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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: September 30, 2002
------------------
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
(Address of principal executiveoffices) (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
October 24,2002: 91,480,777.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at September 30, 2002
(unaudited) and December 31, 2001................................. 3
Condensed Consolidated Statements of Operations for the Three
and Nine-Month Periods Ended September 30, 2002
and 2001 (unaudited)............................................... 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Nine-Month Periods Ended September 30,
2002 and 2001 (unaudited).......................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Period Ended September 30, 2002 and 2001 (unaudited)............... 6
Notes to Unaudited Condensed Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations .................................. 12
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 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
---------------------------------------------------
Item 5. Other Information................................... 19
-----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits................................... 19
(b) Reports on Form 8-K........................ 19
Signatures...................................................... 20
Certifications.................................................. 20
Certification of Principal Financial Officer.................... 21
Certificate of Chairman and Chief Executive Officer............. 22
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2002 2001
-------------- ------------
Unaudited
Assets
Current assets:
Cash and cash equivalents.......................... $ 1,246 $ 2,588
Accounts receivable, net...................... 748 1,043
Inventories................................... 149 129
Prepaid expenses and other current assets..... 229 139
-------- ----------
Total current assets...................... 2,372 3,899
Property and equipment, net........................ 156 161
Capitalized software costs......................... 16 26
Patents and trademarks............................. 5,515 5,799
Other assets....................................... 88 187
-------- ----------
Total assets.............................. $ 8,147 $ 10,072
======== ==========
Liabilities and Stockholders' equity Current
liabilities:
Short-term debt............................... $ - $ 181
Accounts payable.............................. 109 206
Accrued compensation............................... 211 208
Other accrued liabilities..................... 470 196
Deferred revenue.............................. 123 88
Capital Lease Obligations..................... 40 3
--------- ----------
Total current liabilities................. 953 882
Notes payable - noncurrent......................... 3,000 3,000
Minority interest.................................. 133 130
Commitments
Stockholders' equity:
Common stock.................................. 914 909
Additional paid-in capital.................... 82,026 81,605
Accumulated deficit........................... (78,687) (76,258)
Cumulative translation adjustment............. (192) (196)
--------- ----------
Total stockholders' equity................ 4,061 6,060
--------- ----------
Total liabilities and stockholders'
equity ................................... $ 8,147 $ 10,072
========= ==========
See accompanying notes.
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
2002 2001 2002 2001
------- ------ ------ ------
Revenues:
Online................................. $ 83 $ 237 $ 287 $ 977
Corporate.............................. 132 222 1,538 1,884
Nonrecurring maintenance
fees(net)-M10 (previously
PenOp Inc.) - - - 352
China 310 456 968 1,223
------- ------- ------ -------
Total revenues ..................... 525 915 2,793 4,436
Operating costs and expenses:
Cost of sales:
Online ................................ 13 132 198 707
Corporate ............................. 15 12 148 244
China ................................. 176 312 602 829
Research and development ................ 367 428 1,145 1,399
Sales and marketing ..................... 367 470 1,181 1,604
General and administrative .............. 583 728 1,762 2,107
------- ------- ------- -------
Total operating costs and
expenses .......................... 1,521 2,082 5,036 6,890
------- ------- ------- -------
(Loss) from operations................... (996) (1,167) (2,243) (2,454)
Interest and other income
(expense), net ......................... (19) 5 (28) 19
Interest expense ....................... (53) (66) (155) (225)
Minority interest ...................... (2) (1) (3) (3)
-------- ------- -------- -------
Net (loss) .................... (1,070) (1,229) (2,429) (2,663)
======== ======== ======== ========
Basic and diluted (loss) per common share $(0.01) $(0.01) $(0.03) $(0.03)
======== ======== ======== ========
Weighted average common
shares outstanding ................ 91,481 90,715 91,237 90,495
======== ======== ======== ========
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Common Paid-In Accum. Comprehensive
Stock Capital Deficit Gain (Loss) Total
Balances as of December 31, 2001.. $ 909 $81,605 $(76,258) $ (196) $ 6,060
--------------------------------------------
Exercise of options for 148 shares
of Common Stock................. 1 109 - - 110
Foreign currency translation
adjustment...................... - - - 3 3
Net loss.......................... - - (688) - (688)
-------------------------------------------
Balances as of March 31, 2002..... $ 910 $81,714 $(76,946) $(193) $ 5,485
-------------------------------------------
Exercise of options for 420 shares
of Common Stock................. 4 312 - - 316
Foreign currency translation
adjustment ..................... - - - (1) (1)
Net loss.......................... - - (671) (671)
-------------------------------------------
Balances as of June 30, 2002...... $ 914 $82,026 $(77,617) $(194) $ 5,129
-------------------------------------------
Foreign currency translation
adjustment - - - 2 2
Net loss.......................... - (1,070) - (1,070)
-------------------------------------------
Balances as of September 30, 2002. $ 914 $82,026 $(78,687) $ (192) $4,061
============================================
Total shares outstanding as of December 31, 2001, March 31, 2002, June 30, 2002
and September 30, 2002 were 90,911,91,060,91,471 and 91,481, respectively.
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
September 30,
------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net loss.............................................. $ (2,429) $ (2,663)
Adjustments to reconcile net loss to net
cash(used) in operating activities:
Depreciation......................................... 69 125
Patent amortization.................................. 284 322
Loan discount amortization........................... - 74
Non-cash compensation................................ - 46
Disposal of fixed assets............................. 6 -
Changes in operating assets and
liabilities:
Accounts receivable, net........................... 295 1,018
Inventories........................................ (19) (44)
Prepaid expenses and other current assets.......... (87) 24
Other assets....................................... 99 (12)
Accounts payable................................... (66) (541)
Accrued compensation............................... 3 (43)
Other accrued liabilities.......................... 241 (11)
Deferred revenue................................... 35 91
--------- ---------
Net cash used in operating activities (1,569) (1,614)
--------- ---------
Cash flows from investing activity:
Acquisition of property and equipment................ (54) (53)
--------- ---------
Net cash used in investing activity.............. (54) (53)
--------- ----------
Cash flows from financing activities:
Payments on short-term debt......................... (181) (1,802)
Acquisition of property under capital lease......... 40 -
Proceeds from acquisition of short-term debt........ - 362
Proceeds from acquisition of long-term debt......... - 3,000
Proceeds from exercise of stock options
and warrants........................................ 426 817
Principal payments on capital lease obligations..... (4) (6)
--------- ----------
Net cash provided by financing activities 281 2,371
--------- ----------
Effect of exchange rate changes on cash................ - -
---------- ----------
Net increase (decrease) in cash and cash equivalents... (1,342) 704
Cash and cash equivalents at beginning of period....... 2,588 2,349
---------- ----------
Cash and cash equivalents at end of period.............$ 1,246 $ 3,053
========== ==========
See accompanying notes.
-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 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 delivered wirelessly and electronic signature and handwritten
data entry software solutions aimed at emerging, fast growth, large
potential markets such as e-commerce, 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 Recognition System,
referred to as HRS(TM), electronic signature, handwritten signature
verification, writing with the aid of symbols, 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.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
The Company's transaction and communication enabling technologies have been
fundamental in its development of software for signature verification, data
security, and data compression.
For the nine month period ended September 30, 2002, the Company's cash and
cash equivalents decreased by $1,340 from $2,588 at the beginning of the
period to $1,246. The decrease was due primarily to cash used in operating
activities of $1,569, and cash used in investing activities of $54, offset
by $281 provided by financing activities. The $281 provided by financing
activities consists of $426 in proceeds from the exercise of stock options
by the Company's employees and former chairman, the acquisition of capital
equipment under capital lease of $40, reduced by the repayment of the note
by the Company's joint venture in China ("Joint Venture") of $181 and by
payments of capital lease obligations of $4.
As of September 30, 2002, the Company's principal source of funds was its
cash and cash equivalents aggregating $1,246. The Company was incorporated
in Delaware in 1986 and 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 doubt
about its ability to continue as a going concern. The Company is in the
process of filing a registration statement with the Securities and Exchange
Commission in order to obtain funding from equity financing. However, 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 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.
The financial information contained herein should be read in conjunction
with the Company's audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 2001.
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:
September 30, December 31,
2002 2001
--------------------- -- -------------------
Cash in bank $ 1,135 $ 1,621
Commercial paper - 26
Money market 111 941
--------------------- -------------------
$ 1,246 $ 2,588
===================== ===================
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At September 30,
2002, inventories consisted primarily of finished goods.
4. Short-term debt
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a
Chinese bank. The loan bears interest at 5.37% per annum and was due August
23, 2002. The borrowing did not require the Joint Venture to deposit a
compensating balance. In February 2002, the Joint Venture repaid $121 and
in August 2002, paid the remaining equivalent of $60 denominated in Chinese
currency.
5. Related Party Transactions:
--------------------------
A. Long-term debt related party
------------------------------
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.
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
September 30, 2002, 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.
B. Transactions with PenOp
During the fourth quarter of 2000, the Company engaged in a
transaction with PenOp to provide nonrecurring maintenance services from
pre-existing PenOp contracts in the aggregate amount of $1.5 million, of
which a net amount of $877 was recorded as revenue during that quarter. At
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
September 30, 2001, the Company recognized $325 of this contract revenue
net of related expenses of $48. The Company previously entered into a
separate transaction, to acquire the intellectual property rights from
PenOp.
6. Revenue recognition
Online Revenue - Revenue from retail product sales is recognized upon
sell through, while revenue from other product sales is recognized upon
shipment provided that no significant obligations remain and the collection
of the resulting receivable is probable. The Company provides for estimated
sales returns at the time of shipment.
Corporate Revenue - License and product revenues are recognized when
the software has been delivered and when all significant obligations have
been met in accordance with the American Institute of Certified Public
Accountants Statement of Position Number 97-2, "Software Revenue
Recognition." The Company also follows 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.
Royalty revenues are recognized as products are licensed/sold by licensees.
Development contract revenue is generated primarily from non-recurring
engineering activities. Revenue is recognized in accordance with the terms
of the agreements, generally when collection is probable and related costs
have been incurred.
China Revenue - Revenue from system integration activities and product
sales are recognized upon shipment provided that no significant obligations
remain and the collection of the resulting receivable is probable.
7. 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
and nine month periods ended September 30, 2002 and 2001, potential
equivalent shares excluded from the calculation of diluted earnings per
share, as their effect is not dilutive, include stock options of 6,688, and
7,443, respectively, of equivalent shares and warrants of 470 equivalent
shares at September 30, 2001.
8. Comprehensive income
Total comprehensive (loss) was as follows:
Nine month Ended September 30,
-------------- ------ --------------
2002 2001
-------------- --------------
Net loss $ (2,429) $ (2,663)
Other comprehensive income:
Cumulative translation adjustment 4 5
-------------- --------------
Total comprehensive loss $ (2,425) $ (2,658)
============== ==============
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
9. Segment Information
The Company's segment information under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of An Enterprise and Related Information"
("SFAS 131"), is comprised of two segments handwriting recognition software
and systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues
into two categories: handwriting recognition and system integration.
Handwriting recognition software is an aggregate of 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 above represent sales to external customers.
The table below presents information about reporting segments for the
periods indicated:
Nine month ended September 30,
- 2002 2001
---------------------------------------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------------------- ------- ------------ ----------- -----
Revenues $ 2,016 $ 777 $ 2,793 $ 3,439 $ 997 $ 4,436
Loss from
Operations $(2,202) $ 36 $ (2,166) $ (2,368) $ (86) $(2,454)
Significant change
in Total assets
from Year End
$ - $ (35) $ (35) $ - $ - $ -
-11-
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 I - Item 1 of this quarterly report on Form 10-Q and
"Management`s Discussion and Analysis of Financial Condition and Results of
Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
On October 6, 2000, a wholly-owned subsidiary of the Company ("Acquisition
Corp.") acquired certain assets of PenOp Limited and its subsidiary PenOp Inc.
for 4.7 million shares of common stock of the Company pursuant to an Asset
Purchase Agreement, dated as of September 29, 2000, by and among Acquisition
Corp., PenOp Limited and PenOp Inc. At the closing of this transaction, the
former Company's Chairman of the Board, and his designees purchased from PenOp
Limited and PenOp Inc., in a private transaction, an aggregate of 1,713,728
shares of common stock received by PenOp Limited and PenOp Inc. in connection
with the acquisition for $3,300.
Results of Operations
Revenues. For the three and nine months ended September 30, 2002, total
revenues decreased $390 and $1,643, respectively, or 43% and 37%, respectively,
to $525 and $2,793 from $915 and $4,436, respectively, for the comparable three
and nine month periods ended September 30, 2001 as discussed below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Online $ 83 $ 237 $ 287 $ 977
Corporate 132 222 1,538 1,884
Nonrecurring Maintenance
fees (net)- M10
(previously PenOp) - - - 352
China 310 456 968 1,223
------ ------- -------- --------
Total revenues $ 525 $ 915 $ 2,793 $ 4,436
====== ======= ======== ========
Online revenues decreased $154 or 65% to $83 for the three months ended
September 30, 2002 as compared to $237 in the prior year period. This decrease
was primarily due to the curtailment of the direct mail campaign during the
three months ended September 30, 2002 due to the reduced availability of new
names and poor sales close rate compared to the same period last year. For the
nine months ended September 30, 2002, Online revenues decreased $690 or 71% to
$287 from $977 in the same nine month period last year. This decrease was due
primarily to the reasons discussed above.
Corporate sales, which include enterprise sales, OEM and development
contract revenues, decreased for the three and nine month periods ended
September 30, 2002, by $90 and $346, respectively, or 41% and 18%, respectively
to $132 and $1,538, respectively, from $222 and $1,884, respectively, as
compared to the same prior year periods as discussed below.
Enterprise sales, included in corporate sales, increased for the three
months ended September 30, 2002, $40 or 44% to $130 as compared to $90 in the
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
prior year. The increase in enterprise sales for the three months ended
September 30, 2002 was primarily due to a sale to a major construction company
in the current quarter . For the nine months ended September 30, 2002,
enterprise sales increased 44% or $367 to $1,199 compared to $832 in the prior
year period. This increase was primarily due to the increase in the number of
sales of the Company's software signature products over the nine months as
compared to the prior year period. OEM revenues, included in corporate sales,
for the three months ended September 30, 2002 decreased 98% or $130 to $2 from
$132 in the prior period. This decrease was due to a decrease in the amount of
royalty reported by one of the Company's licensees located in Japan and reduced
development contract revenue recognized compared to the prior year. OEM revenues
for the nine months ended September 30, 2002 decreased 68%, or $713, to $339
from $1,052 in the prior period. The decrease in OEM revenues for the nine
months ended September 30, 2002 was due primarily to the same factors discussed
for the current three month period.
During the nine months ended September 30, 2001, the Company recognized
$352 in nonrecurring maintenance fees net of expenses of $48. The Company
engaged in a transaction with PenOp to provide nonrecurring maintenance services
from pre-existing PenOp contracts in the aggregate amount of $1.5 million, of
which $877 was recorded (net) in the fourth quarter of 2000. As stated earlier,
on October 6, 2000 the Company completed a separate transaction to acquire the
intellectual property rights from PenOp.
China sales for the three months ended September 30, 2002 decreased $146,
or 32%, to $310 from $456 in the same prior year period. For the nine months
ended September 30, 2002, China revenues decreased 21% or $255 to $968 from
$1,223 in the same prior year period. This decrease was due to a large sale to a
single customer in the comparable period in the prior year.
Cost of Sales. Cost of sales decreased for the three and nine months ended
September 30, 2002 $252 and $832, respectively, or 55% and 47%, respectively, to
$204 and $948, respectively compared to $456 and $1,780, respectively, in the
same prior year periods as discussed below.
Online cost of sales for the three and nine months ended September 30, 2002
decreased $119 and $509, respectively, or 90% and 72%, respectively, to $13 and
$198, respectively, compared to $132 and $707, respectively, in the same prior
year periods. The decrease during the three and nine month periods ended
September 30, 2002 was due to the elimination of direct mailing costs as a
result of reductions in the number of names available and a poor sales close
rate experienced early in the current nine months as compared to the same
periods in the prior year.
Corporate sales costs for the three months ended September 30, 2002
increased $3 to $15 from $12 in the comparable period of the prior year The
increase was due to an increase in third party hardware sold with the Company's
signature software solution products. For the nine months ended September 30,
2002, corporate cost of sales decreased $96, or 39%, to $148 from $244 in the
comparable prior year period. The decrease was due to the lower sales volumes of
products requiring third party hardware and a reduction in OEM and development
contract revenues and the associated technology import tax and engineering costs
as compared to the same period of the prior year.
China cost of sales for the three and nine months ended September 30, 2002
decreased $136 and $227, respectively, or 44% and 27%, to $176 and $602,
respectively, compared to $312 and $829, respectively, in the same prior year
periods. The decrease in cost of sales for the three and nine months ended
September 30, 2002 was due to an increase in higher margin software products
sales from system integration sales and lower sales overall.
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Gross Margin. Gross margin for the three and nine months ended September
30, 2002 decreased $138 and $459, respectively, or 30% and 20%, respectively, to
$321 and $1,845, respectively, from $459 and $2,304, respectively, in the same
prior year periods.
Online gross margin for the three and nine months ended September 30, 2002
decreased $35 and $181, respectively, or 33% and 67%, respectively, to $70 and
$89, respectively, from $105 and $270, respectively, in the same prior year
periods. This decrease was due to lower sales during the comparable three and
nine month periods offset by the elimination of the mailer program and the
associated costs. Online gross margins were 84% and 31%, respectively, of sales
for the three and nine months ended September 30, 2002 compared to 44% and 28%,
respectively, in the same prior year periods.
Corporate sales gross margin for the three and nine months ended September
30, 2002 decreased $93 and $250, respectively, or 44% and 15%, respectively, to
$117 and $1,390, respectively, compared to $210 and $1,640, respectively, in the
same prior year periods. This decrease was primarily due to the decrease in
corporate sales. Corporate sales gross margin as a percentage of sales was 89%
and 90% for the three and nine month periods ended September 30, 2002 compared
to 94% and 87%, respectively, for the same three and nine month periods of the
prior year.
Gross margins related to nonrecurring maintenance fees from M10 decreased
for the nine months ended September 30, 2002 to $0, compared to $352 in the
prior year period. This decrease was due to the Company not recognizing
nonrecurring maintenance fees during the current three and nine month ended
September 30, 2002, compared to the same periods in the prior year.
China sales gross margin for the three month period ended September 30,
2002 decreased $10, or 7% to $134 from $144 in the same prior year period on a
32% decrease in revenues. This decrease in gross margin for the three months
ended September 30, 2002, resulted from a change in the sales mix from lower
margin system integration sales to higher margin software sales. For the nine
months ended September 30, 2002 gross margin decreased $28, or 7% to $366 from
$394 in the same prior year period on a 37% decrease in revenues. This decrease
in gross margin for the nine months ended September 30, 2002 resulted from a
change in the sales mix from lower margin system integration sales to higher
margin software sales. As a percentage of sales, China gross margins were 43%
and 38% for the three and nine months ended September 30, 2002, respectively,
compared to 32% and 31%, respectively, for the comparable three and nine month
periods in the prior year periods.
Research and development expenses. Research and development expenses for
the three and nine months ended September 30, 2002 decreased by $61 and $254,
respectively, to $367 and $1,145, respectively, as compared to $428 and $1,399,
respectively, in the comparable three and nine month periods of the prior year.
The decrease was due primarily to the reduction of approximately $12 and $224,
respectively, in outside engineering costs associated with the assimilation of
the PenOp intellectual property into the Company's products. In addition,
payroll and related costs decreased approximately $44 and $110, respectively,
for the three and nine months ended September 30, 2002, compared to the prior
year. The reduction in payroll and related expenses was due to actions taken in
the fourth quarter of last year to trim expenses in response to a weakening
economy. Other costs including facilities and shared engineering costs with the
Joint Venture decreased $5 for the three months ended September 30, 2002
compared to the prior year and increased $80 over the nine months ended
September 30, 2002. The increase over the nine month period was due to increases
in facility expenses. Expenses transferred to cost of sales for the nine months
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
ended September 30 2002 decreased $40 compared to the prior year. The
fluctuations in expenses for the three and nine month periods are due to the
changes in the number of revenue generating nonrecouring engineering projects
being worked on during a given period. The Company capitalized $20 in software
development costs associated with new products and enhancements during the nine
months ended September, 2001. The Company did not capitalize any new product
software development costs in the nine month period ending September 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the three
and nine months ended September 30, 2002 decreased $103 and $423, respectively,
to $367 and $1,181, respectively, as compared to $470 and $1,604, respectively,
in the comparable periods of the prior year. Professional services and
advertising expenses decreased $50 to $42 from $92 for the three month ended
September 30, 2002, as compared with the same period last year. For the nine
month period ended September 30, 2002, professional services and advertising
fees decreased $160 to $149 from $309, as compared with the same period last
year. This decrease was due primarily to the reduction in resource guide
advertisements included in the box that accompanies the hand held devices. Other
costs, including salaries and related expenses and travel and recruiting
expenses, decreased $53 for the three months ended September 30, 2002, compared
to the same period in the prior year. For the nine months ended September 30,
2002, other costs, including salaries and related expenses and travel and
recruiting expenses decreased $263 as compared to the same nine month period
last year. The reduction in other expenses was due to actions taken in the
fourth quarter of last year and again in the third quarter of the current year
to trim expenses in response to a weakening economy.
General and administrative expenses. General and administrative expenses
for the three and nine months ended September 30, 2002 decreased $145 and $345
to $583 and $1,762, respectively, from $728 and $2,107, respectively, in the
comparable periods of the prior year. Professional services decreased $64 and
$243, respectively, due to the reduction in legal fees and in financial service
fees paid to the former chairman of the Company. Payroll and related costs
decreased approximately $12 due to reductions in head count in the three months
ended September 30, 2002. Salaries and related expense increased approximately
$8 over the nine months ended September 30, 2002, due to salary increases. Other
costs, including investor relations and facilities and related costs, decreased
$63 and $96, respectively, over the comparable three and nine month periods of
the prior year. The reduction in other expenses was due to actions taken in the
fourth quarter of last year and again in the third quarter of the current year
to trim expenses in response to a weakening economy.
Interest and other income (expense), net. Interest and other income
(expense), net for the three and nine months ended September 30, 2002 decreased
$24 and $47, respectively, to an expense of $19 and $28, respectively, compared
to income of $5 and $19, respectively, in the comparable periods of the prior
year. Interest income from cash and cash equivalents decreased $15 and $31,
respectively, to $2 and $9 for the three and nine months ended September 30,
2002 compared to $17 and $40 in the same periods of the prior year. This
decrease was due to lower cash balances and reduction in interest rates during
the three and nine month periods ended September 30, 2002. The interest income
was offset by $3 and $15, respectively, of credit card processing fees related
to Online sales and other expenses for the three and nine month periods ended
September 30, 2002, compared to $9 and $30, respectively, in the same periods of
the prior year.
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Interest expense. Interest expense decreased $13 to $53 for the three month
period ended September 30, 2002, compared to $66 in the same prior year period.
The decrease was due to the reduction in the prime rate as compared to the prior
year. For the nine months ended September 30, 2002, interest expense decreased
$70 to $155, compared to $225 in the same prior year period. The decrease was
primarily due to the write off in June 2001 of the loan discount as a result of
the payment of the $1,500 note.
Liquidity and Capital Resources
At September 30, 2002, cash and cash equivalents totaled $1,246 compared to
cash and cash equivalents of $2,588 at December 31, 2001. The decrease was due
primarily to cash used in operating activities of $1,569, cash used in investing
activities of $54. Cash provided by financing activities was $281, net. The $281
provided by financing activities consists of $426 in proceeds from the exercise
of stock options by the Company's employees and former chairman, the acquisition
of capital equipment under capital lease of $40, reduced by the repayment of the
note by the Joint Venture of $181, and by payments of capital lease obligations
of $4. Total current assets were $2,372 at September 30, 2002, compared to
$3,899 at December 31, 2001.
As of September 30, 2002, the Company's principal source of funds was its
cash and cash equivalents aggregating $1,246.
The Company was incorporated in Delaware in 1986 and 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 doubt about its ability to continue as a going concern. The Company
is in the process of filing a registration statement with the Securities and
Exchange Commission in order to obtain funding from equity financing. However,
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 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.
Current liabilities, which include deferred revenue, were $953 at September
30, 2002. Deferred revenue, totaling $123 at September 30, 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.
The Company currently owns 90% of a joint venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). The Company's investment in the Joint Venture
is subject to risks of doing business abroad, including fluctuations in the
value of currencies, export duties, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, longer payment
cycles, greater difficulty in accounts receivable collections, burdens of
complying with foreign laws and political and economic instability.
On October 2, 2001, the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores
California for approximately 9,634 square feet. The lease commenced November 1,
2001 with a first year lease cost of approximately $347,000. The cost of the
lease will increase approximately 3% per annum over the term of the lease which
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
expires October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase, if any, in operating cost incurred by the landlord
in such year over the operating expenses incurred by the landlord in the base
year. The Company believes the offices will be adequate for its needs over the
term of the lease.
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a Chinese
bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
In February 2002, the Joint Venture repaid $121, and in June 2002 repaid the
remaining balance of $60 denominated in Chinese currency.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which the former
chairman 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. 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 September 30, 2002, 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.
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;
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Forward Looking Statements(continued)
o Economic, business, market and competitive conditions in the software
industry and technological innovations which could affect the Company's
business;
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 September 30,
2002.
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.
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
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 1. Legal Proceedings (continued)
-----------------------------
violations, alleging that the Company provided incorrect or false information to
plaintiffs' stock broker, thereby delaying the sale of their shares in the
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
During the three months ended September 30, 2002, the Company granted stock
options to employees as follows:
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
Quarterly over
2 Employees 9/25/02 275,000 $0.28 three years 9/25/02
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
We have evaluated the Company's disclosure controls and
procedures within ninety days ("Evaluation Date") prior to this report
and concluded that there were no material weaknesses in those controls
and procedures as of that date. To the best of our knowledge and
belief, there have been no significant changes in internal controls or
other factors subsequent to the Evaluation Date that could
significantly affect internal controls and procedures.
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
None
-19-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
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
October 24 , 2002 /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
September 30, 2002, 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
September 30, 2002, 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: October 28, 2002
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: October 28, 2002
By: /s/ Guido DiGregorio
----------------------------
Chairman
Chief Executive Officer
-22-