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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 0-11254
COPYTELE, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation orOrganization)
900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices) Securities registered pursuant to
Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of January 22, 2002,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($0.55): $34,182,968.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [_]
On January 22, 2002, the registrant had outstanding 67,231,825 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
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Item 1. Business.
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Forward-Looking Statements
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Information included in this Annual Report on Form 10-K may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will," and similar expressions to identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties and other factors, some of which are beyond our control,
that could cause actual results, performance or achievements to differ
materially from those expressed or implied by the forward-looking statements.
These risks, uncertainties and factors include, but are not limited to, those
factors set forth in this Annual Report on Form 10-K under the heading "General
Risks and Uncertainties" below. Except as required by law, we undertake no
obligation to update forward-looking statements made in this Annual Report on
Form 10-K or otherwise.
Overview
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CopyTele, Inc. is a development-stage enterprise. Our
principal activities include the development, production and marketing of a line
of multi-functional, hardware-based, peripheral digital encryption devices. Our
encryption devices provide high-grade information security to accommodate
cellular, satellite, digital and ordinary telephone lines for voice, fax and
data encryption. They are available with either the high-grade strength of the
Harris Corporation digital cryptographic chip - the Citadel(TM) CCX - or the
Triple DES algorithm to provide high-grade encryption.
We are continuing our research and development activities for
additional encryption products and for flat-panel display technologies,
including our thin-film video color display (Field Emission Display or FED) and
our ultra-high resolution charged particle E-Paper(TM) flat-panel display. On
June 13, 2001, we entered into a three-year Joint Cooperation Agreement for
Field Emission Displays (the Futaba Agreement) with Futaba Corporation for the
purpose of jointly developing and commercializing a full-color video display
utilizing our field emission display technology. Futaba was our largest source
of revenues for the fiscal year ended 2001, generating 57% of our total
revenues.
We were incorporated on November 5, 1982 under the laws of the
State of Delaware. Our principal executive offices are located at 900 Walt
Whitman Road, Melville, New York 11747 and our telephone number is 631-549-5900.
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General Risks and Uncertainties
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We have experienced significant net losses and negative cash flows from
operations since our inception and they may continue.
We have had net losses and negative cash flows from operations
in each year since our inception and we may continue to incur substantial losses
and experience substantial negative cash flows from operations. We have incurred
substantial costs and expenses since our inception in developing our flat-panel
display and encryption technologies and in our efforts to produce commercially
marketable products incorporating our technology. We have had limited sales of
products to our dealers, distributors and other customers to support our
operations from inception through October 31, 2001. We have incurred net losses
aggregating approximately $58,696,000 during the same period. Research and
development expenses during that period aggregated approximately $36,531,000 and
negative cash flows from operations aggregated approximately $56,353,000.
We have set forth below our net losses, research and
development expenses, and negative cash flows from operations for the three
fiscal years ended October 31, 2001:
Fiscal Years Ended October 31,
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1999 2000 2001
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Net Loss............................................. $8,465,016 $4,964,173 $ 3,571,957
Research and Development............................. $3,163,000 $2,732,000 $ 2,325,000
Negative Cash Flows From Operations.................. $6,117,096 $4,840,578 $ 717,845
We may need additional funding in the near future, which may not be available on
acceptable terms and may result in dilution to our stockholders.
We anticipate that we will require additional funding to
continue our research and development activities, market our products and
satisfy the Nasdaq Stock Market, or NASDAQ, continued-listing equity standard
(see below), if cash generated from operations is insufficient to satisfy these
requirements. Based on reductions in operating expenses that we have made, we
believe that our cash resources, including cash received from November 1, 2001
to January 22, 2002, and other potential sources of cash flows, primarily sales
of our products and payments under the Futaba Agreement, will be sufficient to
continue operations until at least the end of the first quarter of fiscal 2003.
We anticipate that, thereafter, we may continue to require additional funds to
continue our marketing and research and development activities, and we will
require outside funding if cash generated from operations is insufficient to
satisfy our liquidity requirements. Our projections of future cash needs and
cash flows, however, may differ from actual results. If current cash and cash
that may be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit. The sale of additional equity securities or convertible debt could
result in dilution to our stockholders. We can give you no assurance that we
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will be able to generate adequate funds from operations, that funds will be
available to us from debt or equity financings or that, if available, we will be
able to obtain such funds on favorable terms and conditions.
We may not generate sufficient revenues to support our operations in the future
or to generate profits.
We are principally engaged in jointly developing with Futaba a
full-color video display and in the production and marketing of hardware-based
peripheral digital encryption systems. Our encryption products are only in their
initial stages of commercial production and marketing. Our ability to generate
sufficient revenues to support our operations in the future or to generate
profits will depend upon numerous factors, many of which are beyond our control,
including:
o our ability to jointly develop with Futaba a
full-color video display that can be successfully
marketed;
o our ability to successfully market our line of
encryption products;
o our production capabilities and those of our
suppliers as required for the production of our
encryption products;
o long-term product performance and the capability of
our dealers and distributors to adequately service
our products;
o our ability to maintain an acceptable pricing level
to end-users for our products;
o the ability of suppliers to meet our requirements and
schedule;
o our ability to successfully develop our new products
under development;
o rapidly changing consumer preferences; and
o the possible development of competitive products that
could render our products obsolete or unmarketable.
We are dependent upon a few key executives and the loss of their services could
adversely affect us.
Our Chief Executive Officer, Denis A. Krusos, and our
President, Frank J. DiSanto, founded our company in 1982 and are engaged in the
management and operations of our business, including all aspects of our
development, production and marketing of our products and flat-panel display
technology. Messrs. Krusos and DiSanto, and other senior executives, are
important to our future business and financial arrangements. The loss of the
service of any such persons may have a material adverse effect on our business
and prospects.
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We may not be able to compete successfully in the very competitive market for
our encryption products.
The market for our encryption products worldwide is highly
competitive and subject to rapid technological changes. Most of our competitors
are larger than us and possess financial, research, service support, marketing,
manufacturing and other resources significantly greater than ours. We cannot
give any assurance that we will be able to compete successfully in the market
for our encryption products.
If we are unable to maintain our NASDAQ National Market listing, the market
price of our common stock could be adversely affected.
In order to continue our NASDAQ National Market listing,
NASDAQ requires that we maintain a minimum closing bid price of at least $1 per
share and a minimum of $4,000,000 of net tangible assets, pursuant to an
exception to a recently enacted requirement that we maintain a minimum of
$10,000,000 of stockholders equity. We have until November 1, 2002 to gain
compliance with the $10,000,000 equity listing standard. As of October 31, 2001,
our net tangible assets and stockholders equity were each approximately
$4,167,000. The closing bid price of our common stock on January 22, 2002, was $
0.54, and it has been below $1 since February 12, 2001. If the closing bid price
of our common stock remains below $1 for 30 consecutive trading days following
January 2, 2002, which is the expiration date of a recent NASDAQ moratorium, we
would be afforded a 90 calendar-day grace period to regain compliance. If we
were unable to regain compliance during that grace period, we could request a
hearing, which is usually held within 45 days, during which time our common
stock would remain listed on the NASDAQ National Market. As a result of that
hearing, our common stock could be delisted from the NASDAQ National Market and,
possibly, transferred to the NASDAQ SmallCap Market. If our stock were delisted
from the NASDAQ National Market, it could have an adverse effect on the market
price of our common stock and the liquidity of our shares.
Products
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Encryption Products
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We are producing and marketing a line of high-grade,
hardware-based encryption products that provide security for voice, fax, and
data transmissions utilizing cellular, satellite, digital and analog
communication media. Our encryption technology products encode information
through a complex mathematical formula called an algorithm. The algorithm
requires a secret "key" to both encrypt and decrypt information. Only the secret
key that is used to encrypt the information can be used to decrypt the
information. Our products automatically generate new secret keys electronically
with each call. When communicating encrypted information over a communications
media, all of our products are compatible with each other and generally are
required at both the sending and receiving end.
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The features common to all our products are as follows:
o Simple, one button operation. Secure communication is
indicated by a blinking red light becoming solid red.
o Every session uses a new secret encryption key to
both encrypt and decrypt information.
o All units use a hardware random number generator as
part of the secret key system.
o Encryption from point-to-point communication
utilizing one of our products at each end.
o Export approval received from the U.S. Department of
Commerce using the Citadel(TM) CCX from Harris
Corporation or Triple DES algorithm and a minimum
128-bit encryption key length.
o Small, lightweight, and enclosed in a plastic case.
o Low power consumption.
Our line of encryption products is as follows:
DCS-1200
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The DCS-1200 is a compact, portable, digital
cellular/satellite encryption device for voice and data. It may be installed
with a RS232 port for digital cellular and satellite phones to provide encrypted
voice and data file transfer or with both digital and analog desktop telephone.
The additional features and capabilities of this product include the following:
o Battery or AC powered.
o Keypad for dialing a data connection through a cell
or satellite phone's RS232 port.
o Two RS232 ports, one for the phone and one for
computer file operations.
o Rechargeable lithium ion battery with an internal
charger.
o Encrypts voice and data in the same phone call.
o Encrypts local files for privacy or for secure e-mail
attachment transmission.
o Encrypts e-mail addresses to guard against the spread
of viruses.
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o Connects between the handset and the base of digital
PBX telephones.
o Communication speeds from 2400 to 9600 BPS.
o Headset provided for private discrete communication.
o Small, portable device, weighing approximately 9
ounces and with dimensions of 6" deep x 4.38" wide x
1.38" high.
DCS-1400
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The DCS-1400 is a compact, portable, digital
cellular/satellite encryption device for secure voice communication. The
additional features and capabilities of this product include the following:
o As a voice-only solution, the DCS-1400 has one RS232
port for connection through a cell or satellite
phone's data port.
o Battery or AC powered.
o Smaller than a typical cell phone, weighing
approximately 3 ounces with dimensions of 5" deep x
2.2" wide x .4" high.
o Keypad for dialing a data connection through a cell
or satellite phone's RS232 port.
o Encrypts local files for privacy or for secure e-mail
attachments.
o Encrypts e-mail addresses to guard against the spread
of viruses.
o Rechargeable lithium ion battery with an internal
charger.
o Communication speeds from 2400 to 9600 BPS.
o Headset provided for private discrete communication.
STS-1500
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The STS-1500 is a secure teleconferencing system that can be
customized for specific applications. This device utilizes a combination of
DCS-1200, DCS-1400 and USS-900 equipment for use in remote locations, together
with a teleconferencing bridge at the hub. The additional features and
capabilities of this system include the following:
o Provides fully encrypted voice communication from
remote locations to a central teleconferencing
center.
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o Remote users can speak to hub participants as well as
each other over fully encrypted links.
o Complete point-to-point secure conversations can be
easily established.
o Can be used to encrypt voice calls made to cellular,
satellite, digital and analog telephones.
o Secures simultaneous voice encryption with up to 12
participants.
o Easy to install and operate and prevents third-party
intervention.
USS-900
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The USS-900 is a voice, data and fax desktop encryption
product that is designed to operate on analog telephone lines. This device also
operates over suitable voice, terrestrial and satellite links. The additional
features of this product include the following:
o Encrypts e-mail addresses to guard against the spread
of viruses.
o Encrypts any computer file as an e-mail attachment
that can be sent over the Internet or an ordinary
telephone line.
o Interfaces with virtually any analog telephone,
allowing easy encryption of voice communication.
o Interfaces with virtually any analog fax machine
attended or unattended, ensuring cryptographic
communication of information.
o Interfaces with a computer, ensuring cryptographic
communication of information between computers.
o Interfaces with virtually any computer with the
utilization of a self-contained CD ROM, to encrypt
and decrypt computer files with the use of a single
device. The encrypted files can be stored on the
computer, on networks or on the Internet.
o Interfaces with a telephone and computer to allow
secure simultaneous voice communication and
point-to-point file transfer (SVD) over ordinary
analog telephone lines with transmission rates of
2,400 to 33,600 BPS.
o Interfaces with multiple telephone lines to provide
multi-person encrypted communications over ordinary
telephone lines.
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o Interfaces with telephones, fax machines and
computers to perform secure and encrypted voice, fax
and point-to-point data communication on the same
phone call.
o Small, compact device weighing approximately 9 ounces
and with dimensions of 6" deep x 4.38" wide x 1.38"
high.
DSS-1000
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The DSS-100 is a digital encryption device that can perform
all the functions of the USS-900, except for facsimile transmission and SVD,
over digital or analog telephone lines, via satellite or via the Internet. The
DSS-1000 has the additional ability to interface with a telephone handset of a
digital phone to secure voice and data information over digital lines at
transmission rates of 9,600 BPS. The DSS-1000 has the same size, weight and
major components of the USS-900. The unit is also portable and has low power
consumption.
ULP-1
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The ULP-1 is a hardware-based encryption Personal Computer
Memory Card International Association, or PCMCIA, card that plugs into notebook
or laptop computers. The ULP-1 is the size of a credit card and operates as an
encryption/decryption key to protect data files and e-mail attachments. The
ULP-1 also guards against the spread of viruses by encrypting e-mail addresses.
The ULP-1 can easily be removed when not in use, as a result of which the
encrypted data in the computer files cannot be decrypted and read by an
unauthorized person.
New Technologies Under Development
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Encryption Technology
---------------------
We are continually engaged in the development of additional
capabilities for our current product lines as well as the development of new
products to meet current and anticipated customer applications. We are making
software modifications to all our products in order to accommodate the
Citadel(TM) CCX, Triple DES, or the new Advanced Encryption Standard, or AES,
algorithms. We also are developing additional software for the ULP-1 to
accommodate the requirements of several companies that are evaluating the
product for possible distribution. The new software would add features such as
safeguarding laptop computers by preventing them from powering up unless the
ULP-1 is inserted, and automating the encryption/decryption process to simplify
its use. In addition, we are evaluating the ability of the DCS-1200 and the
DCS-1400 to encrypt mobile devices that combine a Personal Data Assistant, or
PDA, and a mobile phone.
Flat-Panel Display Technology
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During 2001, we continued to pursue our efforts to develop new
technologies for color and video flat-panel displays.
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Thin Film Video Color Display (Field Emission Display)
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We entered into the Futaba Agreement for the purpose of
jointly developing and commercializing a full-color video display utilizing our
field emission display, or FED, technology. Futaba is a high-technology company
located in Mobara, Japan, which has been a major supplier, for more than 30
years, of vacuum fluorescent displays and modules used in automobiles, microwave
ovens, audio-visual products and point-of-sale terminals.
We started the FED program with Futaba in June, 2001, and
Futaba has paid us $2.5 million as the initial payment for the first phase of
development of a prototype for a 320 x 240 pixel, 5-inch diagonal display having
numerous advanced features, including wide viewing angle, low power consumption,
high-resolution, and ultra-bright screen. Our ultimate goal is to use this
technology to develop and produce a variety of FEDs that can be mass produced
and marketed by Futaba for both consumer and industrial applications.
For the first year of the Futaba Agreement, we are primarily
responsible for developing prototypes of the display and providing the required
fabrication, to enable Futaba to utilize its know-how and production facilities
for the mass production of the display. The Futaba Agreement further provides
for negotiations between the parties regarding additional compensation to us for
the use of our technology developed prior to entering into the Futaba Agreement,
which may include the payment of royalties based on sales of products by Futaba.
In January 2002, Futaba paid us an additional $3 million as partial compensation
for the use of this technology. As part of the Futaba Agreement, both parties
would have the exclusive right to produce products, with Futaba having the
exclusive right to sell the products worldwide, excluding Russia. Under the
Futaba agreement, any intellectual property developed during the term of the
agreement will be jointly owned or cross-licensed by Futaba and us. The term of
the Futaba Agreement is three years from June 13, 2001, with the terms of the
project following the first year being subject to future negotiations between
the parties on an annual basis. For additional information with respect to the
Futaba Agreement, we refer you to Exhibits 10.12 and 10.13 of this Annual Report
on Form 10-K.
The technology being utilized in the FED Program is based on
the more than four year joint development program with Volga Svet Ltd., a
Russian display company. We are continuing to utilize Volga's assistance in the
development work under the Futaba Agreement and to fund Volga in accordance with
the amendment to the joint cooperation agreement with Volga entered into on May
10, 2001 (the Volga Agreement). The Volga Agreement provides, among other
things, for the joint development of a prototype of a full-color display having
the specifications set forth in the Futaba Agreement. The term of the Volga
Agreement is three years from May 10, 2001, with the terms of the project
following the first year being subject to future negotiations between the
parties on an annual basis. We have agreed to pay Volga the sum of $180,000 per
quarter for its development work during the 12-month period commencing June 22,
2001, of which $540,000 had been paid as of January 22, 2002. As part of the
Volga Agreement, we and Futaba have the exclusive right to produce products
based upon
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the technology covered by that agreement, with Futaba having the exclusive right
to sell the products worldwide, excluding Russia, where Volga has sales rights.
Volga is required to grant us licenses for background technology, and for
technology developed under the Volga Agreement, upon the payment of amounts to
be negotiated between the parties, which may include the payment of royalties
based on sales of products resulting from the development activities under the
Volga Agreement. We entered into a letter agreement with Volga, effective as of
February 1, 2002, pursuant to which we will make payments to Volga totaling
$750,000 in connection with the $3 million we received from Futaba in January
2002. The sum of $750,000 is payable in installments over a five-month period
ending in June 2002. The funds to be received by Volga are required to be used
primarily for research and development and for purchasing facilities and
production areas for FED technology. For additional information with respect to
the Volga Agreement, we refer you to Exhibits 10.14 and 10.15 of this Annual
Report on Form 10-K.
As part of this development program, we have demonstrated the
feasibility of the basic proprietary FED design. We have developed a simplified
design that we believe has the potential for a low cost and reliable fabrication
process. We achieved this development in cooperation with Volga primarily
utilizing Volga's facilities located in Saratov, Russia. The display design has
color and video capability with the three primary colors of red, green, and blue
controlled by a proprietary matrix driving system. As part of the Futaba
Agreement, we are in the process of providing information to Futaba to enable
Futaba to reproduce the technology at its facilities in Japan. We cannot give
you any assurance, however, that we will be able to successfully develop this
technology or that we will be able to apply this technology to commercially
marketable products.
E-Paper(TM) Flat-Panel Display
------------------------------
The technology utilized in the E-Paper(TM) ultra-high
resolution display that we previously developed is being further developed for
possible application for mobile devices. The E-Paper(TM) characteristics of low
power consumption, flicker-free, wide angle viewing and high contrast are
desirable features for mobile devices. The original E-Paper(TM) display was
primarily designed for ultra-high picture quality, but required separate
illumination. It was able to display information like a printed page, one at a
time. We believe it is desirable to add features for mobile devices so that
displayed information can be continuously updated and use only ambient light.
The new design we are attempting to develop would incorporate the individual
control of the pixels to allow continuous updating of displayed information,
have a high contrast to allow viewing under normal ambient light and, due to a
simplified structure, would result in lower manufacturing cost. The basic design
consists of two glass substrates that contain our proprietary black and white
charged particles in a clear suspension. The viewing substrate is a clear glass
so that individual black or white pixels are displayed to form a high contrast
image. The original design had a structure in the viewing side substrate that
reduced the contrast and thus required a lighting system. In the new design, a
simplified pixel control structure is located on the non-viewing substrate.
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In order to further develop this technology, we are attempting
to optimize the ability of the flat panel to simultaneously control black and
white particles having approximately equal densities that are suspended in a
clear suspension without aglomorating. The suspension being developed is also
being conformed to the chip driver's capability in order to control individual
pixels at required higher speeds. We cannot give you any assurance, however,
that we will be able to develop a commercially marketable display of this type.
Production
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Our encryption products consist of a printed circuit board
populated with electronic components and connectors enclosed in a plastic case.
We design all the hardware, software, packaging and operating manuals for our
products. The three main electronic components, the Citadel(TM) CCX encryption
chip or hardware key generator chip, a digital signal processor, vocoder, and
modems, are contained on a printed circuit board. We are currently using several
U.S.-based electronics-production contractors to procure the printed circuit
boards and mount the associated electronics components on the circuit board. We
currently use approximately a dozen primary component and printed circuit-board
suppliers and two production assembly contractors. Given normal lead times, we
anticipate having a readily available supply of all electronics components that
we require for assembling our encryption products.
Our production contractors produce and visually inspect the
completed circuit boards. We perform final assembly, including installation of
the software, by enclosing the completed printed circuit boards into the product
enclosure and performing functionality testing of all units at our premises at
Melville, New York prior to shipment to our customers. We test our finished
products using internally developed product assurance testing procedures. We are
currently producing our complete line of products, including the newly developed
DCS-1400, which is in the production stage.
Marketing
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The recent terrorist attacks on the United States have
heightened the interest in communication security by corporations and
governments. We believe that this interest will result in creating a stronger
demand for our encryption products in the coming years. We also believe that our
high grade, hardware based point-to-point encryption solutions provide a higher
grade of security than many existing software solutions.
We are continuing to focus our marketing efforts on selling
our encryption products to selected distributors, dealers and original equipment
manufacturers who have marketing capabilities in the commercial and governmental
encryption fields. We currently have a sales and marketing office consisting of
five full-time employees who work principally on a salaried basis and devote
their efforts to sales and support activities, and 14 consultants.
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Worldwide, we presently have 25 dealers and distributors and
two original equipment manufacturers who market our encryption products on a
non-exclusive basis. The dealers and distributors generally are parties to
one-year renewable agreements that do not contain significant minimum purchase
requirements. These dealers and distributors, along with our internal marketing
group, have sold and marketed our encryption products to multinational
corporations, U.S. and foreign governments, and local and federal law
enforcement agencies.
We are using the DCS-1400, DCS-1200 and the STS-1500 as lead
products to satisfy the security requirements for cellular and satellite voice
and data encryption and for secure voice teleconferencing. We believe that most
organizations are aware that security is an issue when utilizing these
communications media and, as a result, we have has been able to obtain access to
their security directors for evaluation of our products.
Now that we have developed and are marketing a broad line of
security products, we are devoting our efforts to selling our products to major
telecommunications companies as well as major computer manufacturers and
distributors that are seeking to complement their product lines. Also, we are
introducing our products to organizations who would not only use our products as
part of their security solutions but would also install our products with
businesses with which they communicate on a regular basis.
We continue to provide training and technical support to our
customers and to our distributors and dealers. During the last year our
encryption products were displayed at six major security and electronic trade
shows.
Competition
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The market for encryption products worldwide is highly
competitive and subject to technological changes. Although successful product
and systems development is not necessarily dependent on substantial financial
resources, most of our competitors are larger than us and possess financial,
research, service support, marketing, manufacturing and other resources
significantly greater than ours.
There are several other companies that sell hardware and/or
software encryption products. We believe, however, that the technology contained
in our products and the size and features of the units distinguish them from the
products being sold by our competitors. The encryption security market is likely
to be characterized by rapid advances in technology and the continuing
introduction of new products that could render our products obsolete or
non-competitive. We cannot give you any assurance that we will be able to
compete successfully in the market for our encryption products.
Patents
- -------
We have received patents from the United States and certain
foreign patent offices, expiring at various dates between 2005 and 2020. At the
present time, additional patent applications are pending with the United States
and certain foreign patent offices. These patents are related to the design,
structure and method of construction of the E-Paper(TM) flat-panel display,
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methods of operating the display, particle generation, applications using the
E-Paper(TM) flat-panel display, and for our solid state and thin film video
color display.
We have also filed or are planning to file patent applications
for our optical encryption system, our FED and simplified E-Paper(TM) flat-panel
display technologies currently under development, and for our DCS-1400,
DCS-1200, DSS-1500, USS-900, DSS-1000 and ULP-1 encryption technologies.
We cannot assure you that patents will be issued for any of
our pending applications. In addition, we cannot assure you that any patents
held or obtained will sufficiently protect us against our competitors. We are
not aware that any of our encryption products are infringing upon the patents of
others. We cannot assure you, however, that other products developed by us, if
any, will not infringe upon the patents of others, or that we will not have to
obtain licenses under the patents of others, although we are not aware of any
such infringement at this time.
We believe that the foregoing patents are significant to our
future operations.
Research and Development
- ------------------------
Research and development expenses, which have comprised a
significant portion of our selling, general and administrative expenses since
our inception, were approximately $2,325,000, $2,732,000, $3,163,000, and
$36,531,000 for the fiscal years ended October 31, 2001, 2000, 1999 and for the
period from November 5, 1982 (inception) through October 31, 2001, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and our Financial Statements.
Employees and Consultants
- -------------------------
We had 28 full-time employees and 22 consultants as of
December 31, 2001. Twenty-five of these individuals, including our Chairman of
the Board and our President, are engaged in research and development. Their
backgrounds include expertise in physics, chemistry, optics and electronics.
Fourteen individuals are engaged in marketing and the remaining individuals are
engaged in administrative and financial functions for us. None of our employees
is represented by a labor organization or union.
Item 2. Properties.
-----------
We lease approximately 12,900 square feet of office and
laboratory research facilities at 900 Walt Whitman Road, Melville, New York (our
principal offices) from an unrelated party pursuant to a lease that expires
November 30, 2003. Our base rent is approximately $243,000 per annum with a 3%
annual increase and an escalation clause for increases in certain operating
costs. We have the right to cancel a portion of the lease as of November 30,
2002. This lease does not contain provisions for its renewal and management will
continue to evaluate the future adequacy of this facility. We anticipate
13
securing a lease renewal for this facility at the end of the lease term if we
determine to remain there. See Note 8 to our Financial Statements.
We believe that the facilities described above are adequate
for our current requirements.
Item 3. Legal Proceedings.
------------------
We are not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted by us to a vote of our shareholders
during the fourth quarter of our fiscal year ended October 31, 2001.
Executive Officers of the Company
- ---------------------------------
Our only executive officers are Denis A. Krusos, Frank J.
DiSanto, and Henry P. Herms. The information required to be furnished with
respect to these executive officers is set forth in Item 10 of Part III of this
Annual Report on Form 10-K and is incorporated herein by reference.
14
PART II
-------
Item 5. Market for the Registrant's Common Equity and
---------------------------------------------
Related Stockholder Matters.
----------------------------
Our common stock has been traded on the NASDAQ National
Market, the automated quotation system of the National Association of Securities
Dealers, Inc., or NASD, under the symbol "COPY," since October 6, 1983, the date
public trading of our common stock commenced. The high and low sales prices as
reported by the NASDAQ National Market for each quarterly fiscal period during
our fiscal years ended October 31, 2000 and 2001 have been as follows:
- -------------------------------------------------------------------------------
Fiscal Period High Low
- -------------------------------------------------------------------------------
1st quarter 2000 $1.81 $0.72
2nd quarter 2000 4.16 1.06
3rd quarter 2000 3.25 1.13
4th quarter 2000 2.25 0.97
- -------------------------------------------------------------------------------
1st quarter 2001 1.31 0.66
2nd quarter 2001 1.03 0.44
3rd quarter 2001 0.96 0.42
4th quarter 2001 $0.62 $0.35
- -------------------------------------------------------------------------------
As of January 22, 2002, the approximate number of record holders of our common
stock was 1,381 and the closing price of our common stock was $0.55 per share.
No cash dividends have been paid on our common stock since our inception. We
have no present intention to pay any cash dividends in the foreseeable future.
15
Item 6. Selected Financial Data.
------------------------
The following data has been derived from our Financial
Statements and should be read in conjunction with those statements, and the
notes related thereto, which are included in this report.
----------------------------------------------------------------------------------------
For the period
from November 5,
As of and for the fiscal year ended October 31, 1982 (inception)
through
October 31, 2001
-------------------------------------------------------------------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Product sales, net $732,435 $1,471,998 $46,877 $ - $ - $2,251,310
Collaborative agreement 958,333 - - - - 958,333
----------------------------------------------------------------------------------------
Total revenues 1,690,768 $1,471,998 46,877 - - 3,209,643
- -------------------------------------------------------------------------------------------------------------------------
Gross Profit 993,129 746,560 9,573 - - 1,749,262
- -------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses 4,597,365 5,831,712 8,284,717 7,231,557 6,378,368 64,303,928
- -------------------------------------------------------------------------------------------------------------------------
Loss from and Impairment of
Investment in Joint Venture - - 345,947 377,219 335,391 1,225,000
- -------------------------------------------------------------------------------------------------------------------------
Interest Income 32,279 120,979 156,075 472,822 913,184 5,083,611
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) (3,571,957) (4,964,173) (8,465,016) (7,135,954) (5,800,575) (58,696,055)
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share of Common
Stock - Basic and Diluted (a) ($.06) ($.08) ($.14) ($.12) ($.10) ($1.18)
- -------------------------------------------------------------------------------------------------------------------------
Total Assets 6,562,403 6,894,501 7,239,544 13,334,972 19,988,207 -
- -------------------------------------------------------------------------------------------------------------------------
Long Term Obligations - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 4,166,526 5,557,599 6,284,777 11,860,913 18,779,142 -
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share - - - - - -
of Common Stock
- -------------------------------------------------------------------------------------------------------------------------
- --------------------
(a) Adjusted for three-for-one stock split declared
in October, 1985, five-for-four stock split declared in
August, 1987, two-for-one stock split declared in February,
1991 and two-for-one stock split declared in May, 1996.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
Forward-Looking Statements
Information included in this Annual Report on Form 10-K may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
16
"plans," "anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in this Annual Report on Form
10-K under the heading "General Risks and Uncertainties."
General
- -------
We have been a development-stage enterprise since our
inception on November 5, 1982. Our principal activities include the development,
production and marketing of multi-functional, hardware-based, peripheral digital
encryption devices. These encryption devices provide high-grade security for
domestic and international users over virtually every communications media. (See
"Business -- Encryption Products").
Our line of encryption products presently includes the
USS-900, the DSS-1000, the DCS-1200, the DCS-1400, the STS-1500 and the ULP-1.
Our encryption products are available with either the high-grade strength of the
Harris digital cryptographic chip - the Citadel (TM) CCX - or the Triple DES
algorithm to provide high-grade encryption. Triple DES, which is used by many
U.S. government agencies, is an algorithm available in the public domain that
has been incorporated into our software.
We are continuing our research and development activities for
additional encryption products and for flat-panel display technologies,
including our thin-film video color display, or FED, and our ultra-high
resolution charged particle E-Paper(TM) flat-panel display. On June 13, 2001, we
entered into the Futaba Agreement for the purpose of jointly developing and
commercializing a full-color video display utilizing our field emission display
technology (See "Business - New Technologies Under Development"). We cannot
assure you, however, that our efforts in these areas will be successful (See
"Business -- General Risks and Uncertainties").
We are currently using several U.S.-based electronic
production contractors to produce the components for our encryption devices.
(See "Business - Production"). We sell our products primarily through a
distributor/dealer network and also to end-users. (See "Business-- Marketing").
During fiscal 2000, we discontinued production of our
Magicom(R) 2000 telecommunications product and our SCS-700 encryption product,
which combined the Magicom(R) 2000 with an encryption device. We are continuing
sales of our remaining inventory of the SCS-700.
17
In reviewing Management's Discussion and Analysis of Financial
Condition and Results of Operations, you should refer to our Financial
Statements and the notes thereto.
Results of Operations
- ---------------------
Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended October 31,
- ----------------------------------------------------------------------------
2000
- ----
Product Sales
Revenues. Product sales, net of sales returns, for fiscal 2001
decreased to approximately $732,000 from approximately $1,472,000 in fiscal
2000. The decrease in product sales is due to lower unit sales.
Gross Profit. Gross profit from product sales decreased in
fiscal 2001 to approximately $409,000 compared to approximately $747,000 in
fiscal 2000. Gross profit as a percentage of revenues increased to approximately
56% in fiscal 2001 compared to approximately 51% in fiscal 2000. The increase in
gross profit as a percentage of revenues resulted primarily from the mix of
products sold.
Collaborative Agreement
Revenues. Revenues for fiscal 2001 related to the Futaba
Agreement, which was entered into in June 2001, were approximately $958,000.
There were no such collaborative agreements that generated revenues prior to
fiscal 2001.
Gross Profit. Gross profit was approximately $584,000 in
fiscal 2001, or 61% as a percentage of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
approximately $1,235,000 or 21% to approximately $4,597,000 for the fiscal year
ended October 31, 2001 from approximately $5,832,000 for the fiscal year ended
October 31, 2000.
The fiscal 2001 decrease in selling, general and
administrative expenses, compared with fiscal 2000, is primarily a result of
effective cost-cutting measures, specifically a reduction in engineering
supplies of approximately $513,000, a reduction in advertising and related
expenses of approximately $390,000, a reduction in patent-related costs of
approximately $195,000, a reduction in depreciation expense of approximately
$95,000, and a reduction of the cost of facilities due to a consolidation of
operating locations of approximately $58,000, offset by an increase in the
provision for doubtful accounts of approximately $197,000 and a charge of
$100,000 related to commercial trade credits.
18
Research and Development Expenses
Research and development expenses, which are included in
selling, general and administrative expenses, decreased approximately $321,000
to $2,325,000 for the fiscal year ended October 31, 2001, from approximately
$2,732,000 for the comparable prior-year period. The decrease in research and
development expenses is primarily a result of a reduction in engineering
supplies and patent related costs, offset by an increase in employee
compensation and related costs and outside research and development charges.
Interest Income
Interest income decreased by approximately $89,000 to
approximately $32,000 in fiscal 2001 as compared to approximately $121,000 in
fiscal 2000, primarily as a result of a reduction in average funds available for
investment and then prevailing interest rates.
Fiscal Year Ended October 31, 2000 Compared to Fiscal Year Ended October 31,
- ----------------------------------------------------------------------------
1999
- ----
Product Sales
Revenues. We commenced recognizing product sales in the fourth
quarter of fiscal 1999. Product sales for fiscal 2000 increased to approximately
$1,472,000 from approximately $47,000 in fiscal 1999.
Gross Profit. Gross profit from product sales increased in
fiscal 2000 to approximately $747,000, or 51% as a percentage of revenues,
compared to approximately $10,000 in fiscal 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased
approximately $2,453,000 or 30% to approximately $5,832,000 for the fiscal year
ended October 31, 2000 from approximately $8,285,000 for the fiscal year ended
October 31, 1999.
The fiscal 2000 decrease in selling, general and
administrative expenses is primarily a result of the timing of a $1,407,000
reserve for amounts due from the Joint Venture, which was recorded in fiscal
1999. In addition, employee compensation and related costs decreased by
approximately $425,000 in fiscal 2000 as compared to fiscal 1999 as a result of
certain personnel waiving a portion or all of their salary and related pension
benefits and certain sales personnel becoming independent dealers and
distributors. These decreases were offset by an increase in advertising expense
of approximately $279,000 as a result of our efforts to increase awareness of
corporate vulnerability to information espionage.
19
Research and Development Expenses
Research and development expenses, which are included in
selling, general and administrative expenses, were approximately $2,732,000 and
$3,163,000 for the fiscal years ended October 31, 2000 and 1999, respectively.
Research and development expenses decreased approximately $431,000, or 14%, in
fiscal 2000 as compared to fiscal 1999 due to a reduction in outside research
and development efforts, which we commenced performing in-house, and a reduction
in engineering supplies. These reductions in research and development expenses
were partially offset by an increase in patent related costs.
Loss from and Impairment of Investment in Joint Venture
During fiscal 2000 the Joint Venture terminated operations and
is now in the process of being liquidated. Additional investments in the Joint
Venture during fiscal 2000 were not material to our operations and were expensed
to selling, general and administrative expenses.
Interest Income
Interest income decreased by approximately $35,000 to
approximately $121,000 in fiscal 2000 as compared to approximately $156,000 in
fiscal 1999, primarily as a result of a reduction in average funds available for
investment.
Liquidity and Capital Resources
- -------------------------------
Since our inception, we have met our liquidity and capital
expenditure needs primarily from the proceeds of sales of our common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and our initial public
offering, and upon the exercise of stock options pursuant to our 1987 and 1993
stock option plans and 2000 stock incentive plan.
In June 2001, we received the initial payment provided for by
the Futaba Agreement of $2,500,000 for the first phase of development of a
prototype for a 320 x 240 pixel, 5-inch diagonal display having numerous
advanced features, including wide viewing angle, low power consumption,
high-resolution, and ultra-bright screen. The Futaba Agreement further provides
for negotiations between the parties regarding additional compensation to us for
the use of our technology developed prior to entering into the Futaba Agreement,
which may include the payment of royalties based on sales of products by Futaba.
In January 2002, Futaba paid us an additional $3 million as partial compensation
for the use of this technology. (See "Business - Flat-Panel Display Technology")
The technology being utilized is based on our joint development program with
Volga. We are continuing to utilize Volga's assistance in the development work
under the Futaba Agreement and to fund Volga in accordance with the Volga
Agreement. We have agreed to pay Volga the sum of $180,000 per quarter for its
development work during the first year of the Volga Agreement, of which $540,000
had been paid as of January 22, 2001. Volga is required to grant us licenses for
background technology, and for technology developed under the Volga Agreement,
upon the payment of amounts to be negotiated between the parties, which may
20
include the payment of royalties based on sales of products resulting from the
development activities under the Volga Agreement. (See "Business - Flat-Panel
Display Technology"). We entered into a letter agreement with Volga, effective
as of February 1, 2002, pursuant to which we will make payments to Volga
totaling $750,000 in connection with the $3 million we received from Futaba in
January 2002. The sum of $750,000 is payable in installments over a five-month
period ending in June 2002. The funds to be received by Volga are required to be
used primarily for research and development and for purchasing facilities and
production areas for FED technology.
Working capital decreased by approximately $1,135,000 from
approximately $2,319,000 at October 31, 2000 to approximately $1,184,000 at
October 31, 2001, as a result of the decrease in accounts receivable, the
decrease in inventories and the increase in deferred revenue, offset by the
increase in prepaid expenses and other current assets, and the decrease in
accounts payable and accrued liabilities. Cash and marketable securities
increased by approximately $86,000 from approximately $1,231,000 at October 31,
2000 to approximately $1,317,000 at October 31, 2001, as a result of proceeds
received in connection with the Futaba Agreement, offset by funds used for
operations. Accounts receivable decreased by approximately $58,000 as a result
of the timing of collections. Prepaid expenses and other assets increased by
approximately $76,000 as a result of the timing of payments of prepaid items.
Accounts payable and accrued liabilities decreased by approximately $483,000,
primarily as a result of the decrease in operating expenses and the timing of
payments.
Our operations used approximately $718,000 in cash during
fiscal 2001, after giving effect to receipt of the Futaba payment. As of October
31, 2001, working capital included approximately $1,317,000 of cash, $536,000 of
net accounts receivable, $1,589,000 of inventory, $137,000 of prepaid expenses
and other current assets and approximately $854,000 of accounts payable and
accrued liabilities and $1,542,000 of deferred revenue. We believe that existing
cash and receivables, cash flows from future sales of encryption products and
other potential sources of cash flows, including payments under the Futaba
Agreement, will be sufficient to enable us to continue in operation until at
least the end of the first quarter of fiscal 2003. We anticipate that,
thereafter, we will require additional funds to continue our marketing and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However, our projections of future cash needs and cash flows may differ from
actual results. If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give you no assurance that we will be able to generate
adequate funds from operations, that we will receive additional payments under
the Futaba Agreement, that funds will be available to us from debt or equity
financings or that, if available, we will be able to obtain such funds on
favorable terms and conditions. We currently have no definitive arrangements
with respect to additional financing.
21
We are seeking to improve our liquidity through increased
sales or license of products and technology. In an effort to generate sales, we
have marketed our encryption products directly to U.S. and international
distributors, dealers and original equipment manufacturers who market our
encryption products on a non-exclusive basis. During fiscal 2001, we have
recognized revenues from product sales of approximately $732,000 and revenues in
connection with the Futaba Agreement of approximately $958,000. We are hopeful,
although we can give you no assurance, that we will generate significant
revenues in the future (through sales or otherwise) to improve our liquidity.
Management has recorded our inventory at the lower of cost or
its current best estimate of net realizable value, which is based upon the
historic and future selling prices of our encryption products and remaining
SCS-700s. To date, sales of our products have been limited. Accordingly, there
can be no assurance that we will not be required to reduce the selling price of
our inventory below its current carrying value.
Furthermore, management believes its other assets, which
consist principally of commercial trade barter credits, will be realized through
future usage, and accordingly are properly valued as of October 31, 2001 based
on our current plan of utilization after giving effect to a charge of
approximately $100,000 during the quarter ended July 31, 2001. We took this
charge after we determined, through our examination, that it was more likely
than not that we would not realize the first-year value of our commercial trade
credits in accordance with our original utilization plan. We will continue to
assess that utilization plan on a quarterly basis.
Our estimated funding capacity indicated above assumes,
although there is no assurance, that the waiver of salary and pension benefits
by the Chairman of the Board, the President and senior level personnel will
continue.
In order to continue our NASDAQ National Market listing,
NASDAQ requires that we maintain a minimum closing bid price of at least $1 per
share and a minimum of $4,000,000 of net tangible assets, pursuant to an
exception to a recently enacted requirement that we maintain a minimum of
$10,000,000 of stockholders equity. We have until November 1, 2002 to gain
compliance with the $10,000,000 equity listing standard. As of October 31, 2001,
our net tangible assets and stockholders equity were each approximately
$4,167,000. The closing bid price of our common stock on January 22, 2002, was $
0.54, and it has been below $1 since February 12, 2001. If the closing bid price
of our common stock remains below $1 for 30 consecutive trading days following
January 2, 2002, which is the expiration date of a recent NASDAQ moratorium, we
would be afforded a 90 calendar-day grace period to regain compliance. If we
were unable to regain compliance during that grace period, we could request a
hearing, which is usually held within 45 days, during which time our common
stock would remain listed on the NASDAQ National Market. As a result of that
hearing, our common stock could be delisted from the NASDAQ National Market and,
possibly, transferred to the NASDAQ SmallCap Market. If our stock were delisted
from the NASDAQ National Market, it could have an adverse effect on the market
price of our common stock and the liquidity of our shares.
22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
We have invested a portion of our cash on hand in short term,
fixed rate and highly liquid instruments that have historically been reinvested
when they mature throughout the year. Although our existing marketable
securities are not considered at risk with respect to changes in interest rates
or markets for these instruments, our rate of return on these securities could
be affected at the time of reinvestment, if any.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See accompanying "Index to Financial Statements."
Item 9. Changes in and Disagreements With Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
-------------------------
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The following table sets forth certain information with
respect to all of our directors and executive officers:
- -----------------------------------------------------------------------------------------------------------
Director and/or
Name Position with the Company and Age Executive Officer
Principal Occupation Since
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos Director, Chairman of the Board and Chief 74 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 77 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 56 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 73 1997
- -----------------------------------------------------------------------------------------------------------
Lewis H. Titterton Director 56 1999
- -----------------------------------------------------------------------------------------------------------
Anthony Bowers Director 44 2000
- -----------------------------------------------------------------------------------------------------------
Mr. Krusos has served as one of our Directors and as our
Chairman of the Board and Chief Executive Officer since November 1982. He holds
an M.S.E.E. degree from Newark College of Engineering, a B.E.E. degree from City
College of New York and a J.D. degree from St. John's University, and is a
member of the New York bar.
Mr. DiSanto has served as one of our Directors and as our
President since November 1982. He holds a B.E.E. degree from Polytechnic
Institute of Brooklyn and an M.E.E. degree from New York University.
Mr. Herms has served as our Chief Financial Officer and Vice
President - Finance since November 2000 and as one of our Directors since August
2001. Prior to joining us, Mr. Herms was employed by takeoutmusic.com Holding
Corp. as Chief Financial Officer, from May 2000 to November 2000. Prior to that,
for approximately 12 years, Mr. Herms was a Principal, Director and Chief
Financial Officer of a group of affiliated, privately held companies operating
under the Ultratan trade name. Mr. Herms was also our Chief Financial Officer
from 1982 to 1987. He is also a former audit manager with the firm of Arthur
Andersen LLP and a CPA. He holds a B.B.A. degree from Adelphi University.
Mr. Larounis has served as one of our Directors since
September 1997, prior to which he served as a consultant to us. Mr. Larounis is
currently retired. From 1960 to 1993, he held numerous positions as a senior
international executive of The Bendix Corporation and Allied Signal Inc., which
is now known as Honeywell International, Inc. He has also served on the Boards
of Directors of numerous affiliates of Allied Signal in Europe, Asia and
24
Australia. He holds a B.E.E. degree from the University of Michigan and a J.D.
degree from New York University.
Mr. Titterton has served as one of our Directors since July
1999. Mr. Titterton is currently Chief Executive Officer of NYMED, Inc., a
diversified health services company. His background is in high technology with
an emphasis on health care and he has been with NYMED, Inc. since 1989. Mr.
Titterton founded MedE America, Inc. in 1986 and was Chief Executive Officer of
Management and Planning Services, Inc. from 1978 to 1986. He holds a M.B.A.
degree from the State University of New York at Albany, and a B.A. degree from
Cornell University.
Mr. Bowers has served as one of our Directors since July 2000,
prior to which he served as a consultant to us. He has been a Partner of OTA
Limited Partnership, a broker-dealer headquartered in Purchase, New York, since
1997. He is responsible for marketing OTA's research to institutional investors.
Mr. Bowers was Director - Institutional Sales at Bear, Stearns International
Limited from 1994 to 1996 and Director - Institutional Sales at Goldman, Sachs
International from 1986 to 1994, each of which were in London, England. From
1979 to 1982, Mr. Bowers was Manager - Investor Relations for American Express
Company in New York. Mr. Bowers holds a B.A. degree from Amherst College and a
M.B.A. degree from the Wharton School of Business.
Item 11. Executive Compensation.
-----------------------
Messrs. Denis A. Krusos, Chairman of the Board, Chief
Executive Officer and Director, Frank J. DiSanto, President and Director, and
Henry P. Herms, Chief Financial Officer, Vice President - Finance and Director,
are our executive officers. While there are no formal agreements, Denis A.
Krusos and Frank J. DiSanto waived any and all rights to receive salary and
related pension benefits for an undetermined period of time commencing November
1, 1985. As a result, Mr. Krusos received no salary or bonus during the last
three fiscal years. No executive officer received an annual salary and bonus in
excess of $100,000 during the fiscal year ended October 31, 2001. The following
is compensation information regarding Mr. Krusos for the fiscal years ended
October 31, 2001, 2000 and 1999:
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------
Name and Fiscal Annual Long-Term
Principal Position Year Compensation Compensation Awards
------------------ Ended ------------ -------------------
-----
Securities Underlying
Options (#)
- ----------------------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/01 - 500,000
Chairman of the Board, 10/31/00 - 250,000
Chief Executive Officer and Director 10/31/99 - 50,000
- ----------------------------------------------------------------------------------------------------------------------
25
The following is information regarding stock options granted
to Mr. Krusos pursuant to the 2000 Share Incentive Plan, during the fiscal year
ended October 31, 2001:
- ----------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option Term
- ----------------------------------------------------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to Exercise
nderlying Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------
Denis A. Krusos 250,000 (1) 5.98% $0.688 (2) 1/1/11 $108,170 $274,124
250,000 (1) 5.98% $0.400 (2) 9/19/11 $62,889 $159,374
- ----------------------------------------------------------------------------------------------------------------------
(1) Options granted pursuant to the 2000 Share Incentive Plan,
which are exercisable in whole or in part commencing six
months following the date of grant unless otherwise
accelerated. The options are not issued in tandem with stock
appreciation or similar rights and are not transferable other
than by will or the laws of descent and distribution. The
options terminate upon termination of employment, except that
in the case of death, disability or termination for reasons
other than cause, options may be exercised for certain periods
of time thereafter as set forth in the 2000 Share Incentive
Plan.
(2) The exercise price of these options was equal to the fair
market value of the underlying common stock on the date of
grant. These options are nonqualified options.
The following is information regarding stock option exercises
during fiscal 2001 by Mr. Krusos and the values of his options as of October 31,
2001:
- ------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
============================================================================================================
Shares Value Realized Number of Securities Value of Unexercised
Acquired on ($) Underlying Unexercised In-the-Money Options at
Name Exercise (#) Options at Fiscal Year End (#) Fiscal Year End ($)(1)
-------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================
Denis A. Krusos - - 3,326,290 250,000 - -
- ------------------------------------------------------------------------------------------------------------
(1) Such value was determined by applying the net difference
between the last sales price of the stock on October 31, 2001
and the exercise price for the options to the number of
unexercised in-the-money options held.
26
There is no present arrangement for cash compensation of
directors for services in that capacity. Under the 2000 Share Incentive Plan,
each non-employee director is entitled to receive nonqualified stock options to
purchase 20,000 shares of common stock each year that such director is elected
to the Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners
-----------------------------------------------
and Management.
---------------
The following table sets forth certain information with
respect to our common stock beneficially owned as of January 22, 2002 by (a)
each person who is known by us to be the beneficial owner of more than 5% of our
outstanding common stock, (b) each of our directors and executive officers, and
(c) all directors and executive officers as a group:
- -----------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Amount and Nature of Beneficial Percent of Class
Ownership(1)(2)
===========================================================================================================
Denis A. Krusos 6,800,150 9.19%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto 3,897,505 5.48%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 250,000 0.37%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
George P. Larounis 342,500 0.51%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Lewis H. Titterton 1,079,600 1.58%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Anthony Bowers 244,300 0.36%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (6 12,614,055 15.80%
persons)
- -----------------------------------------------------------------------------------------------------------
(1) A beneficial owner of a security includes any person who
directly or indirectly has or shares voting power and/or
investment power with respect to such security or has the
right to obtain such voting power and/or investment power
within sixty (60) days. Except as otherwise noted, each
designated beneficial owner in this report has sole voting
power and investment power with respect to the shares of our
common stock beneficially owned by such person.
27
(2) Includes 3,576,290 shares, 3,254,290 shares, 250,000
shares, 342,500 shares, 40,000 shares, 70,000 shares and
7,533,080 shares as to which Denis A. Krusos, Frank J.
DiSanto, Henry P. Herms, George P. Larounis, Lewis H.
Titterton, Anthony Bowers, and all directors and executive
officers as a group, respectively, have the right to acquire
within 60 days upon exercise of options granted pursuant to
the 1993 Stock Option Plan and the 2000 Share Incentive Plan.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
None.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
--------------------------------------------
Reports on Form 8-K.
--------------------
(a)(1)(2) Financial Statement Schedules
-----------------------------
See accompanying "Index to Financial Statements."
(a)(3) Executive Compensation Plans and Arrangements
---------------------------------------------
Stock Option Plan (1987) (filed as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit 10.69
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
Company's Proxy Statement dated June 10, 1993).
Amendment No. 1 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 4(d) to the Company's Form S-8 dated
September 6, 1995).
Amendment No. 2 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 10.32 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 1996).
CopyTele, Inc. 2000 Share Incentive Plan (filed as Annex A of
the Company's Proxy Statement dated June 12, 2000).
Amendment No. 1 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 2001).
(b) Reports on Form 8-K
-------------------
No current report on Form 8-K was filed for the Company during
the fourth quarter of its fiscal year ended October 31, 2001.
(c) Exhibits
--------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-laws.
29
(c) 10.1 Stock Option Plan, adopted on April 1, 1987
and approved by shareholders on May 27,
1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on
March 12, 1990 and approved by shareholders
on May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan,
adopted on April 28, 1993 and approved by
shareholders on July 14, 1993.
(f) 10.4 Amendment No. 1 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 3, 1995
and approved by shareholders on July 19,
1995.
(g) 10.5 Amendment No. 2 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 10, 1996
and approved by shareholders on July 24,
1996.
(h) 10.6 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc.
(i) 10.7 Stock Subscription Agreement dated April 27,
1999, including form of Warrant, between
CopyTele, Inc. and Lewis H. Titterton.
(j) 10.8 Agreement dated July 28, 1999, among
CopyTele, Inc., Harris Corporation and RF
Communications.
(k) 10.9 Stock Subscription Agreement dated August
30, 1999, including form of Warrant, between
CopyTele, Inc. and Lewis H. Titterton.
(l) 10.10 CopyTele, Inc. 2000 Share Incentive Plan.
(m) 10.11 Amendment No. 1 to the CopyTele, Inc. 2000
Share Incentive Plan, adopted on July 6,
2001 and approved by shareholders on August
16, 2001.
(n) 10.12 Joint Cooperation Agreement for Field
Emission Displays, dated June 11, 2001, by
and between CopyTele, Inc. and Futaba
Corporation.
(o) 10.13 Letter Agreement between CopyTele, Inc. and
Futaba Corporation, dated January 11, 2002.
10.14 Amendment, dated May 10, 2001, to the Joint
Cooperation Agreement between CopyTele, Inc.
and Volga Svet Ltd.
30
10.15 Letter Agreement between CopyTele, Inc. and
Volga Svet Ltd., dated as of February 1,
2002.
23.1 Consent of Arthur Andersen LLP.
---------------------
(a) Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 1992 and to Form 10-Q for the
fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment
No. 1 to Form S-8 (Registration No. 33-49402) dated
December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1990.
(e) Incorporated by reference to Proxy Statement dated
June 10, 1993.
(f) Incorporated by reference to Form S-8 (Registration
No. 33-62381) dated September 6, 1995.
(g) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.
(h) Incorporated by reference to Form 10-Q for the fiscal
quarter ended January 31, 1999.
(i) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1999.
(j) Incorporated by reference to Form 8-K dated July 28,
1999.
(k) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1999.
(l) Incorporated by reference to Annex A of the Company's
Proxy Statement dated June 12, 2000.
(m) Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 2001.
(n) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 2001.
(o) Filed herewith.
31
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COPYTELE, INC.
By: Denis A. Krusos
------------------------------
Denis A. Krusos
Chairman of the Board and
January 29, 2002 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
By: Denis A. Krusos
------------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
January 29, 2002 Officer)
By Frank J. DiSanto
------------------------------
Frank J. DiSanto
January 29, 2002 President and Director
By: Henry P. Herms
------------------------------
Henry P. Herms
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
January 29, 2002 and Accounting Officer)
By: George P. Larounis
----------------------
George P. Larounis
January 29, 2002 Director
By: Lewis H. Titterton
----------------------
Lewis H. Titterton
January 29, 2002 Director
By: Anthony Bowers
------------------------------
Anthony Bowers
January 29, 2002 Director
COPYTELE, INC.
(Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2001
Page
----
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 2001 and 2000 F-2
Statements of Operations for each of the three fiscal years in the period ended October 31, 2001 and for F-3
the period from inception (November 5, 1982) to October 31, 2001
Statements of Shareholders' Equity for the period from inception (November 5, 1982) to October 31, 1983 F-4 - F-7
and for each of the eighteen fiscal years in the period ended October 31, 2001
Statements of Cash Flows for each of the three fiscal years in the period ended October 31, 2001 and for F-8
the period from inception (November 5, 1982) to October 31, 2001
Notes to Financial Statements F-9 - F-24
Report of Independent Public Accountants on Schedule S-1
Schedule of Valuation and Qualifying Accounts S-2
Additional information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or notes
thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CopyTele, Inc.:
We have audited the accompanying balance sheets of CopyTele, Inc. (a Delaware
corporation in the development stage - Note 1) as of October 31, 2001 and 2000,
the statements of operations for each of the three fiscal years in the period
ended October 31, 2001 and for the period from inception (November 5, 1982) to
October 31, 2001, the statements of shareholders' equity for the period from
inception (November 5, 1982) to October 31, 1983 and for each of the eighteen
fiscal years in the period ended October 31, 2001, and the statements of cash
flows for each of the three fiscal years in the period ended October 31, 2001
and for the period from inception (November 5, 1982) to October 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CopyTele, Inc. as of October
31, 2001 and 2000, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended October 31, 2001 and for the
period from inception (November 5, 1982) to October 31, 2001, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Melville, New York
January 24, 2002
F-1
COPYTELE, INC.
(Development Stage Enterprise)
BALANCE SHEETS
October 31, October 31,
ASSETS 2001 2000
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,316,860 $ 1,134,045
Marketable securities, at cost - 96,873
Accounts receivable, net of allowance for doubtful accounts of
$240,000 and $75,400, respectively 536,391 594,851
Inventories 1,589,350 1,769,285
Prepaid expenses and other current assets 136,902 60,433
------------------ ------------------
Total current assets 3,579,503 3,655,487
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $2,004,449 and $1,837,946, respectively 119,487 270,018
OTHER ASSETS 2,863,413 2,968,996
------------------ ------------------
$ 6,562,403 $ 6,894,501
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 816,011 $ 1,035,749
Accrued liabilities 38,199 301,153
Deferred revenue 1,541,667 -
------------------ ------------------
Total current liabilities 2,395,877 1,336,902
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000 shares
authorized; no shares issued or outstanding - -
Common stock, par value $.01 per share; 240,000,000 shares
authorized; 66,521,100 and 63,084,526 shares issued and
outstanding, respectively 665,211 630,845
Additional paid-in capital 62,197,370 60,050,852
Deficit accumulated during the development stage (58,696,055) (55,124,098)
------------------ ------------------
4,166,526 5,557,599
------------------ ------------------
$ 6,562,403 $ 6,894,501
================== ==================
The accompanying notes are an integral part of these balance sheets.
F-2
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF OPERATIONS
For the Period
from Inception
For the Fiscal Year Ended October 31, (November 5, 1982)
----------------------------------------------- to
2001 2000 1999 October 31, 2001
------------- -------------- ------------- -----------------
REVENUES
Product sales, net $ 732,435 $ 1,471,998 $ 46,877 $ 2,251,310
Collaborative agreement (Note 2) 958,333 - - 958,333
------------- -------------- ------------- -----------------
Total revenue 1,690,768 1,471,998 46,877 3,209,643
COST OF REVENUES
Cost of product sales 323,705 725,438 37,304 1,086,447
Cost of collaborative agreement 373,934 - - 373,934
------------- -------------- ------------- -----------------
Total cost of revenue 697,639 725,438 37,304 1,460,381
Gross profit 993,129 746,560 9,573 1,749,262
------------- -------------- ------------- -----------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development expenses of
approximately $2,325,000, $2,732,000, $3,163,000,
and $36,531,000, respectively) 4,597,365 5,831,712 8,284,717 64,303,928
------------- -------------- ------------- -----------------
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN JOINT
VENTURE (Note 4) - - 345,947 1,225,000
------------- -------------- ------------- -----------------
INTEREST INCOME 32,279 120,979 156,075 5,083,611
------------- -------------- ------------- -----------------
NET (LOSS) $ (3,571,957) $ (4,964,173) $ (8,465,016) $ (58,696,055)
============= ============== ============= =================
NET (LOSS) PER SHARE OF COMMON STOCK:
Basic and Diluted $ (.06) $ (.08) $ (.14) $ (1.18)
============= ============== ============= =================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 64,561,252 62,261,250 58,792,745 49,712,603
============= ============== ============= =================
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE EIGHTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2001
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Par Value Capital Stage
-------------- --------------- ---------------- ---------------
BALANCE, November 5, 1982 (inception) - $ - $ - $ -
Sale of common stock, at par, to incorporators
on November 8, 1982 1,470,000 14,700 - -
Sale of common stock, at $.10 per share, primarily
to officers and employees, from November 9, 1982
to November 30, 1982 390,000 3,900 35,100 -
Sale of common stock, at $2 per share, in private
offering from January 24, 1983 to March 28, 1983 250,000 2,500 497,500 -
Sale of common stock, at $10 per share, in public
offering on October 6, 1983, net of underwriting
discounts of $1 per share 690,000 6,900 6,203,100 -
Sale of 60,000 warrants to representative of
underwriters, at $.001 each, in conjunction with
public offering - - 60 -
Costs incurred in conjunction with private and
public offerings - - (350,376) -
Net (loss) for the period (976,919)
-------------- --------------- ---------------- ---------------
BALANCE, October 31, 1983 2,800,000 28,000 6,385,384 (976,919)
Additional costs incurred in conjunction with
public offering - - (11,654) -
Net (loss) (1,542,384)
-------------- --------------- ---------------- ---------------
BALANCE, October 31, 1984 2,800,000 28,000 6,373,730 (2,519,303)
Common stock issued, at $12 per share, upon
exercise of 57,200 warrants from February 5, 1985
to October 16, 1985, net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by individuals
from January 29, 1985 to October 4, 1985 under
agreements with the Company, net of costs incurred
by the Company - - 362,365 -
Three-for-one stock split (A) 5,714,400 57,144 (57,144) -
Net (loss) (1,745,389)
-------------- --------------- ---------------- ---------------
BALANCE, October 31, 1985 8,571,600 85,716 7,309,796 (4,264,692)
Common stock issued, at $4 per share, upon
exercise of 2,800 warrants in December 1985 8,400 84 33,516 -
Additional costs incurred by the Company in
conjunction with sales of common stock by
individuals from January 29, 1985 to October
4, 1985 under agreements with the Company - - (62,146) -
Net (loss) (1,806,696)
-------------- --------------- ---------------- ---------------
BALANCE, October 31, 1986 8,580,000 85,800 7,281,166 (6,071,388)
Sale of common stock, at market, to officers
on January 9, 1987 and April 22, 1987 and
to members of their immediate families on
July 28, 1987 67,350 674 861,726 -
Additional costs incurred by the Company in
conjunction with sales of common stock by
individuals from January 29, 1985 to
October 4, 1985 under agreements with the
Company - - (1,474) -
Five-for-four stock split (A) 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction with
five-for-four stock split - - (1,345) -
Sale of common stock, at market, to members of
officers' immediate families on September
10, 1987 and to officers on October 29, 1987 64,740 647 309,601 -
Net (loss) - - - (1,401,736)
-------------- --------------- ---------------- ---------------
F-4
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE EIGHTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2001
Continued
Deficit
Accumulated
Common Stock Additional During the
---------------------------------- Paid-in Development
Shares Par Value Capital Stage
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1987 10,873,825 108,738 8,428,057 (7,473,124)
Sale of common stock, at market, to members
of officers' immediate families from
November 24, 1987 to June 29, 1988 and
additional contributions by officers in
January 1988 and March 1988 related to
adjustments to sales price of common
stock on October 29, 1987 260,210 2,602 2,250,594 -
Net (loss) (1,317,305)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1988 11,134,035 111,340 10,678,651 (8,790,429)
Sale of common stock, at market, to an
officer on February 26, 1989 and to
members of officers' immediate families
from February 26, 1989 (amended on March
10, 1989) to September 27, 1989 142,725 1,427 2,093,851 -
Sale of common stock, at market, to senior
level personnel on February 26, 1989 29,850 299 499,689 -
Sale of common stock, at market, to
unrelated party on February 26, 1989
amended on March 10, 1989 35,820 358 599,627 -
Net (loss) (1,101,515)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1989 11,342,430 113,424 13,871,818 (9,891,944)
Sale of common stock, at market, to members
of officers' immediate families from
November 14, 1989 to October 15, 1990 117,825 1,179 1,140,725 -
Net (loss) (1,111,413)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1990 11,460,255 114,603 15,012,543 (11,003,357)
Sale of common stock, at market, to members
of officers' immediate families on December
4, 1990 42,540 425 329,260 -
Two-for-one stock split (A) 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members
of officers' immediate families from April
26, 1991 to September 16, 1991 102,543 1,025 1,033,981 -
Net (loss) (1,299,992)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1991 23,108,133 231,081 16,260,756 (12,303,349)
Sale of common stock, at market, to members
of officers' immediate families from
December 16, 1991 to October 27, 1992 158,910 1,589 1,754,330 -
Costs incurred in conjunction with registration
of stock option plan - - (33,251) -
Net (loss) (1,827,356)
----------------- --------------- ---------------- -----------------
F-5
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE EIGHTEEN FISCAL YEARS IN THE PERIOD ENDED
OCTOBER 31, 2001
Continued
Deficit
Accumulated
Common Stock Additional During the
---------------------------------- Paid-in Development
Shares Par Value Capital Stage
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1992 23,267,043 232,670 17,981,835 (14,130,705)
Common stock issued upon exercise of
stock options from December 16, 1992
to October 22, 1993 under stock option
plan 1,032,940 10,330 5,914,480 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in September 1993 239,000 2,390 996,774 -
Net (loss) - - - (2,762,849)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1993 24,538,983 245,390 24,893,089 (16,893,554)
Costs incurred in connection with
registration of stock option plan - - (50,324) -
Common stock issued upon exercise of
stock options from December 22, 1993
to June 14, 1994 under stock option
plan 233,200 2,332 1,273,411 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in July 1994 65,220 652 371,754 -
Net (loss) - - - (3,427,517)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1994 24,837,403 248,374 26,487,930 (20,321,071)
Costs incurred in connection with
registration of stock option plan - - (29,759) -
Common stock issued upon exercise of
stock options from February 17,
1995 to October 30, 1995 under
stock option plans 980,400 9,804 5,278,824 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in February, July and
September 1995 137,300 1,373 755,132 -
Net (loss) - - - (2,993,899)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1995 25,955,103 259,551 32,492,127 (23,314,970)
Common stock issued upon exercise of stock
options from November 2, 1995 to June
12, 1996 under stock option plans 2,288,800 22,888 15,843,842 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in January and
March, 1996 138,280 1,383 527,802 -
Two-for-one stock split (A) 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of
stock options from July 8, 1996 to
October 30, 1996 under stock option plans 532,500 5,325 1,795,395 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in July and
October, 1996 107,790 1,078 559,262 -
Net (loss) - - - (5,443,410)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1996 57,404,656 574,047 50,934,606 (28,758,380)
Costs incurred in conjunction with
registration of stock option plan - - (11,705) -
Common stock issued upon exercise of
stock options from November 25, 1996
to October 6, 1997 under stock
option plans 342,700 3,427 1,258,829 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families in March 1997 98,820 988 502,905 -
Common stock issued upon purchase
of equipment 15,000 150 74,850 -
Net (loss) - - - (5,800,575)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1997 57,861,176 578,612 52,759,485 (34,558,955)
Stock option compensation to consultants - - 189,600 -
Common stock issued upon exercise of
stock options in May 1998 10,000 100 28,025 -
Net (loss) - - - (7,135,954)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1998 57,871,176 578,712 52,977,110 (41,694,909)
Stock option compensation to consultants - - 61,650 -
Common stock issued upon exercise of stock
options between January 15, 1999 and
August 3, 1999 886,200 8,862 1,343,868 -
Common stock issued in private placements
on April 30, 1999 and September 8, 1999,
net of expenses 1,300,000 13,000 1,461,500 -
Net (loss) - - - (8,465,016)
----------------- --------------- ---------------- -----------------
F-6
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE EIGHTEEN FISCAL YEARS IN THE PERIOD ENDED
OCTOBER 31, 2001
Continued
Deficit
Accumulated
Common Stock Additional During the
---------------------------------- Paid-in Development
Shares Par Value Capital Stage
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 1999 60,057,376 600,574 55,844,128 (50,159,925)
Stock option compensation to consultants - - 210,650 -
Common stock issued in private placements
in January and March 2000, net of
expenses 616,500 6,165 794,420 -
Common stock issued upon exercise of
stock options from January 2000 to May
2000 under stock option plans 2,267,400 22,674 3,003,050 -
Common stock issued upon exercise of
warrants in May 2000 143,250 1,433 198,604 -
Net (loss) - - - (4,964,173)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 2000 63,084,526 630,846 60,050,852 (55,124,098)
Stock option compensation to consultants - - 229,620 -
Common stock issued upon exercise of stock
options under stock option plans 1,457,034 14,570 805,189 -
Common stock issued to employees for
services rendered 1,707,725 17,077 973,701 -
Common stock issued to consultants 271,815 2,718 138,008 -
Net (loss) - - - (3,571,957)
----------------- --------------- ---------------- -----------------
BALANCE, October 31, 2001 66,521,100 $ 665,211 $ 62,197,370 $ (58,696,055)
================= =============== ================ =================
(A) Reflects cumulative effect on all share data prior to splits described in
Note 7.
The accompanying notes are an integral part of these statements.
F-7
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
For the Period
from Inception
For the Fiscal Year Ended October 31, (November 5, 1982)
----------------------------------------------------- to
2001 2000 1999 October 31, 2001
--------------- -------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (3,695,031) $ (5,769,836) $ (6,314,512) $ (65,226,721)
Cash received from customers 444,907 801,747 46,877 1,293,531
Cash received from collaborative agreement 2,500,000 - - 2,500,000
Interest received 32,279 127,511 150,539 5,080,625
--------------- -------------- ---------------- -----------------
Net cash (used in) operating activities (717,845) (4,840,578) (6,117,096) (56,352,565)
--------------- ------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (15,972) (30,717) (40,283) (2,070,131)
Disbursements to acquire certificates of deposit and
marketable securities - (96,873) (488,038) (13,630,910)
Proceeds from maturities of investments 96,873 488,038 - 13,630,910
Investment made in Joint Venture - - - (1,225,000)
--------------- -------------- ---------------- -----------------
Net cash provided by (used in) investing
activities 80,901 360,448 (528,321) (3,295,131)
--------------- -------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants, net
of underwriting discounts of $690,000 related to
initial public offering in October 1983 - - - 17,647,369
Proceeds from exercise of stock options and warrants,
net of registration disbursements 819,759 3,225,760 1,352,730 41,106,732
Proceeds from sale of common stock in private
placements, net - 800,585 1,474,500 2,275,085
Proceeds from sales of common stock by individuals
under agreements with the Company, net of
disbursements made by the Company - - - 298,745
Disbursements made in conjunction with sales of stock - - - (362,030)
Fractional share payments in conjunction with stock
split - - - (1,345)
--------------- -------------- ---------------- -----------------
Net cash provided by financing activities 819,759 4,026,345 2,827,230 60,964,556
--------------- -------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
182,815 (453,785) (3,818,187) 1,316,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,134,045 1,587,830 5,406,017 -
--------------- -------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,316,860 $ 1,134,045 $ 1,587,830 $ 1,316,860
=============== ============== ================ =================
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) $ (3,571,957) $ (4,964,173) $ (8,465,016) $ (58,696,055)
Stock option compensation to consultants 229,620 210,650 61,650 691,520
Stock awards granted to employees and consultants
pursuant to stock incentive plans 1,036,505 - - 1,036,505
Stock issued to consultants for services rendered 95,000 - - 95,000
Provision for doubtful accounts 272,500 75,400 - 347,900
Depreciation and amortization 166,503 261,804 275,234 2,070,980
Loss from Joint Venture - - 260,775 1,139,828
Impairment of investment in Joint Venture - - 85,172 85,172
Impairment of amount due from Joint Venture - - 1,407,461 1,407,461
Amortization of discount on marketable securities - - - -
Loss on disposal of property and equipment - 30,050 - 30,050
Change in operating assets and liabilities:
Accounts receivable (214,040) (670,251) - (884,291)
Inventories 179,935 (230,677) (1,819,393) (4,589,350)
Prepaid expenses and other current assets (76,469) 6,666 (20,460) (998,902)
Long-term amount due from joint venture - - 1,684,167 (1,407,461)
Other assets 105,583 57,818 70,606 136,586
Accounts payable and accrued liabilities (482,692) 382,135 342,708 1,640,825
Deferred revenue 1,541,667 - - 1,541,667
--------------- -------------- ---------------- -----------------
Net cash (used in) operating activities $ (717,845) $ (4,840,578) $ (6,117,096) $ (56,352,565)
=============== ============== ================ =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Barter transaction (Note 5) $ - $ 3,000,000 $ - $ 3,000,000
=============== ============== ================ =================
The accompanying notes are an integral part of these statements.
F-8
COPYTELE, INC.
(Development Stage Enterprise)
1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
Organization and Development of Business
- ----------------------------------------
CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982, is a
development stage enterprise whose principal activities include the development,
production and marketing of multi-functional encryption products that provide
information security for domestic and international users. The Company's line of
encryption products presently includes the USS-900 (Universal Secure System),
the DSS-1000 (Digital Security System), the DCS-1200 and 1400 (Digital
Cellular/Satellite), the STS-1500 (Secure Teleconferencing System) and the ULP-1
(Ultimate Laptop Privacy). The USS-900, DSS-1000, DCS-1200, DCS-1400, STS-1500
and ULP-1 are multi-functional, hardware-based digital encryption systems that
incorporate the Harris Corporation encryption cryptographic chip - the
Citadel(TM) CCX - or the Triple DES algorithm to provide high-grade encryption.
The Company is also continuing its research and development activities for
additional encryption products and flat panel display technologies, including
its thin film video color display ("Field Emission Display" or "FED") and its
ultra-high resolution charged particle E-Paper(TM) flat panel display.
In June 2001, the Company entered into a Joint Cooperation Agreement for Field
Emission Displays with Futaba Corporation ("Futaba" or the "Futaba Agreement")
for the purpose of jointly developing and commercializing a full-color video
display utilizing the Company's Field Emission Display technology. The Company
received the initial payment provided for by the Futaba Agreement of $2,500,000
for the first phase of development ("Phase I") of a prototype for a 320 x 240
pixel, 5-inch diagonal display in June 2001. During the first phase of the
Futaba Agreement, which is contractually defined as a one-year period, the
Company will be primarily responsible for developing prototypes of the display
and providing the required fabrication, to enable Futaba to utilize its know-how
and production facilities for the possible mass production of the display. The
Futaba Agreement further provided for negotiations between the parties during
the first six months of the Futaba Agreement regarding potential additional
compensation to the Company for use of the Company's technology developed prior
to the Futaba Agreement, which may include the payment of royalties based on
sales of products by Futaba. In accordance with this provision, in January 2002,
the Company received an additional payment of $3,000,000. As part of the Futaba
Agreement, both parties would have the exclusive right to produce products, with
Futaba having the exclusive right to sell the products worldwide, excluding
Russia. Under the Futaba Agreement, any intellectual property developed during
the term of the agreement will be jointly owned or cross licensed by Futaba and
the Company. The Futaba Agreement provides for a term of three years with the
terms of the project following the first year being subject to future
negotiations between the parties on a yearly basis.
Additionally, in May 2001, the Company entered into an agreement with Volga
Svet, Ltd. ("Volga") for certain development efforts in connection with the FED
technology. Under this agreement, the Company has agreed to pay Volga the sum of
$180,000 per quarter for its development work during the first year of the Volga
Agreement, of which $540,000 had been paid through January 2002. In connection
with the additional $3 million payment received from Futaba, the Company entered
into a letter agreement subsequent to year-end to pay Volga a total of $750,000
to continue development under Phase I of the Futaba Agreement. Further, should
the technology being developed under the Futaba Agreement ultimately be
F-9
COPYTELE, INC.
(Development Stage Enterprise)
commercialized, it is expected that Volga will receive further consideration
(e.g. cash payment, license fees or ongoing royalties) for their rights to such
technology.
Funding and Management's Plans
- ------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily through the proceeds from sales of its common stock in its
initial public offering, in private placements, upon exercise of warrants issued
in connection with the private placements and public offering, and upon the
exercise of stock options.
During fiscal 2001, the Company's operating activities used approximately
$718,000 in cash. As of October 31, 2001, working capital included approximately
$1,317,000 of cash, $536,000 of accounts receivable, $1,589,000 of inventory,
$137,000 of prepaid expenses and other current assets, $854,000 of accounts
payable and accrued liabilities, and $1,542,000 of deferred revenue. The Company
believes that its existing cash and net receivables, cash flows from future
sales of encryption products and other potential sources of cash flows,
including the $3 million additional payment received in connection with the
Futaba Agreement in January 2002, will be sufficient to enable it to continue in
operation until at least the end of the first quarter of fiscal 2003.
The Company is currently seeking to improve its liquidity through increased
sales or license of its products and technology and may also seek to improve its
liquidity through sales of its common stock or convertible debt instruments.
Despite the foregoing, there can be no assurance that the Company will generate
significant revenues in the future (through sales or otherwise) to improve its
liquidity, that the Company will receive additional payments under the Futaba
Agreement, that the Company will have sufficient revenues to generate a profit,
that the Company will be able to expand its current distributor/dealer network,
that production capabilities will be adequate, or that other products will not
be produced by other companies that will render the products of the Company
obsolete, or that other sources of funding would be available, if needed, at
terms that the Company would deem favorable.
In order to continue the Company's Nasdaq stock market ("NASDAQ"), National
Market listing, NASDAQ requires that the Company maintain a minimum closing bid
price of at least $1 per share and a minimum of $4,000,000 of net tangible
assets, pursuant to an exception to a recently enacted requirement that it
maintain a minimum of $10,000,000 of stockholders equity. The Company has until
November 1, 2002 to gain compliance with the $10,000,000 equity listing
standard. The closing bid price of the Company's common stock on January 22,
2002, was $ 0.54, and it has been below $1 since February 12, 2001. If the
closing bid price of the Company's common stock remains below $1 for 30
consecutive trading days following January 2, 2002, which is the expiration date
of a recent NASDAQ moratorium, the Company would be afforded a 90 calendar-day
grace period to regain compliance. If the Company were unable to regain
compliance during that grace period, it could request a hearing, which is
usually held within 45 days, during which time the Company's common stock would
remain listed on the NASDAQ National Market. As a result of that hearing, the
Company's common stock could be delisted from the NASDAQ National Market and,
possibly, transferred to the NASDAQ SmallCap Market. If the Company's common
stock were delisted from the NASDAQ National Market, it could have an adverse
effect on the market price of the Company's common stock and the liquidity of
its shares.
F-10
COPYTELE, INC.
(Development Stage Enterprise)
Realizability of Assets
- -----------------------
Management has recorded the Company's inventory at the lower of cost or its
current best estimate of net realizable value, which is based upon the historic
and future selling prices of the Company's products. To date, sales of the
Company's products have been limited. Accordingly, there can be no assurance
that the Company will not be required to reduce the selling price of its
inventory below its current carrying value.
Furthermore, management believes its other assets, which consist principally of
commercial trade barter credits (Note 5), will be realized through future usage,
and accordingly are properly valued as of October 31, 2001 after giving effect
to a current fiscal year charge of approximately $100,000. The Company took this
charge after it determined, through its examination, that it was more likely
than not that the Company would not realize the first-year value of its
commercial trade credits in accordance with its original utilization plan. The
Company will continue to assess that utilization plan on a quarterly basis. The
Company's ability to utilize all of its available barter credit under its plan
is dependent upon significant growth in its product sales and/or revenues under
the Futaba Agreement.
Product Development
- -------------------
The success and profitability of the Company's products will depend upon many
factors, many of which are beyond its control. These factors include the
capability of the Company to market its products, long-term product performance
and the capability of the Company's dealers and distributors to adequately
service the Company's products, the ability of the Company to maintain an
acceptable pricing level to its customers for its products, the ability of
suppliers to meet the Company's requirements and schedule, the Company's ability
to successfully develop its new products under development, rapidly changing
consumer preference, and the possible development of competitive products that
could render the Company's products obsolete or unmarketable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
- -------------------
The Company recognizes revenues from product sales, net of sales returns, and
collaborative agreements in accordance with Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements," or other specific authoritative
literature, as applicable, as follows:
Product Sales
-------------
Revenues from product sales are recorded when all four of the
following criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered;
(iii) the Company's price to the buyer is fixed or determinable; and
(iv) collectibility is reasonably assured. Consequently, revenues
from product sales are generally recognized at the time products are
shipped and title has passed to customers.
Collaborative Agreement
-----------------------
The initial $2.5 million payment from the Futaba Agreement is being
recognized ratably over Phase I, the period of the Company's
commitment under this portion of the contract.
F-11
COPYTELE, INC.
(Development Stage Enterprise)
Sales Returns and Allowances
----------------------------
Revenues are recorded net of sales returns, which amounted to $82,000
during fiscal 2001. Based upon a specific review and in accordance
with the Company's contractual return policy, management believes
that no reserve for anticipated sales returns is required as of
October 31, 2001.
Warranty Policy
- ---------------
The Company warrants that its products are free from defects in material and
workmanship for a period of one year from the date of initial purchase. The
warranty does not cover any losses or damage that occur as a result of improper
installation, misuse or neglect. The Company has recorded a nominal amount of
warranty liability as of October 31, 2001, based upon its historical experience
and its best estimate of future warranty claims.
Accounts Receivable and Concentration of Credit Risk
- ----------------------------------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. The Company reviews its accounts receivable for
potential doubtful accounts and maintains a reserve for estimated uncollectible
amounts. One customer represented 57% of total net revenues throughout fiscal
2001, and four other customers represented 23%, 15%, 14% and 10% of gross
accounts receivable, respectively, as of October 31, 2001.
Cash Equivalents
- ----------------
Cash equivalents consist of investments that are readily convertible into cash
and have original maturities of three months or less.
Marketable Securities
- ---------------------
The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company is required to classify each investment in marketable securities in one
of three categories: trading, available-for-sale, or held-to-maturity. The
Company's investments at October 31, 2000 were classified as held-to-maturity
due to the Company's ability and intent to hold these securities until they
mature. As such, in accordance with SFAS No. 115, these investments are
presented in the accompanying balance sheet at cost as of October 31, 2000.
Accrued interest income related to these investments is included in earnings for
the fiscal year ended October 31, 2000.
Inventories
- -----------
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market, which represents the Company's best estimate of market value.
F-12
COPYTELE, INC.
(Development Stage Enterprise)
Property and Equipment
- ----------------------
Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets, primarily five years.
Other Assets
- ------------
Other assets consists primarily of a barter credit asset, which will be realized
by the Company through future redemption of barter credits to be applied toward
advertising and purchase discounts (Note 5). In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company continually evaluates the carrying amount of this
asset for any potential impairment. Based on this evaluation, management
believes that there is no impairment as of October 31, 2001.
Research and Development Expenses
- ---------------------------------
Research and development expenses incurred by the Company are included in
selling, general and administrative expenses in the year incurred.
Income Taxes
- ------------
The Company recognizes deferred tax assets and liabilities for the estimated
future tax effects of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Stock-Based Compensation
- ------------------------
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied (Note 7).
Net (Loss) Per Share of Common Stock
- ------------------------------------
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
In accordance with SFAS 128, basic net (loss) per common share ("Basic EPS") is
computed by dividing net (loss) by the weighted average number of common shares
outstanding. Diluted net (loss) per common share ("Diluted EPS") is computed by
dividing net (loss) by the weighted average number of common shares and dilutive
common share equivalents and convertible securities then outstanding. SFAS No.
128 requires the presentation of both Basic EPS and Diluted EPS on the face of
the statements of operations. Diluted EPS for all years presented is the same as
Basic EPS, as the inclusion of the impact of common stock equivalents then
outstanding would be anti-dilutive.
F-13
COPYTELE, INC.
(Development Stage Enterprise)
Comprehensive Income
- --------------------
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
Comprehensive income is the total of net income and all other non-owner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive and other comprehensive
income must be reported on the face of the annual financial statements or, in
the case of interim reporting, in the footnotes to the financial statements. The
Company's operations did not give rise to items includible in comprehensive
income (loss) which were not already included in net income (loss). Accordingly,
the Company's comprehensive income (loss) is the same as its net income (loss)
for all periods presented.
Derivative Instruments
- ----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the balance sheet, measured at
fair value. Derivative instruments are recognized as gains or losses in the
period of change. If certain conditions are met where the derivative instrument
has been designated as a fair value hedge, the hedge items may also be marked to
market through earnings, thus creating an offset. If the derivative is designed
and qualifies as a cash flow hedge, the changes in fair value of the derivative
instrument may be recorded in comprehensive income. The Company's adoption of
SFAS No. 133 did not have a material impact on its financial position or results
of operations as the Company does not presently make use of derivative
instruments.
Recently Issued Accounting Standard
- -----------------------------------
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company is required to adopt this statement on November
1, 2002 and is in the process of evaluating any impact it will have on its
financial statements.
Fair Value of Financial Instruments
- -----------------------------------
The Company complies with the provisions of SFAS No. 107, "Disclosure about Fair
Value of Financial Instruments," which requires disclosures about the fair value
of financial instruments. In the opinion of the Company's management, the
carrying value of all financial instruments reflected in the accompanying
consolidated balance sheets approximated fair value as of October 31, 2001.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-14
COPYTELE, INC.
(Development Stage Enterprise)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with current year
presentation.
3. INVENTORIES
Inventories consist of the following as of:
October 31,
----------------------------------------
2001 2000
---------------- -----------------
Component parts $ 411,111 $ 558,286
Work-in-process 23,189 219,250
Finished products 1,155,050 991,749
----------------- -----------------
$ 1,589,350 $ 1,769,285
================= =================
4. JOINT VENTURE
Shanghai CopyTele Electronics Co., Ltd. (the "Joint Venture" or "SCE"), the
Company's 55%-owned joint venture in Shanghai, China, terminated operations
during fiscal 2000 and is in the process of being liquidated pursuant to a
formal Plan of Liquidation. In the opinion of management and its legal counsel,
the Company is not legally liable for any obligations of SCE, and accordingly,
the liquidation of SCE has not had any impact on the operations of the Company.
Accordingly, the Company has not presented any amounts due from Joint Venture or
amounts due to Joint Venture in the accompanying balance sheets, as these
amounts have been offset. All other related assets were previously reserved for
in fiscal 1999.
The Company controlled four of seven votes of the Joint Venture's board of
directors. However, decisions involving the Joint Venture required either a
unanimous or two-thirds vote of the Joint Venture's board of directors. Since
the Company had significant influence over the Joint Venture's operations but
did not have control, the Company has historically reflected its investment in
the Joint Venture under the equity method of accounting.
During fiscal 1999, in accordance with SFAS No. 121, the Company recognized a
permanent impairment charge of approximately $85,000 on its previously recorded
investment in Joint Venture, due to the uncertainty of SCE generating enough
future undiscounted cash flows to cover the carrying amount of the investment.
Additional investments in SCE in fiscal 2000 were directly expensed to the
statement of operations. Such investments were not material to the Company's
fiscal 2000 statement of operations. In addition, due to the uncertainty of
realizing the amounts due from SCE, the Company reserved approximately
$1,407,000 on its previously recorded amounts due from SCE during fiscal 1999.
5. BARTER TRANSACTION
In August 2000, the Company entered into a nonmonetary barter transaction
whereby $3,000,000 of certain inventory was sold in exchange for an equal value
of commercial trade credits. In accordance with APB No. 29, "Accounting for
Non-Monetary Transactions," the Company recognized no gain or loss on the
F-15
COPYTELE, INC.
(Development Stage Enterprise)
transaction as it was management's opinion that this exchange was effected at
fair market value. These trade credits ($2,853,000 as of October 31, 2001 - Note
2), which are recorded as other assets on the accompanying balance sheet, may be
redeemed to reduce the cost of advertising as well as other products and
services. Typical of such arrangements, in order to utilize barter credits, the
Company is required to pay a certain percentage of the advertising or other
expense in cash. The Company evaluates the ultimate realizability of their
commercial trade credits based on a plan of usage relative to their various
products. Based on its current plan, the Company believes that the credits will
be utilized in fiscal 2002 and are expected to be utilized through fiscal 2006.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
October 31,
--------------------------------------
2001 2000
------------ ------------
Accrued professional fees $ 16,526 $ 114,894
Accrued pension - 102,435
Accrued payroll 7,346 49,255
Accrued other 14,327 34,569
---------------- ----------------
$ 38,199 $ 301,153
================ ================
7. SHAREHOLDERS' EQUITY
Common Stock Issuances
- ----------------------
During fiscal 2001, the Company issued 1,707,725 shares of common stock to
certain employees for services rendered, principally in lieu of cash
compensation. In addition, the Company issued 271,815 shares of common stock to
consultants for services rendered.
Sales of Common Stock and Issuance of Warrants
- ----------------------------------------------
During fiscal 2000, the Company sold 616,500 shares of its common stock in four
private placements at an average price of $1.31 per share, for an aggregate of
$800,585 net of expenses. In conjunction with the sales of common stock, the
Company issued warrants to purchase 616,500 shares of common stock at exercise
prices equal to the fair market value of the common stock on the respective
dates of issuance, expiring on various dates through March 22, 2002.
During fiscal 1999, the Company sold 1,300,000 shares of its common stock in
eight private placements at an average price of $1.15 per share, or an aggregate
of $1,500,000 net of expenses, of which 500,000 shares were sold to an
individual who became a director of the Company in July 1999. In conjunction
with the sales of common stock, the Company issued warrants to purchase
1,300,000 shares of common stock at an average exercise price of $1.15 per
share, which expire on various dates through September 8, 2001.
Warrants to purchase 716,500 and 1,241,500 shares of common stock issued and
outstanding were exercisable as of October 31, 2001 and 2000, respectively.
F-16
COPYTELE, INC.
(Development Stage Enterprise)
Stock Splits
- ------------
On October 4, 1985, the Company declared a three-for-one stock split, effected
in the form of a 200% stock dividend, payable on November 8, 1985 to
shareholders of record as of October 15, 1985.
On August 13, 1987, the Company declared a five-for-four stock split, effected
in the form of a 25% stock dividend, payable on September 15, 1987 to
shareholders of record as of August 31, 1987.
On February 12, 1991, the Company declared a two-for-one stock split, effected
in the form of a 100% stock dividend, payable on March 18, 1991 to shareholders
of record as of February 25, 1991.
On May 24, 1996 the Company declared a two-for-one stock split, effected in the
form of a 100% stock dividend, payable on June 17, 1996 to shareholders of
record as of June 4, 1996.
The weighted average number of shares outstanding and net loss per share amounts
in the accompanying financial statements have been restated to reflect these
stock splits.
Preferred Stock
- ---------------
On May 29, 1986, the Company's shareholders authorized 500,000 shares of
preferred stock with a par value of $100 per share. The shares of preferred
stock may be issued in series at the direction of the Board of Directors, and
the relative rights, preferences and limitations of such shares will all be
determined by the Board of Directors.
Stock Option Plans
- ------------------
The Company has three stock option plans: the 1987 Stock Option Plan (the "1987
Plan"), the CopyTele, Inc. 1993 Stock Option Plan (the "1993 Plan"), and the
2000 Share Incentive Plan (the "2000 Share Plan"), which were adopted by the
Board of Directors on April 1, 1987, April 28, 1993, and May 8, 2000,
respectively.
SFAS No. 123, "Accounting for Stock Based Compensation," encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in APB No. 25. Compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. In accordance
with APB Opinion No. 25, no compensation cost has been recognized by the
Company, as all option grants have been made at the fair market value of the
Company's stock on the date of grant.
Had compensation cost for these plans been determined at fair value, consistent
with SFAS No. 123, the Company's net loss and net loss per share would have
increased to the following pro forma amounts:
F-17
COPYTELE, INC.
(Development Stage Enterprise)
For the Year Ended October 31,
---------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net (Loss): As Reported $ (3,571,957) $ (4,964,173) $ (8,465,016)
Pro Forma $ (4,903,739) $ (6,295,955) $ (10,560,690)
Basic and Diluted
Net (Loss) per share of common stock: As Reported $(.06) $(.08) $(.14)
Pro Forma $(.08) $(.10) $(.18)
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used for grants for the years ended October 31, 2001, 2000 and 1999,
respectively: risk free interest rates of 4.05%, 5.97% and 5.50%; expected
dividend yields of 0%; expected lives of 2.50, 2.50 and 3.53 years; and expected
stock price volatility of 62%, 85% and 78%. The weighted average fair value of
options granted under SFAS No. 123 for the years ended October 31, 2001, 2000
and 1999 was $0.55, $0.58 and $1.46, respectively.
Options granted to non-employee consultants are accounted for using the fair
value method required by SFAS No. 123. Compensation expense for consultants,
recognized in the years ended October 31, 2001, 2000, 1999 and the period from
inception (November 5, 1982) to October 31, 2001, was $229,620, $210,650,
$61,650 and $691,520, respectively. Such compensation expense was recognized in
accordance with Emerging Issues Task Force Issue No. 00-08, "Accounting by a
Grantee for an Equity Instrument to be Received in Conjunction with Providing
Goods or Services" and No. 96-18 "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," and is included in selling, general and administrative
expenses in the accompanying statements of operations.
In May 1987, the Company's shareholders approved the 1987 Plan which, after
giving consideration to the five-for-four and the two two-for-one stock splits,
as well as an amendment approved by shareholders in May 1990 to increase the
number of shares issuable under the 1987 Plan, provided for the granting of
stock options to purchase 9,000,000 shares of common stock of the Company. The
1987 Plan provided for the granting of incentive stock options to key employees,
and nonqualified stock options to key employees, consultants and directors of
the Company. The option prices were determined by the Board of Directors, but
with respect to incentive stock options, the option price could not be less than
the fair market value at the date of grant. The stock options are exercisable
over a period not to exceed 10 years, also as determined by the Board of
Directors. In July 1992, the Company registered the shares of common stock
covered by the 1987 Plan. Upon approval of the 1993 Plan by the Company's
shareholders in July 1993, the 1987 Plan was terminated with respect to the
grant of future options.
Information regarding the 1987 Plan for the three years ended October 31, 2001
is as follows:
F-18
COPYTELE, INC.
(Development Stage Enterprise)
Current Weighted
Average Exercise
Shares Price Per Share
-------------- ---------------------
Shares Under Option and Exercisable at October 31, 1998 648,560 $5.08
Expired (67,760) $5.00
--------------
Shares Under Option and Exercisable at October 31, 1999 580,800 $5.09
Expired (125,000) $3.20
--------------
Shares Under Option and Exercisable at October 31, 2000 455,800 $5.41
Expired (6,800) $4.25
--------------
Shares Under Option and Exercisable at October 31, 2001 449,000 $5.63
==============
The following table summarizes information about stock options outstanding under
the 1987 Plan as of October 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/01 Contractual Life Exercise Price at 10/31/01 Exercise Price
- ------------------------------------------------------------------------------ ---------------------------------------
$5.63 449,000 1.32 $5.63 449,000 $5.63
The exercise price with respect to all of the options granted under the 1987
Plan since its inception was at least equal to the fair market value of the
underlying common stock at the date of grant. As of October 31, 2001, all of the
options to purchase shares of common stock granted and outstanding under the
1987 Plan were exercisable.
On July 14, 1993, the Company's shareholders approved the 1993 Plan, which had
been adopted by the Company's Board of Directors on April 28, 1993. The 1993
Plan provided for the granting of incentive stock options and stock appreciation
rights to key employees, and non-qualified stock options and stock appreciation
rights to key employees and consultants of the Company. The 1993 Plan was
administered by the Stock Option Committee, which determined the option price,
term and provisions of each option. However, the purchase price of shares
issuable upon the exercise of incentive stock options could not be less than the
fair market value of such shares and incentive stock options are not exercisable
for more than 10 years. Upon approval of the 2000 Share Plan by the Company's
shareholders in July 2000, the 1993 Plan was terminated with respect to the
grant of future options.
Information regarding the 1993 Plan for the three years ended October 31, 2001
is as follows:
F-19
COPYTELE, INC.
(Development Stage Enterprise)
Current Weighted
Average Exercise
Shares Price Per Share
-------------- -------------------
Shares Under Option at October 31, 1998 13,704,360 $4.71
------------------
Granted 2,421,000 $1.46
Canceled (1,938,000) $5.34
Expired (50,000) $5.37
Exercised (886,200) $1.53
------------------
Shares Under Option at October 31, 1999 13,251,160 $4.22
------------------
Granted 1,939,000 $4.72
Canceled (1,118,700) $4.65
Expired (40,000) $4.47
Exercised (2,267,400) $1.03
------------------
Shares Under Option at October 31, 2000 11,764,060 $4.23
------------------
Canceled (887,280) $3.90
Shares Under Option and Exercisable at October 31, 2001 10,876,780 $4.26
==================
The following table summarizes information about stock options outstanding under
the 1993 Plan as of October 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/01 Contractual Life Exercise Price at 10/31/01 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$0.84 to $1.96 1,270,700 5.62 $1.26 1,270,700 $1.26
$2.19 to $3.16 1,099,500 5.40 $2.35 1,099,500 $2.35
$3.31 to $4.81 5,935,580 4.78 $4.24 5,935,580 $4.24
$5.75 to $6.88 2,571,000 3.23 $6.60 2,571,000 $6.60
The exercise price with respect to all of the options granted under the 1993
Plan, since its inception, was at least equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2001, all of the
options to purchase shares of common stock granted and outstanding under the
1993 Plan were exercisable.
On July 25, 2000, the Company's shareholders approved the 2000 Share Plan. The
maximum number of shares of common stock that may be granted is 5,000,000
shares. On July 6, 2001, the 2000 Share Plan was amended by the Company's Board
of Directors to increase the maximum number of shares of common stock that may
be granted to 10,000,000 shares. The 2000 Share Plan provides for the grant of
incentive stock options, nonqualified stock options, stock appreciation rights,
stock awards, performance awards and stock units to key employees and
consultants of the Company. Directors and future directors are automatically
granted nonqualified stock options to purchase 20,000 shares of common stock
upon their initial election to the Board of Directors and at the time of each
F-20
COPYTELE, INC.
(Development Stage Enterprise)
subsequent annual meeting of the Company's shareholders at which they are
elected to the Board of Directors.
The 2000 Share Plan is administered by the Stock Option Committee, which
determines the option price, term and provisions of each option; however, the
purchase price of shares issuable upon the exercise of incentive stock options
will not be less than the fair market value of such shares and incentive stock
options will not be exercisable for more than 10 years.
Information regarding the 2000 Share Plan for the year ended October 31, 2001 is
as follows:
Current Weighted
Average Exercise
Shares Price Per Share
--------------- ---------------------
Shares Under Option at October 31, 2000 1,144,000 $1.10
Granted 4,180,000 $0.55
Canceled (257,000) $0.75
Exercised (1,457,034) $0.57
--------------------
Shares Under Option at October 31, 2001 3,609,966 $0.70
====================
Options Exercisable at October 31, 2001 2,949,966 $0.77
====================
The following table summarizes information about stock options outstanding under
the 2000 Share Plan as of October 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------------- -----------------------------------------
Weighted Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/01 Contractual Life Exercise Price at 10/31/01 Exercise Price
- ------------------ -------------------- ------------------------ --------------------- ---------------------- ------------------
$0.40 1,435,000 9.71 $0.40 835,000 $0.40
$0.44 - $0.94 1,042,966 7.99 $0.69 982,966 $0.71
$1.00 - $1.38 1,132,000 8.36 $1.09 1,132,000 $1.09
The exercise price with respect to all of the options granted under the 2000
Share Plan since its inception, was at least equal to the fair market value of
the underlying common stock at the grant date. As of October 31, 2001, 3,156,555
options were available for future grants under the 2000 Share Plan.
8. COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases space at its principal location for office and laboratory
research facilities. The current lease is for approximately 12,900 square feet
and expires on November 30, 2003. The lease contains base rentals of
approximately $243,000 per annum with a 3% annual increase and an escalation
clause for increases in certain operating costs. The Company has the right to
cancel a portion of the lease as of November 30, 2002. This lease does not
contain provisions for its renewal.
F-21
COPYTELE, INC.
(Development Stage Enterprise)
Rent expense for the years ended October 31, 2001, 2000, 1999 and for the period
from inception (November 5, 1982) to October 31, 2001, was approximately
$284,000, $332,000, $313,000 and $3,040,000, respectively.
9. EMPLOYEE PENSION PLAN
The Company adopted a noncontributory defined contribution pension plan,
effective November 1, 1983, covering all of its present employees.
Contributions, which are made to a trust, are based upon specified percentages
of compensation, as defined in the plan. During fiscal 2001, the Company
terminated the plan. Pension expense of approximately $0, $102,000, $137,000 and
$907,000 for the fiscal years ended October 31, 2001, 2000, 1999 and for the
period from the inception of the plan to October 31, 2000, respectively, had
been accrued and funded on a current basis.
10. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended October 31,
--------------------------------------------------------------
2001 2000 1999
------------ ---------- ----------
Federal:
Current $ - $ - $ -
Deferred (1,118,000) (2,101,000) (1,849,000)
State:
Current - - -
Deferred 79,000 2,590,000 (267,000)
Adjustment to valuation allowance related
to net deferred tax assets (1,039,000) (489,000) 2,116,000
------------------ ------------------ ------------------
$ - $ - $ -
================== ================== ==================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset, net, at October 31, 2001 and 2000, are as follows:
2001 2000
-------------- -------------
Long-term deferred tax assets:
Reserve on amounts due from joint venture $ - $ 580,000
Federal and state NOL and tax credit carryforwards 33,496,000 31,957,000
Other 80,000 -
----------------- -----------------
Subtotal 33,576,000 32,537,000
Less: valuation allowance (33,576,000) (32,537,000)
----------------- -----------------
Deferred tax asset, net $ - $ -
================= =================
As of October 31, 2001, the Company had tax net operating loss and tax credit
carryforwards of approximately $81,070,000 and $1,767,000, respectively,
available, within statutory limits (expiring at various dates between 2002 and
2021), to offset any future regular Federal corporate taxable income and taxes
payable. If the tax benefits relating to deductions of option holders' income
F-22
COPYTELE, INC.
(Development Stage Enterprise)
are ultimately realized, those benefits will be credited directly to additional
paid-in capital. Certain changes in stock ownership can result in a limitation
on the amount of net operating loss and tax credit carryovers that can be
utilized each year.
The Company had tax net operating loss and tax credit carryforwards of
approximately $81,219,000 and $126,000, respectively, as of October 31, 2001,
available, within statutory limits, to offset future New York State corporate
taxable income and taxes payable, if any, under certain computations of such
taxes. The tax net operating loss carryforwards expire at various dates between
2002 and 2021 and the tax credit carryforwards expire between 2002 and 2016.
During the period from inception (November 5, 1982) to October 31, 2001, the
Company incurred no Federal and no material State income taxes.
11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While there is no formal agreement, the Company's Chairman of the Board and its
President waived any and all rights to receive salary and related pension
benefits for an undetermined period of time beginning November 1985. The
aggregate annual expenses for these individuals at the time of such waivers were
approximately $325,000.
Four other individuals, including an officer and three senior level personnel
then employed at the Company, waived salary and related pension benefits from
January 1987 through December 1990. While there are no formal agreements,
commencing January 1991, these individuals waived such rights for an
undetermined period of time and did not receive salary or related pension
benefits through December 1992. The Company's Chairman of the Board, its
President, and the three senior level personnel, continued to waive such rights
beginning in January 1993, for an undetermined period of time. From February
1993 to September 1998, one additional employee also waived such salary and
benefit rights. The aggregate annual expenses for these five individuals, then
employed at the Company, at the time of their respective initial waivers were
approximately $440,000. The Company does not anticipate the retroactive
reinstatement of any of the salary or related pension benefit waivers indicated
above.
12. SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131,"Disclosures about Segments
of an Enterprise and Related Information." Reportable operating segments are
determined based on the Company's management approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While the Company's results of operations
are primarily reviewed on a consolidated basis, the chief operating
decision-maker also manages the enterprise in two segments: (i) Flat-panel
display; and (ii) Encryption products. The following represents selected
consolidated financial information for the Company's segments for the year ended
October 31, 2001:
Segment Data Flat-Panel Display Encryption Products Total
------------------------ ---------------------- ------------------- -----------------
Net revenues $ 958,333 $ 732,435 $ 1,690,768
Net income (loss) 23,899 (3,595,856) (3,571,957)
Depreciation 13,331 153,172 166,503
Prior to fiscal 2001, the Company operated in one segment.
F-23
COPYTELE, INC.
(Development Stage Enterprise)
Geographic Information
- ----------------------
The Company's management assesses assets and non-operating income statement data
on a consolidated basis only, and the Company has not restated any other prior
period information, as it would be impracticable.
The Company generates revenue both domestically (United States) and
internationally. International revenues are based on the country in which the
Company's customer (distributor) is located. For the years ended October 31,
2001, 2000 and 1999, and as of each respective year-end, sales and accounts
receivable by geographic area are as follows:
Geographic Data 2001 2000 1999
------------------------------------------------ ------------ ------------ ------------
Revenue:
United States $ 581,885 $ 1,433,918 $ 46,877
Japan 958,333 - -
Other international 150,550 38,080 -
------------------ ------------------ ------------------
$ 1,690,768 $ 1,471,998 $ 46,877
================== ==================== ==================
Accounts receivable:
United States $ 468,716 $ 594,851 $ -
International 67,675 - -
------------------ -------------------- ------------------
$ 536,391 $ 594,851 $ -
================== ==================== ==================
13. QUARTERLY RESULTS AND SEASONALITY
The following table sets forth unaudited financial data for each of the
Company's last eight fiscal quarters:
Year Ended October 31, 2001 Year Ended October 31, 2000
--------------------------- ---------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Income Statement Data:
Total net revenues - Product
sales $ 178,291 $ 245,014 $182,495 $126,635 $276,792 $ 421,600 $492,196 $281,410
Collaborative agreements - - 333,333 625,000 - - - -
Gross profit 104,041 150,798 304,248 434,042 69,727 237,086 266,798 172,949
Net loss (1,130,136) (788,080) (946,307) (707,434) (1,334,654) (1,246,395) (973,856) (1,409,268)
Net loss per share of common
stock - basic and diluted $(0.02) $(0.01) $(0.01) $(0.01) $(0.02) $(0.02) $(0.02) $(0.02)
F-24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CopyTele, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of CopyTele, Inc. included in this Form
10-K and have issued our report thereon dated January 24, 2002. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This schedule (Schedule II - Valuation and Qualifying
Accounts) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
January 24, 2002
S-1
COPYTELE, INC.
(Development Stage Enterprise)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(rounded to the nearest thousand)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
Additions
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions end of period
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
2001
Allowance for doubtful accounts $ 75,400 $ 272,500 $ 107,900 $ 240,000
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
2000
Allowance for doubtful accounts $ - $ 75,400 $ - $ 75,400
Reserve on amounts due from Joint Venture $ 1,407,000 $ 862,000 $ 2,269,000 $ -
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
1999
Allowance for doubtful accounts $ - $ - $ - $ -
Reserve on amounts due from Joint Venture $ - $ 1,407,000 $ - $ 1,407,000
- ---------------------------------------------------- --------------------- -------------------- ----------------- ----------------
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
S-2
EXHIBIT INDEX
-------------
Exhibit
Ref. Number Description
- ---- ------ -----------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-Laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on March 12,
1990 and approved by shareholders on May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on July
14, 1993.
(f) 10.4 Amendment No. 1 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 3, 1995 and approved by
shareholders on July 19, 1995.
(g) 10.5 Amendment No. 2 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 10, 1996 and approved by
shareholders on July 24, 1996.
(h) 10.6 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc.
(i) 10.7 Stock Subscription Agreement dated April 27, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton.
(j) 10.8 Agreement dated July 28, 1999 among CopyTele, Inc.,
Harris Corporation and RF Communications.
(k) 10.9 Stock Subscription Agreement dated August 30, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton.
(l) 10.10 CopyTele, Inc. 2000 Share Incentive Plan.
(m) 10.11 Amendment No. 1 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 6, 2001 and approved
by shareholders on August 16, 2001.
(n) 10.12 Joint Cooperation Agreement for Field Emission
Displays, dated June 11, 2001, by and between
CopyTele, Inc. and Futaba Corporation.
(o) 10.13 Letter Agreement between CopyTele, Inc. and Futaba
Corporation, dated January 11, 2002.
10.14 Amendment, dated May 10, 2001, to the Joint
Cooperation Agreement between CopyTele, Inc. and
Volga Svet Ltd.
10.15 Letter Agreement between CopyTele, Inc. and Volga
Svet Ltd., dated as of February 1, 2002.
23.1 Consent of Arthur Andersen LLP.
- ------------------------
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 1992 and the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1990.
(e) Incorporated by reference to Proxy Statement dated June 10, 1993.
(f) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(g) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
(h) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1999.
(i) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1999.
(j) Incorporated by reference to Form 8-K dated July 28, 1999.
(k) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1999.
2
(l) Incorporated by reference to Annex A of the Company's Proxy Statement
dated June 12, 2000.
(m) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 2001.
(n) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 2001.
(o) Filed herewith.
3