<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Communication Intelligence Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Not Applicable
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
275 Shoreline Drive, Suite 520
Redwood Shores, California 94065
------------------------
[LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
May 19, 1997
------------------------
To the Stockholders of Communication Intelligence Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Communication Intelligence Corporation, a Delaware corporation (the
"Company"), will be held at the Hotel Sofitel, 223 Twin Dolphin Drive, Redwood
Shores, California 94065, on May 19, 1997, at 1:00 p.m. Pacific Time, for the
following purposes, all as more fully described in the attached proxy statement:
1. To elect six directors for a one-year term until the next annual meeting
of stockholders and until their respective successors are elected and
qualified.
2. To approve an amendment to the Company's 1994 Stock Option Plan (the
"1994 Plan") to increase the number of shares of the Company's common
stock available for grants of options under the 1994 Plan.
3. To ratify the appointment by the Company's Board of Directors of Price
Waterhouse LLP, as the Company's independent accountants for the year
ending December 31, 1997.
4. To transact such other business as may properly come before the Annual
Meeting.
The Board of Directors has fixed the close of business on March 26, 1997 as
the record date for the determination of stockholders entitled to notice of, and
to vote on the matters proposed at, the Annual Meeting and any adjournments
thereof.
YOUR VOTE IS IMPORTANT
EVEN IF YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED SO THAT YOUR
SHARES MAY BE VOTED AT THE ANNUAL MEETING. IF YOU EXECUTE A PROXY, YOU STILL MAY
ATTEND THE ANNUAL MEETING AND VOTE IN PERSON.
<TABLE>
<S> <C>
Redwood Shores, California By Order of the Board of Directors
April 9, 1997
</TABLE>
[LOGO]
<TABLE>
<S> <C>
James Dao
Chairman and Chief Executive Officer
</TABLE>
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
275 Shoreline Drive, Suite 520
Redwood Shores, California 94065
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
------------------------
INTRODUCTION
This Proxy Statement and the accompanying proxy are being furnished to
stockholders of Communication Intelligence Corporation, a Delaware corporation
(the "Company"), in connection with the solicitation of proxies by the Board of
Directors for the Company's Annual Meeting of Stockholders to be held at the
Hotel Sofitel, 223 Twin Dolphin Drive, Redwood Shores, California 94065 on May
19, 1997, at 1:00 p.m. Pacific Time, and any and all adjournments thereof (the
"Annual Meeting" or the "Meeting"). This Proxy Statement and the accompanying
proxy, together with a copy of the Company's Annual Report to Stockholders, are
first being mailed or delivered to stockholders of the Company on or about April
14, 1997.
At the Annual Meeting, stockholders of the Company as of the close of
business on March 26, 1997 (the "Record Date") will be asked to vote upon the
following: (i) elect six directors for a term of one year until the next annual
meeting of stockholders and until their respective successors are elected and
qualified (Proposal I); (ii) to approve an amendment to the Company's 1994 Stock
Option Plan (the "1994 Plan") to increase the number of shares of the Company's
common stock available for grants of options under the 1994 Plan (Proposal II);
and (iii) to ratify the appointment of Price Waterhouse LLP as the Company's
independent accountants for the year ending December 31, 1997 (Proposal III).
As of the Record Date, the Company had outstanding 44,844,570 shares of
common stock, par value $.01 per share (the "Common Stock"), and 450,000 shares
of 5% cumulative convertible preferred stock, par value $.01 per share, with a
liquidation preference of $25 per share (the "Convertible Preferred"). Each
holder of Common Stock and Convertible Preferred is entitled to one vote per
share on all matters to come before the Annual Meeting. Holders of outstanding
shares of Common Stock and Convertible Preferred (collectively, the "Shares")
will vote as one class on the proposals presented. Only stockholders of record
at the close of business on the Record Date are entitled to notice of and to
vote at the Annual Meeting. The holders of a majority of the outstanding Shares
entitled to vote at the Annual Meeting constitutes a quorum for purposes of the
Annual Meeting.
Approval of Proposal I to elect six directors requires the affirmative vote
of a plurality of the Shares represented in person or by proxy at the Annual
Meeting. Approval of Proposal II to amend the 1994 Plan and Proposal III to
ratify the appointment of Price Waterhouse LLP as the Company's independent
accountants requires in each case the affirmative vote of a majority of the
Shares represented in person or by proxy at the Annual Meeting.
The enclosed proxy provides that each stockholder may specify that his or
her shares be voted "for," "against" or "abstain" from voting with respect to
each of the proposals. If the enclosed proxy is properly executed, duly returned
to the Company in time for the Annual Meeting and not revoked, your shares will
be voted in accordance with the instructions contained thereon. Where a signed
proxy is returned, but no specific instructions are indicated, your shares will
be voted FOR each of the proposals.
Proxies marked as abstaining will be treated as present for purposes of
determining a quorum for the Annual Meeting, but will not be counted as voting
in respect of any matter as to which abstinence is indicated. Proxies returned
by brokers as "non-votes" on behalf of shares held in street name because
beneficial owners' discretion has been withheld as to one or more matters on the
agenda for the Annual Meeting will not be treated as present for purposes of
determining a quorum for the Annual Meeting
<PAGE>
unless they are voted by the broker on at least one matter on the agenda. Such
shares will not be counted as to the matters for which a non-vote is indicated
on the broker's proxy.
Any stockholder who executes and returns a proxy may revoke it in writing at
any time before it is voted at the Annual Meeting by: (i) filing with the
Secretary of the Company, at the above address, written notice of such
revocation bearing a later date than the proxy or a subsequent proxy relating to
the same shares; or (ii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself constitute
revocation of a proxy).
Representatives of Price Waterhouse LLP, independent accountants of the
Company, are expected to be present at the Annual Meeting and available to
respond to appropriate questions. Such representatives also will have the
opportunity, should they so desire, to make any statements to the stockholders
which they deem appropriate.
The enclosed proxy confers discretionary authority with respect to any
amendments or modifications of the Company proposals which properly may be
brought before the Annual Meeting. As of the date hereof, the Company is not
aware of any such amendments or modifications or other matters to be presented
for action at the Annual Meeting. However, if any other matters properly come
before the Annual Meeting, the proxies solicited hereby will be exercised on
such matters in accordance with the reasonable judgment of the proxyholders.
WHETHER OR NOT YOU ATTEND THE ANNUAL MEETING, YOUR VOTE IS IMPORTANT.
ACCORDINGLY, YOU ARE ASKED TO SIGN AND RETURN THE ACCOMPANYING PROXY REGARDLESS
OF THE NUMBER OF SHARES YOU OWN. SHARES CAN BE VOTED AT THE ANNUAL MEETING ONLY
IF THE HOLDER IS REPRESENTED BY PROXY OR IS PRESENT.
2
<PAGE>
THE COMPANY
GENERAL
The Company 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. The Company 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.
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, retail channels 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 others 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-.
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. The Company's natural input technologies are
designed to allow users to interact with a computer through an electronic pen.
The Company 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 to execute protected electronic transactions and discretionary
communications. The Company believes that these technologies offer more
efficient methods to conduct transactions and provide more functional user
authentication and heightened
3
<PAGE>
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
The Company has developed two desktop pen computing end-user products,
Handwriter-Registered Trademark- for Windows-Registered Trademark-, 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. The Company has positioned its
Handwriter-Registered Trademark- products to complement the keyboard and perform
as an ergonomic editing tool. The Company believes its
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 of 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. The Company has also 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.
The Company 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.
4
<PAGE>
MARKET FOR COMPANY'S COMMON STOCK 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 1996, 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.
<TABLE>
<CAPTION>
CLOSING PRICES
--------------------
<C> <S> <C> <C>
YEAR PERIOD HIGH LOW
- --------- ----------------------------------------------------------------------------------------- --------- ---------
1994 First Quarter............................................................................ $ 3.06 $ 2.25
Second Quarter........................................................................... $ 2.50 $ 0.69
Third Quarter............................................................................ $ 0.94 $ 0.06
Fourth Quarter........................................................................... $ 0.91 $ 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
</TABLE>
As of March 25, 1997, the closing sale price of the Common Stock on 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 semiannually, 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 shares of Convertible Preferred have 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.
5
<PAGE>
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 in the Annual Report to Stockholders which
accompanies this Proxy Statement. The selected financial data should be read in
conjunction with the Company's audited financial statements and the notes
thereto and this Proxy Statement including "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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)
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(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 obligations....................................... 32 830 2,069 321 130
Redeemable securities(3).................................... 9,417 -- -- -- --
Common stockholders' equity (deficit) and convertible
preferred stock(3)(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) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Liquidity and Capital Resources" and Note 11 to the
Company's audited consolidated financial statements included in the
accompanying Annual Report to Stockholders.
(4) The Company has never paid dividends to the holders of its Common Stock.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
HISTORY. The Company was initially incorporated 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, the Company's losses aggregated approximately $36.4 million and at
December 31, 1996, the Company's accumulated deficit was approximately $54.3
million.
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 approximately 11% and
10% of revenues in 1996, respectively. One customer accounted for approximately
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 its wholly-owned subsidiary CIC Japan, Inc. ("CIC Japan") and its
79% owned joint venture (the "Joint Venture") in China with the Ministry of
Electronic Industries of the Jiangsu Provence (the "Ministry") 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. Foreign currency assets and liabilities
are translated into
7
<PAGE>
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 Company's
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.
RESEARCH GRANT. In November 1993, the Company 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 law 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 in all of its over 122
stores. The Company's Handwriter-Registered Trademark- Products are also offered
on CompUSA's website.
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. 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
8
<PAGE>
1996 from 22% in 1995 resulted from a shift in the mix of product sales to lower
margin systems 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
expected 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
1995. 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 and
travel and related costs of approximately $338,000 and $167,000, respectively,
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 and
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.
9
<PAGE>
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 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.
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 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 (the
Company'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 by 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 for 1995 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.
10
<PAGE>
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 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, 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 Company's 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 1995 and October 1995,
respectively) 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 million shares of Common Stock at a purchase price of $0.50
per share. The maximum number of shares the Standby Purchaser was obligated to
purchase was reduced 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 therefor (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.
11
<PAGE>
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 cash
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 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 December 24, 1996 (the effective
date of the selling securityholder registration statement which registered the
shares purchased by the purchasers) 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
12
<PAGE>
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
transactions have been first offered to the holders of the Convertible
Preferred. The term "Restrictive Covenant Termination Date" means, 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 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, or
otherwise in respect to, the Convertible Preferred 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.
13
<PAGE>
The following table sets forth the Company's stockholders' equity, at
December 31, 1996, on a historical and proforma basis, adjusted to reflect the
reclassification of the Convertible Preferred and the issuance of the related
warrants:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
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.
14
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 26, 1997 with respect
to the beneficial ownership of (i) any person known to be the beneficial owner
of more than 5% of any class of voting securities of the Company, (ii) each
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table of this Proxy Statement under the heading "Executive
Compensation" and (iv) all directors and executive officers of the Company as a
group. The information set forth below assumes that none of the shares of
Convertible Preferred have been converted into shares of Common Stock. For
additional information concerning the terms of the Convertible Preferred,
including the conversion provisions, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
COMMON STOCK
---------------------- ------------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT COMBINED VOTING
OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS PERCENT
- ----------------------------------------------------- --------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Philip Sassower (1).................................. 9,898,935 22.03% -- -- 22.03%
CIC Standby Ventures, L.P.(2)........................ 9,808,935 21.87 -- -- 21.87
James Dao (3)........................................ 3,961,809 8.77 -- -- 8.77
C. B. Sung (4)....................................... 521,823 1.16 -- -- 1.16
Donald R. Scheuch (5)................................ 114,776 * -- -- *
George P. Clayson, III (6)........................... 53,910 * -- -- *
L. Michael McFarland (7)............................. 140,000 * -- -- *
Francis V. Dane (8).................................. 152,318 * -- -- *
Karen Kellenbach (9)................................. 134,769 * -- -- *
Elliott Associates, L.P.(11)......................... -- -- 168,000 37.33% *
Westgate International, L.P.(12)..................... -- -- 112,000 24.88 *
Lakeshore International Ltd(13)...................... -- -- 30,000 6.66 *
Global Bermuda L.P.(14).............................. -- -- 27,000 6.00 *
Anvil Investment Partners, L.P.(15).................. -- -- 24,000 5.33 *
All directors and executive officers as a group (8
persons)(10)....................................... 14,978,340 33.29% -- -- 33.29%
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes (a) all of the 9,808,935 shares held by CIC Standby Ventures, L.P.,
a Delaware limited partnership as reflected in the table above, and (b)
90,000 shares issuable upon the exercise of stock options to purchase 90,000
shares of Common Stock held by Mr. Sassower which are exercisable within 60
days of March 26, 1997. Mr. Sassower is the sole general partner of CIC
Standby Ventures, L.P. and may be deemed to beneficially own the shares of
Common Stock held by the limited partnership. The business address of Mr.
Sassower is c/o Phoenix Enterprises LLC, 135 East 57th Street, 12th Floor,
New York, New York 10022. Mr. Sassower is a director of the Company. See
"Certain Relationships and Related Transactions".
(2) Mr. Sassower is the sole general partner of CIC Standby Ventures, L.P. and
may be deemed to beneficially own the shares of Common Stock held by the
limited partnership as reflected in the table above. The business address of
CIC Standby Ventures, L.P. is c/o WinSass Corporate Services LLC, 314 West
Main, Suites 3&5, Lewisville, Texas 75057.
(3) Includes 330,000 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997 and excludes the shares of Common Stock or options to
purchase such shares held by Mr. Dao's spouse, Karen Kellenbach. The
business address of Mr. Dao is 275 Shoreline Drive, Suite 520, Redwood
Shores, California 94065.
(4) Includes 148,000 shares issuable upon the exercise of stock options or
warrants to purchase shares of Common Stock which are exercisable within 60
days of March 26, 1997.
15
<PAGE>
(5) Includes 16,000 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997.
(6) Includes 8,000 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997.
(7) Includes 140,000 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997.
(8) Includes 152,106 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997.
(9) Includes 6,000 shares issuable upon the exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
March 26, 1997. Ms. Kellenbach is the spouse of Mr. Dao. Does not include
the shares of Common Stock or options to purchase such shares held by Mr.
Dao.
(10) Includes 890,106 shares issuable upon the exercise of stock options or
warrants to purchase shares of Common Stock which are exercisable within 60
days of March 26, 1997.
(11) The business address of Elliott Associates, L.P. is 712 Fifth Avenue, New
York, New York 10019.
(12) The business address of Westgate International L.P. is c/o Stonington
Management Corp., 712 Fifth Avenue, New York, New York 10019.
(13) The business address of Lakeshore International is c/o Global Capital
Management, Inc., 601 Carlson Parkway, Suite 200, Minnetonka, Minnesota
55305.
(14) The business address of Global Bermuda Limited Partnership is c/o Global
Capital Management, Inc., 601 Carlson Parkway, Suite 200, Minnetonka,
Minnesota 55305.
(15) The business address of Anvil Investment Partners, L.P. is c/o Strome
Susskind & Company, 100 Wilshire Boulevard, 15th Floor, Santa Monica,
California 90401.
16
<PAGE>
EXECUTIVE OFFICERS
The following table sets out the name and age of each executive officer of
the Company; all positions and offices of the Company presently held by each of
them and the periods each has served; and each person's principal occupation and
employment during at least the past five years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DATE FIRST APPOINTED TO
NAME AGE POSITION AND EMPLOYMENT PRESENT POSITION
- -------------------------- --- -------------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
James Dao................. 59 Chief Executive Officer Chief Executive Officer 1981
and Chairman of the Board since 1981; Chairman of
the Board since 1992;
President 1981 to 1995 and
since 1996.
Francis V. Dane........... 45 Vice President, Secretary Vice President since 1989 1989
and Treasurer and Secretary since 1991;
Treasurer since 1995; Vice
President of Finance and
Chief Financial Officer
1989 to 1992; Director of
Business Services, Private
Financial Services
Corporation (a financial
management consulting
firm) 1988 to 1989; Senior
Manager, Entrepreneurial
Services Division, Price
Waterhouse (certified
public accountants) prior
to 1988.
Karen Kellenbach.......... 55 Vice President, Vice President since 1991; 1991
(Spouse of James Dao) Administration and Human Director of Administration
Resources and other positions from
1981 to 1991.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file certain reports
regarding ownership of, and transactions in, the Company's securities with the
Securities and Exchange Commission (the "SEC"). These officers, directors and
stockholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) reports that are filed with SEC.
Based solely on the Company's review of copies of such forms received by it,
or written representations from certain reporting persons, the Company believes
that during fiscal 1996 all Section 16(a) reports required to be filed by the
Company's executive officers, directors and 10% stockholders were filed on a
timely basis.
17
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall consist
of such number of members, with a minimum of three, as the Board of Directors
may determine from time to time. The six persons listed below are currently
directors of the Company and are the nominees for election as directors at the
Annual Meeting. Each director elected at this Meeting will serve for a one-year
term until the next annual meeting of stockholders and until his successor is
elected and qualified or his position is earlier vacated by resignation or
otherwise.
Unless otherwise instructed, the proxyholders named in the accompanying
proxy will vote the shares represented by proxies received by them for the
election of the six nominees to the Board of Directors named below, all of whom
are currently directors of the Company. In the event that any nominee of the
Company is unable or declines to serve as a director at the time of the Annual
Meeting, the shares will be voted for the election of any nominee designated by
the present Board of Directors to fill the vacancy. The Company is not aware of
any nominee who will be unable or will decline to serve as a director. In the
event that additional persons are nominated for election as directors, the
proxyholders intend to vote all proxies received by them in such a manner as
will assure the election of as many of the nominees listed below as possible.
The proxies cannot be voted for a greater number of persons than the number of
nominees named. APPROVAL OF PROPOSAL I TO ELECT SIX DIRECTORS REQUIRES THE
AFFIRMATIVE VOTE OF A PLURALITY OF THE SHARES REPRESENTED IN PERSON OR BY PROXY
AT THE ANNUAL MEETING.
The following table sets forth information, as of March 26, 1997, concerning
the nominees:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE PRINCIPAL OCCUPATION AND EMPLOYMENT ELECTED DIRECTOR
- -------------------------------------------- --- -------------------------------------------- -----------------
<S> <C> <C> <C>
George P. Clayson, III...................... 63 Managing Director, London Branch of Fleet 1988
Bank (a banking institution) since June
1989; Partner, Fleet Associates, 1987 to
1989; Executive Vice President, Corporate
Banking, Fleet Bank, 1986 to 1987.
James Dao................................... 59 Chief Executive Officer of the Company since 1981
1981; Chairman of the Board of the Company
since 1992; President of the Company from
1981 to 1995, and since 1996.
L. Michael McFarland........................ 50 President of Corporate Product Sales 1995
Division of the Company since August 1996;
Member of the Board of Directors of the
Company since August 1995; President and
Chief Operating Officer of the Company from
1995 to 1996; Senior Vice President and
director of Inforite Corporation (a division
of Moore Corporation) 1992 to 1995; Vice
President and General Manager of Business
Communications Services (a division of Moore
Corporation) 1989 to 1992; Vice
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE PRINCIPAL OCCUPATION AND EMPLOYMENT ELECTED DIRECTOR
- -------------------------------------------- --- -------------------------------------------- -----------------
President of Moore Business Forms, Inc. (a
division of Moore Corporation) 1985 to 1989.
<S> <C> <C> <C>
Philip Sassower............................. 57 Chairman of the Executive Committee of the 1994
Company since 1997; Chief Executive Officer
of Phoenix Enterprises, LLC since 1996;
General Partner of CIC Standby Ventures,
L.P. since 1994; Chairman and Chief
Executive Officer of BP Acquisition, LLC
since 1993; General Partner of BP
Restaurants, LP since 1991; Former Chairman
of the Board, Chairman of the Executive
Committee and director of Newpark Resources,
Inc.; General Partner of S&S Newpark
Ventures, LP and General Partner of S&S
Investments.
Dr. Donald R. Scheuch....................... 78 Self-employed business consultant; former 1982
special limited partner, Continental Capital
Ventures (a private venture capital
partnership), serves on a number of boards
of high technology companies, former Senior
Executive Vice President of SRI
International (formerly Stanford Research
Institute).
C. B. Sung.................................. 72 Chairman and Chief Executive Officer, Unison 1986
Group, Inc. (a multi-national corporation
involved in manufacturing, computer systems
and software development, international
investment and trade).
</TABLE>
The Company's affairs are managed under the direction of the Board of
Directors. Members of the Board receive information concerning the Company's
affairs through oral and written reports by management, Board and committee
meetings and other means. Throughout each year, directors attend Board of
Directors meetings, committee meetings and informal meetings with management and
others, participate in telephone conversations and have other communications
with management and others regarding the Company's affairs.
Directors of the Company serve for a one-year term until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified. Except for Mr. James Dao and Ms. Karen Kellenbach, the Company's
Vice President, Administration and Human Resources (Mr. Dao's spouse), there are
no family relationships between the Company's directors and executive officers.
For certain relationships between the Company and its directors, see "Certain
Relationships and Related Transactions."
In 1994, the Company agreed to use its best efforts to include Mr. Sassower
or his designee as a member of the Company's Board of Directors until Mr.
Sassower no longer holds the two million shares of Common Stock issuable upon
the exercise of a warrant issued to him in 1994. See "Certian Relationships and
Related Transactions."
19
<PAGE>
BOARD COMMITTEES
The Company's Board of Directors has formed the five committees set forth
below. The members of each committee are appointed by the Board of Directors.
EXECUTIVE COMMITTEE. In March 1997, the Board of Directors formed an
Executive Committee to provide management with advice on significant matters
during those times in which the full Board of Directors is not immediately
available. The members of the Executive Committee are James Dao, Philip Sassower
and C.B. Sung.
AUDIT COMMITTEE. The Audit Committee reviews the scope and results of the
audit by the Company's independent auditors and reviews the Company's procedures
for establishing and monitoring internal accounting controls. The members of the
Audit Committee are George Clayson, Philip Sassower, Donald Scheuch and C. B.
Sung.
COMPENSATION COMMITTEE. The Compensation Committee reviews and approves
overall policy with respect to compensation matters and approves executive and
senior management compensation arrangements. The members of Compensation
Committee are Philip Sassower, Donald Scheuch and C.B. Sung.
FINANCE COMMITTEE. The Finance Committee develops strategies for the
financing and development of the Company and monitors and evaluates progress
towards established objectives. The members of the Finance Committee are George
Clayson, James Dao, Philip Sassower, C.B. Sung and Donald R. Scheuch.
STOCK OPTION COMMITTEE. The Stock Option Committee administers the
Company's stock option plans. The members of the Stock Option Committee are
Philip Sassower, Donald Scheuch and C.B. Sung.
BOARD AND COMMITTEE MEETINGS
During 1996, the Board of Directors held four formal meetings and took
numerous other actions by unanimous written consent in lieu of formal meetings.
In addition, during 1996, the Audit Committee held two meetings, the
Compensation Committee held two meetings, the Finance Committee held four
meetings and the Stock Option Committee held six meetings. The Board of
Directors does not have a standing nominating committee. Each director
participated in at least 85% of the aggregate of the formal meetings of the
Board and the Committees on which he served.
DIRECTOR COMPENSATION
For their services as directors of the Company, all non-employee directors
receive a fee of $1,000 for each Board of Directors meeting attended and are
reimbursed for all reasonable out-of-pocket expenses. Directors are also
eligible to receive stock options.
20
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by and paid
to the Company's Chief Executive Officer and each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company for the year ended December 31, 1996 (collectively the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- -------------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
- ------------------------------------------------------ --------- ---------- ------------- -------------------
<S> <C> <C> <C> <C>
James Dao............................................. 1996 $ 199,700 $ 7,305(1) --
Chairman and Chief Executive 1995 267,820(2) 7,217(1) --
Officer 1994 115,194(2) 9,330(1) 1,837,120
Francis V. Dane....................................... 1996 129,437 -- 100,000
Vice President and Secretary 1995 130,138 -- --
1994 97,284 -- 127,516
</TABLE>
- ------------------------
(1) Includes the estimated economic benefit received by Mr. James Dao related to
a life insurance policy, the premiums of which were paid by the Company.
(2) To assist the Company through periods of cash constraints, Mr. Dao elected
to defer 50% of his salary from September 1994 through September 1995. In
December 1995, the Company paid the deferred amounts to Mr. Dao.
OPTION GRANTS IN 1996
The following table sets forth certain information concerning the grant of
stock options during 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
PERCENTAGE TO FOR
TOTAL OPTIONS OPTION TERM(1)
OPTIONS GRANTED TO --------------------------
NAME GRANTED EMPLOYEES EXERCISE PRICE $ EXPIRATION DATE 5% 10%
- ------------------------------- --------- --------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James Dao...................... -- -- -- -- -- --
Francis V. Dane................ 100,000 11.2% $ 3.00 8/27/03 $122,000(1) $280,000(1)
</TABLE>
- ------------------------
(1) On March 25, 1997, the closing sale price of the Common Stock on The Nasdaq
SmallCap Market was $2.00 per share.
21
<PAGE>
AGGREGATE OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the exercise
of options by each of the Named Executive Officers in 1996, the number of shares
covered by exercisable and unexercisable stock options at December 31, 1996 and
the value of unexercised "in-the-money" options at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE (1) OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($)
SHARES ACQUIRED ON VALUE (1) EXERCISABLE(E)/ EXERCISABLE (E)/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
- ----------------------------- ------------------ ------------ --------------------- ----------------------
<S> <C> <C> <C> <C>
James Dao.................... 517,120 $ 2,290,973 330,000(E) $ 742,500(E)
990,000(U) 2,227,500(U)
Francis V. Dane.............. 312 769 152,106(E) 331,157(E)
118,000(U) 15,500(U)
</TABLE>
- ------------------------
(1) The value set forth in the table above represents the difference between the
fair market value of the Common Stock and the exercise price of the options
at exercise and fiscal year-end, respectively.
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "1994 Option Plan") provides for
the granting to the Company's directors and employees of nontransferable
incentive stock options ("Incentive Options") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), and
nontransferable nonstatutory stock options ("Non-Qualified Options"). A total of
5,000,000 shares of Common Stock are authorized for issuance under the 1994
Option Plan. As of March 26, 1997, options to purchase an aggregate of 491,000
shares had been exercised under the 1994 Option Plan, options to purchase
3,535,500 shares at a weighted average exercise price of $1.06 per share were
outstanding, and 973,500 shares remained available for future grant. Unless
terminated sooner, the 1994 Option Plan will terminate in November 2004.
The 1994 Option Plan may be administered by the Board of Directors or a
stock option committee of the Board (the "Committee"). The 1994 Option Plan is
currently administered by the Stock Option Committee. The Committee has the
authority to determine the terms of the options granted, including the exercise
price, number of shares subject to the option, vesting provisions, if any, and
the form of consideration payable upon exercise. The exercise price of Incentive
Options must be the fair market value of the Common Stock on the date of grant
and the exercise price of Non-Qualified Options must be at least 85% of the fair
market value of the 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; and 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.
If an employee to whom an award has been granted under the 1994 Option Plan
dies while providing services to the Company, retires from employment with the
Company after attaining his retirement date, or terminates employment with the
Company as a result of permanent and total disability, any restrictions then
applicable to such award shall continue as if the employee had not terminated
employment and such award shall thereafter be exercisable, in whole or in part,
by the person to whom it was granted (or by his duly appointed, qualified, and
acting personal representative, his estate, or by a person who acquired the
right to exercise such option by bequest or inheritance from the grantee) in the
manner set forth in the award, at any time within the remaining term of such
award. Except as provided in the preceding
22
<PAGE>
paragraph, if a person to whom an option has been granted under the 1994 Option
Plan ceases to be an employee of the Company, such option shall continue to be
exercisable to the same extent that it was exercisable on the last day on which
such person was an employee for a period of 30 days thereafter, or for such
longer period as may be determined by the Committee, whereupon such option shall
terminate and shall not thereafter be exercisable.
The Board has the authority to amend or terminate the 1994 Option Plan,
provided that such action does not impair the rights of any optionee under any
option previously granted under the 1994 Option Plan, without the consent of
such optionee.
During 1996, a total of 796,500 options were awarded to 52 individuals under
the 1994 Option Plan, of which 100,000 were awarded to one executive officer.
1991 OPTION PLANS
The Company has two other stock option plans (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. For the year ended December 31, 1996, the Company
granted to 11 persons options to purchase an aggregate of 95,000 shares of
Common Stock under the 1991 Option Plans.
COMPENSATION AND STOCK OPTION COMMITTEE REPORT
The Compensation Committee and Stock Option Committee have provided the
following Board Compensation Committee and Stock Option Committee Report:
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Committees' compensation philosophy is based upon the belief that the
success of the Company results from the coordinated efforts of all employees
working as a team to achieve common objectives of providing superior products
and services to the Company's customers and maximizing the Company's value for
the benefit of its stockholders.
The Committees' compensation programs are designed to attract, retain and
reward personnel whose individual and team performance contributes significantly
to the short and long-term objectives of the Company. The Company's executive
compensation program is guided by the same principles which the Company
considers when making compensation decisions for all employees:
- To ensure competitiveness, the Company monitors industry standards and
incorporates this information into its compensation decisions.
- Executive officers are rewarded based upon individual, team and overall
Company performance. Overall Company performance is based upon achievement
of strategic and operating goals. At this stage in the Company's
development such factors include revenue earned, technology validation,
timely product introductions, capturing market share and preservation of
and increases in stockholders' value. Individual and team performance are
evaluated based upon the extent to which departmental goals are achieved
within the time and budget constraints of approved operating plans.
Additionally, individual performance is evaluated based upon the extent to
which an individual executive officer is able to foster team spirit and
loyalty and minimize employee turnover.
METHODS OF COMPENSATION. The key elements of the Company's executive
compensation program consist primarily of base salary and stock options. Base
salary for the Company's executive officers is determined by reference to the
combined base salary and annual bonus for competitive positions in the
23
<PAGE>
industry and general market. Currently, the Company does not have an annual
bonus plan. The Committees believe that the use of stock options as a means of
compensation provides additional incentive for executives and aligns their
interests with those of the stockholders. All employees are eligible to receive
stock options under the Company's stock option plans. Options are granted by the
Company's Stock Option Committee upon recommendations made by the Chief
Executive Officer. During the past four fiscal years 2,130,095 or 26% of the
total number of options authorized under the Company's employee stock option
plans have been awarded to the Company's executive officers. This includes
377,405 options granted in lieu of salary during 1994 (or 5% of the total
awarded over the past four fiscal years). During 1996, one executive officer was
awarded 100,000 stock options and 696,500 were awarded to 51 other employees.
CHIEF EXECUTIVE OFFICER COMPENSATION. The Chief Executive Officer's
compensation is determined according to the same principles and factors applied
to the determination of compensation for the other executive officers of the
Company.
Mr. Dao's last salary increase was on February 1, 1993 from $150,000 to
$200,000 to reflect successful achievement of corporate objectives prior to that
date. To assist the Company through periods of cash constraints, Mr. Dao elected
to defer 50% of his salary from September 1994 through September 1995. In
December 1995, the deferred salary was paid.
Mr. Dao's annual base salary for the year ended December 31, 1996 was
determined based upon, among other things, the Company's continued progress
towards established Company objectives and the base salary of other Chief
Executive Officers in the industry.
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE STOCK OPTION COMMITTEE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Philip Sassower Philip Sassower
Donald R. Scheuch Donald R. Scheuch
C.B. Sung C.B. Sung
</TABLE>
24
<PAGE>
PERFORMANCE GRAPH
The Securities and Exchange Commission requires the Company to include in
this Proxy Statement a graph comparing the cumulative five-year return on its
Common Stock with a broad-based stock index and either a nationally recognized
industry index or an index of peer companies selected by the Company. This
performance graph compares the cumulative five-year returns on the Common Stock
with the Nasdaq Computer and Data Processing Index and the Nasdaq Index. In
September 1991, the 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, the
Common Stock was delisted from Nasdaq and from July 1994 to July 1996, the
Common Stock was quoted on the OTC Bulletin Board. In July 1996, the Common
Stock was relisted on the Nasdaq SmallCap Market. See "Market for Company's
Common Stock and Related Stockholder Matters."
STOCK PERFORMANCE GRAPH(1)
COMPARISON OF FIVE-YEAR TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
12/31/1991 12/31/1992 12/31/1993 12/31/1994 12/31/1995 12/31/1996
<S> <C> <C> <C> <C> <C> <C>
Communication Intelligence
Corporation $100 $91 $63 $11 $55 $63
Nasdaq Computer & Data Processing $100 $108 $114 $138 $211 $260
Nasdaq Stock Market (US & Foreign) $100 $121 $140 $136 $188 $231
</TABLE>
(1) Assumes $100 was invested on January 1, 1992 (and dividends reinvested for
NASDAQ indices).
25
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, Standby Ventures, L.P., a Delaware limited partnership
("Standby Ventures"), exercised in full (i) warrants to purchase 2,000,000
shares of Common Stock with an exercise price of $0.50 per share (the "Note
Warrants"), and (ii) warrants to purchase 1,563,000 shares of Common Stock with
an exercise price of $1.00 per share (the "Bridge Warrants"). The Note Warrants
and the Bridge Warrants were issued by the Company in 1994 and 1995,
respectively, pursuant to prior financings provided to the Company by Standby
Ventures and its sole general partner (Mr. Philip Sassower). Pursuant to the
warrant exercises, Standby Ventures received an aggregate of 2,759,000 shares of
Common Stock as a result of cashless exercise provisions contained in the
warrants. Philip Sassower, Chairman of the Executive Committee of the Company's
Board of the Directors, is the sole general partner of, and a limited partner
in, Standby Ventures. As of March 26, 1997, Standby Ventures beneficially owned
approximately 22% of the Company's outstanding Common Stock.
In 1988, the Company's then Board of Directors passed a resolution which
provides that in the event Mr. Dao's employment is terminated by the Board of
Directors (the majority of which has changed after August 1988), Mr. Dao will
receive a payment equal to the present value of 299% of his average annual
salary for the most recent five taxable years ending prior to his termination
(the "Termination Fee"). The Termination Fee is required to be paid in equal
monthly installments.
In April 1994, the Company loaned $210,000 to Mr. James Dao, the Company's
Chairman of the Board, President and Chief Executive Officer, pursuant to a
promissory note due April 1, 1996 which bore interest at the highest marginal
rate applicable to the Company's borrowing or the highest rate allowable by law,
whichever is lower. As of March 25, 1997, the promissory note bore interest at
10% per annum and the outstanding principal and accrued interest on the
promissory note was $270,000 . The promissory note is secured by 103,450 shares
of Common Stock owned by Mr. Dao. In 1996, the due date of the promissory note
was extended to April 1, 1998.
In January 1996, the Company retained Mr. Philip Sassower, a member of the
Board of Directors, as a financial consultant in the areas of financing and
investor relations. The consulting arrangement provided payments to Mr. Sassower
totaling $100,000 during 1996. In 1997, Mr. Sassower became Chairman of the
Company's Executive Committee and increased his time commitment to the Company.
To compensate Mr. Sassower for his additional time commitment and to reimburse
him for office expenses, the Company increased the consulting fee to be paid to
Mr. Sassower to $150,000 in 1997.
26
<PAGE>
PROPOSAL 2
AMENDMENT TO 1994 STOCK OPTION PLAN
The Board of Directors proposes that the 1994 Option Plan be amended to
increase the aggregate number of shares subject to issuance under such plan by
1,000,000 shares from 5,000,000 shares to 6,000,000 shares. In 1996, the Board
of Directors approved and recommended that the stockholders approve an amendment
to the 1994 Option Plan to increase the number of shares of Common Stock
available for option grants from 4,000,000 shares to 5,000,000 shares. At the
Company's May 1996 annual meeting of stockholders, the stockholders approved
such amendment.
The purpose of the 1994 Option Plan is to strengthen the ability of the
Company to attract and retain well-qualified executive and managerial personnel,
provide additional incentive to its employees and encourage stock ownership in
the Company so that its participants will have a proprietary interest in the
Company.
Under the 1994 Option Plan, a total of 5,000,000 shares are currently
reserved for issuance. As of March 26, 1997, options to purchase an aggregate of
491,000 shares of Common Stock have been exercised, options to purchase
3,535,500 shares of Common Stock were outstanding and 973,500 shares remain
available for future grants. During 1996, one executive officer of the Company,
Francis V. Dane, Vice President, Secretary and Treasurer, was granted 100,000
stock options and all other employees as a group were granted 695,500 stock
options under the 1994 Option Plan.
Options granted under the 1994 Option Plan may be either incentive stock
options ("Incentive Options"), which are intended to meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, or options that do
not qualify as Incentive Options ("Non-Qualified Stock Options"). Under the 1994
Option Plan, the Committee may grant (i) Incentive Options at an exercise price
per share which is not less than the fair market value of a share of Common
Stock on the date on which such Incentive Options are granted (and not less than
110% of the fair market value in the case of any optionee who beneficially owns
more than 10% of the total combined voting power of the Company) and (ii) Non-
Qualified Stock Options at an exercise price per share which is determined by
the Committee (and which may not be less than 85% of the fair market value of a
share of Common Stock on the date on which such Non-Qualified Stock Options are
granted; and not less than 110% of fair market value in the case of an optionee
who beneficially owns more than 10% of the total combined voting power of the
Company). The 1994 Option Plan further provides that the maximum period in which
options may be exercised will be determined by the Committee, except that
Options may not be exercised after the expiration of ten years from the date the
Option was initially granted (and in the case of Incentive Options, five years
in the case of any optionee who beneficially owns more than 10% of the total
combined voting power of the Company). Any option granted under the 1994 Option
Plan will be nontransferable, except by will or by the laws of descent and
distribution, and may be exercised upon payment of the option price in cash or
by delivery of shares of Common Stock with a fair market value equal to the
option price.
Additional material features of the Company's 1994 Stock Option Plan are
included in this Proxy Statement in the section entitled "1994 Stock Option
Plan".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following outlines certain federal income tax consequences of the 1994
Option Plan under present law to the Company and participants in such plan.
INCENTIVE OPTIONS. A participant will not realize income (except that the
alternative minimum tax may apply), and the Company will not be entitled to a
deduction for federal income tax purposes, upon the grant of an Incentive
Option, and, if certain requirements of the Code and 1994 Option Plan are met,
upon exercise of an Incentive Option. If Common Stock acquired upon the exercise
of an Incentive Option is
27
<PAGE>
disposed of by the participant within two years from the date of granting of the
option or within one year after the date of exercise (a "disqualifying
disposition"), the excess, if any, of (i) the amount realized (up to the fair
market value of such Common Stock on the exercise date) over (ii) the exercise
price, will be ordinary income to the participant, and the Company will be
entitled to a deduction for federal income tax purposes equal to the amount of
ordinary income realized by the participant. The Code limits to $100,000 the
value of employee stock subject to Incentive Options that first become
exercisable in any one year, based upon the fair market value of the stock on
the date of grant. To the extent Options exceed this limit, they are treated as
Non-Qualified Stock Options.
NON-QUALIFIED STOCK OPTIONS. A participant who receives a Non-Qualified
Stock Option does not recognize taxable income on the grant of the option. Upon
the receipt of shares when a NonQualified Stock Option is exercised, a
participant generally has ordinary income in an amount equal to the excess of
the fair market value of the shares at the time of exercise over the exercise
price paid for the shares.
However, if the participant (i) is an officer or director of the Company or
the beneficial owner of more than 10% of the Company's equity securities (in
each case, within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), an "Insider") and (ii) receives shares
upon the exercise of a Non-Qualified Stock Option, the recognition of income
(and the determination of the amount of income) is deferred until the earlier of
(a) six months after the shares are acquired or (b) the earliest date on which
the Insider could sell the shares at a profit without being subject to liability
under Section 16(b) of the Exchange Act (six months after the Non-Qualified
Stock Option is granted, in the case of an "in-the-money" option). Income is not
deferred, however, if such a participant makes a Section 83(b) election at the
time he receives the shares. Rather, income is recognized on the date of
exercise in an amount equal to the excess of the fair market value of the shares
on such date over the exercise price. A Section 83 election must be filed with
the Internal Revenue Service within thirty (30) days after an option is
exercised.
A participant's tax basis in shares received upon exercise of a
Non-Qualified Stock Option is equal to the amount of ordinary income recognized
on the receipt of the shares plus the amount of cash, if any, paid upon
exercise. The holding period for the shares begins on the day after the shares
are received or, in the case of an Insider that has not made a Section 83
election, on the day after the date on which income is recognized by the Insider
on account of the receipt of the shares.
The ordinary income recognized by an employee of the Company on account of
the exercise of a Non-Qualified Stock Option is subject to both wage withholding
and employment taxes. A deduction for federal income tax purposes is allowed to
the Company in an amount equal to the amount of ordinary income included in the
participant's income, provided that such amount constitutes an ordinary and
necessary business expense of the Company, that such amount is reasonable and
that the Company satisfies any tax reporting obligation that it has with respect
to such income.
If a participant exercises a Non-Qualified Stock Option by delivering
previously held shares in payment of the exercise price, the participant does
not recognize gain or loss on the delivered shares if their fair market value is
different from the participant's tax basis in the shares. However, the exercise
of the Non-Qualified Stock Option is taxed, and the Company generally is
entitled to a deduction, in the same amount and at the same time as if the
participant had paid the exercise price in cash. If the participant receives a
separate identifiable stock certificate therefor, his tax basis in the number of
shares received that is equal to the number of shares surrendered on exercise
will be the same as his tax basis in the shares surrendered. His holding period
for such number of shares will include his holding period for the shares
surrendered. The participant's tax basis and holding period for the additional
shares received upon exercise will be the same as it would if the participant
had paid the exercise price in cash.
If a participant receives shares upon the exercise of a Non-Qualified Stock
Option and thereafter disposes of the shares in a taxable transaction, the
difference between the amount realized on the disposition and the participant's
tax basis in the shares is taxed as capital gain or loss (provided the shares
28
<PAGE>
are held as a capital asset on the date of disposition), which is long-term or
short-term depending on the participant's holding period for the shares.
REQUIRED AFFIRMATIVE VOTE
Approval of the amendment to the 1994 Option Plan requires the affirmative
vote of a majority of the Shares represented in person or by proxy at the Annual
Meeting.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSAL IS IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR APPROVAL OF THE AMENDMENT TO THE 1994 OPTION PLAN AS SET FORTH IN THIS
PROPOSAL II.
29
<PAGE>
PROPOSAL 3
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
In 1996, the Company appointed Price Waterhouse LLP, independent
accountants, to re-audit the Company's financial statements for the year ended
December 31, 1995 for the reasons set forth below and to audit the Company's
1996 financial statements. In 1997, upon the recommendation of the Audit
Committee, the Board of Directors has appointed Price Waterhouse LLP as its
independent accountants for the year ending December 31, 1997. Stockholders are
being asked to approve this action by the Board. Representatives of Price
Waterhouse LLP are expected to be present at the Annual Meeting and will be
given the opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
Certain information related to the resignation of the Company's previous
independent auditors, KPMG Peat Marwick LLP ("Peat Marwick") and Ernst & Young
LLP ("Ernst & Young"), is set forth below.
RESIGNATION OF PEAT MARWICK LLP. On August 2, 1996, the Company received a
letter from Peat Marwick stating that it was resigning as the independent
auditors for the Company. Peat Marwick advised the Company that it was resigning
as the Company's independent auditors following discussions between Peat Marwick
and the staff of the Securities and Exchange Commission regarding the
independence of Peat Marwick in light of consulting services provided to the
Company at that time by KPMG BayMark Capital LLC.
In connection with the Company's audit for the year ended December 31, 1995,
and during the subsequent periods through August 2, 1996, there were no
disagreements with Peat Marwick on any matter of accounting principles or
practices, financial statement disclosures, auditing scope or procedures, which
disagreements, if not resolved to Peat Marwick's satisfaction, would have caused
them to make reference in connection with their opinion to the subject matter of
the disagreement.
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 appointed Price Waterhouse LLP as its
independent accountants. The retention of Price Waterhouse LLP was approved by
the Board of Directors of the Company. During the two years ended December 31,
1995 and during subsequent periods, neither the Company nor any person on its
behalf consulted with Price Waterhouse LLP regarding the application of
accounting principles to any transaction or the types of audit opinion that
might be rendered on the Company's financial statements.
The audit of Price Waterhouse LLP of the Company's 1995 consolidated
financial statements did not result in any changes to such financial statements,
and the related audit report of Price Waterhouse LLP did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.
RESIGNATION OF ERNST & YOUNG LLP. On November 3, 1995, the Company replaced
Ernst & Young as its independent auditors and retained Peat Marwick. The
replacement of Ernst & Young and the retention of Peat Marwick were approved by
the Board of Directors of the Company.
In connection with the audits for the years ended December 31, 1994 and
1993, and during subsequent periods during 1995, there were no disagreements
with Ernst & Young on any matter of accounting principles or practices,
financial statement disclosure, or 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.
30
<PAGE>
The audit reports of Ernst & Young on the consolidated financial statements
of the Company as of and for the years ended December 31, 1994 and 1993 did not
contain any adverse opinion or disclaimer of opinion. However, the audit report
of Ernst & Young for the year ended December 31, 1994 noted that the Company had
incurred recurring operating losses, had a net capital deficiency and operated
under the protection of Chapter 11 between July 18 and November 14, 1994. The
audit report concluded that these conditions raised substantial doubt about the
Company's ability to continue as a going concern.
Prior to the retention of Peat Marwick, neither the Company nor any person
on its behalf consulted with Peat Marwick regarding the application of
accounting principles to any transaction or the types of audit opinion that
might be rendered on the Company's financial statements.
REQUIRED AFFIRMATIVE VOTE
Ratification of the appointment of Price Waterhouse LLP as the Company's
independent accountants for the year ending December 31, 1997 requires the
affirmative vote of a majority of the Shares represented in person or by proxy
at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1997.
31
<PAGE>
PROPOSALS OF SECURITY HOLDERS
A stockholder proposal requested to be presented at the 1998 Annual Meeting
of Stockholders must be received by the Company at its principal executive
offices, 275 Shoreline Drive, Suite 520, Redwood Shores, California 94065, not
later than December 19, 1997. The Board of Directors will review any stockholder
proposal received in accordance herewith and will determine whether such
proposal is appropriate and satisfies the applicable requirements for inclusion
in the Company's proxy statement for its next Annual Meeting of Stockholders.
SOLICITATION OF PROXIES
The Company will bear the cost of the Annual Meeting and the solicitation of
proxies, including the costs relating to printing and mailing the proxy
materials. The Company has retained Skinner & Co., a firm specializing in the
solicitation of proxies, to assist the Company in the solicitation of proxies at
a fee estimated to be approximately $8,000 in the aggregate, including expenses.
Officers and employees of the Company may make additional solicitations in
person or by telephone without additional compensation.
OTHER MATTERS
The Board of Directors knows of no other matters which may be presented for
action at the Annual Meeting. However, if any other matter properly comes before
the Annual Meeting, the persons named as proxies in the proxy form enclosed will
vote in accordance with their judgment upon such matter.
Stockholders are urged to complete, sign, date and return the enclosed form
of proxy promptly in the envelope provided, regardless of whether or not you
expect to attend the Annual Meeting. The prompt return of the proxy will assist
the Company in preparing for the Annual Meeting. Your cooperation is greatly
appreciated.
Copies of the Company's Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q and the notice of annual meeting of stockholders, proxy statement and
proxies are available upon written request, without cost, from the Company's
principle executive offices at 275 Shoreline Drive, Suite 520, Redwood Shores,
California 94065 (Attention: Corporate Secretary), Telephone (415) 802-7888.
BY ORDER OF THE BOARD OF DIRECTORS
[LOGO]
James Dao
Chairman and Chief Executive Officer
April 9, 1997
32
<PAGE>
PROXY
COMMUNICATION INTELLIGENCE CORPORATION
275 SHORELINE DRIVE, SUITE 520
REDWOOD SHORES, CALIFORNIA 94065
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 19, 1997.
The undersigned does hereby appoint each of James Dao and Francis V. Dane as
agents and proxies of the undersigned, with full power of substitution, to
represent and to vote as designated below, all the undersigned's shares of
Common Stock and/or Convertible Preferred of Communication Intelligence
Corporation (the "Company") held of record by the undersigned on March 26, 1997
("Record Date") in connection with the Annual Meeting of Stockholders to be held
on May 19, 1997 at the Hotel Sofitel, 223 Twin Dolphin Drive, Redwood Shores,
California 94065, or any adjournment or postponement thereof.
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS: FOR all nominees listed below / / WITHHOLD AUTHORITY / /
(EXCEPT AS MARKED TO THE CONTRARY BELOW) TO VOTE FOR ALL NOMINEES LISTED
BELOW
(Instruction: To withhold authority to vote for any individual nominee strike a line through the nominee's
name in the list below.)
GEORGE P. CLAYSON, III L. MICHAEL McFARLAND DONALD R. SCHEUCH
JAMES DAO PHILIP SASSOWER CHIEN BOR (C.B.) SUNG
2. PROPOSAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR GRANTS OF OPTIONS UNDER THE COMPANY'S
1994 STOCK OPTION PLAN.
</TABLE>
FOR / / AGAINST / / ABSTAIN / /
(CONTINUED ON REVERSE SIDE)
<PAGE>
<TABLE>
<S> <C> <C> <C>
3. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE
YEAR ENDING DECEMBER 31, 1997.
</TABLE>
FOR / / AGAINST / / ABSTAIN / /
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the Annual Meeting.
The undersigned hereby revokes any proxy heretofore given and confirms all
that said proxies, or any of them, or any substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted FOR Proposals 1, 2 and 3.
The undersigned hereby acknowledges receipt of the Company's Notice of
Annual Meeting of Stockholders to be held on May 19, 1997, the Company's Proxy
Statement dated April 9, 1997 (and the accompanying proxy), and the Company's
1996 Annual Report to Stockholders.
Dated: ________________________________________________________, 1997
_____________________________________
(Signature)
_____________________________________
(Additional signature, if held
jointly)
_____________________________________
(Title, if applicable)
Please sign exactly as your name
appears hereon. If shares are held by
joint tenants, both must sign. When
signing as attorney, executor,
administrator, trustee or guardian or
any similar capacity, please give
full title as such. If a corporation,
please sign in full corporate name by
president or other authorized
officers, giving title. If a
partnership, please sign in
partnership name by an authorized
person.
PLEASE COMPLETE, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
