<PAGE>
Amendment No. 1
to
FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Annual Report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the fiscal year ended: December 31, 1995.
- ----- 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
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 802-7888
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the registrant 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 been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicated by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1996, based upon the closing sales price of the
Common Stock on March 25, 1996, reported on NASDAQ, was approximately
$111,724,000. For the purpose of this disclosure, Common Shares held by persons
who hold more than 5% of the outstanding voting shares and Common Shares held by
officers and directors of the Registrant have been excluded in that such persons
may be deemed to be "affiliates" as the term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination is
not necessarily conclusive for any other purpose.
The number of shares outstanding of the registrant's Common Stock, as of
March 25, 1996, was approximately 40,268,335.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1996
are incorporated by reference into Part III.
A list of all Exhibits to this Form 10-K begins on page 16.
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. Page
----
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder 8
Matters
9
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
14
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting 14
and Financial Disclosure
PART III
15
Item 10. Directors and Executive Officers of the Registrant
15
Item 11. Executive Compensation
15
Item 12. Security Ownership of Certain Beneficial Owners and Management
15
Item 13. Certain Relationships and Related Transactions
PART IV
16
</TABLE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
CIC and its logo, HandwriterAE, MacHandwriterAE, PenDOSAE, PenMAC(R),
INKshrINK(R), and Creativity Tool(R), are registered trademarks of the Company.
Zorro(TM), Dynamic Signature Verification(TM), InkSentry(TM), and YPad(TM) are
trademarks of the Company. Applications for registration for various trademarks
are in process in the United States, France, Germany, Italy, Japan, Spain and
the United Kingdom. All other brand names or trademarks appearing in this Form
10-K are the property of their respective holders.
2
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
PART I
Item 1. Business
GENERAL
Communication Intelligence Corporation (the "Company" or "CIC") was
initially incorporated in Delaware on October 1, 1986 as a wholly-owned
subsidiary of a predecessor corporation of the same name incorporated in
California on November 18, 1981. CIC has one wholly-owned operating subsidiary,
CIC Japan, Inc. ("CIC Japan"), incorporated on February 14, 1984 in Japan and
has a 79% owned subsidiary, Communication Intelligence Computer Corporation,
Ltd., a joint venture formed in the People's Republic of China (the "Joint
Venture") in September 1993.
CIC develops and markets natural input, computer interface, handwriting
recognition, and data security technologies and products to satisfy emerging
markets. These emerging markets include all areas of personal computing as well
as electronic commerce and communications
In July of 1994 the Company petitioned for protection under Chapter 11
of the United States Bankruptcy Code with the primary purposes of restructuring
the Company, reorganizing its debt, and protecting its shareholder equity. On
November 14, 1994 the Company's pre-petition creditors approved and the United
States Bankruptcy Court confirmed the Company's Plan of Reorganization (Plan).
The Plan provides for the payment in full, in cash, of all allowed unsecured
claims of creditors while leaving secured creditors unimpaired by providing for
their payment in compliance with the original terms and conditions of their
loans. Creditors are to be paid in three approximately equal installments. The
first two installments were made in February of 1995 and 1996, respectively. The
third installment will be made in February 1997.
In November 1995, the Company completed a private placement of 5,500,000
shares of the Company's common stock, at a price of $2.00 per share, subject to
certain adjustments. The net proceeds to the Company was $10.3 million. The
Company has agreed to register the shares issued in the private placement under
the Securities Act.
CIC's strategic vision is to accelerate the worldwide adoption of pen
computing applications through the establishment of a global, strategic business
alliance network. To achieve this objective, CIC has engaged KPMG BayMark
Capital LLC to assist in the formation of a series of strategic business
alliances on a worldwide basis with other corporations or business entities. The
Company believes that if achieved, this vision will bring the benefits of pen
computing to computer users worldwide, while creating profitable opportunities
both for itself and its strategic business partners. There can be no assurance
that the Company will be able to establish strategic business alliances or, if
established, such alliances will be profitable for the Company.
The Company is pursuing a three-pronged revenue generation strategy for
its products and services. The Company (1) licenses its products to Original
Equipment Manufacturers (OEMs) and Independent Software Vendors (ISVs) who
reproduce and market them in conjunction with their own products, (2) sells its
end-user products, such as the MacHandwriter and Handwriter for Windows, through
independent sales representatives, distributors, strategic relationships, and
corporate sales, and (3) provides system integration services and markets CIC's
pen-based business computer systems to Chinese business and government users
through its joint venture in the People's Republic of China.
3
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
CORE TECHNOLOGIES AND END USER PRODUCTS
- ---------------------------------------
The Company offers a wide range of hardware and software products for
pen-based computing built on the Company's core handwriting recognition and
related technologies. The Company's core technologies are classified into two
broad categories, natural input and transaction and communication enabling
technologies.
CIC's natural input technologies allow people to interact with a
computer by use of an electronic pen. CIC believes using a pen is the most
natural, healthy and efficient way of interacting with a computer. An electronic
pen is an ideal complement to a keyboard, and the Company believes that it
enhances productivity and creativity, and reduces the risk of repetitive stress
illness (RSI).
Transaction and communication enabling technologies facilitate
economical and timely completion of protected electronic transactions and
discretionary communications. CIC believes users of these technologies will
benefit from productivity increases, user authentication and heightened data
security. CIC's transaction and communication enabling technologies portfolio
includes software for signature verification, data security, data compression,
and operating environments. In addition to software applications such as YPad
and E-mail ink annotation, CIC has developed Dynamic Signature Verification
(DSV). DSV is a sophisticated software program for the verification of peoples'
signatures, which can be used as a security device. The Company plans to
extend its products and technologies to take them onto the Internet; however
these plans are in a preliminary stage and no assurance can be given that the
Company will be successful in this regard.
CIC has also developed two desktop pen computing end user products,
Handwriter for Windows, and MacHandwriter. These Handwriter products combine
software and hardware into "all-in-one" input devices for easy pen entry of
graphics, text, and commands. Handwriter products have been carefully designed
so that they are compatible with already installed user applications for Windows
and Macintosh platforms. CIC has positioned the Handwriter products to
complement the keyboard and perform as an ergonomic editing tool. Studies have
shown that 80% of computer user's time is spent editing, and RSI is of major
concern to computer users today. CIC believes Handwriter products enhance
productivity in editing documents, while helping to reduce the risk of RSI.
CIC is also planning the development of new versions of Handwriter which
would be suitable for the growing population of laptop computer users. Actual
development of these versions has not commenced and no assurance can be given
that they will be successfully developed or commercialized. Pen input devices
are particularly attractive to laptop users who are often dissatisfied with the
small trackballs and touch pads which accompany most laptops. Laptops equipped
with Handwriter will allow corporate field sales forces to automate sales by
capturing signatures electronically.
Handwriter for Windows also comes with other bundled applications such
as YPad and E-mail ink annotation. YPad is an electronic notepad. E-mail ink
annotation is a handwriting application that is specifically designed for E-mail
users and allows for electronic annotation on documents. The Company believes
these applications significantly enhance the functionality of Handwriter
products. CIC's Handwriter for Windows and MacHandwriter, along with the PenDOS
and PenMac operating environments have been recognized by industry experts as
leading offerings in the field of pen input technology.
COPYRIGHTS, PATENTS AND TRADEMARKS
- ----------------------------------
CIC's products are protected by a range of copyrights, patents,
trademarks and trade secret laws. The original character recognition technology
processes employed in the Company's products were developed and patented by SRI
International (SRI), and SRI assigned those patents to CIC. The patents assigned
to the Company by SRI expired or expire between 1993 and 1996. Other major
elements of the product technology were developed by CIC and are patented in the
United States and overseas. The Company does not believe that the expiration of
the patents received from SRI will have a significant impact on the operations
of the Company since CIC has made significant
4
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
improvements to the original technology, producing additional patents which have
been received or patent applications which are pending. The Company's internally
developed patents expire between 1998 and 2005.
While CIC's patents protect the methodology of its products, the
implementation of that methodology is protected by copyright law. Recently,
courts in the United States and throughout the world have been providing
expanding copyright protection to software developers. The Company believes that
its intellectual property rights are entitled to protection under current
copyright law.
CIC and its logo, Handwriter(R), MacHandwriter(R), PenDOS(R), PenMAC(R),
INKshrINK(R), and Creativity Tool(R), are registered trademarks of the Company.
Zorro(TM), Dynamic Signature Verification(TM), InkSentry(TM), and YPad(TM) are
trademarks of the Company. Applications for registration for various markets are
in process in the United States, France, Germany, Italy, Japan, Spain and the
United Kingdom. The Company intends to register its trademarks in those
jurisdictions where its products are or will be marketed.
The Company maintains a substantial portion of its technology and
know-how as trade secrets and obligates all employees and contractors to respect
proprietary information through written agreements. The Company follows a
practice of requiring prospective business partners to enter into non-disclosure
agreements before any of the Company's proprietary information is revealed.
SOURCES AND AVAILABILITY OF RAW MATERIALS
- -----------------------------------------
The Handwriter for Windows and MacHandwriter digitizer tablets and
electronic pens are manufactured according to the Company's specification by
CalComp, Inc. (CalComp). Other subcontractors manufacture templates, duplicate
software, print documentation and prepare packaging for the products. The
digitizer, pens and other components are packaged by a turnkey software service
and shipped to customers upon the Company's instructions. If CalComp does not or
is unable to meet product volume requirements, it is obligated to assist the
Company in obtaining an adequate supply of digitizers and pens. Although the
Company believes that the digitizer tablets could be manufactured by another
supplier in the event CalComp were unable or unwilling to supply adequate
quantities for the Company's products, such a lack of supply would adversely
impact the Company's results of operations, at least in the short term.
SEASONALITY OF BUSINESS
- -----------------------
The Company has not experienced seasonal trends affecting sales of its
products or development or licensing of its technologies within its industry
segment of operation. The recent introduction of products to be sold directly to
consumers in North America may expose the Company to seasonal trends which it
has not experienced in the past.
MATERIAL CUSTOMERS
- ------------------
The Company operates in a single industry segment and has been dependent
on a few customers. One customer, the United States Department of Commerce
through an Advanced Technology Program Co-operative Agreement, accounted for
25 percent of total revenues in 1995. This program terminated during 1995. Two
customers accounted for 21 and 9 percent of total revenues in 1994. Two
customers accounted for 39 and 15 percent respectively of total revenues in
1993.
5
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
BACKLOG
- -------
The Company had no backlog at December 31, 1995. Backlog is subject to
rescheduling and cancellation, therefore the Company does not consider backlog
to be a reliable indicator of future sales. The Company's backlog for its
products amounted to approximately $11,000, and $86,000 dollars at December 31,
1994 and 1993, respectively. The decrease in backlog during the three-year
period is attributed to declines in product sales. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations.
COMPETITION
- -----------
The pen-based personal computer market is intensely competitive and has
attracted a number of major companies already established in the personal
computer and software industries. Certain of the Company's competitors have
substantially greater financial and other resources than the Company. The
Company faces competition at a number of different levels. Certain competitors
have developed or are developing complete pen-based hardware and software
systems, while others have focused on different elements of such systems, such
as character recognition technology, pen-based operating systems and
environments, and pen-based applications. For example, Tandy Corporation and
Sony Corporation currently offer pen-based portable computers incorporating
handwriting recognition technology of various levels of sophistication, and
Microsoft offers a handwriting recognition system and a pen-based operating
environment. There can be no assurance that the Company will be able to compete
successfully against these companies. Moreover, there can be no assurance that
the companies with whom the Company establishes distribution, license, product
development or other strategic relationships will not choose to market
technologies and products that they develop internally or acquire from third
parties other than the Company. For example, Apple and IBM are developing
internally or have licensed from other third parties a number of technologies
related to pen-based computing, NCR/AT&T has developed its own pen-based
operating environment, and NEC has developed its own character recognition
technology and pen-based operating system. The Company's strategic partners have
also had access to proprietary information of the Company, and there can be no
assurance that the Company's confidentiality agreements with its strategic
partners will adequately protect it against the improper use of such proprietary
information.
The Company believes that the principal competitive factors in the
market for pen-based computer products are the quality and reliability of
character recognition technology, multilingual capabilities of character based
recognition technology, compatibility with a broad range of computer systems,
name recognition, effective distribution systems, ease of use, software
efficiency and the ability to sell to leading computer companies who may be
predisposed to develop their own technology instead of licensing third party
technology. Because of the as yet undeveloped nature of the pen-based computer
industry, it is unclear which of these factors will be the most important. The
Company believes that it competes favorably with respect to these factors,
although it is at a competitive disadvantage with respect to name recognition
and distribution capability. There can be no assurance that the Company will be
able to maintain any competitive advantages as the pen-based computing industry
evolves, market demands change and the Company's competitors apply substantial
resources toward the development of new products and technologies.
EMPLOYEES
- ---------
As of December 31, 1995, the Company employed 74 full-time employees, no
part-time employees, and engages additional personnel on a contract basis as
needed from time to time.
FOREIGN AND DOMESTIC OPERATIONS
- -------------------------------
Reference is made to Note 10 to the Consolidated Financial Statements
provided pursuant to Part II, Item 8 of this report, which is incorporated
herein by reference.
6
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
Item 2. Properties
The Company currently leases its principal facilities, consisting of
approximately 9,000 square feet in Redwood Shores, California, pursuant to a
lease that expires in 2000. CIC Japan leases approximately 1,580 square feet of
office space in Tokyo and CICC leases approximately 1,000 square feet in China.
The Company believes that these existing facilities will be suitable and
adequate to meet its requirements for the near future.
Item 3. Legal proceedings
See discussion of Reorganization under Chapter 11 of the U. S.
Bankruptcy Code in "Part I, Item 1, Business".
Item 4. Submission of Matters to a Vote of Security Holders
None.
7
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is currently listed on the NASDAQ OTC
Bulletin Board under the trading symbol "CICI." The Company listed its Common
Stock on the NASDAQ Small Cap Market on September 19, 1991, and on the NASDAQ
National Market on June 18, 1993. The Company has filed an application with
NASDAQ to relist its shares on the NASDAQ Small Cap Market. The following table
sets forth the high and low closing prices for shares of the Common Stock for
the periods noted, as reported on NASDAQ.
Closing Prices
-------------------------------
Year Period High Low
---- ------- ------------ ------------
1993 First Quarter $7.13 $4.00
Second Quarter $5.13 $3.25
Third Quarter $3.75 $2.88
Fourth Quarter $3.88 $2.53
1994 First Quarter $3.06 $2.25
Second Quarter $2.50 $0.69
Third Quarter $.094 $0.06
Fourth Quarter $.091 $0.44
1995 First Quarter $1.28 $0.38
Second Quarter $0.78 $0.50
Third Quarter $1.93 $0.53
Fourth Quarter $2.94 $1.63
1996 First Quarter
(through March 25, 1996) $3.78 $2.62
As of March 25, 1996, there were approximately 650 registered holders of
the Company's Common Stock. A high percentage of the Company's Common Stock is
registered in the names of brokerage firms and depository trusts.
The Company has not paid any dividends on its Common Stock or other
securities since incorporation and currently intends to retain any future
earnings for use in its business. No dividends will, therefore, be declared in
the foreseeable future.
8
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
Item 6. Selected Financial Data
The following table includes selected financial data of the Company
for the last five years:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues ........................................ $ 2,314 $ 3,599 $ 2,595 $ 4,070 $ 1,085
Research and development expenses (1) ........... 1,979 2,842 3,380 2,682 2,024
Marketing expenses .............................. 2,801 4,936 4,278 3,681 1,851
General and administrative expenses ............. 1,717 2,395 1,921 1,664 1,065
Loss from operations ............................ (5,534) (10,935) (8,564) (5,058) (4,218)
Net loss ........................................ (5,595) (11,048) (8,299) (5,114) (4,081)
Net loss per common share ....................... (.16) (.53) (.44) (.32) (.29)
<CAPTION>
As of December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
BALANCE SHEET DATA (In thousands)
- ------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalent and short-term
investments ..................................... $ 7,459 $ 4,088 $ 5,305 $ 2,811 $ 3,586
Working capital (deficit) (2) ................... 3,763 (605) 1,907 1,308 2,825
Total assets .................................... 9,776 6,171 10,158 7,239 6,691
Deferred revenue ................................ 2,570 2,754 2,681 1,634 250
Long-term obligations ........................... 830 2,069 321 130 158
Stockholders' equity (Net Capital Deficiency) ... 4,010 (1,219) 4,689 3,515 4,354
</TABLE>
- -------------------
(1) _______ Excludes software development costs capitalized in
accordance with Statement of Financial Accounting Standards No. 86.
(2) _______ Current liabilities used to calculate Working Capital at
December 31, 1995, 1994, 1993, 1992, and 1991 include deferred revenue
of $2,570,000, $2,754,000, $2,681,000, $1,634,000, and $50,000
respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
1995 compared to 1994
Product sales decreased 48% to $1,424,000 in 1995 from $2,724,000
recorded in the prior year. The decline in sales represented a continuation of
the effects of a change in the Company's marketing strategy during 1994. During
late 1993 and the first quarter of 1994, the Company had concentrated its
marketing efforts in North America in direct sales to end-users and, in limited
instances, computer resellers. Since the second quarter of 1994, the Company has
focused on increasing sales of its Handwriter for Windows and MacHandwriter
products through distributors and computer resellers. In connection with its
efforts to broaden its distribution channels, the Company increased the price
for its Windows and MacHandwriter products in April 1994. This price increase
had a pronounced negative effect on the monthly shipments of over 2,500 units
in the first quarter to average monthly shipments of approximately 1,000 units
in the second quarter of 1994. In addition, limited product promotion efforts
since the second quarter of 1994 and change in distribution channels further
reduced the average monthly unit shipments to approximately 165 units during
the last-half of 1994. During 1995 average monthly shipments aggregated
approximately 250 units per month. The Company plans to
9
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
expand its sales efforts to the retail market during 1996 through a
strategic relationship with Gemini Industries. There can be no assurance that
the Company will be successful in its efforts to broaden distribution into the
retail market or that the 1996 revenues from product sales will equal 1995
levels. By virtue of the declining level of product sales, backlog decreased
to $0 at December 31, 1995, as compared to $11,000 at 1994 year-end.
Sales by the Company's Joint Venture in the Peoples Republic of China,
included in product sales, increased to $755,000 in 1995 compared to $340,000
during 1994. The increase in sales is primarily due to completion of one full
year of marketing activities compared to one quarter of marketing activities in
1994.
Revenues from license and royalty fees for 1995 increased to $237,000
from $61,000 in the prior year period. The increase is primarily the result of
increased shipment volumes reported by two of the Company's licensees.
Development contract revenues for 1995 decreased to $653,000 from
$814,000 recorded in the prior year period. Contract revenues are primarily
attributable to a grant received from the US Federal Government's National
Institute of Standards and Technology ("NIST") in December 1993 to supplement
development of a recognition system for the Chinese language. This grant expired
in January 1996. The Company has historically pursued contract revenues as part
of its business strategy, and at least in the short term, expects to continue to
do so.
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 development contract revenues are expensed as
incurred and are included in research and development expenses. Cost of sales
decreased to $1,351,000 in 1995 as compared to $4,361,000 in 1994. This decrease
is attributable to the decreases in product sales and a decrease in amortization
and write offs of software development costs from $1,635,000 in 1994 to $157,000
in 1995. In addition, during 1994 the Company wrote off approximately $550,000
of MacHandwriter II inventory (CIC's Japanese language product). No such write
off occurred during 1995.
Research and development expenses decreased in 1995 by 30% to $1,979,000
from $2,842,000 recorded in 1994. This decrease was primarily attributable to
decreases in the research and development staff and related costs commencing in
the second quarter of 1994. The Company capitalized $20,000 of software
development costs in 1995 as compared to $436,000 in the prior year. The
continuing effect of reductions in personnel and product development efforts in
1994 account for the decline in research and development expenses and software
capitalization during 1995.
Sales and marketing expenses decreased 43% to $2,801,000 as compared to
$4,936,000 in the prior year. This decrease is primarily due to reductions in
staffing and related costs and promotional expenses incurred in the launch of
Handwriter for Windows and MacHandwriter during the first and second quarters of
1994.
General and administrative expenses decreased by 28% to $1,717,000 as
compared to $2,395,000 in the prior year. This decrease was primarily
attributable to the continuing effect of reductions in personnel and other costs
in 1994.
Interest and other income (net) for 1995 increased to $203,000 compared
to a net expense of $38,000 in the prior year. This increase is primarily due to
interest income earned on the Company's cash and short term investments.
Interest expense for 1995 increased to $264,000 compared to $75,000 in
the prior year. This increase is the result of interest expenses associated with
the pre-petition liabilities and increased short term debt in 1995 as compared
to 1994.
10
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
Utilization of the Company's net operating losses may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. As a result, a
portion of the Company's net operating loss carryforwards may not be available
to offset future taxable income. In February 1992, the Financial Accounting
Standards Board issued Statement No. 109, "Accounting for Income Taxes", and the
Company adopted Statement No. 109 in 1993. The Company has determined that, as
of December 31, 1995, a valuation allowance for deferred tax assets of
$15,084,000 is required to eliminate the deferred tax assets based upon the
Company's history of losses.
1994 compared to 1993
- ---------------------
Overview
--------
On July 18, 1994, the Company filed a voluntary petition for
reorganization and protection under Chapter 11 of the U. S. Bankruptcy Code in
the United States Bankruptcy Court, San Francisco District with the primary
purpose of restructuring the Company, reorganizing its debt, and protecting its
shareholder equity
In September 1994, the Company obtained, from an investor together with
his affiliates (the "Investor"), interim financing via a secured $1,000,000
loan. In partial consideration for the loan, the Company issued warrants to
purchase 2,000,000 shares of the Company's common stock at $.50 per share
exercise price. The warrants expire in January 1997.
On November 14, 1994 the Company's pre-petition creditors approved and
the United States Bankruptcy Court confirmed the Company's Plan of
Reorganization (Plan). The Plan provides for the payment in full, in cash, of
all allowed claims of creditors. Unsecured creditors will be paid in three
approximately equal installments. The first two installment were made in
February of 1995 and 1996. The third installment will be made in February 1997.
Under the Plan, each holder of common or preferred stock received, in
exchange for each two shares of preferred or common stock, one Unit consisting
of two new shares of common stock ($0.01 par value) and one stock purchase
warrant ("the warrants"). The unexercised warrants expired on December 15, 1994.
In December 1994, 3.9 million common shares were issued upon exercise of the
Warrants resulting in gross proceeds to the Company of approximately $2 million.
Concurrent with the Plan, the Company negotiated a Standby Stock
Purchase Agreement (the "Standby Agreement") with the Investor, through which
the Investor committed to purchase up to 10 million shares of newly-issued
common stock at a price of $0.50 per share. The terms of the Standby Agreement
provided that the Investor would purchase that number of shares of newly-issued
common stock such that gross proceeds received pursuant to the Standby Agreement
and exercise of warrants described above would total $5 million. The shares
purchased pursuant to the Standby Agreement have certain demand registration
rights. As consideration for the Investor's commitment under the Standby
Agreement, the Company issued 500,000 shares of common stock to the Investor.
The Investor purchased in excess of 6,000,000 shares of common stock pursuant to
the Standby Agreement, payment for a portion of which was effected through the
conversion of the Investor's $1,000,000 loan to the Company plus accrued
interest.
Results of operations
---------------------
Revenues increased by 39% to $3,599,000 in 1994 from $2,595,000 in the
prior year. This increase is principally due to sales of the Company's desktop
peripheral products and increased contract revenue which more than offset the
decrease in license fees as discussed below.
11
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COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
Product sales increased to $2,724,000 in 1994 from $790,000 in the
comparable prior year. This increase is primarily attributable to sales of
Handwriter for Windows and MacHandwriter, the Company's desktop pen-input
systems for Windows and Apple Macintosh based personal computers, respectively.
Sales of desktop pen-input systems declined 62% from $1,980,000 in the first
half of 1994, to $744,000 during the second half of 1994. The decline in sales
was due to an increase in selling price as the Company prepared to sell the
products through distributors and computer resellers and to the reduction in
advertising and marketing efforts brought about by the severe cash constraints
experienced by the Company during 1994. The Company began shipping Handwriter
for Windows to customers in November 1993 and MacHandwriter in February 1994.
During the first quarter of 1994, the Company had concentrated its
marketing efforts in North America in direct sales to end-users and, in limited
instances, computer resellers. Since the second quarter of 1994, the Company
focused on increasing sales of its Handwriter for Windows and MacHandwriter
products through distributors and computer resellers. In connection with its
efforts to broaden its distribution channels, the Company increased the price
for its Windows and MacHandwriter products in April 1994. This price increase
had a pronounced negative effect on the number of units sold directly to end
users by the Company, resulting in a decrease from average monthly shipments of
over 2,500 units in the first quarter to average monthly shipments of
approximately 1,000 units in the second quarter of 1994. In addition, limited
product promotion efforts since the second quarter of 1994 and change in
distribution channels further reduced the average monthly unit shipments to
approximately 165 units.
The Company has been selling MacHandwriter II, a desktop pen-input
system localized for the Japanese Macintosh computer, and its predecessor, the
MacHandwriter, in Japan since 1991. During the third quarter of 1993, technical
incompatibilities between certain functions of MacHandwriter II and certain
third party Japanese application programs were discovered which limited the
demand for MacHandwriter II in Japan. Due to cash constraints and significant
reductions in the engineering staff during 1994, the Company curtailed
correcting these technical incompatibilities. This fact resulted in charges to
cost of sales during 1994 of approximately $550,000 related to MacHandwriter II
units and raw materials on hand or for which the Company was contractually
liable to its supplier.
Revenues from license and royalty fees declined in 1994 to $61,000 from
$1,050,000 in the prior year. This decrease is primarily the result of the
receipt of license fees from IBM under the marketing and technology agreement in
the first quarter of 1993 with no like receipt in 1994. This agreement, as
amended, grants IBM the right to use, resell and exclusively sublicense, on
Intel 386 and above platforms, the Company's PenDOS operating environment and
Handwriter Recognition System for PenDOS worldwide to end users and computer
manufacturers. The Company will focus its available resources on providing
support to its existing customer accounts
Development contract revenues in 1994 increased to $814,000 from
$755,000 reported in the prior year. The increase in contract revenues was
attributable to a $810,000 grant received from the US Federal Government's
National Institute of Standards and Technology ("NIST") in December 1993. The
Company recognized $746,000 from this award in 1994 and $49,000 in 1993.
Contract revenues for 1993 consisted primarily of $328,000 of revenue under a
NIST grant awarded in April 1991 to supplement the Company's development of its
cursive recognition technology and $250,000 from a joint development agreement
with Intel Corporation which concluded in September 1993.
During 1994, the Company significantly reduced a large portion of its
product development and support personnel. As a result, the Company suspended
continued development and support of certain products that had previously
capitalized software development costs associated with them. Because of these
actions, the Company reassessed estimated future revenues by major product and
wrote off approximately $865,000 of capitalized software where continued
development and future revenues were in substantial doubt. Cost of sales
increased to $4,361,000 for 1994 compared to
12
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
$1,580,000 in the prior year. The increase over the prior year is primarily
attributable to higher product sales, an increase in amortization of capitalized
software development costs, a write off of capitalized software development
costs of approximately $865,000, and an inventory write down of approximately
$550,000 against MacHandwriter II inventory
Research and development expenses for 1994 decreased 16% to $2,842,000
compared to $3,380,000 in the prior year The decrease was primarily attributable
to reductions in engineering staffing levels and facilities late in the second
quarter of 1994. The Company capitalized $436,000 of software development costs
during 1994 compared to $831,000 in the prior year.
Sales and marketing expenses for 1994 increased to $4,936,000 as
compared to $4,278,000 in the prior year. This increase was primarily due to
increases in staffing and related costs and promotional expenses incurred in
connection with the North American introduction of Handwriter for Windows and
MacHandwriter during the first and second quarters of 1994. Significant
reductions in personnel, advertising and operations in late June 1994, and a
slow down of expansion plans into the European markets with Handwriter for
Windows and MacHandwriter resulted in a reduction of sales and marketing
expenses in the second half of the year.
General and administrative expenses increased 20% to $2,395,000 compared
to $1,921,000 in the prior year. The increases in general and administrative
costs were attributable to increased personnel costs related to increased
promotional activity and product shipments during the first five months of 1994.
In addition, the Company incurred $298,000 and $142,000 in professional fees and
administrative expenses, respectively, in connection with the Company's Chapter
11 filing. General and administrative expenses decreased in the second half of
the year as a result of the downsizing of the Company's operations in June 1994.
Interest and other income, net, decreased by $375,000 to an expense of
$38,000 in 1994 compared to income of $337,000 in 1993. This decrease was
primarily due to reductions in foreign currency transaction gains and
significantly reduced interest income resulting from the sale of short-term
investments early in the year.
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes", and the Company adopted
Statement No. 109 in 1993. The Company has determined that, as of December 31,
1994, a valuation allowance for deferred tax assets of $12,838,000 is required
to eliminate the deferred tax assets based upon the Company's history of losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short term investments at December 31, 1995
totaled $7,459,000 compared to cash and cash equivalents of $4,088,000 at
December 31, 1994. This increase was the result of $10,480,000 provided by
financing activities offset by $1,754,000 used for investing activities, and
$6,842,000 used in operations.
Current liabilities, which include deferred revenue, were $4,936,000 at
December 31, 1995. Deferred revenue, totaling $2,570,000 at December 31, 1995,
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.
13
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
In June 1995, the Company closed a financing agreement with the Investor
providing for loans ("Bridge Loan") of up to $2.5 million. On the signing of the
Bridge Loan agreement, the Company issued to the Investor warrants to purchase
625,000 shares of common stock of the Company, and each month the Bridge Loan
was available, the Company issued an additional 156,250 warrants, to the
Investor. A total of 1,562,500 warrants were issued under the terms of the
Bridge Loan. The exercise price of the warrants is $1.00 per share. All of the
warrants expire on January 2, 1997 except 156,250 which expire on March 15,
1997. The Bridge Loan of $2,500,000 was repaid in November from the proceeds of
the private placement discussed below.
In November, the Company completed a private placement of 5,500,000
shares of the Company's common stock, at a price of $2.00 per share, subject to
certain adjustments. The net proceeds to the Company was approximately
$10,300,000. The Company has agreed to register, under the Securities Act, the
shares issued in the private placement.
In 1993, the Company formed a 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 a 79% ownership position, the
Company is to contribute up to $5.4 million in cash, and provide certain
distribution rights and non-exclusive licenses to certain technology. The
Government will contribute certain land use rights and provide other services
for the joint venture. At December 31, 1995, the Company had contributed
$900,000 in cash and had provided non-exclusive licenses to technology and
certain distribution rights, and the Government had contributed certain land use
rights.
As of December 31, 1995, the Company's principal source of liquidity was
its cash, cash equivalents and short-term investments of $7,459,000. The Company
believes that the above mentioned funds, together with anticipated revenues, are
adequate to meet projected working capital and other cash requirements
throughout 1996.
Future Results and Stock Price
The Company's future earnings and stock price may be subject to
significant volatility. The public stock markets have exhibited extreme
volatility in stock prices in recent years. The stock prices of high technology
companies have experienced particularly high volatility, including at times
severe price changes that are unrelated or disproportional to the operating
performance of these specific companies. The trading price of the Company's
Common Stock could be subject to wide fluctuation in response to, among other
factors, quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating results.
Item 8. Financial Statements and Supplementary Data
The response to this section is submitted in a separate section of this
report
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
14
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
PART III
Item 10. Directors and, Executive Officers of the Registrant
Information with respect to this item may be found in the sections
captioned "Election of Directors" and "Executive Officers", of the Company's
definitive Proxy Statement dated April 6, 1996, delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1996.
Such information is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to this item may be found in the section
captioned "Executive Compensation" of the Company's definitive Proxy Statement
dated April 6, 1996, 1996, delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on May 20, 1996. Such information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management" of
the Company's definitive Proxy Statement dated April 6, 1996, delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 20, 1996. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item may be found in the section
captioned "Certain Relationships and Related Transactions" of the Company's
definitive Proxy Statement dated April 6, 1996, delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1996.
Such information is incorporated herein by reference.
15
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following Consolidated Financial Statements of Communication
Intelligence Corporation are included in Item 8.
<TABLE>
<CAPTION>
Pages
<S> <C>
(a) 1. Financial Statements and Reports of Independent Auditors.
Report of Price Waterhouse LLP Independent Accountants. 22
Report of Ernst & Young LLP Independent Auditors. 23
Consolidated Balance Sheets at December 31, 1995 and 1994. 24
Consolidated Statement of Operations for the years ended
December 31, 1995, 1994, and 1993. 25
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the years ended December 31, 1995, 1994 and 1993. 26
Consolidated Statement of Cash Flows for the years ended 27
December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements. 28
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 40
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts to require submission of the schedule
or because the information required is included in the Consolidated
Financial Statements and notes thereto.
(b) Reports on Form 8-K
On November 8, 1995, the Company filed a Form 8-K reporting a change in
the Certifying Accountant of Registrant.
On November 28, 1995, the Company filed on Form 8-K reporting a private
placement of 5,500,000 shares of the Company's common stock at $2.00 per
share.
On December 11, 1995 the Company filed on Form 8-K/A reporting a change
in the Certifying Accountant of Registrant (Amendment to November 8, 1995
8-K).
<TABLE>
<CAPTION>
(c) Exhibits Page
<S> <C>
2.0 Second Amended Plan of Reorganization of the Company
incorporated herein by reference to the Company's Form 8-K filed
October 24, 1994.
2.1 Orderly Liquidation Valuation, Exhibit F of the Second Amended
Plan of Reorganization, incorporated herein by reference to the
16
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
<CAPTION>
Page
<S> <C>
Company's Form 8-K filed October 19, 1994.
2.2 Order Confirming Plan Of Reorganization incorporated herein by
reference to the Company's Form 8-K filed November 14, 1994.
3.1 Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and
3.4 to the Company's Registration Statement on Form 10 (File
No. 0-19301).
3.2 Certificate of Amendment of the Company authorizing the
reclassification of the Class A Common Stock and Class B Common
Stock into one class of Common Stock as filed with the Delaware
Secretary of State's office on November 1, 1991, incorporated
herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the
Company's Form 8-A (File No. 0-19301).
3.3 By-laws of the Company adopted on October 6, 1986,
incorporated herein by reference to Exhibit 3.5 to the
Company's Registration Statement on Form 10 (File No. 0-19301).
* 4.1 1984 Stock Option Plan of the Company, as Amended and Restated
as of October 15, 1987 and as amended by resolutions of the
stockholders of the Company passed on August 15, 1989 and
October 8, 1990 to increase the aggregate shares covered
thereby to 1,000,000, incorporated herein by reference to
Exhibit 4.4 to the Registration Statement on Form 10 (File
No. 0-19301).
* 4.2 Form of Stock Option Grant under 1984 Stock Option Plan,
incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form 10 (File No. 0-19301).
* 4.3 1991 Stock Option Plan of the Company, incorporated herein by
reference to Item 4.5 of the Company's Form S-1 dated December
23, 1991 (Registration No. 33-43879).
* 4.4 1991 Non-Discretionary Stock Option Plan, incorporated herein by
reference to Item 4.6 of the Company's Form S-1 dated December
23, 1991 (Registration No. 33-43879).
* 4.5 Form of Incentive Stock Option Grant under 1991 Stock Option
Plan, incorporated herein by reference to Item 4.7 of the
Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
* 4.6 Form of Non-Qualified Stock Option Grant under 1991 Stock Option
Plan, incorporated herein by reference to Item 4.8 of
the Company's Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
* 4.7 Form of Stock Option Grant under 1991 Non-Discretionary Stock
Option Plan, incorporated herein by reference to Item 4.9 of
the Company's Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
* 4.8 1994 Stock Option Plan, incorporated herein by reference to
Exhibit
</TABLE>
17
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
<TABLE>
<CAPTION>
Page
<S> <C>
G of the Company's Second Amended Disclosure Statement
filed on Form 8-K dated October 19, 1994 and approved by
shareholders on November 14, 1994..
10.1 License Agreement effective July 1, 1990 between the Company *
and NCR GmbH, incorporated herein by reference to Exhibit 10.5
to the Company's Registration Statement on Form 10 (File No.
0-19301).
10.2 Description of Termination Agreement with James Dao,
incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form 10 (File No. 0-19301).
10.3 License Agreement dated October 1, 1991 between the Company
and Samsung Electronics Co., Ltd., incorporated herein by
reference to Item 10.9 of the Company's Form S-1 dated
December 23, 1991 (Registration No. 33-43879).
+10.4 License Agreement dated June 16, 1992 between the Company and
NEC Corporation, incorporated herein by reference to item
10.12 of the Company's 1992 Form 10-K (File No. 0-19301)
+10.5 Licensing and Development Agreement for Use and Marketing of
Program Materials dated September 25, 1992 between the Company
and International Business Machines Corporation, incorporated
herein by reference to item 10.13 of the Company's 1992 Form
10-K (File No. 0-19301)
+10.6 OEM License Agreement dated December 15, 1992 between the a10.7
Company and Seiko-Epson Corporation, incorporated herein by
reference to item 10.14 of the Company's 1992 Form 10-K (File
No. 0-19301)
++10.7 OEM Agreement dated August 13, 1993 between CalComp, Inc. and
Communication Intelligence Corporation.
10.8 Standby Stock Purchase Agreement between the Company and 10.9
Philip Sassower dated October 3, 1994, incorporated herein by
reference to item 10.13 of the Company's 1994 Form 10-K (File
No. 0-19301)
10.9 Engagement Letter between the Company and Libra Investments,
Inc. dated November 2, 1995, incorporated herein by reference
to Exhibit 1 of the Company's Form 8-K dated November 28,
1995.
10.10 Form of Subscription Agreement between the Company and the
Purchasers, dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated November
28, 1995.
10.11 Form of Registration Rights Agreement between the Company and
the Purchasers, dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated November
28, 1995.
</TABLE>
18
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
<TABLE>
Page
<S> <C>
10.12 Form of Warrant of the Company issued to Libra on November 28,
1995, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated November 28, 1995.
10.13 Form of Registration Rights Agreement between the Company and
Libra, dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
22.1 Schedule of Subsidiaries (Previously filed).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants. 42
</TABLE>
- -------------------------------
* Identifies management contract or compensatory plan or arrangement.
++ Confidential treatment of certain portions of this exhibit have
been previously granted pursuant to a request for confidentiality dated
March 30, 1994, filed pursuant to Rule 24b-2 of the Security and
Exchange Act of 1934.
+ Confidential treatment of certain portions of this exhibit have
been previously granted pursuant to a request for confidentiality dated
March 29, 1993, filed pursuant to Rule 24b-2 of the Security and
Exchange Act of 1934.
19
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-K/A
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Redwood Shores, State of California, on November 12, 1996.
COMMUNICATION INTELLIGENCE CORPORATION
By: /s/ Francis V. Dane
------------------------------------------------
Francis V. Dane, Vice President, Secretary
and Treasurer
20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
WITH REPORT OF INDEPENDENT ACCOUNTANT
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Communication Intelligence Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 16 present fairly, in all
material respects, the financial position of Communication Intelligence
Corporation and its subsidiaries at December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. The
financial statements of Communication Intelligence Corporation for the two
years ended December 31, 1994 were audited by other independent accountants
whose report dated February 28, 1995 included an explanatory paragraph
regarding the Company's ability to continue as a going concern.
PRICE WATERHOUSE LLP
San Jose, California
November 1, 1996
22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Communication Intelligence Corporation:
We have audited the accompanying consolidated balance sheet of Communication
Intelligence Corporation as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for each of the two years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Communication
Intelligence Corporation at December 31, 1994, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statements schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Communication Intelligence Corporation will continue as a going concern.
The Company has incurred recurring operating losses and has a net capital
deficiency. In addition, between July 18 and November 14, 1994, the Company
conducted its operations under the protection of Chapter 11 of the U.S.
Bankruptcy Code. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 28, 1995
23
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,924 $ 4,088
Short-term investments 1,535 -
Note receivable from officer 210 -
Accounts receivable, net of allowance for doubtful accounts of
$76 381 201
($74 as of December 31, 1994)
Inventories 249 222
Prepaid expenses and other current assets 400 205
------------------------------
Total current assets 8,699 4,716
Note receivable from officer - 210
Property and equipment, net 336 346
Capitalized software development costs, net 88 225
Other assets 653 674
------------------------------
$ 9,776 $ 6,171
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current
liabilities:
Short-term debt $ 30 $ 118
Accounts payable 437 308
Pre-petition liabilities - current 822 1,013
Accrued compensation 282 244
Other accrued liabilities 761 819
Deferred revenue 2,570 2,754
Obligations under capital leases - current 34 65
------------------------------
Total current liabilities 4,936 5,321
Obligations under capital leases - noncurrent 8 43
Pre-petition liabilities - noncurrent 822 2,026
Commitments
Stockholders' equity (net capital deficiency) :
Common stock, $.01 par value; 80,000 shares authorized; 39,992
shares issued and outstanding (33,621 shares as of December
31, 1994) 400 337
Additional paid-in capital 51,687 40,878
Accumulated deficit (47,991) (42,396)
Cumulative foreign currency translation adjustment (86) (38)
------------------------------
Total stockholders' equity (net capital deficiency) 4,010 (1,219)
------------------------------
$ 9,776 $ 6,171
==============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Product $ 1,424 $ 2,724 $ 790
License and royalty 237 61 1,050
Development contracts 653 814 755
--------------------------------------------
2,314 3,599 2,595
Operating costs and expenses:
Cost of product sales 1,351 4,361 1,580
Research and development 1,979 2,842 3,380
Sales and marketing 2,801 4,936 4,278
General and administrative 1,717 2,395 1,921
--------------------------------------------
7,848 14,534 11,159
--------------------------------------------
Loss from operations (5,534) (10,935) (8,564)
Interest and other income (expense), net 203 (38) 337
Interest expense (264) (75) (72)
--------------------------------------------
Net loss $ (5,595) $ (11,048) $ (8,299)
============================================
Net loss per common share $(0.16) $(0.53) $ (.44)
============================================
Weighted average common shares 34,621 20,746 18,738
============================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
25
<PAGE>
<TABLE>
Communication Intelligence Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity (Net Capital Deficiency)
(In thousands)
<CAPTION>
Par Value
------------------------ Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit
-------------------------------------------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1992 .............................................. $ 30 $ 172 $ 26,383 $(23,049)
Exercise of warrants and options for 114 shares of common stock
-- 1 244 --
Issuance of 2,750 shares of common stock in public offering, net
of issuance costs of $1,671 ............................................. -- 28 9,301 --
Foreign currency translation adjustment .................................... -- -- -- --
Net loss ................................................................... -- -- -- (8,299)
-------------------------------------------------
Balances as of December 31, 1993 .............................................. 30 201 35,928 (31,348)
Exercise of options for 75 shares of common stock ........................... -- 1 33 --
Conversion of note payable to employee into 35 shares of common
stock .................................................................... -- -- 154 --
Exchange of preferred stock for common stock* ............................... (30) 30 -- --
Issuance of 10,520 shares of common stock in connection with warrant offering
and private placement, net of issuance costs
of $86* .................................................................. -- 105 4,819 --
Return of 21 shares of common stock and cancellation of note
receivable ............................................................... -- -- (56) --
Foreign currency translation adjustment ..................................... -- -- -- --
Net loss .................................................................... -- -- -- (11,048)
-------------------------------------------------
Balances as of December 31, 1994 .............................................. -- 337 40,878 (42,396)
Exercise of options for 654 shares of common stock .......................... -- 6 288 --
Issuance of 5,500 shares of common stock to investors for cash,
net of issuance costs of $185 ............................................ -- 55 10,285 --
Issuance of 217 shares of common stock to vendor for pre-petition
liabilities .............................................................. -- 2 186 --
Issuance of warrants to purchase 1,563 shares of common stock in
connection with the bridge loan .......................................... -- -- 50 --
Foreign currency translation adjustment ..................................... -- -- -- --
Net loss .................................................................... -- -- -- (5,595)
-------------------------------------------------
Balances as of December 31, 1995 .............................................. $ -- $ 400 $ 51,687 $(47,991)
=================================================
<CAPTION>
Cumulative Total
Notes Foreign Stockholders'
Receivable Currency Equity (Net
From Translation Capital
Stockholders Adjustment Deficiency)
-----------------------------------------
<S> <C> <C> <C>
Balances as of December 31, 1992 .............................................. $ (56) $ 35 $ 3,515
Exercise of warrants and options for 114 shares of common stock
-- -- 245
Issuance of 2,750 shares of common stock in public offering, net
of issuance costs of $1,671 ............................................. -- -- 9,329
Foreign currency translation adjustment .................................... -- (101) (101)
Net loss ................................................................... -- -- (8,299)
-----------------------------------------
Balances as of December 31, 1993 .............................................. (56) (66) 4,689
Exercise of options for 75 shares of common stock ........................... -- -- 34
Conversion of note payable to employee into 35 shares of common
stock .................................................................... -- -- 154
Exchange of preferred stock for common stock* ............................... -- -- --
Issuance of 10,520 shares of common stock in connection with warrant offering
and private placement, net of issuance costs
of $86* .................................................................. -- -- 4,924
Return of 21 shares of common stock and cancellation of note
receivable ............................................................... 56 -- --
Foreign currency translation adjustment ..................................... -- 28 28
Net loss .................................................................... -- -- (11,048)
-----------------------------------------
Balances as of December 31, 1994 .............................................. -- (38) (1,219)
Exercise of options for 654 shares of common stock .......................... -- -- 294
Issuance of 5,500 shares of common stock to investors for cash,
net of issuance costs of $185 ............................................ -- -- 10,340
Issuance of 217 shares of common stock to vendor for pre-petition
liabilities .............................................................. -- -- 188
Issuance of warrants to purchase 1,563 shares of common stock in
connection with the bridge loan .......................................... -- -- 50
Foreign currency translation adjustment ..................................... -- (48) (48)
Net loss .................................................................... -- -- (5,595)
-----------------------------------------
Balances as of December 31, 1995 .............................................. $ -- $ (86) $ 4,010
=========================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
* Relates to Plan of Reorganization (see Note 5).
26
<PAGE>
<TABLE>
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,595) $ (11,048) $ (8,299)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 387 2,283 1,087
Warrant issuance costs 50 - -
Loss on disposal of assets - 163 -
Changes in operating assets and liabilities:
Accounts receivable (180) 84 202
Inventories (27) 618 144
Prepaid expenses and other current assets (195) 420 (160)
Accounts payable 129 (421) 87
Accrued compensation 38 (98) 127
Deferred revenue (184) 73 1,047
Pre-petition liabilities (1,207) 2,822 -
Other accrued liabilities (58) 30 399
----------------------------------------
Net cash used in operating activities (6,842) (5,074) (5,366)
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of short-term investments - 1,827 4,600
Purchase of short-term investments (1,535) - (6,427)
Note receivable from officer - (210) -
Acquisition of property and equipment (144) (324) (329)
Capitalized software costs (20) (436) (831)
Increase (decrease) in other assets (55) 136 (426)
----------------------------------------
Net cash provided by (used in) investing activities (1,754) 993 (3,413)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt and notes
payable 2,530 1,168 154
Principal payments on short-term debt and notes payable (2,618) (330) (63)
Principal payments on capital lease obligations (66) (107) (118)
Net proceeds from issuance of common stock 10,634 3,932 9,574
----------------------------------------
Net cash provided by financing activities 10,480 4,663 9,547
----------------------------------------
Effect of exchange rate changes on cash (48) 28 (101)
----------------------------------------
Net increase in cash and cash equivalents 1,836 610 667
Cash and cash equivalents at beginning of year 4,088 3,478 2,811
----------------------------------------
Cash and cash equivalents at end of year $ 5,924 $ 4,088 $ 3,478
========================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
27
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS
Communication Intelligence Corporation's (the "Company" or "CIC") corporate
mission is to develop and market natural human, pen input, computer interfaces
and handwriting recognition-based security technologies and products to satisfy
the emerging markets for pen-based computing and electronic commerce. These
emerging markets for CIC's products include all areas of personal computing as
well as electronic commerce and communications.
The Company's research and development activities have given rise to numerous
technologies and products including: two pen-based operating environments
(PenDOS(R) and PenMAC(R)), its multi-lingual Handwriter(R) Recognition System,
and two desktop computing products, Handwriter(R) for Windows(R) and
MacHandwriter(R). Additionally, CIC has developed products for dynamic signature
verification, electronic ink data compression, encryption and a suite of
development tools and applications which the Company believes increases the
functionality of its core products and facilitates their integration into
original equipment manufacturers' ("OEM") hardware products and computer systems
and networks.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles and include CIC, its subsidiaries,
and its Chinese Joint Venture (see Note 3), after elimination of intercompany
balances and transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the recorded amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
On July 18, 1994, the Company filed a voluntary petition for reorganization and
protection under Chapter 11 of the U. S. Bankruptcy Code (the "Bankruptcy Code")
in the United States Bankruptcy Court, San Francisco District. Neither CIC's
consolidated foreign subsidiary nor its China Joint Venture filed petitions for
reorganization. On September 28, 1994, the Company filed a Disclosure Statement
and Plan of Reorganization ("the Plan") in the United States Bankruptcy Court,
San Francisco District. The Plan was approved by the creditors on November 14,
1994, and the Company emerged from Chapter 11 protection on that date.
The Plan provides for the payment in full, in cash, of all allowed unsecured
claims of creditors while leaving secured creditors unimpaired by providing for
their payment in compliance with the original terms and conditions of their
loans. Unsecured creditors will be paid in three approximately equal
installments. The first installment was made in February 1995, the second in
February 1996, and the third installment will be made in February 1997. The Plan
also approved certain warrant offerings and stock purchase agreements as
described in Note 5.
28
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity date of up
to 90 days to be cash equivalents.
In 1994, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, in
accounting for short-term investments. Short-term investments are classified as
"available-for-sale" under the provisions of SFAS No. 115 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 equivalents include certain investments classified as available-for-sale
securities as follows:
1995 1994
-----------------------------
(In thousands)
U.S. Corporate Securities $ 5,483 $ 996
Other Debt Securities - 1,990
-----------------------------
$ 5,483 $ 2,986
=============================
Short-term investments consisted of the following available-for-sale securities
as of December 31, 1995:
1995
-------------------
(In thousands)
U.S. Corporate Securities $ 998
Other Debt Securities 537
-------------------
$ 1,535
===================
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market. As
of December 31, 1995 and 1994, inventory was primarily comprised of finished
goods.
29
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets ranging from three to five years.
Property and equipment consisted of the following as of December 31:
1995 1994
-----------------------------------
(in thousands)
Machinery and equipment $ 1,748 $ 1,659
Office furniture and fixtures 350 304
Leasehold improvements 31 25
Purchased software 53 50
-----------------------------------
2,182 2,038
Less accumulated depreciation and
amortization (1,846) (1,692)
-----------------------------------
$ 336 $ 346
===================================
Included in property and equipment as of December 31, 1995 and 1994 is $155,000
and $115,000 of leased equipment net of amortization of $107,000 and $48,000,
respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs and product enhancement costs
once technological feasibility is established. These costs are amortized to cost
of sales on a straight-line basis over the estimated product life, generally
three years, or based upon the ratio of current revenue to the total of current
and anticipated future revenue, whichever is greater.
Amortization commences when the product is available for general release to
customers.
Capitalized software development costs are as follows as of December 31 :
1995 1994
-----------------------------------
(in thousands)
Capitalized software development costs $ 2,372 $ 2,352
Accumulated amortization (2,284) (2,127)
-----------------------------------
$ 88 $ 225
===================================
Amortization and write-offs of capitalized software costs were $157,000,
$1,653,000, and $709,000 in 1995, 1994, and 1993, respectively.
30
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PRE-PETITION LIABILITIES
Pre-petition liabilities represent unsecured creditor claims owed prior to the
filing of the Company's petition for protection under Chapter 11 of the
Bankruptcy Code. The Company's reorganization plan called for unsecured
creditors to be paid in three approximately equal annual installments beginning
in February 1995. Amounts outstanding after February 1995 accrue simple interest
at 8% through February 1996, 10% thereafter through February 1997, and 12% for
any amounts outstanding thereafter.
REVENUES AND REVENUE RECOGNITION
Revenue for 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. Royalties are recognized as products
are licensed/sold by licensees. Under the terms of an agreement with IBM, the
Company is obligated to share with IBM certain revenues from third parties when
earned.
Development contract revenue is generated primarily from research grants and
joint development agreements. Revenue is recognized in accordance with the terms
of the grants and agreements, generally when related costs have been incurred.
The related costs incurred are included in research and development expenses.
There were no joint development agreements for the year ended December 31, 1995.
For the years ended December 31, 1994 and 1993 related costs incurred for joint
development projects were $105,000, and $190,000, respectively, excluding costs
related to the research grant discussed in Note 2.
One customer accounted for 25% of revenues in 1995. Two customers accounted
for 21% and 9% of revenues in 1994. Two customers accounted for 39% and 15%
of revenues in 1993.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares of
common stock outstanding during the period. Common stock equivalents consisting
of common shares issuable upon conversion of the convertible preferred stock
(using the "as if converted" method) and upon the exercise of stock options and
warrants (using the treasury stock method) are not included as their effect upon
net loss per common share would be antidilutive.
FOREIGN CURRENCY TRANSLATION AND TRANSACTION ACCOUNTING
The Company considers the functional currency of its foreign subsidiaries to be
the local currency, and, accordingly, gains and losses from the translation of
the subsidiaries' financial statements are included in "cumulative foreign
currency translation adjustment" in stockholders' equity.
Net foreign currency transaction gains and losses are included in "interest and
other income (expense), net" in the consolidated statements of operations. The
Company recorded net foreign currency transaction gains of $53,000 and $147,000
for the years ended December 31, 1995 and 1994, respectively, and a net loss of
$167,000 for the year ended December 31, 1993.
31
<PAGE>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products and licenses its technology to end users,
manufacturers, and distributors of computer products in North America, Europe,
and the Pacific Rim. The Company performs periodic credit evaluations of its
customers and does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
The Company maintains its cash, cash equivalents and short-term investments in
several different instruments with various financial institutions. This
diversification of risk is consistent with Company policy to maintain liquidity
and ensure the safety of principal.
INCOME TAXES
The Company has adopted SFAS No. 109, Accounting for Income Taxes. SFAS
No. 109 requires deferred tax assets and liabilities to be calculated using
the enacted tax rates in effect when the temporary differences are recovered
or settled.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for
fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its consolidated financial statements costs related
to its employee stock-based compensation plans, such as stock option and stock
purchase plans, or make pro forma disclosures of such costs in a footnote to the
consolidated financial statements.
The Company expects to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its consolidated financial statements for fiscal 1996, the Company will make the
required pro forma disclosures in a footnote to the consolidated financial
statements. SFAS No. 123 is not expected to have a material effect on the
Company's results of operations or financial position.
2. RESEARCH GRANTS, DEVELOPMENT AGREEMENTS, LICENSE AND ROYALTY FEES
In November 1993, CIC received a two-year grant under the Advanced Technology
Program sponsored by the National Institute of Standards and Technology. The
amount of the first year award is $810,000. The second year award of $670,000
was approved in January 1995. The Company recognized $590,000, $746,000, and
$49,000 as contract revenue under this grant for the years ended December 31,
1995, 1994, and 1993, respectively.
32
<PAGE>
3. CHINA JOINT VENTURE
In September 1993, the Company formed a Joint Venture in Nanjing, China, with
the Ministry of Electronic Industries of the Jiangsu Province, People's Republic
of China (the "Government"), to perform system integration services and market
CIC's pen-based business computer systems to Chinese business and government
users. The term of the Joint Venture is 50 years. Under the provisions of the
Joint Venture agreement, in exchange for a 79% ownership position, the Company
is to contribute up to $5.4 million in cash, and the Company will provide
nonexclusive 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 December 31, 1995, the Company had contributed
$900,000 in cash and had provided nonexclusive licenses to technology and
certain distribution rights, while the Government had contributed certain land
use rights. Certain rights and obligations with respect to land use rights are
yet to be finalized.
4. DEBT
In September 1994, the Company received a bridge loan from an investor (the
"Investor") of $1,000,000. The bridge loan, due in March 1995, was secured by
all assets of the Company and bore interest at 2% above the prime rate. In
December 1994, the entire principal and accrued interest of $26,000 were
converted into shares of common stock, at $0.50 per share (see Note 5). In
connection with the bridge loan, the Company granted the Investor warrants to
purchase 2 million shares of common stock at an exercise price of $0.50 per
share. The warrants expire on January 2, 1997.
In June 1995, the Company closed a financing agreement with the Investor
providing for loans ("Bridge Loan") of up to $2.5 million. The Bridge Loan bore
interest at 2% above the prime rate and was repaid on November 28, 1995.
On the signing of the Bridge Loan agreement, the Company issued to the Investor
625,000 warrants to purchase common stock. In addition, each month the Bridge
Loan was available, the Company issued 156,250 warrants to the Investor to
purchase common stock, up to a maximum of 2,500,000 warrants over the term of
the Bridge Loan. The exercise price of the warrants is $1.00 per share. In the
event the Company issues shares of common stock or convertible securities during
the term of the warrants at a price less than the exercise price of the
warrants, the exercise price will be reduced. The warrants expire on January 2,
1997, except 156,250 warrants which expire on March 15, 1997.
5. STOCKHOLDERS' EQUITY
COMMON STOCK AND COMMON STOCK WARRANTS
Under the Plan (see Note 1), each holder of common or preferred stock received,
in exchange for each two shares of preferred or common stock, one Unit
consisting of two new shares of common stock ($0.01 par value) and one stock
purchase warrant. The unexercised warrants expired on December 15, 1994.
Concurrent with the Plan, the Company negotiated a Standby Stock Purchase
Agreement (the "Standby Agreement") with the Investor, through which the
Investor committed to purchase up to 10 million shares of newly issued common
stock at a price of $0.50 per share. The terms of the Standby Agreement provided
the Investor would purchase sufficient shares of newly issued common stock such
that gross proceeds received pursuant to the Standby Agreement and exercise of
warrants described above would total $5 million. The shares purchased pursuant
to the Standby Agreement have certain demand registration rights. As
consideration for the Investor's commitment under the Standby Agreement, the
Company issued 500,000 shares of common stock to the Investor.
33
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK AND COMMON STOCK WARRANTS (CONTINUED)
The Investor purchased 6,050,357 shares of common stock pursuant to the Standby
Agreement, payment for a portion of which was effected through the conversion of
the Investor's Bridge Loan to the Company plus accrued interest (see Note 4).
In November 1994, the Company's Board of Directors approved an increase in the
number of share of common stock authorized for issuance from 40 million to 80
million shares.
STOCK OPTIONS
The Company adopted two stock option plans in 1991 (the 1991 Stock Option Plan
and the 1991 Nondiscretionary Plan). Incentive and nonqualified options under
the 1991 plans may be granted to employees, officers, and consultants of the
Company. As amended, there are 3,050,000 shares of common stock authorized for
issuance under these plans.
In conjunction with the approval of the Plan, the Company received approval of
its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan provides for
granting to directors, officers, and employees incentive and nonqualified stock
options. A total of 4,000,000 shares of common stock are authorized for issuance
under the 1994 Plan.
The exercise prices of options are determined by a committee of the Board of
Directors, but in the case of an incentive stock option, the exercise price may
not be less than 100% of the fair market value on the date of grant.
Nonqualified options may not have an exercise price of less than 85% of the fair
market value on the date of grant. Options generally vest over four years.
In May 1994, the Board of Directors approved a resolution to reprice outstanding
stock options. The repricing occurred on July 11, 1994, resulting in the
cancellation of 1,029,000 original options and the granting of an equivalent
number of new options at an exercise price of $0.50 per share, the then current
price of the stock. Other than the change in the exercise price, the new options
were granted on the same terms and conditions as the cancelled options.
Information with respect to the stock option plans is summarized below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------
SHARES NUMBER OF PRICE PER
AVAILABLE SHARES SHARE
--------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1992 271,000 1,814,000 $ .68-5.36
Increase in shares reserved 500,000 - -
Granted (442,000) 442,000 $ 2.82-4.50
Cancelled 195,000 (195,000) $ .68-5.36
Exercised - (81,000) $ .68-5.36
--------------------------------------------
Balances, December 31, 1993 524,000 1,980,000 $ .68-5.36
Increase in shares reserved 4,000,000 - -
Expired (160,000) - -
Granted (4,901,405) 4,901,405 $ .30-1.14
Cancelled 1,855,000 (1,855,000) $ .68-5.36
Exercised - (25,000) $ .68
--------------------------------------------
Balances, December 31, 1994 1,317,595 5,001,405 $ .30-1.14
Expired (4,000) - -
Granted (1,020,000) 1,020,000 $ .50-2.50
Cancelled 220,000 (220,000) $ .50
Exercised - (146,310) $ .30-.66
--------------------------------------------
Balances, December 31, 1995 513,595 5,655,095 $ .30-2.50
============================================
</TABLE>
As of December 31, 1995, options for 1,995,695 shares were exercisable.
34
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
During 1993, two directors were each granted nonplan options to purchase 100,000
shares of common stock at prices of $3.06 and $3.19 per share, respectively. On
July 11, 1994, these options were cancelled and regranted with an exercise price
of $0.50 per share; all other terms of the original options remained in effect.
Options vest 20% in each of the first three years from date of grant and 40% in
the fourth year from date of grant and expire seven years after grant.
In December 1994, for services rendered prior to and during the Company's
Chapter 11 proceedings, options to purchase 180,000 shares of common stock at
$0.50 per share were granted to three directors of the Company under nonplan
option agreements. In addition, a nonplan option to purchase 100,000 shares of
common stock was granted to a newly elected director and Chairman of the Finance
Committee. The options have an exercise price of $0.50 per share, vest 20% each
year for the first three years, and 40% the fourth year from the date of grant
and expire seven years after grant. As of December 31, 1995, all such options
were outstanding and 256,000 options were exercisable. The newly elected
director also received an option, vesting one year from date of grant, to
purchase 50,000 shares of common stock pursuant to the Company's
Non-discretionary Stock Option Plan.
On June 1, 1994, the Company negotiated with its employees to reduce their
salaries through August 31, 1994. Those employees who agreed to continue their
employment at the reduced wage were granted certain option rights to purchase
common stock (the "Options"). Options to purchase 2,210,071 shares of common
stock were granted at an average exercise price of $0.57 per share under this
agreement, of which 377,405 Options were granted to officers under the 1991
Stock Option Plan (included in the table above), with the remaining options
granted outside of the plan. The Options are immediately exercisable and remain
in effect for seven years from the date of grant. As of December 31, 1995,
146,310 Options were exercised for aggregate proceeds of approximately $75,739
and 220,000 Options were cancelled. As of December 31, 1995, 877,908 such
Options were exercisable and outstanding.
WARRANTS
In December 1994, a director of the Company was granted warrants to purchase
100,000 shares of common stock at $0.50 per share. The warrants expire two years
from the date of grant. The warrants were granted in connection with a bridge
loan.
As of December 31, 1995, 11,273,154 shares were reserved for issuance upon
exercise of outstanding warrants and options.
6. RELATED PARTY TRANSACTIONS
In April 1994, the Company loaned $210,000 to the chief executive officer of the
Company in exchange for a note, secured by Company stock, bearing interest at
the highest marginal rate applicable to the Company's borrowing or the highest
rate allowable by law. The note is due April 1, 1996.
35
<PAGE>
7. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company leases facilities in the United States, Japan and China. In addition
to monthly rent, the U.S. facilities are subject to additional rental payments
for utilities and other costs above a base amount. Facilities rent expense was
approximately $224,000, $559,000, and $585,000 in 1995, 1994, and 1993,
respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $182,000, $185,000, $200,000, $200,000, and $167,000 for the years
ending December 31, 1996, 1997, 1998, 1999, and 2000, respectively.
8. CAPITAL LEASE OBLIGATIONS
The following is a schedule by year of future minimum lease payments under
capital lease obligations as of December 31, 1995:
1995
----------------
(in thousands)
Years ending December 31:
1996 $ 37
1997 9
----------------
Total lease payments 46
Less amount representing interest (4)
----------------
Present value of future lease payments 42
Less current portion (34)
----------------
No current portion of capital lease obligations $ 8
================
9. INCOME TAXES
As of December 31, 1995, the Company has federal and state net operating loss
carryforwards of approximately $35,000,000 and $16,000,000, respectively. The
Company also has federal research and investment tax credit carryforwards of
approximately $499,000, which expire at various dates through 2010, and net
operating loss carryforwards expiring through 2010, approximately as follows
(in thousands):
Federal State
--------------- ---------------
1996 $ 500 $ 2,000
1997 1,100 2,100
1998 1,200 3,800
1999 1,300 4,800
2000 1,000 3,300
Thereafter 29,900 -
--------------- ---------------
$ 35,000 $ 16,000
=============== ===============
36
<PAGE>
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes. A valuation allowance for deferred
tax assets has been provided based on uncertainty as to future recoverability.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of December 31, 1995 and 1994 are as follows
(in thousands):
1995 1994
----------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 12,807 $ 10,699
Credit carryforwards 470 370
Deferred income 1,032 1,105
Research and development capitalized
for tax purposes 73 37
Other, net 742 746
----------------------------------
Total deferred tax assets 15,124 12,957
Deferred tax liabilities:
Capitalized software 40 90
Other, net - 29
----------------------------------
Total deferred tax liabilities 40 119
----------------------------------
15,084 12,838
Valuation allowance (15,084) (12,838)
----------------------------------
Net deferred tax assets $ - $ -
==================================
The valuation allowance for deferred tax assets increased by $2,246,000 for the
year ended December 31, 1995.
37
<PAGE>
10. FOREIGN OPERATIONS
The Company's export sales were 6%, 15%, and 20% of total revenues in 1995,
1994, and 1993, respectively. Information regarding foreign operations is as
follows :
<TABLE>
<CAPTION>
UNITED
STATES JAPAN CHINA ELIMINATIONS TOTAL
-----------------------------------------------------------
(in thousands)
YEAR ENDED DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 2,177 $ 418 $ - $ - $ 2,595
===========================================================
Intercompany transfers $ 403 $ - $ - $ (403) $ -
===========================================================
Loss from operations $ (7,159) $ (1,263) $ (137) $ (5) $ (8,564)
===========================================================
Identifiable assets $ 14,329 $ 613 $ 1,226 $ (6,010) $ 10,158
===========================================================
YEAR ENDED DECEMBER 31, 1994
Sales to unaffiliated customers $ 2,996 $ 263 $ 340 $ - $ 3,599
===========================================================
Intercompany transfers $ 457 $ - $ - $ (457) $ -
===========================================================
Loss from operations $ (9,513) $ (1,032) $ (373) $ (17) $ (10,935)
===========================================================
Identifiable assets $ 15,440 $ 339 $ 1,807 $ (11,415) $ 6,171
===========================================================
YEAR ENDED DECEMBER 31, 1995
Sales to unaffiliated customers $ 1,515 $ 49 $ 755 $ (5) $ 2,314
===========================================================
Intercompany transfers $ - $ - $ - $ - $ -
===========================================================
Loss from operations $ (5,061) $ (387) $ (142) $ 56 $ (5,534)
===========================================================
Identifiable assets $ 19,438 $ 234 $ 1,654 $ (11,550) $ 9,776
===========================================================
</TABLE>
38
<PAGE>
11. STATEMENT OF CASH FLOWS DATA
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Schedule of noncash transactions:
Acquisition of equipment under
capital lease obligation $ - $ 97 $ 94
=======================================================
Issuance of common stock in
exchange for pre-petition
liabilities $ 188 $ - $ -
=======================================================
Conversion of notes payable
and accrued interest into
common stock $ - $ 1,180 $ -
=======================================================
Conversion of accrued
compensation and short-term
debt to pre-petition $ - $ 217 $ -
liabilities
=======================================================
Other, net $ - $ - $ 247
=======================================================
</TABLE>
Supplemental disclosure of cash flow information:
Interest paid in 1995, 1994, and 1993 was $154,000, $57,000, and $83,000,
respectively.
12. Subsequent Events
In June 1996, the Company sold in a private placement, 600,000 shares of
Common Stock at $4.50 per share, resulting in net cash proceeds of
$2,700,000. The purchasers of these shares are entitled to certain rights
with respect to the registration of the Common Stock purchased, including
demand registration rights for the five-year period commencing September
1996. In addition, these purchasers are entitled to receive additional shares
of common stock if, at the time such registration statement becomes
effective, the average sales price of the Company's Common stock for the
previous 20 days is less than $4.50 per share. On July 15, 1996, the Company
filed an amended Registration Statement on Form S-3 to register 6,367,500
shares of Common stock, including the 600,000 shares of Common Stock sold in
the June 1996 private placement. This Registration Statement has not been
declared effective.
39
<PAGE>
<TABLE>
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts
Years Ended December 31, 1993, 1994, 1995
(Dollars in Thousands)
<CAPTION>
Balance Charged to Balance
at Beginning of Costs and at End
Period Expense Deductions of Period
------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts $ 63 $ 22 $ - $ 85
=================== =================== ==================== ===================
$ 63 $ 22 $ - $ 85
=================== =================== ==================== ===================
Year ended December 31, 1994:
Allowance for doubtful accounts $ 85 $ 45 $ (56) $ 74
=================== =================== ==================== ===================
$ 85 $ 45 $ (56) $ 74
=================== =================== ==================== ===================
Year ended December 31, 1995:
Allowance for doubtful accounts $ 74 $ 96 $ (94) $ 76
=================== =================== ==================== ===================
$ 74 $ 96 $ (94) $ 76
=================== =================== ==================== ===================
</TABLE>
40
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-45521 and No. 33-71614) pertaining to the 1984 Stock Option
Plan, the 1991 Stock Option Plan and the 1991 Non-Discretionary Stock Option
Plan of Communication Intelligence Corporation of our report dated February 28,
1995, with respect to the consolidated financial statements and schedule of
Communication Intelligence Corporation included in this Annual Report (Form
10-K/A) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Palo Alto, California
November 12, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-5521, No. 33-71614 and No. 33-92284) of
Communications Intelligence Corporation of our report dated November 1,
1996 appearing on page 22 of this Form 10-K/A.
PRICE WATERHOUSE LLP
San Jose, California
November 12, 1996
