SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On September 9, 2002, the registrant had outstanding 69,181,135 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
1
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Information with respect to financial statements 3
Condensed Balance Sheets as of July 31, 2002 (Unaudited) and
October 31, 2001 4
Condensed Statements of Operations (Unaudited) for the nine months
ended July 31, 2002 and 2001 5
Condensed Statements of Operations (Unaudited) for the three months
ended July 31, 2002 and 2001 6
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended July 31, 2002 and 2001 7
Notes to Condensed Financial Statements (Unaudited) 8-15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 16-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 28
SIGNATURES 29
CERTIFICATIONS 30
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
---------------------
INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS
Our quarterly report for the period ended April 30, 2002 included financial
statements which, at the time the report was filed with the SEC, had not been
reviewed by an independent public accountant pursuant to Rule 10-01 (d) of
Regulation S-X. This was because we elected not to have Arthur Andersen LLP, our
former independent public accountants, conduct the review, as allowed under
temporary SEC regulations applicable to issuers that recently used Arthur
Andersen as their independent public accountants, but no longer do so. Our new
independent public accountants, Grant Thornton LLP, completed the review
required by Rule 10-01 (d) of Regulation S-X of the financial statements
included in our quarterly report for the period ended April 30, 2002 within the
sixty day period required by the temporary SEC regulations. The financial
statements included in our quarterly report for the period ended April 30, 2002
remain unchanged.
3
COPYTELE, INC.
--------------
CONDENSED BALANCE SHEETS
------------------------
(Unaudited)
July 31, October 31,
ASSETS 2002 2001
------
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,301,748 $ 1,316,860
Accounts receivable, net of allowance for doubtful accounts of
$145,000 and $240,000, respectively 201,943 536,391
Other receivables 322,952 -
Inventories 1,516,553 1,589,350
Prepaid expenses and other current assets 136,669 136,902
------------------ ------------------
Total current assets 3,479,865 3,579,503
PROPERTY AND EQUIPMENT, net 84,280 119,487
OTHER ASSETS 11,302 2,863,413
------------------ ------------------
$ 3,575,447 $ 6,562,403
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 340,892 $ 816,011
Accrued liabilities 52,854 38,199
Deferred revenue - 1,541,667
------------------ ------------------
Total current liabilities 393,746 2,395,877
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; 68,839,145 and 66,521,100 shares issued
and outstanding, respectively
688,391 665,211
Additional paid-in capital 63,260,715 62,197,370
Accumulated deficit (60,767,405) (58,696,055)
------------------ ------------------
3,181,701 4,166,526
------------------ ------------------
$ 3,575,447 $ 6,562,403
================== ==================
The accompanying notes are an integral part of these condensed balance sheets.
4
COPYTELE, INC.
--------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
---------------------------------------------
For the nine months ended
--------------------------------------
July 31,
---------------------------------------
2002 2001
----------------- -----------------
REVENUES $ 5,148,023 $ 939,133
COST OF REVENUES 1,761,983 380,046
----------------- -----------------
Gross profit 3,386,040 559,087
RESEARCH AND DEVELOPMENT EXPENSES 1,075,274 1,654,457
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,581,517 1,688,958
----------------- -----------------
Income (loss) from operations 729,249 (2,784,328)
IMPAIRMENT LOSS ON COMMERCIAL TRADE BARTER CREDITS (2,820,800) (100,000)
INTEREST INCOME 20,201 19,805
----------------- -----------------
Net loss $(2,071,350) $ (2,864,523)
================= =================
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.03) $ (0.04)
================= =================
Shares used in computing net loss per share:
Basic and Diluted 67,657,539 64,078,349
================ =================
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
--------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months ended
--------------------------------------
July 31,
---------------------------------------
2002 2001
----------------- -----------------
REVENUES $ 1,253,859 $ 515,828
COST OF REVENUES 507,876 211,580
----------------- -----------------
Gross profit 745,983 304,248
RESEARCH AND DEVELOPMENT EXPENSES 381,583 539,421
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 578,478 620,722
----------------- -----------------
Loss from operations (214,078) (855,895)
IMPAIRMENT LOSS ON COMMERCIAL TRADE BARTER CREDITS (2,820,800) (100,000)
INTEREST INCOME 5,694 9,588
----------------- -----------------
Net loss $(3,029,184) $ (946,307)
================= =================
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.04) $ (0.01)
================= =================
Shares used in computing net loss per share:
Basic and Diluted 68,349,693 65,009,379
================= =================
The accompanying notes are an integral part of these condensed statements.
6
COPYTELE, INC.
--------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------
For the nine months ended
July 31,
----------------------------------
2002 2001
------------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(3,650,574) $(2,921,753)
Cash received from customers 642,852 382,756
Cash received from collaborative agreements 3,000,000 2,500,000
Interest received 20,201 19,805
------------------ ------------
Net cash provided by (used in) operating activities 12,479 (19,192)
------------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment
(35,591) (15,971)
Proceeds from maturities of investments - 96,873
------------------ ------------
Net cash (used in) provided by investing activities (35,591) 80,902
------------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration costs 8,000 819,759
------------------ ------------
Net cash provided by financing activities 8,000 819,759
------------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,112) 881,469
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,316,860 1,134,045
------------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,301,748 $ 2,015,514
================== ============
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (2,071,350) $(2,864,523)
Impairment loss on commercial trade barter credits 2,820,800 100,000
Stock option compensation to consultants - 132,508
Stock awards granted to employees and consultants pursuant to stock
incentive plans
1,078,525 600,023
Stock issued to consultants for services rendered
- 95,000
Provision for doubtful accounts
(25,000) 123,500
Depreciation and amortization
70,798 156,511
Change in operating assets and liabilities:
Accounts receivable and other receivables 36,496 (223,044)
Inventories 72,797 149,441
Prepaid expenses and other current assets 233 (158,767)
Other assets 31,311 5,145
Accounts payable and accrued liabilities (460,464) (301,653)
Deferred revenue (1,541,667) 2,166,667
----------------- ------------
Net cash provided by (used in) operating activities $ 12,479 $ (19,192)
================= ============
The accompanying notes are an integral part of these condensed statements.
7
COPYTELE, INC.
--------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(UNAUDITED)
---------
(1) Nature and Development of Business and Other Disclosures
--------------------------------------------------------
Organization and Development of Business
- ----------------------------------------
CopyTele, Inc. was incorporated on November 5, 1982 and was a development stage
enterprise from inception through our fiscal year ended October 31, 2001. In the
quarter ended January 31, 2002, we met the Statement of Financial Accounting
Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage
Enterprises" requirements to no longer present our financial statements as a
development stage enterprise.
Our principal operations include the development, production and marketing of
multi-functional encryption products that provide information security for
domestic and international users over virtually every communications media and
the development of a full-color video display.
Our line of encryption products presently includes the USS-900 (Universal Secure
System), the DSS-1000 (Digital Security System), the DCS-1200 and DCS-1400
(Digital Cellular/Satellite), the STS-1500 (Secure Teleconferencing System) and
the ULP-1 (Ultimate Laptop Privacy). These encryption products are
multi-functional, hardware-based digital encryption systems that provide
high-grade encryption using either the Citadel(TM) CCX encryption cryptographic
chip (which is manufactured by the Harris Corporation) or the Triple DES or the
new Advanced Encryption Standard ("AES") algorithm (algorithms available in the
public domain which are used by many U.S. government agencies). We are
continuing our research and development activities for additional encryption
products.
We are also continuing our research and development activities with respect to
flat panel display technologies, including our thin flat video color display
("Field Emission Display" or "FED") and our ultra-high resolution charged
particle E-Paper(TM) flat panel display. Using our planar edge emission
technology, we have developed engineering operational models of a 3-inch
(diagonal) full-color video Field Emission Display with 160 x 170 pixels. We
believe that smaller and larger displays can be made with this technology.
We had been developing our Field Emission Display technology with Futaba
Corporation ("Futaba") pursuant to the Joint Cooperation Agreement for Field
Emission Displays (the "Futaba Agreement") which we entered into with Futaba in
June 2001 for the purpose of jointly developing and commercializing a full-color
video display utilizing our Field Emission Display technology. After extensive
negotiations, we were unable to reach agreement with Futaba with respect to the
terms of continuing our joint efforts to develop and commercialize our Field
Emission Display technology, and on June 4, 2002 we received notification from
Futaba terminating the Futaba Agreement. We are now evaluating our options for
further developing and commercializing our technology.
8
In June 2001, we received the initial $2,500,000 payment provided for by the
Futaba Agreement for the first phase of development ("Phase I") of a prototype
for a 320 x 240 pixel, 5-inch diagonal display. During Phase I, which was
contractually defined as a one-year period, we were 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 payments to us for partial compensation
for use of our technology developed prior to entering into the Futaba Agreement.
In accordance with this provision, in January 2002, we received an additional
payment of $3,000,000 relating to Phase I.
Additionally, in May 2001, we entered into an agreement with Volga Svet, Ltd.
("Volga") for certain development efforts in connection with the FED technology.
Under this agreement, we agreed to pay Volga the sum of $180,000 per quarter for
its development work during the first year of the Volga Agreement, which was
paid in full as of April 30, 2002. In connection with the additional $3,000,000
payment received from Futaba, we entered into a letter agreement, effective as
of February 1, 2002, to pay Volga a total of $750,000 (payable during the three
months ended April 30, 2002 and July 31, 2002, in the amounts of $450,000 and
$300,000, respectively) to continue development under Phase I of the Futaba
Agreement.
Funding and Management's Plans
- ------------------------------
From our inception through June 2001, we have met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our 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. Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash from sales of our encryption products, and,
commencing in June 2001, we began to receive development payments from Futaba
under the Futaba Agreement.
During the nine months ended July 31, 2002, our operating activities provided
approximately $12,000 in cash. This resulted from $3,000,000 in payments
received from Futaba, cash of approximately $643,000 received from collections
of accounts receivable related to sales of encryption products and approximately
$20,000 of interest income received, which was offset by payments to suppliers,
employees and consultants of approximately $3,651,000. In addition, we received
approximately $8,000 in cash upon the exercise of stock options and purchased
approximately $36,000 of equipment. As a result, our cash and cash equivalents
at July 31, 2002 decreased to approximately $1,302,000 from approximately
$1,317,000 at the end of fiscal 2001. We believe that our existing cash and net
accounts receivable, together with cash flows from future sales of encryption
products and other potential sources of cash flows, will be sufficient to enable
us to continue in operation until at least the end of the third quarter of
fiscal 2003.
We are seeking to improve our liquidity through increased sales or license of
products and technology and may also seek to improve our liquidity through sales
of debt or equity securities. Despite the foregoing, there can be no assurance
that we will generate significant revenues in the future (through sales or
otherwise) to improve our liquidity, that we will generate sufficient revenues
to sustain future operations and/or profitability, that we will be able to
expand our current distributor/dealer network, that production capabilities will
be adequate, or that other
9
products will not be produced by other companies that will render our
products obsolete, or that other sources of funding would be available, if
needed, at terms that we would deem favorable.
Our common stock is listed on The Nasdaq SmallCap Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid price of at least $1 per share and we maintain either stockholders'
equity of $2,500,000, or market capitalization of $35,000,000, or net income in
the last complete fiscal year of $500,000. The closing bid price of our common
stock on September 9, 2002, was $0.35, and it has been below $1 since February
12, 2001. In August 2002, Nasdaq notified us that our common stock is subject to
delisting if, at anytime before February 10, 2003, the bid price of our common
stock fails to close at $1 per share or more for a minimum of 10 consecutive
trading days. A delisting of our common stock could have an adverse effect on
the market price and liquidity of our common stock.
Basis of Presentation
- ---------------------
The condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The
information contained herein is for the nine and three-month periods ended July
31, 2002 and 2001. In management's opinion, all adjustments (consisting only of
normal recurring adjustments considered necessary for a fair presentation of the
results of operations for such periods) have been included herein.
The results of operations for interim periods may not necessarily reflect the
results of operations for a full year. Reference is made to the audited
financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended October 31, 2001, for more extensive disclosures
than contained in these condensed financial statements.
Realizability of Assets
- -----------------------
Management has recorded inventory at the lower of cost or management's current
best estimate of net realizable value, which is based upon the historic and/or
expected future selling prices of our products. 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.
As more fully discussed in Note 2, we continually evaluated the carrying amount
of our commercial trade barter credits for any impairment loss. As a result of
this evaluation, we wrote off all unused barter credits during the three months
ended July 31, 2002.
Product Development
- -------------------
The success and profitability of our products will depend upon many factors,
many of which are beyond our control. These factors include our ability to
market our products; long-term product performance; the ability of our dealers
and distributors to adequately service our products; our ability to maintain an
acceptable pricing level to our customers; the ability of suppliers to meet our
requirements and schedule; our ability to successfully develop new products;
rapidly changing
10
consumer preferences; and the possible development of competitive products
that could render our products obsolete or unmarketable.
Revenue Recognition
- -------------------
We recognize 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) our
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 Futaba under the Futaba Agreement
has been recognized ratably over Phase I, the period of our commitment
under this portion of the contract. The $3 million payment received
from Futaba under the Futaba Agreement during the three months ended
January 31, 2002 has been recognized ratably over the remaining term of
Phase I.
Sales Returns and Allowances
----------------------------
Revenues are recorded net of sales returns. There were no sales returns
during the nine and three-month periods ended July 31, 2002 and 2001.
Based upon a specific review and in accordance with our contractual
return policy, management believes that no reserve for anticipated
sales returns is required as of July 31, 2002.
Deferred Revenue
----------------
Payments received from Futaba under the Futaba Agreement, which are in
excess of the amounts recognized as revenue, are recorded as deferred
revenue in the accompanying condensed balance sheet. As of July 31,
2002, revenue has been recognized on all payments received from Futaba.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
11
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform with current
period presentation.
Impact of Recent Accounting Pronouncements
- ------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") finalized
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets". SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 141
also requires that we recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to
all business combinations initiated after July 1, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142, that we reclassify the carrying amounts of intangible assets
and goodwill based on the criteria in SFAS No. 141. We do not believe the
adoption of SFAS No. 141 will have a material effect, if any, on our financial
position or results of operations.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that we identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires that we complete a transitional
goodwill impairment test nine months from the date of adoption. Management is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The adoption of SFAS No. 142
will have no effect on our financial position or results of operations as we do
not have any intangible assets falling under the scope of this statement.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do
not believe the adoption of SFAS No. 143 will have a material effect on our
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. We do
not believe the adoption of SFAS No. 144 will have a material effect on our
financial position or results of operations.
12
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
No.145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. SFAS
No. 145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. We do not believe the adoption of SFAS No. 145 will have a material effect
on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. We do not believe the adoption
of SFAS No. 146 will have a material effect on our financial position or results
of operations.
(2) Barter Transaction and Associated Impairment
--------------------------------------------
In August 2000, we entered into a nonmonetary barter transaction in which we
sold $3,000,000 of certain inventory in exchange for an equal value of
commercial trade credits. In accordance with APB No. 29, "Accounting for
Non-Monetary Transactions," we recognized no gain or loss on the transaction as
it was management's opinion that this exchange was effected at fair market
value. These trade credits, which are recorded as other assets on the
accompanying condensed balance sheet as of October 31, 2001, may be redeemed to
reduce the cost of advertising as well as other products and services. As is
typical of such arrangements, to utilize barter credits we must pay a certain
percentage of the advertising or other expense in cash. In accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," we continually evaluate the carrying amount of this
asset for any potential impairment.
Unused barter credits at May 1, 2002 aggregated approximately $2,821,000. To
utilize these barter credits in exchange for advertising and purchase discounts,
we must pay between 65-70% of the transaction value in cash. Because our
anticipated cash flow has been negatively affected by the termination of the
Futaba Agreement, our ability to make such payments and thereby utilize the
barter credits is uncertain. Therefore, during the three months ended July 31,
2002, we wrote off all unused barter credits, thereby recognizing an impairment
loss in the amount of approximately $2,821,000.
13
(3) Inventories
-----------
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market, which represents our best estimate of market value.
Inventories consist of the following as of:
July 31, October 31,
2002 2001
---------------- ------------
Component parts $ 431,540 $ 411,111
Work-in-process 31,662 23,189
Finished products 1,053,351 1,155,050
---------------- ---------------
$ 1,516,553 $ 1,589,350
================ ===============
(4) Other Receivables
-----------------
In May and June 2002, we received restricted common stock from a customer in
connection with an outstanding accounts receivable balance of approximately
$323,000. We anticipate settling this accounts receivable balance through the
sale of the restricted common stock. Any deficiency between the proceeds from
the sale of the restricted common stock and the balance of the outstanding
accounts receivable balance will be cured by the customer and/or its principal
shareholder.
(5) Stock Incentive Plans
---------------------
We have three stock incentive plans: the 1987 Stock Option Plan, the CopyTele,
Inc. 1993 Stock Option Plan, and the CopyTele, Inc. 2000 Share Incentive Plan
(the "2000 Share Plan"), which were adopted by our 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. We have chosen to continue to account for
stock options granted to employees using the intrinsic value method prescribed
in APB Opinion No. 25 "Accounting for Stock Issued to Employees". Compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of our stock at the date of grant over the amount an employee must pay to
acquire the stock. In accordance with APB Opinion No. 25, we have not recognized
any compensation cost, as all option grants to employees have been made at the
fair market value of our stock on the date of grant.
We account for options granted to non-employee consultants using the fair value
method required by SFAS No. 123. Such compensation expense for consultant's
options in the nine-month periods ended July 31, 2002 and 2001, was
approximately $0 and $133,000, respectively, and in the three-month periods
ended July 31, 2002 and 2001, was approximately $0 and $30,000, 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 either research and development expenses or selling, general and
administrative expenses, as applicable, in the accompanying condensed statements
of operations.
14
During the nine month period ended July 31, 2002, we granted options to purchase
59,000 shares and stock awards of 2,298,045 shares, all pursuant to the 2000
Share Plan. As of July 31, 2002, options to purchase 14,704,746 shares were
outstanding, of which stock options to purchase 14,585,746 shares were
exercisable, pursuant to our stock incentive plans. During the period from July
1, 2002 through September 9, 2002, we granted stock awards of 341,990 shares,
pursuant to the 2000 Share plan.
(6) Net Loss Per Share of Common Stock
----------------------------------
We comply with the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 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 periods presented is the same
as Basic EPS, as the inclusion of the effect of common stock equivalents then
outstanding would be anti-dilutive. Excluded from the calculation for the
nine-month and three-month periods ended July 31, 2002 were options to purchase
14,704,746 shares, and for the nine-month and three-month periods ended July 31,
2001 were options to purchase 13,894,546 shares and warrants to purchase
1,373,250 shares.
(7) Segment Information
-------------------
We follow the provisions of SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information." Reportable operating segments are
determined based on management `s 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 our 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.
Prior to commencement of the Futaba Agreement in June 2001, we operated in
one segment. The following represents selected financial information for our
segments for the nine-month and three-month periods ended July 31, 2002 and
2001:
For the nine months ended For the three months ended
----------------------------------------------- ------------------------------------------------
-------------- --------------- ---------------- --------------- --------------- ----------------
Flat-Panel Encryption Flat-Panel Encryption
Display Products Total Display Products Total
------- -------- ----- ------- -------- -----
July 31, 2002:
Net revenues $4,541,667 $ 606,356 $5,148,023 $1,083,667 $ 170,192 $1,253,859
Net income (loss) 2,266,381 (4,337,731) (2,071,350) 367,978 (3,397,162) (3,029,184)
Depreciation 32,966 37,833 70,799 7,780 14,021 21,801
July 31, 2001:
Net revenues $ 333,333 $ 605,800 $ 939,133 $ 333,333 $ 182,495 $ 515,828
Net (loss) (7,578) (2,856,945) (2,864,523) (7,578) (938,729) (946,307)
Depreciation 7,009 149,501 156,510 7,009 38,606 45,615
15
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Forward-Looking Statements
- --------------------------
Information included in this Quarterly Report on Form 10-Q 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. 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 "General Risks and
Uncertainties" below and Note 1 to Condensed Financial Statements. You should
read the following discussion and analysis along with our Annual Report on Form
10-K for the year ended October 31, 2001 and the condensed financial statements
included in this Report. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
Report.
GENERAL
- -------
We were a development stage enterprise from inception through our fiscal year
ended October 31, 2001. In the quarter ended January 31, 2002, we met the
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting by
Development Stage Enterprises" requirements to no longer present our financial
statements as a development stage enterprise.
Our principal operations include the development, production and marketing of
multi-functional encryption products that provide information security for
domestic and international users over virtually every communications media and
the development of a full-color video display.
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. These encryption
products are multi-functional, hardware-based digital encryption systems that
provide high-grade encryption using either the Citadel(TM) CCX encryption
cryptographic chip (which is manufactured by the Harris Corporation) or the
Triple DES or the new Advanced Encryption Standard ("AES") algorithm (algorithms
available in the public domain which are used by many U.S. government agencies).
We are continuing our research and development activities for additional
encryption products.
We are currently using several U.S.-based electronic production contractors to
produce the components for our encryption devices. We sell our products
primarily through a distributor/dealer network and also to end-users.
We are also continuing our research and development activities with respect to
flat panel display technologies, including our thin flat video color display
("Field Emission Display" or "FED") and
16
our ultra-high resolution charged particle E-Paper(TM) flat panel display. Using
our planar edge emission technology, we have developed engineering operational
models of a 3-inch (diagonal) full-color video Field Emission Display with 160 x
170 pixels and a 5-inch (diagonal) monochrome video Field Emission Display with
320 x 240 pixels. We believe that our display:
- can be produced in a variety of sizes, permitting its use for any
application from hand-held to HDTV devices;
- can function in a broad environmental range, similar to a CRT;
- has low power consumption requirements;
- can be viewed from a wide angle, similar to a CRT; and
- has high brightness with full color video capability.
We had been developing our Field Emission Display technology with Futaba
Corporation ("Futaba") pursuant to the Joint Cooperation Agreement for Field
Emission Displays (the "Futaba Agreement") which we entered into with Futaba in
June 2001 for the purpose of jointly developing and commercializing a full-color
video display utilizing our Field Emission Display technology. After extensive
negotiations, we were unable to reach agreement with Futaba with respect to the
terms of continuing our joint efforts to develop and commercialize our Field
Emission Display technology, and on June 4, 2002 we received notification from
Futaba terminating the Futaba Agreement. Since the termination, we have been
continuing to communicate with Futaba in an attempt to reach common ground on
certain issues. The main issues include whether Futaba has an effective license
to our FED technology and whether Futaba can use that technology. Our position
is that Futaba has no such license or right. Futaba has acknowledged that, even
if it does have a license, that license requires that a royalty be agreed upon
if Futaba sells products using our FED technology.
Additionally, in May 2001, we entered into an agreement (the "Volga Agreement")
with Volga Svet, Ltd. ("Volga") for certain development efforts in connection
with the FED technology. We and Volga are continuing to develop larger
prototypes of our FED display. In addition, we are in discussions with several
major companies who could produce displays using our FED technology for use in
their own products.
RESULTS OF OPERATIONS
- ---------------------
Nine months ended July 31, 2002 compared with nine months ended July 31, 2001
Product Sales
Revenues
- --------
Revenues from product sales were approximately $606,000 in both the nine-month
period ended July 31, 2002 and in the comparable prior year period. Product
sales included an increase in sales of Magicom products of approximately $98,000
(from approximately $23,000 in the nine-month period ended July 31, 2001 to
approximately $121,000 in the nine-month period ended July 31, 2002), offset by
a decline in sales of other products of approximately $98,000 (from
approximately $583,000 in the nine-month period ended July 31, 2001 to
approximately $485,000 in the nine-
17
month period ended July 31, 2002). All product sales are encryption
products. We discontinued production of Magicom products in fiscal 2000, but
continue to sell our remaining inventory. All Magicom sales during the
nine-month period ended July, 2002 were made at our inventory carrying value.
Our product sales have been limited and are sensitive to individual large
transactions. We believe that changes in product sales between periods generally
represents the nature of the early stage of our product and sales channel
development.
Gross Profit
Gross profit from product sales decreased by approximately $66,000 in the nine
months ended July 31, 2002, to approximately $288,000, compared to approximately
$354,000 in the comparable prior-year period. Product sales gross profit as a
percentage of sales decreased to approximately 48% in the nine-month period
ended July 31, 2002, compared to approximately 58% in the comparable prior-year
period. The decrease in product sales gross profit as a percentage of sales
resulted primarily from the increase noted above in the portion of current
period sales consisting of Magicom products, as compared to the prior-year
period. Because we have discontinued the Magicom products, we have reduced our
selling prices for those products from our original pricing, and accordingly our
gross profit on sales of the Magicom products is significantly lower than for
our other products.
Collaborative Agreement
- -----------------------
Revenues
We recognized collaborative agreement revenues of approximately $4,542,000 under
the Futaba Agreement in the nine-months ended July 31, 2002, as compared to
approximately $333,000 in the comparable period-year period, an increase of
approximately $4,209,000. We recognize payments received from Futaba as income
ratably over Phase I of the Futaba Agreement. As Futaba has given notice
terminating the Futaba Agreement, we do not anticipate receiving any further
revenue under the Futaba Agreement after the July 31, 2002 period.
Gross Profit
Gross profit from collaborative agreement increased by approximately $2,893,000,
to approximately $3,098,000, in the nine-month period ended July 31, 2002 as a
result of revenues recognized under the Futaba Agreement, as compared to
approximately $205,000 in the comparable prior-year period. Gross profit from
collaborative agreement in the nine-month period ended July 31, 2002 is net of
cost of revenues of approximately $1,444,000 consisting of research and
development costs relating to FED technology, including cost of revenue related
to the Volga Agreement of approximately $1,194,000. Collaborative agreement cost
of revenues for the nine months ended July 31, 2001 were approximately $128,000,
including cost of revenue related to the Volga Agreement of approximately
$96,000. Research and development costs relating to FED technology were included
in research and development expenses prior to the commencement of the Futaba
Agreement in June 2001 and after its termination in June 2002.
18
Research and Development Expenses
- ---------------------------------
Research and development expenses decreased approximately $579,000 to
approximately $1,075,000 for the nine months ended July 31, 2002, from
approximately $1,654,000 for the comparable prior-year period. The decrease in
research and development expenses reflects the classification as costs of
revenues of development efforts related to FED technology during the term of the
Futaba Agreement, rather than research and development expenses. In addition,
employee compensation and related costs were reduced by approximately $96,000,
non-employee consultant expense was reduced by approximately $81,000,
depreciation expense decreased by approximately $ 67,000, engineering supplies
expense decreased by approximately $41,000, and outside R&D costs were reduced
by approximately $29,000.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by approximately $107,000
to approximately $1,582,000 for the nine-month period ended July 31, 2002 from
approximately $1,689,000 for the comparable prior-year period. The decrease in
selling, general and administrative expenses reflects a reduction in the
provision for doubtful accounts of approximately $149,000, and a reduction in
non-employee consulting expense of approximately $102,000, offset by an increase
in professional fees of approximately $95,000 and an increase in advertising
expense of approximately $40,000.
Impairment Loss on Commercial Trade Barter Credits
- --------------------------------------------------
During the three months ended July 31, 2002, we recognized an impairment loss in
the amount of approximately $2,821,000 in connection with unused commercial
trade barter credits. These trade credits may be redeemed to reduce the cost of
advertising as well as other products and services. To utilize these barter
credits in exchange for advertising and purchase discounts, we must pay between
65-70% of the transaction value in cash. Because our anticipated cash flow has
been negatively affected by the termination of the Futaba Agreement, our ability
to make such payments and thereby utilize the barter credits is uncertain.
During the three months ended July 31, 2001, we recognized an impairment charge
in the amount of $100,000 related to the commercial trade barter credits.
Interest Income
- ---------------
Interest income was approximately $20,000 in each of the nine-month periods
ended July 31, 2002 and 2001, respectively. This resulted from an increase in
average funds available for investment offset by a reduction in prevailing
interest rates.
Three months ended July 31, 2002 compared with three months ended July 31, 2001
- -------------------------------------------------------------------------------
Product Sales
- -------------
Revenues
Revenues from product sales decreased by approximately $13,000, to approximately
$170,000, in the three-month period ended July 31, 2002, from approximately
$183,000 in the comparable
19
prior-year period. Product sales included sales of Magicom products of
approximately $21,000 in both periods. Sales of other products decreased by
approximately $12,000, from approximately $161,000 in the three-month period
ended July 31, 2001 to approximately $149,000 in the three-month period ended
July 31, 2002. Our product sales have been limited and are sensitive to
individual large transactions, and a reduction in the number of such
transactions resulted in lower unit sales.
Gross Profit
Gross profit from product sales decreased by approximately $22,000 in the three
months ended July 31, 2002, to approximately $77,000, compared to approximately
$99,000 in the comparable prior-year period. Gross profit from product sales as
a percentage of sales decreased to approximately 45% in the three-month period
ended July 31, 2002, compared to approximately 54% in the comparable prior-year
period. Product sales gross profit as a percentage of sales was reduced in both
periods because each of the periods included approximately $21,000 of sales of
Magicom products. Because we have discontinued the Magicom products, we have
reduced our selling prices for those products from our original pricing, and
accordingly our gross profit on sales of the Magicom products is significantly
lower than for our other products. The decrease in product sales gross profit
between the periods resulted primarily from normal pricing variations.
Collaborative Agreement
- -----------------------
Revenues
We recognized collaborative agreement revenues of approximately $1,084,000 under
the Futaba Agreement in the three months ended July 31, 2002, as compared to
approximately $333,000 in the comparable period-year period, an increase of
approximately $751,000. We recognize payments received from Futaba as income
ratably over Phase I of the Futaba Agreement. As Futaba has given notice
terminating the Futaba Agreement, we do not anticipate receiving any further
revenue under the Futaba Agreement after the July 31, 2002 period.
Gross Profit
Gross profit from collaborative agreement increased by approximately $464,000,
to approximately $669,000, in the three-month period ended July 31, 2002 as a
result of revenues recognized under the Futaba Agreement, as compared to
approximately $205,000 in the comparable prior-year period. Gross profit from
collaborative agreement in the three-month period ended July 31, 2002 is net of
cost of revenues of approximately $415,000 consisting of research and
development costs relating to FED technology, including cost of revenue related
to the Volga Agreement of approximately $355,000. Collaborative agreement cost
of revenues for the three months ended July 31, 2001 were approximately
$128,000, including cost of revenue related to the Volga Agreement of
approximately $96,000. Research and development costs relating to FED technology
were included in research and development expenses prior to the commencement of
the Futaba Agreement in June 2001 and after its termination in June 2002.
Research and Development Expenses
- ---------------------------------
Research and development expenses decreased approximately $157,000 to
approximately $382,000 for the three months ended July 31, 2002, from
approximately $539,000 for the comparable prior-
20
year period. The decrease in research and development expenses reflects
the classification as costs of revenues of development efforts related to FED
technology during the term of the Futaba Agreement, rather than research and
development expense. In addition, employee compensation and related costs were
reduced by approximately $60,000, engineering supplies expense decreased by
approximately $31,000, non-employee consultant expense was reduced by
approximately $27,000, and depreciation expense decreased by approximately
$19,000, offset by an increase in patent related costs of approximately $13,000.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by approximately $43,000
to approximately $578,000 for the three-month period ended July 31, 2002 from
approximately $621,000 for the three-month period ended July 31, 2001. The
decrease in selling, general and administrative expenses reflects a reduction in
the provision for doubtful accounts of approximately $89,000, offset by an
increase in professional fees of approximately $44,000 and an increase in
advertising expense of approximately $23,000.
Impairment Loss on Commercial Trade Barter Credits
- --------------------------------------------------
During the three months ended July 31, 2002, we recognized an impairment loss in
the amount of approximately $2,821,000 in connection with unused commercial
trade barter credits. These trade credits may be redeemed to reduce the cost of
advertising as well as other products and services. To utilize these barter
credits in exchange for advertising and purchase discounts, we must pay between
65-70% of the transaction value in cash. Because our anticipated cash flow has
been negatively affected by the termination of the Futaba Agreement, our ability
to make such payments and thereby utilize the barter credits is uncertain.
During the three months ended July 31, 2001, we recognized an impairment charge
in the amount of $100,000 related to the commercial trade barter credits.
Interest Income
- ---------------
Interest income decreased by approximately $4,000 to approximately $6,000 in the
three months ended July 31, 2002 as compared to approximately $10,000 in the
comparable period in the prior-year, primarily as a result of an increase in
average funds available for investment offset by a reduction in prevailing
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In June 2001, we received the initial $2,500,000 payment provided for by the
Futaba Agreement 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 an ultra-bright
screen. The Futaba Agreement further provided for negotiations between the
parties regarding additional compensation to us for the use of our technology
developed prior to entering into the Futaba Agreement. In January 2002, Futaba
paid us an additional $3,000,000 as partial compensation for the use of this
technology.
21
We agreed to pay Volga the sum of $180,000 per quarter for its development
work during the first year of the Volga Agreement, which was paid in full as of
April 30, 2002. 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, to pay Volga a total of $750,000 in
connection with the $3,000,000 we received from Futaba in January 2002. The
$750,000 was payable in installments over a five-month period ending in June
2002. The funds received by Volga are required to be used primarily for research
and development and for purchasing facilities and production areas for FED
technology.
From our inception through June 2001, we met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our 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. Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash from sales of our encryption products, and,
commencing in June 2001, we began to receive development payments from Futaba
under the Futaba Agreement.
During the nine months ended July 31, 2002, our operating activities provided
approximately $12,000 in cash. This resulted from $3,000,000 in payments
received from Futaba, cash of approximately $643,000 received from collections
of accounts receivable related to sales of encryption products and approximately
$20,000 of interest income received, which was offset by payments to suppliers,
employees and consultants of approximately $3,651,000. In addition, we received
approximately $8,000 in cash upon the exercise of stock options and purchased
approximately $36,000 of equipment. As a result, our cash and cash equivalents
at July 31, 2002 decreased to approximately $1,302,000 from approximately
$1,317,000 at the end of fiscal 2001.
Accounts receivable and other receivables decreased by approximately $11,000
from approximately $536,000 at the end of fiscal 2001 to approximately $525,000
at July 31, 2002. The decrease in accounts receivable is a result of the timing
of collections, offset by the reduction in the allowance for doubtful accounts.
Inventories decreased approximately $72,000 from approximately $1,589,000 at
October 31, 2001 to approximately $1,517,000 at July 31, 2002, as a result of
the timing of shipments and production schedules. Prepaid expenses and other
assets did not change materially during the period. Accounts payable and accrued
liabilities decreased by approximately $460,000 from approximately $854,000 at
the end of fiscal 2001 to approximately $394,000 at July 31, 2002, as a result
of the decrease in operating expenses and the timing of payments. We recognize
the cash received from Futaba as income ratably over Phase I; accordingly,
deferred revenue represents the portion not yet recognized as income. Deferred
revenue decreased from approximately $1,542,000 at October 31, 2001 to $0 at
July 31, 2002.
As a result of these changes, working capital at July 31, 2002 increased to
approximately $3,086,000 from approximately $1,184,000 at the end of fiscal
2001.
Our working capital includes inventory of approximately $1,517,000 and
$1,589,000 at July 31, 2002 and 2001, respectively. Management has recorded our
inventory at the lower of cost or our current best estimate of net realizable
value. 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 our current carrying value.
22
Unused barter credits at May 1, 2002 aggregated approximately $2,821,000.
To utilize these barter credits in exchange for advertising and purchase
discounts, we must pay between 65-70% of the transaction value in cash. Because
our anticipated cash flow has been negatively affected by the termination of the
Futaba Agreement, our ability to make such payments and thereby utilize the
barter credits is uncertain. Therefore, during the three months ended July 31,
2002, we wrote off all unused barter credits, thereby recognizing an impairment
loss in the amount of approximately $2,821,000.
Our plans and expectations for our working capital needs also assume that our
Chairman of the Board, President and other senior level personnel will continue
to perform services without cash compensation or pension benefits. There can be
no assurance that such personnel will continue to provide such services without
such compensation.
We believe that our existing cash and net accounts receivable, together with
cash flows from future sales of encryption products and other potential sources
of cash flows, will be sufficient to enable us to continue in operation until at
least the end of the third 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 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.
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 the nine months ended July 31, 2002, we have
recognized revenues from product sales of approximately $606,000 and revenues in
connection with the Futaba Agreement of approximately $4,542,000.
Our common stock is listed on The Nasdaq SmallCap Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid price of at least $1 per share and we maintain either stockholders'
equity of $2,500,000, or market capitalization of $35,000,000, or net income in
the last complete fiscal year of $500,000. The closing bid price of our common
stock on September 9, 2002, was $0.35, and it has been below $1 since February
12, 2001. In August 2002, Nasdaq notified us that our common stock is subject to
delisting if, at anytime before February 10, 2003, the bid price of our common
stock fails to close at $1 per share or more for a minimum of 10 consecutive
trading days. A delisting of our common stock could have an adverse effect on
the market price and liquidity of our common stock.
23
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our financial statements are prepared in conformity with accounting principles
generally accepted in the United State of America. As such, we are required to
make certain estimates, judgments and assumptions that management believes are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
We believe the following critical accounting polices affect the more significant
judgments and estimates used in the preparation of our financial statements. For
additional discussion on the application of these and other accounting polices,
refer to the financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended October 31, 2001.
Revenue Recognition
- -------------------
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) our 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.
Revenues are recorded net of sales returns. Based upon a specific review and in
accordance with our contractual return policy, management believes that no
reserve for anticipated sales returns is required as of July 31, 2002.
Collaborative Agreement
We recognize payments received from Futaba as income ratably over Phase I of the
Futaba Agreement. As Futaba has given notice terminating the Futaba Agreement,
we will not receive any further revenue under the Futaba Agreement after the
July 31, 2002 period.
Inventories
- -----------
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market, which represents our best estimate of market value. We
regularly review inventory quantities on hand, particularly finished goods, and
record a provision for excess and obsolete inventory based primarily on
forecasts of future product demand. Our net income is directly affected by
management's estimate of the realizability of inventories.
Valuation of Long-Lived Assets
- ------------------------------
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important that could trigger an impairment review include a
significant underperformance relative to expected historical or projected future
operating results and cash flows, a significant change in the manner
24
of the use of the asset or a significant negative industry or economic
trend. When management determines that the carrying value of long-lived asset
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the carrying amount of the asset would be written down
to reflect the impairment.
During the three months ended July 31, 2002, we recognized an impairment
loss in the amount of approximately $2,821,000 in connection with unused
commercial trade barter credits. These trade credits may be redeemed to reduce
the cost of advertising as well as other products and services. To utilize these
barter credits in exchange for advertising and purchase discounts, we must pay
between 65-70% of the transaction value in cash. Because our anticipated cash
flow has been negatively affected by the termination of the Futaba Agreement,
our ability to make such payments and thereby utilize the barter credits is
uncertain.
Stock Option Compensation
- -------------------------
We account for stock options granted to employees using the intrinsic value
method prescribed in APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and comply with the disclosure provision of SFAS No. 123 "Accounting
for Stock Based Compensation". If we were to include the cost of employee stock
option compensation in the financial statements, our operating results would
decline based on the fair value of the stock options granted to employees.
GENERAL RISKS AND UNCERTAINTIES
- -------------------------------
Our business involves a high degree of risk and uncertainty, including, but not
limited to, the following risks and uncertainties:
- - In prior periods we had experienced significant net losses and negative
cash flows from operations and they may occur again.
Although we had income from operations for the nine-month period ended July 31,
2002, in prior periods we had losses and negative cash flows from operations. We
may incur substantial losses and experience substantial negative cash flows from
operations in the future. Our income from operations for the nine-month period
ended July 31, 2002 resulted largely from payments from Futaba under the Futaba
Agreement. The Futaba Agreement terminated in June 2002, and it is likely that
we will again incur substantial losses.
We have incurred substantial costs and expenses in developing our encryption and
flat panel display technologies and in our efforts to produce commercially
marketable products incorporating our technology. We have had limited sales of
products to support our operations from inception through July 31, 2002. We have
set forth below our net (losses), research and development expenses and net cash
provided by (used in) operations for the nine-month periods ended July 31, 2002
and 2001, and for the fiscal years ended October 31, 2001 and 2000:
25
(Unaudited)
Nine Months Ended Fiscal Years Ended
July 31, October 31,
------------------------------- ------------------------------
2002 2001 2001 2000
---- ---- ---- ----
Net (loss) $ (2,071,350) $(2,864,523) $(3,571,957) $(4,964,173)
Research and development $ 1,075,274 $ 1,654,457 $ 2,325,000 $ 2,732,000
Net cash (used in) provided by operations $ 12,479 $ (19,192) $ (717,845) $(4,840,578)
- - We may need additional funding in the future which may not be available on
acceptable terms and, if available, may result in dilution to our
stockholders.
We anticipate that, if cash generated from operations is insufficient to satisfy
our requirements, we will require additional funding to continue our research
and development activities, market our products and satisfy the
continued-listing standards for the Nasdaq Stock Market. We believe that our
existing cash and net accounts receivable, together with cash flows from sales
of encryption products and other potential sources of cash flows, will be
sufficient to enable us to continue in operation until at least the end of the
third 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 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.
- - We may not generate sufficient revenues to support our operations in the
future or to generate profits.
We are engaged in two principal operations: (i) developing, manufacturing and
marketing encryption products for voice, fax, and data communications and (ii)
with Volga, developing an advanced flat panel video display technology. Our
encryption products are only in their initial stages of commercial production
and our flat panel display technology is still in the research and development
stage. Our investments in research and development are considerable. 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:
- our ability to successfully market our line of encryption products;
- our production capabilities and those of our suppliers as required for
the production of our encryption products;
- long-term product performance and the capability of our dealers and
distributors to adequately service our products;
- our ability to maintain an acceptable pricing level to end-users for
our products;
- the ability of suppliers to meet our requirements and schedule;
- our ability to successfully develop our new products under
development;
- rapidly changing consumer preferences;
26
- the possible development of competitive products that could render our
products obsolete or unmarketable;
- our ability to further develop and to commercialize our flat panel
display technology in light of the termination of the Futaba
Agreement;
- our ability to jointly develop with Volga a full-color video display
that can be successfully marketed; and
- our future negotiations with Volga with respect to payments and other
arrangements under the Volga Agreement.
Because our revenue is subject to fluctuation, we may be unable to reduce
operating expenses quickly enough to offset any unexpected revenue shortfall. If
we have a shortfall in revenue in relation to expenses, our operating results
would suffer. Our operating results for any particular quarter may not be
indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of results of operations as an indication of our
future performance.
- - We are dependent upon a few key executives and the loss of their services
could adversely affect us.
Our future success is dependent on our ability to hire, retain and motivate
highly qualified personnel. In particular, our success depends on the continued
efforts of our Chief Executive Officer, Denis A. Krusos, and our President,
Frank J. DiSanto, who founded our company in 1982 and are engaged in the
management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
- - The very competitive markets for our encryption products and flat panel
display technology could have a harmful effect on our business and
operating results.
The markets for our encryption products and flat panel display technology
worldwide are 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. Competitive pressures may have a harmful effect on our
business and operating results.
- - If we are unable to maintain our Nasdaq Stock Market listing, the market
price of our common stock could be adversely affected.
Our common stock is listed on The Nasdaq SmallCap Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid price of at least $1 per share and we maintain either stockholders'
equity of $2,500,000, or market capitalization of $35,000,000, or net income in
the last complete fiscal year of $500,000. The closing bid price of our common
stock on September 9, 2002, was $0.35, and it has been below $1 since February
12, 2001. In August 2002, Nasdaq notified us that our common stock is subject to
delisting if, at anytime before February 10, 2003, the bid price of our common
stock fails to close at $1 per share or more for
27
a minimum of 10 consecutive trading days. A delisting of our common stock
could have an adverse effect on the market price and liquidity of our common
stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
Not applicable.
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
99.1 Statement of Chief Executive Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated September 16, 2002.
99.2 Statement of Chief Financial Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated September 16, 2002.
(b) Reports on Form 8-K
-------------------
The Company filed one Current Report on Form 8-K, dated June
6, 2002, during the quarter ended July 31, 2002, which
reported regarding a change in our independent accountants
under Item 4.
28
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CopyTele, Inc.
By: /s/ Denis A. Krusos
--------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
September 16, 2002 (Principal Executive Officer)
By: /s/ Frank J. DiSanto
--------------------
Frank J. DiSanto
September 16, 2002 President
By: /s/ Henry P. Herms
--------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
September 16, 2002 Financial and Accounting Officer)
29
CERTIFICATIONS
--------------
I, Denis A. Krusos, Chairman of the Board and Chief Executive Officer of
CopyTele, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CopyTele, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ Denis A. Krusos
-------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
September 16, 2002 (Principal Executive Officer)
I, Henry P. Herms, Vice President - Finance and Chief Financial Officer of
CopyTele, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CopyTele, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ Henry P. Herms
------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
September 16, 2002 Financial and Accounting Officer)
30
Exhibit 99.1
------------
Statement of Chief Executive Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code, the
undersigned, Denis A. Krusos, the Chairman of the Board and Chief Executive
Officer of CopyTele, Inc., hereby certifies that:
1. The Company's Form 10-Q Quarterly Report for the period ended July 31,
2002 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Denis A. Krusos
-------------------
Denis A. Krusos
Chairman of the Board,
September 16, 2002 Chief Executive Officer
Exhibit 99.2
------------
Statement of Chief Financial Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned,
Henry P. Herms, the Vice President - Finance and Chief Financial Officer of
CopyTele, Inc., hereby certifies that:
1. The Company's Form 10-Q Quarterly Report for the period ended July 31,
2002 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Henry P. Herms
------------------
Henry P. Herms
Vice President - Finance and
September 16, 2002 Chief Financial Officer