Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
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: March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
----------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500,
Redwood Shores, CA 94065-1413
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
May 7, 1999: 79,550,807.
This Quarterly Report on Form 10-Q contains 17 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, 1999 (unaudited)
and December 31, 1998.................................................3
Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 1999 and 1998 (unaudited).....................4
Condensed Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 1999 and 1998 (unaudited).....................5
Notes to Condensed Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................16
Item 2. Change in Securities..........................................16
Item 3. Defaults Upon Senior Securities...............................16
Item 4. Submission of Matters to a Vote of Security Holders...........16
---------------------------------------------------
Item 5. Other Information.............................................16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.............................................16
(b) Reports on Form 8-K..................................16
Signatures.............................................................17
See accompanying notes.
-2-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- ------------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,405 $ 795
Restricted cash - 250
Accounts receivable, net 628 1,146
Inventories 74 74
Other current assets 159 103
------------------ ------------------
Total current assets 2,266 2,368
Note receivable from officer 180 200
Property and equipment, net 450 539
Other assets 240 247
------------------ ------------------
Total assets $ 3,136 $ 3,354
================== ==================
Liabilities and stockholders' equity Current liabilities:
Short-term debt $ - $ 145
Accounts payable 393 473
Accrued compensation 227 229
Other accrued liabilities 661 524
Deferred revenue 522 651
----------------- ------------------
Total current liabilities 1,803 2,022
Commitments (Note 5)
Stockholders' equity:
Common stock 795 785
Additional paid-in capital 70,702 70,205
Accumulated deficit (69,988) (69,504)
Cumulative translation adjustment (176) (154)
----------------- ------------------
Total stockholders' equity 1,333 1,332
================= ==================
Total liabilities and
stockholders' equity (Note 5) $ 3,136 $ 3,354
================= ==================
</TABLE>
See accompanying notes.
-3-
<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,
------------------------------------------
----------------- -------------------
1999 1998
----------------- -------------------
<S> <C> <C>
Revenues:
Product $ 773 $ 675
License and royalty 218 593
Development contracts 256 98
------------------ -------------------
1,247 1,366
Operating costs and expenses:
Cost of sales:
Product 471 329
License and royalty 17 15
Development contracts 142 57
Research and development 297 579
Sales and marketing 391 547
General and administrative 417 500
------------------- -------------------
Total operating costs
and expenses 1,735 2,027
------------------- -------------------
Loss from operations (488) (661)
Interest and other income
(expense), net (Note 5) 4 64
Interest expense - (14)
------------------- -------------------
Net loss (484) (611)
Preferred stock dividend - (167)
=================== ===================
Net loss applicable to
common stockholders $ (484) $ (778)
=================== ===================
Basic loss per common share $ (0.01) $ (0.02)
=================== ===================
Diluted loss per common share $ (0.01) $ (0.02)
=================== ===================
Weighted average common
shares outstanding 79,111 48,400
=================== ===================
</TABLE>
See accompanying notes.
-4-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
------------- --------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (484) $ (611)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation and amortization 63 71
Non-cash compensation 20 7
Changes in operating assets and liabilities:
Accounts receivable 519 (236)
Inventories 1 35
Other current assets (57) (147)
Other assets - (12)
Accounts payable (79) (709)
Accrued compensation (2) (67)
Other accrued liabilities 162 (284)
Deferred revenue (129) (287)
------------- --------------
Net cash provided by(used in)
operating activities 14 (2,240)
------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (16) -
------------- --------------
Net cash used in investing activities (16) -
------------- --------------
Cash flows from financing activities:
Principal payments on short-term debt (145) (453)
Proceeds from exercise of stock options 507 151
Restricted cash related to short-term debt 250 -
------------- --------------
Net cash provided by (used in)
financing activities 612 (302)
------------- --------------
Net increase (decrease) in cash and
cash equivalents 610 (2,542)
Cash and cash equivalents at
beginning of quarter 795 5,485
------------- --------------
Cash and cash equivalents at end of quarter $ 1,405 $ 2,943
============== ==============
Supplemental disclosures of cash flow information -
Cash paid in the period for -
Interest $ - $ 14
=============== ==============
</TABLE>
See accompanying notes.
-5-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (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 quarterly report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company's results of operations and cash flows for the
periods presented. The Company's interim results are not necessarily
indicative of the results to be expected for the entire year.
The Company develops, markets and licenses pen-input and biometric
security software and technologies for the computer, consumer electronics
and communication markets. The Company's core software technologies
include multilingual handwriting recognition systems (Jot(R) and the
Handwriter(R) Recognition System, referred to as HRS(TM)), dynamic
signature verification and capture tools (InkTools(TM) and Sign-it(TM)),
ink compression (INKshrINK(R)) and operating system extensions that
enable pen input (PenX(TM)). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking
(QuickNotes(TM)) and spell checking utilities (CIC Speller(TM)). CIC's
products are designed to increase the ease of use, functionality and
security of electronic devices ranging from PC peripherals to cellular
phones.
The Company offers a wide range of software products for pen-based
computing, based on the Company's core handwriting recognition and
related technologies. The Company's core technologies are classified into
two broad categories: "Natural Input Technologies" and "Transaction and
Communication Enabling Technologies." Natural input technologies are
designed to allow users to interact with a computer or handheld device by
using an electronic pen as the sole input device or in conjunction with a
keyboard. The pen eliminates the need for a mouse as a navigational
device. The Company believes that pen-input enhances productivity and
creativity because it is a more natural means of input, facilitates
editing and screen navigation, and reduces the risk of repetitive stress
illness. The Company's transaction and communication enabling
technologies are designed to provide a cost-effective means for
protecting electronic transactions, electronic files and private
communications. CIC believes that these technologies offer more efficient
methods to conduct transactions and provide more functional user
authentication and heightened data security. The Company's transaction
and communication enabling technologies have been fundamental in its
development of software for signature verification, data security, data
compression and pen-based operating environments.
For the three months ended March 31, 1999, the Company's cash and cash
equivalents increased by $610 from $795 at the beginning of the period to
$1,405. The increase is due primarily to cash provided by operating
activities of $14 and cash of $612 provided by financing activities.
These increases were offset by $16 used in investing activities. The $612
provided by financing activities consists primarily of $507 in proceeds
from the exercise of stock options by the Company's employees. In
addition, $105 was provided by the release of restricted funds associated
with the note payable held by a Chinese bank at December 31, 1998. The
note was repaid in February 1999. As of March 31, 1999, the Company's
principal source of funds were its cash and cash equivalents of $1,405.
There can be no assurance that the Company will have adequate capital
resources to fund planned operations in the near future. If the Company
does not have adequate capital resources to fund operations, it may be
required to delay, scale back or eliminate some or all of its operations,
which may have a material adverse effect on the Company's business,
results of operations and prospects.
-6-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
1. Interim financial statements (continued)
There can be no assurance that any additional funds will be available to
the Company when needed, or if available, will be available on favorable
terms or in amounts required by the Company.
The financial information contained herein should be read in conjunction
with the Company's audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 1998.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
March 31, December 31,
1999 1998
--------------------- -- -------------------
Cash in bank $ 1,269 $ 668
Commercial paper 110 125
Money market accounts 26 2
===================== ===================
$ 1,405 $ 795
===================== ===================
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At March 31,
1999, inventory was comprised primarily of finished goods.
4. Note receivable from officer
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the
Company's Common Stock. The note bore interest at the lesser of the
highest marginal rate per annum applicable to the Company's borrowings or
the highest rate allowable by law. On August 14, 1998, the Company
entered into an agreement (the "Agreement") with the former Chief
Executive Officer. Under the Agreement, the former officer has agreed to
provide consulting services to the Company through December 15, 2001. In
exchange for these services, $110of the note receivable from the officer
will be forgiven on a monthly basis over the period commencing August 15,
1998 and ending December 15, 2001. The remaining $100of the note
receivable from the officer will be forgiven on December 15, 2001 if the
officer has performed all the required services under the Agreement. The
Agreement will terminate on December 15, 2001.
5. Short-term debt
In June 1998, the Company's 90% owned Joint Venture borrowed the
equivalent of $145, denominated in Chinese currency, from a Chinese bank.
The loan bore interest at 9% and is due on June 30, 1999. The note was
repaid in February 1999. The borrowings were secured by a $250US dollar
denominated deposit held by the bank.
-7-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
5. Short-term debt (continued)
In May 1997, the Company purchased office furniture and a security system
with an approximate value of $209 from a third party. The Company paid
$100 in cash and signed an unsecured note for $109 due in monthly
installments through May 1998. The note bore interest on the unpaid
balance at a rate of 10% per annum. The note was paid in full in May
1998.
In October 1997, the Company entered into an accounts receivable
financing agreement whereby the Company may factor its accounts
receivable in accordance with the terms of the agreement. The maximum
credit available to the Company under the agreement is $1,500 with an
advance rate of 80% of eligible accounts receivable less than 90 days
old. The term of the agreement is twelve months with annual renewals. A
financing fee of 2.1% per month applies to the outstanding balance based
on the face value of each invoice. The line of credit is secured by a
blanket first priority lien on all Company assets with the exception of
intellectual property. There were no amounts financed under the accounts
receivable financing agreement at March 31, 1999. It is unlikely that the
Company will finance additional accounts receivable under this agreement.
6. Revenue recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted, without
material effect, for transactions entered into during the fiscal year
beginning January 1, 1998. SOP 97-2 provides guidance for recognizing
revenue on software transactions and supersedes Statement of Position No.
91-1, "Software Revenue Recognition". In March 1998, the AICPA issued
Statement of Position No. 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP
98-4 defers, for one year, the application of certain passages in SOP
97-2 which limit what is considered vendor-specific objective evidence
("VSOE") necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. In
December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP
98-9") Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 extends the effective date of
SOP 98-4 and provides additional interpretative guidance. SOP 98-9 is
effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue
recognition practice when adopted. Adoption of the remaining provisions
of SOP 97-2 should not have a material impact on revenue recognition
during 1999.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided
that no significant obligations remain and the collection of the
resulting receivable is probable. The Company provides for estimated
sales returns at the time of shipment.
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are
recognized as products are licensed/sold by licensees. Deferred revenue
in the accompanying balance sheets reflects advance royalty fees received
from the Company's licensees in advance of revenue recognition.
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies.
Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collection is probable and related costs have
been incurred.
-8-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
7. Convertible preferred stock
In December 1996, the Company completed a private placement (the
"December Private Placement") of 450 shares of redeemable convertible
preferred stock (the "Series A Preferred Stock") at $25.00 per share to
certain institutional and other investors. On March 28, 1997, and
effective as of December 31, 1996, holders of 100% of the then issued and
outstanding Series A Preferred Stock executed a waiver of certain
provisions
of the Registration Rights Agreement (the "Agreement") entered into in
connection with the December Private Placement. Under the waiver, these
holders irrevocably waived any redemption obligations of the Company with
respect to the Series A Preferred Stock in exchange for the issuance to
such holders of 300 warrants to purchase the Company's Common Stock,
allocated amongst the holders on a pro-rata basis. The warrants expire
five years from the effective date of issuance and have an exercise price
of $2.00 per share, subject to adjustments for anti-dilution. On November
26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per
share to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series
B Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per
share per annum, compounded semi-annually and quarterly, respectively,
when payable (whether or not declared). The dividends could have been
paid in cash or additional shares of preferred stock (with each
additional share valued at $25.00 per share), at the Company's option.
The Company paid the required dividends in additional shares of preferred
stock.
Each share of Series A Preferred Stock and Series B Preferred Stock was
convertible by the holders into shares of the Company's Common Stock at
any time. All of the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock were converted into shares of common stock by
November, 1998.
8. Net loss per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares and dilutive potential common
shares outstanding. All prior year earnings per share data have been
restated to reflect the provisions of SFAS 128. Potential common shares,
including outstanding convertible preferred stock, stock options and
warrants, have been excluded from the calculation of diluted earnings per
share for all periods presented as their effect is anti-dilutive. Per
share results of operations are reduced by the amortization of the
beneficial conversion rate on the Series A Preferred Stock and the
cumulative dividend requirements earned by the preferred stockholders.
9. Comprehensive income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). The Company adopted SFAS 130 effective January 1,
1998. SFAS 130 requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an
annual statement that is displayed with the same prominence as other
annual financial statements. SFAS 130 also requires that an entity
classify items as
-9-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
9. Comprehensive income (continued)
other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments,
and unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required.
Total comprehensive loss was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------- ---------------
1999 1998
------------- ---------------
<S> <C> <C>
Net loss $ (484) $ (611)
Other comprehensive income:
Cumulative translation adjustment (22) 66
============= ===============
Total comprehensive loss $ (506) $ (624)
</TABLE>
============= ===============
10. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of
An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises
information regarding the reporting of operating segments and was
required to be adopted in periods beginning after December 15, 1997. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company adopted SFAS
131 for the year ended December 31, 1998 and the Company's information
concerning segment reporting has been broken down into two Segments -
Handwriting recognition software and Systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment
data includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues into
two categories Handwriting recognition and system integration.
Handwriting recognition software is an aggregate of five revenue
categories. All Handwriting recognition software is developed around the
company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize
the Company's products. All sales above represent sales to external
customers.
The table below presents information about reporting segments for the
periods indicated:
<TABLE>
<CAPTION>
Three Months ended March 31,
1999 1998
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
------- ------- --- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 943 $ 304 $ 1,247 $ 917 $ 449 $ 1,366
Loss from
Operations $ (463) $ (25) $ (488) $ (476) $(185) $ (661)
Significant
change in
Total assets
from Year End $ - $ - $ - $ - $ - $ -
</TABLE>
-10-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this Quarterly Report on Form 10-Q and
"Management`s Discussion and Analysis of Financial Condition and Results of
Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license and
royalty revenues and development contracts. For the three months ended March 31,
1999, total revenues decreased by 9% to $1,247 from $1,366 for the comparable
three month period ended March 31, 1998 as discussed below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------
------------------ ---------------------
1999 1998
------------------ ---------------------
Unaudited
<S> <C> <C>
Revenues:
Product $ 773 $ 675
License and royalty 218 593
Development contract 256 98
================== =====================
Total revenues $ 1,247 $ 1,366
================== =====================
</TABLE>
Product sales increased to $773 or by 15% for the three month period ended March
31, 1999 from $675 in the comparable prior year period. This increase was due
primarily to the increase of $377 or 902% in aftermarket consumer software sales
via the Company's website to $419, compared to $42 in the prior year. The
increase in aftermarket consumer software sales resulted from increased Direct
Mail campaigns as compared to the 1998 comparable quarter. Handwriter(R) and
other product sales decreased by 86% or $191 to $38 during the period ended
March 31, 1999 compared to $229 in the prior year period. The decline in
Handwriter(R) sales resulted from the Company's decision in 1997 to focus on
software sales and discontinue hardware sales. Product sales by the Company's
90% owned joint venture in The People's Republic of China (the "Joint Venture")
were down 33% to $303 for the period ended March 31, 1999 compared to $449
during the same period last year. The decrease was primarily due to the
completion during the first quarter of 1998 of two major system integration
installations totaling approximately $112.
Revenues from license and royalty fees for the three month period ended March
31, 1999 decreased by 63% to $218 from $593 in the comparable prior year period.
This decrease was primarily the result of deferred revenue recognition during
the three months ended March 31, 1998 of approximately $404 of licensing
agreements for which the Company had no further obligation to deliver additional
software or services. Revenues from current license and royalty fees increased
$29 or by15% to $218 for the three months ended March 31, 1999 compared to $189
in the comparable prior year period.
Development contract revenues for the three month period ended March 31, 1999
increased $158 or by 161% to $256 from $98 in the comparable prior year period.
This increase resulted primarily from an increase in non-recurring engineering
fees primarily associated with smart phone development of $78 and an increase of
$80 in grant revenue recognized from the National Science Foundation compared to
the prior year period.
Cost of sales. Cost of product sales for the three months ended March 31, 1999
increased 57% to $630 from $401 in the comparable prior year period. Cost of
product sales at March 31, 1999 comprises approximately $218 of hardware and
-11-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
software components related to the system integration activities of the Joint
Venture, compared to approximately $304 in the prior year period. The decrease
in systems integration cost of product sales is due to the decrease in sales and
was offset by an increase of $252 in Direct Mail programs associated with the
aftermarket consumer software sales. The increase in aftermarket consumer
software product cost of sales resulted from the increase in sales programs for
such products for the three months ended March 31, 1999 compared to the prior
year. License and royalty cost of sales increased by 13% or approximately $2 to
$17 for the three months ended March 31, 1999 compared to $15 for the comparable
1998 period. Costs incurred in connection with development contract revenues
increased 149% for the three months ended March 31, 1999 as compared to the
March 31, 1998 period, commensurate with the increase in contract development
revenues in the first quarter of 1999.
Gross profit. Product gross profit declined to 39% for the first quarter ended
March 31, 1999 compared to 51% for the comparable period in the prior year. In
December 1997, the Company changed its strategy to focus on the sale of software
only, and accordingly wrote down its existing Handwriter(R) products inventory
of approximately $1,600 in December 1997. The Company continued its efforts to
sell the remaining Handwriter inventory during 1998. The lower product costs
resulting from the write-downs of Handwriter(R) product inventory in December
1997 translated into higher gross margins during the three months ended March
31, 1998 as compared to the three months ended March 31, 1999. License and
royalty gross profit declined to 92% for the three month period ended March 31,
1999 compared to 97% for the same period last year. This decrease was primarily
the result of deferred revenue recognition during the three months ended March
31, 1998 of approximately $404 of licensing agreements for which the Company had
no further obligation to deliver additional software or services and no
associated costs. Development contract gross profit increased to 45% for the
three months ended March 31, 1999 compared to 42% for the same period last year.
This increase is primarily due to increased cost efficiencies brought about by
the similar nature of the contract projects.
Research and development expenses. Research and development expenses for the
three month period ended March 31, 1999 decreased by 49% to $297 as compared to
$579 in the comparable period of the prior year. This decrease was primarily due
to a decrease of approximately $204 in payroll and related costs attributable to
a reduction in the number of personnel, primarily in March 1998. In addition,
engineering direct costs associated with development contract revenue charged to
cost of sales increased $85 or by 149% compared to $57 in the comparable period
of the prior year. The Company did not capitalize any software development costs
during the three months ended March 31, 1999 compared to $7 in software
development costs capitalized during the three month period ended March 31,
1998.
Sales and marketing expenses. Sales and marketing expenses for the three month
period ended March 31, 1999 decreased 29% to $391 as compared to $547 in the
comparable period of the prior year. This decrease was primarily due to
decreases of $117 in salaries and related costs due to reductions in personnel
associated with the Joint Venture operations in the first and second quarters of
1998. Other costs, including travel and facilities and related expenses,
decreased $39 commensurate with reductions in staffing.
General and administrative expenses. General and administrative expenses for the
three month period ended March 31, 1999 decreased 17% to $417 as compared to
$500 in the comparable period of the prior year. This decrease was primarily
attributable to a decrease in payroll and related costs of approximately $54 due
reductions in personnel associated with the Joint Venture operations in the
first and second quarters of 1998. Other costs, including professional service,
shareholder related expenses, and facilities and related costs, decreased $26
commensurate with reductions in staffing.
Interest and other income (expense), net. Interest and other income (expense),
net decreased due the extinguishment of debt related to the factoring of
accounts receivable and equipment purchased in 1997. The associated debt was
paid off in January and June of 1998, respectively.
-12-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
Preferred stock dividend. The preferred stock dividend relates to cumulative
dividends of $1.25 per share, per annum, compounded quarterly and semi-annually,
respectively, whether or not declared, on the convertible preferred stock
outstanding during the three month period ended March 31, 1998. All Series A
Preferred and Series B Preferred Stock was converted into shares of common stock
by November 1998. Accordingly, no preferred stock dividends were paid in 1999.
Liquidity and Capital Resources
At March 31, 1999, cash and cash equivalents totaled $1,405 compared to cash and
cash equivalents of $795 at December 31, 1998. The increase is due primarily to
cash provided by operating activities of $14 and cash of $612 provided by
financing activities. These increases were offset by $16 used in investing
activities. The net cash of $14 provided by operating activities was due
primarily to the collection of accounts receivable associated with the advanced
royalty fees and non-recurring engineering pre-payments from Ericsson. The $612
provided by financing activities consists primarily of $507 in proceeds from the
exercise of stock options by the Company's employees. Total current assets were
$2,266 at March 31, 1999 compared to $2,368 at December 31, 1998.
As of March 31, 1999, the Company's principal source of liquidity was its cash
and cash equivalents of $1,405. Although there can be no assurance, the Company
believes that its cash and cash equivalents together with cash provided from
projected revenues will be sufficient to fund planned operations for at least
the next twelve months. However, if, among other things, the Company is unable
to generate adequate cash flows from sales, or if expenditures required to
achieve the Company's plans are greater than expected, the Company may need to
obtain additional funds or reduce discretionary spending. There can be no
assurance that additional funds will be available when needed, or if available,
will be available on favorable terms or in the amounts required by the Company.
If adequate funds are not available when needed, the Company may be required to
delay, scale back or eliminate some or all of its operations, which will have a
material adverse effect on the Company's business, results of operations and
prospects.
Current liabilities, which include deferred revenue, were $1,803 at March 31,
1999. Deferred revenue, totaling $522 at March 31, 1999, primarily reflects
nonrefundable advance royalty fees received from the Company's licensees which
are generally recognized as revenue by the Company in the period in which
licensees report that products incorporating the Company's software have been
shipped. As such, the period over which such deferred revenue will be recognized
as revenue is uncertain because the Company cannot presently determine either
the timing or volume of future shipments by its licensees.
The Company currently owns 90% of a joint venture with the Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of the
People's Republic of China (the "Agency"). In June 1998, the registered capital
of the Joint Venture was reduced from $10,000to $2,550. As of December 31, 1998,
the Company had contributed an aggregate of $1,800 in cash to the Joint Venture
and provided it with non-exclusive licenses to technologies and certain
distribution rights and the Agency had contributed certain land use rights.
Following the reduction in registered capital of the Joint Venture, neither the
Company nor the Agency are required to make further contributions to the Joint
Venture. Prior to the reduction in the amount of registered capital, the Joint
Venture was subject to the annual licensing requirements of the Chinese
government. Concurrent with the reduction in registered capital, the Joint
Venture's business license has been renewed through October 18, 2043. The
Company's investment in the Joint Venture is subject to risks of doing business
abroad, including fluctuations in the value of currencies, export duties, import
controls and trade barriers (including quotas), restrictions on the transfer of
funds, longer payment cycles, greater difficulty in accounts receivable
collections, burdens of complying with foreign laws and political and economic
instability.
-13-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
In December 1996, the Company completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A Preferred Stock") at $25.00 per share to certain institutional and
other investors. On March 28, 1997, and effective as of December 31, 1996,
holders of 100% of the then issued and outstanding Series A Preferred Stock
executed a waiver of certain provisions of the Registration Rights Agreement
(the "Agreement") entered into in connection with the December Private
Placement. Under the waiver, these holders irrevocably waived any redemption
obligations of the Company with respect to the Series A Preferred Stock in
exchange for the issuance to such holders of 300 warrants to purchase the
Company's Common Stock, allocated amongst the holders on a pro-rata basis. The
warrants expire five years from the effective date of issuance and have an
exercise price of $2.00 per share, subject to adjustments for anti-dilution. On
November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series B
Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually and quarterly, respectively, when payable
(whether or not declared). The dividends could have been paid in cash or
additional shares of preferred stock (with each additional share valued at
$25.00 per share), at the Company's option. The Company paid the required
dividends in additional shares of preferred stock. Each share of Series A
Preferred Stock and Series B Preferred Stock was convertible by the holders into
shares of the Company's Common Stock at any time. All of the outstanding shares
of Series A Preferred Stock and Series B Preferred Stock were converted into
shares of common stock by November 1998.
In October 1997, the Company entered into an accounts receivable financing
agreement whereby the Company has the ability to factor its accounts receivable
in accordance with the terms of the agreement. The maximum credit available to
the Company under the agreement is $1,500, with an advance rate of 80% of the
eligible accounts receivable which are less than 90 days old. The term of the
agreement is twelve months with annual renewals. A financing fee of 2.1% per
month applies to the outstanding balance based on the face value of each
invoice. The line of credit is secured by a blanket first priority lien on all
Company assets with the exception of its intellectual property. As of March 31,
1999, the Company had no outstanding financed accounts receivable under this
agreement. The amounts financed under this agreement at December 31, 1997 were
repaid in January 1998. It is unlikely that the Company will finance additional
accounts receivable under this agreement.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $603, $620, and $558 for the years ending December 31, 1999, 2000,
and 2001, respectively. The Company's rent expense is expected to be reduced by
approximately $129 in 1999 in connection with the subleases on excess office
space in the United States.
The Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short term securities.
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
-14-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
Year 2000
Year 2000 issues arise because most computer systems and programs were designed
to handle only a two-digit date code for the year, not a four-digit code. Thus,
the Year 2000 could be interpreted as the year 1900 by such computer systems and
programs, resulting in the incorrect processing of data. CIC's software products
as developed and distributed by CIC are not date sensitive and therefore Year
2000 issues are not applicable to such products. The Company has evaluated its
internal software programs and equipment to ascertain the readiness of computer
software and operating systems for the Year 2000. Management of the Company
believes that its internal software programs are Year 2000 compliant. The
Company is currently in the process of replacing older desktop PC's which are
not, nor cannot be upgraded to be, Year 2000 compliant. The replacement of such
older computer equipment has been completed. The cost of replacing these desktop
systems is not expected to be significant. The Company is not aware of any other
hardware related problems.
The Company is in the process of analyzing the readiness of third parties with
which it does business. The Company believes that the only potentially
significant Year 2000 problems it may experience will result from Year 2000
issues affecting its website or its banks. The Company generates a significant
percentage of revenues from sales made via its website. If the Company's website
were to go off-line for an extended period of time, income would be
significantly impacted until service was restored. The Company has received
assurances that its website is Year 2000 compliant, however, it has not received
any information regarding the phone carrier that links the website server to the
internet. The Company believes that it is not possible to develop a contingency
plan at this time for dealing with the potential effects of such an event. If
banking systems were to fail due to Year 2000 problems, the Company may be cut
off from access to some of its funds for a period of time. The Company maintains
its cash with various financial institutions so that an incident at any one bank
would not have a materially adverse impact on the Company's cash availability.
Future Results and Stock Price
The Company's stock price may be subject to significant volatility. The public
stock markets have experienced significant volatility in stock prices in recent
years. The stock prices of technology companies have experienced particularly
high volatility, including, at times, severe price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, announcements of new strategic relationships by the
Company or its competitors, general conditions in the computer industry or the
global economy generally, or market volatility unrelated to the Company's
business and operating results.
Certain statements contained in this Quarterly Report on Form 10-Q, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following (1) technological, engineering,
manufacturing, quality control or other circumstances which could delay the sale
or shipment of the Company's products; (2) economic, business, market and
competitive conditions in the software industry and technological innovations
which could affect the Company's business; (3) the Company's inability to
protect its trade secrets or other proprietary rights, operate without
infringing upon the proprietary rights of others and prevent others from
infringing on the proprietary rights of the Company; and (4) general economic
and business conditions and the availability of sufficient financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
-15-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
Part II-Other Information
......... Page
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule. 18
.........
(b) Reports on Form 8-K
None
-16-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
(Unaudited)
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
May 7, 1998 /s/ Guido DiGregorio
- ------------------------------- -------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-17-
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<NAME> Communication Intelligence Corporation
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> Mar-31-1999
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0
0
<COMMON> 795
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