UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------ OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
--------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
May 13, 2003: 96,788,023.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at March 31, 2003
(unaudited) and December 31, 2002......................................3
Condensed Consolidated Statements of Operations
for the Three-MonthPeriod Ended March 31, 2003
and 2002 (unaudited)...................................................4
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the Three-Month
Period Ended March 31, 2003 (unaudited)................................5
Condensed Consolidated Statements of Cash Flows for the
Three-Month Period Ended March 31, 2003 and 2002 (unaudited)............6
Notes to Unaudited Condensed Consolidated Financial Statements............7
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations.................................................11
---------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk......18
----------------------------------------------------------
Item 4. Controls and procedures.........................................18
-----------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
-----------------
Item 2. Change in Securities............................................19
--------------------
Item 3. Defaults Upon Senior Securities.................................19
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.............19
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Item 5. Other Information...............................................19
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a)Exhibits......................................................19
(b) Reports on Form 8-K..........................................19
Signatures.......................................................20
Certifications....................................................21
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2003 2002
--------- -----------
Unaudited
Assets
Current assets:
Cash and cash equivalents.........................$ 936 $ 711
Accounts receivable, net..................... 891 477
Inventories.................................. 94 113
Prepaid expenses and other current assets.... 197 244
--------- ----------
Total current assets..................... 2,118 1,545
Property and equipment, net....................... 132 159
Capitalized software costs........................ 9 12
Patents and trademarks............................ 5,326 5,421
Other assets...................................... 30 31
--------- ----------
Total assets.............................$ 7,615 $ 7,168
========= ==========
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt............................. $ 600 $ -
Accounts payable............................ 345 160
Accrued compensation............................. 223 250
Other accrued liabilities................... 474 489
Deferred revenue............................ 67 165
Capital Lease Obligations................... 35 38
--------- -----------
Total current liabilities............... 1,744 1,102
Notes payable - Related party.................... 3,000 3,000
Minority interest................................ 132 132
Commitments
Stockholders' equity:
Common stock................................ 935 915
Additional paid-in capital.................. 82,118 82,025
Accumulated deficit......................... (80,129) (79,819)
Cumulative translation adjustment........... (185) (187)
---------- -----------
Total stockholders' equity.............. 2,739 2,934
---------- -----------
Total liabilities and stockholders' equity... $ 7,615 $ 7,168
========== ============
The accompanying notes form an integral part of these Financial Statements
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended
March 31,
----------- ------------
2003 2002
----------- ------------
Revenues:
Online..................................... $ 114 $ 124
Corporate.................................. 667 698
China...................................... 327 335
----------- -----------
Total revenues......................... 1,108 1,157
Operating costs and expenses:
Cost of sales:
Online................................. 1 163
Corporate ............................. 12 57
China.................................. 220 221
Research and development................... 340 412
Sales and marketing........................ 283 387
General and administrative................. 512 540
----------- -----------
Total operating costs and expenses..... 1,368 1,780
----------- -----------
Loss from operations............................ (260) (623)
Interest and other income (expense), net........ (1) (13)
Interest expense................................ (49) (52)
------------ ------------
Net loss .............................. $ (310) $ (688)
============ ============
Basic and diluted loss per share................ $ (0.01) $ (0.01)
============ ============
Weighted average common shares outstanding...... 91,907 90,946
============ ============
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Shares Common Paid-In Accum. Comprehensive
Outstanding Stock Capital Deficit Loss Total
Balances as
of December
31, 2002......... 91,481 $ 915 $ 82,025 $(79,819) $ (187) $ 2,934
------------------------------------------------------------
Sale of shares
of Common
Stock net of
issuance
costs.............. 2,041 20 93 113
Foreign currency
translation
adjustment... 2 2
Net loss........... (310) (310)
-------------------------------------------------------------
Balances as of
March 31,2003..... 93,522 $ 935 $ 82,118 $(80,129) $ (185) $ 2,739
=============================================================
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31,
----------- ----------
2003 2002
----------- ----------
Cash flows from operating activities:
Net loss............................................ $ (310) $ (688)
Adjustments to reconcile net loss to net cash
(used) in operating activities:
Depreciation..................................... 30 19
Patent amortization.............................. 95 98
Disposal of fixed assets......................... - 5
Changes in operating assets and liabilities:
Accounts receivable, net....................... (414) (74)
Inventories.................................. 19 (40)
Prepaid expenses and other current assets.... 47 (67)
Other assets................................. 1 137
Accounts payable............................. 185 135
Accrued compensation......................... (27) 30
Other accrued liabilities.................... (13) (17)
Deferred revenue............................. (98) 43
------------ ----------
Net cash (used in) operating activities..... (485) (419)
------------ ----------
Cash flows from investing activity:
Acquisition of property and equipment............ - (11)
------------ ----------
Net cash used in investing activity.......... - (11)
------------ ----------
Cash flows from financing activities:
Payments on long-term debt....................... - (121)
Proceeds from acquisition of short term debt..... 600 -
Proceeds from the issuance of common stock....... 400 -
Offering costs................................... (287) -
Proceeds from exercise of stock options
and warrants..................................... - 110
Principal payments on capital lease obligations.. (3) (2)
------------ ----------
Net cash provided by financing activities.... 710 (13)
------------ ----------
Effect of exchange rate changes on cash............... - -
------------ ----------
Net increase (decrease) in cash and cash equivalents.. 225 (443)
Cash and cash equivalents at beginning of period...... 711 2,588
------------ ----------
Cash and cash equivalents at end of period............$ 936 $ 2,145
============ ==========
-6-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
The financial information contained herein should be read in conjunction with
the Company's audited financial statements and notes thereto included in its
Annual Report on Form 10-K for the year ended December 31, 2002.
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the "Company" or
"CIC") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, the financial statements included in this quarterly
report reflect all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for a fair presentation of its financial
position at the dates presented and the Company's results of operations and cash
flows for the periods presented. The Company's interim results are not
necessarily indicative of the results to be expected for the entire year.
The Company develops and markets software that can verify handwritten signatures
and electronic signature and handwritten data entry software solutions aimed at
emerging, large potential markets such as e-commerce, workflow automation,
corporate security, mobile voice/Internet devices including
smartphones/communicators, PDAs, webpads and the Palm OS aftermarket.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R)) and the Handwriter(R) Recognition System, referred
to as HRS(TM), electronic signature, biometric signature verification,
cryptography, electronic ink recording tools (InkTools(R)), Sign-it(R),
iSign(TM) and Sign-On(TM), and operating systems extensions that enable pen
input (PenX(TM)).
Other consumer and original equipment manufacturer ("OEM") products include
electronic notetaking (QuickNotes(TM) and InkSnap(TM)) and predictive text
input, (WordComplete(R)). CIC's products are designed to increase the ease of
use, functionality and security of electronic devices with a primary focus on
wireless internet and information devices such as smartphones, electronic
organizers ("PDA's") and portable web browsers.
The Company offers a wide range of multi-platform software products that enable
or enhance pen-based computing. The Company's core technologies are classified
into two broad categories: "natural input technologies" and "transaction and
communication enabling technologies". Natural input technologies are designed to
allow users to interact with a computer or handheld device by using an
electronic pen or "stylus" as the primary input device or in conjunction with a
keyboard. CIC's natural input offerings include multilingual handwriting
recognition systems, software keyboards, predictive text entry, and electronic
ink capture technologies. Many small handheld devices such as electronic
organizers, pagers and smart cellular phones do not have a keyboard. For such
devices, handwriting recognition and software keyboards offer viable solutions
for performing text entry and editing. CIC's predictive text entry technology
simplifies data entry even further by reducing the number of actual letters
required to be entered. The Company's ink capture technologies facilitate the
capture of electronic ink for notetaking, drawings or short handwritten
messages. The Company's transaction and communication enabling technologies are
designed to provide a cost-effective means for securing electronic transactions,
providing network and device access control, and enabling workflow automation of
traditional paper form processing. CIC believes that these technologies offer
more efficient methods for conducting electronic transactions and provide more
functional user authentication and heightened data security. The Company's
transaction and communication enabling technologies have been fundamental in its
development of software for signature verification, data security, and data
compression.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations that raise a substantial doubt about its ability to
continue as a going concern. At March 31, 2003, the Company's accumulated
deficit was approximately $80 million. The Company filed a registration
statement with the Securities and Exchange Commission that was declared
effective February 2003, pursuant to the line of credit agreement with Cornell
Capital Partners, LP ("Cornell"), (see Note 4). However, there can be no
assurance that the Company will have adequate capital resources to fund planned
operations or that additional funds will be available to the Company when
needed, or if available, will be available on favorable terms or in amounts
required by the Company. If the Company is unable to obtain adequate capital
resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which may have a material adverse
effect on the Company's business, results of operations and ability to operate
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
March 31, December 31,
2003 2002
--------------------- -- -------------------
Cash in bank $ 340 $ 260
Money market 596 451
--------------------- -------------------
$ 936 $ 711
===================== ===================
3. Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method. At March 31, 2003, inventories
consisted primarily of finished goods.
4. Short-term debt
In February 2003, Cornell advanced the Company $1 million (the "Advance"), net,
of a 6.5% financing fee against the Equity Line of Credit Agreement existing
between Cornell and the Company. The advance is due in full within 72 days. If
the Advance is not paid in full when due, the outstanding principal owed shall
be due and payable in full together with interest at a rate of 6% per annum or
the highest permitted by applicable law. The Advance required the Company to
place in escrow 1,000 shares of its common stock. As of March 31, 2003, the
Company repaid $400,000 of the Advance by issuing 2,041,052 shares of its common
stock pursuant to the terms of the Equity Line of Credit Agreement (See Note 9).
5. Related Party Transactions
On June 19, 2001, the Company consummated a three-year $3 million financing (the
"Loan") with a charitable remainder annuity trust of which a former director and
officer of the Company is a trustee (the "Trust"). The proceeds of the Loan were
used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a
loan made by the Trust to the Company in October 1999 and for working capital
purposes.
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Related Party Transactions (continued)
The Loan bears interest at the rate of 2% over the prime rate publicly announced
by Citibank N.A. from time to time, which was 6.75% per annum at March 31, 2003,
and is due June 18, 2004. The Loan may be pre-paid by the Company in whole or in
part at any time without penalty, subject to the right of the Trust to convert
the outstanding principal amount of the Loan into shares of common stock.
Pursuant to the terms of the Loan, the Trust has the option, at any time prior
to maturity, to convert all or any portion of the outstanding principal amount
of the Loan into shares of common stock of the Company at a conversion price of
$2.00 per share, subject to adjustment upon the occurrence of certain events.
If, prior to maturity of the Loan, the Company consummates one or more
financings providing $5 million or more in gross proceeds, the Company is
required to apply 50% of the proceeds in excess of $5 million to the then
outstanding principal amount of the Loan. The Loan is secured by a first
priority security interest in and lien on all of the Company's assets as now
owned or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of the
shares of the Company's common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its reasonable
best efforts to cause such registration statement to become effective. As of
March 31, 2003, no demand had been made upon the Company to filed this
registration statement.
Interest paid during the three months ended March 31, 2003 and 2002 was $50 and
$56, respectively.
6. Net loss per share
The Company calculates earnings per share under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires the disclosure of both basic earnings per share, which is based on
the weighted average number of shares outstanding, and diluted earnings per
share, which is based on the weighted average number of shares and dilutive
potential shares outstanding. For the three month period ended March 31, 2003
and 2002, potential equivalent shares excluded from the calculation of diluted
earnings per share, as their effect is not dilutive, include stock options of
6,358, and 7,518, respectively.
7. Comprehensive income
Total comprehensive (loss) was as follows:
Three month Ended March 31,
------------------ ------ ---------------
2003 2002
----------------- ---------------
Net loss $ (310) $ (688)
Other comprehensive income:
Cumulative translation adjustment 2 3
----------------- ---------------
Total comprehensive loss $ (308) $ (685)
================= ===============
8. Segment Information
The Company identifies reportable segments by classifying revenues into two
categories: handwriting recognition and system integration. Handwriting
recognition software is an aggregate of three revenue categories. All
handwriting recognition software is developed around the Company's core
technology. System integration represents the sale and installation of third
party computer equipment and systems that utilize the Company's products. All
sales represent sales to external customers.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Segment Information (continued)
The accounting policies followed by the segments are the same as those described
in the "Critical Accounting Policies." Segment data includes revenues, as well
as allocated costs charged to each of the operating segments.
The table below presents information about reporting segments for the
periods indicated:
Three months ended March 31,
2003 2002
------------------------------- -------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ------- ----------- ----------- -------
Revenues $ 829 $ 279 $ 1,108 $ 859 $ 298 $ 1,157
Loss from
Operations $ (221) $ (39) $ (260) $ (586) $ (37) $ (623)
Significant change
in Total long
lived assets from
Year End $ - $ - $ - $ - $ (35) $ -
For the three months ended March 31, 2003 and 2002 one customer accounted for
40% and 33% of total handwriting recognition segment revenue, respectively. For
the three months ended March 31, 2003 and 2002 one customer accounted for 23%
and 50% of system integration revenues, respectively.
9. Subsequent Events
In April of 2003, the Company repaid the $600,000 remaining on the Advance (see
Note 4) by issuing 3,266,194 shares of its common stock to Cornell. Also, in
April, Cornell advanced the Company an additional $1 million, net of a 6.5%
financing fee, against the Equity Line of Credit Agreement. The second advance
is due in full within 105 days. If the second Advance is not paid in full when
due, the outstanding principal owed shall be due and payable in full together
with interest at a rate of 6% per annum or the highest permitted by applicable
law. The Second Advance required the Company to place in escrow 3,000 shares of
its common stock. This second advance is scheduled to be repaid, pro rata over a
ten-week period commencing the second week of May 2003, via the issuance of the
Company's common stock to Cornell pursuant to the terms of the Equity Line of
Credit Agreement.
-10-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set fourth in the Company's Annual report on Form 10-K for the
fiscal year ended December 31, 2002.
Overview
History. The Company was initially incorporated in Delaware in October
1986. In each year since its inception, the Company has incurred losses. For the
five-year period ended December 31, 2002, operating losses aggregated
approximately $13.9 million and at December 31, 2002, the Company's accumulated
deficit was approximately $80 million. At March 31, 2003, the Company's
accumulative deficit was approximately $80 million.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in our
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions which are used for,
but not limited to, the accounting for the product returns, allowance for
doubtful accounts, intangible asset impairments, and inventory. Actual results
may differ from these estimates. The following critical accounting policies are
significantly affected by judgments, assumptions and estimates used by our
management in the preparation of the consolidated financial statements.
Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive guidance issued by the Securities and Exchange Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. We recognize revenues
from sales of software products upon shipment, provided that persuasive evidence
of an arrangement exists, collection is determined to be probable and no
significant obligations remain. Revenue from service subscriptions is recognized
as costs are incurred or over the service period.
Revenue from software license agreements is recognized upon delivery of the
software provided that persuasive evidence of an arrangement exists, collection
is determined to be probable and no significant obligations remain. Deferred
revenue is recorded for post contract support and is recognized as costs are
incurred or over the support period. Vendor specific objective evidence of the
fair value of the elements contained in these software license agreements is
based on the price determined by management having the relevant authority when
the element is not yet sold separately.
Revenue from system integration activities is recognized upon installation
provided that persuasive evidence of an arrangement exists, no significant
obligations remain and the collection of the resulting receivable is probable.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable. If
there is a change in actual defaults from our historical experience, our
estimates of recoverability of amounts due us could be affected and we will
adjust the allowance accordingly.
We perform intangible asset impairment analysis on a quarterly basis in
accordance with the guidance in Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142") and Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Lived Assets ("SFAS No. 144"). We use SFAS 144 in response to changes in
industry and market conditions that affect our patents, we then determine if an
impairment of our assets has occurred.
Sources of Revenues. To date, the Company's revenues have been derived
principally from end-users, manufacturers, retailers and distributors of
computer products in North America, Europe and the Pacific Rim. The Company
performs periodic credit evaluations of its customers and does not require
collateral. The Company maintains reserves for potential credit losses.
Historically, such losses have been insignificant and within management's
expectations.
Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
completion of a working model and generally ends upon the release of the
product. The capitalized costs are amortized to cost of sales on a straight line
basis over the estimated life of the product, generally three years. As of March
31, 2003 and 2002, such costs were insignificant.
Research and Development. Research and development costs are charged to
expense as incurred.
Foreign Currency Translation. We consider the functional currency of the
Joint Venture to be the respective local currency and, accordingly, gains and
losses from the translation of the local foreign currency financial statements
are included as a component of "accumulated other comprehensive loss" in our
consolidated balance sheets. Foreign currency assets and liabilities are
translated into U.S. dollars at exchange rates prevailing at the end of the
period, except for non-monetary assets and liabilities that are translated at
historical exchange rates. Revenues and expenses are translated at the average
exchange rates in effect during each period, except for those expenses included
in balance sheet accounts, which are translated at historical exchange rates.
Net foreign currency transaction gains and losses are included as
components of "interest income and other income (expense), net" in the Company's
consolidated statements of operations. Due to the stability of the currency in
China, net foreign currency transaction gains and losses were not material for
the three months ended March 31, 2003 and 2002, respectively.
Net Operating Loss Carryforwards. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets at December 31,
2002 of $28 million based upon the Company's history of losses.
Segments
We report in two segments: handwriting recognition and systems integration.
For purposes of Management Discussion and Analysis, handwriting recognition
includes online/retail revenues and corporate sales, including enterprise and
original equipment manufacturers ("OEM") revenues. All handwriting recognition
software is developed around our core technology. Handwriting recognition
product revenues are generated through our web site and a direct sales force to
individual or enterprise end users. We also license a version of our handwriting
recognition software to OEM's. The handwriting recognition software is included
as part of the OEM's product offering. From time to time, we are required to
develop an interface (port) for our software to run on a new customer's hardware
platform or within the customer's software operating system. The development
contract revenues are included in the handwriting recognition segment. System
integration represents the sale and installation of third party computer
equipment and systems that utilize our products. System integration sales are
derived through a direct sales force which then develops a system to utilize our
software based on the customers requirements. Systems integration sales are
accomplished solely through our Joint Venture.
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Results of Operations
The following table provides unaudited financial information for each of
our two segments.
Three Months Ended
March 31,
2003 2002
------------------- ------------------
------------------- ------------------
Segment revenues:
Handwriting recognition
Online $ 114 $ 124
Corporate 667 698
China 48 37
------------------ ------------------
Total Handwriting recognition $ 829 $ 859
Systems integration
China 279 $ 298
------------------ -------------------
Total revenues $ 1,108 $ 1,157
------------------ -------------------
Cost of Sales
Handwriting recognition $ 16 $ 226
Systems integration 217 215
------------------ -------------------
Total cost of sales $ 233 $ 441
------------------- -------------------
Operating cost and expenses
Research and development $ 340 $ 412
Sales and Marketing 283 387
General and administrative 512 540
------------------ ------------------
Total operating costs and expenses $ 1,135 $ 1,339
------------------ ------------------
Interest and other income
(expense) net $ (50) $ (65)
----------------- ------------------
Net loss $ (310) $ (688)
================= ==================
Amortization of intangible assets
Cost of sales $ 3 $ 3
General and administrative 95 98
----------------- ------------------
Total amortization of
intangible assets $ 98 $ 101
================= ==================
Revenues
Handwriting recognition.
Handwriting recognition segment revenues include online/retail, corporate
and China software sales. Handwriting recognition segment revenues declined 3%
or $30 to $829 for the three months ended March 31, 2003 as compared to $859 in
the comparable prior year period.
Online/retail revenues declined 8% or $10 for the three months ended March
31, 2003 compared to the prior year period. The decrease is due to the
curtailment of the direct mail campaign at the end of the second quarter 2002,
due to the reduced availability of new names and poor sales close rate. The
reduction to online/retail revenues due to the curtailment of the direct mail
campaign was offset by the positive effect of the November 2002 PalmSource
decision to replace Graffiti(R) with CIC's Jot as the standard and only
handwriting software on all new Palm PoweredTM devices. The Company believes
that the November 2002 PalmSource decision and subsequent January 2003
announcement has had a positive effect on its online/retail product sales
resulting in a 73% increase in online/retail sales compared to the fourth
quarter 2002. The Company cannot predict the duration of the favorable benefit
provided by the PalmSource announcement and has no plans to reinstate its direct
mail campaigns in the near future. In March 2003 the Company launched a
multi-channel marketing campaign based on its JotComplete(TM), advanced text
input software solution. Co-Partners include leading hardware manufacturers, the
primary online Palm(TM) software supplier and a leading retail software
publisher. It is too early to project the revenues associated with the new
multi-channel marketing campaign.
Corporate revenues decreased 4%, or $31, over the three months ended March
31, 2003 compared to the prior year period. OEM revenues included in corporate
sales decreased 58% or $62 over the three months ended March 31, 2003 compared
to the prior year period. This decrease was primarily due to a decrease in the
amount of development contract revenue recognized for porting the Company's
software to third party operating systems as compared to the prior year. The
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Company believes Palm Source's replacement of Graffiti(R) with the Company's Jot
product as the standard and only handwriting software on all new Palm PoweredTM
devices will increase OEM revenues in 2003. However, the poor economy and Palm's
prediction of declines in projected shipments of its products may limit or delay
the Company's anticipated increases in OEM revenues to later in 2003. Enterprise
sales included in corporate sales increased 6%, or $33, during the three months
ended March 31, 2003 compared to the prior year period. The Company believes the
$575 increase in enterprise revenue from the fourth quarter of 2002 is an
encouraging indicator of possible trends in IT spending. The Company believes
that IT spending and economic health will be the limiting factors related to
near term deployment revenue potential.
Software sales in China increased 30%, or $11, over the three months ended
March 31, 2003 compared to the prior year period. The minor increase reflects
primarily the need to expand sales coverage from a traditional focus on the
local Nanjing and Jiangsu Province markets to other provinces in China. The
Company hired a new general manager to implement the expansion of its sales
efforts into other provinces.
Systems Integration.
System integration segment revenue declined 6%, or $19, for the three
months ended March 31, 2003 compared to the prior year period. The decrease
primarily reflects the need for the Joint Venture to expand sales coverage from
a traditional focus on the local Nanjing and Jiangsu Province markets to other
provinces with in China. The Company hired a new general manager to implement
the expansion of its sales efforts into other provinces.
Cost of Sales
Handwriting recognition segment.
Handwriting recognition segment cost of sales includes online/retail,
corporate and China software sales costs. Such costs are made up of royalty and
import tax payments, third party hardware costs, direct mail costs, engineering
direct costs and amortization of intangible assets excluding patents. Cost of
sales for the handwriting recognition segment decreased 94% or $212 during the
three months ended March 31, 2003 compared to the prior year period.
Online/retail cost of sales decreases 99% or $162 during the three month
period ended March 31, 2003 compared to the prior year period. The decrease was
due to the elimination of the direct mail campaign and related costs as a result
of reductions in the number of names available and a poor sales close rate. The
Company does not anticipate a material increase is costs associated with the
multi-channel JotComplete(TM) campaign discussed above.
Enterprise and OEM cost of sales decreased 80%, or $45, during the three
months ended March 31, 2003 compared to the prior year period. The decrease was
due to the lower volume of third party hardware sales and engineering
development costs over the comparable three month period of the prior year.
China handwriting recognition segment cost of sales decreased 83%, or $5,
during the three month period ended March 31, 2003 compared to the prior year
period. The increase is due primarily to lower third party hardware costs
associated with the sale of the software compared to the prior year period.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Systems Integration.
China Systems integration segment cost of sales increased 1%, or $2, over
the three month period ended March 31, 2003 as compared to the prior year. The
increase in costs was due primarily to the reduction in price on certain orders
received in the current three months ended March 31, 2003 compared to the prior
year period. See revenue discussion above.
Operating expenses
Research and development expenses. Research and development expenses
decreased 17%, or $72, to $340 for the three months ended March 31, 2003 as
compared to $412 in the prior year period. Engineering expenses consist
primarily of salaries and related costs, outside engineering, maintenance items,
and allocated facilities expenses. These expenses are offset by the
capitalization of software development costs and direct costs associated with
nonrecurring engineering contracts charged to cost of sales. Salaries and
related expenses decreased 11%, or $27, compared to the three months ended March
31, 2002 due primarily to the reduction in head count of three engineers.
Professional services declined 100%, or $30, due to the elimination of outside
engineering support compared to the three month period in the prior year. Other
engineering administrative costs including allocated facilities expenses
declined 1%, or $15, during the three months ended March 31, 2003 compared to
the prior year period. The Company believes that the reductions in engineering
head count and expenses will not have an adverse effect on its ability to cope
with the current requirements. The Company maintains its relationship with an
outside engineering group familiar with its products and, if required, can
engage them on an as needed basis to fill future engineering requirements. In
addition the Company draws on the engineering capabilities of the
Joint Venture as required.
Sales and marketing expenses. Sales and marketing expenses declined 27%, or
$104, to $283 for the three months ended March 31, 2003 compared to $387 for the
comparable three month period in 2002. Sales and marketing expenses consist of
salaries, commissions and related expenses, professional services, advertising
and promotion, general office and allocated facilities expenses. Salaries and
related expenses declined 18%, or $27, for the three months ended March 31, 2003
compared to the prior year period. The decline is salaries and related expense
is due to the reduction of one sales person compared to the three months in the
prior year period. The Company is currently working on a channel strategy that
will increase the amount of market coverage by utilizing the sales force of the
channel partners. CIC has signed several new agreements since December 31, 2002
that the Company believes will begin to produce revenues in the near term.
Professional services declined 100%, or $51, during the current three month
period compared to the prior year period. The decline is primarily due to $37 in
outside commission expense and $14 in salaries expense paid to an outside sales
consultant during the three months ended March 31, of the prior year.
Advertising expense decreased 100%, or $10, compared to the prior year. This
decrease is due to the discontinuance of in the box advertising in the first
three months of 2003 compared to the prior year period.
General and Administrative Expenses. General and administrative expenses
decreased 5%, or $28, to $512 for the three months ended March 31, 2003,
compared to $540 in the prior year period. General and administrative expense
consists of salaries, professional fees, investor relations expenses, patent
amortization and office and allocated facilities costs. Salaries and wages
increased 6%, or $10, for the three months ended March 31, 2003 compared to the
three month period last year, due to salary increases. Professional service
expenses which include consulting, legal and outside accounting fees decreased
19%, or $23, compared to the three month period in the prior year. The decrease
was primarily due to lower consulting service fees resulting from the
resignation of the former Chairman of the Board and the elimination of $19 in
related salary and office fees and $4 in other professional fees for the three
months ended March 31, 2003 compared to last year. The Company reduced its
provision for uncollectable accounts by 67%, or $6, for the three months ended
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
March 31, 2003 due to collection of certain accounts fully reserve for in prior
periods. The Company believes its uncollectible accounts provision is adequate
at the present time. Other administrative expenses declined 4%, or $9, over the
three month period ended March 31, 2003 compared to the prior year period. The
decrease was primarily due to a reduction in travel related expenses of $4 and
allocated facilities expense of $3.
Interest and other income (expense), net
Interest and other income (expense), net decreased 92%, or $12, compared to
the three months ended March 21 2002. The decrease in expense was due to a
refund in value added tax from 2002 received by the Joint Venture.
Interest expense
Interest expense decreased 6% or $3 over the three months ended March 31,
2003 compared to the three months in the prior year. The decrease was primarily
due to the decrease in the interest rate paid on the Company's $3,000 debt over
the comparable three month period.
Liquidity and Capital Resources
At March 31, 2003, cash and cash equivalents totaled $936 compared to cash
and cash equivalents of $711 at December 31, 2002. The increase in cash was
primarily due to financing activities through Cornell Capital Partners, LP. The
Company incurred $600 in short term debt and received $113 from the sale of
stock, net of issuance costs associated with the preparation and filing of the
S-1 in February 2003. The $600 short term note was repaid in April 2003 through
the sale of additional shares of the Company's common stock. This increase was
offset by $485 used in operating activities, and by payments of capital lease
obligations of $3. Total current assets were $2,118 at March 31, 2003, compared
to $1,545 at December 31, 2002. As of March 31, 2003, the Company's principal
sources of funds included its cash and cash equivalents aggregating $936 and the
Equity Line of Credit through Cornell Capital Partners LP.
Accounts receivable increased $414 for the three months ended March 31,
2003 compared to December 31, 2002, due primarily to the increase in sales
during the period. The Company believes the financial results for the first
quarter together with our current sales activity appear to confirm recent
surveys, including studies from UAB Warburg and Celent Communications,
indicating IT spending will increase this year despite the current geopolitical
and economic uncertainties.
Prepaid expenses declined $47 for the three months ended March 31, 2003,
compared to December 31, 2002, due to expensing through operations the
appropriate quarterly amounts. Generally annual insurance premiums and
maintenance fees are prepaid in December and June of each year.
Accounts payable increased $185 for the three months ended March 31, 2003,
compared to December 31, 2002, due to the fees associated with both the annual
audit and the preparation and filing of the Registration Statement on Form S-1.
Accrued compensation decreased $27 due to the elimination of four positions and
related personal late in March 2003. The Company believes that the elimination
of the positions will not have an negative impact on its ability to conduct
business on a going forward basis.
The Company has suffered recurring losses from operations that raise a
substantial doubt about its ability to continue as a going concern. At March 31,
2003, the Company's accumulated deficit was approximately $80 million. There can
be no assurance that the Company will have adequate capital resources to fund
planned operations or that any additional funds will be available to it when
needed, or if available, will be available on favorable terms or in amounts
required by it. If the Company is unable to obtain adequate capital resources to
fund operations, it may be required to delay, scale back or eliminate some or
all of its operations, which may have a material adverse effect on its business,
results of operations and ability to operate as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
The Company intends to use the net proceeds from the issuance of the shares
of its common stock under the Equity Line of Credit to repay short term debt and
for working capital. In addition, fifty percent of any such funds in excess of
$5 million must be applied to the outstanding principal of the Company's
long-term debt. CIC believes the proceeds from the Equity Line of Credit, when
combined with cash provided from operations, will be sufficient to meet its
capital requirements for the foreseeable future. If the Company is unable to
secure at least $5 million in funds under the Equity Line of Credit or is unable
to increase substantially funds generated from operations, the Company may not
be able to continue its operations in their current form and may not be a viable
company on a going forward basis without significant changes in its operations.
The Company believes it will be able to raise the necessary funds under the
Equity Line of Credit and from operations. The Company has not formulated
specific plans to change its operations. Possible changes could include reduced
personnel expenses to better match its revenue stream.
Current liabilities, which include deferred revenue, were $1,744 at March
31, 2003 compared to $1,102 at December 31, 2002. Deferred revenue, totaling $67
at March 31, 2003, compared to $165 at December 31, 2002, primarily reflects
advance payments for products and maintenance fees from the Company's licensees
which are generally recognized as revenue by the Company when all obligations
are met or over the term of the maintenance agreement.
We have the following material commitments as of March 31, 2003:
Payments Due by Period
One to Four to After
Less than three five five
Contractual Obligations Total one year years years years
--------- ---------- ------ -------- --------
Short-term debt $ 600 $ 600 $ - $ - $ -
Long-term debt (1) 3,000 - 3,000 - -
Capital lease obligations 35 6 23 6 -
Operating lease commitments (2) 1,579 407 1,172 - -
--------- --------- ------- ------- -------
Total contractual cash
obligations $ 5,214 $ 1,013 $4,195 $ 6 $ -
========== ========= ======= ======= =======
1. The Long-term debt may be pre-paid by the Company in whole or in part at
any time without penalty, subject to the right to convert the outstanding
principal amount into shares of common stock at a conversion price of $2.00
per share, subject to adjustment upon the occurrence of certain events.
2. The operating lease commenced on November 1, 2001. The cost of the lease
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2006.
Forward Looking Statements
Certain statements contained in this quarterly report on Form 10-Q,
including without limitation, statements containing the words "believes",
"anticipates", "hopes", "intends", "expects", and other words of similar import,
constitute "forward looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors which may cause actual events to
differ materially from expectations. Such factors include the following:
o Technological, engineering, manufacturing, quality control or other
circumstances which could delay the sale or shipment of products;
o Economic, business, market and competitive conditions in the software
industry and technological innovations which could affect the Company's
business;
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
o The Company's inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of others
and prevent others from infringing on the proprietary rights of the
Company; and
o General economic and business conditions and the availability of sufficient
financing.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, as a result of new information, future events or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short term securities. The Company has not entered into
any short-term security investments during the three months ended March 31,
2003.
Foreign Currency Risk
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
Future Results and Stock Price Risk
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's common stock could be subject to wide
fluctuations in response to, among other factors, quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-14(c) within 90 days of the filing date of this quarterly report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
Part II-Other Information
Item 1. Legal Proceedings
The Company was named as a defendant in a suit brought in U.S. District
Court for the Southern District of New York, filed on August 5, 2002, case
number 02-CV-6197. The plaintiffs, Richard M. Ross and Jane Spaulder Ross,
brought claims for breach of contract, conversion, negligence and statutory
violations, alleging that the Company provided incorrect or false information to
plaintiffs' stockbroker, thereby delaying the sale of their shares in the
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Company and causing a loss in excess of $500,000. While the litigation is in an
early stage, based on the available information, we do not believe that the
action will ultimately have a material financial impact on the Company. We
believe that the claims are without merit and we intend to vigorously defend
against them.
In a separate arbitration proceeding the plaintiffs have brought similar
claims for relief against Charles Schwab & Co., Inc., their broker during the
period in question, based upon other legal theories.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certification of Chief Executive Officer and Chief Financial Officer
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 13, 2003, with respect to:
1. the effective date of the Company's Registration Statement on Form S-1.
2. the Company's audited financial results for the year ended December 31, 2003.
3. the Company's options regarding continued listing of its common stock on the
NASDAQ Small Cap Market.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
----------------------------------------
Registrant
May 13, 2003 /s/ Francis V. Dane
- ----------------------------- --------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Communication Intelligence
Corporation (the "Company") on Form 10-Q for the quarterly period ended March
31, 2003, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Francis V. Dane, Principal Financial Officer, certify,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act
of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Francis V. Dane
Principal Financial Officer
In connection with the quarterly report of Communication Intelligence
Corporation (the "Company") on Form 10-Q for the quarterly period ended March
31, 2003, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Guido DiGregorio, Chairman and Chief Executive
Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/Guido DiGregorio
Chairman and Chief Executive Officer
-20-
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
CERTIFICATION
I, Francis V. Dane, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Communication
Intelligence Corporation;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By: /s/ Francis V. Dane
Principal Financial Officer
-21-
CERTIFICATION
I, Guido DiGregorio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Communication
Intelligence Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By: /s/ Guido DiGregorio
Chairman, Chief Executive Officer
-22-