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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-19301
------------------------
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2790442
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
</TABLE>
<TABLE>
<S> <C> <C>
275 SHORELINE DRIVE, SUITE 520 (415) 802-7888 94065
REDWOOD SHORES, CALIFORNIA (Registrant's telephone (Zip Code)
(Address of principal executive number,
offices) including area code)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of March 25, 1997 was approximately
$61,512,672 based on the closing sale price of $2.00 on such date, as reported
by the Nasdaq SmallCap Market-Registered Trademark-.
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 _____
The number of shares of Common Stock outstanding as of March 25, 1997 was
44,844,570.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be delivered to
stockholders in connection with its Annual Meeting of Stockholders, expected to
be held on May 19, 1997, are incorporated by reference into Part III of this
Annual Report on Form 10-K.
A list of Exhibits to this Annual Report on Form 10-K begins on page 19.
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COMMUNICATION INTELLIGENCE CORPORATION*
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PAGE
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<S> <C>
PART I..................................................................................................... 1
Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 6
Item 3. Legal Proceedings.................................................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders................................................ 6
PART II.................................................................................................... 7
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.............................. 7
Item 6. Selected Financial Data............................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 9
Item 8. Financial Statements and Supplementary Data........................................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 17
PART III................................................................................................... 18
Item 10. Directors and Executive Officers of the Registrant................................................ 18
Item 11. Executive Compensation............................................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 18
Item 13. Certain Relationships and Related Transactions.................................................... 18
PART IV.................................................................................................... 19
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 19
</TABLE>
* CIC-Registered Trademark- and its logo, Handwriter-Registered Trademark-,
MacHandwriter-Registered Trademark-, PenDOS-Registered Trademark-,
PenMAC-Registered Trademark-, INKshrINK-Registered Trademark-, and Creativity
Tool-Registered Trademark- are registered trademarks of the Company.
Handwriter-Registered Trademark- Manta-TM-, JOT-TM-, SigCheck-TM-,
InkSentry-TM-, Ink Tools-TM-, Sign-it-TM- and YPad-TM- are trademarks of the
Company. Applications for registration for various trademarks are in process in
the United States, France, Germany, Italy, Japan, Spain and the United Kingdom.
All other trademarks or brand names appearing in this Annual Report on Form 10-K
are the property of their respective holders.
i
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PART I
ITEM 1. BUSINESS
GENERAL
Communication Intelligence Corporation, together with its subsidiary and
majority-owned joint venture (the "Company" or "CIC"), develops, markets and
licenses natural input, computer interface, handwriting recognition and data
security technologies and products for various markets (including personal
computing as well as electronic commerce and communication). The Company's
products include the multi-lingual Handwriter-Registered Trademark- Recognition
System and SigCheck-TM-(signature verification software) and the
PenDOS-Registered Trademark- and PenMAC-Registered Trademark- pen operating
environments. CIC also markets software tools such as InkTools-TM- and
Sign-it-TM-, which allow signature capture and verification within computer
applications, Handwriter-Registered Trademark- for
Windows-Registered Trademark-, a peripheral input device product enabling users
to have pen computing capabilities on their desktop personal computers and
Handwriter-Registered Trademark- Manta-TM-, which provides similar capabilities
for laptop computer users.
The Company's current strategy is to commercialize its products for pen
computing applications internationally through the establishment of a network of
strategic business alliances. To achieve this objective, the Company is seeking
to form a series of strategic business alliances with corporations and other
entities. The Company believes that this strategy will offer the benefits of pen
computing to computer users worldwide while creating opportunities both for
itself and its partners. There can be no assurance that the Company will be able
to establish strategic business alliances or, if established, that such
alliances will be profitable for the Company.
The Company has implemented a three-pronged revenue generation strategy. The
Company (i) licenses its products to original equipment manufacturers ("OEMs")
and independent software vendors who reproduce and market them in conjunction
with their own products, (ii) sells its end-user products, such as the
MacHandwriter-Registered Trademark-, Handwriter-Registered Trademark- for
Windows-Registered Trademark- and Handwriter-Registered Trademark- Manta-TM-
through independent sales representatives, distributors, strategic
relationships, and its corporate sales force, and (iii) provides system
integration services and markets its pen-based business computer systems to
Chinese businesses, Government users and other joint ventures through its
79%-owned joint venture in the People's Republic of China.
In January 1997, the Company announced that CompUSA had expanded its
stocking of the Handwriter-Registered Trademark- for
Windows-Registered Trademark- to all of its over 122 U.S. stores from an initial
four-store introduction in November and December 1996. The Company also
announced in January 1997 that Norand Corporation introduced the PEN KEY 6622, a
powerful PC-based mobile computer, with the Company's
Handwriter-Registered Trademark- Recognition System software pre-installed.
Other manufacturers of handheld computer products which have adopted the
Company's software on the Windows-Registered Trademark- for pen-computing
platform include Fujitsu Personal Systems, Inc., Symbol Technologies, Telxon
Corporation and Seiko-Epson. In March 1997, the Arthritis Foundation awarded the
Company an "Ease of Use Seal of Commendation" for its
Handwriter-Registered Trademark- for Windows-Registered Trademark-.
HISTORY
The Company was initially incorporated in Delaware in October 1986 as a
wholly-owned subsidiary of a predecessor corporation (with the same name). The
Company has one wholly-owned operating subsidiary, CIC Japan, Inc. ("CIC
Japan"), incorporated in Japan in February 1984, and a 79%-owned joint venture,
Communication Intelligence Computer Corporation, Ltd., a joint venture with the
Ministry of Electronic Industries of the Jiangsu Provence, a provincial agency
of the People's Republic of China (the "Joint Venture"). The Joint Venture was
formed in China in September 1993.
1
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In each year since its inception, the Company has incurred losses. In July
1994, the Company filed a voluntary petition for reorganization and protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of San Francisco primarily to restructure the
Company and its debt. On November 14, 1994, the Company's pre-petition creditors
approved, and the United States Bankruptcy Court confirmed, the Company's Plan
of Reorganization (the "Plan") and the Company emerged from bankruptcy. The Plan
provided for the payment in full, in cash, of all allowed unsecured claims of
creditors while leaving secured creditors unimpaired by providing for their
payment in compliance with the original terms and conditions of their loans.
Creditors were paid in three approximately equal installments in February 1995,
1996, and 1997, respectively. In addition, under the Plan each holder of the
Company's then outstanding common stock or convertible preferred stock received
one unit, which consisted of two shares of Common Stock and one stock purchase
warrant, with an exercise price of $0.50 per share, in exchange for each two
shares of convertible preferred or common stock. All unexercised warrants issued
under the Plan expired in December 1994. Since July 1994, the Company has
consummated a number of debt and equity financings. For further information
concerning these transactions, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital
Resources."
CORE TECHNOLOGIES
The Company offers a wide range of hardware and 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. CIC's natural input technologies are designed
to allow users to interact with a computer through an electronic pen. CIC
believes the electronic pen is currently the most natural and cost-effective
manner of interacting with a computer. The Company also believes that natural
input enhances productivity and creativity, and reduces the risk of repetitive
stress illness ("RSI").
TRANSACTION AND COMMUNICATION ENABLING TECHNOLOGIES. The Company believes
its transaction and communication enabling technologies provide cost-effective
means for protected electronic transactions and discretionary 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 operating environments.
PRODUCTS
CIC has developed two desktop pen computing end user products,
Handwriter-Registered Trademark- for Windows, and
MacHandwriter-Registered Trademark-. These Handwriter-Registered Trademark-
products combine software and hardware into "all-in-one" input devices for easy
pen entry of graphics, text and commands. Handwriter-Registered Trademark-
products have been designed to be compatible with Windows-Registered Trademark-
and Macintosh platforms. CIC has positioned its Handwriter-Registered Trademark-
products to complement the keyboard and perform as an ergonomic editing tool.
CIC believes Handwriter-Registered Trademark- products enhance productivity in
editing documents, while helping to reduce the risk of RSI. In March 1997, The
Arthritis Foundation awarded the Company with an "Ease of Use Seal of
Commendation" for its Handwriter-Registered Trademark- for
Windows-Registered Trademark- product.
Handwriter-Registered Trademark- for Windows-Registered Trademark- is also
offered with other bundled applications such as YPad-TM- and E-mail ink
annotation. YPad-TM- is an electronic notepad. E-mail ink annotation is a
handwriting application that is specifically designed for E-mail users and
allows for electronic annotation on documents. The Company believes its
applications enhance the functionality of Handwriter-Registered Trademark-
products. The Company believes its Handwriter-Registered Trademark- for
Windows-Registered Trademark- and MacHandwriter-Registered Trademark-, along
with the PenDOS-Registered Trademark- and PenMAC-Registered Trademark- operating
environments, are competitive product offerings in the field of pen input
technology. CIC has also
2
<PAGE>
developed Handwriter-Registered Trademark- Manta-TM-, which offers laptop
computer users capabilities similar to Handwriter-Registered Trademark- for
Windows-Registered Trademark-. The Company believes that pen input devices are
particularly suitable to laptop users.
CIC markets software tools such as Ink Tools-TM- and Sign-it-TM-, which
allow signature capture and verification within computer applications, and
YPad-TM- and E-mail ink annotation.
The Company's products are marketed through various channels as well as
offered on the Internet.
COPYRIGHTS, PATENTS AND TRADEMARKS
The Company relies on a combination of patents, copyrights, trademarks,
trade secrets and contractual provisions to protect its proprietary rights in
its products and technologies. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies. In addition, the laws of certain countries in which the
Company's products are licensed may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. Because of the rapid evolution of technology and uncertainties in
intellectual property law in the United States and internationally, there can be
no assurance that the Company's current or future products or technologies will
not be subject to infringement by others. The Company's licensees and
distributors have access to proprietary information of the Company, and there
can be no assurance that the measures taken by the Company to protect its
technologies, products and other proprietary rights will adequately protect it
against improper use. A substantial portion of the Company's technology and
know-how are trade secrets and are not protected by patent, trademark or
copyright laws. The Company has a policy of requiring its employees and
contractors to respect proprietary information through written agreements. The
Company also has a policy of requiring prospective business partners to enter
into non-disclosure agreements before any of the Company's proprietary
information is revealed to them.
The original character recognition technology processes employed in the
Company's products were developed and patented by SRI International ("SRI"), and
SRI assigned those patents to CIC (the "SRI Patents"). The SRI Patents have
expired. Other major elements of the Company's products and technologies were
developed by CIC and are patented in the United States and overseas. The Company
does not believe that the expiration of the SRI Patents has had or will have a
significant impact on its operations since CIC has made significant improvements
to the original technology and additional patents relating to such technological
improvements have been applied for or issued. Certain of the Company's existing
patents covering these improvements expire between 1998 and 2005.
CIC-Registered Trademark- and its logo, Handwriter-Registered Trademark-,
MacHandwriter-Registered Trademark-, PenDOS-Registered Trademark-,
PenMAC-Registered Trademark-, INKshrINK-Registered Trademark- and Creativity
Tool-Registered Trademark- are registered trademarks of the Company.
Handwriter-Registered Trademark- Manta-TM-, JOT-TM-, SigCheck-TM-,
InkSentry-TM-, Ink Tools-TM-, Sign-it-TM- and YPad-TM- are trademarks of the
Company. Applications for registration of various trademarks are pending in the
United States, France, Germany, Italy, Japan, Spain and the United Kingdom. The
Company intends to register its trademarks generally in those jurisdictions
where its products are or will be marketed in the future.
The Company may be required to take various forms of legal action from time
to time to protect its proprietary rights. Any litigation regarding claims
against the Company or claims made by the Company against others could result in
significant expense to the Company and divert the efforts of its technical and
management personnel. The Company could be required to expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms, if at all.
3
<PAGE>
SOURCES AND AVAILABILITY OF MATERIALS
Digitizer tablets and electronic pens used in connection with
Handwriter-Registered Trademark- for Windows-Registered Trademark- are
manufactured by one supplier (according to the Company's specifications). In
addition, the digitizer and electronic pen used in connection with the
Handwriter-Registered Trademark- Manta-TM- are manufactured by two suppliers.
Other subcontractors manufacture templates, duplicate software, print
documentation and prepare packaging for the Company's products. The digitizer,
pens and other components are packaged by a turnkey software service and shipped
to customers upon the Company's instructions. If any of the Company's suppliers
or manufacturers do not or are unable to meet the Company's volume requirements,
the Company's operations would be adversely affected even though one of it
suppliers is obligated to assist the Company in obtaining an adequate supply of
digitizers and pens. The Company is currently evaluating whether or not it will
use additional suppliers.
SEASONALITY OF BUSINESS
The Company has not experienced seasonal trends affecting sales of its
products or the development or licensing of its technologies within its industry
segment of operation. However, the recent offering of
Handwriter-Registered Trademark- for Windows-Registered Trademark- through
retail channels (and directly to consumers in North America) may expose the
Company to seasonal trends which it has not experienced in the past.
MATERIAL CUSTOMERS
The Company operates in a single industry segment and historically its
revenues have been derived from a limited number of customers or other sources.
Two customers accounted for approximately 11% and 10% of the Company's revenues
in 1996. One customer accounted for approximately 25% and 21% of the Company's
revenues in 1995 and 1994, respectively. The loss of any significant customer or
other source of revenue would have a material adverse effect on the Company. In
February 1996, the Company's grant from the National Institute of Standards and
Technology ("NIST") with respect to the development of Chinese character
recognition technology expired. For the year ended December 31, 1996, the
Company received an aggregate of $91,000 from this grant, representing
approximately 3% of the Company's total revenues for 1996.
BACKLOG
Backlog for the Company's products is subject to rescheduling and
cancellation. As a result, the Company does not consider backlog to be a
reliable indicator of future sales. The Company had backlog of $195,000 at
December 31, 1996, no backlog at December 31, 1995 and backlog of approximately
$11,000 at December 31, 1994. Backlog consists of orders placed for the
Company's products by third-parties that have not been shipped as of December
31, 1996 due to third-party shipping and delivery requirements. All backlog as
of December 31, 1996 has been shipped as of March 31, 1997.
COMPETITION
The markets in which the Company competes are intensely competitive and have
attracted a number of major companies already established in the personal
computer and software industries. Certain competitors of the Company have
substantially greater financial and other resources than that of the Company.
The Company faces competition at a number of different levels. Certain
competitors have developed or are developing complete pen-based hardware and
software systems, while others have focused on different elements of such
systems, such as character recognition technology, pen-based operating systems
and environments, and pen-based applications. For example, Tandy Corporation and
Sony Corporation currently offer pen-based portable computers incorporating
handwriting recognition technology at various levels of sophistication, and
Microsoft offers a handwriting recognition system and a pen-based operating
environment. There can be no assurance that competitors will not succeed in
4
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developing products or technologies that are more effective, easier to use or
less expensive than the Company's products or technologies or that would render
the Company's technologies or products obsolete or non-competitive. In addition,
there can be no assurance that the companies with whom the Company establishes
distribution, license, product development or other strategic relationships will
not choose to market technologies and products that they develop internally or
acquire from third parties. For example, Apple and IBM are developing internally
or have licensed from third parties a number of technologies related to
pen-based computing, NCR/ATT has developed its own pen-based operating
environment, and NEC has developed its own character recognition technology and
pen-based operating system.
The Company believes that the principal competitive factors in the markets
for pen-based computer products are the quality and reliability of character
recognition technology, multilingual capabilities of character-based recognition
technology, compatibility with a broad range of computer systems, name
recognition, effective distribution channels, ease of use, software efficiency
and the ability to sell to leading computer companies who may be predisposed to
develop their own technology instead of licensing third-party technology. The
markets for pen-based products are still emerging, and the Company is unable to
determine which of these factors are the most important. The Company believes
that it competes favorably with respect to these factors, although it is at a
competitive disadvantage with respect to name recognition and distribution
capability. There can be no assurance that the Company will be able to be
competitive as the pen-based computing industry evolves, market demands change
and the Company's competitors apply substantial resources toward the development
of new products and technologies.
EMPLOYEES
As of December 31, 1996, the Company employed 82 full-time employees and 2
part-time employees. From time to time, the Company also engages additional
personnel on an as needed basis. The Company believes it has good relations with
its employees.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"may", "intends", "expects" and 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 Company results 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 and
competitive conditions in the software industry and technological innovations
which could affect the Company's business; and (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. Certain of these factors
are discussed in more detail elsewhere in this Annual Report on Form 10-K.
FOREIGN OPERATIONS
For the years ended December 31, 1996, 1995 and 1994, the Company's export
sales as a percentage of total revenues were approximately 7%, 6% and 15%,
respectively. For further information regarding the Company's foreign
operations, see the Notes to the Company's consolidated financial statements
provided pursuant to Part II, Item 8 of this Annual Report, which are
incorporated herein by reference.
5
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ITEM 2. PROPERTIES
The Company currently leases its principal facilities (the "Principal
Offices"), consisting of approximately 9,000 square feet, in Redwood Shores,
California, pursuant to a lease that expires in 2000. In addition, the Company
recently signed a 17-month lease for an additional 3,000 square feet of space
near the Principal Offices (the "Expansion Space") in order to accommodate
additional personnel hired by the Company in the last three months in connection
with its increased marketing activities. CIC Japan leases approximately 1,580
square feet of office space in Tokyo, Japan and the Joint Venture leases
approximately 1,000 square feet in Nanjing, China. The Company anticipates that
its existing lease will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. The Company also believes that its
current facilities will be suitable for it to continue operations in the
forseeable future.
ITEM 3. LEGAL PROCEEDINGS
As of March 25, 1997, the Company was not a party to any legal proceeding
which, if adversely determined, would have a material adverse effect on its
business. In July 1994, the Company filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in order to restructure the
Company and its debt. In November 1994, the Plan was approved and confirmed and
the Company emerged from bankruptcy. See "Item 1. Business--Background."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently listed on the Nasdaq SmallCap Market
under the trading symbol "CICI." In September 1991, the Company's Common Stock
was first listed on the Nasdaq SmallCap Market, and in June 1993 it was listed
on the Nasdaq National Market. In July 1994 (during the Company's Chapter 11
reorganization proceedings), the Company's Common Stock was delisted for failure
to meet Nasdaq's minimum price requirements. From July 1994 to July 1996,
quotations concerning the Common Stock were reported on the OTC Bulletin Board.
In July 1994, the Company's Common Stock was relisted on The Nasdaq SmallCap
Market. The following table sets forth the high and low prices of the Common
Stock for the periods noted, as reported on Nasdaq.
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<CAPTION>
YEAR PERIOD HIGH LOW
- ----------- --------------------------------------------------------------- ----------------- -----------------
<C> <S> <C> <C>
1994 First Quarter.................................................. $ 3.06 $ 2.25
Second Quarter................................................. $ 2.50 $ 0.69
Third Quarter.................................................. $ .094 $ 0.06
Fourth Quarter................................................. $ .091 $ 0.44
1995 First Quarter.................................................. $ 1.28 $ 0.38
Second Quarter................................................. $ 0.78 $ 0.50
Third Quarter.................................................. $ 1.93 $ 0.53
Fourth Quarter................................................. $ 2.94 $ 1.63
1996 First Quarter.................................................. $ 4.00 $ 2.62
Second Quarter................................................. $ 6.81 $ 4.18
Third Quarter.................................................. $ 4.87 $ 2.81
Fourth Quarter................................................. $ 3.00 $ 2.18
1997 First Quarter (through March 25, 1997)......................... $ 3.87 $ 1.81
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</TABLE>
As of March 25, 1997, the closing sale price of the Common Stock on the The
Nasdaq SmallCap Market was $2.00 per share and there were approximately 650
registered holders of the Common Stock.
To date, the Company has not paid any dividends on its Common Stock and does
not anticipate paying dividends in the foreseeable future. The declaration and
payment of dividends on the Common Stock is in the discretion of the Board of
Directors and will depend on, among other things, the Company's operating
results, financial condition, capital requirements, contractual restrictions or
prohibitions with respect to the payment of dividends (such as those related to
the Convertible Preferred) and such other factors as the Board of Directors may
deem relevant. At March 25, 1997, the Company had 450,000 shares of Convertible
Preferred issued and outstanding. The Convertible Preferred entitles the holders
thereof to receive cumulative dividends on each share at the rate of $1.25 per
share per annum, compounded semi-annually, when payable, whether or not
declared. Dividends may be paid at the Company's option in cash or additional
shares of Convertible Preferred (with each additional share valued at $25 per
share). The Company has agreed with the holders of the Convertible Preferred
that it would not declare dividends or make any distributions to holders of the
Common Stock prior to the earlier of February 1998 (or later under certain
circumstances) or the date on which all outstanding Convertible Preferred has
been converted into shares of Common Stock. The Company is also required to pay
any accrued and unpaid dividends on outstanding shares of Convertible Preferred
before declaring or paying any dividends on any other class or series of stock,
including the Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1996, 1995, 1994, 1993 and 1992 and for each of the years in the five-year
period ended December 31, 1996, are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, are included elsewhere in this Annual Report on Form
10-K. The selected financial data should be read in conjunction with the
Company's audited financial statements and the notes thereto and other portions
of this Annual Report on Form 10-K including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................ $ 2,887 $ 2,314 $ 3,599 $ 2,595 $ 4,070
Research and development expenses (1)........................... 1,756 1,355 2,062 3,380 2,682
Marketing expenses.............................................. 3,282 2,613 4,936 4,278 3,681
General and administrative expenses............................. 2,037 1,717 2,395 1,921 1,664
Loss from operations............................................ (6,535) (5,534) (10,935) (8,564) (5,058)
Net loss........................................................ (6,356) (5,595) (11,048) (8,299) (5,114)
Net loss per common share....................................... (0.15) (0.16) (0.53) (0.44) (0.32)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............... $ 11,325 $ 7,459 $ 4,088 $ 5,305 $ 2,811
Working capital (deficit) (2)................................... 8,284 3,763 (605) 1,907 1,308
Total assets.................................................... 13,503 9,776 6,171 10,158 7,239
Deferred revenue................................................ 2,006 2,570 2,754 2,681 1,634
Long-term obligation............................................ 32 830 2,069 321 130
Redeemable securities(3)........................................ 9,417 -- -- -- --
Common stockholders' equity (deficit) and convertible preferred
stock(4)...................................................... (82) 4,010 (1,219) 4,689 3,515
</TABLE>
- ------------------------
(1) Excludes software development costs capitalized in accordance with Statement
of Financial Accounting Standards No. 86.
(2) Current liabilities used to calculate working capital at December 31, 1996,
1995, 1994, 1993, and 1992 include deferred revenue of $2,006,000,
$2,570,000, $2,754,000, $2,681,000, and $1,634,000, respectively.
(3) Refer to Note 11 to the consolidated financial statements included elsewhere
within this Annual Report on Form 10-K.
(4) The Company has never paid dividends to the holders of its common stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
HISTORY. The Company was initially incorporated in Delaware in October
1986. In each year since its inception, the Company has incurred losses. In July
1994, the Company filed a petition for reorganization and protection under
Chapter 11 of the United States Bankruptcy Code in order to restructure the
Company and its debt. In November, 1994, the Company's pre-petition creditors
approved, and the United States Bankruptcy Court confirmed, the Company's Plan
of Reorganization and the Company emerged from bankruptcy. For the five-year
period ended December 31, 1996, these losses aggregated approximately $36.4
million and at December 31, 1996, the Company's accumulated deficit was
approximately $54.3 million. See "Item 1. Business--History."
REVENUE RECOGNITION. Revenue from 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 and sold by licensees.
Under the terms of an agreement with IBM, the Company is obligated to share with
IBM certain revenues from third parties when earned. Development contract
revenue is generated primarily from system integration services, and research
grants and joint development agreements with government agencies. Revenue is
recognized in accordance with the terms of the grants and agreements, generally
when collectibility is probable and related costs have been incurred. There were
no joint development agreements in 1996 and 1995. System integration revenue is
generally recognized upon customer acceptance and fulfillment of all significant
obligations under the contract.
SOURCES OF REVENUES. To date, the Company's accounts receivable have been
derived principally from revenues earned from end-users, manufacturers,
retailers and distributors of computer products in North America, Europe, and
the Pacific Rim. The Company performs periodic credit evaluations of its
customers and does not require collateral. The Company maintains reserves for
potential credit losses. Historically, such losses have been insignificant and
within management's expectations.
SOFTWARE DEVELOPMENT COSTS. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
completion of a working model and generally ends upon the release of the
product. As of December 31, 1996 and 1995, such costs were insignificant.
SIGNIFICANT CUSTOMERS. Two customers accounted for 11% and 10% of revenues
in 1996, respectively. One customer accounted for 25% and 21% of revenues in
1995 and 1994, respectively.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION. The Company considers the functional
currencies of CIC Japan and the Joint Venture to be the respective local
currencies and, accordingly, gains and losses from the translation of the local
foreign currency financial statements are included as a component of "cumulative
foreign currency translation adjustment" in the Company's consolidated balance
sheets accompanying this Annual Report on Form 10-K. Foreign currency assets and
liabilities are translated into U.S. dollars at the end-of-period exchange
rates. Revenues and expenses are translated at average exchange rates in effect
during each period.
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Net foreign currency transaction gains and losses are included as components
of "interest income and other income (expense), net" in the Company's
consolidated statements of operations accompanying this Annual Report on Form
10-K. The Company recorded net foreign currency transaction gains of $59,000,
$53,000 and $147,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
RESEARCH GRANT. In November 1993, CIC received a two-year grant under the
Advanced Technology Program sponsored by the National Institute of Standards and
Technology. The amount of the first and second year awards were $810,000 and
$670,000, respectively. The Company recognized $91,000, $590,000 and $746,000 as
development contracts revenue under this grant for the years ended December 31,
1996, 1995 and 1994, respectively.
NET OPERATING LOSS CARRYFORWARDS. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets of $16,170,000
based upon the Company's history of losses.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES. The Company's revenues are derived from product sales, license
and royalty revenues and development contracts. The Company's product sales for
the year ended December 31, 1996 increased by 30% to $1,591,000 from $1,220,000
for the prior year. The increase was due to increased sales with respect to the
hardware and software components involved in the system integration activities
of the Joint Venture ($1,273,000 for 1996 compared to $571,000 for 1995), offset
by reductions in sales of the Company's Handwriter-Registered Trademark- product
in 1996 as compared to the prior year. This decline in
Handwriter-Registered Trademark- product revenue resulted from the Company's
decision to reduce its sales through distributor and catalog resellers and place
increased focus on the retail market, however, significant increases in retail
sales did not materialize in 1996. In January 1997, CompUSA began offering the
Company's Handwriter-Registered Trademark- products nationwide in all of its
over 122 stores. The Company's Handwriter-Registered Trademark- Products are
also offered at CompUSA's website. There can be no assurance, however, that the
Company will be successful in selling its products in the retail market.
Revenues from license and royalty fees for the year ended December 31, 1996
increased by 244% to $816,000 from $237,000 for the prior year. The increase was
primarily attributable to the recognition of approximately $412,000 of
previously deferred royalty revenues that were recognized on agreements for
which the Company has no further obligations to deliver additional software or
services and increased shipment volumes reported by two of the Company's
licensees.
Revenues from development contracts for the year ended December 31, 1996
decreased by 44% to $480,000 from $857,000 for the prior year. Revenues from
development contracts are primarily attributable to grants received from the
National Institute of Standards and Technology ("NIST") and The National Science
Foundation ("NSF"). Grant revenues declined by 60% to $256,000 for 1996 from
$653,000 for 1995. The decline in grant revenues resulted from the expiration in
1996 of a grant received from NIST in January 1995. The Company has historically
pursued contract revenues as part of its business strategy, and at least in the
short term, expects to continue to do so.
COST OF SALES. Cost of sales is comprised of costs from product sales,
licensing, royalty and other costs and development contracts. Cost of product
sales in 1996 consists primarily of cost of materials, approximately $1,223,000
of which for 1996 related to the hardware and software components involved in
the system integration activities of the Joint Venture and the remainder of
which related to material costs of the Company's
Handwriter-Registered Trademark- product sales. The decrease in the gross margin
on product sales to 5% in 1996 from 22% in 1995 resulted from a shift in the mix
of product sales to lower margin systems
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integration activities of the Joint Venture, which comprised 75% of total
product revenues in 1996 as compared to 37% in the prior year. License,
royalties and other costs, which include procurement, warehousing, and related
personnel in connection with the sales of the Company's products, increased by
approximately $139,000 to $376,000 for 1996 from $237,000 for 1995 and were
offset by a reduction in the amortization of capitalized software development
costs of $59,000 for 1996 as compared to the prior year. This increase in other
costs related primarily to additional personnel costs in connection with the
launch of the Company's Handwriter-Registered Trademark- for
Windows-Registered Trademark- product in the retail market in the first quarter
of 1997. Costs incurred in connection with development contract revenue are
expensed as incurred and decreased 56% in 1996 as compared to the prior year,
commensurate with the reduction in contract development revenues in the same
period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 30% to $1,756,000 for the year ended December 31, 1996 from
$1,355,000 for the prior year. This increase was primarily attributable to
continued in-house development of the Chinese character recognition system, the
research and development of which was funded through the NIST grant in 1995 and
consequently was included as a component of cost of development contracts in
that period. Research and development staff and related costs in 1996 were
consistent with staff and related costs incurred in 1995. The Company did not
capitalize any software development costs in 1996 compared to $20,000 of
software development costs capitalized in 1995.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 26% to
$3,282,000 for the year ended December 31, 1996 as compared to $2,613,000 for
the prior year. This increase was primarily due to increases in staffing, travel
and related costs of approximately $338,000 and $167,000, respectively. These
increases were the result of an increase in sales personnel and travel expenses
in anticipation of the Company's entrance into the retail market. The increase
in other selling expenses, including facilities expenses and facilities-related
costs, of $117,000 in 1996 as compared to the prior year were attributable
primarily to the increases in staffing. The remaining increase of $47,000 in
1996 as compared to the prior year related primarily to an increase in sales
consulting expenses offset in part by a decrease in catalog advertising,
resulting from the Company's current focus on the retail market in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19% to $2,037,000 for the year ended December 31, 1996 as compared to
$1,717,000 for the prior year. This increase resulted largely from increased
consulting and stockholder-related costs in 1996 as compared to 1995. The
increase in consulting costs of $73,000 over the prior year resulted from
financial advisory services rendered by a director of the Company in 1996. The
increase in stockholder-related costs of $93,000 in 1996 as compared to the
prior year resulted from additional costs incurred in 1996 with respect to SEC
and Nasdaq filing fees, proxy services and preparation of the Company's annual
report to stockholders. The remaining increase in general and administrative
expenses of $154,000 in 1996 as compared to 1995 resulted primarily from
increased premiums on directors and officers liability insurance, and personnel
and personnel-related costs.
INTEREST INCOME AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net for 1996 increased to $278,000 of income in 1996 compared
to $203,000 of income in the prior year. This increase is primarily due to
interest income earned on the Company's cash and short-term investments.
INTEREST EXPENSE. Interest expense for 1996 decreased to $99,000 compared
to $264,000 in the prior year. This decrease is the result of reduced interest
expenses associated with the reduction of pre-petition liabilities and
short-term debt during 1995.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
REVENUES. Product sales decreased 55% to $1,220,000 in 1995 from $2,710,000
in the prior year. The decline in sales was due to an increase in selling price
as the Company prepared to sell its U.S. products
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through distributors and computer resellers and the reduction in advertising and
marketing efforts brought about by the severe cash constraints experienced by
the Company during 1994. The Company began shipping the
Handwriter-Registered Trademark- for Windows-Registered Trademark- in late 1993
and the MacHandwriter-Registered Trademark- in the first quarter of 1994. Since
the second quarter of 1994, the Company has concentrated its sales efforts on
distributors and catalog resellers.
Revenues from license and royalty fees for 1995 increased to $237,000 from
$61,000 in the prior year. The increase was primarily the result of increased
shipment volumes reported by two of the Company's licensees. Revenues from
development contracts for 1995 increased to $857,000 from $828,000 in the prior
year. Contract revenues were primarily attributable to a grant awarded by NIST
in December 1993 to supplement development of a recognition system for the
Chinese language. This grant expired in January 1996.
COST OF SALES. Cost of sales is comprised of the costs of materials,
procurement, warehousing, and related personnel in connection with the sales of
the Company's products as well as costs of development contract revenue and the
amortization of capitalized software development costs. Costs incurred in
connection with development contract revenue are expensed as incurred. Cost of
sales decreased by 58% to $2,163,000 for the year ended December 31, 1995 as
compared to $5,141,000 for 1994. This decrease was attributable to a decrease in
product sales and a decrease in amortization of software development costs,
including amounts written down to net realizable value (from $1,653,000 in 1994
to $157,000 in 1995). In addition, during 1994 the Company wrote-off
approximately $550,000 of MacHandwriter-Registered Trademark- II inventory
(CIC's Japanese language product). No such write off occurred during 1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased in 1995 by 34% to $1,355,000 from $2,062,000 in 1994. This decrease
was primarily attributable to decreases in the Company's research and
development staff and related costs commencing in the second quarter of 1994.
The Company capitalized $20,000 of software development costs in 1995 as
compared to $436,000 in the prior year. The continuing effect of reductions in
personnel and product development efforts in 1994 accounted for the decline in
research and development expenses and software capitalization during 1995.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased 47% to
$2,613,000 for the year ended December 31, 1995 as compared to $4,936,000 for
the prior year. This decrease was primarily due to reductions in staffing and
related costs and promotional expenses incurred in the launch of
Handwriter-Registered Trademark- for Windows-Registered Trademark- and
MacHandwriter-Registered Trademark- during the first and second quarters of
1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by 28% to $1,717,000 for the year ended December 31, 1995 as compared
to $2,395,000 for the prior year. This decrease was primarily attributable to
the continuing effect of reductions in personnel and other costs in 1994.
INTEREST INCOME AND OTHER INCOME (EXPENSE) NET. Interest income and other
income (expense), net increased to $203,000 of income for the year ended
December 31, 1995 compared to a net expense of $38,000 for the prior year. This
increase was primarily due to interest income earned on the Company's cash, cash
equivalents and short term investments.
INTEREST EXPENSE. Interest expense increased to $264,000 compared to
$75,000 for the prior year. This increase was the result of interest expenses
associated with the pre-petition liabilities and increased short-term debt in
1995 as compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1996 totaled $10,573,000 compared
to cash and cash equivalents of $5,924,000 at December 31, 1995. This increase
was primarily attributable to $11,578,000
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provided by financing activities and $425,000 provided by investing activities
in 1996, offset by $7,363,000 used in operations. In 1996, the effect of
exchange rate changes on cash was immaterial.
At December 31, 1996, current liabilities, which include deferred revenue,
were $4,136,000. Deferred revenue, totaling $2,006,000 at December 31, 1996,
primarily reflects nonrefundable advance royalty fees received from the
Company's licensees which are generally recognized as revenue by the Company in
the period in which licensees report that products incorporating the Company's
software have been shipped or when no significant obligation to provide
additional software or services exists. As such, the period over which such
deferred revenue will be recognized as revenue is uncertain because the Company
cannot presently determine either the timing or volume of future shipments by
its licensees. Under the terms of the Company's agreement with IBM, the Company
is obligated to share certain royalties from third parties with IBM when earned.
As of December 31, 1996, the Company's principal source of liquidity was its
cash, cash equivalents and short-term investments of $11,325,000. The Company
believes that the above-mentioned funds, are adequate to meet projected working
capital and other cash requirements for the next twelve months.
JOINT VENTURE IN PEOPLE'S REPUBLIC OF CHINA
In 1993, the Company formed the Joint Venture with The Ministry of
Electronic Industries of the Jiangsu Province (the "Ministry"), a provincial
agency of the People's Republic of China. The Joint Venture is 79%-owned by the
Company. Under the provisions of the joint venture agreement, the Company may be
required to contribute up to $5.4 million in cash to the Joint Venture and is
required to provide it with nonexclusive licenses to technologies and certain
distribution rights. The Ministry is required to contribute certain land use
rights and provide other services to the Joint Venture. As of December 31, 1996,
the Company had contributed an aggregate of $900,000 in cash to the Joint
Venture and provided it with nonexclusive licenses to technology and certain
distribution rights and the Ministry had contributed certain land use rights.
The Company believes that any future cash contributions it may be required to
make to the Joint Venture will be paid from its working capital or proceeds
received from additional financings, if any. There can be no assurance that the
Company will be able to fund the balance of any required cash contributions to
the Joint Venture, that the Joint Venture will be successful in developing or
selling integrated computer systems or other Company products to the Chinese
market or that the Company will realize any significant benefits from its
contributions to the Joint Venture.
1994 FINANCING. During the bankruptcy proceedings, in September and October
1994, the Company received $1.0 million through the issuance, to one investor
(the "Investor") of two secured convertible notes (the "Notes") in the aggregate
principal amount of $1,000,000 (due in March 1994 and October 1994) and warrants
to purchase 2,000,000 shares of Common Stock, with an exercise price of $0.50
per share. In October 1994, in connection with the Company's Plan of
Reorganization, the Company also entered into a standby stock purchase agreement
(the "Standby Purchase Agreement") with the Investor, pursuant to which the
Investor or his assignee (the "Standby Purchaser") agreed to purchase up to 10.0
million shares of Common Stock at a purchase price of $0.50 per share, which
maximum number was decreased by the number of shares purchased by the Company's
shareholders pursuant to the exercise of warrants they received pursuant to the
Plan. In December 1994, the Standby Purchaser purchased 6,050,357 shares of
Common stock pursuant to the Standby Purchase Agreement and the Company received
approximately $2.0 million in cash (the balance being paid through the
conversion by the Standby Purchaser of the Notes). In December 1994, the Company
issued 500,000 shares of Common Stock to the Standby Purchaser under the terms
of the Standby Purchase Agreement.
NOVEMBER 1995 AND JUNE 1996 EQUITY FINANCINGS. In November 1995, the
Company completed a private placement of 5,500,000 shares of Common Stock at a
price of $2.00 per share, subject to certain adjustments, and received net
proceeds of approximately $10.3 million. In June 1996, the Company completed a
private placement of 600,000 shares of Common Stock, at a price of $4.50 per
share, and
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received net cash proceeds of approximately $2.4 million. In connection with the
June 1996 private placement, the Company also agreed to issue to the purchasers
additional shares of Common Stock (the "Extra Shares") if the average of the
daily closing prices of the Common Stock for the twenty business days prior to
two business days before the "effective date" (as defined in the private
placement agreement) was less than $4.50 per share.
In connection with the private placements, the Company agreed to register
the shares of Common Stock issued and any shares of Common Stock issuable
pursuant to price protection provisions or the exercise of warrants issued to
the placement agent or its designees. In December 1996, the Company's
Registration Statement on Form S-3 (which included the registration of 6,967,500
shares of Common Stock for the account of the purchasers of Common Stock in the
December 1995 and June 1996 private placements, 196,000 Extra Shares issued (for
no additional consideration) to purchasers who did not purchase shares of
Convertible Preferred with shares of Common Stock, and the shares issuable upon
exercise of warrants issued to the placement agent or its designee) was declared
effective by the Securities and Exchange Commission (the "1996 Registration
Statement").
CONVERTIBLE PREFERRED FINANCING. In December 1996, the Company completed a
private placement of 450,000 shares of Convertible Preferred at $25.00 per share
for $11,250,000. In connection with the transaction, the Company received
$9,495,000 in cash and accepted for exchange, in lieu of cash, 390,000 shares of
Common Stock for 70,200 shares of Convertible Preferred. Each share of
Convertible Preferred is convertible by the holder into shares of Common Stock
at any time beginning July 1, 1997, or earlier in the event of a change in
control transaction, pursuant to a conversion formula based upon a discount from
the effective market price of the Common Stock. In addition, all outstanding
shares of Convertible Preferred will automatically convert into shares of Common
Stock on December 31, 1999, subject to the satisfaction of certain conditions,
or later under certain circumstances. There is no limitation on the number of
shares of Common Stock that the Company may be required to issue in connection
with the Convertible Preferred.
The exact number of shares of Common Stock issuable upon conversion of all
of the Convertible Preferred cannot currently be determined but, generally, such
issuances of Common Stock will vary inversely with the market price of the
Common Stock. On March 25, 1997, the last reported sales price of the Common
Stock on the Nasdaq SmallCap Market was $2.00 per share. If the effective market
price of the Common Stock on March 25, 1997 of $1.92 per share (as determined
pursuant to the terms of the Convertible Preferred) were used to determine the
number of shares of Common Stock issuable as of the first date on which the
Convertible Preferred may be converted, the Company would be obligated to issue
a total of approximately 6,840,097 shares of Common Stock assuming all such
shares were converted at such time. To the extent the effective market price per
share of the Common Stock is lower or higher than $1.92 as of any date on which
shares of Convertible Preferred are converted, the Company would issue more or
less shares of Common Stock than reflected in such estimate, and such difference
could be material.
RESTRICTIONS IN INVESTOR AGREEMENT. In connection with the private
placement in December 1996, the Company entered into an investor agreement with
the purchasers of the Convertible Preferred (the "Investor Agreement"). Subject
to certain exceptions, until the Restrictive Covenant Termination Date (as
defined below), the Investor Agreement prohibits or restricts the Company from,
among other things, declaring or paying dividends or making distributions to
holders of the Common Stock, repurchasing any Common Stock or other equity
junior or on parity with the Convertible Preferred, authorizing or issuing other
equity securities senior to the Convertible Preferred and incurring indebtedness
other than for trade payables or a working capital facility not exceeding $10
million. In addition, until the Restrictive Covenant Termination Date, the
Company is prohibited from offering or selling debt, shares of Common Stock or
other equity securities (including convertible securities) other than in a
bona-fide underwritten public offering, or from obtaining any financing from a
third party, unless such transaction has been first offered to the holders of
the Convertible Preferred. The term "Restrictive Covenant Termination Date"
means,
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generally, the date which is the earlier of (a) January 31, 1998 or (b) the date
on which all of the Convertible Preferred has been converted.
REGISTRATION RIGHTS; DEFAULT PAYMENTS. In connection with the Company's
December 1996 private placement, the Company entered into a registration rights
agreement with the holders of the Convertible Preferred (the "Registration
Rights Agreement") pursuant to which the Company agreed to file a Registration
Statement on Form S-3 relating to the shares of Common Stock issuable upon
conversion of the Convertible Preferred by filing a registration statement on
Form S-3 by March 31, 1997 (the "1997 Registration Statement") and to use its
best efforts to cause the 1997 Registration Statement to be declared effective
by June 29, 1997 (the "Declaration Date"). In the event the 1997 Registration
Statement is not declared effective by the Declaration Date, the Company has
agreed to pay to each holder of Convertible Preferred a default payment in cash
(the "Default Payment") in an amount equal to 3% of the liquidation preference
for the Convertible Preferred held for any part of each 30-day period subsequent
to the Declaration Date until the 1997 Registration Statement is declared
effective. The Company has also agreed to make a similar Default Payment to the
holders of Convertible Preferred in the event that (i) the Company fails,
refuses or is unable to cause the securities covered by the 1997 Registration
Statement to be listed on the exchange on which the Common Stock is then traded,
(ii) any holder's ability to sell the securities covered by the 1997
Registration Statement is suspended for more than 60 days in the aggregate, or
at any time during the months of December 1997 or January 1998, or (iii) the
Company does not have a sufficient number of shares of Common Stock available to
effect conversion of the Convertible Preferred. The Default Payments must be
made each month until the condition or event causing the payment to be made no
longer exists.
On March 31, 1997, the Company filed the 1997 Registration Statement with
the Commission registering for sale by the selling securityholders listed
therein 7,477,597 shares of Common Stock.
DIVIDENDS. The Convertible Preferred entitles the holders thereof to
receive cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually, when payable, whether or not declared.
Dividends may be paid at the Company's option in cash or additional shares of
Convertible Preferred.
WAIVER; ADDITIONAL WARRANT ISSUANCE. In March 1997, the Company and all of
the holders of the Convertible Preferred executed a waiver (the "Waiver") in
connection with the Company's obligations to comply with redemption provisions
contained in the Registration Rights Agreement. Pursuant to the Waiver, each
holder of the Convertible Preferred irrevocably waived the Company's obligations
to comply with provisions in the Registration Rights Agreement which would have
obligated the Company to redeem the Convertible Preferred (or shares of Common
Stock issuable upon conversion of, or otherwise in respect to, the Convertible
Preferred) and, in consideration therefor, the Company (a) issued to the holders
(on a pro rata basis) in accordance with the terms thereof, Warrants to purchase
300,000 shares of Common Stock (subject to adjustments), with an exercise price
of $2.00 per share, (b) waived its rights to request that the holders of the
Convertible Preferred receive any Default Payments in additional shares of
Convertible Preferred and (c) agreed that the holders of Convertible Preferred
may convert their shares into shares of Common Stock at approximately 72% of the
effective market price of the Common Stock in the event a change in control
transaction occurs prior to February 1998, or later under certain circumstances.
As a result of the Waiver, the shares of Convertible Preferred which were
classified as redeemable securities at December 31, 1996 will be reclassified as
convertible preferred stock at March 31, 1997 and, as such, will be included in
stockholders' equity at March 31, 1997.
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The following table sets forth the pro forma stockholders' equity at
December 31, 1996, adjusted to reflect the reclassification of the Convertible
Preferred and the issuance of the related warrants:
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Redeemable convertible preferred stock....................................... $ 9,417 $ (9,417) $ --
----------- ----------- -----------
Stockholders' equity (deficit)
Convertible preferred stock................................................ -- 5 5
Common stock............................................................... 419 -- 419
Additional paid-in capital................................................. 54,015 9,896 63,911
Accumulated deficit........................................................ (54,347) (484) (54,831)
Cumulative foreign currency translation adjustment......................... (169) -- (169)
----------- ----------- -----------
Total stockholders' equity (deficit)......................................... $ (82) $ 9,417 $ 9,335
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
VOLATILITY OF STOCK PRICE. The Company's future earnings and 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 disproportional to
the operating performance of such companies. The trading price of the Company's
Common Stock could be subject to wide fluctuation in response to, among other
factors, quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating results.
OPERATING LEASE COMMITMENTS. The Company leases facilities in the United
States, Japan and China. The Company's rental expense for the year ended
December 31, 1996 was approximately $346,000. Future minimum lease payments
under noncancelable operating leases are expected to be approximately $362,000,
$275,000, $221,000 and $191,000 for the years ending December 31, 1997, 1998,
1999, and 2000, respectively.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements for the years ended
December 31, 1996, 1995 and 1994, are set forth at the end of this Annual Report
on Form 10-K and begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 2, 1996, the Company received a letter from KPMG Peat Marwick LLP
("Peat Marwick") stating that it was resigning as auditor of the Company. Peat
Marwick advised the Company that it was resigning as the Company's auditor
following discussions between Peat Marwick and the Staff of the Securities and
Exchange Commission regarding the independence of Peat Marwick in light of the
consulting services provided to the Company at that time by KPMG BayMark Capital
LLC.
In connection with the audit conducted in respect of the year ended December
31, 1995, and during subsequent periods through August 2, 1996, there were no
disagreements between the Company and Peat Marwick on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedures, which disagreements, if not resolved to their satisfaction, would
have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. In addition, the audit report of Peat
Marwick on the consolidated financial statements of the Company as of and for
the year ended December 31, 1995 did not contain any adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles.
On August 14, 1996, the Company retained Price Waterhouse LLP ("PW") as the
Company's independent accountants to audit the Company's financial statements.
During the two years ended December 31, 1995 and during the subsequent period
ended August 14, 1996, neither the Company nor anyone on its behalf consulted PW
regarding (i) the application of accounting principles to any transaction,
either completed or proposed, or (ii) the type of audit opinion that might be
rendered by PW on the Company's financial statements.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this Item is incorporated by reference to the
Company's definitive Proxy Statement dated to be delivered to the Company's
Stockholders in connection with its Annual Meeting of Stockholders expected to
be held on May 19, 1997. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement to be delivered to the Company's
stockholders in connection with its Annual Meeting of Stockholders expected to
be held on May 19, 1997. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement to be delivered to the Company's
stockholders in connection with its Annual Meeting of Stockholders expected to
be held on May 19, 1997. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement to be delivered to the Company's
stockholders in connection with its Annual Meeting of Stockholders expected to
be held on May 19, 1997. Such information is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
(a) (1) Financial Statements
Report of Price Waterhouse LLP, Independent Accountants................................... F-2
Report of Ernst & Young LLP, Independent Auditors......................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1995................................. F-4
Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and
1994...................................................................................... F-5
Consolidated Statements of Changes in Common Stockholders' Equity (Deficit) and
Convertible Preferred Stock for the years ended December 31, 1996, 1995 and 1994.......... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994...................................................................................... F-7
Notes to Consolidated Financial Statements................................................ F-8
(a) (2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves............................... S-1
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts to require submission of the schedule or
because the information required is included in the Company's Consolidated
Financial Statements and notes thereto.
(b) Reports on Form 8-K
On January 6, 1997, the Company filed a Form 8-K (dated December 31, 1996)
reporting the consummation of a private placement of 450,000 shares of 5%
Cumulative Convertible Preferred Stock.
19
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
2.0 Second Amended Plan of Reorganization of the Company, incorporated herein by reference to the
Company's Form 8-K filed October 24, 1994.
2.1 Orderly Liquidation Valuation, Exhibit F to the Second Amended Plan of Reorganization,
incorporated herein by reference to the Company's Form 8-K filed October 19, 1994.
2.2 Order Confirming Plan of Reorganization, incorporated herein by reference to the Company's Form
8-K filed November 14, 1994.
3.1 Certificate of Incorporation of the Company, as amended, incorporated herein by reference to
Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration Statement on Form 10 (File No.
0-19301).
3.2 Certificate of Amendment to the Company's Certificate of Incorporation (authorizing the
reclassification of the Class A Common Stock and Class B Common Stock into one class of Common
Stock) as filed with the Delaware Secretary of State's office on November 1, 1991, incorporated
herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the Company's Form 8-A (File No.
0-19301).
3.3 By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit
3.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.1 1984 Stock Option Plan of the Company, as amended and restated as of October 15, 1987 and as
amended by resolutions of the stockholders of the Company passed on August 15, 1989 and October
8, 1990 to increase the aggregate shares covered thereby to 1,000,000, incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.2 Form of Stock Option Grant under 1984 Stock Option Plan, incorporated herein by reference to
Exhibit 4.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
4.3 1991 Stock Option Plan of the Company, incorporated herein by reference to Exhibit 4.5 of the
Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.4 1991 Non-Discretionary Stock Option Plan, incorporated herein by reference to Exhibit 4.6 of the
Company's Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.5 Form of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated herein by
reference to Exhibit 4.7 of the Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
4.6 Form of Non-Qualified Stock Option Grant under 1991 Stock Option Plan, incorporated herein by
reference to Exhibit 4.8 of the Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
4.7 Form of Stock Option Grant under 1991 Non-Discretionary Stock Option Plan, incorporated herein
by reference to Exhibit 4.9 of the Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
4.8 1994 Stock Option Plan, incorporated herein by reference to Exhibit G of the Company's Second
Amended Disclosure Statement filed on Form 8-K dated October 19, 1994 and approved by
shareholders on November 14, 1994.
**4.9 Form of Warrant of the Company dated March 28, 1997 issued in connection with the Waiver by and
among the Company and the signatories thereto.
10.1 License Agreement effective July 1, 1990 between the Company and NCR GmbH, incorporated herein
by reference to Exhibit 10.5 to the Company's Registration Statement on Form 10 (File No.
0-19301).
10.2 Description of Termination Agreement with James Dao, incorporated herein by reference to Exhibit
10.11 to the Company's Registration Statement on Form 10 (File No. 0-19301).
10.3 License Agreement dated October 1, 1991 between the Company and Samsung Electronics Co., Ltd.,
incorporated herein by reference to Exhibit 10.9 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
+10.4 License Agreement dated June 16, 1992 between the Company and NEC Corporation, incorporated
herein by reference to Exhibit 10.12 of the Company's 1992 Form 10-K (File No. 0-19301)
+10.5 Licensing and Development Agreement for Use and Marketing of Program Materials dated September
25, 1992 between the Company and International Business Machines Corporation, incorporated
herein by reference to Exhibit 10.13 of the Company's 1992 Form 10-K (File No. 0-19301)
+10.6 OEM License Agreement dated December 15, 1992 between the Company and Seiko-Epson Corporation,
incorporated herein by reference to Exhibit 10.14 of the Company's 1992 Form 10-K (File No.
0-19301)
*10.7 OEM Agreement dated August 13, 1993 between CalComp, Inc. and the Company, incorporated herein
by reference to Exhibit 10.13 of the Company's 1993 Form 10-K (File No. 0-19301)
10.8 Standby Stock Purchase Agreement between the Company and Philip Sassower dated October 3, 1994,
incorporated herein by reference to Exhibit 10.13 of the Company's 1994 Form 10-K (File No.
0-19301)
10.9 Engagement Letter between the Company and Libra Investments, Inc. dated November 2, 1995,
incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.10 Form of Subscription Agreement between the Company and the Purchasers, dated November 28, 1995,
incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.11 Form of Registration Rights Agreement between the Company and the Purchasers, dated November 28,
1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28,
1995.
10.12 Form of Warrant of the Company issued to Libra Investments, Inc. on November 28, 1995,
incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.13 Form of Registration Rights Agreement between the Company and Libra Investments, Inc., dated
November 28, 1995, incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
10.14 Form of Subscription Agreement between the Company and various investors, dated June 13, 1996,
incorporated herein by reference to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
10.15 Form of Registration Rights Agreement between the Company and various investors, dated June 13,
1996, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated June 27,
1996.
10.16 Form of Preferred Stock Investment Agreement, dated as of December 31, 1996, between the Company
and the investors listed on Schedule 1 thereto, incorporated herein by reference to Exhibit 1 of
the Company's Form 8-K dated December 31, 1996.
10.17 Form of Registration Rights Agreement between the Company and the Investors Listed on Schedule 1
thereto, incorporated herein by reference to Exhibit 2 of the Company's Form 8-K dated December
31, 1996.
10.18 Form of Certificate of Designation of the Company with respect to the 5%Cumulative Convertible
Preferred Stock, incorporated herein by reference to Exhibit 3 of the Company's Form 8-K dated
December 31, 1996.
**10.19 Waiver, dated March 26, 1997, effective December 31, 1996, by and among the Company and the
signatories thereto.
**21.1 Schedule of Subsidiaries.
**23.1 Consent of Price Waterhouse LLP, Independent Accountants.
**23.2 Consent of Ernst & Young LLP, Independent Auditors.
**27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated March 29,
1993, filed pursuant to the Securities Exchange Act of 1934.
* Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated March 30,
1994, filed pursuant to the Securities Exchange Act of 1934.
** Filed herewith.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Redwood
Shores, State of California, on March 28, 1997.
COMMUNICATION INTELLIGENCE CORPORATION
By: /s/ FRANCIS V. DANE
-----------------------------------------
Francis V. Dane
Vice President, Secretary
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated on March 28, 1997.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ GEORGE P. CLAYSON III Director
- ------------------------------
George P. Clayson III
Vice President, Secretary
/s/ FRANCIS V. DANE and Treasurer (Principal
- ------------------------------ Financial and Accounting
Francis V. Dane Officer)
Chairman of the Board and
/s/ JAMES DAO Chief Executive Officer
- ------------------------------ (Principal Executive
James Dao Officer)
/s/ L. MICHAEL MCFARLAND Director
- ------------------------------
L. Michael McFarland
/s/ PHILIP S. SASSOWER Director
- ------------------------------
Philip S. Sassower
/s/ DONALD R. SCHEUCH Director
- ------------------------------
Donald R. Scheuch
/s/ CHIEN BOR SUNG Director
- ------------------------------
Chien Bor Sung
23
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
COMMUNICATION INTELLIGENCE CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
WITH REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Communication Intelligence Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in common stockholders' equity
(deficit) and convertible preferred stock, and of cash flows present fairly, in
all material respects, the financial position of Communication Intelligence
Corporation and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
February 20, 1997, except as to Note 11,
which is as of March 28, 1997
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Communication Intelligence Corporation:
We have audited the consolidated balance sheet of Communication Intelligence
Corporation as of December 31, 1994 (not presented herein), and the accompanying
related consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the year ended December 31, 1994. Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Communication
Intelligence Corporation at December 31, 1994, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statements schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The consolidated financial statements for the year ended December 31, 1994 have
been prepared assuming that Communication Intelligence Corporation will continue
as a going concern. The Company has incurred recurring operating losses and has
a net capital deficiency. In addition, between July 18 and November 14, 1994,
the Company conducted its operations under the protection of Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 28, 1995
F-3
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 10,573 $ 5,924
Short-term investments................................................................... 752 1,535
Note receivable from officer............................................................. -- 210
Accounts receivable, net of allowance of $85 and $76 in 1996 and 1995, respectively...... 376 381
Inventories.............................................................................. 529 249
Prepaid expenses and other current assets................................................ 190 400
---------- ---------
Total current assets....................................................................... 12,420 8,699
Note receivable from officer............................................................... 210 --
Property and equipment, net................................................................ 537 336
Other assets............................................................................... 336 741
---------- ---------
Total assets............................................................................. $ 13,503 $ 9,776
---------- ---------
---------- ---------
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................................... $ -- $ 30
Accounts payable......................................................................... 367 437
Pre-petition liabilities--current........................................................ 878 822
Accrued compensation..................................................................... 339 282
Other accrued liabilities................................................................ 546 795
Deferred revenue......................................................................... 2,006 2,570
---------- ---------
Total current liabilities.................................................................. 4,136 4,936
---------- ---------
Pre-petition liabilities--noncurrent....................................................... -- 822
Other liabilities.......................................................................... 32 8
Redeemable convertible preferred stock, $.01 par value; 600 shares authorized; 450 shares
issued and outstanding in 1996 (Notes 5 and 11).......................................... 9,417 --
Preferred stock, $.01 par value, 9,400 shares authorized; none issued and outstanding...... -- --
Common stock, $.01 par value; 80,000 shares authorized; 41,901 and 39,992 shares issued and
outstanding in 1996 and 1995, respectively............................................... 419 400
Additional paid-in capital................................................................. 54,015 51,687
Accumulated deficit........................................................................ (54,347) (47,991)
Cumulative foreign currency translation adjustment......................................... (169) (86)
Commitments (Note 7)
---------- ---------
Total liabilities, redeemable securities and common stockholders' equity (Notes 5 and
11).................................................................................... $ 13,503 $ 9,776
---------- ---------
---------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Product........................................................................ $ 1,591 $ 1,220 $ 2,710
License and royalty............................................................ 816 237 61
Development contracts.......................................................... 480 857 828
--------- --------- ----------
2,887 2,314 3,599
Operating costs and expenses:
Cost of sales
Product...................................................................... 1,518 957 2,413
License, royalty and other costs............................................. 474 394 1,948
Development contracts........................................................ 355 812 780
Research and development....................................................... 1,756 1,355 2,062
Sales and marketing............................................................ 3,282 2,613 4,936
General and administrative..................................................... 2,037 1,717 2,395
--------- --------- ----------
9,422 7,848 14,534
--------- --------- ----------
Loss from operations............................................................. (6,535) (5,534) (10,935)
Interest income and other income (expense), net.................................. 278 203 (38)
Interest expense................................................................. (99) (264) (75)
--------- --------- ----------
Net loss......................................................................... $ (6,356) $ (5,595) $ (11,048)
--------- --------- ----------
--------- --------- ----------
Net loss per common share........................................................ $ (0.15) $ (0.16) $ (0.53)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares................................................... 41,265 34,621 20,746
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
AND CONVERTIBLE PREFERRED STOCK
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN ACCUMULATED FROM
STOCK STOCK CAPITAL DEFICIT STOCKHOLDERS
--------------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1993................ $ 30 $ 201 $ 35,928 $ (31,348) $ (56)
Exercise of options for 75 shares of common
stock....................................... -- 1 33 -- --
Conversion of note payable to employee into 35
shares of common stock...................... -- -- 154 -- --
Exchange of preferred stock for common
stock*...................................... (30) 30 -- -- --
Issuance of 10,520 shares of common stock in
connection with warrant offering and private
placement, net of issuance costs of $86*.... -- 105 4,819 -- --
Return of 21 shares of common stock and
cancellation of note receivable............. -- -- (56) -- 56
Foreign currency translation adjustment....... -- -- -- -- --
Net loss...................................... -- -- -- (11,048) --
--- ----- ----------- ------------ ---
Balances as of December 31, 1994................ -- 337 40,878 (42,396) --
Exercise of options for 654 shares of common
stock....................................... -- 6 288 -- --
Issuance of 5,500 shares of common stock to
investors for cash, net of issuance costs of
$185........................................ -- 55 10,285 -- --
Issuance of 217 shares of common stock to
vendor for pre-petition liabilities......... -- 2 186 -- --
Issuance of warrants to purchase 1,563 shares
of common stock in connection with the
bridge loan................................. -- -- 50 -- --
Foreign currency translation adjustment....... -- -- -- -- --
Net loss...................................... -- -- -- (5,595) --
--- ----- ----------- ------------ ---
Balances as of December 31, 1995................ -- 400 51,687 (47,991) --
Exercise of options for 1,403 shares of common
stock....................................... -- 14 664 -- --
Exercise of warrants for 100 shares of common
stock....................................... -- 1 49 -- --
Issuance of 796 shares of common stock to
investors for cash, net of issuance costs of
$292........................................ -- 8 2,400 -- --
Exchange of 390 shares of common stock for 70
shares of redeemable convertible preferred
stock....................................... -- (4) (1,751) -- --
Issuance of warrants to purchase common stock
in connection with the June and December
Private Placements.......................... -- -- 844 -- --
Issuance of 100 options to consultants for
services.................................... -- -- 122 -- --
Foreign currency translation adjustment....... -- -- -- -- --
Net loss...................................... -- -- -- (6,356) --
--- ----- ----------- ------------ ---
Balances as of December 31, 1996................ $ -- $ 419 $ 54,015 $ (54,347) $ --
--- ----- ----------- ------------ ---
--- ----- ----------- ------------ ---
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT
---------------
<S> <C>
Balances as of December 31, 1993................ $ (66)
Exercise of options for 75 shares of common
stock....................................... --
Conversion of note payable to employee into 35
shares of common stock...................... --
Exchange of preferred stock for common
stock*...................................... --
Issuance of 10,520 shares of common stock in
connection with warrant offering and private
placement, net of issuance costs of $86*.... --
Return of 21 shares of common stock and
cancellation of note receivable............. --
Foreign currency translation adjustment....... 28
Net loss...................................... --
-----
Balances as of December 31, 1994................ (38)
Exercise of options for 654 shares of common
stock....................................... --
Issuance of 5,500 shares of common stock to
investors for cash, net of issuance costs of
$185........................................ --
Issuance of 217 shares of common stock to
vendor for pre-petition liabilities......... --
Issuance of warrants to purchase 1,563 shares
of common stock in connection with the
bridge loan................................. --
Foreign currency translation adjustment....... (48)
Net loss...................................... --
-----
Balances as of December 31, 1995................ (86)
Exercise of options for 1,403 shares of common
stock....................................... --
Exercise of warrants for 100 shares of common
stock....................................... --
Issuance of 796 shares of common stock to
investors for cash, net of issuance costs of
$292........................................ --
Exchange of 390 shares of common stock for 70
shares of redeemable convertible preferred
stock....................................... --
Issuance of warrants to purchase common stock
in connection with the June and December
Private Placements.......................... --
Issuance of 100 options to consultants for
services.................................... --
Foreign currency translation adjustment....... (83)
Net loss...................................... --
-----
Balances as of December 31, 1996................ $ (169)
-----
-----
</TABLE>
* Relates to Plan of Reorganization (see Note 5).
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................... $ (6,356) $ (5,595) $ (11,048)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 353 387 2,283
Warrant issuance costs....................................................... -- 50 --
Equity securities issued for services........................................ 122
Loss on disposal of assets................................................... -- -- 163
Changes in operating assets and liabilities:
Accounts receivable........................................................ 5 (180) 84
Inventories................................................................ (284) (27) 618
Prepaid expenses and other current assets.................................. 209 (195) 420
Other assets............................................................... 213 (55) 136
Accounts payable........................................................... (67) 129 (421)
Accrued compensation....................................................... 57 38 (98)
Other accrued liabilities.................................................. (285) (58) 30
Deferred revenue........................................................... (564) (184) 73
Pre-petition liabilities................................................... (766) (1,207) 2,822
---------- --------- ----------
Net cash used in operating activities.......................................... (7,363) (6,897) (4,938)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of short-term investments................... 14,276 -- 1,827
Purchase of short-term investments............................................. (13,493) (1,535) --
Note receivable from officer................................................... -- -- (210)
Acquisition of property and equipment.......................................... (358) (144) (324)
Capitalized software costs..................................................... -- (20) (436)
---------- --------- ----------
Net cash provided by (used in) investing activities............................ 425 (1,699) 857
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt and notes payable.................... -- 2,530 1,168
Principal payments on short-term debt and notes payable........................ (30) (2,618) (330)
Principal payments on capital lease obligations................................ (34) (66) (107)
Proceeds from issuance of redeemable convertible preferred stock and warrants,
net of cash issuance costs................................................... 8,395 -- --
Proceeds from issuance of common stock and warrants, net of cash issuance
costs........................................................................ 3,247 10,634 3,932
---------- --------- ----------
Net cash provided by financing activities...................................... 11,578 10,480 4,663
---------- --------- ----------
Effect of exchange rate changes on cash........................................ 9 (48) 28
---------- --------- ----------
Net increase in cash and cash equivalents...................................... 4,649 1,836 610
Cash and cash equivalents at beginning of year................................. 5,924 4,088 3,478
---------- --------- ----------
Cash and cash equivalents at end of year....................................... $ 10,573 $ 5,924 $ 4,088
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY
The corporate mission of Communication Intelligence Corporation (the
"Company" or "CIC") is to develop and market natural human, pen input, computer
interfaces and handwriting recognition-based security technologies and products
to satisfy the emerging markets for pen-based computing and electronic commerce.
These emerging markets for CIC's products include all areas of personal
computing as well as electronic commerce and communications.
The Company's research and development activities have given rise to
numerous technologies and products including: two pen-based operating
environments (PenDOS-Registered Trademark- and PenMAC-Registered Trademark-),
its multi-lingual Handwriter-Registered Trademark- Recognition System, and two
desktop computing products, Handwriter-Registered Trademark- for
Windows-Registered Trademark- and MacHandwriter-Registered Trademark-.
Additionally, CIC has developed products for dynamic signature verification,
electronic ink data compression and encryption and a suite of development tools
and applications which the Company believes could increase the functionality of
its core products and could facilitate their integration into original equipment
manufacturers' ("OEM") hardware products and computer systems and networks.
Through its majority-owned joint venture in China (the "Chinese Joint
Venture"), the Company provides system integration services and markets its
pen-based business computer systems to Chinese business, government users and
other joint ventures.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles and include the
accounts of CIC, its wholly-owned subsidiary in Japan, CIC Japan, Inc., and its
majority-owned Chinese Joint Venture. All intercompany accounts and transactions
are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
FINANCIAL PRESENTATION
Certain prior period amounts have been reclassified to conform with the 1996
financial statement presentation.
PLAN OF REORGANIZATION AND PRE-PETITION LIABILITIES
On July 18, 1994, the Company filed a voluntary petition for reorganization
and protection under Chapter 11 of the U. S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court, San Francisco District. Neither
CIC's consolidated foreign subsidiary nor its Chinese Joint Venture filed
petitions for reorganization. On September 28, 1994, the Company filed a
Disclosure Statement and
F-8
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Plan of Reorganization (the "Plan") in the United States Bankruptcy Court, San
Francisco District. The Plan was approved by the creditors on November 14, 1994,
and the Company emerged from Chapter 11 protection on that date.
The Plan provides for the payment in full, in cash, of all allowed unsecured
claims of creditors while leaving secured creditors unimpaired by providing for
their payment in compliance with the original terms and conditions of their
loans. Unsecured creditors will be paid in three approximately equal
installments. The first and second installments were made in February 1995 and
1996, respectively. The third installment was made in February 1997. Pursuant to
the Plan, amounts outstanding after February 1995 accrue simple interest at 8%
per annum through February 1996, 10% per annum thereafter through February 1997,
and 12% per annum for any amounts outstanding subsequent to February 1997. The
Plan also approved certain warrant offerings and stock purchase agreements as
described in Note 5.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued compensation, other accrued liabilities and obligations under
capital leases, approximate fair value due to their short maturities.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity at the
date of purchase of three months or less to be cash equivalents.
Short-term investments are classified as "available-for-sale." For all
periods presented, cost of investments approximated fair market value.
Unrealized gains and losses at December 31, 1996 and 1995 and realized gains and
losses for the year ended December 31, 1996 were not material. The cost of
securities sold is based on the specific identification method.
The Company's cash, cash equivalents and short-term investments at December
31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash in bank............................................................. $ 9,483 $ 430
Corporate debt securities................................................ -- 1,000
Commercial paper......................................................... 1,088 4,483
Money markets............................................................ 2 11
--------- ---------
Cash and cash equivalents.............................................. $ 10,573 $ 5,924
--------- ---------
--------- ---------
Corporate debt securities................................................ $ 252 $ 998
Other debt securities.................................................... 500 537
--------- ---------
Short-term investments................................................. $ 752 $ 1,535
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Corporate debt securities at December 31, 1996 mature in less than one year.
Other debt securities at December 31, 1996 consist of securities not due at a
single maturity date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company maintains its cash,
cash equivalents and short-term investments with various financial institutions.
This diversification of risk is consistent with Company policy to maintain
liquidity and ensure the safety of principal.
To date, accounts receivable have been derived principally from revenues
earned from end users, manufacturers, retailers and distributors of computer
products in North America, Europe, and the Pacific Rim. The Company performs
periodic credit evaluations of its customers and does not require collateral.
The Company maintains reserves for potential credit losses; historically, such
losses have been insignificant and within management's expectations.
Two customers accounted for 34% and 13%, respectively, of outstanding
accounts receivable at December 31, 1996, and one customer accounted for 13% of
outstanding accounts receivable at December 31, 1995.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in first-out (FIFO) method. Cost principally includes direct
materials. At December 31, inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................................. $ 59 $ 45
Finished goods............................................................. 470 204
--------- ---------
$ 529 $ 249
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized while maintenance and repairs
are charged to expense as incurred.
F-10
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Property and equipment, net at December 31, consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment.................................................. $ 1,978 $ 1,748
Office furniture and fixtures............................................ 420 350
Leasehold improvements................................................... 43 31
Purchased software....................................................... 103 53
--------- ---------
2,544 2,182
Less accumulated depreciation and amortization........................... (2,007) (1,846)
--------- ---------
$ 537 $ 336
--------- ---------
--------- ---------
</TABLE>
Included in property and equipment as of December 31, 1996 and 1995 is
$31,000 and $262,000 of assets acquired under capital leases, net of accumulated
depreciation of $24,000 and $107,000, respectively. Depreciation and
amortization expense was approximately $177,000, $185,000, and $547,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED ("SFAS 86"). Under SFAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. In
the Company's case, capitalization commences upon the completion of a working
model and ends on general product release. As of December 31, 1996 and 1995,
such costs were insignificant and are included as a component of "other assets"
in the accompanying consolidated balance sheets. Amortization expense, including
amounts written down to net realizable value, was approximately $98,000,
$157,000 and $1,653,000 for 1996, 1995, and 1994, respectively.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans (see Note 5).
REVENUE RECOGNITION
Revenue from 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. Under the terms of an agreement with
IBM, the Company is obligated to share with IBM certain revenues
F-11
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
from third parties when earned. Deferred revenue in the accompanying balance
sheets reflects nonrefundable advance royalty fees received from the Company's
licensees in advance of revenue recognition.
Development contract revenue is generated primarily from system integration
services, and research grants and joint development agreements with government
agencies. Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collectability is probable and related costs have
been incurred. There were no joint development agreements in 1996 and 1995.
System integration revenue is generally recognized upon customer acceptance and
fulfillment of all significant obligations under the contract.
Two customers accounted for 11% and 10% of revenues in 1996, respectively.
One customer accounted for 25% and 21% of revenues in 1995 and 1994,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss by the
weighted average common shares outstanding during each period. Common stock
equivalents, consisting of common shares issuable upon conversion of the
convertible preferred stock (using the "as if converted" method) and upon the
exercise of stock options and warrants (using the treasury stock method), are
not included in the net loss per common share computation as their effect would
be antidilutive.
FOREIGN CURRENCY TRANSLATION
The Company considers the functional currency of its Japanese subsidiary and
the Chinese Joint Venture to be the respective local currency and, accordingly,
gains and losses from the translation of the local foreign currency financial
statements are included as a component of "cumulative foreign currency
translation adjustment" in the accompanying consolidated balance sheets. Foreign
currency assets and liabilities are translated into U.S. dollars at the
end-of-period exchange rates. Revenues and expenses are translated at average
exchange rates in effect during each period.
Net foreign currency transaction gains and losses are included as components
of "interest income and other income (expense), net" in the accompanying
consolidated statements of operations. The Company recorded net foreign currency
transaction gains of $59,000, $53,000 and $147,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss and
credit carryforwards. A valuation allowance is provided against deferred tax
assets for which it is more likely than not that the asset will not be realized.
F-12
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE. SFAS 128 will be effective for financial statements for
periods ending after December 15, 1997, including interim periods, and
establishes standards for computing and presenting earnings per share. In its
consolidated financial statements for the year ending December 31, 1997, the
Company will make the required disclosures of basic and diluted earnings per
share, as applicable, and provide a reconciliation of the numerator and
denominator of its basic and diluted earnings per share computations. All prior
period earnings per share data will be restated by the Company in the period of
adoption of SFAS 128, which is not expected to have a material effect on the
presentation of the Company's earnings (loss) per common share data.
2. RESEARCH GRANT
In November 1993, CIC received a two-year grant under the Advanced
Technology Program sponsored by the National Institute of Standards and
Technology. The amount of the first year award was $810,000. The second year
award of $670,000 was approved in January 1995. The Company recognized $91,000,
$590,000 and $746,000 as development contract revenue under this grant for the
years ended December 31, 1996, 1995 and 1994, respectively.
3. CHINESE JOINT VENTURE
In September 1993, the Company formed the Chinese Joint Venture in Nanjing,
China, with the Ministry of Electronic Industries of the Jiangsu Province,
People's Republic of China (the "Government"), to perform system integration
services and market CIC's pen-based business computer systems to Chinese
business, government users and other joint ventures. The term of the Chinese
Joint Venture is 50 years. Under the provisions of the Chinese Joint Venture
agreement, in exchange for a 79% ownership position, the Company may be required
to contribute up to $5.4 million in cash, and the Company will provide
nonexclusive licenses to technology and certain distribution rights. The
Government will contribute certain land use rights and provide other services
for the Chinese Joint Venture. As of December 31, 1996, the Company had
contributed $900,000 in cash and had provided nonexclusive licenses to
technology and certain distribution rights, while the Government had contributed
certain land use rights. The timing of future contributions has not been
definitively established. The Company believes that any future cash
contributions it may be required to make to the Chinese Joint Venture will be
paid from its working capital or proceeds received from additional financings,
if any. The Chinese Joint Venture is subject to certain regulations which
require government authorization to transfer funds out of China, however, the
Company has, in the past, been able to transfer funds from the Chinese Joint
Venture to the United States.
4. DEBT
In September 1994, the Company received a bridge loan from an investor and
director of the Company (the "Investor") of $1,000,000. The bridge loan, due in
March 1995, was secured by all assets of the Company and bore interest at 2%
above the prime rate. In December 1994, the entire principal and accrued
interest of $26,000 were converted into shares of common stock, at $0.50 per
share (see Note 5). In connection with the bridge loan, the Company granted the
Investor warrants to purchase 2,000,000 shares of common stock at an exercise
price of $0.50 per share. In January 1997, the Company issued
F-13
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
approximately 1,549,000 shares of common stock in connection with the Investor's
net exercise of the aforementioned warrants.
In June 1995, the Company closed a financing agreement with the Investor
providing for loans (the "Bridge Loan") of up to $2,500,000. The Bridge Loan
bore interest at 2% above the prime rate and was repaid on November 28, 1995. On
the signing of the Bridge Loan agreement, the Company issued to the Investor
625,000 warrants to purchase common stock. In addition, each month the Bridge
Loan was available, the Company issued 156,000 warrants to the Investor to
purchase common stock, up to a maximum of 2,500,000 warrants over the term of
the Bridge Loan. Over the term of the Bridge Loan, a total of 1,563,000 warrants
to purchase common stock were issued to the Investor. The exercise price of the
warrants is $1.00 per share. In the event the Company issues shares of common
stock or convertible securities during the term of the warrants at a price less
than the exercise price of the warrants, the exercise price will be reduced. In
January 1997, the Company issued approximately 1,210,000 shares of common stock
in connection with the Investor's net exercise of the aforementioned warrants.
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT
In June 1996, the Company completed a private placement (the "June Private
Placement") of 600,000 shares of the Company's common stock, at a price of $4.50
per share to certain institutional and other investors (collectively, the
"Subscribers"). The net proceeds to the Company were approximately $2,408,000,
net of cash issuance costs of $181,000 and $111,000 of value ascribed to 30,000
warrants to purchase common stock issued to the placement agent. The warrants
expire five years from the date of issuance and have an exercise price of $4.50
per share, subject to adjustments for antidilution. The fair value ascribed to
the warrants was estimated on the date of issuance using the Black-Scholes
pricing model with the following assumptions: risk-free interest rate of 6.69%;
expected life of 5 years; expected volatility of 102%; and expected dividend
yield of 0%. The Company agreed to register the securities which were issued in
conjunction with the June Private Placement and which may be issued upon
exercise of the placements agent's warrants. The Registration Statement on Form
S-3 filed by the Company to effect the registration of these securities was
declared effective on December 24, 1996 (the "Effective Date").
Pursuant to the June Private Placement agreement, the Company agreed to
issue additional shares (the "Extra Shares") of its common stock to the
Subscribers if the average of the daily closing prices of the Company's common
stock for the twenty business days prior to two business days before the
Effective Date is less than $4.50 per share. In December 1996, the Company
issued 196,000 Extra Shares for no additional consideration to the Subscribers
who do not exchange their shares of Common Stock they purchased in the private
placement for Convertible Preferred. The Registration Statement on Form S-3
filed by the Company in connection with the June Private Placement also effected
the registration of the Extra Shares.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
On December 31, 1996, the Company completed a private placement of 450,000
shares of redeemable convertible preferred stock (the "December Private
Placement") at $25.00 per share to certain institutional and other investors. Of
the aggregate 450,000 shares sold, 70,200 shares of redeemable convertible
preferred stock were issued in exchange for 390,000 shares of common stock,
originally issued in the June Private Placement. The net proceeds to the Company
from the remaining 379,800 shares of redeemable
F-14
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
convertible preferred stock sold were approximately $7,662,000, net of cash
issuance costs of $1,100,000 and $733,000 of value ascribed to 337,500 warrants
to purchase common stock issued to the placement agent. The warrants expire five
years from the date of issuance and have an exercise price of $2.50 per share,
subject to adjustment for anti-dilution. The fair value ascribed to the warrants
was estimated on the date of issuance using the Black-Scholes pricing model with
the following assumptions: risk-free interest rate of 6.07%; expected life of 5
years; expected volatility of 104%; and expected dividend yield of 0%.
The Company agreed to register the redeemable convertible preferred stock by
filing a Registration Statement on Form S-3 by March 31, 1997 and by using its
best efforts to cause such Registration Statement to be declared effective
within 180 days from December 31, 1996 (the "Declaration Date"). In the event
that the Registration Statement is not declared effective within 180 days from
December 31, 1996, the Company is required to pay to each holder a default
payment (the "Default Payment") in the amount equal to 3% of the liquidation
preference for the redeemable convertible preferred stock held for any part of
each 30-day period subsequent to the Declaration Date that the Registration
Statement has not been declared effective. A similar Default Payment must be
made by the Company to the holders of redeemable convertible preferred stock in
the event that (i) the Company fails, refuses or is unable to cause the
securities covered by the Registration Statement to be listed on the exchange on
which the Company's common stock is traded, (ii) any holder's ability to sell
the securities covered by the Registration Statement is suspended for more than
60 days, or at any time during the twelfth or thirteenth fiscal month following
December 31, 1996, or (iii) the Company does not have a sufficient number of
shares of common stock available to effect conversion of the redeemable
convertible preferred stock.
In the event the Company fails or refuses to pay any Default Payment when
due, the Company will purchase all or any portion of the redeemable convertible
preferred stock at the request and option of each holder thereof. The Default
Payment will continue to accrue through the date of such purchase. In the event
that the Company fails, refuses or is unable to cure any violation of the
registration rights granted to holders of the redeemable convertible preferred
stock within 60 days of the violation or if the Registration Statement is not
declared effective by the thirteenth month following December 31, 1996, the
Company will redeem the redeemable convertible preferred stock and/or common
stock held by each holder, in whole or in part, at the request and option of
each holder. In the case of redeemable convertible preferred stock, the
redemption price per share will be equal to 1.3865 times the sum of (i) $25.00
times the sum of the number of redeemable convertible preferred shares which
cannot be converted, plus (ii) accrued and unpaid dividends thereon, plus (iii)
any Default Payment due to such holder (in the aggregate, the "Premium
Redemption Price"). In the case of common stock issued to effect the conversion
of redeemable convertible preferred stock, the redemption price per share will
be equal to 1.3865 times the dollar amount which is the product of (i) the
number of shares to be redeemed and (ii) the closing market price of the common
stock on the date of such redemption.
Prior to the earlier of (i) the date which is the last day of the thirteenth
fiscal month following December 31, 1996, or (ii) such date on which all
redeemable convertible preferred shares have been converted, the closing of any
transaction constituting a change in control of the Company is conditioned on
the prior purchase and redemption by the Company of, and payment for, at the
request of any holder, all or the requested portion of the outstanding
redeemable convertible preferred stock held by such holder at the Premium
Redemption Price.
CONVERSION. Each share of redeemable convertible preferred stock is
convertible by the holder into shares of the Company's common stock at any time
beginning six months from December 31, 1996. The
F-15
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
number of common shares to be issued upon conversion is determined by dividing
(i) the sum of $25.00 multiplied by the number of redeemable convertible
preferred shares being converted, plus accrued and unpaid dividends thereon, by
(ii) a conversion price which ranges from approximately 72% to 85% of the fair
value of the Company's common stock (the "Conversion Price"). Each share of
redeemable convertible preferred stock will automatically convert to common
stock upon a change in control of the Company based on a Conversion Price equal
to approximately 85% of the fair value of the common stock. In addition, all
outstanding shares of redeemable convertible preferred stock will be converted
by the holders into shares of the Company's common stock by December 31, 1999,
subject to the satisfaction of certain conditions and other events. So long as
any redeemable convertible preferred stock remains outstanding, the Company will
reserve at all times for purposes of conversion the number of authorized but
unissued shares of common stock that is the greater of (i) 20,000,000 (reduced
by the number of common shares actually delivered pursuant to conversion) or
(ii) 1.5 times the number of common shares sufficient to effect the conversion
of all redeemable convertible preferred stock outstanding.
DIVIDENDS. Holders of redeemable convertible preferred stock are entitled
to receive cumulative dividends of $1.25 per share per annum, compounded
semi-annually, whether or not declared by the Company's Board of Directors (the
"Board"). Dividends are payable six months from December 31, 1996 and
semi-annually every six months thereafter, when and as declared by the Board.
Dividends may be paid, at the Company's option, in cash or additional shares of
redeemable convertible preferred stock. The Company has agreed with the holders
of redeemable convertible preferred stock that the Company would not declare
dividends or make any distributions to holders of its common stock prior to the
earlier of January 31, 1998 (or later under certain circumstances) or the date
on which all outstanding redeemable convertible preferred stock has been
converted into shares of common stock. The Company is also required to pay any
accrued and unpaid dividends on outstanding shares of redeemable convertible
preferred stock before declaring and paying any dividends for any other class or
series of stock. No dividends were declared by the Board through December 31,
1996.
VOTING. Holders of redeemable convertible preferred stock have the right to
vote with the holders of the Company's common stock, combined as one class, for
the election of directors and upon such other matters to be voted on at any
meeting of stockholders. Each share of redeemable convertible preferred stock
entitles the holder to one vote. In addition, the affirmative vote of 75% of the
outstanding shares of redeemable convertible preferred stock is required for the
consummation of certain business combinations and other extraordinary
transactions, amendments or waivers to the Company's Certificate of Designations
or amendments to the Company's organizational documents which may change the
rights of holders.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the holders of redeemable
convertible preferred stock are entitled to receive, prior and in preference to
any distribution of any assets of the Company to the holders of any other class
or series of stock, the amount of $25.00 per share plus any accrued but unpaid
dividends.
COMMON STOCK OPTIONS AND WARRANTS
Under the Plan (see Note 1), each holder of common or convertible preferred
stock received, in exchange for each two shares of convertible preferred or
common stock, one Unit consisting of two new shares of common stock ($0.01 par
value) and one stock purchase warrant having an exercise price of $0.50. The
unexercised warrants expired on December 15, 1994.
F-16
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
Concurrent with the Plan, the Company negotiated a Standby Stock Purchase
Agreement (the "Standby Agreement") with the Investor, through which the
Investor committed to purchase up to 10 million shares of newly issued common
stock at a price of $0.50 per share. The terms of the Standby Agreement provided
the Investor would purchase sufficient shares of newly issued common stock such
that gross proceeds received pursuant to the Standby Agreement and exercise of
warrants described above would total $5 million. The shares purchased pursuant
to the Standby Agreement have certain demand registration rights. As
consideration for the Investor's commitment under the Standby Agreement, the
Company issued 500,000 shares of common stock to the Investor. The Investor
purchased 6,050,000 shares of common stock pursuant to the Standby Agreement,
payment for a portion of which was effected through the conversion of the
Investor's Bridge Loan to the Company plus accrued interest (see Note 4).
In November 1994, the Board approved an increase in the number of shares of
common stock authorized for issuance from 40 million to 80 million shares.
The Company adopted two stock option plans in 1991 (the 1991 Stock Option
Plan and the 1991 Nondiscretionary Plan). Incentive and nonqualified options
under the 1991 plans may be granted to employees, officers, and consultants of
the Company. As amended, there are 2,050,000 shares of common stock authorized
for issuance under these plans.
In conjunction with the approval of the Plan, the Company received approval
of its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan allows directors,
officers, and employees to be eligible for grants of incentive and nonqualified
stock options.
In May 1996, the stockholders approved an increase of 1,000,000 shares to
the number of shares authorized for issuance under the 1994 Plan. Accordingly, a
total of 5,000,000 shares of common stock are authorized for issuance under the
1994 Plan.
The exercise prices of options are determined by a committee of the Board,
but in the case of an incentive stock option, the exercise price may not be less
than 100% of the fair market value of the underlying common stock on the date of
grant. Nonqualified options may not have an exercise price of less than 85% of
the fair market value of the underlying common stock on the date of grant.
Options generally vest over four years. For those options which vest over four
years, 20% of the total options granted vest on the first anniversary of the
date of grant; an additional 20%, 20%, and 40% of the total options granted vest
on the second, third, and fourth anniversary of the date of grant, respectively.
Options are generally exercisable over a period not to exceed seven years.
In May 1994, the Board of Directors approved a resolution to reprice
outstanding stock options. The repricing occurred on July 11, 1994, resulting in
the cancellation of 1,029,000 original options and the granting of an equivalent
number of new options at an exercise price of $0.50 per share, the then current
price of the common stock. Other than the change in the exercise price, the new
options were granted on the same terms and conditions as the canceled options.
In December 1994, for services rendered prior to and during the Company's
Chapter 11 proceedings, options to purchase 180,000 shares of common stock at
$0.50 per share were granted to three directors of the Company under nonplan
option agreements. In addition, a nonplan option to purchase 100,000 shares of
common stock was granted on December 28, 1994, to a newly elected director and
Chairman of the Finance Committee. The options have an exercise price of $0.50
per share. The nonplan options generally vest over four years. For those nonplan
options which vest over four years, 20% of the total nonplan
F-17
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
options granted vest on the first anniversary of the date of grant; an
additional 20%, 20%, and 40% of the total nonplan options granted vest on the
second, third, and fourth anniversary of the date of grant, respectively.
Nonplan options are generally exercisable over a period not to exceed seven
years. As of December 31, 1996, 480,000 nonplan options were outstanding with a
remaining contractual life of 4.4 years and a weighted average exercise price of
$0.50 per share. Of such nonplan options, 312,000 were exercisable at December
31, 1996 with a weighted average exercise price of $0.50 per share. The newly
elected director also received an option, vesting one year from date of grant,
to purchase 50,000 shares of common stock pursuant to the Company's 1991
Nondiscretionary Plan.
On June 1, 1994, the Company negotiated with its employees to reduce their
salaries through August 31, 1994. Those employees who agreed to continue their
employment at the reduced wage were granted certain option rights to purchase
common stock (the "Options"). Options to purchase 2,210,000 shares of common
stock were granted at an average exercise price of $0.57 per share under this
agreement, of which 377,000 Options were granted to officers under the 1991
Stock Option Plan, with the remaining Options granted outside of the plan. The
Options were immediately exercisable and remain in effect for seven years from
the date of grant. As of December 31, 1996, 737,000 Options had been exercised
at a weighted average exercise price of $0.49 per share and 496,000 Options with
a weighted average exercise price of $0.75 per share had been forfeited. The
following table summarizes information about the Options outstanding and
exercisable at December 31, 1996 which were granted outside of the 1991 Stock
Option Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
--------------------------------
OPTIONS REMAINING
OUTSTANDING AND CONTRACTUAL
RANGE OF EXERCISE PRICES EXERCISABLE LIFE EXERCISE PRICE
- ------------------------------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
$0.30--$0.45.................................... 289,000 4.7 $ 0.34
$0.46--$0.69.................................... 179,000 4.8 $ 0.60
$0.70--$1.05.................................... 78,000 4.6 $ 0.81
$1.06--$1.14.................................... 54,000 4.7 $ 1.14
-------
600,000
-------
-------
</TABLE>
F-18
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
Information with respect to the Company's 1991 Stock Option Plan, 1991
Nondiscretionary Plan and 1994 Plan is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995
------------------------------ -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.................... 5,655,000 $ 0.54 5,001,000 $ 0.51
Granted............................................... 891,000 $ 3.00 1,020,000 $ 0.68
Exercised............................................. (1,070,000) $ 0.52 (146,000) $ 0.52
Forfeited............................................. (454,000) $ 0.50 (220,000) $ 0.76
Expired............................................... -- -- -- --
------------- ----------
Outstanding at period end............................. 5,022,000 $ 0.98 5,655,000 $ 0.54
------------- ----------
------------- ----------
Options exercisable at period end..................... 2,001,000 $ 0.66 1,996,000 $ 0.52
------------- ----------
------------- ----------
Weighted average grant-date fair value of options
granted during the period........................... $ 2.14 $ 0.36
------------- ----------
------------- ----------
</TABLE>
The following table summarizes information about employee and director stock
options outstanding under the 1991 Stock Option Plan, 1991 Nondiscretionary Plan
and 1994 Plan at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
--------------------------------
OPTIONS REMAINING EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
- ----------------------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
$0.50................................................ 3,870,000 5.8 $ 0.50
$0.51--$2.00......................................... 186,000 5.4 $ 0.67
$2.01--$2.99......................................... 295,000 6.5 $ 2.73
$3.00................................................ 641,000 6.6 $ 3.00
$3.01--$6.20......................................... 30,000 6.1 $ 4.50
-----------
5,022,000
-----------
-----------
</TABLE>
The following table summarizes information about employee and director stock
options exercisable under the 1991 Stock Option Plan, 1991 Nondiscretionary Plan
and 1994 Plan at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------- ---------- -----------------
<S> <C> <C>
$0.50.......................................................... 1,800,000 $ 0.50
$0.51--$2.00................................................... 86,000 $ 0.72
$2.01--$2.99................................................... 15,000 $ 2.50
$3.00.......................................................... 80,000 $ 3.00
$3.01--$6.20................................................... 20,000 $ 3.66
----------
2,001,000
----------
----------
</TABLE>
F-19
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY (CONTINUED)
FAIR VALUE DISCLOSURE
Had compensation cost for the Company's option plans been determined based
on the fair value of the options at the date of grant, as prescribed by SFAS
123, the Company's net loss and net loss per share would have been as follows
(In thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net loss
As reported................................................... $ (6,356) $ (5,595)
Pro forma..................................................... $ (6,840) $ (5,653)
Net loss per share
As reported................................................... $ (0.15) $ (0.16)
Pro forma..................................................... $ (0.17) $ (0.16)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable period: dividend yield of 0%
for both periods; risk-free interest rate of 6.6% for options granted during the
year ended December 31, 1996 and 5.7% for options granted during the year ended
December 31, 1995; an expected life of 4 years for both periods; and expected
volatility of 100% for both periods.
Because options generally vest over four years and the Company expects to
make additional option grants each year, the above pro forma disclosures are not
representative of the pro forma effects on reported results of operations to be
expected in future periods.
WARRANTS
In December 1994, a director of the Company was granted warrants to purchase
100,000 shares of common stock at $0.50 per share. The warrants were granted in
connection with a bridge loan. The warrants to purchase 100,000 shares of common
stock were exercised in December 1996.
Warrants to purchase 4,167,000 shares of common stock were outstanding as of
December 31, 1996. In January 1997, 3,563,000 of these warrants were exercised
(see Note 4). The remaining 604,000 warrants have a weighted average remaining
contractual life of 4.2 years and a weighted average exercise price of $2.40 per
share.
As of December 31, 1996, 10,269,000 shares of common stock were reserved for
issuance upon exercise of outstanding options and warrants on that date.
6. RELATED PARTY TRANSACTIONS
In April 1994, the Company loaned $210,000 to the Company's Chief Executive
Officer in exchange for a note, secured by the Company's common stock, bearing
interest at the highest marginal rate applicable to the Company's borrowing or
the highest rate allowable by law. During 1996, the due date of the note was
extended from April 1, 1996 to April 1, 1998.
The Company paid a director of the Company $100,000 in consulting fees and
$100,000 in placement fees during 1996 and 1995, respectively. During 1997, the
director agreed to increase his time commitment
F-20
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
to the Company and to maintain an office on behalf of the Company. To compensate
the director for his additional time commitment and to reimburse him for office
expense, the consulting fee was increased to $150,000 for 1997.
7. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company leases facilities in the United States, Japan and China. In
January 1997, the Company entered into a noncancelable operating lease for
additional office facilities in the United States. In addition to monthly rent,
the U.S. facilities are subject to additional rental payments for utilities and
other costs above a base amount. Facilities rent expense was approximately
$346,000, $224,000, and $559,000 in 1996, 1995, and 1994, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $362,000, $275,000, $221,000 and $191,000 for the years ending
December 31, 1997, 1998, 1999, and 2000, respectively. Future minimum payments
required under capital leases, which expire in 1997, are insignificant at
December 31, 1996.
8. INCOME TAXES
As of December 31, 1996, the Company has federal net operating loss
carryforwards available to reduce taxable income through 2011 of approximately
$42,000,000. The Company also has federal research and investment tax credit
carryforwards of approximately $368,000, which expire at various dates through
2010.
Deferred tax assets and liabilities at December 31, consist of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................................... $ 14,362 $ 12,807
Credit carryforwards...................................................................... 368 470
Deferred income........................................................................... 682 1,032
Research and development capitalized for tax purposes..................................... -- 73
Other, net................................................................................ 758 742
---------- ----------
Total deferred tax assets................................................................. 16,170 15,124
---------- ----------
Deferred tax liabilities:
Capitalized software...................................................................... -- 40
Total deferred tax liabilities............................................................ -- 40
---------- ----------
16,170 15,084
Valuation allowance....................................................................... (16,170) (15,084)
---------- ----------
Net deferred tax assets................................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
A full valuation allowance has been established for the Company's net
deferred tax assets since realization of such assets through the generation of
future taxable income is uncertain.
F-21
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating losses and tax credit carryforwards may be impaired or limited in
certain circumstances. These circumstances include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a three
year period. During 1996, the Company experienced stock ownership changes which
could limit the utilization of its net operating loss and research and
investment tax credit carryforwards in future periods.
9. FOREIGN OPERATIONS
The Company's export sales were 7%, 6%, and 15% of total revenues in 1996,
1995, and 1994, respectively. Information regarding foreign operations is as
follows :
<TABLE>
<CAPTION>
UNITED
STATES JAPAN CHINA ELIMINATIONS TOTAL
------------ --------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Sales to unaffiliated customers...................... $ 2,996 $ 263 $ 340 $ -- $ 3,599
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Intercompany transfers............................... $ 457 $ -- $ -- $ (457) $ --
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Loss from operations................................. $ (9,513) $ (1,032) $ (373) $ (17) $ (10,935)
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Identifiable assets.................................. $ 15,440 $ 339 $ 1,807 $ (11,415) $ 6,171
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
YEAR ENDED DECEMBER 31, 1995
Sales to unaffiliated customers...................... $ 1,515 $ 49 $ 755 $ (5) $ 2,314
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Intercompany transfers............................... $ -- $ -- $ -- $ -- $ --
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Loss from operations................................. $ (5,061) $ (387) $ (142) $ 56 $ (5,534)
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Identifiable assets.................................. $ 19,438 $ 234 $ 1,654 $ (11,550) $ 9,776
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated customers...................... $ 1,389 $ 11 $ 1,497 $ (10) $ 2,887
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Intercompany transfers............................... $ -- $ -- $ -- $ -- $ --
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Loss from operations................................. $ (6,060) $ (370) $ (116) $ 11 $ (6,535)
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
Identifiable assets.................................. $ 23,676 $ 224 $ 1,451 $ (11,848) $ 13,503
------------ --------- --------- ------------ ----------
------------ --------- --------- ------------ ----------
</TABLE>
F-22
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STATEMENT OF CASH FLOWS DATA
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Schedule of noncash transactions:
Issuance of warrants to purchase common stock in connection with the June and
December Private Placements........................................................ $ 844 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Common stock exchanged for redeemable convertible preferred stock in the December
Private Placement.................................................................. $ 1,755 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Acquisition of equipment under capital lease obligations............................. $ -- $ -- $ 97
--------- --------- ---------
--------- --------- ---------
Issuance of common stock in exchange for pre-petition liabilities.................... $ -- $ 188 $ --
--------- --------- ---------
--------- --------- ---------
Conversion of notes payable and accrued interest into common stock................... $ -- $ -- $ 1,180
--------- --------- ---------
--------- --------- ---------
Conversion of accrued compensation and short-term debt to pre-petition liabilities... $ -- $ -- $ 217
--------- --------- ---------
--------- --------- ---------
</TABLE>
Supplemental disclosure of cash flow information:
Interest paid in 1996, 1995, and 1994 was $215,000, $154,000, and $57,000,
respectively.
11. SUBSEQUENT EVENT
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding redeemable convertible preferred
stock executed a waiver to certain provisions of the Registration Rights
Agreement (the "Agreement"), entered into in connection with the December
Private Placement, which irrevocably waived such holders' rights to any
redemption (see Note 5) in exchange for the issuance to the holders of 300,000
warrants to purchase the Company's common stock, allocated amongst the holders
on a pro-rata basis. The warrants expire five years from the date of issuance
and have an exercise price of $2.00 per share, subject to adjustment for
antidilution. The Company has ascribed a value of $484,000 to these warrants,
which will be recorded as an expense in the Company's statement of operations
for the first quarter of 1997. The fair value ascribed to the warrants was
estimated on the date of issuance using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 6.60%; expected life of 5
years; expected volatility of 104%; and expected dividend yield of 0%. As a
result of the waiver, the shares of redeemable convertible preferred stock have
been reclassified as convertible preferred stock and, as such, are included in
stockholders' equity.
F-23
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT (CONTINUED)
Unaudited pro forma stockholders' equity at December 31, 1996, adjusted to
reflect the reclassification of redeemable convertible preferred stock to
convertible preferred stock and the issuance of the related warrants, is as
follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Redeemable convertible preferred stock....................................... $ 9,417 $ (9,417) $ --
----------- ----------- -----------
Stockholders' equity (deficit)
Convertible preferred stock................................................ -- 5 5
Common stock............................................................... 419 -- 419
Additional paid-in capital................................................. 54,015 9,896 63,911
Accumulated deficit........................................................ (54,347) (484) (54,831)
Cumulative foreign currency translation adjustment......................... (169) -- (169)
----------- ----------- -----------
Total stockholders' equity (deficit)......................................... $ (82) $ 9,417 $ 9,335
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-24
<PAGE>
SCHEDULE II
COMMUNICATION INTELLIGENCE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1994, 1995, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO
AT BEGINNING COSTS AND
OF PERIOD EXPENSE DEDUCTIONS
--------------- --------------- -------------
<S> <C> <C> <C>
Year ended December 31, 1994:
Accounts receivable reserves......................................... $ 85 $ 45 $ (56)
--- --- ---
--- --- ---
Year ended December 31, 1995:
Accounts receivable reserves......................................... $ 74 $ 96 $ (94)
--- --- ---
--- --- ---
Year ended December 31, 1996:
Accounts receivable reserves......................................... $ 76 $ 74 $ (65)
--- --- ---
--- --- ---
<CAPTION>
BALANCE
AT END
OF PERIOD
-------------
<S> <C>
Year ended December 31, 1994:
Accounts receivable reserves......................................... $ 74
---
---
Year ended December 31, 1995:
Accounts receivable reserves......................................... $ 76
---
---
Year ended December 31, 1996:
Accounts receivable reserves......................................... $ 85
---
---
</TABLE>
S-1
<PAGE>
EXHIBIT 4.9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
CERTIFICATE FOR WARRANTS
EXERCISABLE ON OR AFTER THE DATE OF ISSUANCE UNTIL 5:00 P.M., NEW YORK
CITY TIME, ON MARCH 28, 2002.
COMMUNICATION INTELLIGENCE CORPORATION
COMMON STOCK PURCHASE WARRANT CERTIFICATE
300,000 Warrants
THIS CERTIFIES that for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, ________________________ or
registered assigns is the registered holder (the "Registered Holder") of the
number of Warrants set forth above, each of which, subject to the provisions of
Section 1.1 of Article hereof, represents the right to purchase one fully paid
and nonassessable share (the "Shares") of Common Stock, par value $.01 per share
("Common Stock") of Communication Intelligence Corporation, a corporation formed
under the laws of the state of Delaware (the "Company"), at the initial exercise
price equal to $2.00 per Share (the "Initial Exercise Price"), at any time prior
to the Exercise Deadline hereinafter referred to, by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon duly
executed, at the office of the Company, 275 Shoreline Drive, Redwood Shores, CA
94065, or such other address as to which the Company shall have given written
notice to the Registered Holder. Payment of the exercise price shall be made in
United States currency, by certified check or money order payable to the order
of the Company. This Warrant Certificate is being issued in connection with the
issuance of 300,000 Warrants (the "Warrants") as consideration for the waiver,
dated March 26, 1997, to the Registration Rights Agreement as of December 31,
1996 by and among the Company and the other signatories thereto.
<PAGE>
ARTICLE 1
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
1.1 EXERCISE PRICE; NUMBER OF SHARES. This Warrant Certificate shall,
when executed by the Company, entitle the Registered Holder hereof to purchase
from the Company one Share for each Warrant evidenced hereby, at the Initial
Exercise Price, or such adjusted number of Shares at such adjusted purchase
price as may be established from time to time pursuant to the provisions of
Articles 1 and 2 hereof, payable in full at the time of exercise of this
Warrant. The term "Exercise Price" as used in this Agreement shall mean the
purchase price of one Share upon the exercise of this Warrant, reflecting all
appropriate adjustments made in accordance with the provisions hereof.
1.2 EXERCISABILITY OF WARRANTS. Each Warrant may be exercised at any time
on or after the date of its issuance until 5:00 P.M., New York City time, on
March 28, 2002 (the "Exercise Deadline").
1.3 PROCEDURE FOR EXERCISE. Prior to the Exercise Deadline, Warrants may
be exercised in whole or in part at any time and from time to time by
surrendering this Warrant Certificate to the Company at the address specified
above, accompanied by payment in full of the Exercise Price as provided in
Section 1.1 in effect at the time of such exercise, together with such taxes as
are specified in Section 4.1 hereof, for each Share with respect to which such
Warrants are being exercised. Such Exercise Price and taxes shall be paid in
full by certified check, money order or wire transfer, payable in United States
currency to the order of the Company. The date on which Warrants are exercised
in accordance with this Section 1.3 is sometimes referred to herein as the Date
of Exercise.
1.4 ISSUANCE OF SHARES. As soon as practicable after the Date of Exercise
of any Warrants (but in no event later than 3 business days), the Company shall
issue, or cause the transfer agent for the Common Stock, if any, to issue a
certificate or certificates for the number of full Shares to which the holder is
entitled (together with any other stock or securities or property to which the
Registered Holder is entitled to receive upon exercise), registered in
accordance with the instructions set forth in the attached Form of Election to
Purchase. All Shares shall be validly authorized and issued, fully paid and
nonassessable and free from all liens and charges and received by Registered
Holder within 3 business days from the Date of Exercise. Each person in whose
name any such certificate for Shares is issued shall for all purposes be deemed
to have become the holder of record of the Shares represented thereby on the
Date of Exercise of the Warrants resulting in the issuance of such shares,
irrespective of the date of issuance or delivery of such certificate for the
Shares.
1.5 CERTIFICATES FOR UNEXERCISED WARRANTS. In the event that less than
all of the Warrants represented by a Warrant Certificate are exercised, the
Company shall execute and deliver by overnight courier or hand delivery, as soon
as practicable but, in any event, not later than 5 business days after the Date
of Exercise, to the Registered Holder of such Warrant
-2-
<PAGE>
Certificate, or such other person as shall be designated in the election to
purchase, a new Warrant Certificate representing the number of full Warrants not
exercised. In no event shall a fraction of a Warrant be exercised, and the
Company shall distribute no Warrant Certificates representing fractions of
Warrants under this or any other section of this Agreement. Fractions of Shares
shall be treated as provided in Section 2.10. For clarification purposes, the
Registered Holder may exercise any portion of the Warrants notwithstanding the
fact that it does not have physical possession of the Warrant Certificate
because the Company has not yet delivered the Warrant Certificate to such holder
for any unexercised Warrants.
1.6 RESERVATION OF SHARES. The Company shall at all times reserve and
keep available for issuance upon the exercise of Warrants that number of its
authorized but unissued shares of Common Stock sufficient to permit the exercise
in full of all outstanding Warrants.
1.7 LIMITATION ON EXERCISE. Notwithstanding anything to the contrary
contained herein, the Warrants represented by this Warrant Certificate may not
be exercised by the Registered Holder to the extent that, after giving effect to
Shares to be issued pursuant to a notice of election to purchase, the total
number of shares of Common Stock deemed beneficially owned by such holder,
together with all shares of Common Stock deemed beneficially owned by the
holder's "affiliates" (as described in Rule 144 of the Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934 exists, would exceed 4.9% of the total
issued and outstanding shares of the Common Stock, provided that the Registered
Holder shall have the right to waive this restriction, in whole or in part,
immediately in the case of a pending "Change in Control Transaction" described
in Section 4(i) of the Certificate of Designations for the Company's 5%
Cumulative Convertible Preferred Stock and in any other case upon 61 days prior
notice to the Company. The delivery of a Form of Election to Purchase by the
Registered Holder shall be deemed a representation by such holder that it is in
compliance with this paragraph. A subsequent Registered Holder shall not be
bound by this provision unless it expressly agrees to be so bound. The term
"deemed beneficially owned" as used in this Warrant Certificate shall exclude
shares that might otherwise be deemed beneficially owned by reason of the
exercise of the Warrants by this Warrant Certificate.
ARTICLE 2
ADJUSTMENTS AND NOTICE PROVISIONS
2.1 ADJUSTMENT OF EXERCISE PRICE. Subject to the provisions of this
Article 2, the Exercise Price in effect from time to time shall be subject to
adjustment, as follows:
(a) In case the Company shall at any time after the date hereof (i)
declare a dividend or distribution on the outstanding Common Stock payable in
shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger
-3-
<PAGE>
in which the Company is the continuing corporation), then, in each case, the
Exercise Price in effect, and the number of Shares issuable upon exercise of the
Warrants outstanding, at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, shall be
proportionately adjusted so that the holders of the Warrants after such time
shall be entitled to receive the aggregate number and kind of shares which, if
such Warrants had been exercised immediately prior to such time, such holders
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall distribute to all holders of shares of
Common Stock (including any such distribution made to the shareholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation but excluding the transaction referred to in Section
2.1(a)) evidences of its indebtedness, cash (other than cash dividends) or
assets (other than distributions and dividends payable in Common Stock), then,
in each case, the Registered Holder, upon the exercise hereof, shall be entitled
to receive the amount of evidence of indebtedness, cash or assets which such
Registered Holder would have been entitled to receive had such Registered Holder
exercised the Warrants immediately prior to the record date for such
distribution.
(c) In case the Company shall sell (or issue upon exchange or
conversion) any shares of Common Stock (other than in a transaction referred to
in Section 2.1(a)-(b)) for a consideration (or effective exchange or conversion
ratio) per share less than the Exercise Price per Share, THEN, in each case, the
Exercise Price in effect immediately prior to such sale or event shall be
adjusted to a price determined by multiplying the Exercise Price in effect
immediately prior to such sale or event by a fraction, the numerator of which
shall be the sum of (i) the total number of Shares outstanding immediately prior
to such sale or event, and (ii) the aggregate consideration, if any, received by
the Company upon such sale or event divided by the Exercise Price immediately
prior to such sale or event, and the denominator of which shall be the total
number of Shares outstanding immediately after such sale or event.
(d) For the purposes of any adjustment to be made in accordance with
Section 2.1(c) the following provisions shall be applicable:
(i) In case of the sale of Common Stock for a consideration
part or all of which shall be cash, the amount of the cash portion of the
consideration therefor deemed to have been received by the Company shall be
without deduction for any ordinary and customary expenses (including, without
limitation, any underwriting discount, selling concession or other compensation
paid in connection with such sale) incurred by the Company in connection with
such transaction. In case of the sale of Common Stock for consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error.
-4-
<PAGE>
(ii) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(iii) Except as hereinafter provided, in case the Company
shall at any time after the date hereof issue options, rights or warrants to
subscribe for Common Stock, or issue any securities convertible into or
exchangeable for Common Stock, for a consideration (determined as provided in
this Section 2.1(d)) less than the Exercise Price in effect immediately prior
to the earlier of the issuance of such options, rights or warrants, or such
convertible or exchangeable securities or the record date therefor, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Exercise Price for the Warrants in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities or the record date therefor, as the case
may be, shall be reduced to a price determined by making the computation in
accordance with the provisions of Section 2.1(c) hereof, provided that:
a. The aggregate maximum number of shares of Common
Stock issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase or exercise price per share provided for in such
options, rights or warrants at the time of issuance, plus the consideration, if
any, received by the Company upon the issuance of such options, rights or
warrants (without deduction for ordinary and customary expenses incurred or
amounts paid to any underwriter by the Company in connection with such
issuance); provided, however, that upon the expiration or other termination of
such options, rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this Section 2.1(d) shall be reduced by the number of shares as to
which options, warrants and/or rights shall have expired, and such number of
shares shall no longer be deemed to be issued and outstanding, and the Exercise
Price then in effect shall forthwith be readjusted and thereafter be the price
that it would have been had the adjustment been made on the basis of the
issuance only of the shares actually issued plus the shares remaining issuable
upon the exercise of those options, rights or warrants as to which the exercise
rights shall not have expired or terminated unexercised.
b. The aggregate maximum number of shares of Common
Stock issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company upon the
issuance of such securities (without deduction for ordinary and customary
expenses incurred or amounts paid to any underwriter in connection with such
issuance), plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange
-5-
<PAGE>
thereof; provided, however, that upon the termination of the right to convert
or exchange such convertible or exchangeable securities (whether by reason of
redemption or otherwise), the number of shares of Common Stock deemed to be
issued and outstanding pursuant to this subsection 2.1(d) shall be reduced by
the number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Exercise Price then in effect
shall forthwith be readjusted and thereafter be the price that it would have
been had adjustment been made on the basis of the issuance only of the shares
actually issued plus the shares remaining issuable upon conversion or exchange
of those convertible or exchangeable securities as to which the conversion or
exchange rights shall not have expired or terminated unexercised.
c. If any change shall occur in the price per share
provided for in any of the options, rights or warrants referred to in this
Section 2.1(d), or in the price per share or ratio at which the securities
referred to in this Section 2.1(d) are convertible or exchangeable (in either
case, including changes in such prices or ratios arising pursuant to
antidilution adjustments in such options, rights, warrants, convertible or
exchangeable securities or the instruments pursuant to which they were issued),
such options, rights or warrants or convertible or exchangeable securities, as
the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares of Common Stock not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company shall be deemed to
have issued upon such date new options, rights or warrants or convertible or
exchangeable securities.
2.2 NO ADJUSTMENTS TO EXERCISE PRICE. (a) No adjustment in the Exercise
Price shall be required if such adjustment is less than $.01; provided, however,
that any adjustments which by reason of this Article 2 are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Article 2 shall be made to the nearest
cent or to the nearest one hundredth of a share, as the case may be.
(b) Notwithstanding any provision of this Warrant Certificate, no
adjustment of the Exercise Price or in the number of Shares shall be made as a
result of or in connection with the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements, loan agreements and
convertible or exchangeable securities outstanding or in effect on the date
hereof.
2.3 ADJUSTMENT TO NUMBER OF SHARES. Upon each adjustment of the Exercise
Price as a result of the calculations made in Section 2.1(b), (c) and (d)
hereof, the Warrants shall thereafter evidence the right to purchase, at the
adjusted Exercise Price, that number of shares (calculated to the nearest
hundredth) obtained by dividing (A) the product obtained by multiplying the
number of shares purchasable upon exercise of the Warrants prior to such
adjustment by the Exercise Price in effect prior to adjustment of the Exercise
Price by (B) the Exercise Price in effect after such adjustment of the Exercise
Price.
-6-
<PAGE>
2.4 REORGANIZATIONS. In case of (x) any capital reorganization (other
than in the transactions referred to in Section 2.1 hereof) or (y) the
consolidation or merger of the Company with or into another corporation (other
than a merger or consolidation in which the Company is the surviving or
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock or the conversion of such outstanding Common Stock into
shares of other stock or other securities or property), or in the case of any
sale, lease or conveyance to another corporation of the property and assets of
any nature of the Company as an entirety or substantially as an entirety (such
actions being hereinafter collectively referred to as "Reorganizations"), there
shall thereafter be deliverable upon exercise of any Warrant (in lieu of the
number of shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares which would
otherwise have been deliverable upon the exercise of such Warrant would have
been entitled upon such Reorganization if such Warrant had been exercised in
full immediately prior to such Reorganization on the record date therefor. In
case of any Reorganization, appropriate adjustment, as determined in good faith
by the board of directors of the Company, shall be made in the application of
the provisions herein set forth with respect to the rights and interests of
Warrant holders so that the provisions set forth herein shall thereafter be
applicable, as nearly as possible, in relation to any shares or other property
thereafter deliverable upon exercise of Warrants. Any such adjustment shall be
made by and set forth in a supplemental agreement of the Company, or any
successor thereto, and shall for all purposes hereof conclusively be deemed to
be an appropriate adjustment absent manifest error. The Company shall not
effect any such Reorganization unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of the Common Stock
outstanding at the effective time thereof, then such issuer shall assume by
written instrument the obligation to deliver to the Registered Holder of each
Warrant Certificate such shares of stock, securities, cash or other property as
such holder shall be entitled to purchase in accordance with the foregoing
provisions and all other obligations of the Company under the Warrants, the
Registration Rights Agreement and the Stock Purchase Investment Agreement.
2.5 RECLASSIFICATIONS. In case of any reclassification or change of the
Shares issuable upon exercise of the Warrants (other than a change in par value
or from no par value to a specified par value, or as a result of a transaction
referred to in Section 2.1 or 2.4, but including any change in the shares into
two or more classes or series of shares), or in case of any consolidation or
merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
Common Stock (other than a change in par value, or from no par value to a
specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the holders of the Warrants shall have the right thereafter to receive
upon exercise of the Warrants the kind and amount of shares of stock and other
securities, property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation or merger by a holder of the number of
Shares for which the Warrants might have been exercised immediately prior to
such reclassification, change, consolidation or merger on the record date
therefor.
-7-
<PAGE>
Thereafter, appropriate provision shall be made for adjustments which
shall be as nearly equivalent as practicable to the adjustments in Article 2.
The above provisions of this Section 2.5 shall similarly apply to successive
reclassifications and changes of the Shares.
2.6 CASHLESS EXERCISE. In lieu of exercising this Warrant by paying the
Exercise Price in cash as provided herein, the Registered Holder may exercise
this Warrant by surrender of this Warrant at the principal office of the Company
together with the notice of election to purchase and the payment for such taxes
as specified in Section 4.1 hereof, in which event the Company shall issue to
the Registered Holder upon such exercise a number of shares of the Company's
Common Stock computed using the following formula:
X = Y(A-B)
------
A
Where X = The number of shares of Common Stock to be issued to the
Registered Holder.
Y = The number of shares of Common Stock purchasable under this
Warrant.
A = The fair market value of one share of the Common Stock.
B = Exercise Price per share.
For purposes of this Warrant, fair market value of the Common Stock shall
be determined as follows: (i) if the Common Stock is publicly traded, the fair
market value shall be the average of the highest and lowest reported sales price
of the Common Stock on the NASDAQ SmallCap Market, the NASDAQ National Market
system or on any securities exchange (or, if the sales price of the Common Stock
is unavailable, the average of the highest bid and lowest asked price of the
Common Stock) for the twenty trading days prior to the date of determination of
fair market value, or (ii) if the Common Stock is not publicly traded, the fair
market value shall be determined by the Board of Directors, in their good faith
judgement.
2.7 VERIFICATION OF COMPUTATIONS. Whenever the Exercise Price is adjusted
as provided in this Article 2, the Company will promptly deliver to each
Registered Holder a certificate setting forth the Exercise Price as so adjusted
and a brief statement of the facts accounting for such adjustment, and will make
available a brief summary thereof to the holders of the Warrant, at their
addresses listed on the register maintained for that purpose by the Company.
2.8 NOTICE OF CERTAIN ACTIONS. In case at any time the Company shall
propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends) to all holders of such shares; or
-8-
<PAGE>
(b) to issue any rights, warrants or other securities to all holders
of shares entitling them to purchase any additional shares of Common Stock or
any other rights, warrants, other securities or other property; or
(c) to effect any consolidation, merger, sale, lease, or conveyance
of property, described in Section 2.4, or any reclassification or change of
outstanding shares of Shares, described in Section 2.5; or
(d) to effect any liquidation, dissolution or winding-up of the
Company;
then, in each such case, the Company shall cause notice of such proposed action
to be mailed to each Registered Holder. Such notice shall specify the date on
which the books of the Company shall close, or a record shall be taken, for
determining holders of shares entitled to receive such stock dividend or other
distribution or such rights, warrants or property, or the date on which such
reclassification, change, consolidation, merger, sale, lease, other disposition,
liquidation, dissolution, winding up or exchange or other action shall take
place or commence, as the case may be, and the date as of which it is expected
that holders of record of shares shall be entitled to receive securities or
other property deliverable upon such action, if any such date has been fixed.
Such notice shall be mailed, in the case of any action covered by Subsection
2.8(a) or 2.8(b) above, at least 15 days prior to the record date for
determining holders of shares for purposes of receiving such payment or offer;
in the case of any action covered by Subsection 2.8(c) or 2.8(d) above, at least
15 days prior to the earlier of the date upon which such action is to take place
or any record date to determine holders of shares entitled to receive such
securities or other property.
2.9 WARRANT CERTIFICATE AMENDMENTS. Irrespective of any adjustments
pursuant to this Article 2, Warrant Certificates theretofore or thereafter
issued need not be amended or replaced but certificates thereafter issued shall
bear an appropriate legend or other notice of any adjustments.
2.10 FRACTIONAL SHARES. The Company shall not be required upon the
exercise of any Warrant to issue fractional Shares which may result from
adjustments in the Exercise Price or number of shares purchasable under each
Warrant. If more than one Warrant is exercised at one time by the same
Registered Holder, the number of full shares of Shares which shall be
deliverable shall be computed based on the number of shares deliverable in
exchange for the aggregate number of Warrants exercised. With respect to any
fraction of a share called for upon the exercise of any Warrant or Warrants, the
Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the then fair market value per share.
2.11 COMPLIANCE WITH SECURITIES ACT. The Registered Holder, by acceptance
hereof, agrees that this Warrant, and the shares of Common Stock to be issued
upon exercise hereof, are being acquired for investment and that such Registered
Holder will not offer, sell or otherwise dispose of this Warrant, or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as
-9-
<PAGE>
amended (the "Securities Act") or any applicable state securities laws. Upon
exercise of this Warrant, unless the shares of Common Stock being acquired are
registered under the Securities Act and any applicable state securities laws,
the Registered Holder hereof shall, at the Company's request, confirm in writing
that the shares of Common Stock so purchased are being acquired for investment
and not with a view toward distribution or resale in violation of the Securities
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all shares of Common Stock issued
upon exercise of this Warrant (unless registered under the Securities Act and
any applicable state securities laws) shall be stamped or imprinted with a
legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
ARTICLE 3
OTHER PROVISIONS RELATING TO RIGHTS
OF REGISTERED HOLDERS OF WARRANT CERTIFICATES
3.1 RIGHTS OF WARRANT HOLDERS. This Warrant Certificate shall not entitle
the Registered Holder thereof to any of the rights of a shareholder of the
Company, including, without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
shareholders or any other proceedings of the Company except as herein provided.
3.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANT CERTIFICATES. If this
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Warrant Certificate, or in lieu of or in
substitution for a lost, stolen or destroyed Warrant Certificate, a new Warrant
Certificate for the number of Warrants represented by the Warrant Certificate so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Warrant Certificate, and of the ownership
thereof, and indemnity, if requested, all reasonably satisfactory to the
Company. Applicants for such substitute Warrant Certificates shall also comply
with such other reasonable regulations and pay such other reasonable charges
incidental thereto as the Company may prescribe.
-10-
<PAGE>
ARTICLE 4
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
4.1 SPLIT UP, COMBINATION, EXCHANGE AND TRANSFER OF WARRANT CERTIFICATES.
Prior to the Exercise Deadline, this Warrant Certificate, subject to the
provisions of Section 4.2, may be split up, combined or exchanged for other
Warrant Certificates representing a like aggregate number of Warrants. Any
holder desiring to split up, combine or exchange a Warrant Certificate or
Warrant Certificates shall make such request in writing delivered to the Company
at its principal office and shall surrender the Warrant Certificate or Warrant
Certificates so to be split up, combined or exchanged at said office. Upon any
such surrender for split up, combination or exchange, the Company shall execute
and deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested, provided that, at the
Company's reasonable request, the Company has received an opinion of counsel
reasonably satisfactory to the Company that said split up is in accordance with
the provisions of the Securities Act of 1933, as amended. The Company may
require the holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed by a governmental authority in connection with any
split up, combination, exchange or transfer of Warrant Certificates prior to the
issuance of any new Warrant Certificate.
4.2 AGREEMENT OF WARRANT CERTIFICATE HOLDERS. Every holder of a Warrant
Certificate by accepting the same, consents and agrees with the Company and with
every other holder of a Warrant Certificate that:
(a) transfer of the Warrant Certificates shall be registered on the
books of the Company maintained for that purpose by the Company only if
surrendered at the principal office of the Company, duly endorsed or accompanied
by a proper instrument of transfer and an opinion of counsel reasonably
satisfactory to the Company that such transfer is permitted under the Securities
Act of 1933, as amended; and
(b) prior to due presentment for registration of transfer, the
Company may deem and treat the person in whose name the Warrant Certificate is
registered as the absolute owner thereof and of the Warrants evidenced thereby
(notwithstanding any notations of ownership or writing on the Warrant
Certificates made by anyone other than the Company) for all purposes whatsoever,
and the Company shall not be affected by any notice to the contrary.
-11-
<PAGE>
ARTICLE 5
MISCELLANEOUS
5.1 CHANGES TO AGREEMENT. The Company may, without the consent or
concurrence of any Registered Holder of a Warrant Certificate, by supplemental
agreement, make any changes or corrections in this Certificate that it has been
advised by counsel (i) are required to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or manifest
error herein contained, (ii) add to the covenants and agreements of the Company,
(iii) reduce the Exercise Price or extend the Exercise Deadline or (iv) result
in the surrender of any right or power reserved to or conferred upon the Company
in this Certificate, which changes or corrections do not or will not adversely
affect, alter or change the rights, privileges or immunities of the Registered
Holders of Warrant Certificates provided in each case advance notification is
given to each Registered Holder. Other changes in this Agreement may be made
only with the prior written consent of a holder of a majority of the Warrants
affected thereby, provided that no such change shall increase the Exercise Price
or shorten the exercise period without the prior written consent of each
affected Registered Holder.
5.2 ASSIGNMENT. All the covenants and provisions of this Agreement shall
be binding upon, enforceable by and inure to the benefit of the parties hereto
and their respective permitted successors and assigns.
5.3 NOTICES. Any notice or demand required by this Warrant Certificate to
be given or made by the Registered Holder of any Warrant Certificate to or on
the Company shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed to the Company's principal offices
specified above (until another address is given in writing to the Registered
Holder by the Company), PROVIDED, HOWEVER, that the Notice of Election to
Purchase may be delivered by fax (which has been confirmed to be received), hand
delivery or overnight mail.
Any notice or demand required by this Warrant Certificate to be given or
made by the Company to or on the Registered Holder of any Warrant Certificate
shall be sufficiently given or made, whether or not such holder receives the
notice, if sent by first-class or registered mail, postage prepaid, addressed
to such registered holder at his last address as shown on the books of the
Company. Otherwise such notice or demand shall be deemed given when received
by the party entitled thereto.
5.4 DEFECTS IN NOTICE. Failure to file any certificate or notice or to
mail any notice, or any defect in any certificate or notice pursuant to this
Agreement, shall not affect in any way the rights of any Registered Holder of a
Warrant Certificate or the legality or validity of any adjustment made pursuant
to Article 2 hereof, or any transaction giving rise to any such adjustment, or
the legality or validity of any action taken or to be taken by the Company.
-12-
<PAGE>
5.5 GOVERNING LAW. The laws of the State of New York shall govern this
Warrant Certificate.
5.6 STANDING. Except as provided herein, nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company, and the Registered Holders of the Warrant
Certificates any right, remedy or claim under or by reason of this Warrant
Certificate or of any covenant, condition, stipulation, promise or agreement
contained herein; and all covenants, conditions, stipulations, promises and
agreements contained in this Agreement shall be for the sole and exclusive
benefit of the Company and its successors and assigns, and the Registered
Holders of the Warrant Certificates.
5.7 HEADINGS. The descriptive headings of the articles and sections of
this Warrant Certificate are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
5.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which shall constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
Dated: March 28, 1997
COMMUNICATION INTELLIGENCE CORPORATION
By:
----------------------------------
Name:
Title:
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<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise _______________ of
the Warrants represented by this Warrant Certificate and to purchase the Shares
issuable upon the exercise of said Warrants, and requests that certificates for
such shares be issued and delivered as follows:
ISSUE TO:
-----------------------------------------------------------------
(NAME)
-----------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
-----------------------------------------------------------------
(SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER)
DELIVER TO:
-----------------------------------------------------------------
(NAME)
-----------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
If the number of Warrants hereby exercised is less than all the Warrants
represented by this Warrant Certificate, the undersigned requests that a new
Warrant Certificate representing the number of full Warrants not exercised be
issued and delivered to:
In full payment of the purchase price with respect to the Warrants
exercised and transfer taxes, if any, the undersigned hereby tenders payment of
$______________ by wire transfer or certified check or money order payable to
the order of the Company in United States currency.
Dated: ________________
- --------------------------- -----------------------------------------------
(Insert Social Security or (Signature of registered holder)
other identifying
number(s) of holder(s))
(Signature of registered holder, if co-owned)
NOTE: Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.
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<PAGE>
WAIVER
Waiver (this "WAIVER"), dated March 26, 1997 and effective as of December
31, 1996, by and among Communication Intelligence Corporation ("CIC" or the
"COMPANY") and the signatories hereto (individually, an "INVESTOR" and
collectively, the "INVESTORS").
WHEREAS, CIC and the Investors are parties to a Registration Rights
Agreement as of December 31, 1996 (the "REGISTRATION RIGHTS AGREEMENT");
WHEREAS, CIC has requested the Investors to waive the Company's obligations
to comply with those terms and provisions of the Registration Rights Agreement
which obligate the Company to purchase, redeem or otherwise acquire the
Preferred Shares and/or Common Shares and, in exchange therefor, CIC has agreed
to (i) issue to the Investors executing and delivering this Waiver (on a pro
rata basis) warrants to purchase an aggregate of 300,000 shares of the Company's
common stock, par value $.01 per share (the "COMMON STOCK"), (ii) waive its
right to request that such Investors or subsequent Holders receive any default
payments required to be made by the Company with respect to the Registration
Rights Agreement in additional Preferred Shares in lieu of cash, and (iii)
provide such Investors or subsequent Holders with the right to convert the
Preferred Shares for Common Shares upon a Change in Control Transaction which
occurs prior to the Restrictive Covenant Termination Date at an Applicable
Percentage (as defined in the Designation) equal to 27.875%, all as provided
below;
WHEREAS, the Investors are willing to grant such waiver subject to the
terms and conditions set forth herein;
NOW, THEREFORE, it is agreed as follows:
1. Subject to the terms and conditions contained herein (including those
contained in paragraph 7), each Investor hereby irrevocably waives all of the
Company's obligations to comply with those provisions of Sections 2(b)(v),
2(b)(vi), 2(b)(vii), 2(b)(viii), 10 and 11 of the Registration Rights Agreement
that expressly obligate the Company to purchase, redeem or otherwise acquire any
or all of the Preferred Shares and/or Common Stock.
2. In consideration of the execution and delivery of this Waiver by the
Investors pursuant to the terms hereof, upon effectiveness of this Waiver as
provided in paragraph 7, the Company (a) shall issue to the Investors executing
and delivering this Waiver (on a pro rata basis) five-year warrants to purchase
an aggregate of 300,000 shares of Common Stock, at an exercise price of $2.00
per share (collectively, the "WARRANTS"), substantially in the form of the
warrant certificate (the "WARRANT CERTIFICATE") attached hereto as EXHIBIT A,
such Warrants to be delivered within five (5) business days after this Waiver
has been executed and delivered by the holders of Preferred Shares representing
in excess of 80% of the Preferred Shares issued and outstanding on the date
hereof; (b) irrevocably waives its rights to request that the Investors or
subsequent holders receive any default payments required to be made by the
Company on the Preferred Shares pursuant to Section 2(b)(viii) of the
Registration Rights Agreement in additional Preferred Shares in lieu of cash;
and (c) agrees that, notwithstanding anything to the contrary contained in the
Designation, such Investors or subsequent Holders shall have the right to
convert any or all of their Preferred Shares for Common Shares pursuant to
Section 4 of the Designation at an Applicable Percentage (as defined in the
Designation) equal to 27.875% at any time and from time to time after the
earlier of (i) CIC's delivery of a notice of, (ii) 30 days prior to, (iii) the
<PAGE>
record date for, or (iv) execution of a definitive agreement concerning, a
Change in Control Transaction which Change in Control Transaction occurs at any
time prior to the Restrictive Covenant Termination Date.
3. Capitalized terms used in this Waiver that are not defined herein
shall have the meanings provided to such terms in the Registration Rights
Agreement.
4. This Waiver is limited as specified hereby and shall not otherwise
modify other terms and provisions of the Registration Rights Agreement. This
Waiver shall not modify the Registration Rights Agreement with respect to those
holders of Preferred Shares who do not execute and deliver this Waiver prior to
the date specified in paragraph 7 below.
5. This Waiver and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the internal laws of the
State of New York, without giving effect to conflict of laws principles
thereunder.
6. This Waiver may be executed in any number of counterparts, and by
different parties hereto on separate counterparts, each of which counterparts
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
7. This Waiver shall not become effective unless (i) holders representing
in excess of 80% of the Preferred Shares issued and outstanding on the date
hereof have executed and delivered this Waiver to the Company and (ii) counsel
for the Company has executed and delivered to such holders an opinion of
counsel, substantially in the form attached hereto as EXHIBIT B. Thereafter,
this Waiver shall be effective as of December 31, 1996 (the "WAIVER EFFECTIVE
DATE") and only those holders who have executed and delivered this Waiver prior
to 11:00 a.m. Eastern Standard Time on March 28, 1997 shall be bound by this
Waiver and shall be eligible to receive the consideration provided in
paragraph 2 of this Waiver (including their pro rata portion of the Warrants).
This Waiver is a valid, legal and binding obligation upon the parties hereto,
enforceable against such parties in accordance with its terms. This Waiver
shall not be effective against those holders of Preferred Shares who have not
timely executed and delivered this Waiver to the Company.
8. From and after the Waiver Effective Date, all references to the
Registration Rights Agreement in the Investment Agreement and the Designation
shall be deemed to be references to the Registration Rights Agreement as
modified hereby. The Company agrees that all Common Stock issuable upon
exercise of the Warrants shall be included within the definitions of Registrable
Securities under the Registration Rights Agreement.
9. REPRESENTATIONS AND WARRANTIES OF CIC. CIC hereby makes the following
representations and warranties to each of the Investors executing and delivering
this Waiver as of the date hereof:
(a) AUTHORIZATION; ENFORCEMENT. (i) CIC has the requisite corporate
power and authority to enter into and perform this Waiver and the Warrant
Certificate and to issue the Warrants and the Common Stock issuable upon
exercise of the Warrants (the "UNDERLYING SHARES") in accordance with the terms
thereof, (ii) the execution and delivery of this Waiver and the Warrant
Certificate by CIC and the consummation by it of the transactions contemplated
hereby and thereby, including the issuance of the Warrants and the Underlying
Shares, have been duly authorized by all necessary corporate action, and no
further consent or authorization of CIC or its Board of Directors or
stockholders is required, (iii)
-2-
<PAGE>
this Waiver and the Warrant Certificate have been duly executed and delivered by
CIC, and (iv) this Waiver and the Warrant Certificate constitute valid and
binding obligations of CIC enforceable against CIC in accordance with their
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws, or by the
laws relating to the enforcement of creditors' rights and remedies generally or
by other equitable principles of general application.
(b) ISSUANCE OF COMMON STOCK. The Underlying Shares are duly
authorized and reserved for issuance and, upon such exercise in accordance with
the Warrant Certificate, such Underlying Shares will be validly issued, fully
paid and non-assessable, free and clear of any and all liens, claims and
encumbrances, and provided that the Common Stock is then traded on the NASDAQ
SmallCap Market, the Underlying Shares will be entitled to be traded on the
NASDAQ SmallCap Market, and the holders of such Underlying Shares shall be
entitled to all rights and preferences accorded to a holder of Common Stock.
The outstanding Common Stock are currently listed on the NASDAQ SmallCap Market.
(c) NO CONFLICTS. The execution, delivery and performance of this
Waiver and the Warrant Certificate by CIC and the consummation by CIC of the
transactions contemplated hereby and thereby do not and will not (i) result in a
violation of CIC's Certificate of Incorporation or By-Laws or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which CIC or any of its subsidiaries is a party,
or result in a violation of any Federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to CIC or any of its subsidiaries or by which
any property or asset of CIC or any of its subsidiaries is bound or affected.
CIC is not required under Federal, state or local law, rule or regulation in the
United States to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Waiver and the
Warrant Certificate or issue the Warrants in accordance with the terms thereof
or the Underlying Shares upon exercise thereof, except for the registration
provisions provided in the Registration Rights Agreement, provided that, for
purposes of the representation made in this sentence, CIC is assuming and
relying upon the accuracy of the relevant representations and agreements of the
Investors in the Investment Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly
executed and delivered, as of the date first above written.
COMMUNICATION INTELLIGENCE CORPORATION
By:
---------------------------------------------
Name:
Title:
INVESTORS
ANVIL INVESTMENT PARTNERS, L.P.
By: Anvil Investors, Inc., as general partner
By:
---------------------------------------------
Mark S. Zucker
President
OTATO LIMITED PARTNERSHIP
By:
---------------------------------------------
Name:
Its:
PRAIRIE PATH CORPORATION
By:
---------------------------------------------
Name:
Its:
-4-
<PAGE>
GLOBAL BERMUDA LIMITED PARTNERSHIP
By: Global Capital Management
Its: General Partner
By:
---------------------------------------------
Name:
Title:
MERCED PARTNERS LIMITED PARTNERSHIP
By: Global Capital Management
Its: General Partner
By:
---------------------------------------------
Name:
Title:
LAKESHORE INTERNATIONAL LTD.
By: Global Capital Management
Its: General Partner
By:
---------------------------------------------
Name:
Title:
ELLIOTT ASSOCIATES, L.P.
By:
---------------------------------------------
Paul E. Singer
General Partner
WESTGATE INTERNATIONAL, L.P.
By: MARTLEY INTERNATIONAL, INC.,
as Attorney-In-Fact
By:
---------------------------------------------
Paul E. Singer
President
JMG CAPITAL PARTNERS, L.P.
By:
---------------------------------------------
Jonathan Glaser
General Partner
-5-
<PAGE>
RAVICH REVOCABLE TRUST OF 1989
By:
---------------------------------------------
Name:
Its:
SALOMON BROTHERS INC
By:
---------------------------------------------
Name:
Its:
UBS SECURITIES, LLC
By:
---------------------------------------------
Name:
Title:
-6-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CIC
JURISDICTION OR STATE
OF INCORPORATION OR
NAME OF SUBSIDIARY ORGANIZATION
CIC Japan, Inc. Japan
CIC Corporation, Ltd. China
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-5521, No. 33-71614 and No. 33-92284) of
Communication Intelligence Corporation of our report dated February 20, 1997,
except as to Note 11, which is as of March 28, 1997, appearing on page F-2 of
this Annual Report on Form 10-K. We also consent to the application of such
report to the Financial Statement Schedule for the years ended December 31, 1996
and 1995 listed under Item 14(a) of Communication Intelligence Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996 when such
schedule is read in conjunction with the financial statements referred to in our
report. The audits referred to in such report also included this Financial
Statement Schedule.
PRICE WATERHOUSE LLP
San Jose, California
March 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-5521, 33-71614 and 33-92284) pertaining to the 1984 Stock
Option Plan, the 1991 Stock Option Plan, the 1991 Non-Discretionary Stock Option
Plan, the 1994 Stock Option Plan and Shares of Common Stock Issuable upon
Exercise of Director and Officer Options of Communication Intelligence
Corporation of our report dated February 28, 1995, with respect to the
consolidated financial statements and schedule of Communication Intelligence
Corporation (for the year ended December 31, 1994) included in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000727634
<NAME> COMMUNICATION INTELLIGENCE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,573
<SECURITIES> 752
<RECEIVABLES> 461
<ALLOWANCES> 85
<INVENTORY> 529
<CURRENT-ASSETS> 12,420
<PP&E> 2,544
<DEPRECIATION> 2,007
<TOTAL-ASSETS> 13,503
<CURRENT-LIABILITIES> 4,136
<BONDS> 0
9,417
0
<COMMON> 419
<OTHER-SE> (501)
<TOTAL-LIABILITY-AND-EQUITY> 13,503
<SALES> 1,591
<TOTAL-REVENUES> 2,887
<CGS> 1,518
<TOTAL-COSTS> 2,347
<OTHER-EXPENSES> 1,756
<LOSS-PROVISION> 74
<INTEREST-EXPENSE> (99)
<INCOME-PRETAX> (6,356)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,356)
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<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> (0.15)
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