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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 1999 Commission File No. 0-19301
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Communication Intelligence Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500 (650) 802-7888 94065
- ------------------------------ -------------------------- -------------
Redwood Shores, California (Registrant's telephone (Zip Code)
(Address of principal executive number, including area code)
offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of March 27, 2000 was approximately
$526,497,030 based on the closing sale price of $6.75 on such date, as reported
by the Nasdaq SmallCap Market.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
The number of shares of Common Stock outstanding as of March 27,
2000 was 83,487,305.
A list of Exhibits to this Annual Report on Form 10-K begins on page 23.
COMMUNICATION INTELLIGENCE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I................................................................... 3
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 12
Item 3. Legal Proceedings................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
PART II.................................................................. 13
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters.............................................. 13
Item 6. Selected Financial Data.......................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15
Item 8. Financial Statements and Supplementary Data...................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 22
PART III................................................................. 23
Item 10. Directors and Executive Officers of the Registrant.............. 23
Item 11. Executive Compensation.......................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 23
Item 13. Certain Relationships and Related Transactions.................. 23
PART IV.................................................................. 24
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................... 24
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CIC(R) and its logo, Handwriter(R), Jot(R), and INKshrINK(R) are registered
trademarks of the Company. HRS(TM), InkSnap(TM), InkTools(TM), PenX(TM),
QuickNotes(TM), RecoEcho(TM), Sign-it(TM), Sign-On(TM), Speller(TM) and
WordComplete(TM) are trademarks of the Company. Applications for registration of
various trademarks are pending in the United States, France, Germany, Italy,
Japan, Spain and the United Kingdom. The Company intends to register its
trademarks generally in those jurisdictions where its products are or will be
marketed in the foreseeable future.
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following: (1) technological,
engineering, quality control or other circumstances which could delay the sale
or shipment of products; (2) economic, business, market and competitive
conditions in the software industry and technological innovations which could
affect the Company's business; (3) the Company's inability to protect its trade
secrets or other proprietary rights, operate without infringing upon the
proprietary rights of others or prevent others from infringing on the
proprietary rights of the Company; and (4) general economic and business
conditions and the availability of sufficient financing.
2
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
PART I
Item 1. Business
General
Communication Intelligence Corporation (the "Company" or "CIC") is a
leading supplier of natural input and electronic signature solutions aimed at
emerging, fast growth, large potential markets such as wireless Internet/info
devices and enterprise applications including e-commerce, document automation
and corporate security. CIC is headquartered in Redwood Shores, California and
has a joint venture, Communication Intelligence Computer Corporation, Ltd.
("CICC" or the "Joint Venture"), in Nanjing, China. Over the past two years,
industry leaders such as Compaq, Ericsson, Fujitsu, Legend, Microsoft,
Mitsubishi, National Semiconductor, Wacom and Symbian chose to license CIC
technologies.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R) and the Handwriter(R) Recognition System, referred
to as HRS(TM)), dynamic signature verification and capture tools (InkTools(TM),
Sign-it(TM), and Sign-On(TM)), ink compression (INKshrINK(R)) and operating
system extensions that enable pen input (PenX(TM) and PenX(TM)VC ). Other
consumer and original equipment manufacturer ("OEM") products include electronic
notetaking (QuickNotes(TM) and InkSnap(TM)) and predictive text input
(WordComplete(TM)). CIC's products are designed to increase the ease of use,
functionality and security of electronic devices with a primary focus on
wireless Internet and information devices such as smartphones, electronics
organizers ("PDA'S") and portable web browsers.
In the 4th quarter of 1997, CIC's newly hired President, Mr. Guido
DiGregorio, developed and implemented a comprehensive plan that leveraged key
CIC technologies and focused on specific market opportunities with both
near-term sales and significant growth potential. The plan included actions
which reduced operating costs and expenses (excluding cost of sales) to
approximately $6 million for 1998, 50% of 1997 levels, by focusing primarily on
software products. This "software only" strategy enabled the Company to
eliminate expenses related to hardware products and direct retail sales. The
benefits of this strategy continued into 1999, with base costs levels
approximately $1 million lower than 1998, excluding cost of goods sold.
The Company has a three-pronged channel strategy;
o Accelerate the growth of license revenue derived from software products
through wireless Internet/info device, smartphone and PC peripheral OEMs.
o Accelerate the sale of aftermarket consumer software offerings via the
Company's website and selected on-line resellers.
o Establish enterprise related sales growth by leveraging electronic
signature technologies focused on e-commerce, document automation, and
corporate security applications.
OEM Revenues
The Company's OEM revenues in 1999 (new sales versus the recognition of past
years' deferred revenue) more than doubled over 1998 ($2,641,000 vs $1,300,000).
This growth was driven primarily by license revenues from Ericsson and
Microsoft, of $1,500,000 and $400,000, respectively. OEM revenues in 1998 (new
sales versus the recognition of past years' deferred revenue) almost doubled as
compared to 1997.
A key event in 1998 was the consummation of a licensing agreement with
Ericsson Mobile Communications AB ("Ericsson") which resulted in an order
received in January of 1999. The order covered non-recurring engineering ("NRE")
and advanced royalties for porting several CIC products to two smartphone
reference designs, one of which ( the R380) is expected to begin shipments in
the second quarter of 2000. The Company and Symbian recently announced an
agreement which makes Jot available to other members of the Symbian alliance,
(Symbian member
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companies include: Ericsson, Motorola, Nokia, Psion & Matsushita) who
collectively represent over 85% of worldwide handset shipments. As a part of
this agreement, Jot will also be available to other EPOC platform developers.
Industry forecasts for sales of smartphones and communicators, which combine
voice, personal information management and Internet access, project 60 million
units in 2001 growing to 150 million units by 2002. (data source: Bank of
America-Equity Research & Symbian). The Company believes that significant
royalty revenues from this and subsequent agreements will be generated beyond
2000 based on these forecast smartphone shipments.
In addition, the Company believes that certain other OEM agreements/orders
consummated in 1999 represent significant license revenue potential in 2000 and
beyond. These include an order from National Semiconductor covering natural
input solutions for National's new Geode(TM) WebPAD(TM) product. This portable,
wireless device allows full interaction with the Internet within 500 feet of the
PC or base station. National Semiconductor intends to license this reference
design to other major OEM's which should significantly enhance market coverage
and shipment potential. In addition, Vtech, who licensed Jot(R) in 1998,
forecasts significant demand for its new, low cost, electronic organizer
("PDA"). Vtech also intends to license their proprietary operating system called
the VT-OS(TM) to other organizer manufacturers. CIC anticipates additional
licensing agreements with OEM licensees of the VT-OS(TM), the first of which is
the recently announced agreement with Top Technologies in Israel.
Key OEM licensing customers at December 31, 1999 include:
Licensee Product(s) licensed Application of product
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Compaq Speller(TM) & QuickNotes(TM) Handheld PC Pro
Ericsson Jot(R), QuickNotes(TM) & Smart Cellular Phone
Sign-it(TM)
Fujitsu HRS(TM), PenX(TM),PenX(TM)VC Windows & Windows CE Pen
& InkTools(TM) Computers
Hitachi Jot(R)& Speller(TM) Handheld PC & Handheld PC Pro
Interlink Sign-it(TM)for Acrobat(R) Digitizer tablet
Intermec/Norand HRS(TM)& PenX(TM) Windows Pen Computers
Microsoft Jot(R) Palm-size PC operating system
MiddleSoft Jot(R)& InkTools(TM) Linux offering to be announced
by MiddleSoft
Mitsubishi PenX(TM) Windows Pen Computers
Mutoh PenX(TM) Windows Pen Computers
National
Semiconductor Jot(R) Wireless Internet Access Device
Telxon CIC Soft Keyboard Windows Pen Computers
Vtech Jot(R) Electronic Organizer
Wacom Chinese Handwriter(R)& Digitizer tablet
Sign-it(TM)
Walkabout PenX(TM) Windows Pen Computers
Aftermarket Consumer Sales
Consumer sales of the Company's software sold primarily via CIC's website,
(www.cic.com), increased more than 400% in 1999 versus 1998, from $341,000 to
$1,718,000. In 1998, sales increased approximately 900% vs 1997. This growth
reflects rapid and effective porting of Jot(R) and QuickNotes(TM) to the
Palm(TM) operating system and new products introduced for the Palm(TM) OS
including InkSnap, Word Complete, RecoEcho and Sign-On(R), the first biometric
signature verification security utility for Palm organizers. Direct-mail
programs, e-mail campaigns, pricing promotions, and website enhancements are
utilized to drive web-based sales. A list of on-line resellers of CIC's products
as of December 31, 1999 include:
Digital River.com Beyond.com
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Handango.com Downloadwarehouse.com
Releasesoft.com Egghead.com
Mobileplanet.com SoftwareBuyLine.com
Techwave.com CompuServ.com
Palmgear.com
CIC expects significant growth in aftermarket consumer sales in 2000 and
beyond based on the large and growing installed base of handheld electronic
organizers, estimated at over 5 million units, and projected to more than double
by the end of 2000. (Source: Dataquest). In September 1999, the Company
commissioned market research which confirmed that its products significantly
increase the usability of electronic organizers suggesting high adoption rate
potential. The Company is developing a media campaign aimed at generating high
levels of awareness of the Company's products among current organizer users in
order to bring potential customers to our website. The potential for aftermarket
software sales has been significantly enhanced with the merger of smartphones
and the Internet. The Company believes that as the telecommunications industry
and its service providers lay the foundation for e-commerce done from the palm
of your hand through the wireless Internet, the potential for downloading
software to ten's of millions of smartphones is nearing reality.
Enterprise Sales
The Company's sales efforts in 1999 focused on leveraging its electronic
signature solutions in emerging, fast growth, large potential applications such
as e-commerce, document automation and corporate security. This involved direct
business development activity in signature dependent vertical markets including
financial services, insurance, health care, and real estate in an effort to
secure agreements for initial installations of CIC products which have the
potential for significant rollout and follow-up sales. The Company believes
meaningful sales will result in 2000 and beyond based on the substantive
progress made with target accounts, present status of agreements, ongoing
negotiations and sales activity with strategic partners.
China
The Company owns 90% of a Joint Venture in the People's Republic of China
(the "PRC"). CICC was established in 1993 to respond to the large potential
market for pen-computing software in the PRC, particularly Chinese handwriting
recognition. Since the Chinese language has over 10,000 written characters, it
is extremely difficult and inefficient to perform computer input with a
keyboard. CICC introduced Chinese handwriting recognition for the desktop market
over two years ago. In January 1999, CICC introduced a product specifically
designed for Palm-sized PCs which combines the most frequently used input
methods, Chinese handwritten character recognition, handwritten Pin-Yin and
Roman character recognition, into one product. The Company expects to receive
significant orders from Wacom, the largest digitizer tablet manufacturer in the
world, and from Legend, the largest computer manufacturer in the PRC. The
Company believes these orders will confirm the success and acceptance of the
Chinese versions of our core input technologies.
Three basic sales strategies have been established for CICC:
o The Systems Integration ("SI") operation provides services to Chinese
businesses, government users and other joint ventures in the PRC involving
the sale of desktop and other computer products with a focus on office
automation and Material Replenishment Planning ("MRP") software.
o The Handwriter(R) operation focuses on the sale of Handwriter(R) tablets to
both end users and dealers leveraging CICC's Chinese recognizer software.
CICC is a leading supplier of Handwriter(R) products to the Chinese
Government.
o The OEM sales strategy involves the sale and licensing of handwriting
recognition, electronic signature solutions, and other software products to
the emerging Chinese computer and smart phone OEM market.
Although overall 1999 revenues for CICC were down 14% from 1998 to
$1,620,000 from $1,879,000, license revenue of CIC core technologies to OEMs and
enterprises doubled over 1998. The decline in sales reflected lower
5
revenues from the Systems Integration operation due to reduced spending on the
part of western companies located in China which represented 90% of historical
SI revenues. CICC changed its sales focus in 1999 to Chinese companies and
government facilities which increased sales to these customers by 41% offsetting
some of the reduced sales to ex-patriot companies.
The Company believes that with the emerging market in China for wireless
Internet/info devices, the acceptance of our products by leading OEMs, the
legitimacy and stability provided by the Joint Venture and the explosive growth
potential of the China market, now enhanced by World Trade Organization
membership, CICC will provide significant growth potential in 2000 and beyond.
Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments and was required to be adopted in
periods beginning after December 15, 1997. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998,
and the Company's information has been broken down into two Segments -
Handwriting recognition software and Systems integration. For further
information see Note 9 to the Company's Consolidated Financial Statements.
The Company identifies reportable segments by classifying revenues into two
categories Handwriting recognition and system integration. Handwriting
recognition software is an aggregate of five revenue categories. All Handwriting
recognition software is developed around the Company's core technology. System
integration represents the sale and installation of third party computer
equipment and systems that utilize the Company's products.
Core Technologies
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies".
Natural Input Technologies. CIC's natural input technologies are designed
to allow users to interact with a computer or handheld device by using an
electronic pen or "stylus" as the primary input device or in conjunction with a
keyboard. CIC's natural input offerings include multilingual handwriting
recognition systems, software keyboards, predictive text entry, and electronic
ink capture technologies. Many small handheld devices such as electronic
organizers, pagers and smart cellular phones do not have a keyboard. For such
devices, handwriting recognition and software keyboards offer the most viable
solutions for performing text entry and editing. CIC's predictive text entry
technology simplifies data entry even further by reducing the number of actual
letters required to be entered. The Company's ink capture technologies
facilitate the capture of electronic ink for notetaking, drawings or short
handwritten messages.
Transaction and Communication Enabling Technologies. The Company's
transaction and communication enabling technologies are designed to provide a
cost-effective means for securing electronic transactions, providing network and
device access control, and enabling workflow automation of traditional paper
form processing. CIC believes that these technologies offer more efficient
methods for conducting electronic transactions and provide more functional user
authentication and heightened data security. The Company's transaction and
communication enabling technologies have been fundamental in its development of
software for signature verification, data security, and data compression.
6
Products
Key CIC products include the following:
Handwriter(R) and Jot(R) Handwriting recognition software
WordComplete(TM) Predictive text entry software
INKshrINK(R) Electronic ink data compression software
QuickNotes(TM) Electronic notetaking software
Sign-it(TM) Digital signature support for Word '97 and
Acrobat(R)4.0
Sign-On(TM) Biometric signature verification software
for device access
InkTools(TM) A suite of application development tools
for electronic signatures
PenX(TM) VC Operating system extension for Windows NT
with Citrix Metaframe
Products that were introduced and first shipped in 1999 include:
InkTools(TM) 1.0 for Windows CE 2.11 or later
Handwriter(R) CE 1.0 for
Windows CE 2.11 or later
PenX VC(TM) 1.0 for Windows NT4 with Citrix
Metaframe
PenX(TM) 1.7 for Windows 32 bit operating systems
RecoEcho(TM)1.0 for Palm
InkSnap(TM) 1.0 for Palm
WordComplete(TM) 1.0 for Palm
Sign-On(TM) 1.0 for Palm
CIC Software Keyboard 1.0 for Windows CE 2.11, Windows 95, 98 and NT4.0
Jot(R) for EPOC
Jot(R) for VT-OS(TM)
Sign-it(TM) 1.0 for Adobe(R) Acrobat(R) 4.0
Sign-it(TM) Secure 1.0 for Adobe(R) Acrobat(R) 4.0
Sign-it(TM) Plus 2.0 for Adobe(R) Acrobat(R) 4.0
Sign-it(TM) Pro 2.0 for Adobe(R) Acrobat(R) 4.0
Sign-it(TM) Secure 2.0 for Adobe(R) Acrobat(R) 4.0
Handwriting recognition software analyzes the individual strokes of
characters written with a pen/stylus and converts these stokes into an "ASCII"
text character. This software is especially useful for portable electronic
devices that are too small to employ a keyboard, and for the input of
ideographic script characters such as those used in written Chinese and
Japanese. The Company currently has two recognition system offerings, HRS(TM)
and Jot(R).
CIC's Handwriter(R) Recognition System ("HRS(TM)") is an award-winning
software solution for recognizing handwritten input on Windows(R) based pen
computers and desktop PCs. HRS(TM) accurately recognizes handwritten characters
with no recognizer training required, so the user can write naturally. HRS(TM)
is a full-context recognizer that offers some unique features such as automatic
spacing between words and automatic capitalization of the first letter of new
sentences. HRS(TM) software is currently shipping on many of the leading
Windows(R) based pen computers. Vertical market licensees of HRS(TM) who are
currently shipping devices using the recognizer include Fujitsu, Intermec,
Mitsubishi and NEC/Philips. The Chinese version of the HRS(TM) recognizer is
also available for OEM licensing worldwide.
Jot(R) is a print-based recognizer that is specifically designed for small
form factor devices. Unlike many recognizers that compete in the market for
handheld data input solutions, Jot(R) offers a patented user interface that
allows for the input of natural upper and lowercase letters, standard
punctuation and European languages without requiring the user to memorize unique
characters or symbols. This recognizer offers rapid and accurate recognition
without requiring the consumer to spend time training the system. Jot(R) is
currently licensed to Microsoft and ships with every Palm-size PC. Consumer
offerings of Jot(R) include versions for Handheld PCs ("H/PCs"), Palm-size PCs
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(upgrade to bundled version) and the PalmPilot(TM) and Palm(TM) organizers.
Jot(R) has been ported to many operating platforms including the PalmOS, VT-OS,
EPOC, QNX, and OS/9 for the Nortel Smart Phone and is currently under
development for others. The standard version of Jot(R), which is available
through OEM, enterprise and consumer product offerings, recognizes and supports
input of Roman-based Western European languages.
InkTools(TM), a dynamic signature verification software tool-kit, analyzes
the image, speed, stroke sequence and acceleration of a person's handwritten
electronic signature. InkTools(TM) provides an extremely effective and
inexpensive biometric security check. Commercial applications for this type of
software include document approval, verification of the identity of users
participating in electronic transactions, and, securing log-in access to
computer systems or protected networks. This software toolkit is used internally
by CIC as the underlying technology in its Sign-On and Sign-it products.
Sign-On(TM) is a new product offering that utilizes the Company's dynamic
signature verification technology to provide device access security on portable
devices. This provides the additional level of security needed for devices that
are increasingly being used in business and generally contain sensitive data.
Currently available for the Palm operating system, the product is also being
ported to EPOC and other platforms to meet the specifications of new licensees
and customers.
Sign-it(TM) is a family of signature products for enabling the real time
capture, binding and verification of signatures within standard consumer
applications. The Sign-it(TM) Secure version of the product enables the verified
signature to release a Verisign Digital I.D. Organizations wishing to process
electronic forms requiring varying levels of security can reduce the need for
paper forms by adding signature capture technologies to their workflow solution.
Current signature capture solutions include Sign-it(TM) for Word '97 and for
Adobe(R) Acrobat(R) 4.0.
Electronic inking technologies are used to mark-up electronic documents
without printing a hard copy, and to make electronic sketches and drawings.
Electronic ink is a data type that is made up of pixels versus text characters
and, unless compressed, takes up large amounts of computer memory. Electronic
ink may also be used to capture signatures or for short handwritten messages.
CIC's patented electronic ink compression software, INKshrINK(R), compresses and
decompresses electronic ink quickly and efficiently. This facilitates the
storage and transmission of electronic ink in a compressed state, which reduces
transmission time and the amount of computer memory necessary for storage, thus
decreasing the cost of use. Decompression is almost instantaneous, allowing for
accurate visual presentation on computer display screens without perceptible
delays.
The Company's products are marketed through three sales approaches: OEM
Sales, Enterprise Sales and Consumer Sales. Products sold through OEM Sales and
Consumer Sales are included in the Company's Handwriting Recognition segment,
while Enterprise Sales are included in either the Company's Handwriting
Recognition or System integration Segments depending on the complexity of the
automation solution required.
OEM Licensed Products. CIC currently licenses software products for
Windows(R)3.x, Windows(R)'95, Windows(R)'98, Windows(R)NT, Windows(R)CE, EPOC,
QNX, VT-OS, and Linux. CIC also ports its products to other platforms to meet
the specifications of new licensees. The Company's PenX(TM), Sign-it(TM), and
Handwriter(R) Recognition System are licensed for portable PCs utilizing the
Windows(R)'95, Windows(R)'98, Windows(R)NT, and Windows(R)CE operating systems
and is primarily used for field force automation and in pen-input PC peripherals
for desktop use. Jot(R), QuickNotes(TM), Sign-On(TM), WordComplete(TM) and the
CIC software keyboard are licensed primarily for the new, smaller classes of
Handheld PCs and Palm-size PCs such as those that utilize the EPOC and
Windows(R)CE operating systems and handheld communicators such as smart phones
and PDAs. New OEM licensing growth is also expected from the licensing of CIC's
PenX(TM) pen operating system extensions.
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Enterprise Solution Products. CIC offers several products targeted for
markets in the regulatory and security sensitive industries that require
workflow automation solutions, such as electronic form filing and network
communication. For these markets, CIC offers several products including
InkTools(TM), a high performance Windows(R) (CE, `95 ,`98 and NT) software
developer's kit for implementing systems using electronic ink and handwritten
signatures. InkTools(TM) provides electronic ink capture and display, signature
verification and electronic ink compression. InkTools(TM) is a new release which
incorporates ActiveX technology and enhanced Visual Basic support for CIC's
primary developer's tool kit, allowing signature capture and verification within
computer applications.
New developments on CIC's PenX(TM)VC, pen extensions for Windows(R),
technology have been directed at enabling our enterprise applications to run in
a distributed network architecture. The primary focus of these efforts has been
in the emerging Independent Computing Architecture ("ICA"), in which PenX(TM) VC
enables the full functionality of pen-based clients including PCs with tablets,
handheld devices, and Windows(R) pen computers. PenX(TM) VC is currently
available and under evaluation in pilot programs at several key customers.
Consumer Product Offerings. The Company's consumer sales department is
charged with the sale of the Company's aftermarket software offerings. The
consumer product line currently consists of Jot(R), RecoEcho(TM), Sign-On(TM),
WordComplete(TM), QuickNotes(TM) and InkSnap(TM). These product are sold over
the Internet on CIC's own website and by other Internet-based electronic
resellers. Consumer versions of these products are being sold for users of the
Palm connected organizers and Windows(R) CE based Palm-size PCs and Handheld
PCs. Much of the growth in consumer sales in 1999 was attributable to sales of
these products to users of Palm Computing(R) devices. The Company has also
registered two new domain names (Internet website addresses) for use in direct
mail campaigns and other special promotions targeting the handheld device
installed base which is estimated to consist of more than 5 million users.
History
The Company was initially incorporated in Delaware in October 1986 as a
wholly owned subsidiary of a predecessor corporation with the same name. The
Company has a 90%-owned joint venture, Communication Intelligence Computer
Corporation, Ltd., with the Information Industry Bureau a provincial agency of
the People's Republic of China. The Joint Venture was formed in September 1993.
In each year since its inception, the Company has incurred losses. In July
1994, the Company filed a voluntary petition for reorganization and protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of San Francisco to restructure the Company
and its debt. On November 14, 1994, the Company's pre-petition creditors
approved, and the United States Bankruptcy Court confirmed, the Company's Plan
of Reorganization (the "Plan"), and the Company emerged from bankruptcy. The
Plan provided for the payment in full, in cash, of all allowed unsecured claims
of creditors while leaving secured creditors unimpaired by providing for their
payment in compliance with the original terms and conditions of their loans.
Creditors were paid in three approximately equal installments in February 1995,
1996, and 1997, respectively. In addition, under the Plan each holder of the
Company's then outstanding shares of Common Stock and Convertible Preferred
Stock received one unit, which consisted of two shares of Common Stock and one
Common Stock purchase warrant, with an exercise price of $0.50 per share, in
exchange for two shares of Convertible Preferred Stock or Common Stock. All
unexercised warrants issued pursuant to the Plan expired in December 1994. Since
July 1994, the Company has consummated a number of debt and equity financings.
For further information concerning these transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."
Copyrights, Patents and Trademarks
The Company relies on a combination of patents, copyrights, trademarks,
trade secrets and contractual provisions to protect its software offerings and
technologies. There can be no assurance, however, that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. In addition, the laws of certain countries in which the Company's
products are licensed may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. Because of
the rapid evolution of technology and uncertainties in intellectual property law
9
in the United States and internationally, there can be no assurance that the
Company's current or future products or technologies will not be subject to
infringement by others. The Company's licensees and distributors have access to
proprietary information of the Company. In addition a substantial portion of the
Company's technology and know-how are trade secrets, and are not protected by
patent, trademark or copyright laws. The Company has a policy of requiring its
employees and contractors to respect proprietary information through written
agreements. The Company also has a policy of requiring prospective business
partners to enter into non-disclosure agreements before any of the Company's
proprietary information is revealed to them. There can be no assurance that the
measures taken by the Company to protect its technologies, products and other
proprietary rights will adequately protect it against improper use.
Certain technological processes originally implemented in the Company's
software offerings were developed and patented by Stanford Research Institute
("SRI") and SRI assigned those patents, which subsequently expired, to the
Company. The Company has made significant improvements to the original
technologies and additional patents relating to such technological improvements
have been applied for or issued. Therefore, the Company does not believe that
the expiration of the SRI patents has had or will have a significant effect on
its operations. Other major elements of the Company's software offerings and
technologies were developed by the Company and have been patented. Certain of
the Company's existing patents expire between the years 2002 and 2005. The
Company is unable to predict at this time the impact to its business, if any,
from such expiration.
CIC(R) and its logo, Handwriter(R), Jot(R), and INKshrINK(R) are registered
trademarks of the Company. HRS(TM), InkSnap(TM), InkTools(TM), PenX(TM),
QuickNotes(TM), RecoEcho(TM), Sign-it(TM), Sign-On(TM) Speller(TM) and
WordComplete(TM) are trademarks of the Company. Applications for registration of
various trademarks are pending in the United States, France, Germany, Italy,
Japan, Spain and the United Kingdom. The Company intends to register its
trademarks generally in those jurisdictions where its products are or will be
marketed in the foreseeable future.
The Company may be required or elect to take various forms of legal action
from time to time to protect its proprietary rights. Any litigation regarding
claims against the Company or claims made by the Company against others could
result in significant expense to the Company, divert the efforts of its
technical and management personnel and have a material adverse effect on the
Company, whether or not such litigation is ultimately resolved in favor of the
Company. In the event of an adverse result in any such litigation, the Company
may be required to expend significant resources to develop non-infringing
technology or obtain licenses from third parties. There can be no assurance that
the Company would be successful in such development or that any such licenses
would be available on commercially reasonable terms, if at all.
Seasonality of Business
Historically, The Company has not experienced seasonal trends affecting
sales of its products or the development or licensing of its technologies.
Material Customers
Historically, the Company's Handwriting recognition segment revenues have
been derived from a limited number of customers. One customer accounted for 27%
and 7% of the Company's Handwriting recognition segment revenues in 1999 and
1998, respectively. Three customers accounted for approximately 27%, 16%, and
15%, respectively, of the Company's Handwriting recognition segment revenues in
1997. The loss of any significant customer or other source of revenue could have
a material adverse effect on the Company.
Backlog
At December 31, 1999, backlog approximated $35,000 representing NRE
associated with the Middlesoft and National Semiconductor agreements. At
December 31, 1998, backlog approximated $782,000 representing NRE and pre-paid
royalties associated with the Ericsson agreement. The Company had no significant
backlog at December 31, 1997.
10
Competition
The markets for CIC's offerings are competitive, and have attracted a
number of competitors within certain product markets. The Company intends to be
responsive to emerging market demands as well as competitive threats in those
specific markets where there is competition. While these competitors may pose a
threat to the Company's efforts to gain market share within certain markets, the
Company believes these competitors also help bring attention to and build
awareness for pen-input solutions. Certain competitors of the Company have
substantially greater financial and other resources than that of the Company.
The Company faces competition at different levels. Certain competitors have
developed or are developing software offerings which may compete directly with
the Company's offerings. Most of the direct competitors of CIC have focused only
on one element of such offerings, such as handwriting recognition technology,
signature capture/verification or pen-based operating environments or other
pen-based applications. While the Company believes that it has a competitive
advantage in some cases due to its range of product offerings, there can be no
assurance that competitors will not succeed in developing products or
technologies that are more effective, easier to use or less expensive than the
Company's products or technologies or that would render the Company's products
or technologies obsolete or non-competitive. Competitors of the Company include
certain of the Company's current and potential strategic partners and customers
who are developing or acquiring alternative products and technologies to those
offered by the Company. There can be no assurance that companies with which the
Company has established or will establish distribution, license, product
development or other strategic relationships will not choose to market
competitive technologies or products developed internally or acquired from third
parties. The Company's strategic partners also have had access to proprietary
information of the Company, and there can be no assurance that the Company's
confidentiality agreements with its strategic partners will adequately protect
it against the improper use of such proprietary information.
Joint Venture in the People's Republic of China
The Company currently owns 90% of the Joint Venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). As of December 31, 1998, the Company had
contributed an aggregate of $1.8 million in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights, and the Agency had contributed certain land use rights. In 1998, the
registered capital of the Joint Venture was reduced, and as a result, pursuant
to the terms and provisions of the Joint Venture agreement, no further
contributions are required by either party. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Joint Venture in the People's Republic of China."
Employees
As of March 27, 2000, the Company and the Joint Venture employed an
aggregate of 74 full-time employees, 29 of which are in the United States and 45
of which are in China. From time to time, the Company also engages additional
personnel on an as needed basis. The Company believes it has good relations with
its employees. None of the Company's employees is a party to a collective
bargaining agreement.
Geographic Areas
For the years ended December 31, 1999, 1998, and 1997, , the Company's
export sales as a percentage of total revenues were approximately 36%, 16%, and
40%, respectively. The increase in export sales in 1999 is due to the
recognition of licensing revenues from Ericsson. The decrease in export sales in
1998 was due to the recognition in 1997 of deferred royalty revenue of
approximately $1,424,000 from foreign customers for which the Company had no
further obligation to provide additional software or services compared to
$403,000 in 1998. In conjunction with the Company's current business strategy,
all licensing activities for the Company's software technologies will be
conducted from the United States. Accordingly, in December 1997, the Company
closed its sales office in Japan. The Company maintains certain agreements with
Japanese customers; however the revenues are derived from the Company's U.S.
operations. Due to the volume of the Company's sales on its website, and the
selling price of the products offered, it is not economically feasible to track
individual sales by country.
11
The Company is subject to various risks in connection with the Joint
Venture in the People's Republic of China, including the risks commonly
associated with doing business abroad. For further information see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 2 and 9 to the Company's Consolidated Financial Statements.
Year 2000
Year 2000 issues arose because most computer systems and programs were
designed to handle only a two-digit date code for the year, not a four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and programs, resulting in the incorrect processing of data. CIC's
software products as developed and distributed by CIC are not date sensitive,
and therefore Year 2000 issues are not applicable to such products.
Management as a whole is responsible issues arising from Year 2000
problems. The Company has evaluated its internal software programs and equipment
to ascertain the readiness of computer software and operating systems for the
Year 2000. Management of the Company believes that its internal software
programs are Year 2000 compliant. The Company has not received any reports of
malfunctions or errors in any of its products related to the change to the Year
2000. The Company does not anticipate that it will experience any material
difficulties with Year 2000 issues in the future, and therefore has not
formalized any contingency plan. The Company has been informed by third parties
which it does business with that they are Year 2000 compatible, and has not
experienced any major interuptions or difficulties with its thirs party
relationships.
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, including
without limitation, statements containing the words "believes", "anticipates",
"hopes", "intends", "expects", and other words of similar import, constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks, uncertainties and
other factors which may cause actual events to differ materially from
expectations. Such factors include the following: (1) technological,
engineering, quality control or other circumstances which could delay the sale
or shipment of products; (2) economic, business, market and competitive
conditions in the software industry and technological innovations which could
affect the Company's business; (3) the Company's inability to protect its trade
secrets or other proprietary rights, operate without infringing upon the
proprietary rights of others or prevent others from infringing on the
proprietary rights of the Company; and (4) general economic and business
conditions and the availability of sufficient financing.
Item 2. Properties
The Company currently leases its principal facilities (the "Principal
Offices"), consisting of approximately 11,717 square feet, in Redwood Shores,
California, pursuant to a sub-lease that expires in 2001. In addition, the
Company sub-leases to a third party approximately 3,200 square feet of space
adjacent to the Principal Offices. The sub-lease expires in 2001. The Company
originally leased the additional space in 1997 in order to accommodate
additional personnel hired by the Company in the last three months of 1996 in
connection with its increased marketing activities at that time. Due to the
Company's current business strategy and other cost reduction programs, the
additional space is not required at this time. The Joint Venture leases
approximately 1,000 square feet in Nanjing, China. The Company anticipates that
its existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. The Company also believes that its
current facilities will be suitable for it to continue operations in the
forseeable future.
Item 3. Legal Proceedings
As of March 15, 2000, the Company was not a party to any legal proceeding,
which, if adversely determined, would have a material adverse effect on its
business. In July 1994, the Company filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in order to restructure the
Company and its debt. In November 1994, the Plan was approved and confirmed, and
the Company emerged from bankruptcy. See "Item 1.Business-History."
12
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market under the trading symbol CICI. In September 1991, the Company's Common
Stock was first listed on the Nasdaq SmallCap Market, and in June 1993 it was
listed on the Nasdaq National Market. In July 1994 (during the Company's Chapter
11 reorganization proceedings), the Company's Common Stock was delisted for
failure to meet Nasdaq's continued listing 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 sale prices of
the Common for the periods noted.
Sale Price
Per Share
Year Period High Low
C>
1998 First Quarter................................... $ 1.75 $ 1.03
Second Quarter.................................. $ 1.22 $ 1.00
Third Quarter................................... $ 1.19 $ 0.59
Fourth Quarter.................................. $ 0.91 $ 0.41
1999 First Quarter................................... $ 2.50 $ 0.69
Second Quarter.................................. $ 2.59 $ 0.97
Third Quarter................................... $ 1.47 $ 1.00
Fourth Quarter.................................. $ 8.25 $ 0.88
2000 First Quarter (through March 27, 2000).......... $12.03 $ 6.19
As of March 27, 2000, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $6.75 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 at 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
such other factors as the Board of Directors may deem relevant.
During the three months ended December 31, 1999, the Company has granted
stock options to employees and directors for services rendered as follows:
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
- --------------------------------------------------------------------------------
One Employee Nov. 22, 1999 400,000 $ 1.1875 Quarterly Nov. 22, 2006
overthree
years
13
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of December 31,
1999, 1998, 1997, 1996 and 1995 and for each of the years in the five-year
period ended December 31, 1999 are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, are included in Item 8 of this Form 10-K. The selected
consolidated financial data should be read in conjunction with the Company's
audited financial statements and the notes thereto and other portions of this
Form 10-K including "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues..................... $ 6,518 $ 4,581 $ 5,516 $ 2,887 $ 2,314
Research and
development expenses(1)...... 1,363 1,989 2,360 1,672 1,355
Sales and marketing
expenses.................... 1,877 2,015 6,257 3,282 2,613
General and administrative
expenses.............. 1,683 1,889 2,663 2,037 1,717
Loss from operations......... (1,722) (3,285) (11,627) (6,535) (5,534)
Net loss available to
common stockholders(2)...... (1,740) (3,592) (16,940) (6,356) (5,595)
Basic and diluted loss
per common share............. ( 0.02) ( 0.06) ( 0.37) ( 0.15) ( 0.16)
As of December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents
and restricted cash.... $ 2,374 $ 1,045 $ 5,485 $ 11,325 $ 7,459
Working capital (3)..... 2,929 346 2,721 8,284 3,763
Total assets............ 4,963 3,354 7,491 13,503 9,776
Deferred revenue........ 35 651 440 2,006 2,570
Long-term obligations... 1,338 - 8 32 830
Redeemable securities(4) - - - 9,417 -
Stockholders' equity
(deficit)(5)........... 2,349 1,332 3,989 (82) 4,010
- -----------
(1) Excludes software development costs capitalized in accordance with
Statement of Financial Accounting Standards No. 86 of $9, $17, and $20,
for the years ended December 31, 1999, 1998, and 1995, respectively. No
software development costs were capitalized in the years ended December
31, 1997 and 1996, respectively.
(2) The Company's 1997 net loss applicable to common stockholders includes
a one-time, non-cash charge of $4.9 million related to the embedded
yield on the Company's Series A Preferred Stock issued in December 1996
due to the discounted conversion provisions of such stock and the
cumulative dividends of $1.25 per share, per annum on Series A
Preferred Stock. Includes dividends on Series A Preferred Stock and
Series B Preferred Stock of $435 and $564 for the years ended December
31, 1998 and 1997, respectively.
(3) Current liabilities used to calculate working capital at December 31,
1999, 1998, 1997, 1996, and 1995 include deferred revenue of $32,
$651, $440, $2,006, and $2,570, respectively.
(4) For details, refer to Note 5 to of the Company's Consolidated
Financial Statements included in Item 8 of this Form 10-K.
(5) The Company has never paid dividends to the holders of its common stock.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
History. The Company was initially incorporated in Delaware in October
1986. In each year since its inception, the Company has incurred losses. For the
five-year period ended December 31, 1999, losses aggregated approximately $34
million and, at December 31, 1999, the Company's accumulated deficit was
approximately $71 million. 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. See "Item 1. Business - History."
Revenue Recognition. In October 1997, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which the Company has adopted for
transactions entered into during the fiscal year beginning January 1, 1998. SOP
97-2 provides guidance for recognizing revenue on software transactions and
supersedes Statement of Position No. 91-1, "Software Revenue Recognition". In
March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4"). SOP 98-4 defers, for one year, the application of certain passages in
SOP 97-2 which limit what is considered vendor-specific objective evidence
("VSOE") necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. In December 1998,
the AICPA issued Statement of Position No. 98-9 ("SOP 98-9") "Modifications of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions."
SOP 98-9 extends the effective date of SOP 98-4 and provides additional
interpretative guidance. SOP 98-9 is effective for fiscal years beginning after
March 15, 1999. The Company will determine the impact, if any, of SOP 98-9 on
current revenue recognition practice when adopted. Adoption of the remaining
provisions of SOP 97-2 did not have a material impact on revenue recognition
during 1999.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment, provided that no
significant obligations remain and that collection of the resulting receivable
is likely. The Company provides for estimated sales returns at the time of
shipment. License revenues are recognized when the software has been delivered
and all significant obligations have been met. Royalty revenues are recognized
as products are licensed and sold by licensees. Revenues from development
contracts are primarily generated from non-recurring engineering fees and
research grants. Revenue is recognized in accordance with the terms of the
grants and agreements, generally when collection is probable and related costs
have been incurred.
Sources of Revenues. To date, the Company's revenues have been derived
principally 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, 1999, 1998 and 1997, such costs were insignificant.
15
Significant Customers. One customer accounted for 27% of the Company's
revenues in 1999. No one customer accounted for more than 10% of total revenues
in 1998. Three customers accounted for approximately 27%, 16%, and 15%,
respectively, of the Company's revenues in 1997.
Research and Development. Research and development costs are charged to
expense as incurred.
Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and losses from the translation of the local foreign currency financial
statements are included as a component of "accumulated other comprehensive loss"
in the Company's consolidated balance sheets included in this Annual Report on
Form 10-K. Foreign currency assets and liabilities are translated into U.S.
dollars at exchange rates prevailing at the end of the period except for
non-monetary assets and liabilities which are translated at historical exchange
rates. Revenues and expenses are translated at the average exchange rates in
effect during each period, except for those expenses included in balance sheet
accounts which are translated at historical exchange rates.
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 included in this Annual Report on Form
10-K. The Company recorded a net foreign currency transaction gain of $59,000
and $55,000 for the years ended December 31, 1999 and 1998, respectively, and a
loss of $101,000 for the year ended December 31, 1997.
Net Operating Loss Carryforwards. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets at December 31,
1999 of 18,919,000 based upon the Company's history of losses.
Restatement of 1997 Quarterly Results. In January 1998, the Company
restated the previously issued financial statements for the first, second and
third quarters of 1997. The display of the net loss per common share applicable
to common stock holders and the components thereof in the Company's unaudited
condensed consolidated statements of operations for each of these quarters was
restated to reflect the non-cash charge for the embedded yield on the
convertible preferred stock due to the discount conversion feature provided on
such stock and cumulative dividends on the convertible preferred stock. The
Company believes that the restatements were in accordance with the accounting
treatment of the embedded discount on convertible preferred stock as announced
by the Securities and Exchange Commission at the March 13, 1997 meeting of the
Financial Accounting Standards Board's Emerging Issues Task Force.
Results of Operations
Years Ended December 31, 1999 and December 31, 1998
Revenues. The Company's product sales for the year ended December 31, 1999
increased $429,000 or 14%, to $3,411,000 from $2,982,000 in the prior year.
Sales of the Company's products offered via its website increased $1,376,000 or
402%, to $1,718,000 from $342,000 in the prior year. This increase was due to
increased direct mail campaigns and acceptance of the Company's new software
product offerings, sold over the Internet, aimed at the handheld computer
market. Hardware sales decreased $670,000 or 90%, to $78,000 for the year ended
December 31, 1999 compared to $748,000 in the prior year. This reduction in
hardware sales resulted from the Company's transition from a combined hardware
and software company to a company focused primarily on software. Systems
integration activities of the Joint Venture decreased $259,000, or 14%, in 1999
to $1,620,000 compared to $1,879,000 in 1998. This decrease is due to two major
contracts recorded in the second and third quarters of 1998 which were not
repeated in 1999.
Revenues from license and royalty fees for the year ended December 31, 1999
increased by $1,341,000 or 103%, to $2,641,000 from $1,300,000 for the prior
year. The increase was primarily attributable to the recognition of $1,500,000
of license fees for the Company's Jot software product to be sold on Ericsson
mobile smartphones.
16
Revenues from development contracts in 1999 increased 56% to $466,000 from
$298,000 for the prior year due primarily to increases in non-recurring
engineering revenues. Revenues from development contracts in 1999 were primarily
attributable to porting of the Company's software to third party products such
as smartphones and web browsers. Revenues from development contracts in 1998 and
1997 were primarily attributable to grants awarded by the National Institute of
Standards and Technology and the National Science Foundation.
Cost of Sales. Cost of sales is composed of costs from product sales,
license and royalty fees and development contracts. Cost of product sales for
the year ended December 31, 1999 increased 76% or $1,294,000 to $2,992,000
compared to $1,698,000 in the comparable prior year. The increase is primarily
due to the increase in the Company's direct mail activities associated with the
sale of software products via its website. Cost of product sales in 1999
consisted of cost of materials, approximately $1,160,000 of which related to the
hardware and software components involved in the systems integration activities
of the Joint Venture compared to $1,420,000 in 1998, and $1,803,000 in direct
mail campaign costs compared to $4,000 in the comparable prior year. Product
costs related the Company's discontinued Handwriter(R) product sales in 1999
amounted to $29,000 compared to $278,000 in 1998. License and royalty costs
remained unchanged and amounted to approximately $63,000 in 1999 and 1998,
respectively. Costs incurred in connection with development contracts revenue
are expensed as incurred, and increased 24% in 1999 compared to the prior year,
commensurate with the increase in development contracts revenue compared to the
same period in the prior year.
Gross Margin. Gross margin in 1999 increased 23% to $3,197,000 compared to
$2,609,000 in 1998. This increase was due primarily to an increase in licensing
and royalty fees compared to the prior year. Product gross margins decreased to
$419,000 compared to $1,284,000 in the prior year. This decrease was due
primarily to the costs of direct mail campaigns associated with the Company's
sales via its website. Development contract gross margins increased 137% to
$204,000 in 1999 compared to $86,000 in the prior year. This increase is
commensurate with the increase in development contract revenues.
Research and Development Expenses. Research and development expenses
decreased 31% or $626,000 to $1,363,000 in 1999 from $1,989,000 in the prior
year. Salaries and related costs decreased 12% in 1999 or $151,000 to $1,134,000
from $1,285,000 recorded in the prior year. This decrease resulted from
reductions in U.S. based personal and transfer of engineering development work
to the Joint Venture in China. Other expenses including facilities and related
costs, service and support costs, and other costs decreased $457,000, or 52% in
1999, to $419,000 from $876,000 compared to the prior year. The reductions were
due to the transfer of engineering development work to the Joint Venture in
China where labor and other costs are less expensive and the reduced support of
hardware products sold in prior years. These decreases were offset by increases
in 1999 for travel and related expenses, training fees and software developers
dues and subscriptions of $31,000. In addition, overhead costs associated with
development contracts transferred to cost of goods sold increased 24% to
$262,000 in 1999 compared to $212,000 in the prior year. This increase is
commensurate with the increase in development contract revenue.
Sales and Marketing Expenses. Sales and marketing expense for the year
ended December 31, 1999 decreased 7% or $138,000 compared to the prior year.
Payroll and related costs in 1999 decreased 19% or $165,000 due primarily to
reductions in U.S. personnel related to the Joint Venture operations in China in
the second quarter of 1998. During the third and fourth quarters of 1999, the
Company increased its domestic sales force. Other costs associated with the
reduction in personnel, such as facilities and miscellaneous expenses, decreased
$161,000 or 20% in 1999 to $641,000 from $802,000 in the comparable prior year.
Advertising and promotion expense decreased $49,000 or 21% to $188,000 in 1999
from $237,000 in the comparable prior year. This decrease was due to the
Company's efforts in direct mail campaigns, which costs are a component of cost
of goods sold. These reductions were offset by increases in professional
services associated with marketing studies, recruiting and other expenses of
$112,000. Commission expenses increased $110,000 commensurate with the increase
in sales as compared to the same twelve month period last year.
General and Administrative Expenses. General and administrative expenses
decreased 11% or $206,000 to $1,683,000 for the year ended December 31, 1999
from $1,889,000 for the comparable prior year period. Payroll and related costs
in 1999 decreased 12% or $62,000 due to reductions in U.S. personnel related to
the Joint Venture operations in China in the second quarter of 1998. Other costs
related to the reduction in personnel, including travel and facilities costs
17
were reduced $102,000. Other expenses including provisions for bad debts, patent
amortization and other costs decreased $164,000 in 1999 compared to the same
prior year period. These reductions were partially offset by increases in
recruiting and other professional services, insurance, and investor relation
expenses of $122,000 compared to the same twelve month period last year.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense) net, declined 76% to $35,000 from $147,000 in the prior year.
This decrease resulted from a decrease in interest income due to lower cash
balances during the year, the write off of the loan discount on long-term debt
of approximately $20,000, and fees associated with credit card sales from the
Company's website of approximately $59,000.
Interest Expense. Interest expense increased in 1999 compared to the prior
year due to bridge loans and subsequent conversion to long-term debt to fund the
Company's operations in 1999. Interest expense in 1998 related to an accounts
receivable financing arrangement and an equipment loan which were paid off in
January and June 1998, respectively.
Preferred Stock Dividends. Preferred stock dividends relate to cumulative
dividends of $1.25 per share, per annum, compounded semi-annually or quarterly,
respectively, whether or not declared, on the Series A and Series B Preferred
Stock. All of the shares of the Company's Series A and Series B Preferred Stock
were converted into Common Stock in November 1998 accounting for the decrease
from the amount recorded in 1998.
Years Ended December 31, 1998 and December 31, 1997
Revenues. Product sales for the year ended December 31, 1998 decreased
$264,000, or 8%, to $2,982,000 from $3,246,000 in the prior year. The decrease
was due to the Company's transition from a combined hardware and software
company to a company focused primarily on software. Hardware sales decreased
$1,207,000, or 62%, to $748,000 for the year ended December 31, 1998 compared to
$1,955,000 in the prior year. This reduction in hardware sales was partially
offset by an increase of $305,000, or approximately 850%, in software products
sold over the Internet via the Company's website for the year ended December 31,
1998 compared to the prior year. In addition, systems integration activities of
the Joint Venture increased $404,000, or 27%, in 1998 to $1,879,000 compared to
$1,475,000 in 1997. Other sales including software solutions utilizing the
Company's software and third party hardware and replacement and spare hardware
and software components for the Company's installed hardware base not included
above amounted to $234,000 for the year ended December 31, 1998 compared to
$92,000 in the prior year.
Revenues from license and royalty fees for the year ended December 31, 1998
decreased by $542,000, or 29%, to $1,300,000 from $1,842,000 for the prior year.
The decrease was primarily attributable to the recognition in the prior year of
approximately $1,424,000 of royalty revenues deferred in prior years that were
recognized on agreements for which the Company had no further obligations to
deliver additional software or services, compared to $404,000 recognized in
1998.
Revenues from development contracts for 1998 decreased 30% to $298,000 from
$428,000 for the prior year due primarily to reductions in non-recurring
engineering revenues. Revenues from development contracts in 1998 and 1997 are
primarily attributable to grants awarded by the National Institute of Standards
and Technology and the National Science Foundation.
Cost of Sales. Cost of sales is composed of costs from product sales,
license and royalty fees and development contracts. Cost of product sales in
1998 consisted primarily of cost of materials, approximately $1,420,000 of which
related to the hardware and software components involved in the systems
integration activities of the Joint Venture and the remainder of which related
to material and other costs of the Company's discontinued Handwriter(R) product
sales. Cost of product sales decreased 69% to $1,698,000 from $5,458,000 in the
prior year. In the fourth quarter of 1997, the Company wrote down its Handwriter
products finished goods inventory by approximately $1,600,000 due to the
intended withdrawal of its Handwriter product from the retail market in the
first quarter of 1998. In addition, the Company charged approximately 300,000 to
product cost of sales in the fourth quarter of 1997, related to noncancelable
manufacturing license agreements associated with the Handwriter products entered
into in 1997. License and royalty costs decreased by approximately $69,000, or
52%, to $63,000 in 1998 from $132,000 in 1997. This decrease in license and
royalty costs related primarily to decreases in capitalized software
18
amortization and software maintenance. Costs incurred in connection with
development contracts revenue are expensed as incurred, and decreased 22% in
1998 compared to the prior year, commensurate with the reduction in development
contracts revenue in the same period.
Gross Margin. The gross margin increased to $2,609,000 in 1998 from a
negative margin of $347,000 in 1997. This increase was due to a shift from low
margin retail hardware sales to the sales of the Company's higher margin
software products, and there being no write-offs in 1998 similar to the
write-offs in 1997 of Handwriter(R) inventory and non-cancelable manufacturing
licenses as discussed above.
Research and Development Expenses. Research and development expenses
decreased $371,000, or 16%, to $1,989,000 in 1998 compared to $2,360,000 in the
prior year. Salaries and wages decreased $465,000, or 23%, to $1,535,000
compared to $2,000,000 in the prior year. This decrease was due to the reduction
in domestic staffing due to moving the development of the Chinese character
recognition system to the Joint Venture which has a lower average salary per
person. Outside engineering costs decreased $155,000, or 99%, in 1998 to $2,000
from $157,000 in the prior year. This decrease was due to the elimination of
outside development for the Company's discontinued hardware products. Other
overhead costs, including facilities and related expenses, increased $150,000,
or 74%, to $353,000 from $203,000 in the prior year. This increase was due
primarily to the decrease in applied overhead to cost of sales from the
reduction in development contract revenues and increases in the development
effort by the Joint Venture.
Sales and Marketing Expenses. Sales and marketing expenses decreased 68%,
or $4,242,000, to $2,015,000 for the year ended December 31, 1998 compared to
$6,257,000 in the prior year. Salaries, wages, and related costs decreased by
$1,821,000, or 70%, to $774,000 compared to $2,595,000 in the prior year, due to
reductions in staffing as the Company discontinued its sales efforts related to
hardware products in the corporate and retail markets. In addition to the
reductions in the Company's sales force, outside services particular to the
retail market, such as retail site visits and product display, were also
discontinued. The cost reduction related to these services amounted to
approximately $354,000, or 96%, of the amount incurred during the same period
last year. Advertising and promotion expense decreased $1,843,000, or 89%, to
$237,000 in 1998 compared to $2,080,000 in the prior year. This decrease was due
to the reduction in costs associated with in-store hardware product positioning
and advertising in the retail channel. Other costs including facilities and
related costs, recruiting and training materials costs associated with the
combined corporate and retail hardware effort decreased $224,000, or 18%,
compared to the prior year.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 were $1,889,000, a decrease of $774,000, or
29%, compared to $2,663,000 in the prior year. Salaries and related expenses
decreased $184,000 to $570,000 from $754,000 during 1997. The decrease in
salaries and related expenses resulted from a decrease in the number of
personnel. Professional services including legal, accounting, and investor
relations expenses decreased approximately $479,000 during the year ended
December 31, 1998 to $727,000 from $1,206,000 in the prior year. The decrease is
due primarily to the reduction in expense for the number of registration
statements filed with the SEC in 1998 related to financings compared to 1997,
and the shift of investor relations activities from outside services to internal
personnel. Other costs including insurance, telephone, recruiting, and
miscellaneous expenses decreased $151,000 to $551,000 from $702,000 during the
prior year. The reduction in other costs is due primarily to the reduction in
personnel, the number of recruiting efforts, and directors and officers
insurance costs.
Interest Income and Other Income (Expense), Net. Interest income and other
income (expense), net was $147,000 in 1998 compared to an expense of $322,000 in
1997. The decrease in expense was due to a one-time, non-cash charge of $484,000
in 1997 for 300,000 warrants issued on March 28, 1997, and effective as of
December 31, 1996, to holders of 100% of the then issued and outstanding shares
of Series A Preferred Stock in exchange for the execution of a waiver to certain
provisions of the registration rights agreement entered into in connection with
the private placement of the Series A Preferred Stock in December 1996. See Note
5 in the Consolidated Financial Statements.
Interest Expense. Interest expense decreased in 1998 compared to the prior
year due to the final payment in February 1997 of the pre-petition liabilities,
the repayment in January 1998 of the amounts outstanding at December 31, 1997
under the accounts receivable financing agreement, and the repayment in June
1998 of the note outstanding at December 31, 1997 for the purchase of equipment.
19
Embedded Yield on Preferred Stock. The embedded yield on preferred stock
results from the discount feature provided on the conversion price of the Series
A Preferred Stock into Common Stock. The embedded yield totaling $4,376,000 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date on which the Series A Preferred Stock first became convertible.
Preferred Stock Dividends. Preferred stock dividends relate to cumulative
dividends of $1.25 per share, per annum, compounded semi-annually or quarterly,
respectively, whether or not declared, on the Series A and Series B Preferred
Stock. All of the shares of the Company's Series A and Series B Preferred Stock
were converted into Common Stock in November 1998 resulting in a decrease from
the amounts recorded in 1997.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1999 totaled $2,374,000 compared
to cash and cash equivalents of $795,000 at December 31, 1998. This increase was
primarily attributable to the $4,296,000 of cash from financing activities
offset by $2,656,000 used by operations, and $61,000 of cash used in investing
activities in 1999. In 1999, the effect of exchange rate changes on cash was
immaterial.
At December 31, 1999, current liabilities, which include deferred revenue,
were $1,276,000. Deferred revenue, totaling $35,000 at December 31, 1999,
primarily reflects advance non-recurring engineering fees received from the
Company's licensees which are generally recognized as revenue by the Company in
the period in which the engineering work is completed.
As of December 31, 1999, the Company's principal source of liquidity was
its cash and cash equivalents of $2,374,000. In each year since its inception,
the Company has incurred losses. Although there can be no assurance, the Company
believes that its current cash and resources, together with the expected revenue
levels, will provide sufficient funds for planned operations for at least the
next twelve months. However, if the Company is unable to generate adequate cash
flow from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. There can be no assurance that additional funds will be
available when needed, or if available will be on favorable terms or in the
amounts required by the Company. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some or
all of its marketing and development efforts or other operations, which could
have a material adverse effect on the Company's business, results of operations
and prospects.
Joint Venture in the People's Republic of China. The Company currently owns
90% of a joint venture with the Information Industry Bureau, a provincial agency
of the People's Republic of China (the "Agency"). In June 1998, the registered
capital of the Joint Venture was reduced from $10,000,000 to $2,550,000. As of
December 31, 1999, the Company had contributed an aggregate of $1,800,000 in
cash to the Joint Venture and provided it with non-exclusive licenses to
technologies and certain distribution rights, and the Agency had contributed
certain land use rights. Following the reduction in registered capital of the
Joint Venture, neither the Company nor the Agency are required to make further
contributions to the Joint Venture. Prior to the reduction in the amount of
registered capital, the Joint Venture was subject to the annual licensing
requirements of the Chinese government. Concurrent with the reduction in
registered capital, the Joint Venture's business license has been renewed
through October 18, 2043. The Company's investment in the Joint Venture is
subject to risks of doing business abroad, including fluctuations in the value
of currencies, export duties, import controls and trade barriers (including
quotas), restrictions on the transfer of funds, longer payment cycles, greater
difficulty in accounts receivable collections, burdens of complying with foreign
laws and political and economic instability.
20
Financing. On June 16, 1999, the Company obtained a bridge loan, (the
"Bridge Loan") in the amount of $500,000 from a charitable remainder annuity
trust, of which a director and officer of the Company is a trustee. The Bridge
Loan was increased by $150,000 and $100,000 in August and September 1999,
respectively. Amounts outstanding under the Bridge Loan bore interest at the
prime rate plus 2%. The loan was secured by the Company's cash, accounts
receivable and other receivables as then owned or thereafter acquired by the
Company. The Bridge Loan plus accrued interest was due December 31, 1999.
On October 20, 1999, the Company entered into a loan agreement with the
same charitable remainder annuity trust, whereby the then existing Bridge Loan
of $750,000 was converted into a long term loan in the amount of $1,500,000 (the
"1999 Loan"). The 1999 Loan is secured by a first priority security interest in
all of the Company's assets as now owned or hereafter acquired by the Company.
The 1999 Loan bears interest at the rate of 2% over the prime rate as published
by Citibank from time to time, and is due January 31, 2002. Interest on the
principal amount under the 1999 Loan is payable quarterly. The 1999 Loan can be
re-paid in whole at any time or in part at any time without penalty. Any partial
payment must be in the principal amount of $100 or a multiple thereof. The
interest rate at December 31, 1999 was 10.25%.
On October 20, 1999, in connection with the 1999 Loan the Company issued to
the charitable remainder annuity trust warrants to purchase 300,000 shares of
the Company's common stock. The warrants expire October 20, 2001 and have an
exercise price of $1.09 per share. The Company ascribed a value of $179,000 to
these warrants, which will be amortized to the Company's results of operations
over the life of the warrant. The fair value ascribed to the warrants was
estimated on the date of issuance using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 5.50%; expected life of 2
years; expected volatility of 99%; and expected dividend yield of 0%.
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96,000, denominated in Chinese currency, from a Chinese bank. The
loan bears interest at 5.12% and was due on March 2, 2000. The borrowings do not
require a compensating balance. The note was repaid in January, 2000.
Operating Lease Commitments. The Company leases facilities in the United
States and China. The Company's rental expense for the year ended December 31,
1999 was approximately $376,000. Sublease income was approximately $209,000 and
$188,000 for the years ended December 31, 1999 and 1998, respectively. Future
minimum lease payments under non-cancelable operating leases are expected to be
approximately $517,000, and $431,000, excluding sub-lease income for the years
ending December 31, 2000, and 2001, respectively. The Company's rent expense is
expected to be reduced by approximately $98,000 and $82,000 in 2000 and 2001,
respectively, in connection with the subleases.
Year 2000
Year 2000 issues arose because most computer systems and programs were
designed to handle only a two-digit date code for the year, not a four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and programs, resulting in the incorrect processing of data. CIC's
software products as developed and distributed by CIC are not date sensitive,
and therefore Year 2000 issues are not applicable to such products.
Management as a whole is responsible issues arising from Year 2000
problems. The Company has evaluated its internal software programs and equipment
to ascertain the readiness of computer software and operating systems for the
Year 2000. Management of the Company believes that its internal software
programs are Year 2000 compliant. The Company has not received any reports of
malfunctions or errors in any of its products related to the change to the Year
2000. The Company does not anticipate that it will experience any material
difficulties with Year 2000 issues in the future, and therefore has not
formalized any contingency plan. The Company has been informed by third parties
which it does business with that they are Year 2000 compatible, and has not
experienced any major interuptions or difficulties with its thirs party
relationships.
Volatility of Stock Price
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to, among other factors, quarter to quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
21
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Item 8. Financial Statements and Supplementary Data
The Company's audited consolidated financial statements for the years ended
December 31, 1999, 1998 and 1997 begin on page F-1 of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 8, 1999, the Company dismissed PricewaterhouseCoopers LLP
("Pricewaterhouse") as its independent accountants.
In connection with the audits conducted and during the subsequent period
through December 8, 1999, there were no disagreements between the Company and
Pricewaterhouse on any matter of accounting principles or practice, financial
statement disclosure, auditing scope or procedures, which disagreements, if not
resolved to their satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement. In
addition, the audit report of Pricewaterhouse on the consolidated financial
statements of the Company as of and for the years ended December 31,1998 and
1997 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 December 13, 1999, the Company retained Stonefield Josephson
Accountancy Corporation ("Stonefield Josephson") as its independent accountants
to audit the Company's financial statements. During the two years ended December
31, 1998 and during the subsequent period ended December 13, 1999, neither the
Company nor anyone on its behalf consulted Stonefield Josephson regarding (i)
the application of accounting principles to any transaction either completed or
proposed, or (ii) the type of audit opinion that might be rendered by Stonefield
Josephson on the Company's financial statements.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 12, 2000.
Item 11. Executive Compensation
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 12, 2000.
22
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 12, 2000.
Item 13. Certain Relationships and Related Transactions
Information with respect to this Item is incorporated by reference to
the Company's definitive proxy statement with respect to its Annual Meeting of
Stockholders expected to be held on June 12, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
Page
(a)(1) Financial Statements
Report of Stonefield Josephson, Inc., Independent Accountants.... F-1
Report of PricewaterhouseCoopers LLP, Independent Accountants.... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998........ F-3
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998, and 1997.......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................. F-6
Notes to Consolidated Financial Statements....................... F-7
(a)(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves....... S-1
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 14, 1999, regarding (i) dismissal
of Pricewaterhouse as its independent accountants, (ii) appointment of
Stonefield Josephson as the Company's independent accountants, and (iii) Hiring
of Marjorie L. Bailey as Vice President of Finance and Chief Financial Officer.
(c) Exhibits
Exhibit Document
Number
2.0 Second Amended Plan of Reorganization of the Company, incorporated
herein by reference to the Company's Form 8-K filed October 24,
1994.
2.1 Orderly Liquidation Valuation, Exhibit F to the Second Amended
Plan of Reorganization, incorporated herein by reference to the
Company's Form 8-K filed October 19, 1994.
2.2 Order Confirming Plan of Reorganization, incorporated herein by
reference to the Company's Form 8-K filed November 14, 1994.
3.1 Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4
to the Company's Registration Statement on Form 10 (File No.
0-19301).
23
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation (authorizing the reclassification of the Class A
Common Stock and Class B Common Stock into one class of Common
Stock) as filed with the Delaware Secretary of State's office on
November 1, 1991, incorporated herein by reference to Exhibit 3 to
Amendment 1 on Form 8 to the Company's Form 8-A (File No.
0-19301).
3.3 By-laws of the Company adopted on October 6, 1986, incorporated
herein by reference to Exhibit 3.5 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
4.1 1984 Stock Option Plan of the Company, as amended and restated as
of October 15, 1987 and as amended by resolutions of the
stockholders of the Company passed on August 15, 1989 and October
8, 1990 to increase the aggregate shares covered thereby to
1,000,000, incorporated herein by reference to Exhibit 4.4 to the
Company's Registration Statement on Form 10 (File No. 0-19301).
4.2 Form of Stock Option Grant under 1984 Stock Option Plan,
incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form 10 (File No. 0-19301).
4.3 1991 Stock Option Plan of the Company, incorporated herein by
reference to Exhibit 4.5 of the Company's Form S-1 dated December
23, 1991 (Registration No. 33-43879).
4.4 1991 Non-Discretionary Stock Option Plan, incorporated herein by
reference to Exhibit 4.6 of the Company's Form S-1 dated December
23, 1991 (Registration No. 33-43879).
4.5 Form of Incentive Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.7 of the Company's
Form S-1 dated December 23, 1991 (Registration No. 33-43879).
4.6 Form of Non-Qualified Stock Option Grant under 1991 Stock Option
Plan, incorporated herein by reference to Exhibit 4.8 of the
Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
4.7 Form of Stock Option Grant under 1991 Non-Discretionary Stock
Option Plan, incorporated herein by reference to Exhibit 4.9 of
the Company's Form S-1 dated December 23, 1991 (Registration No.
33-43879).
4.8 1994 Stock Option Plan, incorporated herein by reference to
Exhibit G of the Company's Second Amended Disclosure Statement
filed on Form 8-K dated October 19, 1994 and approved by
shareholders on November 14, 1994.
4.9 Form of Warrant of the Company dated March 28, 1997 issued in
connection with the Waiver by and among the Company and the
signatories thereto, incorporated herein by reference to Exhibit
4.9 of the Company's 1996 Form 10-K (File No. 0-19301).
4.10 1999 Stock Option Plan, incorporated herein by reference to
Exhibit A of the Company's Definitive Proxy Statement filed on May
4, 1999 and approved by shareholders on June 7, 1999.
.
+10.1 Licensing and Development Agreement for Use and Marketing of
Program Materials dated September 25, 1992 between the Company and
International Business Machines Corporation, incorporated herein
by reference to Exhibit 10.13 of the Company's 1992 Form 10-K
(File No. 0-19301)
10.2 Standby Stock Purchase Agreement between the Company and Philip
Sassower dated October 3, 1994, incorporated herein by reference
to Exhibit 10.13 of the Company's 1994 Form 10-K (File No.
0-19301)
10.3 Form of Subscription Agreement between the Company and the
Purchasers, dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated November
28, 1995.
10.4 Form of Registration Rights Agreement between the Company and the
Purchasers, dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated November
28, 1995.
10.5 Form of Warrant of the Company issued to Libra Investments, Inc.
on November 28, 1995, incorporated herein by reference to Exhibit
1 of the Company's Form 8-K dated November 28, 1995.
10.6 Form of Registration Rights Agreement between the Company and
Libra Investments, Inc., dated November 28, 1995, incorporated
herein by reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
24
10.7 Form of Subscription Agreement between the Company and various
investors, dated June 13, 1996, incorporated herein by reference
to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
10.8 Form of Registration Rights Agreement between the Company and
various investors, dated June 13, 1996, incorporated herein by
reference to Exhibit 2 of the Company's Form 8-K dated June 27,
1996.
10.9 Form of Preferred Stock Investment Agreement, dated as of December
31, 1996, between the Company and the investors listed on Schedule
1 thereto, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated December 31, 1996.
10.10 Form of Registration Rights Agreement between the Company and the
Investors Listed on Schedule 1 thereto, incorporated herein by
reference to Exhibit 2 of the Company's Form 8-K dated December
31, 1996.
10.11 Form of Certificate of Designation of the Company with respect to
the 5% Cumulative Convertible Preferred Stock, incorporated herein
by reference to Exhibit 3 of the Company's Form 8-K dated December
31, 1996.
10.12 Waiver, dated March 26, 1997, effective December 31, 1996, by and
among the Company and the signatories thereto, incorporated herein
by reference to Exhibit 10.19 of the Company's 1996 Form 10-K
(File No. 0-19301).
10.13 Form of Subscription Agreement between the Company and each
subscriber, dated as of November 25, 1997, incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K dated December
3, 1997.
10.14 Certificate of Designations of the Company with respect to the
Series B 5% Cumulative Convertible Preferred Stock, incorporated
herein by reference to Exhibit 10.2 of the Company's Form 8-K
dated November 13, 1997.
10.15 Form of Registration Rights Agreement, by and among the Company
and the signatories thereto, dated as of November 25, 1997,
incorporated herein by reference to Exhibit 10.3 to the Company's
Form 8-K dated November 13, 1997.
10.16 Amendment to the Company's Certificate of Designation with respect
to the 5% Cumulative Convertible Preferred Stock dated June 12,
1998, incorporated herein by reference to Exhibit 10.23 of the
Company's 1998 Form 10-K (File No. 0-19301).
10.17 Amendment to the Company's Amended and Restated Certificate of
Incorporation dated June 12, 1998, incorporated herein by
reference to Exhibit 10.24 of the Company's 1998 Form 10-K (File
No. 0-19301).
10.18 Employment Agreement dated August 14, 1998 between James Dao and
the Company, incorporated herein by reference to Exhibit 10.25 of
the Company's 1998 Form 10-K (File No. 0-19301).
++10.19 Software Development and License Agreement dated December 4, 1998
between Ericsson Mobile Communications AB and the Company,
incorporated herein by reference to Exhibit 10.26 of the Company's
1998 Form 10-K (File No. 0-19301).
**10.20 Loan and Warrant Agreement dated October 20, 1999 between the
Company and the Philip S. Sassower 1996 Charitable Remainder
Annuity Trust.
**21.1 Schedule of Subsidiaries.
**23.1 Consent of Stonefield Josephson, Accountancy Corporation,
Independent Accountants.
**23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
**27.1 Financial Data Schedule.
- -----------
+ Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated
March 29, 1993, filed pursuant to the Securities Exchange Act of 1934.
* Confidential treatment of certain portions of this exhibit have been
previously granted pursuant to a request for confidentiality dated
March 30, 1994, filed pursuant to the Securities Exchange Act of 1934.
** Filed herewith.
++ Confidential treatment of certain portions of this exhibit have been
requested from the SEC pursuant to a request for confidentiality dated
March 30, 1999, filed pursuant to the Securities and Exchange Act of
1934.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 15, 2000.
COMMUNICATION INTELLIGENCE CORP.
By: /s/ Guido Digregorio
---------------------------------------
Guido DiGregorio
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on March 15, 2000.
Signature Title
/s/ Guido DiGregorio Director, President and Chief Operating Officer
--------------------
Guido DiGregorio (Principal Executive Officer)
/s/ Marjorie L. Bailey Vice President and Chief Financial Officer
--------------------
Marjorie L. Bailey (Principal Financial and Accounting Officer)
/s/ Jess M. Ravich Director
--------------------
Jess M. Ravich
/s/ Philip S. Sassower Director, Chairman of the Board , and Secretary
--------------------
Philip S. Sassower
/s/ Jeffrey Steiner Director
--------------------
Jeffrey Steiner
/s/ Chien Bor Sung Director
--------------------
Chien Bor Sung
26
Report of Independent Auditors
Board of Directors and Stockholders of
Communication Intelligence Corporation
Redwood Shores, California
We have audited the accompanying consolidated balance sheet of Communication
Intelligence Corporation as of December 31, 1999 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), cash flows
and financial statement schedule for the year then ended, as listed in the index
appearing under Item 14(a)(1) and (2) of this Annual Report on Form 10-K. These
financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion the consolidated financial statements and financial statements
schedule listed in the index appearing under Item 14(a)(1) and (2) of this
Annual Report on Form 10-K present fairly, in all material respects, the
financial position of Communication Intelligence Corporation and its
subsidiaries ("the Company") at December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
STONEFIELD JOSEPHSON
Certified Public Accountants
San Francisco, California
February 25, 2000
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
Communication Intelligence Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) of this Annual Report on Form 10-K present
fairly, in all material respects, the financial position of Communication
Intelligence Corporation and its subsidiaries ("the Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)2 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, CA
March 29, 1999
F-2
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
December 31,
---------------------------------
1999 1998
---------------------------------
Assets
Current assets:
Cash and cash equivalents.................. $ 2,374 $ 795
Restricted cash............................ - 250
Accounts receivable, net
of allowances of $13 and $174 at
December 31, 1999 and 1998,
respectively.............................. 1,575 1,146
Inventories................................ 81 74
Prepaid expenses and other current assets.. 175 103
--------------- ---------------
Total current assets................. 4,205 2,368
Note receivable from officer................. 135 200
Property and equipment, net.................. 344 539
Other assets................................. 279 247
--------------- ---------------
Total assets......................... $ 4,963 $ 3,354
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................... $ 288 $ 473
Short-term debt............................ 60 145
Accrued compensation....................... 268 229
Other accrued liabilities.................. 625 524
Deferred revenue........................... 35 651
--------------- ---------------
Total current liabilities............ 1,276 2,022
Long-term debt - related party............... 1,338 -
Commitments..................................
Stockholders' equity:
Common stock, $.01 par value; 100,000
shares authorized; 82,209 and 78,459
shares issued and outstanding at
December 31, 1999 and 1998,respectively... 822 785
Additional paid-in capital................. 72,983 70,205
Accumulated deficit........................ (71,244) (69,504)
Accumulated other comprehensive loss....... (212) (154)
--------------- ---------------
Total stockholders' equity................... 2,349 1,332
--------------- ---------------
Total liabilities and stockholders' equity... $ 4,963 $ 3,354
=============== ===============
See accompanying Notes to Consolidated Financial Statements
F-3
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Revenues:
Product........................... $ 3,411 $ 2,982 $ 3,246
License and royalty............... 2,641 1,300 1,842
Development contracts............. 466 298 428
----------------------------------------
6,518 4,581 5,516
----------------------------------------
Operating costs and expenses:
Cost of sales:
Product........................ 2,992 1,698 5,458
License and royalty............ 63 63 132
Development contracts.......... 262 212 273
Research and development......... 1,363 1,989 2,360
Sales and marketing.............. 1,877 2,015 6,257
General and administrative....... 1,683 1,889 2,663
----------------------------------------
8,240 7,866 17,143
----------------------------------------
Loss from operations................ (1,722) (3,285) (11,627)
Interest income and other
income (expense), net............. 35 147 (322)
Interest expense.................... (53) (19) (51)
----------------------------------------
Net loss............................ (1,740) (3,157) (12,000)
Embedded yield on preferred stock.. - - (4,376)
Preferred stock dividends........... - (435) (564)
----------------------------------------
Net loss available to common
stockholders....................... $ (1,740) $ (3,592) $(16,940)
========================================
Basic and diluted loss per
common share....................... $ (0.02) $ (0.06) $ (0.37)
========================================
Weighted average common shares...... 79,625 56,233 45,370
========================================
See accompanying Notes to Consolidated Financial Statements
F-4
Communication Intelligence Corporation
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(In thousands, except per share amounts)
Series Series
A B Accumulated
Convert. Convert. Additional Other
Preferred Preferred Common Paid-In Accum. Comprehensive
Stock Stock Stock Capital Deficit Loss Total
Balances as of
December 31, 1996.. $ - $ - $ 419 $54,015 $(54,347) $ (169) $ (82)
-------------------------------------------------------
Exercise of options
and warrants for 3,092
shares of Common Stock - - 31 135 - - 166
Issuance of 50 options to
consultants for services - - - 75 - - 75
Conversion of redeemable
convertible preferred
stock into 450 shares
of Series A
Preferred Stock......... 5 - - 9,412 - - 9,417
Issuance of warrants to
purchase 300 shares of
Common Stock in
connection with the
waiver of redemption
rights on Series A
Preferred Stock...........- - - 484 - - 484
Conversion of 121 shares of
Series A Preferred
Stock into 2,437 shares
of Common Stock.... (1) - 24 (23) - - -
Issuance of 240 Series B
Preferred Stock, net of
issuance costs of $141 - 2 - 5,857 - - 5,859
Foreign currency
translation adjustment.... - - - - - 70 70
Net loss................... - - - - (12,000) - (12,000)
-----------------------------------------------------
Balances as of
December 31, 1997......... 4 2 474 69,955 (66,347) (99) 3,989
Conversion of 329 shares
of Series A Preferred
Stock into 18,598 shares
of Common Stock...........(4) - 186 (182) - - -
Conversion of 240 shares
of Series B Preferred
Stock into 11,384
shares of Common Stock... - (2) 114 (112) - - -
Exercise of options
for 1,126 shares of
Common Stock.......... - - 11 511 - - 522
Accelerated vesting of
40 options to
consultants for
services................. - - - 33 - - 33
Foreign currency
translation
adjustment............... - - - - - (55) (55)
Net loss.................. - - - - (3,157) - (3,157)
------------------------------------------------------
Balances as of December
31, 1998................. - - 785 70,205 (69,504) (154) 1,332
Issuance of 300 warrants in
connection
with Long-term debt...... - - - 179 - - 179
Exercise of options
for 3,421 shares of
Common Stock.............. - - 34 1,802 - - 1,836
Exercise of 329 warrants
for 329 shares of
Common Stock............. - - 3 797 - - 800
Foreign currency
translation
adjustment............... - - - - - (58) (58)
Net loss.................. - - - - (1,740) - (1,740)
======================================================
Balances as of
December 31, 1999........$ - $ - $ 822 $72,983 $(71,244) $(212) $2,349
======================================================
See accompanying Notes to Consolidated Financial Statements
F-5
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands, except per share amounts)
Years ended December 31,
----------------------------------
1999 1998 1997
----------------------------------
Cash flows from operating activities
Net loss...................................... $ (1,740) $ (3,157) $ (12,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization............... 334 327 347
Warrant issuance costs...................... - - 484
Equity securities issued for services....... - 33 75
(Gain) loss on disposal of
property and equipment.................... (1) (2) 32
Changes in operating assets and liabilities
Accounts receivable, net.................. (429) (784) 15
Inventories............................... (7) 119 317
Prepaid expenses and other current assets. (72) 72 15
Other assets.............................. (49) (12) (32)
Accounts payable.......................... (184) (586) 692
Pre-petition liabilities.................. - - (878)
Accrued compensation...................... 38 (217) 107
Other accrued liabilities................. 70 (595) 623
Deferred revenue.......................... (616) 211 (1,537)
--------- -------- --------
Net cash used in operating activities......... (2,656) (4,591) (11,740)
--------- -------- --------
Cash flows from investing activities
Proceeds from sales and maturities of
short-term investments....................... - - 8,782
Purchase of short-term investments............ - - (8,035)
Acquisition of property and equipment......... (78) (45) (601)
Acquisition of property through
capital leases............................... 17 - -
Proceeds from the sale of property
and equipment................................ - 25 -
---------- -------- --------
Net cash provided by (used in)
investing activities......................... (61) (20) 146
---------- -------- --------
Cash flows from financing activities
Proceeds from issuance of short-term debt..... 96 145 525
Proceeds from issuance of long-term debt
- related party............................... 1,500 - -
Restricted cash related to short-term debt.... 250 (250) -
Principal payments on short-term debt......... (181) (490) (35)
Principal payments on capital lease
obligations................................. ( 5) ( 6) (11)
Proceeds from issuance of Series B
Convertible Preferred Stock,
net of cash issuance costs.................. - - 5,859
Proceeds from exercise of warrants............ 800 - -
Proceeds from exercise of stock options....... 1,836 522 166
---------- -------- --------
Net cash provided by (used in)
financing activities........................ 4,296 (79) 6,504
---------- -------- --------
Effect of exchange rate changes on cash....... - - 2
Net increase (decrease) in cash and
cash equivalents............................ 1,579 (4,690) (5,088)
Cash and cash equivalents at beginning
of year..................................... 795 5,485 10,573
---------- -------- --------
Cash and cash equivalents at end of year...... $ 2,374 $ 795 $ 5,485
========== ======== ========
See accompanying Notes to Consolidated Financial Statements
F-6
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies
The Company
Communication Intelligence Corporation (the "Company" or "CIC") develops
and markets natural input and electronic signature solutions aimed at the
emerging markets for pen-based computing, wireless Internet/information devices,
and enterprise applications including electronic commerce document automation
and corporate security. These emerging markets for CIC's products include all
areas of personal computing, as well as electronic commerce and communications.
The Company's research and development activities have given rise to
numerous technologies and products. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies". CIC's natural input
technologies are designed to allow users to interact with a computer or handheld
device through use of a pen. Such products include the Company's multi-lingual
Handwriter(R) Recognition System, and its Handwriter(R) for Windows(R) family of
desktop computing products. CIC's transaction and communication enabling
technologies provide a means for protecting electronic transactions and
discretionary communications. CIC has developed products for dynamic signature
verification, electronic ink data compression and encryption and a suite of
development tools and applications which the Company believes could increase the
functionality of its core products and facilitate their integration into
original equipment manufacturers' ("OEM") hardware products and computer systems
and networks.
Through its majority-owned joint venture in China (the "Joint Venture"),
the Company provides system integration services and markets its pen-based
business computer systems to Chinese businesses, government users and other
joint ventures.
For the five-year period ended December 31, 1999, the Company incurred
aggregate losses of $34 million, and, at December 31, 1999, the Company's
accumulated deficit was approximately $71 million. The Company has primarily
funded these losses through the sale of debt and equity and debt securities.
As of December 31, 1999, the Company's principal source of liquidity was
its cash and cash equivalents of $2,374. Although there can be no assurance, the
Company believes that its current resources, together with expected revenues,
will provide sufficient funds for planned operations for at least the next
twelve months. However, if the Company is unable to generate adequate cash flow
from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. Management believes that it will be able to reduce
discretionary spending if required.
Basis of Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles, and include the
accounts of CIC and its 90% owned Joint Venture in the People's Republic of
China. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-7
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Plan of Reorganization and Pre-Petition Liabilities
On July 18, 1994, the Company filed a voluntary petition for reorganization
and protection under Chapter 11 of the U. S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court, San Francisco District. The Joint
Venture did not file a petition for reorganization. On September 28, 1994, the
Company filed a Disclosure Statement and Plan of Reorganization (the "Plan") in
the United States Bankruptcy Court, San Francisco District. The Plan was
approved by the creditors on November 14, 1994, and the Company emerged from
Chapter 11 protection on that date.
The Plan provided for the payment in full, in cash, of all allowed
unsecured claims of creditors while leaving secured creditors unimpaired by
providing for their payment in compliance with the original terms and conditions
of their loans. Unsecured creditors were paid in three approximately equal
installments in each of February 1995, 1996 and 1997. Pursuant to the Plan,
amounts outstanding after February 1995 accrued simple interest at 8% per annum
through February 1996 and 10% per annum thereafter through February 1997. The
Plan also approved certain warrant offerings and stock purchase agreements as
described in Note 5.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, restricted cash, short-term debt, approximate fair value
due to their short maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity at the
date of purchase of three months or less to be cash equivalents.
Short-term investments are classified as "available-for-sale." For all
periods presented, cost of investments approximated fair market value. The cost
of securities sold is based on the specific identification method. The Company
had no short-term investments as of December 31, 1999 or 1998.
The Company's cash and cash equivalents, at December 31, consisted of
the following:
1999 1998
----------- ------------
Cash in bank........................................ $ 2,359 $ 668
Commercial paper.................................... 11 125
Money markets....................................... 4 2
-----------------------
Cash and cash equivalents......................... $ 2,374 $ 795
=======================
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
restricted cash, short-term investments and accounts receivable. The Company
maintains its cash, cash equivalents and short-term investments with various
financial institutions. This diversification of risk is consistent with Company
policy to maintain liquidity and ensure the safety of principal. Although such
amounts may exceed the F. D. I. C. limits, the Company limits the amount of
credit exposure with any one financial institution and believes that no
significant concentration of credit risk exists with respect to cash and cash
equivalents.
At December 31, 1999, the Joint Venture had approximately $649 in cash
accounts held by a financial institution in the People's Republic of China. The
Joint Venture deposits are not covered by any federal deposit insurance program
that is comparable to the programs applicable to U.S. deposits.
F-8
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
To date, accounts receivable have been derived principally from revenues
earned from end users, manufacturers, retailers and distributors of computer
products in North America, Europe and the Pacific Rim. The Company performs
periodic credit evaluations of its customers, and does not require collateral.
The Company maintains reserves for potential credit losses; historically, such
losses have been insignificant and within management's expectations.
One customer accounted for 95% of accounts receivable at December 31, 1999.
Two customers accounted for 46% and 24%, respectively, of accounts receivable at
December 31, 1998.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in first-out ("FIFO") method. Cost principally
includes direct materials. At December 31, 1999 and 1998, inventories consisted
of finished goods.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred.
Property and equipment, net at December 31, consists of the following:
1999 1998
---------- ---------
Machinery and equipment................................ $ 1,127 $ 1,121
Office furniture and fixtures.......................... 438 438
Leasehold improvements................................. 84 84
Purchased software..................................... 146 130
---------------------
1,795 1,773
Less accumulated depreciation and amortization......... (1,451) (1,234)
---------------------
$ 344 $ 539
=====================
Included in property and equipment as of December 31, 1999 and 1998 is $39
and $34, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $25 and $27 at December 31, 1999 and 1998,
respectively.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever
circumstances or events indicate such assets might be impaired. The Company
would recognize an impairment reserve in the event the net book value of such
assets exceeded the future undercounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 1999.
Software Development Costs
The Company capitalizes software development costs upon the establishment
of technological feasibility, subject to net realizable value considerations.
Capitalization commences upon the completion of a working model and ends on
general product release. As of December 31, 1999 and 1998, such costs were
F-9
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
insignificant and are included as a 1. Nature of Business, Basis of Presentation
and Summary of Significant Accounting Policies (continued)
component of "other assets" in the accompanying consolidated balance sheets.
Amortization expense related to capitalized software development costs in 1999
and 1998 amounted to $1 and $7, respectively. There was no amortization expense
related to capitalized software development costs in 1997.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has elected to continue to use the intrinsic value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted for transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes
Statement of Position No. 91-1, "Software Revenue Recognition". In March 1998,
the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4
defers, for one year, the application of certain passages in SOP 97-2 which
limit what is considered vendor-specific objective evidence ("VSOE") necessary
to recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. In December 1998, the AICPA issued Statement of
Position No. 98-9 ("SOP 98-9") Modifications of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 extends the
effective date of SOP 98-4 and provides additional interpretative guidance. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue recognition
practice when adopted. Adoption of the remaining provisions of SOP 97-2 did not
have a material impact on revenue recognition during 1999 and 1998,
respectivley.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided that no
significant obligations remain and the collection of the resulting receivable is
probable. The Company provides for estimated sales returns at the time of
shipment.
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are recognized
as products are licensed/sold by licensees. Deferred revenue in the accompanying
balance sheets reflects non-recurring engineering fees and advance royalty fees
received from the Company's licensees in advance of revenue recognition.
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies. Revenue is
recognized in accordance with the terms of the grants and agreements, generally
when collection is probable and related costs have been incurred.
One customer accounted for 27% of revenues in 1999. Three customers
accounted for 27%, 16% and 15%, respectively, of revenues in 1997. No other
customers accounted for greater than 10% of revenues in 1999, 1998 and 1997.
Research and Development
Research and development costs are charged to expense as incurred.
F-10
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1.Nature of Business, Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Advertising
The Company expenses advertising costs as incurred. Advertising expense
for the year ended December 31, 1999, 1998, and 1997 was $140,000, $162,000, and
$1,745,000, respectively.
Net Loss Per Share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the disclosure of both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares and dilutive potential common shares outstanding. All prior year
earnings per share data have been restated to reflect the provisions of SFAS
128. Potential common shares, including outstanding convertible preferred stock,
stock options and warrants, have been excluded from the calculation of diluted
earnings per share for all periods presented as their effect is anti-dilutive.
For the years ended December 31, 1998 and 1997, the per share results of
operations are reduced by the amortization of the beneficial conversion rate on
the Series A Preferred Stock and the cumulative dividend requirements earned by
the preferred stockholders.
Foreign Currency Translation
The Company considers the functional currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency financial statements are included as a component
of "accumulated other comprehensive loss" in the accompanying consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the end-of-period exchange rates except for non-monetary assets and
liabilities, which are translated at historical exchange rates. Revenues and
expenses are translated at the average exchange rates in effect during each
period except for those expenses related to balance sheet amounts which are
translated at historical exchange rates.
Net foreign currency transaction gains and losses are included in "interest
income and other income (expense), net" in the accompanying consolidated
statements of operations. The Company recorded a net foreign currency
transaction gain of $59, $58, and a loss of $101 for the years ended December
31, 1999, 1998 and 1997, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss and
credit carryforwards. A valuation allowance is provided against deferred tax
assets for which it is more likely than not that the asset will not be realized.
2. Chinese Joint Venture
The Company currently owns 90% of a joint venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). In June 1998, the registered capital of the
Joint Venture was reduced from $10,000 to $2,550. As of December 31, 1999, the
Company had contributed an aggregate of $1,800 in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had contributed certain land use rights. Following the
reduction in registered capital of the Joint Venture, neither the Company nor
the Agency are required to make further contributions to the Joint Venture.
Prior to the reduction in the amount of registered capital, the Joint Venture
was subject to the annual licensing requirements of the Chinese government.
Concurrent with the reduction in registered capital, the Joint Venture's
business license has been renewed through October 18, 2043.
F-11
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Annual financial statements for prior periods have been
reclassified, as required.
The accumulated other comprehensive loss at December 31, 1999 and 1998
consisted of cumulative foreign currency translation adjustments.
4. Debt
In May 1997, the Company purchased office furniture and a security system
with an approximate value of $209 from a third party. The Company paid $100 in
cash and signed an unsecured note for $109 due in monthly installments through
May 1998. The note bore interest on the unpaid balance at a rate of 10% per
annum. The note was paid in full in May 1998.
In June 1998, the Company's 90% owned Joint Venture borrowed the equivalent
of $145, denominated in Chinese currency, from a Chinese bank. The loan bore
interest at 9% and was due on June 30, 1999. The note was repaid in February
1999. The borrowings were secured by a $250 US dollar denominated deposit held
by the bank.
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank. The
loan bears interest at 5.12% and is due on March 2, 2000. The borrowings do not
require a compensating balance. The note was repaid in full in January, 2000.
Interest expense for the year ending December 31, 1999, 1998, and 1997 was
$53,000, $19,000, and $51,000, respectively. Interest expense associated with
related party debt was $52,000 for the year ended December 31, 1999. There was
no related party debt in the years ended December 31, 1998 and 1997.
5. Stockholders' Equity
Private Placement
In June 1996, the Company completed a private placement (the "June Private
Placement") of 600 shares of the Company's Common Stock, at a price of $4.50 per
share to certain institutional and other investors (collectively, the
"Subscribers"). The net proceeds to the Company were approximately $2,408, net
of cash issuance costs of $181 and $111 of value ascribed to 30 warrants to
purchase common stock issued to the placement agent. The warrants expire five
years from the date of issuance and have an exercise price of $4.50 per share,
subject to adjustments for anti-dilution. The fair value ascribed to the
warrants was estimated on the date of issuance using the Black-Scholes pricing
model with the following assumptions: risk-free interest rate of 6.69%; expected
life of 5 years; expected volatility of 102%; and expected dividend yield of 0%.
The Company agreed to register the securities which were issued in conjunction
with the June Private Placement and which may be issued upon exercise of the
placements agent's warrants. The Registration Statement on Form S-3 filed by the
Company to effect the registration of these securities was declared effective on
December 24, 1996 (the "Effective Date").
Pursuant to the June Private Placement agreement, the Company agreed to
issue additional shares (the "Extra Shares") of its Common Stock to the
Subscribers if the average of the daily closing prices of the Company's Common
Stock for the twenty business days prior to two business days before the
Effective Date was less than $4.50 per share. In December 1996, the Company
issued 196 Extra Shares for no additional consideration to the Subscribers who
did not exchange the shares of Common Stock which they purchased in the June
Private Placement for the Company's Series A
F-12
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
5. Stockholders' Equity (continued)
Private Placement
preferred Stock (as defined below). The Registration Statement on Form S-3 filed
by the Company in connection with the June Private Placement also effected the
registration of the Extra Shares.
Convertible Preferred Stock
In December 1996, the Company completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A Preferred Stock") at $25.00 per share to certain institutional and
other investors. On March 28, 1997, and effective as of December 31, 1996,
holders of 100% of the then issued and outstanding Series A Preferred Stock
executed a waiver of certain provisions of the Registration Rights Agreement
(the "Agreement") entered into in connection with the December Private
Placement. Under the waiver, these holders irrevocably waived any redemption
obligations of the Company with respect to the Series A Preferred Stock in
exchange for the issuance to such holders of 300 warrants to purchase the
Company's Common Stock, allocated amongst the holders on a pro-rata basis. The
warrants expire five years from the effective date of issuance and have an
exercise price of $2.00 per share, subject to adjustments for anti-dilution. On
November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series B
Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually and quarterly, respectively, when payable
(whether or not declared). The dividends could have been paid in cash or
additional shares of preferred stock (with each additional share valued at
$25.00 per share), at the Company's option. The Company paid the required
dividends in additional shares of preferred stock.
Each share of Series A Preferred Stock and Series B Preferred Stock was
convertible by the holders into shares of the Company's Common Stock. All of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock were
converted into shares of common stock by November 1998.
Common Stock Options
The Company adopted two stock option plans in 1991 (the 1991 Stock Option
Plan and the 1991 Non-discretionary Plan, collectively, the "1991 Plans").
Incentive and non-qualified options under the 1991 Plans may be granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans.
In conjunction with the approval of the Company's plan of reorganization,
the Company adopted the 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan
allows directors, officers and employees to be eligible for grants of incentive
and non-qualified stock options. In May 1997, the stockholders approved an
increase of 1,000 shares to the number of shares authorized for issuance under
the 1994 Plan. Accordingly, a total of 6,000 shares of Common Stock are
authorized for issuance under the 1994 Plan. The exercise prices of options
under the 1994 Plan are determined by a committee of the Board of Directors,
but, in the case of an incentive stock option, the exercise price may not be
less than 100% of the fair market value of the underlying Common Stock on the
date of grant. Non-qualified options may not have an exercise price of less than
85% of the fair market value of the underlying Common Stock on the date of
grant. Options under the 1994 Plan 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 anniversaries of
the date of grant, respectively. Options under the 1994 Plan are generally
exercisable over a period not to exceed seven years.
F-13
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
5. Stockholders' Equity (continued)
Common Stock Options
In December 1994, for services rendered prior to and during the Company's
Chapter 11 proceedings, options to purchase 180 shares of Common Stock at $0.50
per share were granted to three directors of the Company under non-plan option
agreements. In addition, a non-plan option to purchase 100 shares of Common
Stock at $0.50 per share was granted on December 28, 1994 to a newly elected
director and Chairman of the Finance Committee. The newly elected director also
received an option, vesting one year from date of grant, to purchase 50 shares
of Common Stock at an exercise price of $0.50 per share pursuant to the
Company's 1991 Non-discretionary Plan. The non-plan options generally vest over
four years. For those non-plan options which vest over four years, 20% of the
total non-plan options granted vest on the first anniversary of the date of
grant and an additional 20%, 20%, and 40% of the total non-plan options granted
vest on the second, third, and fourth anniversaries of the date of grant,
respectively. Non-plan options under the 1994 Plan are generally exercisable
over a period not to exceed seven years. As of December 31, 1999, 6,368 non-plan
options were outstanding with a weighted average exercise price of $0.75 per
share. Of such non-plan options, 1,807 were exercisable at December 31, 1999
with a weighted average exercise price of $0.75 per share.
On June 1, 1994, the Company negotiated with employees to reduce their
salaries through August 31, 1994. Those employees who agreed to continue their
employment at the reduced wage were granted certain option rights to purchase
Common Stock (the "Options"). Options to purchase 2,210 shares of Common Stock
were granted at an average exercise price of $0.57 per share under this
arrangement, of which 377 Options were granted to officers under the 1991 Plan,
with the remaining Options granted outside of the plans. The Options were
immediately exercisable and have a term of seven years from the date of grant.
As of December 31, 1999, 1,216 Options had been exercised at a weighted average
exercise price of $0.50 per share and 573 Options with a weighted average
exercise price of $0.81 per share had been forfeited. The following table
summarizes information about the Options outstanding and exercisable at December
31, 1999 which were granted outside of the Plans:
Weighted Average
Range of Exercise Prices Options Remaining
Outstanding and Contractual
Exercisable Life (Years) Exercise Price
---------------------------------------------------
$0.30 - $1.05.......... 44 1.6 $0.64
=========
In June 1999, the Company adopted and the shareholders approved a new stock
option plan (the "1999 Plan"). Incentive and non-qualified options under the
1999 Plan may be granted to employees, officers, and consultants of the Company.
There are 2,000 shares of Common Stock authorized for issuance under the 1999
Plan. The options have a ten year life and vest quarterly over three years. At
December 31, 1999 there were 1,600 shares available for future grants.
F-14
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
5. Stockholders' Equity (continued)
Common Stock Options
Information with respect to the Company's 1991 Plans the 1994 Plan and the
1999 Plan is summarized below:
Year Ended December 31,
------------------------------------------
1999 1998
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------
Outstanding at beginning
of period............................... 4,540 $0.82 6,016 $1.15
Granted................................. 3,745 $0.94 1,021 $1.03
Exercised...............................(2,723) $0.55 (804) $0.50
Forfeited...............................(2,018) $1.61 (1,693) $1.62
======= =========
Outstanding at period end............... 3,544 $1.02 4,540 $1.06
======= =========
Options exercisable at period end...... 784 $1.04 3,243 $0.82
======= =========
Weighted average grant-date
fair value ofoptions granted
during the period.................... $1.02 $0.73
======= =========
The following table summarizes information about stock options outstanding
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 1999:
Weighted Average
-------------------------------
Remaining
Options Contractual Life
Range of Exercise Prices Outstanding (Years) ercise Price
- -------------------------------------------------------------------------------
$0.50.......................... 196 2.5 $0.50
$0.51 - $2.00.................. 3,229 6.6 $0.99
$2.01 - $2.99.................. 99 3.5 $2.63
$3.00.......................... 20 3.7 $3.00
--------------
3,544
The following table summarizes information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 1999:
Weighted
Options Average
Range of Exercise Prices Exercisable Exercise Price
--------------- ---------------
$0.50.............................. 170 $0.50
$0.51 - $2.00...................... 526 $0.94
$2.01 - $2.99...................... 68 $2.57
$3.00.............................. 20 $3.00
----------------
784
===============
F-15
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
5. Stockholders' Equity (continued)
Common Stock Options
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
Company has elected to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, to
account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.
Had compensation cost for the Company's option plans been determined based
on the fair value of the options at the date of grant, as prescribed by SFAS
123, the Company's net loss available to common stockholders and basic and
diluted net loss per share available to common stockholders for the year ended
December 31, would have been as follows:
1999 1998 1997
--------- --------- ----------
Net loss available to common stockholders:
As reported.............................. $ (1,740) $ (3,592) $(16,940)
Pro forma................................ $ (3,316) $ (4,863) $(18,024)
Basic and diluted net loss per share
available to common stockholders:
As reported.............................. $ (0.02) $ (0.06) $ (0.37)
Pro forma................................ $ (0.04) $ (0.09) $ (0.40)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods: risk-free interest
rate of 5.4% for 1999, 4.5% for 1998 and 6.2% for 1997; an expected life of 4
years for 1999 and 1998 and 5 years for 1997, respectively; expected volatility
of 100% all periods and dividend yield of 0% for all periods.
Stock options generally vest over three to four years and the Company
expects to make additional option grants each year, the Company believes the
above pro forma disclosures are not representative of the pro forma effects on
reported results of operations to be expected in future periods.
Warrants
In September 1994, in connection with a $1,000 bridge loan provided to the
Company by an investor (who became a director), the Company granted to the
investor warrants to purchase 2,000 shares of Common Stock at an exercise price
of $0.50 per share. In January 1997, the Company issued approximately 1,686
shares of Common Stock in connection with the net exercise of the warrants by
the investor's assignee. In June 1995, the Company entered into a financing
agreement with the investor providing for loans to the Company of up to $2,500.
Upon signing the agreement, the Company issued to the investor 625 warrants to
purchase Common Stock, and, in each month in which the loan was available, the
Company was obligated to issue to the investor 156 warrants to purchase shares
of common stock. Under the financing agreement, a total of 1,563 warrants to
purchase Common Stock were issued to the investor at an exercise price of $1.00
per share. In January 1997, the Company issued approximately 1,073 shares of
Common Stock in connection with the investor's net exercise of the
aforementioned warrants.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the then issued and outstanding shares of Series A
Preferred Stock executed a waiver to certain provisions of the registration
rights agreement (the "Agreement") entered into in connection with the December
Private Placement. Under the waiver, these holders irrevocably waived any
redemption obligation of the Company with respect to its Series A Preferred
Stock in exchange for the issuance to the holders of warrants to purchase the
300 shares of the Company's Common Stock, allocated amongst the holders on a
pro-rata basis. The warrants expire five years from the date of issuance and
have an
F-16
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
5. Stockholders' Equity continued)
Warrants
exercise price of $2.00 per share, subject to adjustment for anti-dilution. The
Company has ascribed a value of $484 to these warrants, which was recorded as an
expense in the Company's statement of operations during the first quarter of
1997. The fair value ascribed to the warrants was estimated on the date of
issuance using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 6.60%; expected life of 5 years; expected volatility
of 104%; and expected dividend yield of 0%. As a result of the aforementioned
waiver, the shares of Series A Preferred Stock, which were classified as
redeemable securities at December 31, 1996, were reclassified as convertible
preferred stock at March 31, 1997 and, as such, are included in stockholders'
equity at December 31, 1997.
On October 20, 1999, in connection with the 1999 Loan (as defined below)
the Company issued to the charitable remainder annuity trust warrants to
purchase 300 shares of the Company's common stock. The warrants expire two years
from the effective date of issuance and have an exercise price of $1.09 per
share. The Company ascribed a value of $179 to these warrants, which will be
amortized to the Company's results of operations over the life of the warrant.
The fair value ascribed to the warrants was estimated on the date of issuance
using the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 5.50%; expected life of 2 years; expected volatility of 99%;
and expected dividend yield of 0%.
Warrants to purchase a total of 876 shares of Common Stock were outstanding
as of December 31, 1999, and have a weighted average remaining contractual life
of 2.8 years and a weighted average exercise price of $2.27 per share.
As of December 31, 1999, 10,832 shares of Common Stock were reserved for
issuance upon exercise of outstanding options and warrants.
6. Related Party Transactions
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the Company's
Common Stock, bearing interest at the lesser of the highest marginal rate per
annum applicable to the Company's borrowings or the highest rate allowable by
law (10% per annum at December 31, 1997). On August 14, 1998, the Company
entered into an employment agreement (the "Employment Agreement") with the
aforementioned former officer. Under the Employment Agreement, the former
officer will provide consulting services to the Company through December 15,
2001. In exchange for these services, $110 of the note receivable from the
officer shall be forgiven on a monthly basis over the period commencing August
15, 1998 and ending December 15, 2001. The remaining, $100 of the note
receivable from the officer will be forgiven on December 15, 2001 if the officer
has performed all the required services under the Agreement. The Agreement will
terminate on December 15, 2001.
On June 16, 1999, the Company obtained a bridge loan, (the "Bridge Loan")
in the amount of $500,000 from a charitable remainder annuity trust, of which a
director and officer of the Company is a trustee. The Bridge Loan was increased
by $150,000 and $100,000 in August and September 1999, respectively. Amounts
outstanding under the Bridge Loan bore interest at the prime rate plus 2% with
an effective rate of . The loan was secured by the Company's cash, accounts
receivable and other receivables as then owned or thereafter acquired by the
Company. The Bridge Loan plus accrued interest was due December 31, 1999. In
October 1999, the Bridge Loan was converted to long-term debt as discussed
below.
On October 20, 1999, the Company entered into a loan agreement with the
same charitable remainder annuity trust, whereby the then existing Bridge Loan
of $750,000 was converted into a long term loan in the amount of $1,500,000 (the
"1999 Loan"). The 1999 Loan is secured by a first priority security interest in
all of the Company's assets as now owned or hereafter acquired by the Company.
The 1999 Loan bears interest at the rate of 2% over the prime rate as published
by Citibank from time to time, 10.25% at December 31, 19999. The note is due
January 31, 2002. Interest on the principal amount under the 1999 Loan is
payable quarterly. The 1999 Loan can be re-paid in whole at any time or in part
at any time
F-17
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
6. Related Party Transactions (continued)
without penalty. Any partial payment must be in the principal amount of $100 or
a multiple thereof. The interest rate at December 31, 1999 was 10.25%.
On October 20, 1999, in connection with the 1999 Loan the Company issued to
the charitable remainder annuity trust warrants to purchase 300,000 shares of
the Company's common stock. The warrants expire October 20, 2001 and have an
exercise price of $1.09 per share. The Company ascribed a value of $179,000 to
these warrants, which will be amortized to the Company's results of operations
over the life of the debt. The fair value ascribed to the warrants was estimated
on the date of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 5.50%; expected life of 2 years;
expected volatility of 99%; and expected dividend yield of 0%.
In 1997, a director of the Company increased the amount of time devoted to
the affairs of the Company. The director received consulting fees of $150 in
1999, 1998 and 1997, including fees for office expenses.
7. Commitments
Operating Lease Commitments
The Company currently leases its principal facilities (the "Principal
Offices) in Redwood Shores, California, pursuant to a sublease that expires in
2001. In addition, the Company subleases to third parties certain space adjacent
to the Principal Offices. The Joint Venture leases approximately 1,000 square
feet in Nanjing, China. In addition to monthly rent, the U.S. facilities are
subject to additional rental payments for utilities and other costs above the
base amount. Facilities rent expense was approximately $376, $420, and $892 in
1999, 1998, and 1997, respectively. Sublease income was approximately $209,
$128, and $188 for the years ended December 31, 1999, 1998, and 1997,
respectrively.
Future minimum lease payments under noncancelable operating leases are
approximately, $517, and $431 for the years ending December 31, 2000, and 2001,
respectively. The Company's rent expense is expected to be reduced by
approximately $98 in 2000 in connection with the subleases described above.
Future minimum payments required under capital leases, which expire in 2000, are
insignificant at December 31, 1999.
8. Income Taxes
As of December 31, 1999, the Company had federal net operating loss
carryforwards available to reduce taxable income through 2012 of approximately
$52,442. The Company also had federal research and investment tax credit
carryforwards of approximately $315 which expire at various dates through 2010.
Deferred tax assets and liabilities at December 31, consist of the
following:
1999 1998
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards................ $ 20,977 $ 16,210
Credit carryforwards............................ 315 430
Deferred income................................. 13 221
Other, net...................................... 844 877
-------------- -------------
Total deferred tax assets....................... 22,149 17,740
-------------- -------------
22,149 17,740
Valuation allowance............................. (22,149) (17,740)
-------------- -------------
Net deferred tax assets......................... $ - $ -
============== =============
F-18
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
8. Income Taxes (continued)
A full valuation allowance has been established for the Company's net
deferred tax assets since the realization of such assets through the generation
of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating losses and tax credit carryforwards may be impaired or limited in
certain circumstances. These circumstances include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a three
year period. During 1997, the Company experienced stock ownership changes which
could limit the utilization of its net operating loss and research and
investment tax credit carryforwards in future periods.
9. Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments and was required to be adopted in
periods beginning after December 15, 1997. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's information has been broken down into two Segments - Handwriting
recognition software and Systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs charged to
each of the operating segments.
The Company identifies reportable segments by classifying revenues into two
categories Handwriting recognition and system integration. Handwriting
recognition software is an aggregate of five revenue categories. All Handwriting
recognition software is developed around the Company's core technology. System
integration represents the sale and installation of third party computer
equipment and systems that utilize the Company's products. All sales above
represent sales to external customers.
The table below presents information about reporting segments for the years
ended December 31,:
Handwriting Systems
Recognition Integration Total
----------------- ---------------- -----------------
1999
Revenues $ 4,898 $ 1,620 $ 6,518
Loss from Operations $ (1,078) $ (44) $ (1,722)
Total assets $ 3,523 $ 1,440 $ 4,963
Depreciation and
amortization $ 289 $ 45 $ 334
1998
Revenues $ 2,702 $ 1,879 $ 4,581
Loss from Operations $ (2,561) $ (684) $ (3,285)
Total assets $ 2,160 $ 1,194 $ 3,354
Depreciation and
amortization $ 283 $ 44 $ 327
1997
Revenues $ 4,040 $ 1,476 $ 5,516
Loss from Operations $ (11,609) $ (18) $ (11,627)
Total assets $ 6,192 $ 1,299 $ 7,491
Depreciation and
amortization $ 314 $ 33 $ 347
F-19
COMMUNICATION INTELLIGENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
9. Segment Information (continued)
The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31,:
Revenues Long Lived Assets
------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
----------- --------- --------- --------- ---------- -----------
U.S. $ 4,898 $ 2,702 $ 4,039 $ 261 $ 416 $ 655
China 1,620 1,879 1,476 83 123 143
Other 1
========== ========= ========= ========== ========== ==========
Total $ 6,518 $ 4,581 $ 5,516 $ 344 $ 539 $ 798
========== ========= ========= ========== ========== ==========
The Company's export sales from U.S. operations were 36%, 16%, and 40% of
total revenues in 1999, 1998, and 1997, respectively.
10. Statement of Cash Flows Data
December 31,
------------------------------------
1999 1998 1997
----------- ------------ -----------
Schedule of non-cash transactions:
Conversion of redeemable convertible
preferred stock into Series A
Preferred Stock....................... $ - $ - $ 9,417
Fair market value of warrants issued
connection with long-term debt - related
party................................. $ 176
Supplemental disclosure of cash flow information:
Interest paid in 1999, 1998, and 1997 was $4, $19, and $106, respectively.
11. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution plan covering all
employees meeting certain eligibility requirements. Contributions made by the
Company are determined annually by the Board of Directors. To date, the Company
has made no contributions to this plan.
12. Subsequent event
On January 20, 2000, the charitable remainder trust, of which a director
and officer of the Company is a trustee, exercised all 300,000 warrants issued
in connection with the $1,500,000 long-term debt. The warrants were exercised
under the cashless exercise provision in the warrant agreement. The Company
issued 255,186 shares ofcommon stock in exchange for the 300,000 warrants.
F-20
EXHIPIT 10.20
SCHEDULE II
Communication Intelligence Corporation
Valuation and Qualifying Accounts and Reserves
(In thousands)
Years Ended December 31, 1997, 1998, 1999
Balance Charged to
At Beginning Costs and Balance
Of Period Expense At End
Deductions Of Period
Year ended December 31, 1997:
Accounts receivable reserves... $85 $195 $(243) $46
Year ended December 31, 1998:
Accounts receivable reserves.. $46 $236 $(108) $174
Year ended December 31, 1999:
Accounts receivable reserves... $174 $38 $(200) $12
S-1
EXHIBIT 10.20
AMENDED AND RESTATED LOAN AGREEMENT
AMENDED AND RESTATED LOAN AGREEMENT (the "Agreement") dated as of October 20,
1999 between The Philip S. Sassower 1996 Charitable Remainder Annuity Trust (the
"Lender"), and Communication Intelligence Corporation, a Delaware corporation
(the "Borrower").
----------------------------
Subject to the terms and conditions hereinafter set forth, the Lender is making
a loan to the Borrower in the aggregate principal amount of $1,500,000, and the
Borrower is willing to accept and repay such loan as herein provided.
This Agreement amends and restates in its entirety that
certain loan agreement dated June 15, 1999, as amended, between the Lender and
the Borrower (the "Prior Agreement"), and such Prior Agreement is hereby
terminated.
In consideration of the mutual promises and covenants in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
I. LOANS
1.1 Loans. Subject to the terms and conditions hereof, the Lender hereby loans
(the "Loan") to the Borrower until the earlier of January 31, 2002, or the
date on which the Loan is paid in full pursuant to Section 2.2 of this
Agreement (such earlier date being the "Maturity Date"), an aggregate
principal amount of $1,500,000. Borrower hereby acknowledges and agrees
that Lender has previously made loans to Borrower under the Prior Agreement
in the aggregate principal amount of $750,000 (collectively, the "Prior
Notes") and that the outstanding principal amount under the Prior Notes is
included in the determination of the aggregate principal amount outstanding
under the Loan. Borrower further acknowledges and agrees that all accrued
and unpaid interest with respect to the Prior Notes shall be due and
payable on December 31, 1999. The Loan shall mature on the Maturity Date
and bear interest at a rate per annum equal to 2% per annum in excess of
the rate per annum publicly announced from time to time by Citibank, N.A.
as its prime rate in effect at its principal office in New York City, each
such change in the interest rate on the Loan to take effect simultaneously
with the corresponding change in such prime rate.
1.2 The Note. (a) The Borrower's obligation to repay the Loan shall be
evidenced by a promissory note, substantially in the form attached hereto
as Exhibit A (such note being individually referred to as a "Note"), dated
the date of the Loan and maturing on the Maturity Date.
EXHIBIT 10.20
(b) Subject to Section 1.1, interest on the Loan shall be payable in arrears on
each March 31, June 30, September 30 and December 31, commencing December
31, 1999 and all accrued and unpaid interest on the outstanding balance of
the Loan shall be due and payable on the Maturity Date. Overdue principal
and, to the extent permitted by law, overdue interest with respect to the
Loan shall bear interest, payable on demand, at the highest rate of
interest permitted by applicable law.
1.3 Payments. (a) The Borrower may, at its option, prepay the principal amount
of the Loan (without premium), in whole at any time or in part from time to
time, together with accrued interest to the date of prepayment on the
amount being prepaid. Each partial prepayment pursuant to this paragraph
(a) shall be in the principal amount of $100,000 or any multiple thereof.
(b) Notwithstanding any other provision of this Agreement to the contrary, on
the Maturity Date, the entire principal amount of the Loan, together with
accrued interest thereon through the date of payment, shall be paid in
full.
(c) All payments and prepayments made by Borrower hereunder shall be made in
immediately available funds.
II. TERMINATION OR REDUCTION OF LOAN
2.1 The Borrower may, without penalty, at any time repay the principal amount
of the Loan then outstanding, together with accrued interest to the date of
such repayment and shall pay all other amounts owed to the Lender under
this Agreement.
2.2 The Borrower hereby covenants and agrees that to the extent the Company's
cash, cash equivalents and marketable securities, as determined in
accordance with generally accepted accounting principles consistently
applied, in any quarter commencing March 31, 2000 and ending on the
Maturity Date exceeds $500,000, such excess shall be applied to reduce the
Loan on a dollar for dollar basis.
III. OTHER DOCUMENTS
3.1 On the date hereof, Borrower has executed and delivered to the Lender
warrants (the "Warrants") registered on the books of Borrower in the name
of the Lender and in the form annexed hereto as Exhibit B to purchase
300,000 shares of Borrower's common stock (the "Common Stock").
3.2 The Borrower has executed and delivered to the Lender on the date hereof a
security agreement (the "Security Agreement") in the form annexed hereto as
Exhibit C.
IV. REPRESENTATIONS OF THE BORROWER
The Borrower hereby represents and warrants to the Lender as follows:
4.1 Organization and Standing. The Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of
2
EXHIBIT 10.20
Delaware and has full corporate power and authority to conduct its business
as presently conducted and as proposed to be conducted by it and to enter
into and perform this Agreement, the Security Agreement, the Note and the
Warrants and to carry out the transactions contemplated hereby and thereby.
The Borrower and each Subsidiary are duly qualified and in good standing in
each jurisdiction in which the character or location of its properties or
nature of its business makes such qualification necessary.
4.2 Capitalization. The authorized and outstanding capital stock of the
Borrower is as described in the Borrower's Annual Report on Form 10-K for
the year ended December 31, 1999 (the "Annual Report"). Borrower has
heretofore delivered to Lender a true and complete copy of the Annual
Report. Except as set forth in the Annual Report or as provided in this
Agreement, (i) no subscription, warrant, option, convertible security or
other right (contingent or otherwise) to purchase or acquire any shares of
capital stock of the Borrower is authorized or outstanding, (ii) there is
no commitment of the Borrower to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to
holders of any shares of its capital stock any evidence of indebtedness or
assets of the Borrower, and (iii) the Borrower has no obligation
(contingent or otherwise) to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any dividend
or make any other distribution in respect thereof. Except as provided in
the Annual Report, no person or entity is entitled to (i) any preemptive or
similar right with respect to the issuance of any capital stock of the
Borrower, or (ii) any rights with respect to the registration of any
capital stock of the Borrower under the Act.
4.3 Subsidiaries. On the date hereof, the Borrower has three Subsidiaries, CIC
Japan, CICI Limited and CICI Limited II. The only asset of CICI Limited is
a 90% interest in a joint venture in the Peoples Republic of China (the
"Joint Venture"). No Subsidiary is material to the business of the
Borrower, nor possesses significant or exclusive rights with respect to the
Intellectual Property (as hereinafter defined). As used herein, the term
"Subsidiary" shall mean any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are owned directly
or indirectly through one or more intermediaries, or both, by the Borrower.
4.4 Issuance of Shares. The issuance, sale and delivery of the Note, the
Warrants and the shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") in accordance with this Agreement have been
duly authorized by all necessary corporate action on the part of the
Borrower, and the Warrants and the Warrant Shares, when issued, sold and
delivered against payment therefor in accordance with the provisions of
this Agreement, will be duly and validly issued, fully paid and
nonassessable and will not be issued in violation of any preemptive or
similar rights. The Borrower will issue the Warrants and, upon exercise of
the Warrants, the Warrants Shares, free and clear of all Liens (as defined
in Section 4.8 hereof).
4.5 Authority. The execution, delivery and performance by the Borrower of this
Agreement, the Security Agreement and the Warrants have been duly
authorized by all necessary corporate action, and this Agreement, the
Security Agreement and the Warrants have been duly executed and delivered
3
EXHIBIT 10.20
by the Borrower. This Agreement, the Security Agreement and the Warrants
constitute the valid and binding obligations of the Borrower enforceable in
accordance with their respective terms, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights in general and by general
equity principles (regardless of whether such enforcement is considered in
a proceeding in equity or at law). The execution, delivery and performance
of this Agreement, the Security Agreement, the Note and the Warrants and
the consummation of the transactions contemplated hereby and thereby do not
and will not violate any provision of law applicable to Borrower or any
Subsidiary and do not and will not conflict with or result in any breach of
any of the terms, conditions or provisions of, or constitute a default
under, the certificate of incorporation or bylaws of the Borrower or any
Subsidiary, or any indenture, lease, agreement or other instrument to which
the Borrower or any Subsidiary is a party or by which it or any of its
properties or assets is bound, or any decree, judgment, order, statute,
rule or regulation applicable to the Borrower or any Subsidiary.
4.6 Governmental Consents. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
governmental authority is required on the part of the Borrower or any
Subsidiary in connection with the execution and delivery of this Agreement,
the Security Agreement, the offer, issue, sale and delivery of the Note,
the Warrants or the Warrant Shares, or the other transactions contemplated
hereby or thereby, except for such filings as shall have been made prior to
and shall be effective on and as of the date hereof.
4.7 Litigation. Except as disclosed in the Annual Report, there is no action,
suit, proceeding or investigation pending, or threatened, against the
Borrower or any Subsidiary which questions the validity of this Agreement,
the Security Agreement, the Note or the Warrants or the right of the
Borrower to execute, deliver and perform any of the foregoing, or which
might result, either individually or in the aggregate, in any material
adverse change in the assets, results of operations, conditions (financial
or otherwise), net worth, business or prospects of the Borrower and its
Subsidiaries taken as a whole (a "Material Adverse Change").
4.8 Property and Assets. Each of the Borrower and its Subsidiaries has good
title to all of its properties and assets, including all properties and
assets reflected in the financial statements included with the Annual
Report, except those disposed of since the date thereof in the ordinary
course of business consistent with past practice, and none of such
properties or assets is subject to any mortgage, pledge, lien, security
interest, lease, charge, claim or encumbrance ("Lien") other than those the
material terms of which are described in the Annual Report or the financial
statements included therein.
4.9 Compliance. Each of the Borrower and its Subsidiaries has, in all material
respects, complied with all laws, regulations and orders applicable to its
present and proposed business as described in the Annual Report and has all
permits, consents, approvals, authorizations, orders, registrations,
qualifications and licenses ("Licenses") of and from all public, regulatory
or governmental agencies and bodies necessary to own its properties and
conduct its existing and proposed business and is in compliance in all
material respects with such Licenses.
4
EXHIBIT 10.20
4.10 Financial Statements. The financial statements included in the Annual
Report and in the Borrower's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (the "Quarterly Report"), are true and correct in all
material respects and present fairly the financial position, results of
operations and changes in financial position of the Borrower as of the
dates and for the periods indicated in conformity with generally accepted
accounting principles consistently applied ("GAAP") during such periods. As
of December 31, 1998, the Borrower did not have any direct or indirect
indebtedness, liability, claim, loss, damage, deficiency or obligation,
whether fixed or unfixed, liquidated or unliquidated, secured or unsecured,
contingent or otherwise of a kind required by GAAP to be set forth on a
financial statement or in the notes thereto ("Liabilities") that were not
fully and adequately reflected on or reserved against the Borrower's
balance sheet at such date included in the Annual Report (the "Balance
Sheet"). Except as disclosed in the Quarterly Report, since December 31,
1998, the Borrower has not incurred any Liability, other than Liabilities
incurred in the ordinary course of business, none of which, individually or
in the aggregate, are material.
4.11 Absence of Certain Changes. Except as disclosed in the Annual Report or the
Quarterly Report, since December 31, 1998, each of the Borrower and its
Subsidiaries has conducted its business in the ordinary and usual course
consistent with past practices and has not (i) transferred to any other
person, corporation or entity any Intellectual Property (as hereinafter
defined), except for licenses granted by the Company to third parties in
the ordinary course of business consistent with past practices, (ii) made
any loan, advance, capital contribution or investment in any person or
entity, (iii) terminated or amended in any material respect any material
contract to which the Borrower or such Subsidiary is a party or by which it
is bound, (iv) materially increased the compensation payable to any
employee of the Borrower or such Subsidiary except in the ordinary course
of business, consistent with past practice, (v) suffered any material
damage, destruction or other loss (whether or not covered by insurance)
affecting its business or assets, (vi) made any material change in its
business policies, (vii) taken any action or agreed to take any action
which, if taken prior to the date hereof, would have made any
representation or warranty herein untrue, or (viii) suffered any Material
Adverse Change.
4.12 No Defaults. Neither the Borrower nor any Subsidiary is in default and, to
Borrower's knowledge, no other party is in default, nor does there exist
any event that, with notice or lapse of time or both, would constitute a
default or give rise to rights of termination, under any agreement or other
instrument to which the Borrower or any Subsidiary is a party or by which
it or its properties are bound. All such agreements and instruments are
valid, subsisting in full force and effect and binding on the parties.
4.13 Intellectual Property. Except as disclosed in the Annual Report or the
Quarterly Report, the Borrower owns, free and clear of any Liens, all trade
patents, trademarks, copyrights, service marks, trade secrets,
manufacturing and process know-how, processes, unpatented inventions,
technical information, technology, designs and other intellectual property
utilized in the conduct of its business as described in the Annual Report
(the "Intellectual Property"). To best of the Borrower's knowledge, the
Intellectual Property does not conflict with or infringe upon the rights of
others.
5
EXHIBIT 10.20
4.14 Accuracy. Neither the representations and warranties contained herein or in
the Security Agreement, or the statements made in the Annual Report or the
Quarterly Report, nor in any other agreement between the Borrower and the
Lender made in connection with the transactions contemplated hereby contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
4.15 Full Disclosure. There is no fact or circumstance which the Borrower has
not disclosed to Lender in writing that could reasonably result in a
Material Adverse Change.
V. REPRESENTATIONS OF THE LENDER
Lender represents and warrants to the Borrower as follows:
5.1 Investment Intent. Lender is acquiring the Note and the Warrants (and when
issued, the Warrant Shares) for its own account for investment and not with
a view to, or for sale in connection with, any distribution thereof, nor
with any present intention of distributing or selling the same except, in
each case, distributions or sales made in accordance with the Securities
Act of 1933, as amended (the "Act").
5.2 Speculative Investment. Lender is aware that an investment in the Borrower
is highly speculative. Lender understands that there are significant risks
in this investment, including, without limitation, the impact on the
Borrower of the highly competitive market in which it operates, the
uncertainty with respect to the Borrower's obtaining additional financing
which it may require, the Borrower's reliance on the efforts of key
individuals, the potential impact of the regulatory climate in which the
Borrower operates and the significant restrictions on transferability of
the Note, the Warrants and the Warrant Shares.
5.3 Authority. The execution, delivery and performance by Lender of this
Agreement have been duly authorized by all necessary action required by its
partnership agreement, and this Agreement has been duly executed and
delivered by Lender. This Agreement constitutes the valid and binding
obligations of Lender enforceable in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting the enforcement of creditors' rights in
general and by general equity principles (regardless of whether such
enforcement is considered in a proceeding in equity or at law). To the
knowledge of Lender, the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated thereby do
not and will not violate any provision of law applicable to the Lender and
do not and will not conflict with or result in any breach of any of the
terms, conditions or provisions of, or constitute a default under, its
trust agreement, or any indenture, lease, agreement or other instrument to
which the Lender is a party or by which it or any of its properties or
assets is bound, or any law applicable to the Lender.
5.4 Accredited Investor. The Lender is an "accredited investor" as such term is
defined in Rule 501(a) of Regulation D promulgated under the Act.
6
EXHIBIT 10.20
VI. CONDITIONS PRECEDENT
6.1 The obligation of the Lender to make the Loan is subject to the fulfillment
of each of the following conditions prior to or contemporaneously with the
making of such Loan.
(a) The Lender shall have received certified copies of all corporate action
taken by the Borrower to authorize the execution, delivery and performance
of this Agreement, the Security Agreement, the Note and the Warrants,
together with such other documents as the Lender may reasonably request,
all of which shall be satisfactory in form and substance to the Lender.
(b) The Lender shall have executed and delivered (i) the Note, (ii) the
Security Agreement, and (iii) the Warrants.
VII. COVENANTS
So long as the Loan or other amount payable hereunder or under the Note is
outstanding and unpaid or the Borrower shall have the right to borrow hereunder,
the Borrower covenants and agrees as follows: 7.1 Affirmative Covenants. The
Borrower shall and shall cause each of its Subsidiaries to:
(a) Maintain (i) its corporate existence and material agreements, (ii) its
properties in good condition and repair (subject to normal wear and tear),
and (iii) to the same extent and in such amounts and manner as do companies
engaged in similar lines of business under similar circumstances, insurance
on its fixed assets, inventory and other properties, workmen's compensation
or similar insurance as required by law, and adequate public liability
insurance against claims for personal injury, death or property damage
arising out of its products, facilities or operations.
(b) Pay and discharge all taxes, assessments and governmental charges or levies
imposed upon it or on its income or profits or on any of its property prior
to the date on which any penalties would otherwise attach thereto; other
than any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and for which an adequate
reserve has been established if such reserve is required by GAAP in effect
at the time.
(c) Allow the Lender by or through its officers, agents, attorneys or
accountants, at all reasonable times and from time to time upon reasonable
notice to the Borrower, to inspect and to make extracts from the Borrower's
books and records and to visit or inspect the facilities of the Borrower.
(d) Keep full and correct books of account in accordance with GAAP, including
the maintenance of adequate reserves for doubtful or uncollectible accounts
and for depreciation of property.
7
EXHIBIT 10.20
(e) Continue to engage in all material respects in its present business and
comply with all applicable laws, rules and regulations relating to such
business, other than laws, rules and regulations, the failure to comply
with which, when taken together with the failure to comply with all other
laws, rules and regulations, would not individually or in the aggregate
have a Material Adverse Effect.
(f) Maintain in full force and effect all Licenses referred to in Section 4.9
hereof to the extent necessary to conduct its normal course of business.
7.2 Financial Statements and Information. The Borrower will furnish or cause to
be furnished to the Lender:
(a) Within 45 days after the close of each of the first three quarterly
accounting periods in each fiscal year of the Borrower, a true and complete
copy of the Borrower's Quarterly Report on Form 10-Q for such quarter. At
the time such quarterly reports are furnished, the Borrower shall also
furnish a certificate of the Borrower's president or chief financial
officer, stating that, based on an examination which in the opinion of the
signer was sufficient to enable him to make an informed statement, no Event
of Default, nor any event which with the giving of notice or the passage of
time or both would constitute an Event of Default, exists, or, if such an
Event of Default or event exists, stating its nature, when it occurred and
what action the Borrower proposes to take with respect thereto.
(b) Within 90 days after the end of each fiscal year of the Borrower, a true
and complete copy of the Borrower's Annual Report on Form 10-K (which shall
include an unqualified report of the Borrower's independent public
accountants on the financial statements included therein) for such year. At
the time such annual reports are furnished, the Borrower shall also furnish
a certificate of the Borrower's president or chief financial officer to the
effect set forth in Section 7.2(a).
(c) As soon as practicable, copies of all registration statements, proxy
statements and all periodic or other reports which the Borrower shall or
may be required to file with the Securities and Exchange Commission or any
successor commission, and copies of all press releases.
(d) From time to time, such data, certificates, reports, statements, documents
or further information regarding the business or financial condition of the
Borrower as the Lender may reasonably request in writing.
(e) Prompt notice of all proceedings by or before any governmental commission,
board, bureau or other administrative agency and all judicial actions,
suits or proceedings against the Borrower or its properties, which if
adversely determined could, together with all such other litigation and
proceedings, if similarly determined, have a Material Adverse Effect.
(f) Prompt notice of (i) any fact, circumstance, condition or development which
could reasonably be expected to have a Material Adverse Effect, (ii) any
Event of Default or any event, which with the giving of notice or the
passage of time or both would constitute, an Event of Default under this
Agreement, (iii) an Event of Default or a default with respect to any other
8
EXHIBIT 10.20
indebtedness of the Borrower or any Subsidiary or any agreement or
instrument under any other agreement to which the Borrower or any
Subsidiary is a party or by which the Borrower or any Subsidiary or their
respective properties are bound.
7.3 Negative Covenants. The Borrower shall not and shall not permit any of its
Subsidiaries to:
(a) Create, assume, incur, directly or indirectly, or permit to exist or to be
created, assumed or incurred any Lien except (i) Liens for taxes,
governmental assessments and governmental charges or levies imposed upon it
or upon its income or profits or upon any of its property, real or
personal, or any part thereof if the same shall not at the time be due and
payable or are being contested in good faith by appropriate proceedings and
for which adequate reserves have been established if such reserves are
required by GAAP in effect at the time, (ii) Liens imposed by law such as
for carriers, warehousemen and mechanics incurred in the ordinary course of
business for sums not yet due and payable or which are being contested in
good faith by appropriate proceedings and (iii) Liens permitted by the
Security Agreement.
(b) Incur, create, assume or otherwise become obligated in respect of or permit
to be outstanding any Indebtedness (as hereinafter defined), except
Indebtedness incurred as a result of borrowings under this Agreement or
Indebtedness secured by a Lien to the extent permitted by the Security
Agreement. As used herein, the term "Indebtedness" shall mean (i) money
borrowed by the Borrower or any Subsidiary from any person; (ii) any
indebtedness of the Borrower or any Subsidiary arising under leases
required to be capitalized under GAAP or evidenced by a note, bond,
debenture or similar instrument; (iii) any indebtedness of the Borrower or
any Subsidiary arising under purchase money obligations or representing the
deferred purchase price of property and services (other than current trade
payables incurred in the ordinary course of the Business) and (iv) any
Liability of the Borrower or any Subsidiary under any guaranty, letter of
credit, performance credit or other agreement having the effect of assuring
a creditor against loss.
(c) Declare or pay any dividends (other than dividends payable in capital
stock) on any shares of any class of capital stock of the Borrower or any
Subsidiary (other than a wholly-owned Subsidiary) or apply any property or
assets of the Borrower or any Subsidiary to the purchase, redemption or
other retirement of or set apart any sum for the payment of, any dividends
on or for the purchase, redemption or other retirement of or make any other
distribution by reduction of capital or otherwise in respect of any shares
of capital stock of the Borrower or any Subsidiary (other than a
wholly-owned Subsidiary).
(d) Liquidate or dissolve itself (or suffer any liquidation or dissolution),
merge or consolidate with any corporation (other than a merger of a
wholly-owned Subsidiary into the Borrower), or, sell, lease, transfer or
otherwise dispose of all or, except in the ordinary course of business,
consistent with past practice, any part of its assets, property or
business.
(e) Make any investment in or capital contribution to, or make or permit to be
outstanding any loan, advance or extension of credit to or purchase,
acquire or incur any liability for the purchase or acquisition of any
business, assets or securities of any person, or entity except (i) loans,
9
EXHIBIT 10.20
advances and extensions of credit on account of sales on credit in the
ordinary course of business, (ii) purchases or acquisitions of assets in
the ordinary course of business, (iii) travel advances in the ordinary
course of business to officers and employees, (iv) advances in the ordinary
course of business to employees or consultants against commissions and (v)
temporary cash investments consisting of investments in prime commercial
paper, short-term investment grade securities or certificates of deposit.
(f) Enter into any transaction, including, without limitation, the purchase,
sale or exchange of property or the rendering of any service, with any
Affiliate (as hereinafter defined), except a transaction which is in the
ordinary course of business and is upon fair and reasonable terms not less
favorable to the Borrower or the Subsidiary than it would obtain in a
comparable arm's length transaction. As used herein, the term, "Affiliate"
shall mean any other person directly or indirectly through one or more
intermediary persons, controlling, controlled by or under common control
with the Borrower.
(g) Acquire an interest in any corporation, partnership, joint venture or
similar entity or create any Subsidiary.
(h) Establish, become obligated to make contributions under or permit to exist
any pension plan subject to the provisions of the Employee Retirement
Income Security Act of 1974, other than such plans of the Borrower or any
Subsidiary existing on the date hereof.
VIII. EVENTS OF DEFAULT
8.1 Events of Default. Each of the following shall constitute an Event of
Default:
(a) Default in the payment of the principal amount of the Note when due
(whether at maturity, by reason of acceleration or otherwise) or in the
payment of any interest on the Note within five days after such interest
becomes due.
(b) Any representation or warranty made by the Borrower under this Agreement
shall have been incorrect in any material respect when made.
(c) The Borrower shall default in the performance of any agreement or covenant
contained in Section 7.3 of this Agreement.
(d) The Borrower shall default in the performance of any other agreement or
covenant contained in this Agreement or the Security Agreement and such
default shall remain unremedied for 10 days.
(e) The Borrower or any Subsidiary shall fail to pay when due and payable the
principal of or interest on any Indebtedness in respect of which it is
obligated to make such payment, other than Indebtedness evidenced by any
Note, or the maturity of any such Indebtedness shall have been accelerated
in accordance with the provision of any indenture, contract or instrument
providing for the creation of or concerning such Indebtedness or any event
shall have occurred and be continuing which, with the passage of time or
the giving of notice or both would permit any holder or holders of such
10
EXHIBIT 10.20
Indebtedness, any trustee or agent acting on behalf of such holder or
holders or any other person so to accelerate such maturity.
(f) The Borrower or any Subsidiary shall commence any proceeding in bankruptcy
or under any law relating to the relief of debtors from, or readjustment
of, any Indebtedness; or any proceeding shall be commenced against the
Borrower or any Subsidiary and shall be consented to or approved or
sustained as meritorious by a court of competent jurisdiction or not be
dismissed or stayed within a period of 30 days after the commencement
thereof; or the Borrower or any Subsidiary shall become insolvent or
consent to the appointment of a trustee or receiver or make an assignment
for the benefit of creditors.
(g) A final judgment shall be rendered against the Borrower or any Subsidiary
and if within 30 days after the entry thereof such judgment or any of such
other judgments shall not have been discharged or execution thereof stayed
pending appeal or, if within 30 days after the expiration of any such stay,
such judgment or any of such other judgments shall not have been
discharged.
8.2 Remedies. If any Event of Default shall occur and be continuing, the Lender
may, by written notice to the Borrower, do any or all of the following (i)
declare the principal of and interest on the Loan and the Note to be
forthwith due and payable whereupon the same shall become forthwith due and
payable without presentment, demand, protest or other notice of any kind,
all of which are expressly waived, anything in this Agreement or the Note
to the contrary notwithstanding, (ii) exercise all of its rights or
remedies under the Security Agreement and (iii) exercise all rights and
remedies which may be available at law or in equity.
IX. MISCELLANEOUS
9.1 Notices. All notices, notifications and other communications required or
permitted by this Agreement shall be in writing and shall be delivered by
hand, telegraphically transmitted, sent by telecopy, or mailed by
registered or certified first class airmail to the parties at the following
addresses (or such other address for a party as shall be specified by
notice given pursuant hereto):
If to the Borrower:
Communication Intelligence Corporation
275 Shoreline Drive
Redwood City, CA 94065-1413
Attn: President
Tel: (650) 802-7888
Fax: (650) 802-7777
If to the Lender:
The Philip S. Sassower 1996 Charitable Remainder Annuity Trust
c/o Mr. Philip Sassower
135 East 57th Street
New York, New York 10022
Tel: (212) 759-1909
Fax: (212) 319-4930
with a copy to:
Baer Marks & Upham LLP
805 Third Avenue
New York, NY 10022-7513
Attn: Jonathan J. Russo, Esq.
11
EXHIBIT 10.20
Tel: (212) 702-5700
Fax: (212) 702-5941
Notices delivered by hand, telegraphically transmitted, or sent by telecopy
shall be deemed given the day so delivered, transmitted or sent. Notices mailed
as provided herein shall be deemed given on the third business day following the
date so mailed or on the date of actual receipt, whichever is earlier.
9.2 Expenses. The Borrower will pay (i) all out-of-pocket expenses of the
Lender in connection with the preparation, execution and delivery of this
Agreement, the Security Agreement, the Warrants and the Note and the
transactions contemplated hereby and thereby, including reasonable fees and
disbursements of counsel to the Lender, (ii) all out-of-pocket expenses in
connection with the preparation, execution and delivery of any waiver,
amendment or consent by the Lender relating to this Agreement, including
reasonable fees and disbursements of counsel to the Lender, and (iii) all
costs of obtaining performance under this Agreement and the Security
Agreement by the Borrower and all costs of collection in respect to this
Agreement, which costs shall include reasonable counsel fees and expenses.
9.3 Rights, Remedies Cumulative. The rights and remedies of the Lender under
this Agreement, the Security Agreement or the Note shall be cumulative and
not exclusive of any rights or remedies which it would otherwise have, and
no failure or delay by the Lender in exercising any right shall operate as
a waiver of it, nor shall any single or partial exercise of any power or
right preclude its other or further exercise or the exercise of any other
power or right. Any term, covenant, agreement or condition of this
Agreement or the Note may be amended with the written consent of the
Borrower and the Lender. No modification or waiver of any provision of this
Agreement or the Note and no consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be in
writing and signed by the Lender and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which it
was given.
9.4 Assignment. This Agreement may not be assigned by the Borrower unless
consent to such assignment is given in writing by the Lender. Subject to
the foregoing, this Agreement and the Note shall be binding upon and inure
to the benefit of the parties hereto and their respective successors, heirs
and legal representatives.
9.5 Exhibits. All Exhibits attached hereto are hereby incorporated by reference
into, and made a part of, this Agreement.
12
EXHIBIT 10.20
9.6 Enforceability. If any provision of this Agreement or the Note for any
reason shall be held to be illegal, invalid or unenforceable, such
illegality shall not affect any other provision of this Agreement or the
Note, but this Agreement or the Note shall be construed as if such illegal,
invalid or unenforceable provision had never been included herein.
9.7 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, and shall be binding upon
all parties, their successors and assigns.
9.8 Governing Law. This Agreement and the Note shall be construed in accordance
with and governed by the laws of the State of New York, without giving
effect to the conflicts of law principles applied in such state.
9.9 Prior Agreement. This Agreement amends and restates in its entirety the
Prior Agreement, and the Prior Agreement is hereby terminated.
COMMUNICATION INTELLIGENCE
CORPORATION
By: /s/Guido DiGregorio
Name: Guido DiGregorio
Title: President and CEO
THE PHILIP S. SASSOWER 1996 CHARITABLE
REMAINDER ANNUITY TRUST
By: /s/ Philip S. Sassower
Name: Philip S. Sassower
Title: Trustee
13
EXHIBIT 10.20
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY IF SO REGISTERED UNDER
SAID ACT OR IF THE HOLDER HAS DELIVERED TO THE MAKER AN OPINION OF COUNSEL,
WHICH COUNSEL AND OPINION SHALL BE SATISFACTORY TO THE MAKER, THAT AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE.
NOTE
$1,500,000 October 20, 1999
FOR VALUE RECEIVED, the undersigned, Communication Intelligence
Corporation (the "Borrower"), hereby promises to pay to the order of The Philip
S. Sassower 1996 Charitable Remainder Annuity Trust (the "Lender") at the office
of the Lender located at 135 East 57th Street, New York, New York 10022, the
principal amount of $1,500,000, or if less the then unpaid aggregate principal
amount then due, on January 31, 2002, in lawful money of the United States of
America in immediately available funds, and to pay interest on the unpaid
principal amount hereof for each day from the date hereof until due (whether at
maturity, by reason of acceleration or otherwise) at an annual rate equal to the
sum of 2% in excess of the rate per annum publicly announced from time to time
by Citibank, N.A., as its prime rate in effect at its principal office in New
York City in immediately available funds. Interest on this Note shall be payable
in arrears on each March 31, June 30, September 30 and December 31, commencing
December 31, 1999, provided that any unpaid interest, in addition to the unpaid
principal amount of this Note, shall be due and payable on the Maturity Date as
defined in the Loan Agreement hereinafter described.
EXHIBIT 10.20
Presentation, demand, protest and notice of dishonor are hereby waived by
the undersigned.
This Note amends and restates the following: (i) Borrower's promissory note
dated June 15, 1999 in the principal amount of $500,000, (ii) Borrower's
promissory note dated August 18, 1999 in the principal amount of $150,000 and
(iii) Borrower's promissory note dated September 17, 1999 in the principal
amount of $100,000 (collectively the "Prior Notes"), and such Prior Notes shall
hereby be terminated. The outstanding principal amounts due pursuant to the
Prior Notes shall be included in the amount due under this Note and all accrued
and unpaid interest with respect to the Prior Notes shall be due and payable on
December 31, 1999.
This Note evidences a loan under and is entitled to the benefits of the
Amended and Restated Loan Agreement dated October 19, 1999 between the Borrower
and the Lender, which agreement, among other things, contains provisions with
respect to the acceleration of the maturity of this Note upon the happening of
certain stated events and for prepayments on account of the principal of this
Note prior to maturity, all upon the terms and conditions specified therein. The
provisions of such Loan Agreement are incorporated by reference into the Note as
if more fully set forth herein. This Note is also entitled to the benefits of
the Amended and Restated Security Agreement, dated October 19, 1999, between the
Borrower and the Lender.
The Borrower hereby agrees to pay all of Lender's costs and expenses in
connection with the execution and delivery of the Loan agreement, the Security
Agreement and this Note and the exercise of Lender's rights contemplated
hereunder and thereunder.
Communication Intelligence Corporation
By: /s/Guido DiGregorio
Name: Guido DiGregorio
Title: President and CEO
EXHIBIT 10.20
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY IF SO REGISTERED
UNDER SAID ACT OR IF THE HOLDER HAS DELIVERED TO THE COMPANY AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE
CERTIFICATE FOR WARRANTS
EXERCISABLE ON OR AFTER THE DATE OF ISSUANCE UNTIL 5:00 P.M., NEW YORK CITY
TIME, ON OCTOBER 20, 2001
COMMUNICATION INTELLIGENCE CORPORATION
COMMON STOCK PURCHASE WARRANT CERTIFICATE
300,000 Warrants
THIS CERTIFIES that: THE PHILIP S. SASSOWER 1996 CHARITABLE
REMAINDER ANNUITY TRUST
or registered assigns is the registered holder (the "Registered Holder") of the
number of Warrants set forth above, each of which, subject to the provisions of
Section 1.1 of Article hereof, represents the right to purchase one fully paid
and nonassessable share (the "Shares") of Common Stock, par value $.01 per share
("Common Stock") of Communication Intelligence Corporation, a corporation formed
under the laws of the state of Delaware (the "Company"), at the initial exercise
price of $1.09 per Share, at any time prior to the Exercise Deadline hereinafter
referred to, by surrendering this Warrant Certificate, with the form of election
to purchase set forth hereon duly executed, at the office of the Company, 275
Shoreline Drive, Redwood Shores, CA 94065, or such other address as to which the
Company shall have given written notice to the Registered Holder. Payment of the
exercise price shall be made in United States currency, by certified check or
money order payable to the order of the Company. This Warrant Certificate is
being issued in connection with the issuance of 300,000 Warrants (the
"Warrants").
EXHIBIT 10.20
ARTICLE 1
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
1.1 Exercise Price; Number of Shares. This Warrant Certificate shall,
when executed by the Company, entitle the Registered Holder hereof to purchase
from the Company one Share for each Warrant evidenced hereby, at the initial
Exercise Price of $1.09 per Share, or such adjusted number of Shares at such
adjusted purchase price as may be established from time to time pursuant to the
provisions of Articles 1 and 2 hereof, payable in full at the time of exercise
of this Warrant. The term "Exercise Price" as used in this Agreement shall mean
the purchase price of one Share upon the exercise of this Warrant, reflecting
all appropriate adjustments made in accordance with the provisions hereof.
1.2 Exercisability of Warrants. Each Warrant may be exercised at any
time on or after the date of its issuance until 5:00 P.M., New York City time,
on October 20, 2001 (the "Exercise Deadline").
1.3 Procedure for Exercise. Prior to the Exercise Deadline, Warrants may
be exercised by surrendering this Warrant Certificate to the Company at the
address specified above, accompanied by payment in full of the Exercise Price as
provided in Section 1.1 in effect at the time of such exercise, together with
such taxes as are specified in Section 4.1 hereof, for each Share with respect
to which such Warrants are being exercised. Such Exercise Price and taxes shall
be paid in full by certified check or money order, payable in United States
currency to the order of the Company. The date on which Warrants are exercised
in accordance with this Section 1.3 is sometimes referred to herein as the Date
of Exercise. In addition to the method of payment set forth in Section 1.3 and
in lieu of any cash payment required thereunder, the Registered Holder of the
Warrants shall have the right at any time and from time to time to exercise the
Warrants in full or in part by surrendering the Warrant Certificate in the
manner specified in Section 1.3 in exchange for the number of shares of common
stock equal to the product of (x) the number of shares of common stock as to
which the Warrants are being exercised multiplied by (y) a fraction, the
numerator of which is the Market Price of the shares of Common Stock less the
Exercise Price and the denominator of which is such Market Price. Solely for the
purposes of this paragraph, Market Price shall be calculated on the date which
the form of election attached hereto is deemed to have been sent to the Company
("Notice Date").
For purposes of this Agreement, "Market Price" of any security on any
date means the average of the daily closing prices for 10 consecutive trading
days commencing five trading days prior to the Notice Date. The closing price
for each day shall be the last reported sales price regular way or, in case no
such reported sale takes place on such day, the average of the closing bid and
asked prices regular way for such day, in each case on the principal national
securities exchange on which the securities are listed or admitted to trading
or, if not so listed or admitted to trading, the last sale price regular way for
the security as published by NASDAQ or if no such sale takes place on such day,
the mean between the closing bid and asked prices for the security as published
by NASDAQ or if no such sale takes place on such day, the mean between the
closing bid and asked prices for the security as published by NASDAQ. In the
2
EXHIBIT 10.20
absence of one or more such quotations, the Company shall determine the Market
Price in good faith, based on the best information available to it.
1.4 Issuance of Shares. As soon as practicable after the Date of
Exercise of any Warrants, the Company shall issue, or cause the transfer agent
for the Common Stock, if any, to issue a certificate or certificates for the
number of full Shares to which the holder is entitled, registered in accordance
with the instructions set forth in the Form of Election to Purchase. All Shares
shall be validly authorized and issued, fully paid and nonassessable and free
from all liens and charges created by the Company in respect of the issue
thereof. Each person in whose name any such certificate for Shares is issued
shall for all purposes be deemed to have become the holder of record of the
Shares represented thereby on the Date of Exercise of the Warrants resulting in
the issuance of such shares, irrespective of the date of issuance or delivery of
such certificate for the Shares.
1.5 Certificates for Unexercised Warrants. In the event that less than
all of the Warrants represented by a Warrant Certificate are exercised, the
Warrant Agent shall execute and mail, by first class mail, as soon as
practicable but, in any event, not later than 30 days after the Date of
Exercise, to the Registered Holder of such Warrant Certificate, or such other
person as shall be designated in the election to purchase, a new Warrant
Certificate representing the number of full Warrants not exercised. In no event
shall a fraction of a Warrant be exercised, and the Warrant Agent shall
distribute no Warrant Certificates representing fractions of Warrants under this
or any other section of this Agreement. Fractions of Shares shall be treated as
provided in Section 2.9.
1.6 Reservation of Shares. The Company shall at all times reserve and
keep available for issuance upon the exercise of Warrants a number of its
authorized but unissued shares of Common Stock that will be sufficient to permit
the exercise in full of all outstanding Warrants.
ARTICLE 2
ADJUSTMENTS AND NOTICE PROVISIONS
2.1 Adjustment of Exercise Price. Subject to the provisions of this
Article 2, the Exercise Price in effect from time to time shall be subject to
adjustment, as follows:
(a) [Intentionally Omitted.]
(b) In case the Company shall at any time after the date hereof
(i) declare a dividend on the outstanding Common Stock payable in shares of its
capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the
outstanding Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price in effect, and the number of Shares issuable upon exercise of the Warrants
outstanding, at the time of the record date for such dividend or of the
3
EXHIBIT 10.20
effective date of such subdivision, combination or reclassification, shall be
proportionately adjusted so that the holders of the Warrants after such time
shall be entitled to receive the aggregate number and kind of shares which, if
such Warrants had been exercised immediately prior to such time, such holders
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(c) In case the Company shall distribute to all holders of
shares of Common Stock (including any such distribution made to the shareholders
of the Company in connection with a consolidation or merger in which the Company
is the continuing corporation but excluding the transaction referred to in
Section 2.1(b)) evidences of its indebtedness, cash (other than cash dividends)
or assets (other than distributions and dividends payable in Common Stock), or
rights, options or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock, then, in each
case, the Exercise Price shall be adjusted by multiplying the Exercise Price in
effect immediately prior to the record date for the determination of
shareholders entitled to receive such distribution by a fraction, the numerator
of which shall be the Exercise Price per Share on such record date, less the
fair market value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be distributed, or of
such rights, options, or warrants or convertible or exchangeable securities, or
the amount of such cash, applicable to one Share, and the denominator of which
shall be such Exercise Price per Share. Such adjustment shall become effective
at the close of business on such record date.
(d) In case the Company shall sell any shares of Common Stock
(other than in a transaction referred to in Section 2.1(a)-(c) for a
consideration per share less than the Exercise Price per Share, then, in each
case, the Exercise Price in effect immediately prior to such sale shall be
adjusted to a price determined by multiplying the Exercise Price in effect
immediately prior to such sale by a fraction, the numerator of which shall be
the sum of (i) the total number of Shares outstanding immediately prior to such
sale, and (ii) the aggregate consideration, if any, received by the Company upon
such sale divided by the Exercise Price immediately prior to such sale, and the
denominator of which shall be the total number of Shares outstanding immediately
after such sale.
(e) For the purposes of any adjustment to be made in accordance
with Section 2.1(d) the following provisions shall be applicable:
(i) In case of the sale of Common Stock for a consideration part or all of
which shall be cash, the amount of the cash portion of the consideration
therefor deemed to have been received by the Company shall be without deduction
for any expenses (including, without limitation, any underwriting discount,
selling concession or other compensation paid in connection with such sale)
incurred by the Company in connection with such transaction. In case of the sale
of Common Stock for consideration part or all of which shall be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the board of directors of the Company, whose determination shall be
conclusive absent manifest error.
4
EXHIBIT 10.20
(ii) The number of shares of Common Stock at any one time outstanding shall
be deemed to include the aggregate maximum number of shares issuable (subject to
readjustment upon the actual issuance thereof) upon the exercise of options,
rights or warrants and upon the conversion or exchange of convertible or
exchangeable securities.
(iii) Except as hereinafter provided, in case the Company shall at any time
after the date hereof issue options, rights or warrants to subscribe for Common
Stock, or issue any securities convertible into or exchangeable for Common
Stock, for a consideration per share (determined as provided in this Section
2.1(e)) less than the Exercise Price in effect immediately prior to the earlier
of the issuance of such options, rights or warrants, or such convertible or
exchangeable securities or the record date therefor, or without consideration
(including the issuance of any such securities by way of dividend or other
distribution), the Exercise Price for the Warrants in effect immediately prior
to the issuance of such options, rights or warrants, or such convertible or
exchangeable securities or the record date therefor, as the case may be, shall
be reduced to a price determined by making the computation in accordance with
the provisions of Section 2.1(d) hereof, provided that:
a. The aggregate maximum number of shares of Common Stock issuable or that
may become issuable under such options, rights or warrants (assuming exercise in
full even if not then currently exercisable or currently exercisable in full)
shall be deemed to be issued and outstanding at the time such options, rights or
warrants were issued, for a consideration equal to the minimum purchase or
exercise price per share provided for in such options, rights or warrants at the
time of issuance, plus the consideration, if any, received by the Company upon
the issuance of such options, rights or warrants (without deduction for expenses
incurred or amounts paid to any underwriter by the Company in connection with
such issuance); provided, however, that upon the expiration or other termination
of such options, rights or warrants, if any thereof shall not have been
exercised, the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this Section 2.1(e) shall be reduced by the number of
shares as to which options, warrants and/or rights shall have expired, and such
number of shares shall no longer be deemed to be issued and outstanding, and the
Exercise Price then in effect shall forthwith be readjusted and thereafter be
the price that it would have been had the adjustment been made on the basis of
the issuance only of the shares actually issued plus the shares remaining
issuable upon the exercise of those options, rights or warrants as to which the
exercise rights shall not have expired or terminated unexercised.
b. The aggregate maximum number of shares of Common Stock issuable or that
may become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if not
then currently convertible or exchangeable in full) shall be deemed to be issued
and outstanding at the time of issuance of such securities, for a consideration
equal to the consideration received by the Company upon the issuance of such
securities (without deduction for expenses incurred or amounts paid to any
underwriter in connection with such issuance), plus the minimum consideration,
if any, receivable by the Company upon the conversion or exchange thereof;
provided, however, that upon the termination of the right to convert or exchange
such convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be issued and
5
EXHIBIT 10.20
outstanding pursuant to this subsection 2.1(e) shall be reduced by the number of
shares as to which the conversion or exchange rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding, and the Exercise Price then in effect shall forthwith
be readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued plus
the shares remaining issuable upon conversion or exchange of those convertible
or exchangeable securities as to which the conversion or exchange rights shall
not have expired or terminated unexercised.
c. If any change shall occur in the price per share provided for in any of
the options, rights or warrants referred to in this Section 2.1(e), or in the
price per share or ratio at which the securities referred to in this Section
2.1(e) are convertible or exchangeable (in either case, other than changes in
such prices or ratios arising pursuant to antidilution adjustments in such
options, rights, warrants, convertible or exchangeable securities or the
instruments pursuant to which they were issued), such options, rights or
warrants or convertible or exchangeable securities, as the case may be, to the
extent not theretofore exercised, shall be deemed to have expired or terminated
on the date when such price change became effective in respect of shares of
Common Stock not theretofore issued pursuant to the exercise or conversion or
exchange thereof, and the Company shall be deemed to have issued upon such date
new options, rights or warrants or convertible or exchangeable securities.
2.2 No Adjustments to Exercise Price. (a) No adjustment in the Exercise
Price shall be required if such adjustment is less than $.01; provided, however,
that any adjustments which by reason of this Article 2 are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Article 2 shall be made to the nearest
cent or to the nearest one hundredth of a share, as the case may be.
(b) Notwithstanding any provision of this Warrant Certificate,
no adjustment of the Exercise Price or in the number of Shares shall be made as
a result of or in connection with the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof.
2.3 Adjustment to Number of Shares. Upon each adjustment of the Exercise
Price as a result of the calculations made in Section 2.1(a), (c)-(d) and
Section 2.10 hereof, the Warrants shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of shares (calculated to
the nearest hundredth) obtained by dividing (A) the product obtained by
multiplying the number of shares purchasable upon exercise of the Warrants prior
to such adjustment by the Exercise Price in effect prior to adjustment of the
Exercise Price by (B) the Exercise Price in effect after such adjustment of the
Exercise Price.
2.4 Reorganizations. In case of any capital reorganization, other than
in the transactions referred to in Section 2.1 hereof, or the consolidation or
merger of the Company with or into another corporation (other than a merger or
consolidation in which the Company is the surviving or continuing corporation
and which does not result in any reclassification of the outstanding Common
Stock or the conversion of such outstanding Common Stock into shares of other
6
EXHIBIT 10.20
stock or other securities or property), or in the case of any sale, lease or
conveyance to another corporation of the property and assets of any nature of
the Company as an entirety or substantially as an entirety (such actions being
hereinafter collectively referred to as "Reorganizations"), there shall
thereafter be deliverable upon exercise of any Warrant (in lieu of the number of
shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares which would
otherwise have been deliverable upon the exercise of such Warrant would have
been entitled upon such Reorganization if such Warrant had been exercised in
full immediately prior to such Reorganization on the record date therefor. In
case of any Reorganization, appropriate adjustment, as determined in good faith
by the board of directors of the Company, shall be made in the application of
the provisions herein set forth with respect to the rights and interests of
Warrant holders so that the provisions set forth herein shall thereafter be
applicable, as nearly as possible, in relation to any shares or other property
thereafter deliverable upon exercise of Warrants. Any such adjustment shall be
made by and set forth in a supplemental agreement of the Company, or any
successor thereto, and shall for all purposes hereof conclusively be deemed to
be an appropriate adjustment. The Company shall not effect any such
Reorganization unless upon or prior to the consummation thereof the successor
corporation, or if the Company shall be the surviving corporation in any such
Reorganization and is not the issuer of the shares of stock or other securities
or property to be delivered to holders of the Common Stock outstanding at the
effective time thereof, then such issuer, shall assume by written instrument the
obligation to deliver to the Registered Holder of each Warrant Certificate such
shares of stock, securities, cash or other property as such holder shall be
entitled to purchase in accordance with the foregoing provisions. In the event
of sale, lease or conveyance or other transfer of all or substantially all of
the assets of the Company as part of a plan for liquidation of the Company, all
rights to exercise any Warrant shall terminate 30 days after the Company gives
written notice to each Registered Holder of each Warrant Certificate that such
sale or conveyance or other transfer has been consummated.
2.5 Reclassifications. In case of any reclassification or change of the
Ordinary Shares issuable upon exercise of the Warrants (other than a change in
par value or from no par value to a specified par value, or as a result of a
transaction referred to in Section 2.1 or 2.4, but including any change in the
shares into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other property) of
the Common Stock (other than a change in par value, or from no par value to a
specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the holders of the Warrants shall have the right thereafter to receive
upon exercise of the Warrants solely, the kind and amount of shares of stock and
other securities, property, cash, or any combination thereof receivable upon
such reclassification, change, consolidation or merger by a holder of the number
of Shares for which the Warrants might have been exercised immediately prior to
such reclassification, change, consolidation or merger on the record date
therefor. Thereafter, appropriate provision shall be made for adjustments which
shall be as nearly equivalent as practicable to the adjustments in Article 2.
The above provisions of this Section 2.5 shall similarly apply to successive
reclassifications and changes of the Shares.
7
EXHIBIT 10.20
2.6 Verification of Computations. Whenever the Exercise Price is
adjusted as provided in this Article 2, the Company will promptly deliver to
each Registered Holder a certificate setting forth the Exercise Price as so
adjusted and a brief statement of the facts accounting for such adjustment, and
will make available a brief summary thereof to the holders of the Warrant, at
their addresses listed on the register maintained for that purpose by the
Company.
2.7 Notice of Certain Actions. In case at any time the Company shall
propose:
(a) to pay any dividend or make any distribution on shares of Common Stock
in shares of Common Stock or make any other distribution (other than regularly
scheduled cash dividends) to all holders of such shares; or
(b) to issue any rights, warrants or other securities to all holders of
shares entitling them to purchase any additional shares of Common Stock or any
other rights, warrants, other securities or other property; or
(c) to effect any consolidation, merger, sale, lease, or conveyance of
property, described in Section 2.4, or any reclassification or change of
outstanding shares of Shares, described in Section 2.5; or
(d) to effect any liquidation, dissolution or winding-up of the Company;
then, in each such case, the Company shall cause notice of such proposed action
to be mailed to each Registered Holder. Such notice shall specify the date on
which the books of the Company shall close, or a record shall be taken, for
determining holders of shares entitled to receive such stock dividend or other
distribution or such rights, warrants or property, or the date on which such
reclassification, change, consolidation, merger, sale, lease, other disposition,
liquidation, dissolution, winding up or exchange or other action shall take
place or commence, as the case may be, and the date as of which it is expected
that holders of record of shares shall be entitled to receive securities or
other property deliverable upon such action, if any such date has been fixed.
Such notice shall be mailed, in the case of any action covered by Subsection
2.7(a) or 2.7(b) above, at least 15 days prior to the record date for
determining holders of shares for purposes of receiving such payment or offer;
in the case of any action covered by Subsection 2.7(c) or 2.7(d) above, at least
15 days prior to the earlier of the date upon which such action is to take place
or any record date to determine holders of shares entitled to receive such
securities or other property.
2.8 Warrant Certificate Amendments. Irrespective of any adjustments
pursuant to this Article 2, Warrant Certificates theretofore or thereafter
issued need not be amended or replaced but certificates thereafter issued shall
bear an appropriate legend or other notice of any adjustments.
2.9 Fractional Shares. The Company shall not be required upon the
exercise of any Warrant to issue fractional Shares which may result from
adjustments in the Exercise Price or number of shares purchasable under each
Warrant. If more than one Warrant is exercised at one time by the same
Registered Holder, the number of full shares of Shares which shall be
8
EXHIBIT 10.20
deliverable shall be computed based on the number of shares deliverable in
exchange for the aggregate number of Warrants exercised. With respect to any
fraction of a share called for upon the exercise of any Warrant or Warrants, the
Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the then Exercise Price per share.
ARTICLE 3
OTHER PROVISIONS RELATING TO RIGHTS
OF REGISTERED HOLDERS OF WARRANT CERTIFICATES
3.1 Rights of Warrant Holders. This Warrant Certificate shall not
entitle the Registered Holder thereof to any of the rights of a shareholder of
the Company, including, without limitation, the right to vote, to receive
dividends and other distributions, or to receive any notice of, or to attend,
meetings of shareholders or any other proceedings of the Company.
3.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If this
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Warrant Certificate, or in lieu of or in
substitution for a lost, stolen or destroyed Warrant Certificate, a new Warrant
Certificate for the number of Warrants represented by the Warrant Certificate so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Warrant Certificate, and of the ownership
thereof, and indemnity, if requested, all satisfactory to the Company.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges incidental
thereto as the Company may prescribe.
ARTICLE 4
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
4.1 Split Up, Combination, Exchange and Transfer of Warrant
Certificates. Prior to the Exercise Deadline, this Warrant Certificate, subject
to the provisions of Section 4.2, may be split up, combined or exchanged for
other Warrant Certificates representing a like aggregate number of Warrants. Any
holder desiring to split up, combine or exchange a Warrant Certificate or
Warrant Certificates shall make such request in writing delivered to the Company
at its principal office and shall surrender the Warrant Certificate or Warrant
Certificates so to be split up, combined or exchanged at said office. Upon any
such surrender for split up, combination or exchange, the Company shall execute
and deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested. The Company may require the
holder to pay a sum sufficient to cover any tax or governmental charge that may
be imposed in connection with any split up, combination, exchange or transfer of
Warrant Certificates prior to the issuance of any new Warrant Certificate.
9
EXHIBIT 10.20
4.2 Agreement of Warrant Certificate Holders. Every holder of a Warrant
Certificate by accepting the same, consents and agrees with the Company and with
every other holder of a Warrant Certificate that:
(a) transfer of the Warrant Certificates shall be registered on
the books of the Company maintained for that purpose by the Company only if
surrendered at the principal office of the Company, duly endorsed or accompanied
by a proper instrument of transfer; and
(b) prior to due presentment for registration of transfer, the
Company may deem and treat the person in whose name the Warrant Certificate is
registered as the absolute owner thereof and of the Warrants evidenced thereby
(notwithstanding any notations of ownership or writing on the Warrant
Certificates made by anyone other than the Company) for all purposes whatsoever,
and the Company shall not be affected by any notice to the contrary.
ARTICLE 5
MISCELLANEOUS
5.1 Changes to Agreement. The Company may, without the consent or
concurrence of any Registered Holder of a Warrant Certificate, by supplemental
agreement, make any changes or corrections in this Certificate that it has been
advised by counsel (i) are required to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or manifest
error herein contained, (ii) add to the covenants and agreements of the Company,
(iii) reduce the Exercise Price or extend the Exercise Deadline or (iv) result
in the surrender of any right or power reserved to or conferred upon the Company
in this Certificate, which changes or corrections do not or will not adversely
affect, alter or change the rights, privileges or immunities of the Registered
Holders of Warrant Certificates. Other changes in this Agreement may be made
only with the prior written consent of a holder of a majority of the Warrants
affected thereby, provided that no such change shall increase the Exercise Price
or shorten the exercise period without the prior written consent of each
affected Registered Holder.
5.2 Assignment. All the covenants and provisions of this Agreement by or
for the benefit of the Company shall bind and inure to the benefit of their
respective successors and assigns.
5.3 Notices. Any notice or demand required by this Warrant Certificate
to be given or made by the Registered Holder of any Warrant Certificate to or on
the Company shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed to the Company's principal offices
specified above (until another address is given in writing to the Registered
Holder by the Company).
Any notice or demand required by this Warrant Certificate to be given or
made by the Company to or on the Registered Holder of any Warrant Certificate
shall be sufficiently given or made, whether or not such holder receives the
notice, if sent by first-class or registered mail, postage prepaid, addressed to
such registered holder at his last address as shown on the books of the Company.
Otherwise such notice or demand shall be deemed given when received by the party
entitled thereto.
5.4 Defects in Notice. Failure to file any certificate or notice or to
mail any notice, or any defect in any certificate or notice pursuant to this
Agreement, shall not affect in any way the rights of any Registered Holder of a
Warrant Certificate or the legality or validity of any adjustment made pursuant
10
EXHIBIT 10.20
to Article 2 hereof, or any transaction giving rise to any such adjustment, or
the legality or validity of any action taken or to be taken by the Company.
5.5 Governing Law. The laws of the State of New York shall govern this
Warrant Certificate.
5.6 Standing. Nothing in this Agreement expressed and nothing that may
be implied from any of the provisions hereof is intended, or shall be construed,
to confer upon, or give to, any person or corporation other than the Company,
and the Registered Holders of the Warrant Certificates any right, remedy or
claim under or by reason of this Warrant Certificate or of any covenant,
condition, stipulation, promise or agreement contained herein; and all
covenants, conditions, stipulations, promises and agreements contained in this
Agreement shall be for the sole and exclusive benefit of the Company and its
successors and assigns, and the Registered Holders of the Warrant Certificates.
5.7 Headings. The descriptive headings of the articles and sections of
this Warrant Certificate are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
11
EXHIBIT 10.20
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
Dated: October 20, 1999
COMMUNICATION INTELLIGENCE CORPORATION
By: /s/Guido DiGregorio
Name: Guido DiGregorio
Title: President and CEO
12
EXHIBIT 10.20
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise
_______________ of the Warrants represented by this Warrant Certificate and to
purchase the Shares issuable upon the exercise of said Warrants, and requests
that certificates for such shares be issued and delivered as follows:
ISSUE TO:
(NAME)
(ADDRESS, INCLUDING ZIP CODE)
(SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER)
DELIVER TO:
(NAME)
(ADDRESS, INCLUDING ZIP CODE)
If the number of Warrants hereby exercised is less than all
the Warrants represented by this Warrant Certificate, the undersigned requests
that a new Warrant Certificate representing the number of full Warrants not
exercised be issued and delivered as set forth below.
In full payment of the purchase price with respect to the
Warrants exercised and transfer taxes, if any, the undersigned hereby tenders
(i) payment of $______________ by certified check or money order payable to the
order of the Company in United States currency or (ii) shares valued as provided
in the Warrant Agreement.
Dated: ________________
(Insert Social Security or other (Signature of registered holder)
identifying number(s) of holder(s))
(Signature of registered holder, if co-owned)
NOTE: Signature must conform in all respects to name of
holder as specified on the face of the
Warrant Certificate.
EXHIBIT 10.20
AMENDED AND RESTATED SECURITY AGREEMENT
This AMENDED AND RESTATED SECURITY AGREEMENT ("Agreement") is entered into as of
the 20th day of October, 1999 by COMMUNICATION INTELLIGENCE CORPORATION, a
Delaware corporation (the "Borrower"), in favor of THE PHILIP S. SASSOWER 1996
CHARITABLE REMAINDER ANNUITY TRUST (the "Secured Party").
This Agreement amends and restates in its entirety that certain security
agreement dated June 15, 1999 between the Borrower and the Secured Party (the
"Original Security Agreement") and such Original Security Agreement shall no
longer be in effect.
All terms used herein but not defined herein shall have the meaning
ascribed to them in the Uniform Commercial Code as in effect in the State
of California from time to time (the "UCC").
Section 1. Creation of Security Interest
1.1 Grant of Security Interest. (a) Borrower, for good and
valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, hereby grants to Secured Party a
continuing, first priority security interest in and lien on
(the "Security Interest") the Collateral (as defined in
Section 2 hereof) to secure performance and payment of (i)
that certain Loan (the "Loan") to be made by the Secured
Party in favor of Borrower in the aggregate principal amount
of $1,500,000 pursuant to a Loan Agreement of even date
herewith (the "Loan Agreement"); (ii) all renewals and
extensions of the Loan; (iii) all other obligations of
Borrower under this Agreement and the Loan Agreement; and
(iv) all other obligations and indebtedness of Borrower to
Secured Party of whatever kind and whenever or however
created or incurred, whether absolute or contingent, matured
or unmatured, direct or indirect (all of the foregoing
described in this Section 1 being the "Secured
Indebtedness").
(b) The Security Interest granted herein shall continue in full
force and effect until all of the Secured Indebtedness has
been discharged.
1.2 Priority. The Secured Indebtedness shall be the senior obligation
of Borrower, secured by a first priority Security Interest in the
Collateral.
Section 2. Collateral
As used herein, the term "Collateral" shall mean all of Borrower's
right, title and interest in and to all tangible and intangible property,
now owned or hereafter acquired by Borrower, wherever located, whether
real, personal or mixed. The Collateral includes, without limitation, all
goods (including all Equipment, Inventory, consumer goods and farm
products), Fixtures, Accounts Receivable, other receivables, general
intangibles, patents and patent applications, including those listed on
Exhibit A annexed hereto, Trademarks, Trademark Licenses, Trade Secrets
(each as hereinafter defined), service marks, all other intellectual
property, contract rights, rights to receive payments of every kind, all
goodwill (including all goodwill associated with the Trademarks, Trademark
Licenses, Trade Secrets, service marks and all other intellectual property
referred to above), documents, instruments and chattel paper, each as now
owned or hereafter acquired by Borrower, together with all proceeds of the
EXHIBIT 10.20
foregoing, including without limitation, all proceeds of the foregoing
consisting of goods and intangible personal property. As used herein, the
following terms shall have the meanings indicated:
(a) "Trademarks" shall mean all of the following now or hereafter
owned by Borrower: (i) all trademarks, service marks, trade names,
corporate names, company names, indicia, business source identifiers,
business names, fictitious business names, trade styles, trade dress,
logos, other source or business identifiers, prints and labels on which any
of the foregoing have appeared or appear, designs and general intangibles
of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, registrations, recordings and
applications in the United States Patent and Trademark Office (the "USPTO")
listed on Exhibit B annexed hereto, any State of the United States or any
other country or any political subdivision thereof, (ii) all goodwill
associated therewith arising in or relating to the ordinary course of
business of Borrower, (iii) all extensions or renewals thereof, and (iv)
the right to sue for past, present and future infringement of the
foregoing.
(b) "Trademark Licenses" shall mean any written agreement, now
executed or to be executed hereafter by Borrower, granting to any third
party any right to use any Trademark now or hereafter owned by Borrower, or
granting to Borrower any right to use any Trademark now or hereafter owned
by any third party.
(c) "Trade Secrets" shall mean all trade secrets and other
confidential or proprietary technical and business information, now or
hereinafter owned by Borrower, as any of the foregoing may be amended or
supplemented from time to time, and any improvements thereon or changes
thereto.
Section 3. Payment of Obligations of Borrower
3.1 Direct Obligations. Borrower shall pay to Secured Party any sum or
sums due or which may become due pursuant to the Loan, or any extensions or
renewals thereof, or under this Agreement or the Loan Agreement.
3.2 Expenses. Borrower shall pay to Secured Party on demand all
expenses and expenditures, including reasonable attorneys' fees and other
legal expenses incurred or paid by Secured Party in exercising or
protecting its interests, rights and remedies under the Loan Agreement or
this Agreement plus interest thereon at the maximum non-usurious rate
permitted by applicable law with respect to Borrower. Such expenses and
expenditures shall be part of the Secured Indebtedness.
3.3 Acceleration. Borrower shall pay immediately, without notice, the
entire unpaid Secured Indebtedness of Borrower to Secured Party, whether
created or incurred pursuant to this Agreement, the Loan Agreement or
otherwise, upon the occurrence of an Event of Default as described in
Section 5 of this Agreement and acceleration of said Secured Indebtedness
as provided for in the Loan Agreement.
Section 4. Borrower's Representations, Warranties, Covenants and Agreements
Borrower represents, warrants, covenants and agrees that:
2
EXHIBIT 10.20
4.1 Valid Accounts. As used herein, the term "Accounts Receivable"
shall mean all accounts, contract rights, chattel paper, instruments,
general intangibles and rights to payment of every kind from Borrower, now
or at any time hereafter arising. Each Account Receivable will represent
the valid and legally enforceable indebtedness of a bona fide customer
("Customer") arising from the sale or lease of goods or rendition by
Borrower of services and will be subject to no set-offs, counterclaims or
defenses; such goods or services will have been delivered to or performed
for, and accepted by, the Customer, and the amount shown as to each account
on Borrower's books will be the true and undisputed amount owing and unpaid
thereon, payable in full at the time referred to in the invoice, or if no
time is specified within at least ninety (90) days from the date of the
particular invoice, and Borrower has no knowledge of any fact or
circumstance that would impair the validity or enforceability of any
Account Receivable.
4.2 Title; Authority. (a) Except for the Security Interest granted
hereby and except as set forth on Exhibit C attached hereto, Borrower is,
and as to Collateral acquired after the date hereof Borrower shall be, the
absolute owner and holder of, and has good and, with respect to real
property, marketable, title to, the Collateral, free and clear of all
liens, security interests, charges, mortgages or encumbrances of any kind
or nature whatsoever (collectively, "Liens"). All instruments, documents
and chattel paper pertaining to the Accounts are or, with respect to
Accounts Receivable arising after the date hereof, will be, valid and
genuine and free from all Liens, except for the security interests granted
hereby or as otherwise disclosed on Exhibit C.
(b) Borrower has full power and authority to grant to Secured
Party the Security Interest herein granted, and the execution,
delivery and performance of this Agreement is not in contravention of
any charter or by-law provision of Borrower, or of any indenture,
contract or other agreement to which Borrower is a party or by which
its properties or assets are bound.
4.3 Performance of Obligations. Borrower will duly perform and will
cause to be performed all obligations with respect to the goods, the sale
or lease of which gave rise to each Account.
4.4 Information. All information supplied and statements made by
Borrower or any guarantor in any financial, credit or accounting statement
or application for credit prior to, contemporaneously with or subsequent to
the execution of this Agreement are and shall be true, correct, complete,
valid and genuine.
4.5 Place of Business; Records. (a) The chief place of business of
Borrower is the address shown for Borrower in this Agreement. Borrower will
immediately notify Secured Party in writing of any change in Borrower's
chief place of business.
(b) Borrower will (i) keep such books and records pertaining to
the Collateral at such chief place of business, and at such office or
offices of Borrower as shall be approved in writing by Secured Party;
(ii) mark its books and records in such fashion as to indicate the
Security Interest granted hereby; (iii) permit officers, employees, or
other representatives of Secured Party at all reasonable times to
inspect the Collateral and inspect and make abstracts from the books
3
EXHIBIT 10.20
and records of Borrower pertaining to the Collateral; and (iv) furnish
to Secured Party such reasonable information and reports regarding the
Collateral as Secured Party may from time to time require.
(c) The Secured Party's right to take possession of any of
Borrower's books and records after the occurrence of and during an
Event of Default shall be enforceable at law, by action of replevin or
by any other appropriate remedy at law or in equity and, to the extent
permitted by law, the Borrower consents to the entry of judicial
orders or injunctions enforcing such rights without any notice to
Borrower or opportunity to be heard.
4.6 Taxes. Borrower will promptly pay any and all taxes, assessments
and governmental charges upon the Collateral prior to the date penalties
are attached thereto, except to the extent otherwise permitted by Secured
Party.
4.7 Notice to Customers. Upon Secured Party's request, Borrower will
give such notice in writing as Secured Party may require at any time to any
or all Customers indebted on all or any of the Accounts and, if Secured
Party shall so request, deliver to Secured Party copies of any and all such
notices and, in addition Secured Party, or its agents or representatives
may (1) transmit to any or all Customers at any time or times such notice
of Secured Party's interest in any such Accounts as Secured Party may
determine (but Secured Party shall not be required to give any such notice
and any failure to give such notice by Secured Party shall in no way affect
Secured Party's rights and interest hereunder or under any Accounts); (2)
request from Customers at any time or times information concerning the
amount owing under any or all Accounts; (3) request from Customers that
Accounts be paid directly to Secured Party or to a post office box address
over which Secured Party has control; or (4) enforce payment of and
collect, by legal proceedings or otherwise, all Accounts.
4.8 Information to Secured Party Regarding Collateral. Borrower will
transmit to Secured Party all information that it may have or receive with
respect to the Collateral or with respect to Customers indebted on the
Accounts Receivable which might in any way affect the value of the
Collateral or Secured Party's rights or remedies with respect thereto,
including, but not limited to (i) rejection of goods or services by a
Customer, (ii) assertion of claims, counterclaims or set-offs by a
Customer, and (iii) information of financial difficulties of a Customer of
which Borrower has or obtains knowledge.
4.9 No Additional Security Interests or Liens. Borrower will not
pledge, mortgage or otherwise encumber, or create or suffer a security
interest or Lien to exist in any of the Collateral to or in favor of any
person other than Secured Party, except as otherwise authorized pursuant to
this Agreement. Borrower will defend the Collateral against all claims and
demands of all persons at any time claiming the same or any interest
therein senior or pari passu to that of Secured Party.
4.10 Additional Documentation. Borrower will execute, alone or with
Secured Party, any financing statement or other document or procure any
document, and pay all connected costs, necessary or desirable to protect
the Security Interest, rights and remedies created by, provided in or
emanating from this Agreement. Borrower shall use its best efforts to
furnish to Secured Party, if requested, a landlord's waiver of all liens
with respect to any Collateral covered by this Agreement that is or that
4
EXHIBIT 10.20
may be located upon leased premises. Such landlord's waiver is to be in
such form and upon such terms as are acceptable to Secured Party.
4.11 Protective Action. Borrower will, at its own expense, do, make,
procure, execute and deliver all acts, things, writing and assurances as
Secured Party may at any time request to protect, assure or enforce its
interests, rights and remedies created by, provided in or emanating from
this Agreement.
4.12 No Leases, Licenses or Encumbrances. Borrower will not lend,
rent, lease, license or otherwise dispose of the Collateral or any interest
therein except as authorized in this Agreement or in writing by Secured
Party, and Borrower shall keep the Collateral, including the proceeds from
any disposition thereof, free from unpaid charges, including taxes, and
from all Liens.
4.13 Collateral Locations. The Collateral shall remain in Borrower's
possession or control at its address shown in this Agreement or at such
other locations as Secured Party may approve in writing, and shall not be
removed except for temporary removal in the ordinary course of Borrower's
business from those locations.
4.14 Insurance. Borrower will have and maintain or cause to be
maintained insurance at all times with respect to all Collateral against
risks of fire, theft and such other risks as Secured Party may require.
Such insurance policies shall contain such terms and be written by
companies satisfactory to Secured Party. Such insurance policies shall also
contain a standard mortgagee's endorsement providing for payment of any
loss to Secured Party. All policies of insurance shall provide for a
minimum of thirty (30) days written cancellation notice to Secured Party.
Borrower shall furnish Secured Party with certificates or other evidence
satisfactory to Secured Party of compliance with the foregoing insurance
provisions. Borrower hereby irrevocably appoints Secured Party as attorney
for Borrower in obtaining, adjusting, settling and canceling such insurance
and endorsing any drafts drawn by insurers of the Collateral, which power
is coupled with an interest; provided, however, that Secured Party shall
not be required to obtain, adjust, settle or cancel such insurance or
endorse such drafts and any failure to do so by Secured Party shall in no
way affect Secured Party's rights and interest hereunder or in any of the
Collateral. In the event of loss and the payment of insurance proceeds, all
monies shall be payable to Secured Party for the accounts of Secured Party
and Borrower, as their interests may appear. At the option of Secured
Party, all monies so received, from less than an actual or constructive
total loss shall be applied (i) to the Loan secured thereby, (ii) to repair
of the damage in respect of which the insurance loss was paid, or (iii) in
reimbursements for monies theretofore so applied by the Borrower with the
consent of the Secured Party. In the event of actual or constructive total
loss of the Collateral, the insurance proceeds for such loss shall, unless
otherwise agreed by Secured Party, be applied as follows: (i) to the
payment of the costs of collecting such insurance, if any, (ii) to the
payment of all indebtedness, principal, interest and other sums owed by the
Borrower to Secured Party secured hereby, and (iii) the balance, if any to
the Borrower.
4.15 Segregation of Returned Goods. Returned or repossessed goods
arising from or relating to any accounts included within the Collateral
shall, if requested by Secured Party, be held separate and apart from any
other property of Borrower.
5
EXHIBIT 10.20
4.16 Accounts as Proceeds. All accounts that are proceeds of the
inventory included within the Collateral shall be subject to the security
interest granted hereby and all of the other terms and provisions hereof.
4.17 Certificates of Title. If certificates of title or similar
documents are issued or outstanding or become issued and outstanding with
respect to any of the Collateral, Borrower will promptly advise Secured
Party thereof and will immediately cause the interest of Secured Party to
be properly noted thereon and said certificates to be delivered to Secured
Party.
4.18 Business Use. The Collateral is and will be used for the sole
purpose of conducting Borrower's business, unless otherwise agreed to in
writing by Secured Party.
4.19 No Misuse; Duty to Maintain. The Collateral will not be misused
or abused, wasted or allowed to deteriorate, except for the ordinary wear
and tear of its intended primary use, and will not be used in violation of
any statute, regulation or ordinance. Borrower agrees to maintain and use
the Collateral in a careful and proper manner and in conformity with all
applicable statutes, laws, ordinances and regulations and with all permits
and licenses. Borrower will not use the Collateral in any manner which
exposes the Collateral to unusual risk or to penalty, forfeiture or
capture. Borrower shall maintain, service and repair the Collateral so as
to keep the Collateral in good operating condition.
4.20 Collateral Affixed to Real Estate. If the Collateral is or is to
be wholly or partly affixed to real estate or other goods, a description of
the real estate or other goods shall be delivered to Secured Party and
become a part of this Agreement, and shall specify the location and record
owner of such real estate or other goods. If requested by Secured Party,
Borrower shall use its best efforts to furnish disclaimers or waivers of
all parties having an interest in the real estate or other goods to which
the Collateral is or is to be attached to any interest in the Collateral.
4.21 No Financing Statements. Except as otherwise set forth on Exhibit
D attached hereto, there is no financing statement or similar filing now on
file in any public office covering any part of the Collateral which has not
been discharged nor is there any filing with the USPTO for the purpose of
perfecting, confirming, continuing, enforcing or protecting any security
interest granted by Borrower in the Collateral, and Borrower will not
execute and there will not be on file in any public office any financing
statement or similar filing, except the financing statements filed or to be
filed in favor of Secured Party and the filing of this Agreement with the
USPTO, or as otherwise specifically permitted by this Agreement.
4.22 Trademarks. (a) Borrower (either itself or through licensees)
will, for each Trademark material to the conduct of Borrower's business,
(i) to the extent consistent with past practice, continue to use such
Trademark on each and every trademark class of goods applicable to its
current line of business in order to maintain such Trademark in full force
free from any claim of abandonment for nonuse, (ii) maintain as in the past
the quality of products and services offered under such Trademark, (iii)
employ such Trademark with the notice of Federal registration, and (iv) not
(and not permit any licensee or sublicensee thereof to) do any act or
knowingly omit to do any act whereby such Trademark may become abandoned or
invalidated.
6
EXHIBIT 10.20
(b) In no event shall Borrower, either itself or through any
agent, employee, licensee or designee, file an application for any
Trademark with the United States Patent and Trademark Office, or any
similar office or agency in any other country or any political
subdivision thereof or enter into a Trademark License, unless it
promptly informs Secured Party, and, upon request of Secured Party,
executes and delivers any and all agreements, instruments, documents
and papers as Secured Party may request to evidence Secured Party's
security interest in such Trademark or Trademark License, and the
goodwill and general intangibles of Borrower relating thereto or
represented thereby.
(c) Borrower will take all necessary steps that are consistent
with the practice in any proceeding before the USPTO, or any similar
office or agency in any other country or any political subdivision
thereof, to maintain and pursue each material application relating to
the Trademarks (and to obtain the relevant grant or registration) and
to maintain each material registration of the Trademarks which is
material to the conduct of such Borrower's business, including,
without limitation, filing of application for renewal, affidavits of
use, affidavits of incontestability and maintenance fees, and, where
appropriate, to initiate opposition, interference and cancellation
proceedings against third parties.
4.23 In the event that any Collateral consisting of a Trademark
material to the conduct of Borrower's business is believed infringed,
misappropriated or diluted by a third party, Borrower shall notify Secured
Party within fifteen (15) days after it learns thereof and shall, if
consistent with good business practice, promptly sue for infringement,
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and take such other actions as
are appropriate under the circumstances to protect such Collateral.
4.24 Borrower shall use its best effort to cause all existing UCC
financing statements and liens with respect to the Collateral, other than
those relating to the Secured Party, to be terminated.
Section 5. Events of Default
Borrower shall be in default under this Agreement upon the happening
of an Event of Default under the terms and conditions of the Loan Agreement
(herein called an "Event of Default").
Section 6. Secured Party's Rights and Remedies
6.1 Secured Party's Rights.
(a) This Agreement, Secured Party's rights hereunder or the
Secured Indebtedness may be assigned by Secured Party, at any
time and from time to time, and in any such case the assignee
shall be entitled to all of the rights, privileges and remedies
granted in this Agreement to Secured Party; provided, however,
that prior to the time an Event of Default has occurred, Secured
Party shall not make any such assignment to any party in the same
or similar business of that of the Borrower.
(b) Borrower hereby appoints the Secured Party as its true
and lawful attorney, with full power of substitution, for the
purpose of carrying out the provisions of this Agreement and
7
EXHIBIT 10.20
taking any action and executing any instrument which Secured
Party may deem necessary or advisable to accomplish the purposes
hereof. The power of attorney granted herein shall be deemed to
be coupled with an interest, shall be irrevocable, shall survive
the death, disability, dissolution, liquidation or other
termination of Borrower, shall be binding upon all heirs, legal
representatives, successors and assigns of Borrower, and shall
inure to the benefit of Secured Party and its successors and
assigns. Without limiting the generality of the foregoing,
Secured Party shall have the right to receive, collect and
endorse all checks made payable to Borrower or its order
representing any proceeds in respect of the Collateral or any
part thereof and to give full discharge therefor. Secured Party
may, but is not obligated to, exercise at any time and from time
to time all or any of Borrower's rights including, but not
limited to, the following powers, with respect to all or any of
the Collateral:
(i) to demand, sue for, collect, receive and give
acquittance for any and all monies due or to become due upon
or by virtue thereof;
(ii) to receive, take, endorse, assign and deliver any
and all checks, notes, drafts, documents and other
negotiable and non-negotiable instruments and chattel paper
taken or received by Secured Party in connection therewith;
(iii) to settle, compromise, compound, prosecute or
defend any action or proceeding with respect thereto;
(iv) to sell, transfer, assign or otherwise deal in or
with the same or the proceeds or avails thereof or the
relative goods, as fully and effectually as if Secured Party
were the absolute owner thereof; and
(v) to extend the time of payment of any or all thereof
and to make any allowance and other adjustments with
reference thereto, including without limitation, arrangement
for payment in installments, other modifications of the
payment terms thereof, or release thereof;
provided, however, that the exercise by Secured Party of or failure to so
exercise any such authority shall in no manner affect or discharge Borrower's
liability to Secured Party hereunder or under the Loan Agreement or under any
other instrument evidencing or securing any of the Secured Indebtedness;
provided, further, Secured Party shall be under no obligation, responsibility or
duty to exercise any of the powers hereby conferred upon it and it shall be
without liability for any act or failure to act in connection with any of the
Collateral. Secured Party shall not be required to take any steps necessary to
preserve the rights of the Collateral, except as required by law. Secured Party
shall at all times have the right to apply the proceeds of any of the Accounts
or other property in which Secured Party has been granted a Security Interest
herein towards payment of the Loan and other Secured Indebtedness immediately
upon receipt or collection of such proceeds.
(c) Secured Party or any of its employees, agents or representatives
may enter upon Borrower's premises at any reasonable time to inspect
Borrower's records pertaining to the Collateral and Borrower shall assist
such parties in making such inspections.
8
EXHIBIT 10.20
(d) Secured Party may execute, sign, endorse, transfer or deliver in
the name of Borrower notes, checks, drafts or other instruments for the
payment of money and receipts, certificates of origin, applications for
certificates of title or any other documents necessary to evidence, perfect
or realize upon the security interest and obligations created by this
Agreement.
6.2 Rights in Event of Default. (a) Upon the occurrence and during the
continuance of an Event of Default, in addition to the rights granted pursuant
to Section 6.1, the Secured Party may, without notice to the Borrower (except as
otherwise specified herein), do any or all of the following, all of which rights
and remedies are cumulative, and the exercise of any one or more of the remedies
provided for herein shall not be construed as a waiver of any of the other
remedies of Secured Party:
(i) Secured Party may declare the Secured Indebtedness
immediately due and payable and may exercise any of the rights and
remedies available to a secured party under the UCC or otherwise
available to Secured Party by agreement, at law or in equity, and
under all other applicable laws of each state having jurisdiction over
the Collateral or any part thereof, including without limitation
thereto, the right to sell, lease or otherwise dispose of any or all
of the Collateral and the right to take possession of the Collateral,
and for that purpose Secured Party may, with or without notice or
process of any kind, enter upon any premises on which the Collateral
or any part thereof may be situated and remove the Collateral or books
and records evidencing same, or may require Borrower to assemble the
Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both
parties. Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized
market, Secured Party will send Borrower reasonable notice of the time
and place of any public sale thereof or of the time after which any
private sale or other disposition thereof is to be made. The
requirement of sending reasonable notice shall be met if such notice
is mailed, postage prepaid, to Borrower at the address designated in
this Agreement at least ten (10) days before the time of the sale or
disposition. Expenses of retaking, holding, preparing for sale,
selling or the like shall include Secured Party's reasonable
attorneys' fees and legal expenses, plus interest thereon at the
maximum non-usurious rate permitted by applicable law with respect to
Borrower and shall constitute part of the Secured Indebtedness.
Secured Party may apply the proceeds of any disposition of Collateral
available for satisfaction of the Secured Indebtedness in any order of
preference which Secured Party, in its sole discretion, chooses.
Borrower shall remain liable for any deficiency.
(ii) Secured Party may retain all books and records of Borrower.
(iii) Secured Party may complete any uncompleted Inventory in the
process of construction or completion.
(iv) Secured Party may notify any of Borrower's lessees,
consignees, renters and/or debtors to make all payments directly to
the Secured Party and to surrender, at the termination of any such
lease, rental agreement or consignment, the item or items leased,
rented or consigned, directly to the Secured Party.
9
EXHIBIT 10.20
(v) Secured Party may cure any default in any reasonable manner
and add the cost of such cure to the Secured Indebtedness.
(b) Secured Party may remedy any default and may waive any default
without waiving the default remedied or without waiving any other prior or
subsequent default.
(c) Secured Party may enforce its rights under this Agreement without
resort to prior judicial process or judicial hearing, and Borrower
expressly waives, renounces and knowingly relinquishes any legal right
which might otherwise require Secured Party to enforce its rights by
judicial process. In so providing for a non-judicial remedy, Borrower
recognizes and concedes that such a remedy is consistent with the usage of
the trade, is responsive to commercial necessity and is the result of
bargaining at arms length. Nothing in this Agreement is intended to prevent
Borrower or Secured Party from resorting to judicial process at either
party's option.
(d) Borrower agrees that in performing any act under this Agreement
that time shall be of the essence and that Secured Party's acceptance of a
partial or delinquent payment or payments, or the failure of Secured Party
to exercise any right or remedy shall not be a waiver of any obligation of
Borrower or any right of Secured Party or constitute a waiver of any other
similar default subsequently occurring.
(e) Secured Party may at any time demand, sue for, collect or make any
compromise or settlement with reference to the Collateral as Secured Party,
in its sole discretion, chooses. Secured Party may delay exercising or omit
to exercise any right or remedy under this Agreement without waiving that
or any other past, present or future right or remedy, except in writing
signed by Secured Party.
Section 7. Additional Agreements
7.1 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties, their successors, endorsers,
representatives, receivers, trustees and assigns; provided, however, that
nothing contained herein shall be construed to permit the Borrower to
assign this Agreement or any of its rights or obligations hereunder,
without obtaining the prior written approval of the Secured Party.
7.2 Waiver and Indemnity. Borrower hereby waives and releases all
relief from any and all appraisement, stay or exemption laws of any state
now in force or hereinafter enacted. Borrower hereby waives presentment,
notice of dishonor and protest of all instruments included in or evidencing
the Collateral and any and all notices and demand whatsoever, whether or
not relating to such instruments.
7.3 Section Headings. The section headings appearing in this
instrument have been inserted for convenience only and shall be given no
substantive meaning or significance whatever in construing the terms and
provisions of this instrument.
7.4 Applicable Law; Place of Payment. The law governing this secured
transaction shall be that of the State of California in force at the date
10
EXHIBIT 10.20
of this instrument, and all payments and obligations hereunder shall be
made and performed in California, unless otherwise agreed.
7.5 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and may be personally
served or sent by telex, telecopier, mail or the express mail service of
the United States Postal Service, Federal Express or other equivalent
overnight or expedited delivery service and (i) if given by personal
service, telex (confirmed by telephone) or telecopier (confirmed by
telephone), it shall be deemed to have been given upon receipt, (ii) if
sent by telex or telecopier without telephone confirmation, it shall be
deemed to have been given twenty-four (24) hours after being given, (iii)
if sent by mail, it shall be deemed to have been given upon receipt and
(iv) if sent by Federal Express, the Express Mail Service of the United
States Postal Service or other equivalent overnight or expedited delivery
service, it shall be deemed given twenty-four (24) hours after delivery to
such overnight or expedited delivery service, delivery charges prepaid and
properly addressed to Borrower or Secured Party as the case may be. For
purposes hereof, the addresses of Borrower and Secured Party shall be as
follows:
Borrower:
Communication Intelligence Corporation
275 Shoreline Drive
Redwood Shores, CA 94065-1413
Attention: President
Secured Party:
The Philip S. Sassower 1996 Charitable Remainder Annuity Trust
135 East 57th Street
New York, New York 10022
Attn: Mr. Philip Sassower, Trustee
Tel: (212) 759-1909
Fax: (212) 319-4930
with a copy to:
Baer Marks & Upham LLP
805 Third Avenue
New York, NY 10022-7513
Attn: Jonathan J. Russo, Esq.
Tel: (212) 702-5700
Fax: (212) 702-5941
Any party may, by proper written notice hereunder to the other party, change the
address to which notices shall thereafter be sent to it.
7.6 Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully
severable, and the remaining provisions of this Agreement shall be in full
force and effect.
11
EXHIBIT 10.20
7.7 Savings Clause. Notwithstanding any provision to the contrary
herein, or in any of the documents evidencing the Secured Indebtedness, no
such provision shall require the payment or permit the collection of
interest in excess of the maximum permitted by applicable usury laws. If
any such excessive interest is so provided for, then in such event (i) the
provisions of this paragraph shall govern and control, (ii) neither the
Borrower nor his heirs, legal representatives, successors or assigns or any
other party liable for the payment thereof, shall be obligated to pay the
amount of such interest to the extent that is in excess of the maximum
non-usurious interest rate permitted by applicable law, (iii) any such
excess interest that may have been collected shall be, at the option of the
holder of the instrument evidencing the Secured Indebtedness either applied
as a credit against the then unpaid principal amount thereof or refunded to
the maker thereof, and (iv) the effective rate of interest shall be
automatically reduced to the maximum non-usurious interest rate permitted
under the applicable usury laws as now or hereafter construed by courts
having jurisdiction.
7.8 Pronouns. The pronouns used in this instrument are in the
masculine gender but shall be construed as feminine or neuter as occasions
may require.
7.9 Prior Agreement. This Agreement amends and restates in its
entirety the Original Security Agreement and such agreement shall no longer
be in effect.
EXECUTED as of the date set forth above.
BORROWER:
COMMUNICATIONS INTELLIGENCE CORPORATION
By: /s/ Guido DiGregorio
-------------------------------------
Name: Guido DiGregorio
Title: President and CEO
SECURED PARTY:
THE PHILIP S. SASSOWER 1996 CHARITABLE REMAINDER
ANNUITY TRUST
By: /s/ Philip S. Sassower
-------------------------------------
Name: Philip S. Sassower
Title: Trustee
12
EXHIBIT 10.20
EXHIBIT A
TRADEMARKS AND APPLICATIONS
Trademark Country Application/ Application/
Registration No. Registration Date
Handwriter France R: 92/421.079 R: 06/02/92
InkShrink France R: 93/489.492 R: 10/26/93
MacHandwriter France R: 92/418.221 R: 05/07/92
Sign-It France R: 96/637.456 R: 08/05/96
Handwriter Germany R: 2,057,970 R: 02/25/94
InkShrink Germany R: 2,071,642 R: 07/15/94
MacHandwriter Germany R: 2,027,414 R: 12/30/92
Sign-It Germany R: 39,634,957 R: 04/22/97
Handwriter Great Britain R: B 1,488,780 R: 07/15/94
InkShrink Great Britain R: 1,549,138 R: 11/04/94
MacHandwriter Great Britain R: B 1,488,781 R: 08/26/94
Sign-It Great Britain R: 2,017,049 R: 02/07/97
Handwriter Italy R: 639,696 R: 12/27/94
InkShrink Italy R: 677,464 R: 05/14/96
MacHandwriter Italy R: 639,697 R: 12/27/94
Sign-It Italy R: 763,200 R: 04/22/99
InkShrink Japan R: 3,199,505 R: 09/30/96
MacHandwriter Japan R: 4,074,160 R: 10/24/97
Handwriter Spain R: 1,682,610 R: 10/05/92
MacHandwriter Spain R: 1,682,611 R: 02/07/92
Sign-It Spain R: 2,044,039 R: 10/06/97
CIC US R: 1,306,886 R: 11/27/84
CIC Sign-It US A: 75/149,023 A: 7/23/96
(Statement of use
to be filed.)
Creativity Tool US R: 1,951,744 R: 01/23/96
Handwriter US R: 1,308,756 R: 12/11/84
Handwriter Sign-It
(Statement of
use to be filed.) US A: 75/133-509 A: 07/96
A-1
EXHIBIT 10.20
EXHIBIT A
TRADEMARKS AND APPLICATIONS
(continued)
Trademark Country Application/ Application/
Registration No. Registration Date
Handwriter Sign-It US A: 75/133,504 A: 07/96
& design (Statement of
use to be filed)
InkSentry US R: 2,073,729 R: 06/24/97
InkShrink US R: 1,931,730 R: 10/31/95
Ink-Snap US A: Pending A: 08/11/99
InkTools US R: 2,152,,968 R: 04/21/98
Jot US R: 2,219,350 R: 01/19/99
MacHandwriter US R: 1,721,067 R: 09/22/92
PenMac US R: 1,930,050 R: 10/24/95
Quicknotes US A: 75/206,691 A: 12/20/96
RecoEcho US A: Pending A: 08/11/99
SigCheck
(Statement of use
to be filed.) US A: 75/114,457 A: 06/05/96
Sign-It
(Statement of
use to be filed.) US A: 75/122,341 A: 06/19/96
Sign-It & design
(Statement of use to
be filed.) US A: 75/133,508 A: 07/96
Sign-On US A: Pending A: 08/11/99
SigView US R: 2,152,967 R: 04/21/98
WordComplete US A: Pending A: 08/11/99
YPAD US R: 2,065,304 R: 05/27/97
A-2
EXHIBIT 10.20
EXHIBIT B
PATENTS AND APPLICATIONS
Patent Inventor(s) Country Application Application
Issue No. Issue Date
Method for Dynamic John S. Ostrem USA 5,933,514 08/03/1999
Reconstruction Norman A. Austin
of Handwritten Data Hewitt D. Crane
Keyless Flat Panel James Dao USA 5,049,862 09/17/1991
Portable Computer David C. Foyt
- - Computer Aided Jeffrey J. Dao
Notebook Kenneth R. Allen
Method for Hewitt D. Crane USA 4,531,231 07/23/1985
Distinguishing John S. Ostrem
Between Complex Peter K. Edberg
CharacterSets
Confusion Grouping Hewitt D. Crane USA 4,573,196 02/25/1986
of Strokes in John S. Ostrem
Pattern Recognition
Method andSystem
Process and Apparatus Hewitt D. Crane USA 4,718,102 01/05/1988
Involving Pattern John S. Ostrem
Recognition
Complex Pattern Hewitt D. Crane USA 4,561,105 12/24/1985
Recognition Method John S. Ostrem
and System
B-1
EXHIBIT 10.20
EXHIBIT C
TO SECURITY AGREEMENT
Leasing Company Lease Number Product Leased
Xerox 950329631 Photo Copier
Serial # 6W6-311599
Dell Financial Services 0017336519001 Dell File Server Power
Edge 2300 Server
Dell Financial Services 0017336519002 Dell Hard Drives
for PowerEdge 2300
Server
Dell Financial Services 0017336519003 Dell Dimension XPST
Dell Financial Services 0017336519004 Dell Dimension XPST (2)
C-1
EXHIBIT 21.1
COMMUNICATION INTELLIGENCE CORPORATION
SCHEDULE OF SUBSIDIARIES
Communication Intelligence Computer Corporation Peoples Republic of China
Exhibit 23.1
CONSENT OF STONEFIELD JOSEPHSON
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The undersigned independent certified public accounting firm hereby consents to
the inclusion of its report on the financial statements of Communication
Intelligence Corp. for the year ending December 31, 1999, and to the reference
to it as experts in accounting and auditing relating to said financial
statements, in the Form 10k filed with Securities and Exchange Commission for
Communication Intelligence Corp., dated February 25, 2000.
- -----------------------------------------
STONEFIELD JOSEPHSON, INC.
Certified Public Accountants
Santa Monica, California
February 25, 2000
1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-04711, No.
333-24257 and No. 333-43855) and the incorporation by reference in the
Registration Statements on Form S-8 (No. 33-5521, No. 33-71614 and No. 33-92284)
of Communication Intelligence Corporation of our report dated March 29, 1999
appearing in this Form 10-K. We also consent to the reference to us under the
heading "Experts" in such Prospectuses.
PricewaterhouseCoopers LLP
San Jose, California
March 28, 2000
1