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, 1999
OR
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
--------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
August 12, 1999: 79,568,307.
This Quarterly Report on Form 10-Q contains 21 pages of which this is page 1.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at June 30, 1999 (unaudited) and
December 31, 1998........................................................3
Condensed Consolidated Statements of Operations for the three and six month
periods ended June 30, 1999 and 1998 (unaudited).........................4
Condensed Consolidated Statements of Cash Flows for the six month periods
ended June 30, 1999 and 1998 (unaudited).................................5
Notes to Condensed Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................18
Item 2. Change in Securities.............................................18
Item 3. Defaults Upon Senior Securities..................................18
Item 4. Submission of Matters to a Vote of Security Holders..............18
Item 5. Other Information................................................19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.....................................................19
(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,
1999 1998
-------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,443 $ 795
Restricted cash - 250
Accounts receivable, net 710 1,146
Inventories 58 74
Other current assets 141 103
-------------- --------------
Total current assets 2,352 2,368
Note receivable from officer 158 200
Property and equipment, net 414 539
Other assets 233 247
-------------- --------------
Total assets $ 3,157 $ 3,354
============== ==============
Liabilities and stockholders' equity Current liabilities:
Short-term debt (Note 5) $ 500 $ 145
Accounts payable 252 473
Accrued compensation 248 229
Other accrued liabilities 631 524
Deferred revenue 508 651
-------------- --------------
Total current liabilities 2,139 2,022
Commitments (Note 5)
Stockholders' equity:
Common stock 796 785
Additional paid-in capital 70,778 70,205
Accumulated deficit (70,368) (69,504)
Cumulative translation adjustment (188) (154)
-------------- --------------
Total stockholders' equity 1,018 1,332
============== ==============
Total liabilities and stockholders'
equity (Note 5) $ 3,157 $ 3,354
============== ==============
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,
------------------ -------------------
1999 1998 1999 1998
------- -------- -------- --------
Revenues:
Product $ 787 $ 803 $ 1,560 $ 1,478
License and royalty 592 295 810 888
Development contracts 57 102 313 200
-------- -------- -------- --------
Total revenues 1,436 1,200 2,683 2,566
Operating costs and expenses:
Cost of sales:
Product 494 447 965 776
License and royalty 15 7 32 22
Development contracts 24 53 166 110
Research and development 384 486 681 1,065
Sales and marketing 440 734 831 1,281
General and administrative 485 466 902 966
-------- -------- -------- --------
Total operating costs and expenses 1,842 2,193 3,577 4,220
-------- -------- -------- --------
Loss from operations (406) (993) (894) (1,654)
Interest income and other income
(expense), net 28 38 32 102
Interest expense (Note 5) (2) (2) (2) (16)
-------- -------- -------- --------
Net loss (380) (957) (864) (1,568)
Preferred stock dividend - (143) - (310)
-------- -------- -------- --------
Net loss applicable to common
stockholders $ (380) $(1,100) $ (864) $(1,878)
======== ======== ======== ========
Basic loss per common share (Note 8) $(0.005) $(0.022) $ 0.011) $(0.038)
======== ======== ======== ========
Diluted loss per common share (Note 8)$(0.005) $(0.022) $(0.011) $(0.038)
======== ======== ======== ========
Weighted average common
shares outstanding 79,527 50,884 79,320 49,649
======== ======== ======== ========
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30,
-------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (864) $(1,568)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation and amortization 136 164
Non-cash compensation 42 32
Changes in operating assets and liabilities:
Accounts receivable 436 (499)
Inventories 16 (52)
Other current assets (38) (99)
Other assets - (17)
Accounts payable (221) (673)
Accrued compensation 20
Other accrued liabilities 118 (273)
Deferred revenue (143) (414)
-------- --------
Net cash used in operating activities (498) (3,399)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (43) (35)
-------- --------
Net cash used in investing activities (43) (35)
-------- --------
Cash flows from financing activities:
Principal payments on short-term debt (145) (490)
Principal payments on capital lease obligations - (3)
Proceeds from issuance of short-term debt 500 145
Proceeds from issuance of common stock 584 236
Restricted cash related to short-term debt 250 -
-------- --------
Net cash provided by (used in) financing activities 1,189 (112)
-------- --------
Net decrease in cash and cash equivalents 648 (3,546)
Cash and cash equivalents at beginning of period 795 5,485
========== ========
Cash and cash equivalents at end of period $ 1,443 $ 1,939
======== ========
See accompanying notes.
-5-
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 (collectively,
the "Company" or "CIC", and the subsidiary, individually, the "Joint
Venture") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements
included in this quarterly report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company's results of operations and cash flows for the
periods presented. The Company's interim results are not necessarily
indicative of the results to be expected for the entire year.
The Company develops, markets and licenses pen-input and biometric
security software and technologies for the computer, consumer electronics
and communication markets. The Company's core software technologies
include multilingual handwriting recognition systems (Jot(R) and the
Handwriter(R) Recognition System, referred to as HRS(TM)), dynamic
signature verification and capture tools (InkTools(TM) and Sign-it(TM)),
ink compression (INKshrINK(R)) and operating system extensions that
enable pen input (PenX(TM)). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking
(QuickNotes(TM)) and spell checking utilities (CIC Speller(TM)). CIC's
products are designed to increase the ease of use, functionality and
security of electronic devices ranging from PC peripherals to 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, 1999, the Company's cash and cash
equivalents increased by $648 from $795 at the beginning of the period to
$1,443. The increase is due primarily to cash of $1,189 provided by
financing activities. These increases were offset by $43 used in
investing activities and $498 used in operating activities. The $1,189
provided by financing activities consists primarily of $584 in proceeds
from the exercise of stock options by the Company's employees, and $500
in proceeds from the issuance of short term debt to a charitable
remainder annuity trust, of which an officer and director of the Company
is a trustee. In addition, $105 was provided by the release of restricted
which previously secured a loan from a Chinese bank. The loan was repaid
in February 1999. As of June 30, 1999, the Company's principal source of
funds were its cash and cash equivalents of $1,443. There can be no
assurance that the Company will have adequate capital resources to fund
planned operations in the near future. If the Company does not have
adequate capital resources to fund operations, it may be required to
delay, scale back or eliminate some or all of its operations, which could
have a material adverse effect on the Company's business, results of
operations and prospects.
-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 (continued)
There can be no assurance that any additional funds will be available to
the Company when needed, or if available, will be available on favorable
terms or in amounts required by the Company.
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, 1998.
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, December 31,
1999 1998
--------------------------------------------
Cash in bank $ 743 $ 668
Commercial paper - 125
Money market accounts 700 2
===================== ===================
$ 1,443 $ 795
===================== ===================
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, 1999,
inventory is comprised primarily of finished goods.
4. Note receivable from officer
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the
Company's Common Stock. The note bore interest at the lesser of the
highest marginal rate per annum applicable to the Company's borrowings or
the highest rate allowable by law. On August 14, 1998, the Company
entered into an agreement (the "Agreement") with the former Chief
Executive Officer. Under the Agreement, the former officer has agreed to
provide consulting services to the Company through December 15, 2001. In
exchange for these services, $110 of the note receivable from the officer
will be forgiven on a monthly basis over the period commencing August 15,
1998 and ending December 15, 2001. The remaining $100 of the note
receivable from the officer will be forgiven on December 15, 2001 if the
officer has performed all the required services under the Agreement. The
Agreement will terminate on December 15, 2001.
5. Short-term debt
On June 16, 1999, the Company obtained a bridge loan, (the "Bridge Loan")
in the amount of $500 from a charitable remainder annuity trust, of which
a director and officer of the Company is a trustee. The Bridge Loan bears
interest at the prime rate plus 2%; that was 9.75% at June 30, 1999. The
loan is secured by the Company's cash, accounts receivable and other
receivables as now owned or hereafter acquired by the Company. The Bridge
Loan plus accrued interest is due December 31, 1999.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt (continued)
In June 1998, the Company's 90% owned Joint Venture borrowed the
equivalent of $145, denominated in Chinese currency, from a Chinese bank.
The loan bore interest at 9% and was due on June 30, 1999. The note was
repaid in February 1999. The borrowings were secured by a $250 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 under which 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. There were no amounts financed under the accounts
receivable financing agreement at June 30, 1999. It is unlikely that the
Company will finance additional accounts receivable under this agreement
due to the cessation of the sale of the Company's hardware products in
the retail market .
6. Revenue recognition
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, without
material effect, 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, 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. In
December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP
98-9") "Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 extends the effective date of
SOP 98-4 and provides additional interpretative guidance. SOP 98-9 is
effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue
recognition practice when adopted. Adoption of the remaining provisions
of SOP 97-2 should not have a material impact on revenue recognition
during 1999.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided
that no significant obligations remain and the collection of the
resulting receivable is probable. The Company provides for estimated
sales returns at the time of shipment.
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are
recognized as products are licensed/sold by licensees. Deferred revenue
in the accompanying balance sheets reflects advance royalty fees received
from the Company's licensees in advance of revenue recognition.
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
6. Revenue recognition(continued)
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies.
Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collection is probable and related costs have
been incurred.
7. 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. 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. 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 holder of outstanding shares of Series A Preferred Stock and Series
B Preferred Stock was 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 could have been
paid in cash or additional shares of preferred stock (with each
additional share valued at $25.00 per share), at the Company's option.
The Company paid the required dividends in additional shares of preferred
stock.
Each share of Series A Preferred Stock and Series B Preferred Stock was
convertible by the holders into shares of the Company's Common Stock. All
of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock were converted into shares of common stock by November
1998.
8. Net loss per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic 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 then outstanding convertible preferred stock and 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 for
periods during which preferred stock was outstanding.
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
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
9. Comprehensive income (continued)
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,
------------------------------------
1999 1998
------------ ------------
Net loss $ (864) $ (1,568)
Other comprehensive income:
Cumulative translation adjustment (34) 80
============ ============
Total comprehensive loss $ (898) $ (1,488)
============ ============
10. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information regarding the reporting of operating segments and was
required to be adopted in periods beginning after December 15, 1997. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company adopted SFAS
131 for the year ended December 31, 1998 and the Company's information
concerning segment reporting has been broken down into two segments,
handwriting recognition software and systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment
data includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues into
two categories handwriting recognition and system integration.
Handwriting recognition software is an aggregate of five revenue
categories. All handwriting recognition software is developed around the
company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize
the Company's products. All sales above represent sales to external
customers.
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
10. Segment Information (continued)
The table below presents information about reporting segments for the
periods indicated:
Six months ended June 30,
1999 1998
---------------------------------------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ------ ----------- ----------- --------
Revenues $2,092 $591 $2,683 $ 1,583 $ 983 $ 2,566
Loss from Operations $ (877) $(17) $ (894) $(1,203) $(451) $(1,654)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
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, 1998.
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,
1999, revenues increased by 20% to $1,436 from $1,200, and for the six months
revenues increased 5% to $2,683 from $2,566 for the comparable three and six
month periods ended June 30, 1998 as discussed below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Product sales $ 787 $ 803 $ 1,560 $ 1,478
License and royalty fees 592 295 810 888
Development contracts 57 102 313 200
======= ======= ======= =======
Total revenues $ 1,436 $ 1,200 $ 2,683 $ 2,566
======= ======= ======= =======
Product sales for the three months ended June 30, 1999 decreased to $787 or by
2% from $803 in the comparable prior year period. Handwriter(R) and other
product sales for the three months ended June 30, 1999 decreased $218 or 92% to
$18 from $236 in the prior year period. The decline in Handwriter(R) and other
product sales resulted from the Company's decision in 1997 to focus on software
sales and discontinue hardware sales. This decrease was offset by the increase
of $440 or 1073% in aftermarket consumer software sales via the Company's
website to $481, compared to $41 in the prior year. The increase in aftermarket
consumer software sales resulted from increased direct mail campaigns as
compared to the 1998 comparable quarter. Product sales by the Company's 90%
owned joint venture in The People's Republic of China (the "Joint Venture") were
down 45% to $288 for the three month period ended June 30, 1999 compared to $526
during the same period last year. The decrease primarily resulted from the
absence of a large order completed in the second quarter of 1998.
Product sales for the six months ended June 30, 1999 increased to $1,560 or by
6% from $1,478 in the comparable prior year period. This increase was due to the
increase of $817 or 984% in aftermarket consumer software sales via the
Company's website to $900, compared to $83 in the prior year. The increase in
aftermarket consumer software sales resulted from increased direct mail
campaigns as compared to the 1998 six month period. Handwriter(R) and other
product sales for the six months ended June 30, 1999 decreased $343 or 83% to
$69 from $412 in the prior year period. The decline in Handwriter(R) and other
product sales resulted from the Company's decision in 1997 to focus on software
sales and discontinue hardware sales. Product sales by the Company's 90% owned
joint venture in The People's Republic of China (the "Joint Venture") were down
40% to $591 from $983 for the six month period ended June 30, 1999 compared to
the same period last year. The decrease was primarily due to the absence of two
large orders of $112 and $247 in the first and second quarters of 1998,
respectively.
-12-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Revenues from license and royalty fees for the three month period ended June 30,
1999 increased $297 or 101% to $592 from $295 in the comparable prior year
period. This increase is primarily attributable to new agreements entered into
with existing OEM licensees. For the six month period ended June 30, 1999,
revenues from license and royalty fees decreased $78 or 9% to $810 from $888 in
the comparable prior year period. This decrease was primarily the result of
decreases in reported OEM product shipments bundling the Company's handwriting
recognition software during the six months ended June 30, 1999 compared to the
same period last year. The Company recognized no revenues from licensing
agreements for which the Company has no further obligation to deliver additional
software or services for the six months ended June 30, 1999 compared to $404 in
the comparable prior year period.
Development contract revenues for the three month period ended June 30, 1999
decreased 44% to $57 from $102 in the comparable prior year period. This
decrease resulted from reduced grant revenue from the National Science
Foundation. For the six months ended June 30, 1998, development contract revenue
increased 57% to $313 from $200 in the comparable prior year period. The
increase is due to non-recurring engineering revenues compared to the prior year
period.
Cost of sales. Cost of product sales for the three and six month periods ended
June 30, 1999 increased 11% and 25%, respectively, to $494 and $965,
respectively, from $447 and $776, respectively, in the comparable prior year
periods. Cost of product sales for the three and six month periods ended June
30, 1999 includes approximately $163 and $381, respectively, of hardware and
software components related to the system integration activities of the Joint
Venture, compared to approximately $405 and $709, respectively, in the prior
year periods. The decrease in systems integration costs of product sales for the
three and six month periods ended June 30, 1999 is due to the decrease in sales
of such products. The decrease in system integration costs was offset by
increases over the three and six month periods ending June 30, 1999 of $331 and
$584, respectively, in the Company's web product cost of sales. The increase in
web product cost of sales is due to increased direct mail campaigns as compared
to the three and six months ended June 30, 1998. License and royalty cost of
sales increased approximately $8 and $10, respectively, to $15 and $32,
respectively, for the three and six months ended June 30, 1999, compared to $7
and $22, respectively, for the comparable 1998 periods. The increase is due to
increased technology import tax on the higher Japanese OEM shipments bundling
the Company's handwriting recognition software. Costs incurred in connection
with development contract revenues decreased 55% to $24 for the three months
ended June 30, 1999 as compared to $53 in the prior period, commensurate with
the decrease in contract development revenues. For the six months ended June 30,
1999, contract development costs increased 51% to $166 as compared to $110 in
the prior period. The increase is commensurate with the increase in contract
development revenues over the six months ended June 30, 1999 compared to the
same period last year.
Research and development expenses. Research and development expenses for the
three and six month periods ended June 30, 1999 decreased by 21% and 36%,
respectively, to $384 and $681, respectively, as compared to $486 and $1,065 in
the comparable period of the prior year. The decreases were primarily due to
reductions of approximately $20 and $200, 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, 1999 compared to the same three and
six month prior year periods. Other costs, including facilities and related
costs, decreased approximately $81 and $184, respectively, for the three and six
month periods ended June 30, 1999 from the comparable prior year periods. The
decrease in other costs was commensurate with the decreased number of U.S. based
personnel. The Company did not capitalize any significant software development
costs in the three and six month periods ended June 30, 1999, and 1998.
Sales and marketing expenses. Sales and marketing expenses for the three and six
month periods ended June 30, 1999 decreased 40% and 35% to $440 and $831,
respectively, as compared to $734 and $1,281 in the comparable periods of the
prior year. The decreases were primarily due to decreases of $174 and $302 in
salaries and related costs due to reductions in U.S. based personnel associated
with the Joint Venture operations in the first and second quarters of the prior
year. Other costs, including travel and facilities and related expenses,
decreased $120 and $140, respectively, compared to the same periods last year,
commensurate with reductions in staffing.
-13-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
General and administrative expenses. General and administrative expenses for the
three month period ended June 30, 1999 increased 4% to $485 as compared to $466
in the comparable period of the prior year. This increase was primarily
attributable to a an increase in other costs, including professional services,
of $36. This increase was offset by a reduction of approximately $17 in payroll
and related costs due to reductions in personnel associated with the Joint
Venture operations in the first quarter of the prior year. For the six months
ended June 30, 1999, general and administrative expenses decreased 7% to $901
compared to $966 in the comparable prior year period. This decrease was due to a
reduction of $34 and $18 in payroll and related expenses, and other costs,
respectively, associated to the reductions in personnel associated with the
Joint Venture operations in the first and second quarters of the prior year.
Interest and other income (expense), net. Interest and other income (expense),
net, decreased for the three and six months ended June 30, 1999 due to the
increase in credit card processing fees associated with internet sales. The
decrease was offset by the extinguishment of debt and associated interest
related to the factoring of accounts receivable and equipment purchased in 1997.
The associated debt was paid off in January and June of 1998, respectively.
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 the convertible preferred stock
outstanding during the three and six month periods ended June 30, 1998. All
Series A Preferred and Series B Preferred Stock was converted into shares of
common stock by November 1998. Accordingly, no preferred stock dividends were
paid in 1999.
Liquidity and Capital Resources
At June 30, 1999, cash and cash equivalents totaled $1,443 compared to cash and
cash equivalents of $795 at December 31, 1998. The increase is due primarily to
cash provided by financing activities consisting of $584 in proceeds from the
exercise of stock options by the Company's employees and $500 from the Bridge
Loan obtained from a charitable remainder annuity trust, of which a director and
officer of the Company is a trustee. These increases were offset by $498 used in
operating activities and $43 used in investing activities. Total current assets
were $2,352 at June 30, 1999 compared to $2,368 at December 31, 1998, and total
current liabilities were $2,139 compared to $2,022 for the same periods
As of June 30, 1999, the Company's principal source of liquidity was its cash
and cash equivalents of $1,443. Although there can be no assurance, the Company
believes that its cash and cash equivalents together with cash provided from the
Bridge Loan and projected revenues will be sufficient to fund planned operations
in the near future. 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 $2,139 at June 30,
1999. Deferred revenue, totaling $508 at June 30, 1999, primarily reflects
nonrefundable advance royalty fees received from the Company's licensees which
are generally recognized as revenue by the Company in the period in which
licensees report that products incorporating the Company's software have been
shipped. As such, the period over which such deferred revenue will be recognized
as revenue is uncertain because the Company cannot presently determine either
the timing or volume of future shipments by its licensees. In addition, current
liabilities include a Bridge Loan of $500 from a charitable remainder annuity
trust, of which a director and officer of the Company is a trustee. The Bridge
Loan bears interest at the prime rate plus 2%; that was 9.75% at June 30, 1999.
The loan is secured by the Company's cash, accounts receivable and other
receivables as now owned or hereafter acquired by the Company. The Bridge Loan
plus accrued interest is due December 31, 1999.
-14-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
The Company currently owns 90% of a joint venture with the Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of the
People's Republic of China (the "Agency"). In June 1998, the registered capital
of the Joint Venture was reduced from $10,000 to $2,550. As of June 30, 1999,
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 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 (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. 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. 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 holder of outstanding shares of Series A Preferred Stock and Series B
Preferred Stock was 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 could have been paid in cash or
additional shares of preferred stock (with each additional share valued at
$25.00 per share), at the Company's option. The Company paid the required
dividends in additional shares of preferred stock. Each share of Series A
Preferred Stock and Series B Preferred Stock was convertible by the holders into
shares of the Company's Common Stock. All of the outstanding shares of Series A
Preferred Stock and Series B Preferred Stock were converted into shares of
common stock by November 1998.
In October 1997, the Company entered into an accounts receivable financing
agreement under which 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, 1999, the Company had no outstanding financed accounts receivable under this
agreement. It is unlikely that the Company will finance additional accounts
receivable under this agreement due to the cessation of the sale of the
Company's hardware products in the retail market.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $603, $620, and $558 for the years ending December 31, 1999, 2000,
and 2001, respectively. The Company's rent expense is expected to be reduced by
approximately $129 in 1999 in connection with the subleases it has granted on
excess office space in the United States.
-15-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
Year 2000
Year 2000 issues arise because most computer systems and programs were designed
to handle only a two-digit date code for the year, not a four-digit code. Thus,
the Year 2000 could be interpreted as the year 1900 by such computer systems and
programs, resulting in the incorrect processing of data. CIC's software products
as developed and distributed by CIC are not date sensitive and therefore Year
2000 issues are not applicable to such products. The Company has evaluated its
internal software programs and equipment to ascertain the readiness of computer
software and operating systems for the Year 2000. Management of the Company
believes that its internal software programs are Year 2000 compliant. The
Company replaced older desktop PC's which were not, and could not be upgraded to
be, Year 2000 compliant. The replacement of such older computer equipment has
been completed. The cost of replacing these desktop systems was not significant.
The Company is not aware of any other hardware related problems.
The Company is in the process of analyzing the readiness of third parties with
which it does business. The Company believes that the only potentially
significant Year 2000 problems it may experience will result from Year 2000
issues affecting its website or its banks. The Company generates a significant
percentage of revenues from sales made via its website. If the Company's website
were to go off-line for an extended period of time, income would be
significantly impacted until service was restored. The Company has received
assurances that its website is Year 2000 compliant; however, it has not received
any information regarding the phone carrier that links the website server to the
internet. The Company believes that it is not possible to develop a contingency
plan at this time for dealing with the potential effects of such an event. If
banking systems were to fail due to Year 2000 problems, the Company may be cut
off from access to some of its funds for a period of time. The Company maintains
its cash with various financial institutions so that an incident at any one bank
would not have a material adverse impact on the Company's cash availability.
Future Results and Stock Price
The Company's stock price may be subject to significant volatility. The public
stock markets have experienced significant volatility in stock prices in recent
years. The stock prices of technology companies have experienced particularly
high volatility, including, at times, severe price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, announcements of new strategic relationships by the
Company or its competitors, general conditions in the computer industry or the
global economy generally, or market volatility unrelated to the Company's
business and operating results.
Certain statements contained in this Quarterly Report on Form 10-Q, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following (1) technological, engineering,
manufacturing, quality control or other circumstances which could delay the sale
or shipment of 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.
-16-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
-17-
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
For the six months ended June 30, 1999 the Company has granted stock
options to employees and directors for services
rendered as follows:
- --------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
- --------------------------------------------------------------------------------
Employees(34) January 12, 1999 9,528,261 $ 0.7500 Quarterly January 12, 2006
over three
years
Employees(16) June 7, 1999 300,000 $ 1.1875 Quarterly June 7, 2006
over three
years
Non-Employee
Directors(3) June 7, 1999 75,000 $ 1.1875 Upon grant June 7, 2006
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(in thousands, except percentages)
The Company held its Annual Meeting of Stockholders on June 7, 1999. 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 69,821 shares or 88% 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 five 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
---------------- ------ -------- --------- -------
Guido DiGregorio 69,397 424 None None
Jess M. Ravich 69,274 546 None None
Philip Sassower 69,361 460 None None
Jeffrey Steiner 69,383 437 None None
C. B. Sung 69,388 432 None None
Proposal 2
To approve the Company's 1999 Stock Option Plan. The number of votes for,
against and abstaining on this proposal was as follows:
Broker
-------------------------
For Against Abstain Non-votes Abstain
------ ------- ------- --------- -------
All Classes 67,337 1,756 231 None None
-18-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Proposal 3
To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending December 31, 1999. The
number of votes for, against and abstaining on this proposal was as follows:
Broker
-------------------------
For Against Abstain Non-votes Abstain
------ ------- ------- --------- -------
All Classes 69,481 288 52 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
-19-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
------------------------------------------------
Registrant
August 12, 1998 /s/ Guido DiGregorio
- -------------------------- ------------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-20-