-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fwsu7/MytluN9q3v7XS+kp6Pq+bX7UH+ftc4TCgQvzFV1njfyTB81AJEepfNpGXN QMBLQN7hfnt8X4F7ntRTFg== 0000912057-97-000323.txt : 19970108 0000912057-97-000323.hdr.sgml : 19970108 ACCESSION NUMBER: 0000912057-97-000323 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATION INTELLIGENCE CORP CENTRAL INDEX KEY: 0000727634 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 942790442 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19301 FILM NUMBER: 97501903 BUSINESS ADDRESS: STREET 1: 275 SHORELINE DR 6TH FL STREET 2: STE 520 CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4158027888 MAIL ADDRESS: STREET 1: 275 SHORELINE DR STREET 2: STE 520 CITY: REDWOOD CITY STATE: CA ZIP: 94063 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 31, 1996 COMMUNICATION INTELLIGENCE CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE --------------------------------------------- (State or other jurisdiction of incorporation) 0-19301 94-2790442 - ----------------------------- ---------------------------------- (Commission File Number) (I.R.S. Employer Identification No.) 275 SHORELINE DRIVE, SUITE 520, REDWOOD SHORES, CA 94065 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 802-7888 NOT APPLICABLE ----------------------------------------------------------------------- (Former name or former address, if changed since last report.) ITEM 5. OTHER EVENTS. On December 31, 1996, Communication Intelligence Corporation (the "Company") consummated a private placement of 450,000 shares of 5% cumulative convertible preferred stock at a purchase price of $25 per share for $11,250,000. In connection with the transaction, the Company received gross cash proceeds of $9,495,000 and accepted for exchange 390,000 shares of common stock (and rights to receive additional shares) for 70,200 shares of preferred stock from investors who purchased these common shares from the Company in June 1996. Each share of preferred stock is convertible by the holder into shares of common stock at any time beginning six months from December 31, 1996 pursuant to a conversion formula determined by dividing (i) the sum of $25 multiplied by the number of shares being converted, plus accrued and unpaid dividends thereon, by (ii) a conversion price which ranges from approximately 85% to 72% of the marketprice of the common stock. In addition, all outstanding shares of preferred stock must be converted by the holders into shares of the Company's common stock by December 31, 1999, subject to the satisfaction of certain conditions and other events. Under the terms of the preferred stock, the holders are entitled to receive, out of assets legally available therefor, cumulative dividends at the rate of $1.25 per share per annum, compounded semi-annually, when payable (whether or not declared). Such dividends may be paid at the Company's option in cash or additional shares of preferred stock. The Company is required to pay any accrued and unpaid dividends on the outstanding shares of preferred stock before declaring or paying any dividends for any other class or series of stock, including the common stock. Holders of the preferred stock have the right to vote with the holders of the common stock, combined as one class, for the election of directors and such other matters to be voted on at a meeting of the stockholders. Each share of preferred stock has one vote on such matters. In addition, the affirmative vote of holders of 75% of the outstanding shares of preferred stock is required for the consummation of certain business combinations and other extraordinary transactions, amendments or waivers to the Company's certificate of designations or amendments to the Company's organizational documents which may change the rights of the holders of the preferred stock. In the event of the Company's liquidation, dissolution or winding up, the holders of the preferred stock are entitled to receive, prior and in preference to any distribution of Company assets to the holders of any other class or series of shares, $25 per share plus any accrued but unpaid dividends. For a more complete description of the terms of the preferred stock, see the Certificate of Designations of the Company filed as Exhibit 3 hereto, which is incorporated by reference herein. In connection with the sale of the preferred stock, the Company entered into a registration rights agreement with the holders of the preferred stock which provides that the Company file a registration statement with the Securities and Exchange Commission relating to the shares of common stock issuable upon conversion of the preferred stock no later than March 31, 1997 and will use its best efforts to cause such registration statement to become effective. For a more complete description of the terms of the registration rights agreement, see the Registration Rights Agreement filed as Exhibit 2 hereto, which is incorporated by reference herein. Libra Investments, Inc. ("Libra") acted as the Company's placement agent in connection with the private placement and in connection therewith received $675,000 in commissions and a five-year warrant to purchase 337,500 shares of common stock with an exercise price of $2.50 per share. The Company also granted Libra registration rights with respect to the shares of common stock underlying the warrant. For a more complete description of the warrant and registration rights granted to Libra, see the Warrant Certificate and the Registration Rights Agreement filed as Exhibits 5 and 4, respectively, hereto, which are incorporated by reference herein. -2- ITEM 7. EXHIBITS. (c) The following documents are filed herewith as exhibits to this Form 8-K: 1. Preferred Stock Investment Agreement, dated as of December 31, 1996, between the Company and the Investors listed on Schedule I attached thereto. 2. Registration Rights Agreement, dated as of December 31, 1996, between the Company and the Investors listed on Schedule I attached thereto. 3. Certificate of Designations of the Company with respect to the 5% Cumulative Convertible Preferred Stock. 4. Registration Rights Agreement, dated as of December 31, 1996, of the Company and Libra Investments, Inc. 5. Warrant Certificate, dated as of December 31, 1996, issued to Libra Investments, Inc. -3- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMMUNICATION INTELLIGENCE CORPORATION Date: January 6, 1997 By: /s/ Francis V. Dane ---------------------------------- Name: Francis V. Dane Title: Vice President, Secretary and Treasurer -4- EXHIBIT INDEX EXHIBIT PAGE ------- ---- 1. Preferred Stock Investment Agreement, dated as of December 31, 1996, between the Company and the investors listed on Schedule I attached thereto. 2. Registration Rights Agreement, dated as of December 31, 1996, between the Company and the Investors listed on Schedule I attached thereto. 3. Certificate of Designations of the Company with respect to the 5% Cumulative Convertible Preferred Stock. 4. Registration Rights Agreement, dated as of December 31, 1996, of the Company and Libra Investments, Inc. 5. Warrant Certificate, dated as of December 31, 1996, issued to Libra Investments, Inc. -5- EX-1 2 EXHIBIT 1 Exhibit 1 PREFERRED STOCK INVESTMENT AGREEMENT PREFERRED STOCK INVESTMENT AGREEMENT ("Agreement") dated as of December 31, 1996 between Communication Intelligence Corporation, a Delaware corporation ("CIC"), and each person or entity listed as an investor on Schedule I attached to this Agreement (each individually an "Investor" and collectively the "Investors"). W I T N E S S E T H: WHEREAS, CIC desires to sell and issue to the Investors, and the Investors wish to purchase from CIC, an aggregate of 450,000 shares of CIC's 5% Cumulative Convertible Preferred Stock, par value $0.01, having the rights, designations and preferences set forth in the Certificate of Designations of CIC (the "Designation") in the identical form and substance of Exhibit 2.1(c) attached hereto (the "Preferred Shares"), on the terms and conditions set forth herein; and WHEREAS, the Preferred Shares will be convertible into shares ("Common Shares") of common stock, par value $0.01, of CIC ("Common Stock"), pursuant to the terms of the Designation, and the Investors will have registration rights with respect to such Common Shares issuable upon conversion, pursuant to the terms of that certain Registration Rights Agreement to be entered into between CIC and the Investors substantially in the form of Exhibit 4.2(f) hereto ("Registration Rights Agreement"), and the Preferred Shares will be subject to certain rights of redemption of CIC and the Investors; NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF PREFERRED STOCK Section 1.1 PURCHASE AND SALE OF PREFERRED STOCK. Upon the following terms and conditions, CIC shall issue and sell to each Investor severally, and each Investor severally shall purchase from CIC, the number of Preferred Shares indicated next to such Investor's name on Schedule I attached hereto. Section 1.2 PURCHASE PRICE. The purchase price for the Preferred Shares (the "Purchase Price") shall be $25 per share. Section 1.3 THE CLOSING. (a) The closing of the purchase and sale of the Preferred Shares (the "Closing"), shall take place at the offices of the Investors' counsel, at 10:00 am., local time on the later of the following: (i) the date on which the last to be fulfilled or waived of the conditions set forth in Article IV hereof and applicable to the Closing shall be fulfilled or waived in accordance herewith, or (ii) such other time and place and/or on such other date as the Investors and CIC may agree. The date on which the Closing occurs is referred to herein as the "Closing Date." (b) On the Closing Date, CIC shall deliver to each Investor certificates (with the number of and denomination of such certificates reasonably requested by such Investor) representing the Preferred Shares purchased hereunder by such Investor registered in the name of such Investor or its nominee or deposit such Preferred Shares into accounts designated by such Investor, and such Investor shall deliver to CIC the Purchase Price for the number of Preferred Shares purchased by such Investor hereunder (i) by wire transfer in immediately available funds to an account designated in writing by CIC, and/or (ii) by transfer and delivery to CIC of the Swap Shares (as defined below), together with any certificates evidencing such Swap Shares and duly executed stock powers, as appropriate. CIC shall immediately cancel such Swap Shares upon receipt. The delivery of payment by each Investor of the Purchase Price applicable to it as set forth in this paragraph shall constitute a payment delivered to CIC in satisfaction of such Investor's obligation to pay the Purchase Price hereunder. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. Section 1.4 SWAP SHARES. Upon Closing, CIC and each Investor paying the Purchase Price for Preferred Shares in whole or in part by delivering to CIC shares ("Swap Shares") of Common Stock issued to such Investor pursuant to a Subscription Agreement (each a "Subscription Agreement") dated in June, 1996 between CIC and such Investor in connection with the June 1996 Private Placement (as defined below) ("Swap Investors") acknowledge and agree that any and all rights with respect to such Swap Shares shall terminate, including without limitation any and all rights with respect to the June 1996 Private Placement to the extent relating to the Swap Shares and any and all agreements or instruments executed in connection therewith, including without limitation any rights under the Registration Rights Agreement dated in June, 1996 between CIC and such Investor with respect to such Swap Shares and any rights to acquire Extra Shares (as defined in the Subscription Agreement) with respect to the value of the Swap Shares (at $4.50 per share). Upon Closing, CIC and the Swap Investors acknowledge and agree that any and all rights under the Swap Shares and under agreements relating to the Swap Shares shall be null and void and of no further force and effect. CIC represents and warrants that as of the date hereof and the Closing Date no Extra Shares have been issued to any such Investor under any Subscription Agreement with respect to the value of the Swap Shares (at $4.50 per share). The term "June 1996 Private Placement" shall mean the private placement by CIC of 600,000 shares of Common Stock at $4.50 per share in June, 1996 to various investors pursuant to subscription agreements and registration rights agreements entered into between CIC and such investors in connection with such private placement. For purposes of Section 4.2(l) below, the term "November 1995 Private Placement" shall mean the private placement by CIC of 5,500,000 shares of Common Stock at $2.00 per share on or about November 28, 1995 to various investors pursuant to subscription agreements and registration rights agreements entered into between CIC and such investors in connection with such private placement. -2- ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 REPRESENTATIONS AND WARRANTIES OF CIC. CIC hereby makes the following representations and warranties to each of the Investors as of the date hereof and on the Closing Date: (a) ORGANIZATION AND QUALIFICATION. CIC is a corporation duly incorporated and existing in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to carry on its business as now being conducted. CIC does not have any direct or indirect subsidiaries other than the subsidiaries listed on Schedule 2.1(a) attached hereto. CIC is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary other than those in which the failure so to qualify would not have a Material Adverse Effect. "Material Adverse Effect" means any adverse effect on the business, operations, properties, prospects, or financial condition of the entity with respect to which such term is used and which is material to such entity and other entities controlling or controlled by such entity taken as a whole, and any material adverse effect on the transactions contemplated under this Agreement, the Registration Rights Agreement or any other agreement or document contemplated hereby or thereby. (b) AUTHORIZATION; ENFORCEMENT. (i) CIC has the requisite corporate power and authority to enter into and perform this Agreement and the Registration Rights Agreement and to issue the Preferred Shares in accordance with the terms hereof, (ii) the execution and delivery of this Agreement and the Registration Rights Agreement by CIC and the consummation by it of the transactions contemplated hereby and thereby, including the issuance of the Preferred Shares, and the resolutions contained in the Designation, have been duly authorized by all necessary corporate action, and no further consent or authorization of CIC or its Board of Directors or stockholders is required, (iii) this Agreement and the Registration Rights Agreement have been duly executed and delivered by CIC, and (iv) this Agreement and the Registration Rights Agreement constitute valid and binding obligations of CIC enforceable against CIC in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) CAPITALIZATION. The authorized capital stock of CIC consists of 80,000,000 shares of common stock and 10,000,000 shares of preferred stock; there are 42,095,375 shares of common stock and no shares of preferred stock issued and outstanding. All of the outstanding shares of CIC's common stock have been validly issued and are fully paid and nonassessable. No Common Shares are entitled to preemptive rights; 12,917,857 Common Shares are entitled to registration rights; and there are outstanding options for 6,111,838 Common Shares and outstanding warrants for 3,830,000 Common Shares. There are no other scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights exchangeable or convertible into, any shares of capital stock of CIC, or contracts, commitments, understandings, or arrangements by which CIC is or may become bound to issue additional shares of capital stock of CIC or options, warrants, scrip, rights to subscribe to, or commitments -3- to purchase or acquire, any shares, or securities or rights convertible into shares, of capital stock of CIC (except as contemplated by this Agreement or disclosed in the SEC Documents (as defined below)). Attached hereto as Exhibit 2.1(c) are true and correct copies of CIC's Certificate of Incorporation (the "Charter") and the Designation, each as in effect on the date hereof, and CIC has furnished or made available to the Investors true and correct copies of CIC's By-Laws, as in effect on the date hereof (the "By-Laws"). The Designation has been duly filed in the State of Delaware. (d) ISSUANCE OF COMMON SHARES. The Common Shares issuable upon conversion of the Preferred Shares pursuant to the Designation (the "Underlying Shares") are duly authorized and reserved for issuance and, upon such conversion in accordance with the Designation, such Underlying Shares will be validly issued, fully paid and non-assessable, free and clear of any and all liens, claims and encumbrances, and entitled to be traded on the NASDAQ Small Capitalization Market, and the holders of such Underlying Shares shall be entitled to all rights and preferences accorded to a holder of Common Shares. The outstanding Common Shares are currently listed on the NASDAQ Small Capitalization Market. (e) NO CONFLICTS. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by CIC and the consummation by CIC of the transactions contemplated hereby and thereby and the filing of the Designation do not and will not (i) result in a violation of CIC's Charter or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which CIC or any of its subsidiaries is a party, or result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to CIC or any of its subsidiaries or by which any property or asset of CIC or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect); provided that, for purposes of such representation as to Federal, state, local or foreign law, rule or regulation, no representation is made herein with respect to any of the same applicable solely to the Investors and not to CIC. The business of CIC and its direct and indirect subsidiaries is not being conducted in violation of any law, ordinance or regulations of any governmental entity, except for violations which either singly or in the aggregate do not and will not have a Material Adverse Effect. CIC is not required under Federal, state or local law, rule or regulation in the United States to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement and the Registration Rights Agreement and the Designation or issue and sell the Preferred Shares in accordance with the terms hereof and issue the Underlying Shares upon conversion thereof, except for the registration provisions provided in the Registration Rights Agreement, provided that, for purposes of the representation made in this sentence, CIC is assuming and relying upon the accuracy of the relevant representations and agreements of the Investors herein. (f) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Common Stock of CIC is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and CIC has filed all reports, schedules, forms, statements and other documents required to be filed by it with the Securities and Exchange Commission ("SEC") -4- pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d), in addition to one or more registration statements and amendments thereto heretofore filed by CIC with the SEC (all of the foregoing including filings incorporated by reference therein being referred to herein as the "SEC Documents"). CIC has delivered or made available to the Investors true and complete copies of all SEC Documents (including, without limitation, proxy information and solicitation materials and registration statements) filed with the SEC since December 31, 1995 and all annual SEC Documents filed with the SEC since December 31, 1994. CIC has not provided to the Investor any information which, according to applicable law, rule or regulation, should have been disclosed publicly by CIC but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The SEC Documents contain all material information concerning CIC, and no event or circumstance has occurred which would require CIC to disclose such event or circumstance in order to make the statements in the SEC Documents not misleading on the date hereof or on the Closing Date but which has not been so disclosed. The financial statements of CIC included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of CIC as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (g) PRINCIPAL EXCHANGE/MARKET. The principal market on which the Common Shares are currently traded is the NASDAQ Small Capitalization Market. (h) NO MATERIAL ADVERSE CHANGE. Since September 30, 1996, the date through which the most recent quarterly report of CIC on Form 10-Q has been prepared and filed with the SEC, a copy of which is included in the SEC Documents, no Material Adverse Effect has occurred or exists with respect to CIC or its subsidiaries, except as otherwise disclosed or reflected in other SEC Documents prepared through or as of a date subsequent to September 30, 1996 and except that since September 30, 1996 there has been a continuation of the losses reflected therein in an amount not exceeding $1,500,000 and if additional equity is not received or if revenues generated from sales do not increase, this would, among other things, affect CIC's ability to maintain its listing on the NASDAQ Small Capitalization Market. (i) NO UNDISCLOSED LIABILITIES. CIC and its direct and indirect subsidiaries have no liabilities or obligations not disclosed in the SEC Documents, other than those liabilities incurred in the ordinary course of CIC's or its subsidiaries' respective businesses since September 30, 1996, which liabilities, individually or in the aggregate, do not or would not have a Material Adverse Effect on CIC or its direct or indirect subsidiaries. -5- (j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or circumstance has occurred or exists with respect to CIC or its direct or indirect subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by CIC but which has not been so publicly announced or disclosed. (k) NO GENERAL SOLICITATION. Neither CIC, nor any of its affiliates, or, to its knowledge, any person acting on its or their behalf (including Libra Investments, Inc. ("Placement Agent")), has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Act")) in connection with the offer or sale of the Preferred Shares or Common Shares. (l) NO INTEGRATED OFFERING. Neither CIC, nor any of its affiliates, nor to its knowledge any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Preferred Shares under the Act. (m) FORM S-3. CIC is eligible to file the Registration Statement (as defined in the Registration Rights Agreement) on Form S-3 under the Act and rules promulgated thereunder, and Form S-3 is permitted to be used for the transactions contemplated hereby under the Act and rules promulgated thereunder. (n) INTELLECTUAL PROPERTY. CIC (and/or its wholly-owned subsidiaries) owns or has licenses to use certain patents, copyrights and trademarks ("intellectual property") associated with its business. To its knowledge CIC and its subsidiaries have all intellectual property rights which are needed to conduct the business of CIC and its subsidiaries as it is now being conducted or as proposed to be conducted as disclosed in the SEC Documents. CIC and its subsidiaries have no reason to believe that the intellectual property rights which it owns are invalid or unenforceable or that the use of such intellectual property by CIC or its subsidiaries infringes upon or conflicts with any right of any third party, and neither CIC nor any of its subsidiaries has received notice of any such infringement or conflict. CIC and its subsidiaries have no knowledge of any infringement of its intellectual property by any third party. (o) STANDOFF COMMITMENTS. CIC has received binding assurances from James Dao, Philip Sassower and CIC Standby Ventures, L.P., and CIC shall use its best efforts to promptly cause all of the other executive officers and directors of CIC to agree, that none of them will sell any Common Shares until the Restrictive Covenant Termination Date (as defined below), except that with the approval of the Chairman of the Board of CIC, such executive officers and directors may sell individually up to ten percent (10%) of their present holdings of Common Shares (including Common Shares to be received in the future upon the exercise of any presently held options, warrants, stock appreciation rights or the like), and may sell amounts in excess of 10% with the approval of a majority in interest of the holders of the outstanding Preferred Shares. CIC represents and warrants that such amount of present holdings of Common Shares is as set forth on Schedule 2.1(o) attached hereto. (p) NO LITIGATION. No litigation or claim (including those for unpaid taxes) against CIC or any of its subsidiaries is pending or, to CIC's knowledge, threatened, and no -6- other event has occurred, which if determined adversely would have a Material Adverse Effect on CIC or would materially adversely affect the transactions contemplated hereby. (q) BROKERS. CIC has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by any Investor relating to this Agreement or the transactions contemplated hereby, except for amounts owing to the Placement Agent, which amounts shall be paid by CIC. Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of the Investors, severally and not jointly, hereby makes the following representations and warranties to CIC as of the date hereof and on the Closing Date: (a) AUTHORIZATION; ENFORCEMENT. (i) Such Investor has the requisite power and authority to enter into and perform this Agreement and the Registration Rights Agreement and to purchase the Preferred Shares being sold hereunder, (ii) the execution and delivery of this Agreement and the Registration Rights Agreement by such Investor and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and (iii) this Agreement and the Registration Rights Agreement constitute valid and binding obligations of such Investor enforceable against such Investor in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (b) NO CONFLICTS. The execution, delivery and performance of this Agreement and the Registration Rights Agreement and the consummation by such Investor of the transactions contemplated hereby and thereby do not and will not (i) result in a violation of such Investor's organizational documents, or (ii) conflict with any agreement, indenture or instrument to which such Investor is a party, or (iii) result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Investor. Such Investor is not required to obtain any consent or authorization of any governmental agency in order for it to perform its obligations under this Agreement or the Registration Rights Agreement. (c) INVESTMENT REPRESENTATION. Such Investor is purchasing the Preferred Shares for its own account and not with a view to distribution in violation of any securities laws. Such Investor has no present intention to sell the Preferred Shares and such Investor has no present arrangement (whether or not legally binding) to sell the Preferred Shares to or through any person or entity; provided, however, that by making the representations herein, such Investor does not agree to hold the Preferred Shares for any minimum or other specific term and reserves the right to dispose of the Preferred Shares at any time in accordance with Federal and state securities laws applicable to such disposition. (d) ACCREDITED INVESTOR. Such Investor is an "accredited investor" as defined in Rule 501 promulgated under the Act. The Investor has such knowledge and experience in financial and business matters in general and investments in particular, so that such Investor is able to evaluate the merits and risks of an investment in the Preferred Shares and to protect its own interests in connection with such investment. In addition (but without limiting the effect -7- of CIC's representations and warranties contained herein), such Investor has received such information as it considers necessary or appropriate for deciding whether to purchase the Preferred Shares pursuant hereto. Such Investor acknowledges that no representation or warranty is made by the Placement Agent or any persons representing the Placement Agent with respect to CIC or the sale of the Preferred Shares. (e) RULE 144. Such Investor understands that there is no public trading market for the Preferred Shares, that none is expected to develop, and that the Preferred Shares must be held indefinitely unless such Preferred Shares are converted or registered under the Act or an exemption from registration is available. Such Investor has been advised or is aware of the provisions of Rule 144 promulgated under the Act. (f) BROKERS. Such Investor has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by CIC relating to this Agreement or the transactions contemplated hereby, except for amounts owing to the Placement Agent, which amounts shall be paid by CIC. (g) RELIANCE BY CIC. Such Investor understands that the Preferred Shares are being offered and sold in reliance on a transactional exemption from the registration requirements of Federal and state securities laws and that CIC is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Investor set forth herein in order to determine the applicability of such exemptions and the suitability of such Investor to acquire the Preferred Shares. ARTICLE III COVENANTS Section 3.1 REGISTRATION AND LISTING. Until such time as no Preferred Shares are outstanding or, if earlier, until the Forced Conversion Date (as defined in the Designation), CIC will cause the Common Shares to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such reporting and filing obligations. Until such time as no Preferred Shares are outstanding or, if earlier, until the Forced Conversion Date, CIC shall, to the extent permitted by the rules of NASDAQ, continue the listing or trading of the Common Shares on the NASDAQ Small Capitalization Market or National Market and comply in all respects with CIC's reporting, filing and other obligations under the bylaws or rules of the NASD and NASDAQ and any exchange or market where the Common Shares are then traded. CIC shall cause the Underlying Shares to be listed on the NASDAQ Small Capitalization Market or National Market or such other market on which the Common Shares are then trading if traded on the New York Stock Exchange or American Stock Exchange, prior to the Conversion Commencement Date. As used herein and in the Registration Rights Agreement and the Designation, the term "Effective Registration" shall mean that all registration obligations of CIC pursuant to the Registration Rights Agreement have been satisfied, such registration is not subject to any suspension or stop order, the prospectus for the Common Shares issuable upon conversion of the Preferred Shares is current and such Common -8- Shares are listed for trading on the NASDAQ Small Capitalization or National Market, or such other market on which the Common Shares are then trading if traded on the New York Stock Exchange or American Stock Exchange, and such trading has not been suspended for any reason, and none of CIC or any direct or indirect subsidiary of CIC is subject to any bankruptcy, insolvency or similar proceeding. Section 3.2 CERTIFICATES ON CONVERSION. Upon any conversion by an Investor (or then holder of Preferred Shares) of the Preferred Shares pursuant to the Designation, CIC shall issue and deliver to such Investor (or holder) within three (3) days of the Conversion Date (as defined in the Designation) a new certificate or certificates for the number of Preferred Shares which such Investor (or holder) has not yet elected to convert but which are evidenced in part by the certificate(s) submitted to CIC in connection with such conversion (with the number of and denomination of such new certificate(s) designated by such Investor or holder). Section 3.3 REPLACEMENT CERTIFICATES. The certificate(s) representing the Preferred Shares held by any Investor (or then holder) may be exchanged by such Investor (or such holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Preferred Shares, as reasonably requested by such Investor (or such holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. Section 3.4 EXPENSES. CIC shall pay, at the Closing and promptly upon receipt of any further invoices relating to same, all reasonable due diligence fees and expenses and reasonable attorneys' fees and expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C., up to a maximum amount of $100,000, incurred by the Investors in connection with the preparation, negotiation, execution and delivery of this Agreement, the Registration Rights Agreement, the Designation and the related agreements and documents and the transactions contemplated hereunder and thereunder. At Closing CIC shall pay the amount due for such fees and expenses (which may include fees and expenses estimated to be incurred for completion of the transaction including post-closing matters). In the event such amount is ultimately less than the actual fees and expenses, CIC shall promptly pay such deficiency upon receipt of an invoice regarding same. CIC shall pay all fees and/or commissions payable to the Placement Agent in connection with the transactions contemplated hereby and the agreements and documents related hereto. The Placement Agent's compensation shall be (i) a cash payment of 6% of the aggregate gross proceeds received by CIC from the sale of the Preferred Shares hereunder and (ii) the issuance to the Placement Agent by CIC of warrants to purchase 30,000 shares of CIC's Common Stock for each $1,000,000 of aggregate gross proceeds received by CIC from the sale of the Preferred Shares hereunder (with an exercise price equal to the lesser of $2.50 per share or the closing price of CIC's Common Stock as reported on the NASDAQ Small Capitalization Market on the Closing Date). Section 3.5 SECURITIES COMPLIANCE. CIC shall notify the SEC and NASD, in accordance with their requirements, of the transactions contemplated by this Agreement, the Designation and the Registration Rights Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Preferred Shares hereunder and the Common Shares issuable upon conversion thereof. -9- Section 3.6 INTERCOMPANY TRANSACTIONS. Until the Restrictive Covenant Termination Date (as defined below) and except for up to $2,000,000 of funds required in connection with payments to the China Joint Venture (as described in the SEC Documents) and strategic alliances with other unrelated entities: (i) any monies or assets paid or transferred from CIC to any direct or indirect subsidiary of CIC for any reason whatsoever shall be treated and deemed as a loan from CIC to such subsidiary; (ii) any monies or assets paid or transferred from any direct or indirect subsidiary of CIC to CIC for any reason whatsoever shall be treated and deemed as a dividend and/or distribution from such subsidiary to CIC; (iii) CIC shall not issue or transfer any of its shares of Common Stock to any direct or indirect subsidiary; and (iv) CIC shall not, and shall cause its direct and indirect subsidiaries not to, without the prior written consent of a majority in interest of the holders of Preferred Shares, create any new subsidiaries. The term "Restrictive Covenant Termination Date" shall mean the date which is the earlier of (i) the date which is the last day of the 13th fiscal month following the Closing Date ("Maximum Restrictive Covenant Termination Date"), or (ii) such date on which all the Preferred Shares have been converted for Common Shares, provided that the Maximum Restrictive Covenant Termination Date shall not occur until such time as CIC has performed all material obligations under this Agreement, the Registration Rights Agreement and the Designation which were required under the terms hereof or thereof to have been so performed, and provided further that the Maximum Restrictive Covenant Termination Date shall be deferred one day for each day that there is no Effective Registration after the date which is six (6) months following the Closing Date. Section 3.7 DIVIDENDS OR DISTRIBUTIONS. Until the Restrictive Covenant Termination Date, CIC agrees that it shall not (a) declare or pay any dividends or make any distributions to any holder or holders of Common Shares, (b) purchase or otherwise acquire for value, directly or indirectly, any Common Stock or other equity security of CIC either junior to or on parity with the Preferred Shares, or (c) authorize or issue any other equity security senior to the Preferred Shares. Section 3.8 NO SENIOR SECURITIES. Until the Restrictive Covenant Termination Date, CIC agrees that neither CIC nor any direct or indirect subsidiary of CIC shall (i) create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, or permit any liens, claims or encumbrances to exist against CIC or any direct or indirect subsidiary of CIC or any of their assets, except for trade payables incurred in the ordinary course of business consistent with past practices and except for a working capital facility in form and substance and with a lender reasonably satisfactory to the Investors, which working capital facility shall not exceed $10,000,000, or (ii) issue any shares of its preferred stock or any securities convertible into its preferred stock without prior written approval of such preferred stock (or convertible security) issuance by a majority in interest of the holders of outstanding Preferred Shares, except for preferred stock which is junior to or on parity with the Preferred Shares in all respects. Section 3.9 NOTICES. CIC agrees to provide all holders of Preferred Shares with copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to the holders of shares of Common Shares, contemporaneously with the delivery of such notices or information to such Common Share holders. -10- Section 3.10 USE OF PROCEEDS. Until the Restrictive Covenant Termination Date, CIC agrees that the proceeds received by CIC from the sale of the Preferred Shares hereunder shall be used for working capital purposes (including the funding of up to $2,000,000 for the China Joint Venture and strategic alliances with other unrelated entities). Section 3.11 OTHER OFFERINGS; RIGHT OF FIRST REFUSAL; CONVERSION PRICE ADJUSTMENT; MORE FAVORABLE FINANCING. (a) OTHER OFFERING. Notwithstanding anything contained herein, in the event that CIC issues or sells, or proposes to issue or sell, any Common Shares or any of its securities which are directly or indirectly convertible into or exchangeable for Common Shares, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of Common Shares (other than shares or options issued or which may be issued pursuant to CIC's employee or director option plans or shares issued upon exercise of options, warrants or rights outstanding on the Closing Date listed in the SEC Documents), then such Common Shares so issued or sold and such Common Shares so issuable upon conversion or exchange of other securities shall be subject to a "lock-up" provision in form and substance reasonably acceptable to the Investors pursuant to which such Common Shares may not be sold by any holder thereof until the date ("Lock-Up Date") which is three (3) months following the Conversion Commencement Date (as defined in the Designation), provided that the Lock-Up Date shall be deferred by 1.5 days for each day that there is no Effective Registration or there is not a sufficient amount of Common Shares available for conversion of all outstanding Preferred Shares at any time on and after the Conversion Commencement Date, and provided further that such Common Shares may be sold in a private transaction so long as each successive transferee of such Common Shares is subject to such lock-up provision. (b) RIGHT OF FIRST OFFER. Until the Restrictive Covenant Termination Date, CIC shall not (i) offer, sell, contract to sell or otherwise issue or deliver or dispose of any debt or any Common Shares or other equity securities or any securities which are convertible into or exchangeable for its Common Shares or other equity securities or any convertible security, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of Common Shares or other equity securities (other than in a bona-fide underwritten primary public offering and other than shares or options issued or which may be issued pursuant to CIC's employee or director option plans or shares issued upon exercise of options, warrants or rights outstanding on the Closing Date listed in the SEC Documents), or (ii) obtain any financing from any third party (excluding trade payables incurred in the ordinary course of business consistent with past practices), unless such offer, sale, issuance or financing ("Financing Transaction") is first offered to the Investors. CIC shall make such offer by providing each Investor with written notice of CIC's intention to enter into the Financing Transaction together with a term sheet containing the economic terms and significant provisions of the Financing Transaction and any other information reasonably requested by the Investors (the "Offer"). Such Offer shall be given with respect to each Financing Transaction contemplated by CIC. The Investors shall have ten (10) business days from receipt of the Offer to deliver a written notice to CIC that the Investors wish to accept the Offer (subject to satisfactory due diligence and reasonably acceptable definitive documentation) for the Financing Transaction. If the Investors reject the Offer or fail to respond within such ten (10) business day period, then CIC shall be permitted to complete such Financing Transaction without the Investors on terms and conditions substantially the same as those contained in the Offer. If any -11- Financing Transaction is contemplated on terms and conditions not substantially the same as those contained in the Offer or with proposed definitive documentation not substantially the same as that proposed by CIC with respect the Offer, then such Financing Transaction shall be deemed a new Financing Transaction and the Investors shall again be entitled to receive an Offer for such Financing Transaction on such new terms and conditions (and/or with such new definitive documentation if applicable). If the Investors accept the Offer but fail to close the Financing Transaction within twenty (20) business days of acceptance of the Offer for any reason other than any breach by CIC of its obligations hereunder, any delay by CIC or reasonable delay in connection with execution of definitive documentation, failure of the parties to reasonably agree on definitive documentation or reasonable dissatisfaction by the Investors with their due diligence examination, the Offer to the Investors shall terminate and the Investors shall not be entitled to receive any Offer in any future Financing Transaction, this being in addition to any other rights or remedies CIC may have against the Investors for their failure to close such Financing Transaction. As among the Investors, each Investor shall have the right to participate in the Offer to the full extent of the Offer, provided that if such Offer is oversubscribed by the Investors, each Investor shall only be entitled to participate in the Offer up to its pro rata share. Section 3.12 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. CIC shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the conversion of the Preferred Shares, such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Shares, and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the conversion of all the then outstanding Preferred Shares, CIC will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite shareholder approval. Without in any way limiting the foregoing, CIC agrees to reserve and at all times keep available solely for purposes of conversion of Preferred Shares such number of authorized but unissued Common Shares that is the greater of (A) 20,000,000 or (B) 1.5 times the number as shall from time to time be sufficient to effect conversion of all outstanding Preferred Shares at the Conversion Price as provided in Section 4(b) of the Designation, which 20,000,000 figure may be reduced by the number of Common Shares actually delivered pursuant to conversion of Preferred Shares under the Designation and shall be appropriately and equitably adjusted for any stock split, reverse split, stock dividend or reclassification of the Common Stock. If at any time the number of authorized but unissued Common Shares is not sufficient to effect the conversion of all the then outstanding Preferred Shares, the Investors shall be entitled to the redemption rights provided in the Registration Rights Agreement. Section 3.13 BOARD POSITIONS. So long as any Preferred Shares are outstanding, if the Registration Statement (as defined in the Registration Rights Agreement) is not declared effective within 180 days of the Closing Date, CIC shall use its best efforts to nominate and cause the election of a person designated by the holders of a majority of the Preferred Stock then outstanding to serve on the Board of Directors of CIC until the Restrictive Covenant Termination Date. CIC represents, warrants and covenants that it has the authority and ability to, and shall, increase the size of the Board of Directors of CIC if necessary to comply with the provisions of this paragraph. -12- Section 3.14 INVESTOR COMMON STOCK SALES. Each Investor covenants and agrees that if such Investor gives a Conversion Notice (as defined in the Designation) pursuant to Section 4(b)(i)(y) under the Designation, then such Investor, during the three (3) trading days prior to such Conversion Notice, shall not have sold long any shares of Common Stock which were not acquired by any conversion of any Preferred Shares. ARTICLE IV CONDITIONS Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF CIC TO SELL THE PREFERRED SHARES. The obligation hereunder of CIC to issue and/or sell the Preferred Shares to the Investors is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions are for CIC's sole benefit and may be waived by CIC at any time in its sole discretion. (a) ACCURACY OF THE INVESTORS' REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Investor shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a particular date). (b) PERFORMANCE BY THE INVESTORS. Each Investor shall have performed all agreements and satisfied all conditions required to be performed or satisfied by such Investor at or prior to the Closing. (c) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement or the Designation. Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTORS TO PURCHASE THE PREFERRED SHARES. The obligation hereunder of each Investor to acquire and pay for the Preferred Shares is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions are for the Investors' sole benefit and may be waived by the Investors at any time in their sole discretion. (a) ACCURACY OF CIC'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of CIC shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a particular date). (b) PERFORMANCE BY CIC. CIC shall have performed all agreements and satisfied all conditions required to be performed or satisfied by CIC at or prior to the Closing. (c) NASDAQ. From the date hereof to the Closing Date, trading in CIC's Common Shares shall not have been suspended by the SEC or the NASDAQ Small Capitalization Market, and trading in securities generally as reported by NASDAQ shall not have -13- been suspended or limited, and the Common Shares shall not have been delisted from any exchange or market where they are currently listed, and the market value of the outstanding Common Shares shall not have decreased below $1.75 per share. (d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement or the Designation. (e) OPINION OF COUNSEL. At the Closing the Investors shall have received an opinion of counsel to CIC in the form attached hereto and such other opinions, certificates and documents as the Investors or their counsel shall reasonably require incident to the Closing. (f) REGISTRATION RIGHTS AGREEMENT. CIC and the Investors shall have executed and delivered the Registration Rights Agreement in the form and substance of Exhibit 4.2(f) attached hereto. (g) FULL SUBSCRIPTION. At least 432,000 Preferred Shares shall have been purchased in the aggregate by the Investors pursuant to this Agreement. (h) ADVERSE CHANGES. Since September 30, 1996, no event which had or is likely to have a Material Adverse Effect on CIC or any of its direct or indirect subsidiaries shall have occurred. (i) OFFICER'S CERTIFICATE. CIC shall have delivered to the Investors a certificate in form and substance reasonably satisfactory to the Investors, executed by an officer of CIC, certifying as to satisfaction of closing conditions, incumbency of signing officers, charter, by-laws, good standing and authorizing resolutions of CIC. (j) DESIGNATION FILED. The Investors shall have received copies of the filed Designation. (k) STANDOFF COMMITMENTS. The Investors shall have received copies of the standoff commitments from James Dao, Philip Sassower and CIC Standby Ventures, L.P. as set forth in Section 2.1(o) hereof. (l) PRIOR PRIVATE PLACEMENTS. The registration statement with respect to the November 1995 Private Placement and the June 1996 Private Placement shall have been declared effective, the "Pricing Period" under the subscription agreements for such private placements shall have been fixed, and the "Average Sales Price" under the subscription agreements for such private placements shall not be less than $1.75 per share. -14- ARTICLE V LEGEND AND STOCK Each certificate representing the Preferred Shares shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. CIC agrees to reissue certificates representing the Preferred Shares without the legend set forth above at such time as (i) the holder thereof is permitted to dispose of such Preferred Shares pursuant to Rule 144(k) under the Act, (ii) such Preferred Shares are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to CIC and its counsel) are able to dispose of such shares publicly without registration under the Act, or (iii) such Preferred Shares are registered under the Act. Prior to the Registration Statement (as defined in the Registration Rights Agreement) being declared effective, any Common Shares issued pursuant to conversion of Preferred Shares shall bear a legend in the same form as the legend on the Preferred Shares indicated above. Upon such Registration Statement becoming effective, CIC agrees to promptly, but no later than three (3) business days thereafter, issue new certificates representing such Common Shares without such legend. Any Common Shares issued pursuant to conversion of Preferred Shares after the Registration Statement has become effective shall be free and clear of any legends, transfer restrictions and stop orders. ARTICLE VI TERMINATION Section 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of CIC and the Investors. Section 6.2 OTHER TERMINATION. This Agreement may be terminated by action of the Board of Directors of CIC or by a majority in interest of the Investors at any time if the Closing shall not have been consummated by the fifth business day following the date of this Agreement. ARTICLE VII -15- MISCELLANEOUS Section 7.1 STAMP TAXES; PLACEMENT AGENT FEES. CIC shall pay all stamp and other taxes and duties levied in connection with the issuance of the Preferred Shares pursuant hereto and the Common Shares issued upon conversion thereof. CIC shall be responsible for timely paying the compensation due to the Placement Agent in connection with the transactions contemplated hereby. Section 7.2 SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION. (a) CIC and the Investors acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) CIC and each of the Investors (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court, the New York State courts and other courts of the United States sitting in New York County, New York for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. CIC and each of the Investors consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. Section 7.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with the Registration Rights Agreement and the agreements and documents executed in connection herewith and therewith, contains the entire understanding of the parties with respect to the matters covered hereby and thereby and, except as specifically set forth herein or therein, neither CIC nor any Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Notwithstanding the foregoing, any of CIC's obligations under Sections 3.1, 3.6, 3.7, 3.8, 3.10, 3.11 and 3.13 above may be waived from time to time in whole or in part by the affirmative vote of a seventy-five percent (75%) majority-in-interest of the holders of Preferred Shares, provided, however, that holders of Preferred Shares who are affiliates of CIC (and CIC itself) shall not participate in such vote and the Preferred Shares of such holders shall be disregarded and deemed not to be outstanding. Section 7.4 NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective upon actual receipt of such mailing. The addresses for such communications shall be: -16- to CIC: Communication Intelligence Corporation 275 Shoreline Drive Redwood Shores, California 94065 Fax: (415) 802-7888 Attn: Frank Dane, Vice President and Secretary with copies to: Donald J. Bezahler, Esq. Baer, Marks & Upham LLP 805 Third Avenue, 20th Floor New York, New York 10022 Fax: (212) 702-5941;5810 to the Investors: To each Investor at the address and/or fax number set forth on Schedule I of this Agreement. with copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Fax: (212) 986-8866 Attn: Stephen M. Schultz Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other parties hereto. Section 7.5 INDEMNITY. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees but excluding consequential damages) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement. Section 7.6 WAIVERS. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 7.7 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 7.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The parties hereto may amend this Agreement without notice to or the consent of any third party. CIC may not assign this Agreement or any rights or obligations hereunder without the prior written consent of all Investors (which consent may be withheld for any reason in their sole discretion), except that CIC may assign this Agreement in connection with the sale of all or substantially all of its assets provided that CIC is not released from any of its obligations -17- hereunder, such assignee assumes all obligations of CIC hereunder, and appropriate adjustment of the provisions contained in this Agreement, the Registration Rights Agreement and the Designation to place the Investors in the same position as they would have been but for such assignment, in accordance with the terms of the Designation. Any Investor may assign this Agreement (in whole or in part) or any rights or obligations hereunder without the consent of CIC in connection with any sale or transfer all or any portion of the Preferred Shares held by such Investor, provided that no Investor may assign this Agreement prior to the Closing Date without CIC's prior written consent except to an affiliate or affiliates of such Investor. Section 7.9 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Section 7.10 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to such state's principles of conflict of laws. Section 7.11 SURVIVAL. The representations and warranties and the agreements and covenants of CIC and each Investor contained herein shall survive the Closing. Section 7.12 EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. Section 7.13 PUBLICITY. CIC agrees that it will not disclose, and will not include in any public announcement, the name of any Investor without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Section 7.14 SEVERABILITY. The parties acknowledge and agree that the Investors are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Investors hereunder are several and not joint, that no Investor shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Investor, and that any rights granted to "Investors" hereunder shall be enforceable by each Investor hereunder. Section 7.15 LIKE TREATMENT OF HOLDERS. Neither CIC nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee, payment for the redemptions or exchange of Preferred Shares, or otherwise, to any holder of Preferred Shares, for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment of any terms or provisions of the Preferred Shares or this Agreement or the Registration Rights Agreement, unless such consideration is required to be paid to all holders of Preferred Shares bound by such consent, waiver or amendment whether or not such holders so consent, waive or agree to amend and whether or not such holders tender their Preferred Shares for redemption or exchange. CIC shall not, directly or indirectly, redeem any Preferred Shares unless such offer of redemption is made pro rata to all holders of Preferred Shares on identical terms. -18- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CIC: COMMUNICATION INTELLIGENCE CORPORATION By: /s/James Dao ----------------------------------------- Name: James Dao Title: Chief Executive Officer INVESTORS: ANVIL INVESTMENT PARTNERS, L.P. By: Anvil Investors, Inc., as general partner By: /s/Mark S. Zucker -------------------------------------- Name: Mark S. Zucker Title: President OTATO LIMITED PARTNERSHIP By: /s/Richard M. Cayne ------------------------------------------ Name: Richard M. Cayne Its: General Counsel for OTA Grand Cayman General Partner for OTATO Limited Partnership PRAIRIE PATH CORPORATION By: /s/Cathleen S. McKinzie ------------------------------------------ Name: Cathleen S. McKinzie Title: Vice President -19- GLOBAL BERMUDA LIMITED PARTNERSHIP By: Global Capital Management, Inc., Its: General Partner By: /s/Richard J. Emmerich ------------------------------------ Name: Richard J. Emmerich Title: President MERCED PARTNERS LIMITED PARTNERSHIP By: Global Capital Management, Inc., Its: General Partner By: /s/Richard J. Emmerich ------------------------------------ Name: Richard J. Emmerich Title: President LAKESHORE INTERNATIONAL LTD. By: Global Capital Management, Inc. Its: Investment Manager By: /s/Richard J. Emmerich ------------------------------------- Name: Richard J. Emmerich Title: Director ELLIOTT ASSOCIATES, L.P. By: /s/Paul E. Singer ------------------------------------------ Name: Paul E. Singer Its: General Partner WESTGATE INTERNATIONAL, L.P. By: MARTLEY INTERNATIONAL, INC., as Attorney-In-Fact By: /s/Paul E. Singer ------------------------------------- Name: Paul E. Singer Its: President -20- JMG CAPITAL PARTNERS, L.P. By: /s/Jonathan Glaser ---------------------------------------------- Name: Jonathan Glaser Its: General Partner RAVICH REVOCABLE TRUST OF 1989 By: /s/Jess Ravich ---------------------------------------------- Name: Jess Ravich Its: Trustee NAVESINK INVESTMENT FUND LDC By: /s/John Burke ---------------------------------------------- Name: John Burke Title: Managing Member CERBERUS PARTNERS, L.P. By: Cerberus Associates, L.P., as General Partner By: /s/Stephen Feinberg ----------------------------------------- Name: Stephen Feinberg Title: General Partner CERBERUS INTERNATIONAL, LTD By: /s/Stephen Feinberg ---------------------------------------------- Name: Stephen Feinberg Title: Investment Advisor -21- EX-2 3 EXHIBIT 2 Exhibit 2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of December 31, 1996 between Communication Intelligence Corporation, a Delaware corporation with offices at 275 Shoreline Drive, Redwood Shores, California 94065 ("CIC"), and each of the entities listed under "Investors" on the signature page hereto (each an "Investor" and collectively the "Investors"), each with offices at the address listed under such Investor's name on Schedule I hereto. W I T N E S S E T H: WHEREAS, pursuant to that certain Preferred Stock Investment Agreement by and between CIC and the Investors (the "Investment Agreement"), CIC has agreed to sell and issue to the Investors, and the Investors have agreed to purchase from CIC, an aggregate of 450,000 shares, par value $0.01, of CIC's 5% Cumulative Convertible Preferred Stock (the "Preferred Shares") on the terms and conditions set forth therein; WHEREAS, the Investment Agreement contemplates that the Preferred Shares will be convertible into shares ("Common Shares") of common stock, par value $0.01, of CIC ("Common Stock") pursuant to the terms and conditions set forth in the Certificate of Designations (the "Designation") for such Preferred Shares; and WHEREAS, pursuant to the terms of, and in partial consideration for, the Investors' agreement to enter into the Investment Agreement, CIC has agreed to provide the Investors with certain registration rights with respect to the Common Shares and certain other rights and remedies with respect to the Preferred Shares as set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in the Investment Agreement and this Agreement, CIC and the Investors agree as follows: 1. CERTAIN DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Investment Agreement or the Designation. As used in this Agreement, the following terms shall have the following respective meanings: "Closing" and "Closing Date" shall have the meanings ascribed to such terms in the Investment Agreement. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Liquidation Preference" shall have the meaning ascribed to such term in the Designation. For clarification purposes, "Liquidation Preference" hereunder shall include any accrued and unpaid dividends on the Preferred Shares on a per diem basis through the date of any event for which default payments are payable pursuant to Section 2(b) below and thereafter. "Registrable Securities" shall mean: (i) the Common Shares issued to each Holder or its permitted transferee or designee upon conversion of the Preferred Shares or upon any stock split, stock dividend, recapitalization or similar event with respect to such Common Shares; (ii) any securities issued or issuable to each Holder upon the exchange or conversion of any Preferred Shares or Common Shares; (iii) any other security of CIC issued as a dividend or other distribution with respect to, in exchange of or in replacement of Registrable Securities; and the Common Shares issued pursuant to the exercise of the warrants delivered to the Placement Agent as described in Section 3.4 of the Investment Agreement. The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses to be incurred by CIC in connection with each Holder's registration rights under this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for CIC, blue sky fees and expenses, reasonable fees and disbursements of counsel to Holders (using a single counsel selected by a majority in interest of the Holders) for a "due diligence" examination of CIC and review of the Registration Statement and related documents, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of CIC, which shall be paid in any event by CIC). "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for Holders not included within "Registration Expenses". "Holder" and "Holders" shall include an Investor or the Investors, respectively, and any transferee of the Preferred Shares or Common Shares or Registrable Securities which have not been sold to the public to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement. "Registration Statement" shall have the meaning set forth in Section 2(a) herein. "Regulation D" shall mean Regulation D as promulgated pursuant to the Securities Act, and as subsequently amended. "Securities Act" or "Act" shall mean the Securities Act of 1933, as amended. 2. REGISTRATION REQUIREMENTS. CIC shall use its best efforts to effect the registration of the Registrable Securities (including without limitation the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as would permit or facilitate the sale or distribution of all the Registrable Securities in the manner (including manner of sale) and in all states reasonably requested by the Holder. Such best efforts by CIC shall include the following: -2- (a) CIC shall, as expeditiously as reasonably possible after the Closing Date: (i) Prepare and file a registration statement with the Commission pursuant to Rule 415 under the Securities Act on Form S-3 under the Securities Act (or in the event that CIC is ineligible to use such form, such other form as CIC is eligible to use under the Securities Act) covering the Registrable Securities ("Registration Statement") by March 31, 1997. Thereafter CIC shall use its best efforts to cause such Registration Statement and other filings to be declared effective prior to 180 days following the Closing Date. CIC shall provide Holders reasonable opportunity to review any such Registration Statement or amendment or supplement thereto prior to filing. (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement and notify the Holders of the filing and effectiveness of such Registration Statement and any amendments or supplements. (iii) Furnish to each Holder such numbers of copies of a current prospectus conforming with the requirements of the Act, copies of the Registration Statement, any amendment or supplement thereto and any documents incorporated by reference therein and such other documents as such Holder may reasonably require in order to facilitate the disposition of Registrable Securities owned by such Holder. (iv) Use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by each Holder; provided that CIC shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) Notify each Holder immediately of the happening of any event as a result of which the prospectus (including any supplements thereto or thereof) included in such Registration Statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and use its best efforts to promptly update and/or correct such prospectus. (vi) Notify each Holder immediately of the issuance by the Commission or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. CIC shall use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (vii) Permit a single firm of counsel, designated as Holders' counsel by a majority of the Registrable Securities included in the Registration Statement, to review the Registration Statement and all amendments and supplements thereto within -3- a reasonable period of time prior to each filing, and shall not file any document in a form to which such counsel reasonably objects. (viii) Use its best efforts to list the Registrable Securities covered by such Registration Statement with any securities exchange(s) and/or markets on which the Common Stock is then listed and prepare and file any required filings with the National Association of Securities Dealers, Inc. or any exchange or market where the Common Shares are traded. (b) (i) CIC agrees that it shall file the Registration Statement complying with the requirements of this Agreement by March 31, 1997 and shall use its best efforts to cause such Registration Statement to become effective within 180 days from the Closing Date. In the event that such Registration Statement has not been declared effective within 180 days from the Closing Date, then CIC shall pay to each Holder a default payment in an amount equal to three percent (3%) of the Liquidation Preference for the Preferred Shares held by such Holder for each 30-day period from and after the 180th day following the Closing Date during any part of which such Registration Statement is not effective. (ii) In the event that CIC fails, refuses or is unable to cause the Registrable Securities covered by the Registration Statement to be listed with the securities exchange(s) and markets on which the Common Stock is then traded and the NASDAQ Small Capitalization Market or the National Market at all times during the period ("Listing Period") from the Conversion Commencement Date (subject to acceleration pursuant to Section 4 of the Designation) until the date which is the last day of the 13th fiscal month following the Closing Date (provided that such date shall be deferred 1.5 days for each day that there is no Effective Registration after the Conversion Commencement Date), then CIC shall pay to each Holder a default payment in an amount equal to three percent (3%) of the Liquidation Preference for the Preferred Shares held by such Holder for each 30-day period during the Listing Period from and after such failure, refusal or inability to so list the Registrable Securities until the Registrable Securities are so listed. (iii) In the event any Holder's ability to sell Registrable Securities under the Registration Statement is suspended for more that sixty (60) days in the aggregate ("Suspension Grace Period") or if any Holder's ability to sell Registrable Securities under the Registration Statement is suspended at any time during the 12th or 13th fiscal month following the Closing Date, including without limitation by reason of any suspension or stop order with respect to the Registration Statement or the fact that an event has occurred as a result of which the prospectus (including any supplements thereto) included in such Registration Statement then in effect includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, then CIC shall pay to each Holder a default payment in an amount equal to three percent (3%) of the Liquidation Preference for the Preferred Shares held by such Holder for each 30-day period from and after the last day of the Suspension Grace Period or during the 12th or 13th fiscal month following the Closing Date, as the case may be, until such suspension no longer exists. -4- (iv) In the event that CIC does not have a sufficient number of Common Shares available to satisfy CIC's obligations to any Holder upon receipt of a Conversion Notice (as defined in the Designation) or is otherwise unable to issue such Common Shares (including without limitation by reason of the limit described in Section 11 below) in accordance with the terms of the Designation for any reason after receipt of a Conversion Notice, then CIC shall pay to each Holder a default payment in an amount equal to three percent (3%) of the Liquidation Preference for the Preferred Shares held by such Holder for each 30-day period from and after the Conversion Date (as defined in the Designation) that CIC fails or refuses to issue Common Shares in accordance with the terms thereof. (v) Each default payment provided for in the foregoing clauses (i) through (iv) shall be in addition to each other default payment; provided, however, that in no event shall CIC be obligated to pay to any Holder default payments in an aggregate amount greater than three percent (3%) of the Liquidation Preference for the Preferred Shares held by such Holder for any 30-day period. All default payments required to be made in connection with the above provisions shall be paid in cash by the tenth (10th) day of each calendar month (which payments shall be pro rata on a per diem basis for any period of less than 30 days); provided, however, that in the event of the circumstance described in clause (i) above, CIC may pay the default payments due for the first 60 days under such clause in additional Preferred Shares (with each new Preferred Share valued at $25 per share) instead of in cash. In the event that CIC fails or refuses to pay any default payment when due, at any Holder's request and option CIC shall purchase all or a portion of the Preferred Shares held by such Holder (with default payments accruing through the date of such purchase), within five (5) days of such request, at a purchase price equal to the Premium Redemption Price (as defined below), provided that such Holder may revoke such request at any time prior to receipt of such payment of such purchase price. Until such time as the CIC purchases such Preferred Shares at the request of such Holder pursuant to the preceding sentence, the default payment amounts due shall accrue interest at the lower of 38.65% per annum or the highest rate permitted by law, and at any Holder's request and option CIC shall pay such amount in additional Preferred Shares (with each new Preferred Share valued at $25 per share) or by adding and including the amount of such default payment to the Conversion Amount and the Liquidation Preference) instead of in cash. (vi) CIC acknowledges that any failure, refusal or inability by CIC described in the foregoing clauses (i) through (iv) will cause the Holders to suffer damages in an amount that will be difficult to ascertain, including without limitation damages resulting from the loss of liquidity in the Registrable Securities and the additional investment risk in holding the Registrable Securities, whether or not such Holders ultimately achieve the return on investment contemplated in the Designation. Accordingly, the parties agree that it is appropriate to include in this Agreement the foregoing provisions for default payments in order to compensate the Holders for such damages. The parties acknowledge and agree that the default payments set forth above represent the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such default payments are reasonable and will not constitute a penalty. The default payments provided for above are in addition to and not in lieu or limitation of any other rights the Holders may have at law, in equity or under the terms -5- of the Designation, the Investment Agreement or this Agreement, including without limitation the right to specific performance. Each Holder shall be entitled to specific performance of any and all obligations of CIC in connection with the registration rights of the Holders hereunder. In the event of any of the circumstances described in the foregoing clauses (i) through (iv) above, then the Forced Conversion Date (as defined in the Designation) shall be deferred by 1.5 days for each day that any of the circumstances in clauses (i), (ii), (iii) (without regard to the applicability of the Suspension Grace Period), or (iv) exist. In addition to and without in any way limiting the foregoing, CIC agrees that in the event that (A) any failure, refusal or inability by CIC described in the clauses (ii) and (iii) of this Section 2(b) is not cured within sixty (60) days of such event or (B) the Registration Statement has not been declared effective by the 13th month following the Closing Date, then at the option of each Holder and to the extent such Holder so elects, CIC shall redeem the Preferred Shares and/or Common Shares held by such Holder, in whole or in part, as follows: (i) in the case of Preferred Shares, such shares shall be redeemed at a redemption price per share equal to the Premium Redemption Price (as defined below); and (ii) in the case of Common Shares issued to such Holder pursuant to conversion of Preferred Shares, such shares shall be redeemed at a redemption price per share equal to 1.3865 times the dollar amount which is the product of (x) the number of shares so to be redeemed pursuant to this paragraph, and (y) the closing market price on the principal trading market or exchange of CIC's Common Stock on the date of such redemption; provided, however, that such Holder may revoke such request at any time prior to receipt of such payment of such redemption price. Default payments shall no longer accrue on Preferred Shares after such shares have been redeemed by CIC pursuant to the foregoing provision. (vii) In the event any Holder at any time is unable to convert any Preferred Shares under the Designation due to an insufficient number of Common Shares available for any reason, then at any time thereafter at the request of any Holder pursuant to a redemption notice, CIC promptly shall purchase from such Holder, at a purchase price equal to the "Premium Redemption Price", the number of Preferred Shares equal to such Holder's pro rata share of the "Deficiency", as such terms are defined below; provided, however, if within three (3) business days of such redemption notice CIC delivers to such Holder a notice stating that CIC will have a sufficient number of Common Shares available for conversion of all outstanding Preferred Shares within ten (10) business days, then CIC shall not be required to redeem such Preferred Shares pursuant to this Section unless CIC shall fail to have a sufficient number of Common Shares available for conversion of all outstanding Preferred Shares after such ten (10) business day period. Notwithstanding the foregoing, in the event any Holder delivers a Conversion Notice and CIC is unable to convert any Preferred Shares under the Designation due to an insufficient number of Common Shares available for any reason, CIC promptly shall purchase from such Holder, at a purchase price equal to the Premium Redemption Price, the number of Preferred Shares requested to be converted in such Conversion Notice which are not so converted. The "Premium Redemption Price" is equal to 1.3865 (i.e., 1 DIVIDED BY .72125) times the following: the sum of $25 times the number of Preferred Shares which cannot be converted plus accrued and unpaid dividends thereon (with dividends deemed accrued on a per diem basis through the date of such purchase even if such date is not a Dividend Payment Date (as defined in the Designation)) plus any default payments owing to such Holder pursuant to this Agreement. The "Deficiency" -6- shall be equal to the number of Preferred Shares that would not be able to be converted for Common Shares, due to an insufficient number of Common Shares available, if all the outstanding Preferred Shares were submitted for conversion at the Conversion Price set forth in the Designation as of the date such Deficiency is determined. (viii) In the event CIC becomes obligated to make default payments on Preferred Shares hereunder in cash, then once per month during any such period in which CIC is obligated to make such cash payments, CIC may, by written notice ("PIK Notice") to all the Holders of Preferred Shares, request that CIC either, at each Holder's option (i) be permitted to pay such default payments to such Holder in additional Preferred Shares (with each new Preferred Share valued at $25 per share) instead of in cash for the following thirty (30) day period, or (ii) have the right to repurchase such Preferred Shares at the Premium Redemption Price. Such PIK Notice shall be delivered to all the Holders at least ten (10) days before the default payment for any such month is due. Each Holder shall respond to such PIK Notice at least five (5) days before such payment is due by selecting clause (i) or (ii) above, provided that if any Holder fails to respond to such PIK Notice by such time, such Holder shall be deemed to have selected clause (i) above. In the event any Holder selects clause (ii) above, then the repurchase of the Preferred Shares contemplated by this paragraph shall occur on the date in which the default payment is due for such month. In the event any Holder selects clause (i) above (whether by responding or failing to respond to the PIK Notice), then CIC shall issue and deliver to such Holder the requisite number of additional Preferred Shares constituting such default payment on the date in which the default payment is due for such month. (c) If the Holder(s) intend to distribute the Registrable Securities by means of an underwriting, the Holder(s) shall so advise CIC. Any such underwriting may only be administered by investment bankers reasonably satisfactory to CIC. CIC shall only be obligated to permit one underwritten offering, which offering shall be determined by a seventy-five percent (75%) majority-in-interest of the Holders. (d) CIC shall enter into such customary agreements for secondary offerings (including a customary underwriting agreement with the underwriter or underwriters, if any) and take all such other reasonable actions reasonably requested by the Holders in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities are to be sold in an underwritten offering: (i) make such representations and warranties to the Holders and the underwriter or underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in secondary offerings; (ii) cause to be delivered to the sellers of Registrable Securities and the underwriter or underwriters, if any, opinions of independent counsel to CIC, on and dated as of the effective day (or in the case of an underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the Registration Statement, and within ninety (90) days following the end of each fiscal year thereafter, which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory -7- to the Holders and the underwriter(s), if any, and their counsel and covering, without limitation, such matters as the due authorization and issuance of the securities being registered and compliance with securities laws by CIC in connection with the authorization, issuance and registration thereof and other matters that are customarily given to underwriters in underwritten offerings, addressed to the Holders and each underwriter, if any; such counsel shall have undertaken in each such opinion delivered pursuant to the preceding sentence to update the same during each such fiscal year so that such updates received by the Holders during such year, if any, shall have been reasonably satisfactory to such Holders. CIC hereby covenants and agrees to advise such counsel of any and all factual matters which might pertain to any such update or as to which such an update may be so required, and such counsel may rely upon such advice in providing any such update. In the absence of such advice from CIC, any such update shall be provided to and upon such counsel's best knowledge insofar as and to the extent such update depends upon a factual matter. (iii) cause to be delivered, immediately prior to the effectiveness of the Registration Statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), and at the beginning of each fiscal year following a year during which CIC's independent certified public accountants shall have reviewed any of CIC's books or records, a "comfort" letter from CIC's independent certified public accountants addressed to the Holders and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable published rules and regulations thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with secondary offerings, subject to the receipt by such accountants of a representation letter from the Holders reasonably acceptable to such accountants to enable such accountants to issue a comfort letter to the Holders in a non-underwritten offering; such accountants shall have undertaken in each such letter to update the same during each such fiscal year in which such books or records are being reviewed so that each such letter shall remain current, correct and complete throughout such fiscal year; and each such letter and update thereof, if any, shall be reasonably satisfactory to the Holders. (iv) if an underwriting agreement is entered into, the same shall include customary indemnification and contribution provisions to and from the underwriters and procedures for secondary underwritten offerings; (v) deliver such documents and certificates as may be reasonably requested by the Holders of the Registrable Securities being sold or the managing underwriter or underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement, if any; and (vi) deliver to the Holders on the effective day (or in the case of an underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the Registration Statement, and at the beginning of each fiscal quarter thereafter, a certificate in form and substance as shall be reasonably satisfactory to the Holders, executed by an executive officer of CIC and to the effect that all the -8- representations and warranties of CIC contained in the Investment Agreement are still true and correct except as disclosed in such certificate; CIC shall, as to each such certificate delivered at the beginning of each fiscal quarter, update or cause to be updated each such certificate during such quarter so that it shall remain current, complete and correct throughout such quarter; and such updates received by the Holders during such quarter, if any, shall have been reasonably satisfactory to the Holders. (e) CIC shall make available for inspection by the Holders, representative(s) of all the Holders together, any underwriter participating in any disposition pursuant to a Registration Statement, and any attorney or accountant retained by any Holder or underwriter, all financial and other records customary for purposes of the Holders' due diligence examination of CIC and review of any Registration Statement, all SEC Documents (as defined in the Investment Agreement) filed subsequent to the Closing, pertinent corporate documents and properties of CIC, and cause CIC's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement, provided that such parties agree to keep such information confidential. (f) Subject to Section 2(b) above, CIC may suspend the use of any prospectus used in connection with the Registration Statement only (i) in the event, and for such period of time as, such a suspension is required by the rules and regulations of the Commission, or (ii) in the event such a suspension is required by the underwriter in a bona fide, underwritten primary public offering, provided that such suspension or suspensions under the foregoing clauses (i) and (ii) shall not in the aggregate exceed sixty (60) days. CIC will use its best efforts to cause such suspension to terminate at the earliest possible date. (g) CIC shall file a Registration Statement with respect to any newly authorized and/or reserved shares within five (5) business days of any shareholders meeting authorizing same and shall use its best efforts to cause such Registration Statement to become effective within sixty (60) days of such shareholders meeting. If the Holders become entitled, pursuant to an event described in clause (iii) of the definition of Registrable Securities, to receive any securities in respect of Registrable Securities that were already included in a Registration Statement, subsequent to the date such Registration Statement is declared effective, and CIC is unable under the securities laws to add such securities to the then effective Registration Statement, CIC shall promptly file, in accordance with the procedures set forth herein, an additional Registration Statement with respect to such newly Registrable Securities. CIC shall use its best efforts to (i) cause any such additional Registration Statement, when filed, to become effective under the Securities Act, and (ii) keep such additional Registration Statement effective during the period described in Section 5 below. All of the registration rights and remedies under this Agreement shall apply to the registration of such newly reserved shares and such new Registrable Securities, including without limitation the provisions providing for default payments contained herein. 3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance with registration pursuant to this Agreement shall be borne by CIC, and all Selling Expenses of a Holder shall be borne by such Holder. -9- 4. REGISTRATION ON FORM S-3. CIC shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms, or in the event that CIC is ineligible to use such form, such form as CIC is eligible to use under the Securities Act. 5. REGISTRATION PERIOD. In the case of the registration effected by CIC pursuant to this Agreement, CIC will use its best efforts to keep such registration effective until all the Holders have completed the sales or distribution described in the Registration Statement relating thereto or, if earlier, until such Registerable Securities may be sold under Rule 144(k) (provided that CIC's transfer agent has accepted an instruction from CIC to such effect). 6. INDEMNIFICATION. (a) CIC INDEMNITY. CIC will indemnify each Holder, each of its officers, directors and partners, and each person controlling each Holder, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by CIC of the Securities Act or any state securities law or in either case, any rule or regulation thereunder applicable to CIC and relating to action or inaction required of CIC in connection with any such registration, qualification or compliance, and will reimburse each Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that CIC will not be liable in any such case to a Holder to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to CIC by such Holder or the underwriter (if any) therefor and stated to be specifically for use therein. The indemnity agreement contained in this Section 6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of CIC (which consent will not be unreasonably withheld). (b) HOLDER INDEMNITY. Each Holder will, severally and not jointly, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify CIC, each of its directors, officers, partners, and each underwriter, if any, of CIC's securities covered by such a registration statement, each person who controls CIC or such underwriter within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, each other Holder (if any), and each of their officers, directors and partners, and each person controlling such other Holder(s) against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse CIC and such other Holder(s) and their directors, officers and partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or -10- alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to CIC by such Holder and stated to be specifically for use therein, and provided that the maximum amount for which such Holder shall be liable under this indemnity shall not exceed the net proceeds received by such Holder from the sale of the Registrable Securities. The indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) PROCEDURE. Each party entitled to indemnification under this Article (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article except to the extent that the Indemnifying Party is materially and adversely affected by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 7. CONTRIBUTION. If the indemnification provided for in Section 6 herein is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein (other than by reason of the exceptions provided therein), then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities as between CIC on the one hand and any Holder on the other, in such proportion as is appropriate to reflect the relative fault of CIC and of such Holder in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of CIC on the one hand and of any Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by CIC or by such Holder. -11- In no event shall the obligation of any Indemnifying Party to contribute under this Section 7 exceed the amount that such Indemnifying Party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 6(a) or 6(b) hereof had been available under the circumstances. CIC and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Holders or the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraphs. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraphs shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this section, no Holder or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any Holder, the net proceeds received by such Holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such Holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. SURVIVAL. The indemnity and contribution agreements contained in Sections 6 and 7 and the representations and warranties of CIC referred to in Section 2(d)(i) shall remain operative and in full force and effect regardless of (i) any termination of this Agreement or the Investment Agreement or any underwriting agreement, (ii) any investigation made by or on behalf of any Indemnified Party or by or on behalf of CIC, and (iii) the consummation of the sale or successive resales of the Registrable Securities. 9. INFORMATION BY HOLDERS. Each Holder shall furnish to CIC such information regarding such Holder and the distribution and/or sale proposed by such Holder as CIC may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. The intended method or methods of disposition and/or sale (Plan of Distribution) of such securities as so provided by such Investor shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without written consent of such Holder. 10. CHANGE IN CONTROL TRANSACTION. Prior to the Restrictive Covenant Termination Date (as defined in the Investment Agreement), in the event CIC desires to effect a Change in Control Transaction (as defined in the Designation) at any time (whether occurring before or after the Preferred Shares become convertible), the closing of such transaction shall be conditioned upon the prior purchase and redemption by CIC of, and payment for, at the request of any Holder, all (or such portion requested by such Holder) of the outstanding Preferred Shares held by such Holder at a purchase price equal to the Premium Redemption Price. CIC shall provide all Holders of Preferred Shares with 30 days' prior notice of any such transaction, and such notice shall be deemed an offer to redeem the Preferred Shares pursuant to this paragraph. -12- 11. NASDAQ LIMIT ON STOCK ISSUANCES. In the event that CIC is unable to issue any Common Shares upon conversion of Preferred Shares under the Designation due to the rules or regulations of any market or exchange regulator for the market or exchange on which the Common Shares are then trading, CIC shall, at the request of any Holder promptly following such determination, purchase such Preferred Shares of such Holder which cannot be converted at a purchase price equal to the Premium Redemption Price. 12. REPLACEMENT CERTIFICATES. The certificate(s) representing the Common Shares held by any Investor (or then Holder) may be exchanged by such Investor (or such Holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Common Shares, as reasonably requested by such Investor (or such Holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. 13. TRANSFER OR ASSIGNMENT. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The rights granted to the Investors by CIC under this Agreement to cause CIC to register Registrable Securities may be transferred or assigned (in whole or in part) to a transferee or assignee of not less than 5,000 Preferred Shares, and all other rights granted to the Investors by CIC hereunder may be transferred or assigned to any transferee or assignee of any Preferred Shares (regardless of the number of Preferred Shares transferred); provided in each case that CIC must be given written notice by the such Investor at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and provided further that the transferee or assignee of such rights agrees in writing to be bound by the registration and exchange provisions of this Agreement. 14. MISCELLANEOUS. (a) REMEDIES. CIC and the Investors acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) JURISDICTION. CIC and each of the Investors (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court, the New York State courts and other courts of the United States sitting in New York County, New York for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. CIC and each of the Investors consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process -13- and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. (c) NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective upon actual receipt of such mailing. The addresses for such communications shall be: to CIC: Communication Intelligence Corporation 275 Shoreline Drive Redwood Shores, California 94065 Fax: (415) 802-7888 Attn: Frank Dane, Vice President and Secretary with copies to: Donald J. Bezahler, Esq. Baer, Marks & Upham LLP 805 Third Avenue, 20th Floor New York, New York 10022 Fax: (212) 702-5941;5810 to the Investors: To each Investor at the address and/or fax number set forth on Schedule I of this Agreement. with copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Fax: (212) 986-8866 Attn: Stephen M. Schultz Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other parties hereto. (d) INDEMNITY. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement. (e) WAIVERS. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. The representations and warranties and the agreements and covenants of CIC and each Investor contained herein shall survive the Closing. Notwithstanding anything contained herein, CIC's obligation to pay default payments hereunder may be waived from time to time in whole or in part by the affirmative vote of a seventy-five percent (75%) majority-in-interest of the holders of Preferred Shares, provided, however, that holders of Preferred Shares who are affiliates of CIC (and CIC itself) shall not participate in such -14- vote and the Preferred Shares of such holders shall be disregarded and deemed not to be outstanding. (f) EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. (g) PUBLICITY. CIC agrees that it will not disclose, and will not include in any public announcement, the name of any Investor without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. (h) ENTIRE AGREEMENT. This Agreement, together with the Investment Agreement and the Designation and the agreements and documents contemplated hereby and thereby, contains the entire understanding and agreement of the parties, and may not be modified or terminated except by a written agreement signed by both parties. (i) GOVERNING LAW; CONSENT OF JURISDICTION. This Agreement and the validity and performance of the terms hereof shall be governed by and construed in accordance with the laws of the State of New York, except to the extent that the law of Delaware regulates CIC's issuance of securities. (j) SEVERABILITY. The parties acknowledge and agree that the Investors are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Investors hereunder are several and not joint, that no Investor shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Investor, and that any rights granted to "Investors" hereunder shall be enforceable by each Investor hereunder. (k) TITLES. The titles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. -15- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CIC: COMMUNICATION INTELLIGENCE CORPORATION By: /s/James Dao ----------------------------------------------- Name: James Dao Title: Chief Executive Officer INVESTORS: ANVIL INVESTMENT PARTNERS, L.P. By: Anvil Investors, Inc., as general partner By: /s/Mark S. Zucker ------------------------------------------ Name: Mark S. Zucker Title: President OTATO LIMITED PARTNERSHIP By: /s/Richard M. Cayne ----------------------------------------------- Name: Richard M. Cayne Its: General Counsel for OTA Grand Cayman General Partner of OTATO Limited Partnership PRAIRIE PATH CORPORATION By: /s/Cathleen S. McKinzie ----------------------------------------------- Name: Cathleen S. McKinzie Title: Vice President -16- GLOBAL BERMUDA LIMITED PARTNERSHIP By: Global Capital Management, Inc., Its: General Partner By: /s/Richard J. Emmerich --------------------------------------------- Name: Richard J. Emmerich Title: President MERCED PARTNERS LIMITED PARTNERSHIP By: Global Capital Management, Inc., Its: General Partner By: /s/Richard J. Emmerich ------------------------------------------ Name: Richard J. Emmerich Title: President LAKESHORE INTERNATIONAL LTD. By: Global Capital Management, Inc. Its: Investment Manager By: /s/Richard J. Emmerich ----------------------------------------- Name: Richard J. Emmerich Title: Director ELLIOTT ASSOCIATES, L.P. By: /s/Paul E. Singer ----------------------------------------------- Name: Paul E. Singer Its: General Partner WESTGATE INTERNATIONAL, L.P. By: MARTLEY INTERNATIONAL, INC., as Attorney-In-Fact -17- By: /s/Paul E. Singer ------------------------------------------ Name: Paul E. Singer Its: President JMG CAPITAL PARTNERS, L.P. By: /s/Jonathan Glaser ----------------------------------------------- Name: Jonathan Glaser Its: General Partner RAVICH REVOCABLE TRUST OF 1989 By: /s/Jess Ravich ----------------------------------------------- Name: Jess Ravich Its: Trustee NAVESINK INVESTMENT FUND LDC By: /s/John Burke ----------------------------------------------- Name: John Burke Title: Managing Member CERBERUS PARTNERS, L.P. By: Cerberus Associates, L.P., as General Partner By: /s/Stephen Feinberg ------------------------------------------ Name: Stephen Feinberg Title: General Partner CERBERUS INTERNATIONAL, LTD By: /s/Stephen Feinberg ----------------------------------------------- Name: Stephen Feinberg Title: Investment Advisor -18- EX-3 4 EXHIBIT 3 Exhibit 3 CERTIFICATE OF DESIGNATIONS OF 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK FOR COMMUNICATION INTELLIGENCE CORPORATION Communication Intelligence Corporation, a Delaware corporation (the "Corporation"), pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, does hereby make this Certificate of Designations and does hereby state and certify that pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, the Board of Directors duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof: RESOLVED, that, pursuant to Article FOURTH of the Certificate of Incorporation of the Corporation, the Board of Directors hereby authorizes the issuance of, and fixes the designation and preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions, of a series of Preferred Stock consisting of 600,000 shares, par value $0.01, to be designated "5% Cumulative Convertible Preferred Stock" (the "Preferred Shares"). RESOLVED, that each of the Preferred Shares shall rank equally in all respects and shall be subject to the following terms and provisions: 1. DIVIDENDS. (a) CUMULATIVE. The holders of the Preferred Shares shall be entitled to receive out of any assets legally available therefor cumulative dividends at the rate of $1.25 per share per annum compounded semi-annually when payable (whether or not declared), payable on the Conversion Commencement Date (as defined below) and semi-annually every six (6) months thereafter (each a "Dividend Payment Date"), when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on the Common Stock (as defined below) or any other class or series of stock of the Corporation. Such dividends shall accrue on any given share from the most recent date on which a dividend has been paid with respect to such share, or if no dividends have been paid, from the date of the original issuance of such share, and such dividends shall accrue from day to day whether or not declared, based on the actual number of days elapsed. If at any time dividends on the outstanding Preferred Shares at the rate set forth above shall not have been paid or declared and set apart for payment with respect to all preceding periods, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon or set apart for the shares of any other class or series of stock of the Corporation. -1- (b) CASH OR PIK. Any dividend payable on the outstanding Preferred Shares may be paid, at the option of the Corporation, either (i) in cash or (ii) in additional Preferred Shares (with each new Preferred Share valued at $25 per share); provided, however, that if the Corporation shall fail to pay any dividend on a Dividend Payment Date, the amount of such dividend shall be added to the Liquidation Preference (as defined below) for such Preferred Shares. 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Preferred Shares shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of any other class or series of shares, the amount of $25 per share plus any accrued but unpaid dividends (with dividends deemed accrued on a per diem basis through the date of such event and thereafter even if such event or any distribution is not on a Dividend Payment Date) (the "Liquidation Preference"). 3. ISSUANCE OF PREFERRED SHARES. The Preferred Shares shall be issued by the Corporation pursuant to a Preferred Stock Investment Agreement ("Investment Agreement") to be entered into between the Corporation and the initial subscribers for the Preferred Shares, and holders of Preferred Shares shall enjoy the benefits of the Registration Rights Agreement ("Registration Rights Agreement") to be entered into between such parties in connection with the Investment Agreement. The 150,000 Preferred Shares authorized and designated hereunder which are not issued pursuant to the Investment Agreement may only be issued to the initial subscribers for Preferred Shares under the Investment Agreement or the holders of Preferred Shares for the sole purpose of paying stock dividends hereunder or default payments under the Registration Rights Agreement to the extent permitted hereunder and under the Registration Rights Agreement. 4. CONVERSION. On and after the date ("Conversion Commencement Date") which is six (6) months from the Closing Date (as defined in the Investment Agreement), or such earlier date as may be permitted pursuant to Section 4(i) below, each holder of the Preferred Shares shall have the right at any time and from time to time, at the option of such holder, to convert any or all Preferred Shares for such number of fully paid, validly issued and nonassessable shares ("Common Shares") of common stock, par value $0.01, of the Corporation ("Common Stock"), free and clear of any liens, claims or encumbrances, as is determined by dividing (i) the sum of $25 times the number of Preferred Shares being converted plus accrued and unpaid dividends thereon up to and including the most recent Dividend Payment Date (or up to and including the Conversion Date (as defined below) if the Conversion Date occurs on the Conversion Commencement Date or another Dividend Payment Date) plus any default payments owing to such holder on the Conversion Date pursuant to the Registration Rights Agreement (the "Conversion Amount"), by (ii) the Conversion Price determined as hereinafter provided in effect on the Conversion Date, on the following terms and conditions. (a) MECHANICS OF CONVERSION. To convert Preferred Shares into Common Shares, the holder shall give written notice ("Conversion Notice") to the Corporation in the form of page 1 of Exhibit A hereto (which Conversion Notice may be given by facsimile transmission) stating that such holder elects to convert the same and shall state therein the number of shares to be converted and the name or names in which such holder wishes the certificate or certificates -2- for Common Shares to be issued (the date of such Conversion Notice shall be referred to herein as the "Conversion Date"). Within one (1) trading day after such conversion the holder shall deliver page 2 to Exhibit A hereto indicating the computation of the number of Common Shares to be received and shall surrender the certificate or certificates representing the shares being converted, duly endorsed, at the office of the Corporation or of any transfer agent for such shares, provided that the Corporation shall at all times maintain an office or agency in New York City for such purposes. The Corporation shall, immediately upon receipt of such Conversion Notice, issue and deliver to or upon the order of such holder, against delivery of the certificates representing the shares which have been converted, a certificate or certificates for the number of Common Shares to which such holder shall be entitled (with the number of and denomination of such certificates designated by such holder), and the Corporation shall immediately issue and deliver to such holder a certificate or certificates for the number of Preferred Shares which such holder has not yet elected to convert hereunder but which are evidenced in part by the certificate(s) delivered to the Corporation in connection with such Conversion Notice; the Corporation shall effect such issuance within three (3) trading days (as defined in Section 4(b)(iv) below) of the Conversion Date and shall transmit the certificates by messenger or overnight delivery service to reach the address designated by such holder within three (3) trading days after the receipt of such Conversion Notice ("T+3"). In the alternative to physical delivery of certificates for Common Shares, if delivery of the Common Shares pursuant to any conversion hereunder may be effectuated by electronic book-entry through Depository Trust Company ("DTC"), then delivery of Common Shares pursuant to such conversion shall be closed and settled on T+3 by book-entry transfer through DTC, and the Common Shares in connection with such conversion shall be deemed delivered by such book-entry transfer. The parties agree to coordinate with DTC to accomplish this objective. The conversion pursuant to this Section 4 shall be deemed to have been made immediately prior to the close of business on the Conversion Date. The person or persons entitled to receive the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Shares at the close of business on the Conversion Date. (b) DETERMINATION OF CONVERSION PRICE. (i) At any date up to and including the date which is the last day of the thirteenth fiscal month following the Closing Date, the Conversion Price shall be equal to: [1 - Applicable Percentage (as set forth below)] x Agreed Value (as defined below). The Agreed Value shall equal: (x) if the holder giving a Conversion Notice shall have sold Common Shares, the weighted-average (based upon the number of shares sold) of the actual selling prices at which such holder shall have sold Common Shares (but not less than the lowest trading price on the date of such trade as reported by the principal market on which the Common Stock is traded or on Instinet), net of normal and customary commissions and underwriting or dealer spreads; or (y) if the holder giving a Conversion Notice shall not have sold Common Shares, the average of the daily means between the low trading price of the Common Stock and the Closing Price of the Common Stock for the three (3) consecutive trading days immediately preceding the Conversion Date. -3- (ii) The Applicable Percentage shall be as follows: 14.375% during the 7th fiscal month following the Closing Date 18.125% during the 8th fiscal month following the Closing Date 19.875% during the 9th fiscal month following the Closing Date 21.625% during the 10th fiscal month following the Closing Date 23.250% during the 11th fiscal month following the Closing Date 24.875% during the 12th fiscal month following the Closing Date 25.000% during the 13th fiscal month following the Closing Date (iii) After the date which is the last day of the thirteenth fiscal month following the Closing Date, the Conversion Price shall be the lesser of: (x) 72.125% of the average of the daily means between the low trading price of the Common Stock and the Closing Price of the Common Stock for all the trading days during the 13th fiscal month following the Closing Date; or (y) (1) if the holder giving a Conversion Notice shall have sold Common Shares, 72.125% of the weighted-average (based upon the number of shares sold) of the actual selling prices at which the holder giving a Conversion Notice shall have sold Common Shares (but not less than the lowest trading price on the date of such trade as reported by the principal market on which the Common Stock is traded or on Instinet), net of normal and customary commissions and underwriting or dealer spreads, or (2) if the holder giving a Conversion Notice shall not have sold Common Shares, 72.125% of the average of the daily means between the low trading price of the Common Stock and the Closing Price of the Common Stock during the three (3) consecutive trading days immediately preceding the Conversion Date. (iv) The "low trading price" and the "Closing Price", respectively, of the Common Stock on any day, as indicated in the next day's Wall Street Journal if so reported in the Wall Street Journal, shall be (A) the lowest reported sale price and the reported Closing Price (last sale price) of the Common Stock on the New York Stock Exchange or the American Stock Exchange, or (B) if the Common Stock is not listed on the New York Stock Exchange or the American Stock Exchange, the lowest reported sale price and the reported Closing Price of the Common Stock on the principal automated securities price quotation system on which sale prices of the Common Stock are reported, or (C) if the Common Stock is not listed on such stock exchanges and sale prices of the Common Stock are not reported on an automated quotation system, the lowest bid price and the mean of the final bid and asked prices for the Common Stock as reported by National Quotation Bureau Incorporated if at least two securities dealers have inserted both bid and asked quotations for the Common Stock on at least five of the ten preceding trading days. If none of the foregoing provisions are applicable, the "mean of the low trading price and the Closing Price" of the Common Stock on a day will be the fair market value of the Common Stock on that day as determined by a member firm of the New York Stock Exchange, Inc., selected in good faith by the Board of Directors of the Corporation and reasonably acceptable to the holders of Preferred Shares. The term "trading day" means (x) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, a day on which there is trading on such stock exchange, (y) if the Common Stock is not listed on either of such stock exchanges but sale prices of the Common Stock are reported on an automated quotation system, a day on which -5- trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. Any "fiscal month following the Closing Date" shall mean the period commencing on the same numerical date as the Closing Date in the applicable month following the Closing Date and ending on the date in the following calendar month which is one day prior to the numerical date of the Closing Date. If the Closing Date occurs on a numerical date of 29, 30 or 31, and any calendar month following the Closing Date does not have a corresponding numerical date, then the ending date for such fiscal month shall be the last day of such calendar month. If the Closing Date occurs on the first day of a calendar month, then each fiscal month shall be a calendar month. (v) In the event that during any period of consecutive trading days provided for above, the Corporation shall declare or pay any dividend on the Common Stock payable in Common Stock or in rights to acquire Common Stock, or shall effect a stock split or reverse stock split, or a combination, consolidation or reclassification of the Common Stock, then the Conversion Price shall be proportionately decreased or increased, as appropriate, to give effect to such event. (c) DISTRIBUTIONS. In the event the Corporation shall at any time or from time to time make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation or any of its direct or indirect subsidiaries other than additional Common Shares, then in each such event, in addition to the number of shares of Common Stock receivable upon conversion, provision shall be made so that the holders of Preferred Shares shall receive, upon the conversion thereof, the securities of the Corporation or such subsidiary which they would have received had they been the owners on the date of such event of the number of Common Shares issuable to them upon conversion. The Corporation shall, upon the written request at any time of any holder of Preferred Shares, furnish or cause to be furnished to such holder a certificate prepared by the Corporation setting forth the number of other securities and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Shares with respect to each share of Common Stock received upon such conversion. (d) NOTICE OF RECORD DATE. In the event of any taking by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive additional Common Shares, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Shares at least 10 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (e) ISSUE TAXES. The Corporation shall pay any and all issue and other taxes, excluding any income, franchise or similar taxes, that may be payable in respect of any issue or delivery of Common Shares on conversion of Preferred Shares pursuant hereto; provided, -5- however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the conversion of the Preferred Shares, such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Shares, and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the conversion of all the then outstanding Preferred Shares, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite shareholder approval. Without in any way limiting the foregoing, so long as any Preferred Shares remain outstanding the Corporation agrees to reserve and at all times keep available solely for purposes of conversion of Preferred Shares such number of authorized but unissued Common Shares that is the greater of (A) 20,000,000 or (B) 1.5 times the number as shall from time to time be sufficient to effect conversion of all outstanding Preferred Shares at the Conversion Price as provided in Section 4(b) above, which 20,000,000 figure may be reduced by the number of Common Shares actually delivered pursuant to conversion of Preferred Shares hereunder and shall be appropriately and equitably adjusted for any stock split, reverse split, stock dividend or reclassification of the Common Stock. (g) FRACTIONAL SHARES. No fractional shares shall be issued upon the conversion of any Preferred Shares. All Common Shares (including fractions thereof) issuable upon conversion of more than one Preferred Share by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the Conversion Date (as determined in good faith by the Board of Directors of the Corporation). (h) REORGANIZATION OR MERGER. In case of any reorganization or any reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Corporation to any other person, then, as part of such reorganization, consolidation, merger or sale, if the holders of Common Shares receive any publicly traded securities as part or all of the consideration for such reorganization, consolidation, merger or sale, then provision shall be made such that each Preferred Share shall thereafter be convertible into such new securities at a conversion price which places the holders of Preferred Shares in an economically equivalent position as they would have been if not for such event. In addition to the foregoing, if the holders of Common Shares receive any non-publicly traded securities or other property or cash as part or all of the consideration for such reorganization, consolidation, merger or sale, then such distribution shall be treated as a distribution under Section 4(c) above and such Section shall govern such distribution. So long as any Preferred Shares are outstanding, the Corporation agrees that there shall be no such reorganization, consolidation, merger or sale unless an appropriate adjustment of the conversion price and other provisions contained herein -6- is agreed to in writing in advance by the Board of Directors of the Corporation and a majority in interest of the holders of outstanding Preferred Shares (which agreement will not be unreasonably withheld), provided that such consent shall not be required if (i) such reorganization, consolidation, merger or sale places such holders in the equivalent position as they would have been if not for such event and (ii) the surviving entity and the entity into whose securities the Preferred Shares are then convertible in connection with such reorganization, consolidation, merger or sale are in compliance with all the material provisions of this Designation, the Registration Rights Agreement and the Investment Agreement as if such agreements and documents were applicable to such entities and their securities (including without limitation that the applicable securities into which the Preferred Shares are convertible are authorized and available for conversion, registered, and listed and traded on the applicable exchanges and/or markets). (i) CHANGE IN CONTROL. If at any time (a) there occurs any consolidation or merger of the Corporation with or into any other corporation or other entity or person (whether or not the Corporation is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in excess of 50% of the Corporation's voting power is transferred through a merger, consolidation, tender offer or similar transaction, (b) in excess of 50% of the Corporation's Board of Directors consists of directors not nominated by the prior Board of Directors of the Corporation, or (c) any person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), together with its affiliates and associates (as such terms are defined in Rule 405 under the Securities Act of 1933, as amended (the "Act")), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) in excess of 50% of the Corporation's voting power (the events in the foregoing clauses (a), (b) and (c) collectively referred to as a "Change in Control Transaction"), then notwithstanding the date restriction contained in the first paragraph of this Section 4, each holder of Preferred Shares shall have the right to convert any or all of its Preferred Shares for Common Shares at any time prior to the Conversion Commencement Date in accordance with the terms hereof at an Applicable Percentage equal to 14.375% (which right shall be in addition to such holder's right to convert Preferred Shares at any time on or after the Conversion Commencement Date in accordance with the terms hereof). The Corporation shall provide all holders of Preferred Shares with 30 days' prior notice of any such transaction. The Corporation further agrees that it shall not agree or consent to or enter into any transaction or series of transactions as a result of which the Common Shares would cease to be publicly traded unless agreed to in writing in advance by the Board of Directors of the Corporation and a majority in interest of the holders of Preferred Shares. (j) FORCED CONVERSION. Subject to the following sentence, each holder of Preferred Shares shall convert any Preferred Shares held by such holder on the date which is the third (3rd) anniversary of the Closing Date ("Forced Conversion Date"), provided that such Forced Conversion Date shall be deferred for such number of days as is equal to 1.5 times the number of days there is not Effective Registration or there is not a sufficient amount of Common Shares available for conversion of all outstanding Preferred Shares at any time on and after the Conversion Commencement Date. Notwithstanding the preceding sentence, no holder of Preferred Shares shall be obligated to convert any Preferred Shares held by such holder on the Forced Conversion Date unless and until each of the following conditions has been satisfied or exists, each of which shall be a condition precedent to any such forced conversion: -7- (1) no material default or breach exists, and no event shall have occurred which constitutes (or would constitute with notice or the passage of time or both) a material default or breach of the Investment Agreement, the Registration Rights Agreement or this Certificate of Designations; (2) none of the events described in clauses (i) through (iv) of Section 2(b) of the Registration Rights Agreement shall have occurred and be continuing; (3) Effective Registration (as defined in the Investment Agreement) has occurred and is continuing and has continuously existed for the prior 30 consecutive trading days; (4) the Corporation and its direct and indirect subsidiaries on a consolidated basis has assets with a net realizable fair market value exceeding its liabilities and is able to pay all its debts as they become due in the ordinary course of business, and the Corporation is not and has not been subject to any liquidation, dissolution or winding up of its affairs; and (5) each holder of Preferred Shares shall have received a certificate from an appropriate executive officer of the Corporation certifying that each of the foregoing conditions precedent exist or have been satisfied. Such forced conversion shall be subject to and governed by all the provisions relating to voluntary exchange of the Preferred Shares contained herein, except that the Conversion Amount for any forced conversion shall include accrued and unpaid dividends on the Preferred Shares on a per diem basis through the date of such forced conversion even if such date is not a Dividend Payment Date. (k) LIMITATIONS ON HOLDER'S RIGHT TO CONVERT. (i) Notwithstanding anything to the contrary contained herein, no Preferred Share may be converted by a holder to the extent that, after giving effect to Common Shares to be issued pursuant to a Conversion Notice, the total number of Common Shares deemed beneficially owned by such holder, together with all Common Shares deemed beneficially owned by the holder's "affiliates" as defined in Rule 144 of the Act, would exceed 4.9% of the total issued and outstanding shares of the Corporation's Common Stock, provided that each holder shall have the right to waive this restriction, in whole or in part, immediately in the case of a pending Change in Control Transaction and in any other case upon 61 days prior notice to the Corporation. The delivery of a Conversion Notice by any holder shall be deemed a representation by such holder that it is in compliance with this paragraph. A transferee of the Preferred Shares shall not be bound by this provision unless it expressly agrees to be so bound. The term "deemed beneficially owned" as used in this Certificate of Designations shall exclude shares that might otherwise be deemed beneficially owned by reason of the convertibility of the Preferred Shares. -8- (l) CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Corporation shall, upon the written request at any time of any holder of Preferred Shares, furnish or cause to be furnished to such holder a certificate prepared by the Corporation setting forth any adjustments or readjustments of the Conversion Price pursuant to this Section 4. (m) SPECIFIC ENFORCEMENT. The Corporation agrees that irreparable damage would occur in the event that any of the provisions of this Certificate of Designations were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the holders of Preferred Shares shall be entitled to specific performance, injunctive relief or other equitable remedies to prevent or cure breaches of the provisions of this Certificate of Designations and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled under agreement, at law or in equity. 5. VOTING RIGHTS. (a) In addition to the voting rights provided in Section 5(b) below, the holders of Preferred Shares shall have the right, together with the holders of Common Stock, to vote in the election of directors and upon each other matter coming before any meeting of the holders of Common Stock on the basis of one vote for each Preferred Share held, and the holders of Preferred Shares and the holders of Common Stock shall vote together as if they were one class on such matters. (b) The affirmative vote of seventy-five percent (75%) of the Corporation's outstanding Preferred Shares shall be necessary for (i) any amendment of this Certificate of Designations, (ii) any amendment to the Certificate of Incorporation or by-laws of the Corporation that may amend or change any of the rights, preferences, or privileges of the Preferred Shares, (iii) any waiver of a default in payment of dividends on the Preferred Shares, and (iv) any reorganization or reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into any other corporation or corporations, or any sale of all or substantially all of the assets of the Corporation, that would have an adverse effect on any of the rights, preferences, or privileges of the Preferred Shares, provided, however, that holders of Preferred Shares who are affiliates of the Corporation (and the Corporation itself) shall not participate in such vote and the Preferred Shares of such holders shall be disregarded and deemed not to be outstanding for purposes of such vote. 6. NOTICES. The Corporation shall distribute to the holders of Preferred Shares copies of all notices, materials, annual and quarterly reports, proxy statements, information statements and any other documents distributed generally to the holders of shares of Common Stock of the Corporation, at such times and by such method as such documents are distributed to such holders of such Common Stock. 7. REPLACEMENT CERTIFICATES. The certificate(s) representing the Preferred Shares held by any holder of Preferred Shares may be exchanged by such holder at any time and from time to time for certificates with different denominations representing an equal aggregate number of Preferred Shares, as reasonably requested by such holder, upon surrendering the same. No service charge will be made for such registration or transfer or exchange. -9- 8. ATTORNEYS' FEES. Any holder of Preferred Shares shall be entitled to recover from the Corporation the reasonable attorneys' fees and expenses incurred by such holder in connection with enforcement by such holder of any obligation of the Corporation hereunder. Signed on December 27, 1996 /s/James Dao ---------------------------------- James Dao, Chief Executive Officer -10- EXHIBIT A (To be Executed by Holder in order to Convert Preferred Shares) CONVERSION NOTICE FOR 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK The undersigned, as a holder ("Holder") of shares of 5% Cumulative Convertible Preferred Stock ("Preferred Shares") of Communication Intelligence Corporation (the "Corporation"), hereby irrevocably elects to convert _____________ Preferred Shares for shares ("Common Shares") of common stock, par value $0.01 per share (the "Common Stock"), of the Corporation according to the terms and conditions of the Certificate of Designations for the Preferred Shares as of the date written below. The undersigned hereby requests that share certificates for the Common Stock to be issued to the undersigned pursuant to this Conversion Notice be issued in the name of, and delivered to, the undersigned or its designee as indicated below. No fee will be charged to the holder of Preferred Shares for any conversion. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Certificate of Designations. Conversion Date: --------------------------- Conversion Information: NAME OF HOLDER: ---------------------------------- By: --------------------------------------------------- Print Name: Print Title: Print Address of Holder: ------------------------------------------------------ ------------------------------------------------------ Issue Common Stock to: -------------------------------- at: ------------------------------------------------- ------------------------------------------------------ IF COMMON STOCK IS TO BE ISSUED TO A PERSON OTHER THAN HOLDER, HOLDER'S SIGNATURE MUST BE GUARANTEED BELOW: SIGNATURE GUARANTEED BY: - ------------------------------------------------------------------------------ THE COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE. PAGE 1 OF CONVERSION NOTICE PAGE 2 TO CONVERSION NOTICE DATED FOR: --------------- ----------------- (CONVERSION DATE) (NAME OF HOLDER) COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED Number of Preferred Shares converted: shares ----------------- A. Number of Preferred Shares converted x $25 $ --------- B. Number of Preferred Shares converted x accrued and unpaid dividends up to the most recent Dividend Payment Date $ --------- C. Default payments due Holder $ --------- TOTAL DOLLAR AMOUNT CONVERTED (TOTAL OF A + B + C) $ --------- Amount of Commissions $ --------- CONVERSION PRICE (with the Agreed Value determined pursuant to clause ____ of Section 4(b)(i) or clause ____ of Section 4(b)(iii) of the Certificate of Designations) $ --------- Number of Common Shares = $ --------- Total dollar amount converted = $ --------- Conversion Price = $ --------- NUMBER OF COMMON SHARES = $ --------- If the conversion is not being settled by DTC, please issue and deliver certificate(s) for Common Shares in the following amount(s): - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- If the Holder is receiving certificate(s) for Preferred Shares upon the conversion, please issue and deliver certificate(s) for Preferred Shares in the following amounts: ----- - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- EX-4 5 EXHIBIT 4 Exhibit 4 COMMUNICATION INTELLIGENCE CORPORATION REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of December 31, 1996, is made by and between Communication Intelligence Corporation, a Delaware corporation (the "Company") and Libra Investments, Inc. (the "Advisor"). R E C I T A L S WHEREAS, the Advisor is acting as placement agent for a private placement of 450,000 shares (the "Shares") of 5% Cumulative Convertible Preferred Stock of the Company (the "Preferred Shares") (the "Private Placement"); and WHEREAS, in partial consideration for the Advisor acting as placement agent for the Preferred Shares, the Company is issuing Warrants to purchase common stock, par value $0.01 per share (the "Common Stock") of the Company to the Advisor (the "Designee"); and WHEREAS, as further inducement for the Advisor to act as placement agent for the Preferred Shares, the Company desires to undertake to register the Warrant Shares (as hereinafter defined) under the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), in accordance with, and subject to, the terms hereof. NOW, THEREFORE, the Advisor and the Company covenant and agree, upon the terms and subject to the conditions set forth herein, as follows: 1. DEFINITIONS. For the purposes of this Agreement, the following capitalized terms shall have the following meanings: (a) "Holder" means, initially, the Designee, and thereafter, any person or entity (a "person") who at a given time is the holder of record of any Registrable Securities or Warrants, so long as such transfers or assignments were made in compliance with Section 8 hereof or, with respect to the Warrants, in compliance with the terms thereof. (b) "Register," "registered" and "registration" refer to a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act. (c) "Registration Statement" means any registration statement or comparable document of the Company under the Securities Act through which a public sale or disposition of the Company's securities may be registered (except a form used exclusively for the sale or distribution of securities in connection with an employee stock option plan or in connection with a business combination), the prospectus contained therein and all amendments and supplements to such Registration Statement, including post-effective amendments, and all material incorporated by reference in such Registration Statement. (d) "Registrable Securities" means (i) the Warrant Shares (as defined below); and (ii) any other security of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of the Warrant Shares, excluding in all cases, however, any Registrable Securities disposed of by a Holder in a transaction in which its registration rights under this Agreement are not assigned pursuant to Section 8 of this Agreement. (e) "SEC" means the United States Securities and Exchange Commission or any similar agency then having the authority to enforce the Securities Act. (f) "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants pursuant to the terms of the Warrants. (g) "Warrants" means the 337,500 Warrants of the Company being issued by the Company to the Designees on the date hereof. 2. ADVISOR'S REGISTRATION. (a) PIGGYBACK REGISTRATION. If at any time during the five year period from the date hereof the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of others, in connection with the public offering of such securities solely for cash, pursuant to a Registration Statement that would also permit the registration of the Registrable Securities, the Company shall, in each such time, promptly give the Holder written notice of such proposal and the Holder may, within fifteen days after the Company provides such notice, request the inclusion of Registrable Securities in such Registration Statement; provided, however, that it shall be a condition precedent to the Company's obligations under this Section 2(a) that the underwriter(s) of such offering, if any, consent to the inclusion of the Holder's Registrable Securities in any such offering. In such event the Company shall include the Registrable Securities in such registration; provided that the Holder (i) agrees to sell the Registrable Securities on the basis provided in any underwriting agreements relating to such offering, and otherwise complies with the provisions of Section 4 hereof, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up agreements and other documents required under the terms of such underwriting arrangements, and (iii) agrees to pay the Holder's pro rata portion of all underwriting discounts and commissions. (b) DEMAND REGISTRATION. Subject to Section 2(c) hereof, at any one time during the period commencing ninety (90) days from the closing date of the Private -2- Placement (the "Closing Date") and terminating five years from the Closing Date, the Holder may deliver to the Company a written request that the Company register the Registrable Securities (but no less than all of the Registrable Securities) under the Securities Act and, upon receipt of such request, the Company shall prepare and file a Registration Statement with the SEC covering the Registrable Securities provided that if at the time of such written request, (i) the Company has filed an application to list its Common Stock on the NASDAQ SmallCap Market, (ii) the Company has met all of the NASDAQ SmallCap Market listing requirements, and (iii) the Company has no reason to believe that the Common Stock will not be so listed, the Company may extend the filing date of the Registration Statement for not more than 90 days after the date of the Holder's written request. The Company shall use its best efforts to keep such Registration Statement continually effective for the earlier to occur of the following: (i) all of the Registrable Securities covered by such Registration Statement have been sold, and (ii) nine months from the effective date of any such Registration Statement. The Holder shall notify the Company in writing within five (5) days after the sale of all of the Registrable Securities to enable the Company to determine when its obligation to continue effectiveness of such Registration Statement terminates. (c) Notwithstanding anything contained in Section 2(b) to the contrary, the Holder shall have no rights under Section 2(b), and Section 2(b) shall be deemed null and void, if the Holder elects to exercise the Warrants pursuant to and in accordance with Section 2.6 of the Warrant Certificate evidencing the Warrants. (d) SUSPENSION OF SALES BY HOLDERS. If at any time when a Registration Statement is effective with respect to Registrable Securities pursuant to Section 2(b) hereof, the Company intends to file a registration statement for an underwritten public offering of securities to be issued by the Company (a "Company Registration Statement"), the Company shall promptly give written notice thereof to the Holder, which notice shall include the anticipated filing date of the Company Registration Statement, and the Holder shall suspend offers and sales of its Registrable Securities covered by such Registration Statement for a period commencing fourteen days prior to the anticipated filing date of the Company Registration Statement and terminating not later than 150 days from the effective date of the Company Registration Statement (a "Suspension Period"); provided, however, that the Holder shall only be required to suspend such offers and sales of its Registrable Securities (i) if so requested by the underwriter of any such offering, and (ii) if and to the extent that any other securityholders of the Company whose securities have been registered by the Company pursuant to registration rights also agree to suspension of their sales. The Holder agrees that, during any such Suspension Period, the Holder shall not sell, make any short sale of, pledge, grant any option for the purchase of or otherwise dispose of any Registrable Securities without the prior written consent of such underwriter(s), and shall enter into such agreements with such underwriter(s) with respect to the foregoing as is reasonably requested by such underwriter(s). -3- 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities pursuant to Section 2 of this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a Registration Statement with respect to all Registrable Securities included therein, and use its best efforts to cause the Registration Statement to become effective as soon as reasonably possible after such filing, and to keep the Registration Statement effective for the period specified in Section 2 hereof, which Registration Statement shall not contain during such period any untrue statement of a material fact or omit to state during such period a material fact required to be stated therein or necessary to make the statements therein not misleading. (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective for the period specified in Section 2 hereof and as may be required by the Securities Act, and during such periods to comply with the provisions of the Securities Act with respect to the Registration Statement. (c) Furnish promptly to each Holder whose Registrable Securities are included in the Registration Statement such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by such Holder. (d) Use its best efforts to register and qualify the Registrable Securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders and prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements and to take such other actions as may be necessary to maintain such registration and qualification in effect at all times during which it has agreed to use its best efforts to keep a Registration Statement effective under the Securities Act pursuant to the terms of this Agreement, and to take all other actions necessary or advisable to enable the disposition of such securities in such jurisdictions, PROVIDED that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business, to file a general consent to service of process, to subject itself to general taxation in any such states or jurisdictions or to make any change in its charter or bylaws which the Board of Directors determines to be contrary to the best interest of the Company and its shareholders. (e) Notify the Holders who hold Registrable Securities being sold of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not -4- misleading. The Company shall promptly amend or supplement the Registration Statement to correct any such untrue statement or omission. (f) Notify the Holders who hold Registrable Securities being sold of the issuance by the SEC or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (g) Permit a single firm of counsel to review the Registration Statement and all amendments and supplements thereto within a reasonable period of time prior to each filing, and shall not file any document in a form to which such counsel reasonably objects. (h) Furnish to the Holders on the effective date of the Registration Statement, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given in such an offering, addressed to the Company; and (ii) a "cold comfort" letter, dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to securityholders in such an offering, so addressed. (i) Make available for inspection by representatives of the Holders and any counsel, accountants or other agents retained by any thereof, all pertinent financial and other records, corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such party in connection with the Registration Statement. (j) Use its best efforts to cause the Registrable Securities being sold to be listed on the NASDAQ SmallCap Market. (k) Take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be sold pursuant to the Registration Statement and to enable such certificates to be in such denominations and registered in such names as the Holders of the Registrable Securities being sold. (l) Take all other actions reasonably necessary to expedite and facilitate disposition by the Holders of the Registrable Securities being sold pursuant to the Registration Statement. 4. OBLIGATIONS OF THE HOLDERS. In connection with the registration of the Registrable Securities, the Holders shall have the following obligations: -5- (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to each Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended methods of disposition of such securities as shall be reasonably required to effect the registration of the Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least ten days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Holder of the information the Company requires from each such Holder if it elects to have any of his Registrable Securities included in the Registration Statement. (b) Each Holder agrees to cooperate with the Company in connection with the preparation and filing of any Registration Statement hereunder. (c) No Holder may participate in any underwritten registration hereunder unless such Holder (i) agrees to enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations; (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements; (iii) agrees to pay such Holder's pro rata portion of all underwriting discounts and commissions; and (iv) agrees to take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities being sold. (d) Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2(c) or Section 3(e), such Holder will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder's receipt of (i) confirmation from the Company that such sales may resume under the terms of Section 2(c) or (ii) the copies of the supplemented or amended prospectus contemplated by Section 3(e) and, if so requested in writing by the Company, such Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of such destruction) all copies, other than the permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities at the time of receipt of such notice. 5. EXPENSES OF REGISTRATION. All expenses incurred in connection with registration, filings or qualifications pursuant to Section 2, including, without limitation, all registration, listing, filing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one firm of counsel for the Holders, shall be borne by the Company. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: -6- (a) To the fullest extent permitted by law, the Company will indemnify and hold each Holder, it partners and their respective directors, officers, employees and representatives, and each person who controls any such Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934 (the "1934 Act") (each such person being referred to as an "Indemnified Person") harmless from and against any and all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or allegation thereof based upon information furnished in writing to the Company by such Indemnified Person expressly for use therein. Notwithstanding the foregoing, the Company shall not be obligated to so indemnify any such Holder, officer, director or controlling person with respect to any loss, claim, damage, liability or expense arising out of the failure by such person to comply with the prospectus delivery requirements under the Securities Act and the rules and regulations thereunder. (b) If any action or proceeding (including any governmental investigation) shall be brought, threatened or asserted against any Indemnified Person in respect of which indemnity may be sought from the Company, such Indemnified Person shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including employment of counsel and the payment of all expenses related thereto. Any such Indemnified Person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Company has agreed to pay such fees and expenses; or (ii) the Company shall have failed to assume the defense of such action or proceeding and employ counsel in such action or proceeding; or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Person and the Company, and such Indemnified Person shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Person which are different from or additional to those available to the Company (in which case, if such Indemnified Person notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company will not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Person); provided, however, that the Company will not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys at any time for all such Indemnified Persons, which firm shall be designated in writing by a majority in interest of such Indemnified Persons. The Company shall not be liable for any default judgment caused by any Indemnified Person or settlement of any such action or proceeding or confession of judgment without its prior written consent, but if settled with its written consent (which consent shall not be unreasonably -7- withheld), or if there be a final judgment (other than such default judgment) for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Subject to the following sentence, if the Company agrees to a settlement of an action or proceeding against an Indemnified Person which does not involve any finding or admission of liability or wrongdoing on the part of the Indemnified Person and stands ready, willing and able to pay such settlement and the Indemnified Person refuses to settle, then the Indemnified Person shall continue the defense at its own expense and the Company shall be responsible to indemnify only the lesser of the amount of the settlement accepted by the Company or the cost of the final disposition of the claim. The Company will not, without the prior written consent of any Indemnified Person, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect to which indemnification or contribution may be sought hereunder unless such settlement, compromise, consent or termination includes an express unconditional release of all Indemnified Persons from all liability arising out of such action, claim, suit or proceeding. (c) Each Holder, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors and officers, and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the 1934 Act, to the same extent as the indemnity from the Company to each Indemnified Person set forth in Section 6(a), but only (i) with respect to untrue statements, alleged untrue statements, omissions or alleged omissions relating to such Holder or an Indemnified Person who is such by reason of such person's relationship to such Holder, furnished in writing by such Holder or such person to the Company expressly for use in the Registration Statement or the Prospectus, or any amendment or supplement thereto; and (ii) with respect to any failure by such Holder to comply with the prospectus delivery requirements under the Securities Act and the rules and regulations thereunder. In case any action or proceeding shall be brought against the Company or its officers or directors or any such controlling person in respect of which indemnity may be sought against a Holder under the provisions of this Section 6(c), such Holder shall have the rights and duties given to the Company and each of the Company or its directors or its officers or its controlling persons shall have the rights and duties given to each Holder and other Indemnified Persons, under the terms of Section 6(b) above. Notwithstanding anything contained herein, no Holder shall be liable for an amount which is greater than the proceeds received by such Holder from the sale of Registrable Securities. (d) If the indemnification provided for under Section 6(a) or Section 6(c) hereof is unavailable to an indemnified party thereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the applicable Holders on the other in connection with the statements or -8- omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the applicable Holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or information supplied by the applicable Holder in writing for use in the Registration Statement and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Subsection 11(f) of the Securities Act) or of gross negligence, willful misconduct or bad faith shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation, gross negligence, willful, misconduct or bad faith. Notwithstanding anything contained herein, no Holder shall be liable for an amount which is greater than the proceeds received by such Holder from the sale of Registrable Securities. 7. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of SEC Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit the Holders to sell securities of the Company to the public without registration, the Company agrees to file with the SEC all reports and documents required to be filed by it under the Securities Act and the 1934 Act and the rules and regulations promulgated thereunder, and to furnish to each Holder, so long as such Holder owns any Registrable Securities, a copy of the most recent annual or quarterly report of the Company, such other reports and documents filed by the Company with the SEC, and such other information as may be reasonably requested in availing the Holders of any rule or regulation of the SEC which permits the selling of any such securities without registration. 8. ASSIGNMENTS OF REGISTRATION RIGHTS. The rights of a Holder under this Agreement may be assigned by a Holder to permitted transferees or assignees of Registrable Securities or Warrants provided that (i) the Company is furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (ii) the transfer or assignment of such Registrable Securities or Warrants has been made in compliance with the Securities Act and applicable state securities law and, immediately following such transfer or assignment the further disposition of such Registrable Securities or Warrants is restricted under the Securities Act; and (iii) the notice provided in this Section 8 contains a written agreement by the transferee or assignee to be bound by the terms and provisions of this Agreement. 9. MISCELLANEOUS. (a) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered or sent by registered mail, return receipt requested, addressed (i) if to the Company, at 275 Shoreline Drive, Redwood Shores, California 94065, with a copy to Donald J. Bezahler, Esq., Baer Marks & Upham LLP, 805 Third Avenue, New York, New York 10022; (ii) if to the -9- Advisor, at 11766 Wilshire Boulevard, Suite 870, Los Angeles, CA 90025; or at such other address as any such party furnishes by notice given in accordance with this Section 9. (b) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, will not operate as a waiver thereof. (c) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law applied in such State. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (d) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a writing executed by the Company and each of the Holders. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Holders and the Company. (e) Any person or entity is deemed to be a Holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall be entitled to act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (f) This Agreement may be executed in counterparts, each of which shall be an original, but all of which shall constitute one instrument. [Remainder of page intentionally left blank] -10- IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed on its behalf as of the date first set forth above. COMMUNICATION INTELLIGENCE CORPORATION By: /s/James Dao -------------------------------- Name: James Dao Title: Chief Executive Officer LIBRA INVESTMENTS, INC. By: -------------------------------- Name: Title: -11- EX-5 6 EXHIBIT 5 Exhibit 5 NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THIS WARRANT MAY ONLY BE EXERCISED AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT 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 SATISFACTORY 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 DECEMBER 31, 2001 COMMUNICATION INTELLIGENCE CORPORATION COMMON STOCK PURCHASE WARRANT CERTIFICATE 337,500 Warrants THIS CERTIFIES that: LIBRA INVESTMENTS, INC. or registered assigns is the registered holder (the "Registered Holder") of the number of Warrants set forth above, each of which, subject to the provisions of Section 1.1 of Article hereof, represents the right to purchase one fully paid and nonassessable share (the "Shares") of Common Stock, par value $.01 per share ("Common Stock") of Communication Intelligence Corporation, a corporation formed under the laws of the state of Delaware (the "Company"), at the initial exercise price equal to the lesser of (i) $2.50 per Share, or (ii) the closing price of the Common Stock as reported on the NASDAQ SmallCap Market on the date hereof (the "Initial Exercise Price"), at any time prior to the Exercise Deadline hereinafter referred to, by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon duly executed, at the office of the Company, 275 Shoreline Drive, Redwood Shores, CA 94065, or such other address as to which the Company shall have given written notice to the Registered Holder. Payment of the exercise price shall be made in United States currency, by certified check or money order payable to the order of the Company. This Warrant Certificate is being issued in connection with the issuance of 337,500 Warrants (the "Warrants"). ARTICLE 1 WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS 1.1 EXERCISE PRICE; NUMBER OF SHARES. This Warrant Certificate shall, when executed by the Company, entitle the Registered Holder hereof to purchase from the Company one Share for each Warrant evidenced hereby, at the Initial Exercise Price, or such adjusted number of Shares at such adjusted purchase price as may be established from time to time pursuant to the provisions of Articles 1 and 2 hereof, payable in full at the time of exercise of this Warrant. The term "Exercise Price" as used in this Agreement shall mean the purchase price of one Share upon the exercise of this Warrant, reflecting all appropriate adjustments made in accordance with the provisions hereof. 1.2 EXERCISABILITY OF WARRANTS. Each Warrant may be exercised at any time on or after the date of its issuance until 5:00 P.M., New York City time, on December 31, 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, money order or wire transfer, payable in United States currency to the order of the Company. The date on which Warrants are exercised in accordance with this Section 1.3 is sometimes referred to herein as the Date of Exercise. 1.4 ISSUANCE OF SHARES. As soon as practicable after the Date of Exercise of any Warrants, 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 Company 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 Company shall distribute no Warrant Certificates representing fractions of Warrants under this or any other section of this Agreement. Fractions of Shares shall be treated as provided in Section 2.9. -2- 1.6 RESERVATION OF SHARES. The Company shall at all times reserve and keep available for issuance upon the exercise of Warrants that number of its authorized but unissued shares of Common Stock sufficient to permit the exercise in full of all outstanding Warrants. ARTICLE 2 ADJUSTMENTS AND NOTICE PROVISIONS 2.1 ADJUSTMENT OF EXERCISE PRICE. Subject to the provisions of this Article 2, the Exercise Price in effect from time to time shall be subject to adjustment, as follows: (a) In case the Company shall at any time after the date hereof (i) declare a dividend 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 effective date of such subdivision, combination or reclassification, shall be proportionately adjusted so that the holders of the Warrants after such time shall be entitled to receive the aggregate number and kind of shares which, if such Warrants had been exercised immediately prior to such time, such holders would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of shares of Common Stock (including any such distribution made to the shareholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation but excluding the transaction referred to in Section 2.1(a)) evidences of its indebtedness, cash (other than cash dividends) or assets (other than distributions and dividends payable in Common Stock), then, in each case, the Registered Holder, upon the exercise hereof, shall be entitled to receive the amount of evidence of indebtedness, cash or assets which such Registered Holder would have been entitled to receive had such Registered Holder exercised the Warrants immediately prior to the record date for such distribution. (c) In case the Company shall sell any shares of Common Stock (other than in a transaction referred to in Section 2.1(a)-(b)) 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. -3- (d) For the purposes of any adjustment to be made in accordance with Section 2.1(c) the following provisions shall be applicable: (i) In case of the sale of Common Stock for a consideration part or all of which shall be cash, the amount of the cash portion of the consideration therefor deemed to have been received by the Company shall be without deduction for any 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. (ii) The number of shares of Common Stock at any one time outstanding shall be deemed to include the aggregate maximum number of shares issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights or warrants and upon the conversion or exchange of convertible or exchangeable securities. (iii) Except as hereinafter provided, in case the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for Common Stock, or issue any securities convertible into or exchangeable for Common Stock, for a consideration (determined as provided in this Section 2.1(d)) less than the Exercise Price in effect immediately prior to the earlier of the issuance of such options, rights or warrants, or such convertible or exchangeable securities or the record date therefor, or without consideration (including the issuance of any such securities by way of dividend or other distribution), the Exercise Price for the Warrants in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities or the record date therefor, as the case may be, shall be reduced to a price determined by making the computation in accordance with the provisions of Section 2.1(c) hereof, provided that: a. The aggregate maximum number of shares of Common Stock issuable or that may become issuable under such options, rights or warrants (assuming exercise in full even if not then currently exercisable or currently exercisable in full) shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, for a consideration equal to the minimum purchase or exercise price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration, if any, received by the Company upon the issuance of such options, rights or warrants (without deduction for expenses incurred or amounts paid to any underwriter by the Company in connection with such issuance); provided, however, that upon the expiration or other termination of such options, rights or warrants, if any thereof shall not have been exercised, the number of shares of Common Stock deemed to be issued and outstanding pursuant to this Section 2.1(d) shall be reduced by the number of shares as to which options, warrants and/or rights shall have expired, and such number of shares shall no longer be deemed to be issued and outstanding, and the Exercise Price then in effect shall forthwith be readjusted and thereafter be the price that it would have been had the adjustment been made on the basis of the issuance only of the shares actually issued plus the shares remaining issuable upon the exercise of those options, rights or warrants as to which the exercise rights shall not have expired or terminated unexercised. -4- 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 outstanding pursuant to this subsection 2.1(d) shall be reduced by the number of shares as to which the conversion or exchange rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding, and the Exercise Price then in effect shall forthwith be readjusted and thereafter be the price that it would have been had adjustment been made on the basis of the issuance only of the shares actually issued plus the shares remaining issuable upon conversion or exchange of those convertible or exchangeable securities as to which the conversion or exchange rights shall not have expired or terminated unexercised. c. If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in this Section 2.1(d), or in the price per share or ratio at which the securities referred to in this Section 2.1(d) are convertible or exchangeable (in either case, 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, loan agreements and convertible or exchangeable securities outstanding or in effect on the date hereof. 2.3 ADJUSTMENT TO NUMBER OF SHARES. Upon each adjustment of the Exercise Price as a result of the calculations made in Section 2.1(b), (c) and (d) hereof, the Warrants shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated -5- 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 (x) any capital reorganization (other than in the transactions referred to in Section 2.1 hereof) or (y) the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the surviving or continuing corporation and which does not result in any reclassification of the outstanding Common Stock or the conversion of such outstanding Common Stock into shares of other stock or other securities or property), or in the case of any sale, lease or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety (such actions being hereinafter collectively referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of any Warrant (in lieu of the number of shares theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of shares which would otherwise have been deliverable upon the exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization on the record date therefor. In case of any Reorganization, appropriate adjustment, as determined in good faith by the board of directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Warrant holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of Warrants. Any such adjustment shall be made by and set forth in a supplemental agreement of the Company, or any successor thereto, and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. 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 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), -6- 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. 2.6 CASHLESS EXERCISE. In lieu of exercising this Warrant by paying the Exercise Price in cash as provided herein, the Registered Holder may exercise this Warrant by surrender of this Warrant at the principal office of the Company together with the notice of election to purchase and the payment for such taxes as specified in Section 4.1 hereof, in which event the Company shall issue to the Registered Holder upon such exercise a number of shares of the Company's Common Stock computed using the following formula: X = Y(A-B) ------ A Where X = The number of shares of Common Stock to be issued to the Registered Holder. Y = The number of shares of Common Stock purchasable under this Warrant. A = The fair market value of one share of the Common Stock. B = Exercise Price per share. For purposes of this Warrant, fair market value of the Common Stock shall be determined as follows: (i) if the Common Stock is publicly traded, the fair market value shall be the average of the highest and lowest reported sales price of the Common Stock on the NASDAQ SmallCap Market, the NASDAQ National Market system or on any securities exchange (or, if the sales price of the Common Stock is unavailable, the average of the highest bid and lowest asked price of the Common Stock) for the twenty trading days prior to the date of determination of fair market value, or (ii) if the Common Stock is not publicly traded, the fair market value shall be determined by the Board of Directors, in their good faith judgement. 2.7 VERIFICATION OF COMPUTATIONS. Whenever the Exercise Price is adjusted as provided in this Article 2, the Company will promptly deliver to each Registered Holder a certificate setting forth the Exercise Price as so adjusted and a brief statement of the facts accounting for such adjustment, and will make available a brief summary thereof to the holders of the Warrant, at their addresses listed on the register maintained for that purpose by the Company. 2.8 NOTICE OF CERTAIN ACTIONS. In case at any time the Company shall propose: (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends) to all holders of such shares; or -7- (b) to issue any rights, warrants or other securities to all holders of shares entitling them to purchase any additional shares of Common Stock or any other rights, warrants, other securities or other property; or (c) to effect any consolidation, merger, sale, lease, or conveyance of property, described in Section 2.4, or any reclassification or change of outstanding shares of Shares, described in Section 2.5; or (d) to effect any liquidation, dissolution or winding-up of the Company; then, in each such case, the Company shall cause notice of such proposed action to be mailed to each Registered Holder. Such notice shall specify the date on which the books of the Company shall close, or a record shall be taken, for determining holders of shares entitled to receive such stock dividend or other distribution or such rights, warrants or property, or the date on which such reclassification, change, consolidation, merger, sale, lease, other disposition, liquidation, dissolution, winding up or exchange or other action shall take place or commence, as the case may be, and the date as of which it is expected that holders of record of shares shall be entitled to receive securities or other property deliverable upon such action, if any such date has been fixed. Such notice shall be mailed, in the case of any action covered by Subsection 2.8(a) or 2.8(b) above, at least 15 days prior to the record date for determining holders of shares for purposes of receiving such payment or offer; in the case of any action covered by Subsection 2.8(c) or 2.8(d) above, at least 15 days prior to the earlier of the date upon which such action is to take place or any record date to determine holders of shares entitled to receive such securities or other property. 2.9 WARRANT CERTIFICATE AMENDMENTS. Irrespective of any adjustments pursuant to this Article 2, Warrant Certificates theretofore or thereafter issued need not be amended or replaced but certificates thereafter issued shall bear an appropriate legend or other notice of any adjustments. 2.10 FRACTIONAL SHARES. The Company shall not be required upon the exercise of any Warrant to issue fractional Shares which may result from adjustments in the Exercise Price or number of shares purchasable under each Warrant. If more than one Warrant is exercised at one time by the same Registered Holder, the number of full shares of Shares which shall be deliverable shall be computed based on the number of shares deliverable in exchange for the aggregate number of Warrants exercised. With respect to any fraction of a share called for upon the exercise of any Warrant or Warrants, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the then fair market value per share. 2.11 COMPLIANCE WITH SECURITIES ACT. The Registered Holder, by acceptance hereof, agrees that this Warrant, and the shares of Common Stock to be issued upon exercise hereof, are being acquired for investment and that such Registered Holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Securities Act") or any applicable state securities laws. Upon exercise of this Warrant, unless the shares of Common Stock being acquired are registered under the Securities -8- Act and any applicable state securities laws, the Registered Holder hereof shall confirm in writing that the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale in violation of the Securities Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all shares of Common Stock issued upon exercise of this Warrant (unless registered under the Securities Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. ARTICLE 3 OTHER PROVISIONS RELATING TO RIGHTS OF REGISTERED HOLDERS OF WARRANT CERTIFICATES 3.1 RIGHTS OF WARRANT HOLDERS. This Warrant Certificate shall not entitle the Registered Holder thereof to any of the rights of a shareholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of shareholders or any other proceedings of the Company. 3.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANT CERTIFICATES. If this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Warrant Certificate, or in lieu of or in substitution for a lost, stolen or destroyed Warrant Certificate, a new Warrant Certificate for the number of Warrants represented by the Warrant Certificate so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Warrant Certificate, and of the ownership thereof, and indemnity, if requested, all reasonably satisfactory to the Company. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges incidental thereto as the Company may prescribe. -9- ARTICLE 4 SPLIT UP, COMBINATION, EXCHANGE, TRANSFER AND CANCELLATION OF WARRANT CERTIFICATES 4.1 SPLIT UP, COMBINATION, EXCHANGE AND TRANSFER OF WARRANT CERTIFICATES. Prior to the Exercise Deadline, this Warrant Certificate, subject to the provisions of Section 4.2, may be split up, combined or exchanged for other Warrant Certificates representing a like aggregate number of Warrants. Any holder desiring to split up, combine or exchange a Warrant Certificate or Warrant Certificates shall make such request in writing delivered to the Company at its principal office and shall surrender the Warrant Certificate or Warrant Certificates so to be split up, combined or exchanged at said office. Upon any such surrender for split up, combination or exchange, the Company shall execute and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested, provided that, the Company has received an opinion of counsel reasonably satisfactory to the Company that said split up is in accordance with the provisions of the Securities Act of 1933, as amended. The Company may require the holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split up, combination, exchange or transfer of Warrant Certificates prior to the issuance of any new Warrant Certificate. 4.2 AGREEMENT OF WARRANT CERTIFICATE HOLDERS. Every holder of a Warrant Certificate by accepting the same, consents and agrees with the Company and with every other holder of a Warrant Certificate that: (a) transfer of the Warrant Certificates shall be registered on the books of the Company maintained for that purpose by the Company only if surrendered at the principal office of the Company, duly endorsed or accompanied by a proper instrument of transfer and an opinion of counsel reasonably satisfactory to the Company that such transfer is permitted under the Securities Act of 1933, as amended; and (b) prior to due presentment for registration of transfer, the Company may deem and treat the person in whose name the Warrant Certificate is registered as the absolute owner thereof and of the Warrants evidenced thereby (notwithstanding any notations of ownership or writing on the Warrant Certificates made by anyone other than the Company) for all purposes whatsoever, and the Company shall not be affected by any notice to the contrary. 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 -10- 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 permitted successors and assigns. 5.3 NOTICES. Any notice or demand required by this Warrant Certificate to be given or made by the Registered Holder of any Warrant Certificate to or on the Company shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed to the Company's principal offices specified above (until another address is given in writing to the Registered Holder by the Company). Any notice or demand required by this Warrant Certificate to be given or made by the Company to or on the Registered Holder of any Warrant Certificate shall be sufficiently given or made, whether or not such holder receives the notice, if sent by first-class or registered mail, postage prepaid, addressed to such registered holder at his last address as shown on the books of the Company. Otherwise such notice or demand shall be deemed given when received by the party entitled thereto. 5.4 DEFECTS IN NOTICE. Failure to file any certificate or notice or to mail any notice, or any defect in any certificate or notice pursuant to this Agreement, shall not affect in any way the rights of any Registered Holder of a Warrant Certificate or the legality or validity of any adjustment made pursuant to Article 2 hereof, or any transaction giving rise to any such adjustment, or the legality or validity of any action taken or to be taken by the Company. 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. -11- 5.7 HEADINGS. The descriptive headings of the articles and sections of this Warrant Certificate are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 5.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original, but all of which shall constitute one instrument. 5.9 REGISTERED BROKER/DEALER. The initial Holder hereby represents and warrants to the Company that Libra Investments, Inc. is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -12- IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. Dated: December 31, 1996 COMMUNICATION INTELLIGENCE CORPORATION By: /s/James Dao ------------------------------------ Name: James Dao Title: Chief Executive Officer AGREED AND ACCEPTED LIBRA INVESTMENTS, INC. By: --------------------- Name: Title: -13- [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 payment of $______________ by certified check or money order payable to the order of the Company in United States currency. Dated: ________________ - --------------------------- ----------------------------------- (Insert Social Security or (Signature of registered holder) other identifying number(s) of holder(s)) --------------------------------------------- (Signature of registered holder, if co-owned) NOTE: Signature must conform in all respects to name of holder as specifiedon the face of the Warrant Certificate. -----END PRIVACY-ENHANCED MESSAGE-----