UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
- ------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 520, Redwood Shores, CA 94065-1413
---------------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
------- -------
Number of shares outstanding of the issuer's Common Stock, as of November
13, 1996: 41,994,375
This Quarterly Report on Form 10-Q contains 12 pages of which this is
page 1.
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets, at September 30, 1996
and December 31, 1995......................................3
Condensed Consolidated Statements of Operations, for the three
and nine months ended September 30, 1996 and 1995..........4
Condensed Consolidated Statements of Cash Flows, for the nine
months ended September 30, 1996 and 1995...................5
Notes to Condensed Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.........................................11
(b) Reports on Form 8-K..............................11
Signatures.........................................................12
<PAGE>
See accompanying notes.
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
Assets 1996 1995
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents .......................... $ 1,598 $ 5,924
Short-term investments ............................. 2,800 1,535
Note receivable from officer ....................... -- 210
Accounts receivable, net ........................... 457 381
Inventories ........................................ 607 249
Other current assets ............................... 417 400
-------- --------
Total current assets ........................... 5,879 8,699
Note receivable from officer ............................ 210 --
Property and equipment, net ............................. 431 336
Capitalized software development costs, net ............. 38 88
Other assets ............................................ 525 653
-------- --------
Total assets ................................... $ 7,083 $ 9,776
======== ========
Liabilities and stockholders' equity Current liabilities:
Short-term debt .................................... $ 100 $ 30
Accounts payable ................................... 234 437
Pre-petition liabilities - current ................. 873 822
Accrued compensation ............................... 308 282
Other accrued liabilities .......................... 530 761
Deferred revenue ................................... 2,266 2,570
Obligations under capital leases - current ......... 8 34
-------- --------
Total current liabilities ...................... 4,319 4,936
Obligations under capital leases - noncurrent ........... 8 8
Pre-petition liabilities - noncurrent ................... -- 822
Commitments ............................................. -- --
Stockholders' equity:
Common stock ....................................... 421 400
Additional paid-in capital ......................... 54,906 51,687
Accumulated deficit ................................ (52,412) (47,991)
Cumulative foreign currency translation adjustment . (159) (86)
-------- --------
Total stockholders' equity ..................... 2,756 4,010
======== ========
Total liabilities and stockholders' equity ..... $ 7,083 $ 9,776
======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
--------- --------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
<S> <C> <C> <C> <C>
Product ..................... $ 51 $ 273 $ 238 $ 569
License and royalty ......... 252 100 545 149
Development contract ........ 451 266 1,288 878
-------- -------- -------- --------
754 639 2,071 1,596
-------- -------- -------- --------
Operating costs and expenses:
Cost of sales:
Product .................. 60 178 180 310
Development contract ..... 291 97 858 289
Other costs .............. 95 99 309 270
Research and development .... 496 512 1,423 1,530
Sales and marketing ......... 833 802 2,350 1,980
General and administrative .. 454 375 1,483 1,341
-------- -------- -------- --------
2,229 2,063 6,603 5,720
-------- -------- -------- --------
Loss from operations ............. (1,475) (1,424) (4,532) (4,124)
Interest and other income ........ 78 19 233 126
Interest expense ................. (25) (103) (122) (183)
-------- -------- -------- --------
Net loss ................ $ (1,422) $ (1,508) $ (4,421) $ (4,181)
======== ======== ======== ========
Net loss per common share $ (0.03) $ (0.04) $ (0.11) $ (0.12)
======== ======== ======== ========
Weighted average common
shares outstanding . 41,951 34,108 41,011 33,925
======== ======== ======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash used in operating activities ................. (6,148) (5,130)
-------- --------
Cash flows from investing activities:
Sale of short-term investments ................... 11,385 --
Purchase of short-term investments ............... (12,650) --
Acquisition of property and equipment ............ (204) (88)
Increase in capitalized software costs ........... -- (10)
Increase (decrease) in other assets .............. 79 (122)
-------- --------
Net cash used in investing activities ........ (1,390) (220)
-------- --------
Cash flows from financing activities:
Principal payments on short-term debt ............ (30) (118)
Principal payments on capital lease obligations .. (26) (52)
Proceeds from issuance of note payable ........... 100 1,500
Proceeds from issuance of common stock ........... 3,240 236
-------- --------
Net cash provided by financing activities .... 3,284 1,566
-------- --------
Effect of exchange rate changes on cash ............... (72) (30)
-------- --------
Net decrease in cash and cash equivalents ............. (4,326) (3,814)
Cash and cash equivalents at beginning of period ...... 5,924 4,088
-------- --------
Cash and cash equivalents at end of period (See note 2) $ 1,598 $ 274
======== ========
Schedule of non-cash transactions:
Issuance of common stock in exchange
for pre-petition liabilities ................ $ -- $ 188
======== ========
Issuance of stock purchase warrants in conjunction
with short term debt ........................ $ -- $ 67
======== ========
</TABLE>
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by Generally Accepted Accounting
Principles for complete financial statements. In the opinion of
management, the financial statements included in this report reflect
all adjustments (consisting only of normal recurring adjustments) which
Communication Intelligence Corporation (the "Company" or "CIC")
considers necessary for a fair presentation of its financial position
at the dates and its results of operations and cash flows for the
periods presented. The interim results are not necessarily indicative
of the results to be expected for the entire year.
This financial information should be read in conjunction with the
Company's audited financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1995.
Certain prior period amounts in the financial statements have been
reclassified to conform with the current period presentation.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Short-term investments are classified as "available-for-sale" and are
stated at fair value. Any unrealized gains or losses are reported as a
separate component of stockholders' equity, but, to date, have not been
significant.
Cash and cash equivalents included the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Cash in bank ................ $ 598 $ 441
U.S. Corporate Securities ... -- 5,483
Other Debt Securities ....... 1,000 --
------- -------
$ 1,598 $ 5,924
======= =======
</TABLE>
Short-term investments consisted of the following available-for-sale
securities as follows:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
U.S. Corporate Securities $ 1,000 $ 998
Other Debt Securities ... 1,800 537
------- -------
$ 2,800 $ 1,535
======= =======
</TABLE>
<PAGE>
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. At September 30, 1996, inventory was comprised primarily of
finished goods.
4. Private Placement
In June 1996, the Company completed a private placement of 600,000
shares of the Company's common stock, at a price of $4.50 per share,
subject to certain adjustments. The net proceeds to the Company
approximated $2,523,000. The Company has agreed to register, under the
Securities Act, the shares issued in the private placement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues for the quarter and nine months ended September 30, 1996 increased by
18% and 30% to $754,000 and $2,071,000 respectively, from the comparable three
and nine-month periods of the prior year. Revenues comprised product sales,
license and royalty fees, and development contract revenues. The increases are
principally due to higher license and royalty fees and development contract
revenues as discussed below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(In thousands)
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Product sales ................. $ 51 $ 273 $ 238 $ 569
License and royalty fees....... 252 100 545 149
Development contract .......... 451 266 1,288 878
======= ======= ======= =======
Total Revenues .......... $ 754 $ 639 $ 2,071 $ 1,596
======= ======= ======= =======
</TABLE>
Product sales for the three and nine months ended September 30, 1996 decreased
to $51,000 and $238,000 compared to $273,000 and $569,000 respectively in the
prior year periods. The decline in product sales for the three months ended
September 30, 1996 is due to reduced unit shipments to retail and catalog
resellers as compared to the prior year period. The decline in product sales for
the nine months ended September 30, 1996, was also due to reductions in
MacHandwriter II unit sales by the Company's Japanese subsidiary. Since the
second quarter of 1994, the Company has concentrated its domestic sales effort
on distributors and catalog resellers. In 1995, the Company began a limited
entry into the retail and corporate markets with its domestic Handwriter
products. The Company plans to expand its retail and corporate market sales
efforts during 1996. There can be no assurance that the Company will be
successful in its efforts to broaden its corporate and retail market
distribution.
Revenues from license and royalty fees for the three and nine month periods
ended September 30, 1996 increased to $252,000 and $545,000 from $100,000 and
$149,000 respectively in the comparable prior year periods. This increase is
primarily the result of higher shipment volumes by the Company's licensees and
to approximately $164,000 in royalty revenues that have been recognized on
agreements for which the Company has no further obligation to deliver additional
software or services.
Development contract revenues for the three and nine month period ended
September 30, 1996 increased 70% and 47% to $451,000 and $1,288,000 compared to
$266,000 and $878,000 respectively in the comparable prior year periods. The
increase is due primarily to increased system integration service and marketing
activities by the Company's 79% owned joint venture in The Peoples Republic of
China (the "Joint Venture"), and research grants from The National Science
Foundation (NSF), compared to the same periods last year. The increases for the
three and nine month periods were offset in part by a decrease in revenues
attributable to a grant from the US Government's National Institute of Standards
and Technology ("NIST") which expired in April 1996. No revenue was recorded in
the current quarter ended September 30, 1996 for the NIST grant compared to
$118,000 for the comparable three-month period last year. For the nine-month
period ended September 30, 1996, revenue attributable to the NIST grant was
$91,000 compared to $450,000 during the comparable prior year period. The NIST
grant was awarded in December 1993 to supplement the Company's development of a
recognition system for the Chinese language.
Cost of sales includes the costs of materials, procurement, warehousing, and
related personnel in connection with the sales of the Company's products and
services as well as the amortization of capitalized software development costs.
Costs incurred in connection with the NIST grant, included in development
contract revenue, are expensed as incurred and are included in research and
development expenses. Cost of sales for the three and nine-month periods
increased to $446,000 and $1,347,000, respectively, as compared to $374,000 and
$869,000, respectively for the comparable periods of the prior year. The
increases are attributable to a shift in the revenue mix to lower margin
development contract revenues generated by the Joint Venture, and increases in
the costs of procurement, warehousing, and related personnel. Amortization of
software development costs declined to $11,000 and $50,000 respectively for the
three and nine month periods ended September 30, 1996 as compared to $23,000 and
$104,000 respectively for the comparable periods of the prior year.
Research and development expenses for the three and nine-month periods ended
September 30, 1996 decreased by 3% and 7% to $496,000 and $1,423,000
respectively as compared to $512,000 and $1,530,000 respectively during the
comparable periods of the prior year. The decreases are primarily attributable
to decreases in the purchase of outside development services, and the reduction
of other overhead costs.
Sales and marketing expenses for the three and nine-month periods ended
September 30, 1996 increased 4% and 19% to $833,000 and $2,350,000 as compared
to $802,000 and $1,980,000 respectively in the comparable periods of the prior
year. These increases are primarily due to additions in staffing and related
costs in support of heightened sales activities in the U. S. and China.
General and administrative expenses for the three-month period ended September
30, 1996 increased 21% to $454,000 as compared to $375,000 in the comparable
period of the prior year. For the nine months ended September 30, 1996, general
and administrative expenses increased 11% to $1,483,000 as compared to
$1,341,000 in the comparable period of the prior year. The increase over the
three and nine months ended September 30, 1996 reflects increased costs of
insurance, professional services, and personnel and related costs.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments totaled $4,398,000 at
September 30, 1996, compared to cash, cash equivalents and short-term
investments of $7,459,000 at December 31, 1995. This decrease was primarily the
result of $6,148,000 used in operating activities offset by $3,284,000 provided
by financing activities as discussed below. Total current assets were $5,879,000
at September 30, 1996 compared to $8,699,000 at December 31, 1995.
Current liabilities, which include deferred revenue, were $4,319,000 at
September 30, 1996. Deferred revenue, totaling $2,266,000 at September 30, 1996,
primarily reflects nonrefundable advance royalty fees received from the
Company's licensees which are generally recognized as revenue by the Company in
the period in which licensees report that products incorporating the Company's
software have been shipped or no further obligations exist. As such, the period
over which such deferred revenue will be recognized as revenue is uncertain
because the Company cannot presently determine either the timing or volume of
future shipments by its licensees. Under the terms of the Company's agreement
with IBM, the Company is obligated to share certain royalties from third parties
with IBM when earned.
In June 1996, the Company completed a private placement of 600,000 shares of the
Company's common stock, at a price of $4.50 per share, subject to certain
adjustments. The net proceeds to the Company approximated $2,523,000. The
Company has agreed to register, under the Securities Act, the shares issued in
the private placement.
In 1993, the Company formed the Joint Venture with The Ministry of Electronic
Industries of Jiangsu Province (the "Government") of The People's Republic of
China. The Joint Venture, Communication Intelligence Computer Corporation, Ltd.
("CICC"), is 79% owned by the Company. Under the provisions of the joint venture
agreement, in exchange for 79% ownership, the Company is to contribute up to
$5.4 million in cash, and the Company will provide non-exclusive licenses to
technology and certain distribution rights. The Government will contribute
certain land use rights and provide other services for the joint venture. As of
September 30, 1996, the Company had contributed $900,000 in cash and had
provided non-exclusive licenses to technology and certain distribution rights,
while the Government had contributed certain land use rights.
As of September 30, 1996, the Company's principal source of liquidity was its
cash, cash equivalents and short-term investments of $4,398,000. The Company
believes that the above mentioned funds, together with anticipated revenues, are
adequate to meet projected working capital and other cash requirements.
Future Results and Stock Price
The Company's future earnings and stock price may be subject to significant
volatility. The public stock markets have exhibited extreme volatility in stock
prices in recent years. The stock prices of high technology companies have
experienced particularly high volatility, including at times severe price
changes that are unrelated or disproportional to the operating performance of
these specific companies. The trading price of the Company's Common Stock could
be subject to wide fluctuation in response to, among other factors,
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating results.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K
On August 8, 1996, the Company filed a Form 8K under ITEM 4, Change in
Registrant's Certifying Accountants, regarding the resignation of KPMG Peat
Marwick LLP as the Company's auditors.
On August 14, 1996, the Company filed a Form 8KA under ITEM 4, Change in
Registrant's Certifying Accountants, regarding the above and the
appointment of Price Waterhouse LLP as the Company's independent public
accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
----------------------------------------
Registrant
November 13, 1996 /s/ Francis V. Dane
- --------------------- ----------------------------------------
Date Francis V. Dane
Vice President, Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from September 30,
1996 Form 10-Q Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000727634
<NAME> Communication Intelligence Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,598
<SECURITIES> 2,800
<RECEIVABLES> 457
<ALLOWANCES> 0
<INVENTORY> 607
<CURRENT-ASSETS> 5,879
<PP&E> 431
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,083
<CURRENT-LIABILITIES> 4,319
<BONDS> 0
0
0
<COMMON> 421
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,083
<SALES> 238
<TOTAL-REVENUES> 2,071
<CGS> 1,347
<TOTAL-COSTS> 6,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (122)
<INCOME-PRETAX> (4,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,421)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,421)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
