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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 520, Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of August 12,
1996: 41,937,898.
This Quarterly Report on Form 10-Q contains 12 pages of which this is
page 1.
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets, at June 30, 1996 and
December 31, 1995..........................................3
Condensed Consolidated Statements of Operations, for the three and
six month periods ending June 30, 1996 and 1995............4
Condensed Consolidated Statements of Cash Flows, for the
six-month periods ending June 30, 1996 and 1995............5
Notes to Condensed Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders.......11
------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.........................................11
(b) Reports on Form 8-K..............................11
Signatures.........................................................12
<PAGE>
See accompanying notes.
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
Assets 1996 1995 (A)
-------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents .......................... $ 3,873 $ 5,924
Short-term investments ............................. 2,099 1,535
Note receivable from officer ....................... -- 210
Accounts receivable, net ........................... 350 381
Inventories ........................................ 491 249
Other current assets ............................... 383 400
-------- --------
Total current assets ........................... 7,196 8,699
Note receivable from officer ............................ 210 --
Property and equipment, net ............................. 412 336
Capitalized software development costs, net ............. 49 88
Other assets ............................................ 638 653
-------- --------
Total assets ................................... $ 8,505 $ 9,776
======== ========
Liabilities and stockholders' equity Current liabilities:
Short-term debt .................................... $ 100 $ 30
Accounts payable ................................... 261 437
Pre-petition liabilities - current ................. 873 822
Accrued compensation ............................... 282 282
Other accrued liabilities .......................... 475 761
Deferred revenue ................................... 2,334 2,570
Obligations under capital leases - current ......... 16 34
-------- --------
Total current liabilities ...................... 4,341 4,936
Obligations under capital leases - noncurrent ........... 8 8
Pre-petition liabilities - noncurrent ................... -- 822
Commitments
Stockholders' equity:
Common stock ....................................... 419 400
Additional paid-in capital ......................... 54,875 51,687
Accumulated deficit ................................ (50,990) (47,991)
Cumulative foreign currency translation adjustment . (148) (86)
-------- --------
Total stockholders' equity ..................... 4,156 4,010
======== ========
Total liabilities and stockholders' equity ..... $ 8,505 $ 9,776
======== ========
</TABLE>
A. The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date (see Note 1).
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Product ..................... $ 46 $ 120 $ 187 $ 296
License and royalty ......... 162 16 293 49
Development contract ........ 470 327 837 612
-------- -------- -------- --------
678 463 1,317 957
Operating costs and expenses:
Cost of sales:
Product .................. 24 78 120 132
Development contract ..... 334 131 567 192
Other costs .............. 111 76 214 171
Research and development .... 479 493 927 1,018
Sales and marketing ......... 803 595 1,517 1,178
General and administrative .. 535 619 1,029 966
-------- -------- -------- --------
2,286 1,992 4,374 3,657
-------- -------- -------- --------
Loss from operations ............. (1,608) (1,529) (3,057) (2,700)
Interest and other income ........ 75 52 155 107
Interest expense ................. (18) (40) (97) (80)
-------- -------- -------- --------
Net loss ................ $ (1,551) $ (1,517) $ (2,999) $ (2,673)
======== ======== ======== ========
Net loss per common share $ (0.04) $ (0.04) $ (0.07) $ (0.08)
======== ======== ======== ========
Weighted average common
shares outstanding . 40,925 33,925 40,533 33,832
======== ======== ======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
------- -------
1996 1995
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net loss ................................................. $(2,999) $(2,673)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ....................... 144 199
Net (increase) decrease in operating assets and
liabilities:
Accounts receivable
Inventories ..................................... 31 43
Prepaid expenses and other current assets ....... (242) (131)
Accounts payable and accrued compensation ....... 17 66
Deferred revenues ............................... (176) 230
Pre-petition liabilities ........................ (236) (32)
Other accrued liabilities ....................... (771) (1,117)
(286) (254)
------- -------
Net cash used in operating activities ........... (4,518) (3,669)
------- -------
Cash flows from investing activities:
Sale of short-term investments ...................... 6,065 --
Purchase of short-term investments .................. (6,629) --
Acquisition of property and equipment ............... (146) (74)
Increase in capitalized software costs .............. -- (10)
Increase in other assets ............................ (20) (3)
------- -------
Net cash used in investing activities ........... (730) (87)
------- -------
Cash flows from financing activities:
Principal payments on short-term debt ............... (30) (118)
Principal payments on capital lease obligations ..... (18) (34)
Proceeds from issuance of note payable .............. 100 500
Proceeds from issuance of common stock .............. 3,207 87
------- -------
Net cash provided by financing activities ....... 3,259 435
------- -------
Effect of exchange rate changes on cash .................. (62) (13)
------- -------
Net decrease in cash and cash equivalents ................ (2,051) (3,334)
Cash and cash equivalents at beginning of quarter ........ 5,924 4,088
======= =======
Cash and cash equivalents at end of quarter (See note 2) . $ 3,873 $ 754
======= =======
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1996 1995
------- -------
Schedule of non-cash transactions:
<S> <C> <C>
Issuance of common stock in exchange
for pre-petition liabilities ............................. $ -- $188
======= =======
Issuance of stock purchase warrants in conjunction
with short term debt ..................................... $ -- $ 90
======= =======
Reclassification of current note receivable from
officer to non-current ................................... $ 210 $ --
======= =======
</TABLE>
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements
included in this report reflect all adjustments (consisting only of
normal recurring adjustments) which Communication Intelligence
Corporation (the "Company" or "CIC") considers necessary for a fair
presentation of its financial position at the dates and its results of
operations and cash flows for the periods presented. The interim
results are not necessarily indicative of the results to be expected
for the entire year.
This financial information should be read in conjunction with the
Company's audited financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1995.
Certain prior period amounts in the financial statements have been
reclassified to conform with the current period presentation.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Short-term investments are classified as "available-for-sale" and are
stated at fair value. Any unrealized gains or losses are reported as a
separate component of stockholders' equity, but, to date, have not been
significant.
Cash and cash equivalents included certain highly liquid investments
with original maturities of up to 90 days as follows:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Cash in bank ........................ $2,744 $ 441
U.S. Corporate Securities ........... -- 5,483
Other Debt Securities ............... 1,129 --
====== ======
$3,873 $5,924
====== ======
</TABLE>
Short-term investments consisted of the following available-for-sale
securities as follows:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
------ ------
(In thousands)
<S> <C> <C>
U.S. Corporate Securities .................... $1,499 $ 998
Other Debt Securities ........................ 600 537
------ ------
$2,099 $1,535
====== ======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues for the quarter and six months ended June 30, 1996 increased by 46% and
38% to $678,000 and $1,317,000 respectively, from the comparable three and six
month periods of the prior year. Revenues are comprised of product sales,
license and royalty fees, and development contract revenues. The increases are
principally due to higher license and royalty fees and development contract
revenues as discussed below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands)
1996 1995 1996 1995
------ ------ ------ ------
Revenues:
<S> <C> <C> <C> <C>
Product sales .................. $ 46 $ 120 $ 187 $ 296
License and royalty fees ....... 162 16 293 49
Development contract ........... 470 327 837 612
====== ====== ====== ======
Total Revenues ........... $ 678 $ 463 $1,317 $ 957
====== ====== ====== ======
</TABLE>
Product sales for the three and six months ended June 30, 1996 decreased to
$46,000 and $187,000 compared to $120,000 and $296,000 respectively in the prior
year periods. The decline in Product sales for the three months ended June 30,
1996 was due to reduced unit orders from the Company's distributors. The
reduction in unit sales to distributors was offset in part by an increase in
unit sales to corporate and retail accounts and sales direct to end users. The
decline in Product sales for the six months ended June 30, 1996, was also due to
reductions in MacHandwriter II unit sales by the Company's Japanese subsidiary.
Since the second quarter of 1994, the Company has concentrated its domestic
sales effort on distributors and catalog resellers. In 1995, the Company began a
limited entry into the retail and corporate markets with its domestic Handwriter
products. The Company plans to expand its retail and corporate market sales
efforts during 1996. There can be no assurance that the Company will be
successful in its efforts to broaden its corporate and retail market
distribution.
Revenues from license and royalty fees for the three and six month periods ended
June 30, 1996 increased to $162,000 and $293,000 from $16,000 and $49,000
respectively in the comparable prior year periods. This increase is primarily
the result of higher shipment volumes by the Company's licensees.
Development contract revenues for the three and six month period ended June 30,
1996 increased 44% and 37% to $470,000 and $837,000 compared to $327,000 and
$612,000 respectively in the comparable prior year periods. The increase is due
to increased operational and marketing activities by the Company's 79% owned
joint venture in The Peoples Republic of China (the "Joint Venture"), compared
to the same periods last year. The increases for the three and six month periods
were offset in part by a decrease in revenues attributable to a grant from the
US Government's National Institute of Standards and Technology ("NIST") which
expired in April 1996. For the six months period ended June 30, 1996, revenue
attributable to the NIST grant was $91,000 compared to $332,000 during the
comparable prior year period. The NIST grant was awarded in December 1993 to
supplement the Company's development of a recognition system for the Chinese
language.
Cost of sales includes the costs of materials, procurement, warehousing, and
related personnel in connection with the sales of the Company's products as well
as the amortization of capitalized software development costs. Costs incurred in
connection with the NIST grant, included in development contract revenue, are
expensed as incurred and are included in research and development expenses. Cost
of sales for the three and six month periods increased to $469,000 and $901,000
as compared to $285,000 and $495,000 for the comparable periods of the prior
year. The increases are attributable to a shift in the revenue mix to lower
margin development contract revenues generated by the Joint Venture, and
increases in the costs of procurement, warehousing, and related personnel.
Amortization of software development costs declined to $17,000 and $39,000
respectively for the three and six month periods ended June 30, 1996 as compared
to $32,000 and $81,000 respectively for the comparable periods of the prior
year.
Research and development expenses for the three and six month periods ended June
30, 1996 decreased by 3% and 9% to $479,000 and $927,000 respectively as
compared to $493,000 and $1,018,000 respectively during the comparable periods
of the prior year. The decreases are primarily attributable to decreases in the
purchase of outside development services, and the reduction of other overhead
costs.
Sales and marketing expenses for the three and six month periods ended June 30,
1996 increased 35% and 29% to $803,000 and $1,517,000 as compared to $595,000
and $1,178,000 respectively in the comparable periods of the prior year. These
increase are primarily due to additions in staffing and related costs in support
of heightened sales activities in the U. S. and China.
General and administrative expenses for the three month period ended June 30,
1996 decreased 14% to $535,000 as compared to $619,000 in the comparable period
of the prior year. For the six months ended June 30, 1996, general and
administrative expenses increased 7% to $1,029,000 as compared to $966,000 in
the comparable period of the prior year The decrease during the three month
period ended June 30, 1996 is due to non recurring recruiting expenses related
to the search for a senior executive officer in the comparable period of the
prior year. The increase over the six months ended June 30, 1996 reflects
increased costs of professional services, insurance, and personnel and related
costs.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments totaled $5,972,000 at June
30, 1996, compared to cash, cash equivalents and short-term investments of
$7,459,000 at December 31, 1995. This decrease was primarily the result of
$4,518,000 used in operating activities offset by $3,259,000 provided by
financing activities as discussed below. Total current assets were $7,196,000 at
June 30, 1996 compared to $8,699,000 at December 31, 1995.
Current liabilities, which include deferred revenue, were $4,341,000 at June 30,
1996. Deferred revenue, totaling $2,334,000 at June 30, 1996, primarily reflects
nonrefundable advance royalty fees received from the Company's licensees which
are generally recognized as revenue by the Company in the period in which
licensees report that products incorporating the Company's software have been
shipped. As such, the period over which such deferred revenue will be recognized
as revenue is uncertain because the Company cannot presently determine either
the timing or volume of future shipments by its licensees. Under the terms of
the Company's agreement with IBM, the Company is obligated to share certain
royalties from third parties with IBM when earned.
In June 1996, the Company completed a private placement of 600,000 shares of the
Company's common stock, at a price of $4.50 per share, subject to certain
adjustments. The net proceeds to the Company was approximately $2,523,000. The
Company has agreed to register, under the Securities Act, the shares issued in
the private placement.
In 1993, the Company formed the Joint Venture with The Ministry of Electronic
Industries of Jiangsu Province (the "Government") of The People's Republic of
China. The Joint Venture, Communication Intelligence Computer Corporation, Ltd.
("CICC"), is 79% owned by the Company. Under the provisions of the joint venture
agreement, in exchange for 79% ownership, the Company is to contribute up to
$5.4 million in cash, and the Company will provide non-exclusive licenses to
technology and certain distribution rights. The Government will contribute
certain land use rights and provide other services for the joint venture. As of
June 30, 1996, the Company had contributed $900,000 in cash and had provided
non-exclusive licenses to technology and certain distribution rights, while the
Government had contributed certain land use rights. In February 1996, CICC
repaid borrowings of approximately $30,000 denominated in Chinese currency to a
local bank. In May 1996, the Joint Venture borrowed the approximate equivalent
of $100,000 denominated in Chinese currency from a local bank. The note bears
interest at 8% and is due in August 1996.
As of June 30, 1996, the Company's principal source of liquidity was its cash,
cash equivalents and short-term investments of $5,972,000. The Company believes
that the above mentioned funds, together with anticipated revenues, are adequate
to meet projected working capital and other cash requirements through the end of
1996.
Future Results and Stock Price
The Company's future earnings and stock price may be subject to significant
volatility. The public stock markets have exhibited extreme volatility in stock
prices in recent years. The stock prices of high technology companies have
experienced particularly high volatility, including at times severe price
changes that are unrelated or disproportional to the operating performance of
these specific companies. The trading price of the Company's Common Stock could
be subject to wide fluctuation in response to, among other factors,
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating results.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual General Meeting of stockholders on May 20,
1996. 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 35,906,473
shares or 89 percent of the eligible outstanding Common Stock of the Company.
Three proposals were voted upon by the stockholders. The proposals and the
voting results follow:
Proposal 1
Each of the six persons listed below were re-elected as directors to
serve until the next Annual General 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.
<TABLE>
<CAPTION>
Name For Withheld
- --------------------------- ------------------- ------------------
<S> <C> <C>
George P. Clayson III 35,869,970 36,503
James Dao 35,858,270 48,203
Michael McFarland 35,858,270 48,203
Philip Sassower 35,868,170 38,303
Dr. Donald R. Scheuch 35,851,520 54,953
C. B. Sung 35,869,620 36,853
</TABLE>
Proposal 2
It was resolved to increase the number of Common Shares available for
issuance under the Company's 1994 Stock option plan. The number of votes for,
against and abstaining on this proposal follows:
<TABLE>
<CAPTION>
For Against Abstain
- ------------------- ------------------ ------------------
<S> <C> <C> <C>
34,540,916 1,231,645 133,912
</TABLE>
Proposal 3
It was resolved that KPMG Peat Marwick LLP be appointed as auditors of
the Company for the fiscal year ending December 31, 1996 and that the Board of
Directors be authorized to fix the remuneration to be paid to the auditors. The
number of votes for, against and abstaining on this proposal follows:
<TABLE>
<CAPTION>
For Against Abstain
- ------------------- ------------------ ------------------
<S> <C> <C> <C>
34,540,916 1,231,645 133,912
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K
On June 27, 1996 the Company filed a Form 8K under ITEM 5, Other
Events, regarding the private placement of 600,000 shares of the
Company's Common Stock, and the approval of its common shares for
quotation on the NASDAQ SmallCap market.
<PAGE>
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, 1996 /s/ Francis V. Dane
- -------------- ---------------------------------------
Date Francis V. Dane
Vice President, Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from June 30, 1996
Form 10-Q Financial Statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000727634
<NAME> Communication Intelligence Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,873
<SECURITIES> 2,099
<RECEIVABLES> 350
<ALLOWANCES> 0
<INVENTORY> 491
<CURRENT-ASSETS> 7,196
<PP&E> 412
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,505
<CURRENT-LIABILITIES> 4,341
<BONDS> 0
0
0
<COMMON> 419
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,505
<SALES> 187
<TOTAL-REVENUES> 1,317
<CGS> 901
<TOTAL-COSTS> 2,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (97)
<INCOME-PRETAX> (2,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,999)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
