Communication Intelligence Corporation
and Subsidiaries
FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 520, Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of May 14, 1997:
44,872,570.
This Quarterly Report on Form 10-Q/A contains 15 pages of which this is page 1.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at March 31, 1997
(unaudited) and December 31, 1996..................................3
Condensed Consolidated Statements of Operations for the
three-month periods ended March 31, 1997 and 1996(unaudited).......4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 1997 and 1996 (unaudited)......5
Notes to Condensed Consolidated Financial Statements...............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....... .......................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits........................................14
(b) Reports on Form 8-K.............................14
Signatures........................................................15
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
Assets 1997 1996
--------- ---------
Current assets: (Restated)
<S> <C> <C>
Cash and cash equivalents ........................... $ 5,164 $ 10,573
Short-term investments .............................. 2,481 752
Accounts receivable, net ............................ 656 376
Inventories ......................................... 845 529
Other current assets ................................ 246 190
--------- ---------
Total current assets ............................. 9,392 12,420
Note receivable from officer ........................... 210 210
Property and equipment, net ............................ 582 537
Other assets ........................................... 468 336
--------- ---------
Total assets ..................................... $ 10,652 $ 13,503
========= =========
Liabilities and stockholders' equity Current liabilities:
Accounts payable .................................... $ 424 $ 367
Pre-petition liabilities - current .................. - 878
Accrued compensation ................................ 343 339
Other accrued liabilities ........................... 548 546
Deferred revenue .................................... 1,835 2,006
--------- ---------
Total current liabilities ........................ 3,150 4,136
Other liabilities ...................................... 20 32
Redeemable convertible preferred stock (Note 4) ........ - 9,417
Convertible preferred stock (Note 4) ................... 5 -
Common stock ........................................... 420 419
Additional paid-in capital ............................. 64,054 54,015
Accumulated deficit .................................... (56,793) (54,347)
Cumulative foreign currency translation adjustment ..... (204) (169)
Commitments (Note 3)
--------- ---------
Total liabilities, redeemable securities,
convertible preferred and common stockholders'
equity (Note 4) .................................. $ 10,652 $ 13,503
========= =========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
Revenues: (Restated)
<S> <C> <C>
Product ...................................... $ 765 417
License and royalty .......................... 272 131
Development contracts ........................ 161 91
-------- --------
1,198 639
Operating costs and expenses:
Cost of sales
Product .................................. 635 329
License, royalty and other costs ......... 169 103
Development contracts .................... 97 91
Research and development ..................... 476 357
Sales and marketing .......................... 1,400 714
General and administrative ................... 429 494
-------- --------
Total operating costs and expenses ....... 3,206 2,088
-------- --------
Loss from operations .............................. (2,008) (1,449)
Interest and other income (expense) net, (Note 4) . (421) 80
Interest expense .................................. (17) (79)
-------- --------
Net loss ................................. (2,446) (1,448)
Embedded yield on preferred stock ........ (2,188) -
Preferred stock dividend ................. (141) -
-------- --------
Net loss applicable to common stockholders (4,775) (1,448)
======== ========
Net loss per common share ................ $ (0.11) $ (0.04)
======== ========
Weighted average common shares outstanding 44,521 40,140
======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
--------- ----------
1997 1996
--------- ----------
Cash flows from operating activities: (Restated)
<S> <C> <C>
Net loss .............................................. $ (2,446) $ (1,448)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ...................... 47 74
Warrant issuance ................................... 484 -
Stock options issued for services .................. 46 -
Net (increase) decrease in operating assets
and liabilities:
Accounts receivable ............................. (280) 189
Inventories ..................................... (337) (74)
Prepaid expenses and other current assets ....... (57) 67
Accounts payable and accrued compensation ....... 61 (249)
Deferred revenues ............................... (172) (96)
Pre-petition liabilities ........................ (878) (762)
Other accrued liabilities ....................... (6) (169)
-------- --------
Net cash used in operating activities ........ (3,538) (2,468)
-------- --------
Cash flows from investing activities:
Proceeds from sale of short-term investments ..... 3,000 2,062
Purchase of short-term investments ............... (4,729) (3,029)
Acquisition of property and equipment ............ (79) (70)
Increase in other assets ......................... (127) (54)
-------- --------
Net cash used in investing activities ........ (1,935) (1,091)
-------- --------
Cash flows from financing activities:
Principal payments on short-term debt ............ - (30)
Principal payments on capital lease obligations .. (4) (9)
Proceeds from issuance of common stock ........... 102 120
-------- --------
Net cash provided by financing activities .... 98 81
-------- --------
Effect of exchange rate changes on cash ............... (34) (46)
-------- --------
Net decrease in cash and cash equivalents ............. (5,409) (3,524)
Cash and cash equivalents at beginning of quarter ..... 10,573 5,924
======== ========
Cash and cash equivalents at end of quarter ........... $ 5,164 $ 2,400
======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
Schedule of non-cash transactions: (Restated)
<S> <C> <C>
Embedded yield on preferred stock $ (2,188) $ -
========= =========
Preferred stock dividend $ (141) $ -
========= =========
Reclassification of current note receivable from
officer to non-current $ - $ 210
========= =========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiaries
FORM 10-Q/A
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
of Communication Intelligence Corporation (the "Company" or "CIC") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements included
in this report reflect all adjustments (consisting only of normal recurring
adjustments) which Communication Intelligence Corporation considers
necessary for a fair presentation of its financial position at the dates
and the Company's results of operations and cash flows for the periods
presented. The interim results are not necessarily indicative of the
results to be expected for the entire year.
The corporate mission of Communication Intelligence Corporation 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 three desktop computing products, Handwriter(R) for
Windows(R)and MacHandwriter(R)and its recently released Handwriter Manta.
Additionally, CIC has developed products for dynamic signature
verification, electronic ink data compression and encryption and a suite of
development tools and applications which the Company believes could
increase the functionality of its core products and could facilitate their
integration into original equipment manufacturers' ("OEM") hardware
products and computer systems and networks.
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, 1996.
Certain prior period amounts in the financial statements have been
reclassified to conform with the current period presentation.
Financial statement restatement
The Company's Form 10-Q for the quarter ended March 31, 1997 has been
restated to reflect the non-cash charge for the embedded yield on the
convertible preferred stock resulting from the discounted conversion
feature provided on such stock and the cumulative dividends of $1.25 per
share , per annum, on outstanding shares of convertible preferred stock.
The Company beleives the restatement of the March 31, 1997 quarterly
results is in accordance with the accounting treatment of the embedded
discount on convertible preferred stock as announced by the Securities and
Exchange Commission at the March 13, 1997 meeting of the Financial
Accounting Standards Board's Emerging Issues Task Force. The effect of this
restatement on the results of operations originally reported in the
Company's Form 10-Q for the quarter ended March 31, 1997 was to increase
the net loss applicable to common stockholders by $2,329,000 from
$2,446,000 to $4,775,000 and to increase net loss per common share by $0.6
from $.05 to $0.11. The restatement has no effect on the Company's cash
position at March 31, 1997.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents. 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. The cost of
securities sold is based on the specific identification method.
<PAGE>
2. Cash and cash equivalents (continued)
Cash and cash equivalents included certain highly liquid investments
with original maturities of up to 90 days as follows:
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1996
---------- ---------
(In thousands)
<S> <C> <C>
Cash in bank $ 493 $ 9,483
Commercial paper 4,667 1,088
Money markets 4 2
======== ========
$ 5,164 $10,573
======== ========
</TABLE>
Short-term investments consisted of the following available-for-sale
securities as follows:
<TABLE>
<CAPTION>
March 31, Dec.31,
1997 1996
---------- --------
(In thousands)
<S> <C> <C>
U.S. Corporate securities $ 1,981 $ 252
Other debt securities 500 500
--------- ---------
$ 2,481 $ 752
========= =========
</TABLE>
Corporate debt securities at March 31, 1997 mature in less than one
year. Other debt securities at March 31,1997 consist of securities not due
at a single maturity date.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. At March 31, 1997, inventory was comprised primarily of finished
goods.
4. Convertible Preferred Stock
On December 31, 1996, the Company completed a private placement of
450,000 shares of redeemable convertible preferred stock (the "December
Private Placement") at $25.00 per share to certain institutional and other
investors. Of the aggregate 450,000 shares sold, 70,200 shares of
redeemable convertible preferred stock were issued in exchange for 390,000
shares of common stock, originally issued in the June Private Placement.
The holders of the convertible preferred stock may convert their
shares into shares of Common Stock at between 72% and 85% of the effective
market price of the Common Stock at the date of conversion. The convertible
preferred stock may be converted by the holders into shares of Common Stock
at any time beginning July 1, 1997.
The convertible preferred stock entitles the holders thereof to
receive cumulative dividends on each shares are the rate of $1.25 per share
per annum, compounded semi-annually, when payable, whether or not declared.
Dividends may be paid at the Company's option in cash or additional shares
of convertible preferred stock.
The Company agreed to register the redeemable convertible preferred
stock by filing a Registration Statement on Form S-3 by March 31, 1997 and
by using its best efforts to cause such Registration Statement to be
declared effective within 180 days from December 31, 1996 (the "Declaration
Date"). In the event that the Registration Statement is not declared
effective within 180 days from December 31, 1996, the Company is required
to pay to each holder a default payment (the "Default Payment") in the
amount equal to 3% of the liquidation preference for the redeemable
convertible preferred stock held for any part of each 30-day period
subsequent to the Declaration Date that the Registration Statement has not
been declared effective. A similar Default Payment must be made by the
Company to the holders of redeemable convertible preferred stock in the
event that (i) the Company fails, refuses or is unable to cause the
<PAGE>
4. Convertible Preferred Stock (continued)
securities covered by the Registration Statement to be listed on the
exchange on which the Company's common stock is traded, (ii) any holder's
ability to sell the securities covered by the Registration Statement is
suspended for more than 60 days, or at any time during the twelfth or
thirteenth fiscal month following December 31, 1996, or (iii) the Company
does not have a sufficient number of shares of common stock available to
effect conversion of the redeemable convertible preferred stock.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding redeemable convertible
preferred stock executed a waiver to certain provisions of the Registration
Rights Agreement (the "Agreement"), entered into in connection with the
December Private Placement, which irrevocably waived such holders' rights
to any redemption in exchange for the issuance to the holders of 300,000
warrants to purchase the Company's common stock, allocated amongst the
holders on a pro-rata basis. The warrants expire five years from the date
of issuance and have an exercise price of $2.00 per share, subject to
adjustment for antidilution. The Company has ascribed a value of $484,000
to these warrants, which was recorded as an expense in the Company's
statement of operations for the quarter ended March 31, 1997. The fair
value ascribed to the warrants was estimated on the date of issuance using
the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 6.60%; expected life of 5 years; expected volatility of
104%; and expected dividend yield of 0%. As a result of the waiver, the
shares of redeemable convertible preferred stock have been reclassified as
convertible preferred stock for the quarter ended March 31, 1997 and, as
such, are included in stockholders' equity for such period.
5. Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
This statement is effective for the Company's quarter ending December 31,
1997. The Statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share
is replaced is replaced by basic earnings per share and fully diluted
earnings per share is replaced with diluted earnings per share. If the
Company had adopted this statement for the quarter ended March 31, 1997 and
for the comparable period in the prior year, the Company's loss per share
would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------- --------
(Restated)
(in thousands)
<S> <C> <C>
Basic loss per share . $ (0.11) $ (0.04)
Diluted loss per share $ (0.11) $ (0.04)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company has restated the previously issued financial results for
the three months ended March 31, 1997. The Company's financial results have
been restated to reflect the non-cash charge for the embedded yield on
convertible preferred stock resulting from the discount conversion feature
provided on such stock and cumulative dividends on the convertible
preferred stock. The Company beleives the restatement of the March 31, 1997
quarterly results is in accordance with the accounting treatment of the
embedded discount on convertible preferred stock as announced by the
Securities and Exchange Commission at the March 13, 1997 meeting of the
Financial Accounting Standards Board's Emerging Issues Task Force. The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto
included in Part I- Item 1 of this Form 10-Q/A and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth in
the Company's 1996 Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Results of Operations
Revenues. The Company's revenues are derived from product sales,
license and royalty revenues and development contracts. For the three
months ended March 31, 1997, revenues increased by 87% to $1,198,000 from
$639,000 for the comparable three months period ended March 31, 1996 as
discussed below:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
---------- ---------
1997 996
--------- ---------
Unaudited
(in thousands)
Revenues:
<S> <C> <C>
Product .............................. $ 765 $ 417
License and royalty................... 272 131
Development contract.................. 161 91
====== ======
$1,198 $ 639
====== ======
</TABLE>
Product sales increased to $765,000 for the three month period ended
March 31, 1997 from $417,000 in the comparable prior year period. This
increase was due primarily to the introduction of Handwriter products into
the retail channel through CompUSA and an increase in Handwriter sales to
the Corporate market. Handwriter product sales increased $350,000 to
$488,000 during the period ended March 31, 1997 compared to $138,000 in the
prior year period. Product sales by the Company's 79% owned joint venture
in The Peoples Republic of China (the "Joint Venture") were $275,000 for
the period ended March 31, 1997compared to $277,000 during the same period
last year.
Revenues from license and royalty fees for the three month period
ended March 31, 1997 increased to $272,000 from $131,000 in the comparable
prior period. This increase was primarily the result of higher shipment
volumes by the Company's licensees and to approximately $164,000 in royalty
revenues recognized on licensing agreements for which the Company has no
further obligation to deliver additional software or services.
Development contract revenues for the three month period ended March
31, 1997 increased 77% to $161,000 from $91,000 in the comparable prior
year period. This increase was offset in part by a $10,000 or 11% decrease
in grant revenues received from The National Science Foundation ("NSF"),
for basic research, compared to the first quarter 1996 development contract
revenues attributable to a grant from the US Government's National
Institute of Standards and Technology ("NIST") of $91,000. The NIST grant
was awarded in December 1993 to supplement the Company's development of a
recognition system for the Chinese language The NIST grant expired in April
1996.
<PAGE>
Cost of Sales. Cost of sales is comprised of costs from product sales,
licensing, royalty and other costs and development contracts. Cost of
product sales for the three months ended March 31, 1997 consists primarily
of cost of materials, approximately $235,000 of which is related to the
hardware and software components involved in the system integration
activities of the Joint Venture, compared to approximately $233,000 in the
prior year period, and the remainder of which related to costs of
Handwriter product sales. HandwriterAE product cost of materials was
approximately $400,000 for the three months ended March 31, 1997 compared
to approximately $95,000 in the prior year period. The decrease in the
Handwriter products gross margin to 17% during the three months ended March
31, 1997 from 31% in the comparable period of the prior year resulted from
the introduction of the Handwriter products into the retail channel. Gross
margin on product sales activities of the Joint Venture was 15% during the
three months ended March 31, 1997 compared to 16% in the prior year.
License, royalties and other costs, which include procurement, warehousing,
and related personnel in connection with sales of the Company's products,
increased by approximately $87,000 to $169,000 for the three months ended
March 31, 1997 compared $82,000 for the comparable 1996 period. This
increase in other costs related primarily to additional personnel costs of
$42,000 and product fulfillment and other costs of $43,000 in connection
with the launch of the Company's HandwriterAE for WindowsAE product in the
retail market in the first quarter of 1997. There were no comparable
activities in the prior year period. The increase in other costs was offset
by a reduction in the amortization of capitalized software development
costs of $21,000 for the three months ended March 31, 1997 as compared to
the prior year. Costs incurred in connection with development contract
revenue are expensed as incurred and increased 6% during the three months
ended March 31, 1997 as compared to the March 31, 1996 period, commensurate
with the increase in contract development revenues in the first quarter of
1997.
Research and development. Research and development expenses for the
three month period ended March 31, 1997 increased by 33% to $476,000 as
compared to $357,000 in the comparable period of the prior year. This
increase was primarily attributable to approximately $63,000 in payroll and
related costs attributable to increases in headcount and $37,000 in
consulting services compared to the prior year. Other costs, including
facility and related costs, increased approximately $19,000 for the three
month period ended March 31, 1997 as compared to the prior year. This
increase was commensurate with the increase in personnel. The Company did
not capitalize any software development costs in the three month period
ended March 31, 1997 or 1996, respectfully.
Sales and marketing. Sales and marketing expenses for the three month
period ended March 31, 1997 increased 96% to $1,400,000 as compared to
$714,000 in the comparable period of the prior year. This increase was
primarily due to increases of $374,000 in advertising and related expenses,
and $233,000 in payroll and related expenses. Other costs including
facilities and related expenses increased $49,000 commensurate with
additions in staffing. The increases in staffing and advertising expenses
were primarily due to the introduction and support of the Company's
Handwriter products into the retail channel during the first quarter of
1997, and continued marketing and sales efforts in the corporate channel.
General and administrative. General and administrative expenses for
the three month period ended March 31, 1997 decreased 13% to $429,000 as
compared to $494,000 in the comparable period of the prior year. This
decrease was primarily attributable to reductions of approximately $42,000
in payroll and related costs and $21,000 in other costs including insurance
and facilities and related costs associated with the transfers of general
and administrative staff to sales and marketing activities.
Interest and other income (expense). Interest and other income
(expense) increased due to a one time charge to expense of $484,000 for
300,000 warrants issued on March 28, 1997, and effective as of December 31,
1996, to holders constituting 100% of the issued and outstanding redeemable
convertible preferred stock in exchange for the execution of a waiver to
certain provisions of the Registration Rights Agreement (the "Agreement"),
entered into in connection with the December Private Placement (Note 4).
Embedded yield on preferred stock. The embedded yield on preferred
stock results from the discount feature provided on conversion of the
convertible preferred stock into Common Stock. The embedded yield totaling
$4,376,000 will be recognized from the issuance date through July 1, 1997,
the date upon which the preferred sock becomes convertible.
Preferred stock dividend. The preferred stock dividend relates to
cumulative dividends of $1.25 per share per annum, compounded
semi-annually, when payable, whether or not declared, on the convertible
preferred stock.
<PAGE>
Liquidity and Capital Resources
At March 31, 1997, cash, cash equivalents and short term investments
totaled $7,645,000 compared to cash, cash equivalents and short term
investments of $11,325,000 at December 31, 1996. This decrease was
primarily the result of $3,538,000 used in operating activities including
the final payment of $878,000 to pre-petition creditors during the quarter.
Total current assets were $9,392,000 at March 31, 1997 compared to
$12,420,000 at December 31, 1996.
As of March 31, 1997, the Company's principal source of liquidity was
its cash, cash equivalents and short-term investments of $7,645,000. The
Company believes that the above-mentioned funds, are adequate to meet
projected working capital and other cash requirements for the next twelve
months. However the Company may be required to obtain additional financing
earlier.
Current liabilities, which include deferred revenue, were $3,150,000
at March 31, 1997. Deferred revenue, totaling $1,835,000 at March 31, 1997,
primarily reflects nonrefundable advance royalty fees received from the
Company's licensees which are generally recognized as revenue by the
Company in the period in which licensees report that products incorporating
the Company's software have been shipped. As such, the period over which
such deferred revenue will be recognized as revenue is uncertain because
the Company cannot presently determine either the timing or volume of
future shipments by its licensees.
In 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 March 31, 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.
The Company is planning the next contribution of $900,000 in cash and
approximately $1,700,000 in licensed technology rights during the second
quarter of 1997. This contribution will help fund CICC's new Software
Development Division. This division was formed to create pencentric
applications initially for the Chinese market. CICC also plans to introduce
the Chinese Handwriter during the second quarter of 1997. There can be no
assurance that the Company will be able to fund the balance of any required
cash contributions to the Joint Venture, that the Joint Venture will be
successful in developing or selling integrated computer systems or other
Company products to the Chinese market or that the Company will realize any
significant benefits from its contributions to the Joint Venture.
In April 1997, the Company's 1997 Registration Statement on Form S-3
for the offering by selling security holders of shares of common stock
issuable upon conversion of or otherwise in respect to 450,000 shares of
the Company's Convertible Preferred and the exercise of warrants to
purchase and aggregate of 637,000 shares of common stock was declared
effective by the Securities and Exchange Commission. The Convertible
Preferred may be converted by the holder into shares of common stock at any
time beginning July 1, 1997 or earlier if a change in control transaction
occurs.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding redeemable convertible
preferred stock executed a waiver to certain provisions of the Registration
Rights Agreement (the "Agreement"), entered into in connection with the
December Private Placement, which irrevocably waived such holders' rights
to any redemption in exchange for the issuance to the holders of 300,000
warrants to purchase the Company's common stock, allocated amongst the
holders on a pro-rata basis. The warrants expire five years from the date
of issuance and have an exercise price of $2.00 per share, subject to
adjustment for antidilution. The Company has ascribed a value of $484,000
to these warrants, which was recorded as an expense in the Company's
statement of operations for the quarter ended March 31, 1997. The fair
value ascribed to the warrants was estimated on the date of issuance using
the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 6.60%; expected life of 5 years; expected volatility of
104%; and expected dividend yield of 0%. As a result of the waiver, the
shares of redeemable convertible preferred stock have been reclassified as
convertible preferred stock for the quarter ended March 31, 1997 and, as
such, are included in stockholders' equity for such period.
<PAGE>
Future Results and Stock Price
The Company's future earnings and stock price may be subject to
significant volatility. The public stock markets have exhibited extreme
volatility in stock prices in recent years. The stock prices of high
technology companies have experienced particularly high volatility,
including at times severe price changes that are unrelated or
disproportional to the operating performance of these specific companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuation in response to, among other factors, quarter-to-quarter
variations in operating results, announcements of technological innovations
or new products by the Company or its competitors, announcements of new
strategic relationships by the Company or its competitors, general
conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating
results.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
On January 22, 1997, the Company filed a Form 8-K (dated January
22,1997) under Item 5, Other Events, reporting nation wide offering of
CIC Handwriter products by CompUSA.
<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
January 6, 1998 /s/ Craig M. Hutchison
- ---------------------- ---------------------------------------------
Date Craig M. Hutchison
(Principal Financial Officer and Officer Duly
authorized to Sign on Behalf of the Registrant)
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