The Company believes that pen-input enhances
productivity and creativity because it is a more natural means of
input, facilitates editing and screen navigation, and reduces the risk
of repetitive stress illness. The Company's transaction and
communication enabling technologies are designed to provide a
cost-effective means for protecting electronic transactions, electronic
files and private communications. CIC believes that these technologies
offer more efficient methods to conduct 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, data compression and pen-based operating environments.
For the six months ended June 30, 1998, the Company's cash and cash
equivalents decreased by $3,546 from $5,485 at the beginning of the
period to $1,939. The decrease is due primarily to cash used in
operating activities of $3,399 and $453 used to repay an accounts
receivable line of credit in January, 1998. Although there can be no
assurance, the Company believes that its cash and cash equivalents will
be sufficient to fund planned operations for at least the next twelve
months. However, if the Company is unable to generate adequate cash
flow 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
- 7 -
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements (continued)
discretionary spending. Management believes that it will be able to
reduce discretionary spending if required.
The Company's Form 10-Q for the three and six months ended June 30,
1997 was 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 Series A
Preferred Stock. The Company believes the restatement of the June 30,
1997 three and six month results was 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 to increase the net loss applicable to
common stockholders by $2,329 from $2,539 to $4,868 and to increase the
basic and diluted loss per common share by $0.05 from $0.06 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 to increase the net loss applicable to common stockholders by
$4,658 from $4,985 to $9,643 and to increase the basic and diluted loss
per common share by $0.11 from $0.11 to $0.22 The restatement had no
effect on the Company's cash position at June 30, 1997.
Certain prior period amounts in this Form 10-Q have been reclassified
to conform with the current period presentation.
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, 1997.
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:
June 30, Dec. 31,
1998 1997
------ ------
Cash in bank ................. $ 715 $1,160
Commercial paper ............. 410 2,330
Money market accounts ........ 14 1,004
Corporate debt securities .... -- 991
Other debt securities ........ 800 --
------ ------
$1,939 $5,485
====== ======
- 8 -
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At June 30,
1998, inventory was comprised primarily of finished goods.
4. Short-term debt
On June 30, 1998, the Company's 90% owned Chinese joint venture (the
"Joint Venture") borrowed the equivalent of $145, denominated in
Chinese currency from a Chinese bank. The loan bears interest at 9% and
is due on June 30, 1999. The borrowings are secured by a US dollar
denominated deposit held by the bank.
In May 1997, the Company purchased office furniture and a security
system with an approximate value of $209 from a third party. The
Company paid $100 in cash and signed an unsecured note for $109 due in
monthly installments through May 1998. The note bore interest on the
unpaid balance at a rate of 10% per annum. The note was paid in full in
May, 1998.
In October 1997, the Company entered into an accounts receivable
financing agreement whereby the Company may factor its accounts
receivable in accordance with the terms of the agreement. The maximum
credit available to the Company under the agreement is $1,500 with an
advance rate of 80% of eligible accounts receivable less than 90 days
old. The term of the agreement is twelve months with annual renewals. A
financing fee of 2.1% per month applies to the outstanding balance
based on the face value of each invoice. The line of credit is secured
by a blanket first priority lien on all Company assets with the
exception of intellectual property. The amounts financed under the
accounts receivable financing agreement at December 31, 1997, were
repaid in January 1998. The Company had approximately $1,500 of credit
available under this agreement at June 30, 1998.
5. Revenue recognition
Revenue from software and other product sales are recognized upon
shipment provided that no significant obligations remain and the
collection of the resulting receivable is probable. The Company
provides for estimated sales returns at the time of shipment. License
revenues are recognized when the software has been delivered and when
all significant obligations have been met. Royalty revenues are
recognized as products are licensed and sold by licensees. Development
contract revenue is generated primarily from system integration
services, research grants and joint development agreements with
private and government agencies. Revenue is recognized in accordance
with the terms of the grants and agreements, generally when
collectability is probable and related costs have been incurred.
In October 1997, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which the Company has
adopted for transactions entered into during the fiscal year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on
software transactions and supersedes Statement of Position No.
91-1,"Software Revenue Recognition". In March 1998,
- 9 -
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Revenue recognition (continued)
the AICPA issued Statement of Position No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" ("SOP 98-4"). SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is
considered vendor-specific objective evidence ("VSOE") necessary to
recognize revenue for software licenses in multiple-element
arrangements when undelivered elements exist. Additional guidance is
expected to be provided prior to adoption of the deferred provision of
SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the three and six months
ended June 30, 1998.
6. Convertible preferred stock
In December 1996, the Company completed a private placement (the
"December Private Placement") of 450 shares of redeemable convertible
preferred stock (the "Series A Preferred Stock") at $25.00 per share to
certain institutional and other investors. Of the aggregate 450 shares
sold, 70 shares of Series A Preferred Stock were issued in exchange for
390 shares of Common Stock originally issued by the Company in a
private placement of Common Stock in June 1996.
On March 28, 1997, and effective as of December 31, 1996, holders of
100% of the then issued and outstanding Series A Preferred Stock
executed a waiver of certain provisions of the Registration Rights
Agreement (the "Agreement") entered into in connection with the
December Private Placement. Under the waiver, these holders irrevocably
waived any redemption obligations of the Company with respect to the
Series A Preferred Stock in exchange for the issuance to such holders
of 300 warrants to purchase the Company's Common Stock, allocated
amongst the holders on a pro-rata basis. The warrants expire five years
from the effective date of issuance and have an exercise price of $2.00
per share, subject to adjustments for anti-dilution. The Company has
ascribed a value of $484 to these warrants, which was recorded as an
expense in the Company's statement of operations during the first
quarter of 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 aforementioned waiver, the shares of Series A
Preferred Stock which were classified as redeemable securities at
December 31, 1996 were reclassified as convertible preferred stock at
March 31, 1997 and, as such, are included in stockholders' equity.
On November 26, 1997, the Company completed a private placement of 240
shares of Series B Preferred Stock (the "November Private Placement")
at $25.00 per share to certain investors. Each share of Series A
Preferred Stock and Series B Preferred Stock is convertible by the
holders into shares of the Company's Common Stock at any time. In
addition, all outstanding shares of Series A Preferred Stock will be
automatically converted into shares of Common Stock on December 31,
1999, subject to the satisfaction of certain conditions and events by
the Company, or later under certain circumstances. All outstanding
shares of Series B Preferred Stock will be automatically converted into
shares of Common Stock on November 25, 2000, or at the Company's
option, up to one year later.
- 10 -
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
6. Convertible preferred stock (continued)
The number of shares of Common Stock to be issued upon conversion of
the Series A Preferred Stock is determined by dividing (i) the sum of
$25.00 multiplied by the number of Series A Preferred shares being
converted, plus accrued and unpaid dividends and any unpaid default
payments thereon, by (ii) a conversion price which is approximately 72%
of the then applicable market price of the Company's Common Stock.
The number of shares of Common Stock to be issued upon conversion of
the Series B Preferred Stock is determined by dividing (i) the sum of
$25.00 multiplied by the number of shares of Series B Preferred Stock
being converted, plus accrued and unpaid dividends, by (ii) a
conversion price equal to the lower of (a) the average market price of
the Common Stock or (b) $1.59 per share
Each holder of the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock is entitled to receive, out of funds legally
available therefor, cumulative dividends on each share at the rate of
$1.25 per share per annum, compounded semi-annually and quarterly,
respectively, when payable (whether or not declared). The dividends may
be paid in cash or additional shares of preferred stock (with each
additional share valued at $25.00 per share), at the Company's option.
Dividends must be paid on the Series A Preferred Stock and Series B
Preferred Stock prior to any dividends being paid on any other class of
stock ranking junior thereto.
Pursuant to the Series A Registration Rights Agreement entered into in
connection with the sale of the Series A Preferred Stock, the Company
is required to pay to each holder a default payment in an amount equal
to 3% of the liquidation preference of the Series A Preferred Stock
held for any part of each 30-day period in which (i) the Company fails,
refuses or is unable to cause the securities covered by the
registration statement related to the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock (the "1997 Registration
Statement") to be listed on the exchange on which the Common Stock is
traded, (ii) any holder's ability to sell the securities covered by the
1997 Registration Statement is suspended for more than sixty days in
the aggregate, or (iii) the Company does not have a sufficient number
of shares of Common Stock available to effect conversion of the Series
A Preferred Stock.
7. Net loss per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires the disclosure of both basic
earnings per share, which is based on the weighted average number of
common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares and dilutive
potential common shares outstanding. All prior year earnings per share
data have been restated to reflect the provisions of SFAS 128.
Potential common shares, including outstanding convertible preferred
stock, stock options and warrants, have been excluded from the
calculation of diluted earnings per share for all periods presented as
their effect is anti-dilutive. Per share results of operations are
reduced by the amortization of the beneficial conversion rate on the
Series A Preferred Stock and the cumulative dividend requirements
earned by the preferred stockholders.
- 11 -
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Recent accounting pronouncement
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 for the year ended December 31, 1998 and such adoption
is not expected to have a material effect on its consolidated financial
statements.
9. Comprehensive income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). The Company adopted SFAS 130 effective January 1,
1998. SFAS 130 requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an
annual statement that is displayed with the same prominence as other
annual financial statements. SFAS 130 also requires that an entity
classify items as other comprehensive earnings by their nature in an
annual financial statement. For example other comprehensive earnings
may include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable
securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required.
Total comprehensive loss was as follows:
Six Months Ended June 30,
-------------------------
1998 1997
------- -------
Net loss .................................... $(1,568) $(4,985)
Other comprehensive loss:
Cumulative translation adjustment ........ 80 81
------- -------
Total comprehensive loss .................... $(1,488) $(4,904)
======= =======
- 12 -
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
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this 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, 1997.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license and
royalty fees and development contracts. For the three months ended June 30,
1998, revenues decreased by 14% to $1,200 from $1,397, and for the six months
revenues decreased 1% to $2,566 from $2,595 for the comparable three and six
month periods ended June 30, 1997 as discussed below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Product sales .......... $ 803 $ 995 $1,478 $1,760
License and royalty fees 295 318 888 590
Development contracts .. 102 84 200 245
====== ====== ====== ======
Total revenues ... $1,200 $1,397 $2,566 $2,595
====== ====== ====== ======
Product sales decreased to $803 and $1,478, or by 19% and 16%, respectively, for
the three and six month periods ended June 30, 1998 from $995 and $1,760,
respectively, in the comparable prior year periods. This decrease was due
primarily to the withdrawal of Handwriter products from the retail channel
during the six months ended June 30, 1998. Handwriter product sales decreased
$541 and $861 to $184 and $379, respectively, during the three and six month
periods ended June 30, 1998 compared to $725 and $1,240, respectively, in the
prior year periods. Product sales by the Company's 90% owned joint venture in
The People's Republic of China (the "Joint Venture") increased $112 and $292, or
by 27% and 42%, respectively, for the three and six month periods ended June 30,
1998 to $526 and $983,respectively, compared to $414 and $691, respectively, in
the comparable prior year periods. The increase is primarily due to increases in
sales efforts made possible by an expansion of the sales force during the first
and second quarters of 1998 which offsets a portion of the decline in Handwriter
sales.
Revenues from license and royalty fees for the three month period ended June 30,
1998 decreased $23 or 7% to $295 from $318 in the comparable prior year period.
This decrease was primarily the result of approximately $219 of revenues
recognized during the three month period ended June 30, 1997 on licensing
agreements for which the Company had no further obligation to deliver additional
software or services offset by increased shipments by OEM's of products
incorporating the Company's software.. For the six month period ended June 30,
1998, revenues from license and royalty fees increased $298 or 51% to $888 from
$590 in the comparable prior year period. This increase is primarily
attributable to increases in OEM product shipments bundling the Company's
handwriting recognition software reported by licensees. Revenues recognized on
licensing agreements for which the Company has no further obligation to deliver
additional software or services for the six months ended June 30, 1998 was $404
compared to $383 in the comparable prior year period
- 13 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Development contract revenues for the three month period ended June 30, 1998
increased 21% to $102 from $84 in the comparable prior year period. This
increase resulted from non-grant development revenue from the LA Unified School
District. For the six months ended June 30, 1998, development contract revenue
decreased 18% to $200 from $245 in the comparable prior year period. The decline
is due to reduced grant revenues from the National Science Foundation from the
comparable prior year period.
Cost of sales. Cost of product sales for the three and six month periods ended
June 30, 1998 decreased 56% and 57%, respectively, to $447 and $776,
respectively, from $1,014 and $1,799, respectively, in the comparable prior year
periods. Cost of product sales for the three and six month periods ended June
30, 1998 includes approximately $405 and $709, respectively, of hardware and
software components related to the system integration activities of the Joint
Venture, compared to approximately $323 and $558, respectively, in the prior
year periods. The increase in systems integration costs of product sales for the
three and six month periods ended June 30, 1998 is due to the increase in sales
of such products and was offset by a decrease for the three and six month
periods ending June 30, 1998 of $500 and $875, respectively, in Handwriter(R)
product cost of sales. The decrease in Handwriter(R) product cost of sales is
due to reduced sales of such products for the three and six months ended June
30, 1998 compared to the prior year, and lower product costs. License and
royalty cost of sales decreased approximately $15 and $19, respectively, to $7
and $22, respectively, for the three and six months ended June 30, 1998,
compared to $22 and $41, respectively, for the comparable 1997 periods. Costs
incurred in connection with development contract revenues decreased 37% and 39%
for the three and six months ended June 30, 1998 as compared to the prior year
periods, commensurate with the decrease in contract development revenues in the
first and second quarters of 1998.
Research and development expenses. Research and development expenses for the
three and six month periods ended June 30, 1998 decreased by 18% and 1%,
respectively, to $486 and $1,065, respectively, as compared to $595 and $1,071
in the comparable period of the prior year. The decreases were primarily due to
reductions of approximately $181 and $148, respectively, in payroll and related
costs attributable to a decrease in the number of U.S. based personnel for the
three and six month periods ended June 30, 1998 compared to the same three and
six month prior year periods. Other costs, including facilities and related
costs, increased approximately $72 and $142, respectively, for the three and six
month periods ended June 30, 1998 from the comparable prior year periods. The
increase in other costs was commensurate with the decreased development contract
revenues and increased engineering activities by the Company's Joint Venture.
The Company did not capitalize any software development costs during the three
month periods ended June 30, 1998, and 1997. For the six months ended June 30,
1998 and 1997, the Company did not capitalized any significant software
development costs.
Sales and marketing expenses. Sales and marketing expenses for the three and six
month periods ended June 30, 1998 decreased 54% and 57%, respectively, to $734
and $1,281, respectively, as compared to $1,580 and $2,980 in the comparable
period of the prior year. The decrease for the three and six month periods ended
June 30, 1998 was primarily due to decreases of $483 and $928, respectively, in
advertising and related expenses, and $228 and $450, respectively, in payroll
and related expenses consistent with the Company's new objectives. Other costs
including facilities and related expenses decreased $135 and $321, respectively,
commensurate with overall reductions in staffing. The reductions in staffing and
advertising expenses were primarily due to the withdrawal of the Company's
Handwriter products from the retail channel during the first quarter of 1998, a
reduction in the U. S. based sales force in October 1997, and the closure of the
Japanese sales office in December 1997, respectively.
- 14 -
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 and six month periods ended June 30, 1998 decreased 32% and 14%,
respectively, to $466 and $966 as compared to $690 and $1,119, respectively,
from the comparable periods of the prior year. The decreases were primarily
attributable to decreases of approximately $224 and $233, respectively, in other
costs, including consulting and professional service expenses. The reductions
were offset by increases in allocated facilities and related costs, and an
increase in the administrative activities of the Joint Venture.
Interest income and other income (expense), net. Interest income and other
income (expense), net decreased due to a one time non-cash charge to expense in
March 1997 of $484 for 300 warrants issued on March 28, 1997 to holders of 100%
of the then 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 December Private Placement
(See Note 6 in the Notes to the Condensed Consolidated Financial Statements).
Embedded yield on preferred stock. The embedded yield on preferred stock for the
three and six month periods ended June 30, 1997 results from the discount
feature provided on the conversion of the Series A Preferred Stock into Common
Stock. The embedded yield totaling $4,376 was recognized from the effective
issuance date of December 31, 1996 through July 1, 1997, the date on which the
Series A Preferred Stock first became convertible.
Preferred stock dividend. The preferred stock dividend relates to cumulative
dividends of $1.25 per share, per annum, compounded quarterly and semi-annually,
respectively, whether or not declared, on all of the Company's convertible
preferred stock.
Liquidity and Capital Resources
At June 30, 1998, cash and cash equivalents totaled $1,939 compared to cash and
cash equivalents of $5,485 at December 31, 1997. This decrease was primarily the
result of $3,399 used in operating activities and approximately $453 used to
repay the accounts receivable line of credit. Total current assets were $3,318
at June 30, 1998 compared to $6,215 at December 31, 1997.
As of June 30, 1998, the Company's principal source of liquidity was its cash
and cash equivalents of $1,939. Although there can be no assurance, the Company
believes that its cash and cash equivalents will be sufficient to fund planned
operations for at least the next twelve months. However, if, among other things,
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 $1,713 at June 30,
1998. Deferred revenue, totaling $55 at June 30, 1998, primarily reflects
nonrefundable advance royalty and service fees received from the Company's
customers and 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 the service is performed.
The Company currently owns 90% of a joint venture with The Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of The
- 15 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
People's Republic of China (the "Agency"). In June 1998 the registered capital
of the Joint Venture was reduced from $10,000 to $2,550. Under the old
provisions of the joint venture agreement, the Company could have been required
to contribute up to an aggregate of $5,400 in cash to the Joint Venture and
provide it with non-exclusive licenses to technologies and certain distribution
rights. The Agency was required to contribute certain land use rights and
provide other services to the Joint Venture. As of June 30, 1998, the Company
had contributed an aggregate of $1,800 in cash to the Joint Venture and provided
it with non-exclusive licenses to technologies and certain distribution rights
and the Agency had contributed certain land use rights. Following the reduction
in registered capital of the Joint Venture neither the Company nor the Agency
are required to make further contributions to the Joint Venture. Prior to the
reduction in the amount of registered capital, the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered capital, the Joint Venture's business license has been
renewed through October 18, 2043.. The Company's investment in the Joint Venture
is subject to the 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.
In December 1996, the Company completed a private placement of 450 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 shares sold, 70 shares of redeemable convertible preferred stock were issued
in exchange for 390 shares of Common Stock, originally issued by the Company in
an earlier private placement in June 1996.
On November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each share of Series A and Series B Preferred Stock is convertible by the
holders into shares of Common Stock at any time. In addition, all outstanding
shares of Series A Preferred Stock will be automatically converted into shares
of Common Stock on December 31, 1999, subject to the satisfaction of certain
conditions and events by the Company, or later under certain circumstances. All
outstanding shares of Series B Preferred Stock will be automatically converted
into shares of Common Stock on November 25, 2000, or at the Company's option, up
to one year later.
Generally, the number of shares of Common Stock to be issued upon conversion of
the Series A Preferred Stock is determined by dividing (i) the sum of $25
- 16 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
multiplied by the number of shares being converted, plus accrued and unpaid
dividends thereon and any unpaid default payments, by (ii) a conversion price
(as determined in the certificate of designations for such shares) which is
approximately 72% of the then applicable market price of the Common Stock. The
then applicable market price generally will be determined as follows: (i) if the
holder giving the conversion notice has sold the shares of Common Stock issuable
upon conversion, the market price will be the weighted average of the actual
selling price at which the holder converting has sold the shares of Common Stock
(which may not be less than the lowest trading price on the date of such trade
as reported by the Nasdaq Small-Cap Market), net of normal and customary
commissions and underwriting or dealer spreads, or (ii) if the holder giving the
conversion notice has not sold the shares of Common Stock issuable upon
conversion, the market price will be the average of the daily mean between the
low trading price and the closing price of the Common Stock for each of the
three consecutive trading days prior to the conversion date. The conversion
price is also subject to adjustment for customary dilutive events such as stock
splits, stock dividends, reorganizations and certain mergers.
Generally, the number of shares of Common Stock to be issued upon conversion of
the Series B Preferred Stock is determined by dividing (i) the sum of $25
multiplied by the number of shares being converted, plus accrued and unpaid
dividends thereon, by (ii) a conversion price (as determined in the certificate
of designations for such shares) equal to the lower of (a) the average market
price of the Common Stock, or (b) $1.59 per share. The average market price
generally will be the average of the daily closing prices of the Common Stock
for the three consecutive trading days prior to the conversion date. The
conversion price is also subject to adjustment for customary dilutive events
such as stock splits, stock dividends, reorganizations and certain mergers.
If the average market price of the Common Stock on August 12, 1998 of $1.00 per
share was used to determine the number of shares issuable upon conversion of all
of the shares of Series A and Series B Preferred Stock outstanding as of the
same date, the Company would be obligated to issue an aggregate of approximately
11,738 shares of Common Stock. There is no limitation on the number of shares of
Common Stock that the Company may be required to issue in connection with the
conversion of the Series A and Series B Preferred Stock. The number of shares of
Common Stock issuable upon conversion of, or otherwise with respect to, the
shares of Series A and Series B Preferred Stock is subject to adjustment, and
will likely be different than the amount estimated herein. The exact number is
dependent upon factors which the Company is unable to predict at this time,
including the future market price of the Common Stock.
Pursuant to the Series A Registration Rights Agreement entered into in
connection with the sale of the Series A Preferred Stock, the Company is
required to pay to each holder a default payment in an amount equal to 3% of the
liquidation preference of the Series A Preferred Stock held for any part of each
30-day period in which (i) the Company fails, refuses or is unable to cause the
securities covered by the Registration Statement related to the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock (the "1997
Registration Statement") to be listed on the exchange on which the Common Stock
is traded, (ii) any holder's ability to sell the securities covered by the 1997
Registration Statement is suspended for more than sixty days in the aggregate,
or (iii) the Company does not have a sufficient number of shares of Common Stock
available to effect conversion of the Series A Preferred Stock. Any default
payment which the Company is required to make may have a material adverse effect
on the Company and, if such payment is made by the issuance of additional
shares, may further dilute the ownership interests of the holders of the Common
Stock.
As of August 12, 1998, there were approximately 162 shares of Series A Preferred
Stock and 219 shares of Series B Preferred Stock issued and outstanding.
In October 1997, the Company entered into an accounts receivable financing
agreement whereby the Company has the ability to factor its accounts receivable
in accordance with the terms of the agreement. The maximum credit available to
the Company under the agreement is $1,500, with an advance rate of 80% of the
eligible accounts receivable which are less than 90 days old. The term of the
agreement is twelve months with annual renewals. A financing fee of 2.1% per
month applies to the outstanding balance based on the face value of each
invoice. The line of credit is secured by a blanket first priority lien on all
Company assets with the exception of its intellectual property. As of June 30,
1998, the Company had no outstanding financed accounts receivable under this
agreement. The amounts financed under this agreement at December 31, 1997 were
repaid in January 1998.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $617, $603, $620, and $558 for the years ending December 31, 1998,
1999, 2000 and 2001, respectively. The Company's rent expense is expected to be
reduced by approximately $167 in 1998 in connection with subleases on excess
office space in the United States.
The Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
- 17 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short-term securities.From time to time the Company makes
certain capital equipment or other purchases denominated in foreign currencies.
As a result the Company's cash flows and earnings are exposed to fluctuations in
interest rates and foreign currency exchange rates. The Company attempts to
limit these exposures through operational strategies and generally has not
hedged currency exposures.
Year 2000 Compliance
The Company develops, markets and licenses pen-input and biometric security
software and technologies for the computer, consumer electronics and
communication markets. The Company's products include multi-lingual character
recognition software, signature verification software, biometric security
development tools, and electronic ink compression and electronic note-taking
software. The Company believes that all versions of its products are and have
been Year 2000 compliant. The Company has been assessing internal software
programs and equipment to ascertain the readiness of computer software and
operating systems for the Year 2000. Management of the Company believes the
internal financial and applications software is Year 2000 compliant. The Company
is currently in the process of replacing older desktop PC's which are not, nor
cannot be upgraded to be, Year 2000 compliant. The cost of replacing these
desktop systems is not expected to have a material adverse impact on the
Company's business, financial condition and results of operations. The Company
is still in the process of analyzing its supplier's and customer's readiness
with respect to Year 2000 compliance. There can be no assurance that failure of
the Company's suppliers and customers to rectify their Year 2000 compliance
issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
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.
Certain statements contained in this Quarterly Report on Form 10-Q, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following (1) technological, engineering,
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; (3) the Company's inability to protect its trade
secrets or other proprietary rights, operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
proprietary rights of the Company; and (4) general economic and business
conditions and the availability of sufficient financing.
- 18 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 1, 1998. 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 46,136 shares or 93% of the
eligible outstanding Common Stock of the Company. Four proposals were voted upon
by the stockholders. The proposals and the voting results follow:
Proposal 1
Each of the six persons listed below were 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
---------------- ------ -------- --------- -------
All Classes Michael A. Braun 45,949 187 None None
All Classes James Dao ...... 45,850 286 None None
All Classes Guido DiGregorio 45,915 221 None None
All Classes Jess M. Ravich . 45,950 186 None None
All Classes Philip Sassower 45,950 186 None None
All Classes Jeffrey Steiner 45,949 187 None None
All Classes C. B. Sung ..... 45,854 282 None None
Proposal 2
It was resolved to amend the Company's Certificate of Designation relating to
its first series of 5% Cumulative Convertible Preferred Stock to cause the
dividend and liquidation rights with respect thereto to be pari passu with the
Company's Series B 5% Cumulative Convertible Preferred Stock. The number of
votes for, against and abstaining on this proposal follows:
- 19 -
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Item 4. Submission of Matters to a Vote of Security Holders (continued)
Proposal 2 (continued)
Broker
--------------------
For Against Abstain Non-votes Abstain
------ ------- ------- --------- ---------
All Classes ........ 26,832 427 290 None None
Proposal 3
It was resolved to amend the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 80,000 to 100,000: The number of votes for, against and
abstaining on this proposal follows:
Broker
-------------------
For Against Abstain Non-votes Abstain
------ ----- ------ --------- -------
All Classes ........... 43,884 1,974 278 None None
Common only ........... 43,152 1,974 278 None None
Proposal 4
It was resolved to ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year ending December 31,
1998. The number of votes for, against and abstaining on this proposal follows:
Broker
-------------------
For Against Abstain Non-votes Abstain
------ ----- ------ --------- -------
All Classes ......... 45,901 197 38 None None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
None
- 20 -
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
August 7, 1998 /s/ Guido DiGregorio
- -------------------------- -----------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)