UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
-------------
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 No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
August 2, 2000: 84,512,621.
This Quarterly Report on Form 10-Q contains 19 pages of which this is page 1.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and
December 31,1999.......................................................3
Condensed Consolidated Statements of Operations for the Three and
Six-month Periods Ended June 30, 2000 and 1999 (unaudited).............4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Six-month Period Ended June 30, 2000(unaudited)................5
Condensed Consolidated Statements of Cash Flows for the Six-month
Periods Ended June 30, 2000 and 1999 (unaudited).......................6
Notes to Unaudited Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................17
Item 2. Change in Securities and Use of Proceeds.........................17
Item 3. Defaults Upon Senior Securities..................................17
Item 4. Submission of Matters to a Vote of Security Holders..............17
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits................................................18
(b) Reports on Form 8-K.....................................18
Signatures................................................................19
-2-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -----------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,633 $ 2,374
Accounts receivable, net 923 1,575
Inventories 118 81
Prepaid expenses and other current assets 245 175
------------ -----------
Total current assets 4,919 4,205
Note receivable from officer 94 135
Property and equipment, net 297 344
Other assets 203 279
------------ -----------
Total assets $ 5,513 $ 4,963
============ ===========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ - $ 60
Accounts payable 415 288
Accrued compensation 261 268
Other accrued liabilities 275 500
Deferred revenue 1,113 35
------------ -----------
Total current liabilities 2,064 1,151
Long-term debt - related party 1,370 1,338
Minority interest 124 125
Commitments
Stockholders' equity:
Common stock 844 822
Additional paid-in capital 74,578 72,983
Accumulated deficit (73,259) (71,244)
Cumulative translation adjustment (208) (212)
------------ -----------
Total stockholders' equity 1,955 2,349
------------ -----------
Total liabilities and stockholders' equity $ 5,513 $ 4,963
============ ===========
</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 Six Months Ended
June 30, June 30,
------- ------- -------- -------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product $ 977 $ 787 $ 2,074 $ 1,560
License and royalty 134 592 318 810
Development contracts 139 57 235 313
------- ------- ------- -------
Total revenues 1,250 1,436 2,627 2,683
Operating costs and expenses:
Cost of sales:
Product 678 494 1,332 965
License and royalty 13 15 34 32
Development contracts 117 24 171 166
Research and development 388 384 817 681
Sales and marketing 588 440 1180 831
General and administrative 571 485 1041 902
------- ------- ------- ------
Total operating costs and expenses 2,355 1,842 4,575 3,577
------- -------- ------- ------
Loss from operations (1,105) (406) (1,948) (894)
Interest and other income
(expense), net 53 28 46 32
Interest expense (75) (2) (114) (2)
Minority interest - - 1 -
------- ------- ------- -------
Net loss (1,127) (380) (2,015) (864)
======= ======= ======= =======
Basic loss per common share $(0.013) $(0.005) $(0.024) $(0.011)
======== ======== ======== ========
Diluted loss per common share $(0.013) $(0.005) $(0.024) $(0.011)
======== ======== ======== ========
Weighted average common
shares outstanding 84,370 79,527 83,684 79,320
======== ======== ======== ========
</TABLE>
-4-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Loss Total
------ -------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1999......... $ 822 $ 72,983 $(71,244) $(212) $ 2,349
Cashless Exercise of
300 warrantsfor 255
shares of Common Stock.. 3 - - - 3
Exercise of options
for 1,596shares of
Common Stock.......... 16 1,439 - - 1,455
Exercise of 106 warrants
for 106shares of Common
Stock.......... 1 - - - 1
Foreign currency translation
adjustment................ - - - 2 2
Net loss.................... - - (888) - (888)
---------------------------------------------------
Balances as of
March 31, 2000............ $ 842 $ 74,422 $(72,132) $(210) $ 2,922
---------------------------------------------------
Exercise of options
for 1,809 shares of
Common Stock.............. 2 156 - - 158
Foreign currency translation
adjustment................ - - - 2 2
Net loss.................... - - (1,127) - (1,127)
---------------------------------------------------
Balances as of
June 30, 2000............. $ 844 $ 74,578 $(73,259) $(208) $ 1,955
===================================================
</TABLE>
-5-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,015) $ (864)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation and amortization 133 136
Non-cash compensation 40 42
Changes in operating assets and liabilities:
Accounts receivable 653 436
Inventories (36) 16
Prepaid expenses and other current assets (70) (38)
Other assets 69 -
Accounts payable 127 (221)
Accrued compensation (5) 20
Other accrued liabilities (225) 118
Deferred revenue 1,078 (143)
----------- -----------
Net cash used in operating activities (251) (498)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (43) (43)
----------- -----------
Net cash used in investing activities (43) (43)
----------- -----------
Cash flows from financing activities:
Principal payments on short-term debt (60) (145)
Principal payments on capital lease obligations (4) -
Proceeds from issuance of short-term debt - 500
Proceeds from issuance of common stock 1,617 584
Restricted cash related to short-term debt - 250
----------- -----------
Net cash provided by financing activities 1,553 1,189
----------- -----------
Net increase in cash and cash equivalents 1,259 648
Cash and cash equivalents at beginning of period 2,374 795
----------- -----------
Cash and cash equivalents at end of period $ 3,633 $ 1,443
=========== ===========
</TABLE>
-6-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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 and markets
natural input and electronic signature solutions for wireless internet
information devices and enterprise applications including e-commerce,
document automation and corporate security. 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), Sign-it(TM), and
Sign-On(TM)), ink compression (INKshrINK(R)) and operating system
extensions that enable pen input (PenX(TM) and PenX(TM) VC). Other consumer
and original equipment manufacturer ("OEM") products include electronic
notetaking (QuickNotes(TM) and InkSnap(TM)) and predictive text input,
(WordComplete(TM)). CIC's products are designed to increase the ease of
use, functionality and security of electronic devices with a primary focus
on wireless internet and information devices such as smartphones,
electronic organizers ("PDA's") and portable web browsers. The Company
offers a wide range of multi-platform software products that enable or
enhance pen-based computing. 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 or "stylus" as the primary input device or in
conjunction with a keyboard. CIC's natural input offerings include
multilingual handwriting recognition systems, software keyboards,
predictive text entry, and electronic ink capture technologies. Many small
handheld devices such as electronic organizers, pagers and smart cellular
phones do not have a keyboard. For such devices, handwriting recognition
and software keyboards offer the most viable solutions for performing text
entry and editing. CIC's predictive text entry technology simplifies data
entry even further by reducing the number of actual letters required to be
entered. The Company's ink capture technologies facilitate the capture of
electronic ink for notetaking, drawings or short handwritten messages. The
Company's transaction and communication enabling technologies are designed
to provide a cost-effective means for securing electronic transactions,
providing network and device access control, and enabling workflow
automation of traditional paper form processing. CIC believes that these
technologies offer more efficient methods for conducting electronic
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, and data compression. For the six
months ended June 30, 2000, the Company's cash and cash equivalents
increased by $1,259 from $2,374 at the beginning of the period to $3,633.
The increase is due primarily to cash of $1,553 provided by financing
activities. This increase was offset by cash used in operating activities
of $251 and cash used in investing activities of $43. The $1,553 provided
by financing activities consists primarily of $1,617 in proceeds from the
exercise of stock options and warrants by the Company's employees and
others, offset by principal payments of short-term debt and capital lease
obligations of $64. As of June 30, 2000, the Company's principal source of
funds were its cash and cash equivalents aggregating $3,633. The Company
anticipates that it will
-7-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements (continued)
have adequate capital to fund its planned operations in the forseeable
future. However, there can be no assurance that the Company will have
adequate capital resources to fund planned operations or 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. If the Company is unable to obtain 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.
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, 1999.
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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------- -- -------------------
<S> <C> <C>
Cash in bank $ 1,451 $ 1,705
Commercial paper 644 11
Money market accounts 1,538 658
--------------------- -------------------
$ 3,633 $ 2,374
===================== ===================
</TABLE>
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At June 30, 2000,
inventories consisted 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 agreed to provide consulting
services to the Company through December 15, 2001. In exchange for these
services, $110 of the note receivable from the former officer will be
forgiven on a monthly basis over the period commencing August 15, 1998 and
ending December 15, 2001. The remaining $100 of the note receivable from
the former officer will be forgiven on December 15, 2001, if the former
officer has performed all the required services under the Agreement. The
Agreement will terminate on December 15, 2001.
-8-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank.
The loan bore interest at 5.12% and was due on March 2, 2000. The
borrowings did not require a compensating balance. The note was repaid in
full in January 2000.
6. Long-term debt related party
On October 20, 1999, the Company entered into a loan agreement with a
charitable remainder annuity trust, of which a director and officer of the
Company is a trustee, in the amount of $1,500 (the "1999 Loan"). The 1999
Loan is secured by a first priority security interest in all of the
Company's assets as now owned or hereafter acquired by the Company. The
1999 Loan bears interest at the rate of 2% over the prime rate as published
by Citibank from time to time, 11.5% at June 30, 2000. The note is due
January 31, 2002. Interest on the principal amount under the 1999 Loan is
payable quarterly. The 1999 Loan can be re-paid in whole at any time or in
part at any time without penalty. Any partial payment must be in the
principal amount of $100 or a multiple thereof. At June 30, 2000 $1,500 of
the 1999 Loan is outstanding.
On October 20, 1999, in connection with the 1999 Loan the Company issued to
the charitable remainder annuity trust warrants to purchase 300 shares of
the Company's common stock. The warrants expire October 20, 2001, and have
an exercise price of $1.09 per share. The Company ascribed a value of $179
to these warrants, which will be amortized to the Company's results of
operations over the life of the debt. 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
5.50%; expected life of 2 years; expected volatility of 99%; and expected
dividend yield of 0%. On January 20, 2000, the charitable remainder trust
exercised all 300 warrants issued in connection with the 1999 Loan. The
warrants were exercised under the cashless exercise provision in the
warrant agreement. The Company issued 255 shares of common stock in
exchange for the 300 warrants.
7. Revenue recognition
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.
-9-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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
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.
9. Comprehensive income
Total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Net loss $ (2,015) $ (864)
Other comprehensive income:
Cumulative translation adjustment 4 (34)
------------ ------------
Total comprehensive loss $ (2,011) $ (898)
============ ============
</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 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" set forth in
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999. 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.
-10-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
10. Segment Information (continued)
The table below presents information about reporting segments for the
periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------------------------- -----------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,891 $ 736 $ 2,627 $ 2,092 $ 591 $ 2,683
Loss from Operations $(1,942) $ (6) $ (1,948) $ (877) $ (17) $ (894)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
</TABLE>
-11-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this 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, 1999.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license and
royalty fees and development contracts. For the three months ended June 30,
2000, revenues decreased by 13% to $1,250 from $1,436, and for the six months
revenues decreased 2% to $2,627 from $2,683 for the comparable three and six
month periods ended June 30, 1999, as discussed below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 977 $ 787 $ 2,074 $ 1,560
License and royalty fees 134 592 318 810
Development contracts 139 57 235 313
------- ------- ------- -------
Total revenues $ 1,250 $ 1,436 $ 2,627 $ 2,683
======= ======== ======= =======
</TABLE>
Product sales for the three months ended June 30, 2000 increased 24% to $977
from $787 in the comparable prior year period. This increase is due to an
increase of $159 or 883% in the sales of electronic signature software compared
to the same three month period last year. This increase was offset by a decrease
of $52 or 11% in aftermarket consumer software sales via the Company's website
to $429 compared to $481 in the prior year. The decrease in aftermarket consumer
software sales resulted from decreased availability of new names to be used in
direct mail campaigns as compared to the 1999 comparable quarter. Product sales
by the Company's 90% owned joint venture in The People's Republic of China (the
"Joint Venture") increased $83 or 29% to $371 for the three month period ended
June 30, 2000 compared to $288 during the same period last year. The increase is
primarily due to increased sales activity as opposed to one time large orders
during the period.
Product sales for the six months ended June 30, 2000 increased 33% to $2,074
from $1,560 in the comparable prior year period. This increase was due to the
increase of $535 or 723% in the Company's electronic signature software. The
product revenue increase reflects a breakthrough order for electronic signature
software from Charles Schwab & Co in 2000. Aftermarket consumer software sales
via the Company's website declined $171 or 19% to $729 compared to $900 in the
prior year. The decrease in aftermarket consumer software sales resulted from
decreased availability in names used in direct mail campaigns as compared to the
1999 six month period. Product sales by the Joint Venture increased $150 or 26%
to $736 from $586 for the six month period ended June 30, 2000 compared to the
same period last year. The increase is primarily due to increased sales activity
as opposed to one time large orders during the period.
Revenues from license and royalty fees for the three month period ended June 30,
2000 decreased $458 or 77% to $134 from $592 in the comparable prior year
period. This decrease is primarily attributable to the recognition of $400 in
the second quarter of 1999 in connection with a license agreement for which the
Company had no further obligation to provide software or services. For the six
month period ended June 30, 2000, revenues from license and royalty fees
decreased $492 or 61% to $318 from $810 in the comparable prior year period.
-12-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
This decrease was primarily the result of the event described above and the
decrease in reported OEM product shipments bundling the Company's handwriting
recognition software during the six months ended June 30, 2000 compared to the
same period last year.
Development contract revenues for the three month period ended June 30, 2000
increased 143% to $139 from $57 in the comparable prior year period. This
increase resulted from grant revenue from the National Science Foundation
("NSF"). For the six months ended June 30, 2000, development contract revenue
decreased 25% to $235 from $313 in the comparable prior year period. The
decrease is due to the higher non-recurring engineering revenues from Ericsson
during the six month period in the prior year.
Cost of sales. Cost of total product sales for the three and six month periods
ended June 30, 2000 increased 52% and 32%, respectively, to $808 and $1,537
respectively, from $533 and $1,163, respectively, in the comparable prior year
periods. Cost of product sales for the three and six month periods ended June
30, 2000 includes approximately $271 and $526, respectively, of hardware and
software components related to the system integration activities of the Joint
Venture, compared to approximately $218 and $381, respectively, in the prior
year periods. The increase in systems integration costs of product sales for the
three and six month periods ended June 30, 2000 is due to the increase in sales
of such products. Web sale costs over the three and six month periods ending
June 30, 2000 increased $130 and $112, respectively, to $400 and $671,
respectively, compared to $270 and $559 in the comparable period of the prior
year. The increase in web product cost of sales is due to banner advertising on
the web as well as direct mail campaigns. No banner advertising was done over
the three and six months ended June 30, 1999. License and royalty cost of sales
decreased approximately $2 to $13 in the three months ended June 30, 2000
compared to $15 during the prior year period. For the six months ended June 30,
2000 license and royalty cost of sales increased $2 to $34 compared to $32 in
the comparable 1999 period. The change is due to the technology import tax on
the Company's Japanese OEM shipments bundling the Company's handwriting
recognition software. Costs incurred in connection with development contract
revenues increased 388% to $117 for the three months ended June 30, 2000 as
compared to $24 in the prior period, due to the costs associated with the NSF
grant. For the six months ended June 30, 2000, contract development costs
increased 3% to $171 as compared to $166 in the prior period. The increase is
due to the higher costs associated with the NSF grant over the six months ended
June 30, 2000 compared to the same period last year.
Gross profit. Gross profit decreased to $442 and $1,090 or 35% and 41% of sales,
respectively for the three and six months period ended June 30, 2000 compared to
$903 and $1,852 or 63% and 69% of sales, respectively, for the comparable period
in the prior year. This decrease was due primarily to the decrease in licensing
and royalty revenues compared to the prior year. Product gross margins increased
to $299 and $742 compared to $293 and $595 in the prior year. This increase was
due to the breakthrough order of the Company's electronic signature solution
software from Charles Schwab & Co in 2000. License and royalty gross profit
declined to $121 and $284 for the three and six-month period ended June 30, 2000
compared to $577 and 778 for the same period last year. The lower gross margins
were primarily due to a $400 licensing agreement recognized in the second
quarter of last year and lower shipments by the Company's licensees as discussed
above. Development contract gross profit decreased to $22 and $64 for the three
and six-months ended June 30, 2000 compared to $33 and $147 for the comparable
periods last year. The decrease is due to costs associated with the NSF grant
and lower revenues as discussed above.
Research and development expenses. Research and development expenses for the
three and six month periods ended June 30, 2000 increased by $4 and $136 or 1%
and 20%, respectively, to $388 and $817, respectively, as compared to $384 and
$681 in the comparable period of the prior year. The increases were primarily
due to increases of approximately $19 and $55, respectively, in payroll and
related costs for existing personal over the three and six month periods ended
June 30, 2000 compared to the same three and six month prior year period. Other
costs including facilities expenses increases $77 and $86 over the three and six
month periods of the prior year. During the three and six months ended June 30,
2000, $116 and $171, respectively, of engineering costs were transferred to cost
of sales compared to $24 and $166, respectively, in the comparable period of the
-13-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
prior year. The higher rate of transferred cost is associated with the NSF grant
in the current three month period. The Company did not capitalize any
significant software development costs in the three and six month periods ended
June 30, 2000, and 1999.
Sales and marketing expenses. Sales and marketing expenses for the three and six
month periods ended June 30, 2000 increased $148 and $349, respectively, or 34%
and 42% to $588 and $1,180, respectively, as compared to $440 and $831,
respectively, in the comparable periods of the prior year. The increases were
due to increases of $65 and $91, respectively, in salaries and related costs due
to increased sales personal. Other expenses including recruiting and
professional service expenses increased $56 and $133, respectively, over the
prior year three and six month periods. These increases were due to the expense
of hiring additional sales and marketing personal and a one-time cost of
development of a media campaign aimed at significantly increasing aftermarket
software sales via CIC's website. Advertising and promotion expense increased
$27 and $125, respectively as compared to the same three and six month periods
in the prior year. This increases resulted from increased efforts to promote the
Company and its products in the marketplace.
General and administrative expenses. General and administrative expenses for the
three and six month period ended June 30, 2000 increased $86 and $139,
respectively, or 18% and 15% to $571 and $1,041 as compared to $485 and $902 in
the comparable three and six month period of the prior year. This increase was
primarily attributable to an increase of $73 and $119, respectively, in investor
relations expenses due to the costs associated with disseminating information to
the substantially increased number of shareholders over the prior year period.
In addition, salaries and related expenses for the three and six month period,
increased $30 and $54, respectively. This increase was due to an increase in the
number of administrative personal late in the fourth quarter of 1999. The
increases in payroll and investor relations expenses were off set by reductions
in other costs such as recruiting, professional service and facilities related
costs of $17 and $34, respectively compared to the three and six month period in
the prior year.
Interest and other income (expense), net. Interest and other income (expense),
net, increased $25 and $14 to $53 and $46 for the three and six months ended
June 30, 2000, compared to $28 and $32 in the comparable prior year period. The
increase is due to the increase in interest income from the higher cash and
equivalents compared to the prior year. The increase in interest income is
offset by credit card processing fees associated with internet sales.
Liquidity and Capital Resources
At June 30, 2000, cash and cash equivalents totaled $3,633 compared to cash and
cash equivalents of $2,374 at December 31, 1999. The increase is due primarily
to cash of $1,553 provided by financing activities. This increase was offset by
cash used in operating activities of $251 and cash used in investing activities
of $43. The $1,553 provided by financing activities consists primarily of $1,617
in proceeds from the exercise of stock options and warrants by the Company's
employees and others, offset by principal payments of short-term debt and
capital lease obligations of $60 and $4, respectively. Total current assets were
$4,919 at June 30, 2000, compared to $4,205 at December 31, 1999.
As of June 30, 2000, the Company's principal source of liquidity was its cash
and cash equivalents of $3,633. 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 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.
-14-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Current liabilities, which include deferred revenue, were $2,064 at June 30,
2000. Deferred revenue, totaling $1,113 at June 30, 2000, primarily reflects
nonrefundable advance royalty fees for 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 Information Industry
Bureau, 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 $10,000
to $2,550. As of December 31, 1999, the Company had contributed an aggregate of
$1,800 in cash to the Joint Venture and provided it with both non-exclusive
licenses to technologies and certain distribution rights. 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.
On October 20, 1999, the Company entered into a loan agreement with a charitable
remainder annuity trust, of which a director and officer of the Company is a
trustee, in the amount of $1,500 (the "1999 Loan"). The 1999 Loan is secured by
a first priority security interest in all of the Company's assets as now owned
or hereafter acquired by the Company. The 1999 Loan bears interest at the rate
of 2% over the prime rate as published by Citibank from time to time, and is due
January 31, 2002. Interest on the principal amount under the 1999 Loan is
payable quarterly. The 1999 Loan can be re-paid in whole at any time or in part
at any time without penalty. Any partial payment must be in the principal amount
of $100 or a multiple thereof. The interest rate at June 30, 2000 was 11.5%. At
June 30, 2000 $1,500 of the 1999 Loan is outstanding.
In October 1999, in connection with the 1999 Loan, the Company issued to the
charitable remainder annuity trust warrants to purchase 300 shares of the
Company's common stock. The Company ascribed a value of $179 to these warrants,
which will be amortized to the Company's results of operations over the life of
the warrant. 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 5.50%; expected life of 2 years;
expected volatility of 99%; and expected dividend yield of 0%. The warrants were
due to expire October 20, 2001, and had an exercise price of $1.09 per share. On
January 20, 2000, the charitable remainder trust, of which a director and
officer of the Company is a trustee, exercised all 300 warrants issued in
connection with the $1,500 long-term debt. The warrants were exercised under the
cashless exercise provision in the warrant agreement. The Company issued
approximately 255 shares of common stock in exchange for the 300 warrants.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $517, and $431 excluding sub-lease income for the years ending
December 31, 2000, and 2001, respectively. The Company's rent expense is
expected to be reduced by approximately $98 in 2000 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.
-15-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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.
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 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
-16-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
For the six months ended June 30, 1999 the Company has granted stock
options to employees and directors for services rendered as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees (30) January 31, 2000 45,000 $ 7.3125 Quarterly Jan. 31, 2010
over three
years
Employees (2) June 12, 2000 575,000 $ 3.3438 Quarterly June 12, 2010
over three
years
Employees (1) June 13, 2000 10,000 $ 3.1250 Quarterly June 13, 2010
over three
years
Employees (1) June 20, 2000 15,000 $ 3.5625 Quarterly June 20, 2010
over three
years
Employees (1) June 26, 2000 75,000 $ 3.0625 Quarterly June 26, 2010
over three
years
Non-Employee
Directors (3) June 12, 2000 75,000 $ 3.3438 Upon grant June 12, 2007
------------------------------------------------------------------------------
</TABLE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(in thousands, except percentages)
The Company held its Annual Meeting of Stockholders on June 12, 2000. The number
of shares of common stock with voting rights as of the record date represented
at the meeting either in person or by proxy was 78,336 shares or 93% of the
eligible outstanding Common Stock of the Company. Two proposals were voted upon
by the stockholders.
The proposals and the voting results follow:
Proposal 1
Each of the five persons listed below were elected as directors to serve until
the next Annual Meeting or until his successor is elected or appointed. The
number of votes for and withheld for each individual is listed next to his name.
<TABLE>
<CAPTION>
Broker
-------------------------
Name For Withheld Non-votes Abstain
------------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Guido DiGregorio 77,702 634 None None
Jess M. Ravich 75,577 2,759 None None
Philip Sassower 74,532 3,803 None None
Jeffrey Steiner 74,785 3,551 None None
C. B. Sung 77,640 696 None None
</TABLE>
-17-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
Proposal 2
To ratify the appointment of Stonefield Josephson, Inc. as independent
accountants of the Company for the fiscal year ending December 31, 2000. The
number of votes for, against and abstaining on this proposal was as follows:
<TABLE>
<CAPTION>
Broker
---------------------
For Against Abstain Non-votes Abstain
--------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
All Classes 77,620 411 305 None None
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
--------------------------------------
Registrant
August 2, 2000 /s/ Guido DiGregorio
----------------------------- -----------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-19-
