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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, 2002
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
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COPYTELE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
(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:
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Title of Each Class Name of Each Exchange
on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
Common Stock, $.01 par value
(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].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [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 April 30, 2002 (the
last business day of the registrant's most recently completed second fiscal
quarter), computed by reference to the closing sale price of the registrant's
Common Stock on the Nasdaq National Market on such date ($0.52): $32,723,098.
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 February 6, 2003, the registrant had outstanding 72,433,870 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
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DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
Item 1. Business.
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,"
"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" below. 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 Annual Report on Form 10-K.
Overview
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 encryption products provide high-grade information security to
computers and to accommodate cellular, satellite, digital and ordinary telephone
lines for voice, fax and data encryption. They are available with either the
high-grade encryption of the Harris Corporation digital cryptographic chip - the
Citadel(TM) CCX - or the Triple DES or the new Advanced Encryption Standard
("AES") algorithms (algorithms available in the public domain which are used by
many U.S. government agencies). We are continuing our research and development
activities for encryption products.
We are also continuing our research and development activities for flat
panel display technologies, including our thin-film video color displays ("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 our display:
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- - can be produced in a variety of sizes, permitting its use for any
application from hand-held to high definition TV ("HDTV") devices;
- - can function in a broad environmental range, similar to a cathode ray tube
("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.
From June 2001 until June 2002, we worked with Futaba Corporation
("Futaba") of Japan under a Joint Cooperating Agreement for Field Emission
Displays (the "Futaba Agreement") to jointly develop a full-color video display
utilizing our field emission display technology. During that period, with the
additional assistance of Volga Svet Ltd. ("Volga"), a Russian display company,
we developed a 3-inch (diagonal) engineering model consisting of 160 x 170
pixels and having full color video capability. Since June 2002, working with
Volga under a Joint Cooperation Agreement (the "Volga Agreement"), we have
developed additional engineering models using the technology, including a 5-inch
(diagonal) monochrome video display having 320 x 240 pixels. We have also worked
with Volga to improve our FED technology, developing technology that results in
substantially higher brightness than conventional CRTs and LCD or plasma flat
panel displays. Together with Volga, we have incorporated this high brightness
technology into engineering models of a 3.7-inch (diagonal) monochrome video
display having 160 x 80 pixels and a 5-inch (diagonal) monochrome video display
having 320 x 240 pixels. We have recently received, from the U.S. patent office,
a notice of allowance of the claims contained in our patent application for two
variations of our FED technology.
We have used these engineering models to begin discussing commercial
production of our displays with potential purchasers. We are negotiating to
supply two potential purchasers with up to 5-inch (diagonal) high brightness
displays, to be produced by Volga using its current production facilities and
supplied to us, for incorporation into the purchaser's products for industrial
and governmental applications. We have also received a letter of intent from a
large U.S. company to provide larger, color displays for certain of its
products. This letter of intent requires, among other things, that we develop
technology for our displays that we are able to commercially produce and that
the displays meet certain technical specifications and price and market
conditions. Volga will also need to upgrade its production facilities to meet
the requirements of the letter of intent, and will need to obtain financing for
that upgrade. There can be no assurance that we can produce such displays, that
these purchasers will purchase any displays from us, or of the revenue we might
derive from such sales.
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
Our business involves a high degree of risk and uncertainty,
including, but not limited to, the following risks and uncertainties:
- - We have experienced significant net losses and negative cash flows from
operations 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. While payments from
Futaba under the Futaba Agreement provided substantial cash from operations in
the year ended October 31, 2002, since the Futaba Agreement terminated in June
2002, it is possible that we will again incur 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
October 31, 2002. We have set forth below our net losses, research and
development expenses and net cash used in operations for the three fiscal years
ended October 31, 2002:
Fiscal Years Ended October 31,
2002 2001 2000
---- ---- ----
Net loss.............................................$ 3,285,240 $ 3,571,957 $ 4,964,173
Research and development expenses....................$ 1,625,974 $ 2,324,949 $ 2,732,229
Net cash used in operations..........................$ 431,471 $ 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, and our auditors have issued a "going concern" audit opinion.
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. The auditor's report
on our financial statements as of October 31, 2002 states that the net loss
incurred during the year ended October 31, 2002, our accumulated deficit as of
that date, and the other factors described in Note 1 to the Financial Statements
raise substantial doubt about our ability to continue as a going concern. Our
financial statements have been prepared assuming we will continue as a going
concern and do not include any adjustments that might result from the outcome of
this uncertainty.
Based on reductions in operating expenses that have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing cash and accounts receivable, together with cash flows from expected
sales of encryption products and flat panel displays, and other potential
sources of cash flows, will be sufficient to enable us to continue in operation
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until at least the end of the first quarter of fiscal 2004. We anticipate that,
thereafter, we will require additional funds to continue marketing, production,
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 arrangements with respect
to additional financing.
- - We may not generate sufficient revenue 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 and marketing an advanced flat panel video display
technology. Our encryption products are only in their initial stages of
commercial production and we have not yet begun commercial production of our
flat panel displays. Our investments in research and development are
considerable. Our ability to generate sufficient revenue 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 encryption products;
- - our ability to maintain an acceptable pricing level to end-users for our
encryption products;
- - the ability of suppliers to meet our requirements and schedule;
- - our ability to successfully develop our new encryption products under
development;
- - rapidly changing consumer preferences;
- - the possible development of competitive products that could render our
encryption 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;
- - the capability of Volga to produce video displays and supply them to us;
and
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- - 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 fiscal year may not be
indicative of future operating results. You should not rely on year-to-year
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 SmallCap 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 of at least $1 per share and that 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. Our stockholders' equity as of
October 31, 2002 was approximately $2,317,000. The closing bid price of our
common stock on February 6, 2003, was $0.17, 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 the bid price of our common stock fails to close at $1
per share or more for a minimum of 10 consecutive trading days prior to February
10, 2003. Since we did not regain compliance during that period, Nadaq could
provide written notification that our securities will be delisted. Upon
receiving such notification we intend to request a hearing, which is usually
held within 45 days, during which time our common stock would remain listed on
The Nasdaq SmallCap Market. As a result of that hearing, our common stock could
be delisted. A delisting of our common stock could have an adverse affect on the
market price and liquidity of our common stock.
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Products
Encryption Products
We are producing and marketing a line of high-grade, hardware and software
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.
The features common to all our hardware communication products are as
follows:
- - Simple, one button operation. Secure communication is indicated by a
blinking red light becoming solid red.
- - Every session uses a new secret encryption key to both encrypt and decrypt
information.
- - All units use a random number generator as part of the secret key system.
- - Encryption from point-to-point communication utilizing one of our products
at each end.
- - Export approval received from the U.S. Department of Commerce using the
Citadel(TM) CCX from Harris Corporation or Triple DES or AES algorithms and
a minimum 128-bit encryption key length.
- - Small, lightweight, and enclosed in a plastic case.
- - Low power consumption.
Our line of encryption products is as follows:
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DCS-1200
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:
- - Battery or AC powered.
- - Keypad for dialing a data connection through a cell or satellite phone's
RS232 port.
- - Two RS232 ports, one for the phone and one for computer file operations.
- - Rechargeable lithium ion battery with an internal charger.
- - Encrypts voice and data in the same phone call.
- - Encrypts local files for privacy or for secure e-mail attachment
transmission.
- - Encrypts e-mail addresses to guard against the spread of viruses.
- - Connects between the handset and the base of digital PBX telephones.
- - Communication speeds from 2400 to 9600 BPS.
- - Headset provided for private discrete communication.
- - Small, portable device, weighing approximately 9 ounces and with dimensions
of 6" deep x 4.38" wide x 1.38" high.
DCS-1400
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:
- - As a voice-only solution, the DCS-1400 has one RS232 port for connection
through a cell or satellite phone's data port.
- - Battery or AC powered.
- - Smaller than a typical cell phone, weighing approximately 3 ounces with
dimensions of 5" deep x 2.2" wide x .4" high.
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- - Keypad for dialing a data connection through a cell or satellite phone's
RS232 port.
- - Encrypts local files for privacy or for secure e-mail attachments.
- - Encrypts e-mail addresses to guard against the spread of viruses.
- - Rechargeable lithium ion battery with an internal charger.
- - Communication speeds from 2400 to 9600 BPS.
- - Headset provided for private discrete communication.
STS-1500
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:
- - Provides fully encrypted voice communication from remote locations to a
central teleconferencing center.
- - Remote users can speak to hub participants as well as each other over fully
encrypted links.
- - Complete point-to-point secure conversations can be easily established.
- - Can be used to encrypt voice calls made to cellular, satellite, digital and
analog telephones.
- - Easy to install and operate and prevents third-party intervention.
USS-900
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:
- - Encrypts e-mail addresses to guard against the spread of viruses.
- - Encrypts any computer file as an e-mail attachment that can be sent over
the Internet or an ordinary telephone line.
- - Interfaces with virtually any analog telephone, allowing easy encryption of
voice communication.
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- - Interfaces with virtually any analog fax machine attended or unattended,
ensuring cryptographic communication of information.
- - Interfaces with a computer, ensuring cryptographic communication of
information between computers.
- - 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.
- - 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.
- - Interfaces with multiple telephone lines to provide multi-person encrypted
communications over ordinary telephone lines.
- - 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.
- - Small, compact device weighing approximately 9 ounces and with dimensions
of 6" deep x 4.38" wide x 1.38" high.
We have also developed for medical and governmental applications a version
of the USS-900 which is designed to operate automatically in the clear or the
encrypted mode for fax applications only.
In addition, we have recently developed the USS-900 Security Software, a
stand-alone software security product derived from the USS-900 software, to
secure data files and e-mail attachments in both desktop and laptop computers
utilizing Windows operating systems. This product is available at a
substantially lower cost than the ULP-1 and is aimed to address a larger
potential market.
ULP-1
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.
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New Technologies Under Development
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 have made software modifications to all our products in order to
accommodate the Citadel(TM) CCX, Triple DES, or AES algorithms. We have
developed software to provide additional features to the ULP-1, 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. We have also developed a software security product derived from the
USS-900 software. In addition, we are evaluating the ability of the DCS-1200 to
interface with high governmental security devices over satellite communication.
We are continuing the process of obtaining U.S. federal government
certification for our encryption products. To obtain certification, we are
modifying our software and other technology to conform to the requirements of
the government's published standards. The certification would attest that our
products meet such standards and that the features described in our
specification sheets are actually implemented in our products.
Flat Panel Display Technology
During 2002, we continued to pursue our efforts to develop new technologies
for color, video flat panel displays.
Thin Film Video Color Display (Field Emission Display Technology)
FED technology is one of the most promising candidates to replace CRTs.
CRTs have been highly successful for decades, but are bulky and power hungry.
FED technology, by contrast, holds promise of allowing us to build a display
that will preserve the desirable characteristics of a CRT - including full
color; a wide viewing angle; the ability to operate in severe environmental
conditions; and a long operational life - in a much more compact,
energy-efficient, flat panel display.
Both CRTs and FEDs create images by directing electrons at a phosphor, a
material which glows when stuck. Different phosphors glow red, green, or blue,
creating the familiar RGB combination from which we can make any color. By
controlling the pattern of phosphors struck, we control the images created. The
major difference between FED technology and CRTs is that, while CRTs emit the
electrons from a single large point source, FEDs emit electrons from a field of
small sources. This allows for a flatter device, since we do not need to make
room for a single bulky CRT gun.
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We have developed several variations of our FED technology. We have
recently received from the U.S. patent office a notice of allowance of the
claims contained in our patent application for two of the variations. One of
these variations is an FED structure which starts with two sheets of clear, thin
glass. A coating of patterned layers of electrically conductive and insulator
materials forms a matrix of pixels, or dots. This layer both emits the
electrons, in a controllable pattern, and focuses the electron emissions. This
emitter/focuser is made from a specially developed composite material which is
electrically, mechanically and chemically stable. A second coating consists of a
layer of red, green, and blue phosphors which creates the image. The structure
also includes a flat metal surface, which controls the quantity of electrons
emitted to the phosphors. Spacers - glass columns - hold the glass sheets apart.
Air is evacuated from between the sheets, creating a vacuum, and the entire
structure is sealed.
This unique design includes several major advances. First, other FED
technologies require a separate element in their structure to focus the electron
emissions. By using a single element to both emit and focus the electrons, our
design reduces the complexity and cost of manufacturing. Our design can be
produced using existing flat panel production facilities. Second, directing
electrons from the metallic surface to the phosphors, rather than directly from
the emitter as in other FED technologies, should provide a longer operational
life than is obtained with other FED technologies. In addition, our emitter
operates on low voltages, thereby saving energy, and can be controlled by low
cost electronics of the type now used by liquid crystal displays ("LCDs").
Finally, in this structure, the electron emitters remain cold even during normal
operation.
This type of FED contains the features of the CRT, but in a very thin,
lightweight device which consumes considerably less power and potentially can be
produced at a lower cost than existing flat panel display technologies such as
thin film transistor LCDs and plasma TV displays. We believe our FED could be
used in a wide range of devices, from small hand-held devices such as cellular
phones and personal digital assistants ("PDAs") to large-screen HDTVs and
stadium-size viewscreens.
We are developing our technology for our FED display through more than a
five-year program with Volga. In June 2001, we entered into the Futaba
Agreement, to implement our technology utilizing Futaba's facilities. We
modified our design to accommodate Futaba's fabrication requirements, and worked
with Futaba to calibrate its equipment to our technology's requirements. With
the assistance of Volga, we first produced an initial display of approximately
1.2-inch diagonal, with 64 x 64 RGB pixels, to confirm our ability to produce
our FEDs with Futaba's facilities. Utilizing Futaba's facilities, a 3-inch
diagonal display was then produced having 160 x 170 RGB pixels, or approximately
80 dots per inch.
Following this success, however, we were unable to reach an agreement with
Futaba on terms to continue to work together. As we announced on June 5, 2002,
Futaba elected to terminate our 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.
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Since the termination of the Futaba Agreement, we have made advances in our
FED technology. This has included the development, along with Volga, of
engineering models of a 5-inch (diagonal) monochrome video display having 320 x
240 pixels. We have also worked with Volga to improve our FED technology,
developing technology incorporating high brightness capability. In most
presently available displays, a high ambient light environment essentially
washes out the displayed image. It is desirable to have a flat panel display to
operate effectively from low to high ambient light conditions. The display we
are developing accomplishes this goal with technology that produces
substantially higher brightness than conventional CRTs and LCD or plasma flat
panel displays. Together with Volga, we have incorporated this high brightness
technology into engineering models of a 3.7-inch (diagonal) monochrome video
display having 160 x 80 pixels and a 5-inch (diagonal) monochrome video display
having 320 x 240 pixels.
We have used these engineering models to demonstrate this high brightness
technology to several organizations to begin discussing commercial production of
our displays with potential purchasers that might incorporate the displays into
industrial and governmental applications. We are negotiating to supply two
potential purchasers with up to 5-inch (diagonal) high brightness displays, to
be produced by Volga using its current production facilities and supplied to us,
for incorporation into the purchaser's products for industrial and governmental
applications. (See Production - Video Display Products.) We have also received a
letter of intent from a large U.S. company to provide larger, color displays for
certain of its products. This letter of intent requires, among other things,
that we develop technology for our displays that we are able to commercially
produce and that the displays meet certain technical specifications and price
and market conditions. Volga will also need to upgrade its production facilities
to meet the requirements of the letter of intent, and will need to obtain
financing for that upgrade. There can be no assurance that we can produce such
displays, that these purchasers will purchase any displays from us, or of the
revenue we might derive from such sales.
We are also further developing our high brightness FED technology to
provide full color in displays sizes up to large-screen HDTVs and stadium-size
viewscreens.
E-Paper(TM) Flat Panel Display
The technology utilized in the E-Paper(TM) ultra-high resolution display
that we previously developed continued to be 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 such as a printed page, one at a time. We believe it is
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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.
To further develop this technology, we have been 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 agglomerating. We cannot give you any assurance, however, that we will
be able to develop a commercially marketable display of this type.
In addition, we have been developing the E-Paper(TM) display matrix
electronic driver technology for use in our FED displays.
Production
Encryption Products
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
four 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 one production assembly contractor. 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
currently produce our line of products to meet marketing requirements.
Video Display Products
We plan to use Volga to produce our displays for us. We are currently
working with Volga to set up Volga's current facilities as a production source
13
for high brightness monochrome and color video displays. Volga is working with
several Russian companies that are supplying components of the displays to
Volga. We believe that, at its current facilities, Volga could produce displays
that would meet the display requirements associated with two potential
purchasers of the displays, based on our discussions with those purchasers. We
also believe that other interested companies could be supplied by Volga's
current facilities. We are, however, working with Volga to expand Volga's
existing production facilities. Volga would expand its facilities to accommodate
state-of-the-art equipment including clean rooms and lithographic, deposition,
glass handling, processing, testing and evaluation equipment. We would supply
production equipment and technical services to Volga in the amount of
approximately $25 million upon Volga's purchase orders, supported by letters of
credit, to us. This expansion would help allow us to meet the requirements of
the letter of intent (discussed above) we have received from a large U.S.
company to provide displays for its products. Volga is negotiating with a
Russian finance group to obtain long term financing for this project. There can
be no assurance that the long term financing would be obtained by Volga under
favorable terms and conditions.
Marketing
Encryption
With the creation of the U.S. Department of Homeland Security, there is a
long range potential for both corporations and governments to increase their
communication security. We believe that this potential will result in creating a
stronger demand for our encryption products in the coming years. We also believe
that our wide range of hardware and software based encryption solutions can
potentially meet the security demands of many of these organizations.
Previously, we have attempted to meet these potential security requirements
by utilizing a network of dealers and distributors. Recently, we also began
working with large organizations that are adding security products to their
existing product lines. Our goal is to establish a mutually beneficial
arrangement with such organizations that will meet the needs of such
organizations' customers while also substantially increasing the security market
penetration of our products. We currently are supplying and working with two
large organizations to accomplish this goal. We marketed our ULP-1 Privacy Card
through the catalog of one of these organizations in the second half of 2002.
This program has provided valuable insight into methods by which we might secure
computer information on a broader scale. As a result, we have proposed to this
organization and other major companies our USS-900 Security Software solution
for both desktop and laptop computers that can be incorporated into each
computer before the computer is sold to the consumer, so that every consumer's
computer would contain features to permit security for data files and e-mail
attachments.
The other organization has world-wide marketing capabilities for their
office products, especially in the health field. Our patented USS-900 is capable
of encrypting medical information sent via fax by private and governmental
medical groups, hospitals, and doctors. We have added features to our USS-900
14
that we are supplying to this organization to meet medical fax programs. Based
on marketing inputs from this program, we have formulated a low cost rental plan
which adds a small rental charge, similar to cell phones, with the goal of
making our products more affordable and potentially increase market demand. We
are currently in discussions with this organization to determine the best method
to market our USS-900, including our rental plan. We have also received from a
U.S. company a letter of intent to incorporate our USS-900 Security Software
solution into its cellular and satellite voice and data communications product.
In addition to the above marketing efforts, we are directly marketing to
major corporations and government agencies. We have recently developed and
completed a secure voice conferencing system for two Fortune 500 companies. We
have also started a program with a large company to provide security for its fax
products which are to be sold to multi-national governmental organizations.
While these programs are not currently large, we believe that they have the
potential to grow and that they are seed programs that have the potential to
help us obtain larger programs.
In addition, we presently use a network of distributors in the security
field and original equipment manufacturers who market our encryption products on
a non-exclusive basis. The distributors generally are parties to one-year
renewable agreements that do not contain significant minimum purchase
requirements. These 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 continue to provide training and technical support to our customers and
to our distributors and dealers and to display our encryption products at major
security and electronic trade shows.
Video Display Products
We are utilizing engineering models of our display, incorporating our high
brightness technology, to demonstrate the capabilities of our displays to
potential users. We presently have, at our facility, models that allow for video
inputs, supplied by a desktop computer, of data and pictures with scrolling
capabilities. We are also presenting our displays to major corporations that
could incorporate our displays into their products. Since our technology is
suitable for hand held, TV, and monitor devices, we are seeking potential
purchasers that have a wide range of products.
We are negotiating to supply two potential purchasers with up to 5-inch
(diagonal) high brightness displays, to be produced by Volga using its current
production facilities and supplied to us, for incorporation into the purchaser's
products for industrial and governmental applications. We have also received a
letter of intent from a large U.S. company to provide larger, color displays for
certain of its products. This letter of intent requires, among other things,
that we develop technology for our displays that we are able to commercially
produce and that the displays meet certain technical specifications and price
and market conditions. Volga will also need to upgrade its production facilities
to meet the requirements of the letter of intent, and will need to obtain
financing for that upgrade. There can be no assurance that we can produce such
displays, that these purchasers will purchase any displays from us, or of the
revenue we might derive from such sales.
15
We are receiving technical support from Volga executives and technical
personnel during presentations to organizations. We plan to continue to work
with Volga personnel to seek additional opportunities for our display
technology.
Customers
During fiscal 2002 and 2001, we recognized $4,541,667 and $958,333,
respectively, in revenue from Futaba under the Futaba Agreement, or
approximately 88% and 57% of total net revenue in fiscal 2002 and 2001,
respectively. In addition, we recognized $360,000 and $109,225, respectively, in
product sales revenue from one customer, or approximately 56% and 15% of the
revenue from product sales in fiscal 2002 and 2001, respectively.
Competition
The market for encryption products and flat panel displays 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 and there are many large companies that sell flat panel
displays. We believe, however, that the technology contained in our encryption
products and our flat panel displays have features that distinguish them from
the products being sold by our competitors. The encryption security and flat
panel display markets are 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
and our flat panel displays.
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, 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 FED
and simplified E-Paper(TM) flat panel display technologies currently under
development, and for our encryption technologies. We have recently received a
U.S. patent for our USS-900, which expires in 2020, and a notice of allowance of
the claims contained in our patent application for two variations of our FED
technology.
16
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 were approximately $1,626,000,
$2,325,000, and $2,732,000 for the fiscal years ended October 31, 2002, 2001,
2000, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below and our Financial Statements.
Employees and Consultants
We had 25 full-time employees and 23 consultants as of December 31, 2002.
Twenty-three 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. Eighteen 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.
Financial Information About Segments and Geographical Areas
See our Financial Statements.
Item 2. Properties.
We lease approximately 12,000 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 $228,000 per annum with a 3%
annual increase and an escalation clause for increases in certain operating
costs. This lease does not contain provisions for its renewal and management
will continue to evaluate the future adequacy of this facility. We anticipate
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.
17
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.
At our Annual Meeting of Stockholders, held on September 12, 2002, six
directors were elected, an amendment to the CopyTele, Inc. 2000 Share Incentive
Plan was approved, and the selection of Grant Thornton LLP, independent
certified public accountants, as our independent auditors for the fiscal year
ending October 31, 2002 was ratified. The following is a tabulation of the
voting with respect to the foregoing matters:
(a) Election of Directors:
Nominee For Withheld
-------------------- ---------- ----------
Denis A. Krusos 62,044,398 1,094,551
Frank J. DiSanto 62,000,748 1,136,301
George P. Larounis 62,042,498 1,094,551
Anthony Bowers 62,178,276 958,773
Henry P. Herms 62,152,276 984,773
Lewis H. Titterton 62,120,826 1,016,223
(b) Approval of the amendment to the CopyTele, Inc. 2000 Share Incentive
Plan:
For Against Abstain
---------- --------- ---------
15,462,272 6,781,841 225,497
(c) Ratification of selection of Grant Thornton LLP as independent auditors
for the fiscal year ending October 31, 2002:
For Against Abstain
---------- ------- -------
62,279,862 759,701 97,486
18
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.
Our common stock has been traded on The Nasdaq Stock Market, Inc., 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. On August 2, 2002 our listing was
transferred from the The Nasdaq National Market to The Nasdaq SmallCap Market.
The high and low sales prices as reported by The Nasdaq Stock Market, Inc. for
each quarterly fiscal period during our fiscal years ended October 31, 2001 and
2002 have been as follows:
Fiscal Period High Low
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
1st quarter 2002 0.74 0.36
2nd quarter 2002 0.58 0.43
3rd quarter 2002 0.94 0.27
4th quarter 2002 $0.48 $0.15
- --------------------------------------------------------------------------------
To maintain our listing on The Nasdaq SmallCap Market, Nasdaq requires,
among other things, that our stock maintain a minimum closing bid of at least $1
per share and that 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. Our stockholders' equity as of October 31, 2002 was
approximately $2,317,000. The closing bid price of our common stock on February
6, 2003, was $0.17, 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 the
bid price of our common stock fails to close at $1 per share or more for a
minimum of 10 consecutive trading days prior to February 10, 2003. Since we did
not regain compliance during that period, Nasdaq could provide written
notification that our securities will be delisted. Upon receiving such
notification we intend to request a hearing, which is usually held within 45
days, during which time our common stock would remain listed on The Nasdaq
SmallCap Market. As a result of that hearing, our common stock could be
delisted. A delisting of our common stock could have an adverse affect on the
market price and liquidity of our common stock.
As of February 6, 2002, the approximate number of record holders of our
common stock was 1,421 and the closing price of our common stock was $0.17 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.
19
Item 6. Selected Financial Data.
The following selected financial data has been derived from our audited
Financial Statements and should be read in conjunction with those statements,
and the notes related thereto, which are included in this report.
---------------------------------------------------------------
As of and for the fiscal year ended October 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Revenue
Product sales, net $ 645,027 $ 732,435 $ 1,471,998 $ 46,877 $ -
Collaborative agreement 4,541,667 958,333 - - -
-------------------------------------------------------------------
Total revenue 5,186,694 1,690,768 1,471,998 46,877 -
- -------------------------------------------------------------------------------------------------------
Gross Profit 3,315,636 993,129 746,560 9,573 -
- -------------------------------------------------------------------------------------------------------
Research and Development Expenses 1,625,974 2,324,979 2,732,229 3,163,000 3,926,000
- -------------------------------------------------------------------------------------------------------
Selling, General and Administrative 2,177,608 2,272,386 3,099,483 5,121,717 3,305,557
Expenses
- -------------------------------------------------------------------------------------------------------
Impairment Loss on Commercial Trade
Barter Credits 2,820,800 - - - -
- -------------------------------------------------------------------------------------------------------
Loss from and Impairment of Investment
in Joint Venture - - - 345,947 377,219
- -------------------------------------------------------------------------------------------------------
Interest Income
23,506 32,279 120,979 156,075 472,822
- -----------------------------------------------------------------------------------------------------------
Net Loss (3,285,240) (3,571,957) (4,964,173) (8,465,016) (7,135,954)
- -----------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock -
Basic and Diluted ($.05) ($.06) ($.08) ($.14) ($.12)
- -----------------------------------------------------------------------------------------------------------
Total Assets 2,731,509 6,562,403 6,894,501 7,239,544 13,334,972
- -----------------------------------------------------------------------------------------------------------
Long Term Obligations - - - - -
- -----------------------------------------------------------------------------------------------------------
Shareholders' Equity 2,317,490 4,166,526 5,557,599 6,284,777 11,860,913
- -----------------------------------------------------------------------------------------------------------
Cash Dividends Per Share of Common Stock - - - - -
- -----------------------------------------------------------------------------------------------------------
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,"
"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
20
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" below. 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 Annual Report on Form 10-K.
General
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 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 hardware encryption products presently includes the USS-900,
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 AES algorithm (algorithms available in the public domain
which are used by many U.S. government agencies). We have recently developed the
USS-900 Security Software, a software security product for the encryption of
data files and e-mail attachments in both desktop and laptop computers utilizing
Windows operating systems. We are continuing our research and development
activities for additional encryption products. (See "Business - New Technologies
Under Development").
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").
We are also continuing our research and development activities with respect
to flat panel display technologies, including our Field Emission Display and our
ultra-high resolution charged particle E-Paper(TM) flat panel display. (See
"Business - New Technologies Under Development"). 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 our display:
21
- - 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.
From June 2001 until June 2002, we worked with Futaba under the Futaba
Agreement to jointly develop a full-color video display utilizing our field
emission display technology. During that period, with the additional assistance
of Volga, we developed a 3-inch (diagonal) engineering model consisting of 160 x
170 pixels and having full color video capability. Since June 2002, working with
Volga under the Volga Agreement, we have developed additional engineering models
using the technology, including a 5-inch (diagonal) monochrome video display
having 320 x 240 pixels. We have also worked with Volga to improve our FED
technology, developing technology that results in substantially higher
brightness than conventional CRTs and LCD or plasma flat panel displays.
Together with Volga, we have incorporated this high brightness technology into
engineering models of a 3.7-inch (diagonal) monochrome video display having 160
x 80 pixels and a 5-inch (diagonal) monochrome video display having 320 x 240
pixels. We have recently received, from the U.S. patent office, a notice of
allowance of the claims contained in our patent application for two variations
of our FED technology.
We have used these engineering models to begin discussing commercial
production of our displays with potential purchasers. We are negotiating to
supply two potential purchasers with up to 5-inch (diagonal) high brightness
displays, to be produced by Volga using its current production facilities and
supplied to us, for incorporation into the purchaser's products for industrial
and governmental applications. We have also received a letter of intent from a
large U.S. company to provide larger, color displays for certain of its
products. This letter of intent requires, among other things, that we develop
technology for our displays that we are able to commercially produce and that
the displays meet certain technical specifications and price and market
conditions. Volga will also need to upgrade its production facilities to meet
the requirements of the letter of intent, and will need to obtain financing for
that upgrade. There can be no assurance that we can produce such displays, that
these purchasers will purchase any displays from us, or of the revenue we might
derive from such sales. (See "Business - General Risks and Uncertainties").
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.
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
22
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 revenue 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.
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.
Collaborative Agreement
The initial $2.5 million payment from Futaba pursuant to the Futaba
Agreement has been recognized ratably over Phase I. 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 fiscal 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. As
of July 31, 2002, all payments received from Futaba have been recognized as
revenue.
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
23
significant underperformance relative to expected historical or projected future
operating results and cash flows, a significant change in the manner 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 fair value
based upon the present value of estimated future cash flows, to reflect the
impairment.
During the year ended October 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 Based 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.
Results of Operations
Fiscal Year Ended October 31, 2002 Compared to Fiscal Year Ended October
31, 2001
Product Sales
Revenue. Product sales decreased by approximately $87,000 in fiscal 2002,
to approximately $645,000, as compared to approximately $732,000 in fiscal 2001.
All product sales are encryption products and are net of sales returns. Product
sales included an increase in sales of Magicom products of approximately $73,000
(from approximately $48,000 in fiscal 2001 to approximately $121,000 in fiscal
2002), offset by a decline in sales of other products of approximately $160,000
(from approximately $684,000 in fiscal 2001 to approximately $524,000 in fiscal
2002). We discontinued production of Magicom products in fiscal 2000, but
continue to sell our remaining inventory. All Magicom sales during fiscal 2002
and fiscal 2001 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.
24
Gross Profit. Gross profit from product sales decreased by approximately
$191,000 in fiscal 2002, to approximately $218,000, as compared to approximately
$409,000 in fiscal 2001. Product sales gross profit as a percentage of revenue
decreased to approximately 34% in fiscal 2002, compared to approximately 56% in
fiscal 2001. The decrease in product sales gross profit as a percentage of
revenue is primarily the result of the provision for slow-moving inventory of
approximately $100,000 recorded in fiscal 2002 which represented approximately
16% of the 22% decrease in gross profit as a percentage of revenue. We took this
provision as a result of our experience with sales of our USS-900 inventory. The
decrease in product sales gross profit as a percentage of revenue also reflected
the increase noted above in the portion of fiscal 2002 sales consisting of
Magicom products, as compared to fiscal 2001. 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
Revenue. We recognized collaborative agreement revenue of approximately
$4,542,000 in fiscal 2002, as compared to approximately $958,000 in fiscal 2001,
an increase of approximately $3,584,000. All collaborative agreement revenue is
revenue received from Futaba under the Futaba Agreement. We recognized 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.
Gross Profit. Gross profit from collaborative agreement increased by
approximately $2,514,000 in fiscal 2002, to approximately $3,098,000, as
compared to approximately $584,000 in fiscal 2001. Gross profit from
collaborative agreement in fiscal 2002 is net of cost of revenue 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 revenue for fiscal
2001 was approximately $374,000, including cost of revenue related to the Volga
Agreement of approximately $276,000. 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 by approximately $699,000 in
fiscal 2002, to approximately $1,626,000, from approximately $2,325,000 in
fiscal 2001. The decrease in research and development expenses reflects the
classification of development efforts related to FED technology during the term
of the Futaba Agreement as costs of revenue rather than as research and
development expenses. In addition, employee compensation and related costs were
reduced by approximately $222,000, non-employee consultant expense was reduced
by approximately $104,000, depreciation expense decreased by approximately
$73,000, engineering supplies expense decreased by approximately $38,000, patent
related expenses decreased by approximately $33,000, and rent expense decreased
by approximately $28,000.
25
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$94,000 to approximately $2,178,000 for fiscal 2002 from approximately
$2,272,000 for fiscal 2001. The decrease in selling, general and administrative
expenses reflects a decrease in the provision for doubtful accounts of
approximately $117,000, a decrease in non-employee consulting expense of
approximately $113,000, and a decrease in employee compensation and related
costs of by approximately $23,000, offset by an increase in professional fees of
approximately $77,000 and an increase in advertising expense of approximately
$66,000.
Impairment Loss on Commercial Trade Barter credits
In fiscal 2002, we recognized an impairment loss in the amount of
approximately $2,821,000 in connection with unused commercial trade barter
credits. These barter 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 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.
Interest Income
Interest income was approximately $24,000 in fiscal 2002, compared to
approximately $32,000 in fiscal 2001. This resulted from an increase in average
funds available for investment offset by a reduction in prevailing interest
rates.
Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended October
31, 2000
Product Sales
Revenue. 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. 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 in fiscal 2001 to
approximately $409,000 compared to approximately $747,000 in fiscal 2000. Gross
profit as a percentage of revenue increased to approximately 56% in fiscal 2001
compared to approximately 51% in fiscal 2000. The increase in gross profit as a
percentage of revenue resulted primarily from a change in the mix of products
sold.
26
Collaborative Agreement
Revenue. Revenue for fiscal 2001 related to the Futaba Agreement, which was
entered into in June 2001, was approximately $958,000. We recognized payments
received from Futaba as income ratably over Phase I of the Futaba Agreement.
There were no such collaborative agreements that generated revenue prior to
fiscal 2001.
Gross Profit. Gross profit was approximately $584,000 in fiscal 2001, or
61% as a percentage of revenue. Collaborative agreement cost of revenue for
fiscal 2001 was approximately $374,000, including cost of revenue related to the
Volga Agreement of approximately $276,000. 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.
Research and Development Expenses
Research and development expenses decreased by approximately $407,000 in
fiscal 2001, to approximately $2,325,000, from approximately $2,732,000 in
fiscal 2000. The decrease in research and development expenses reflects the
classification in fiscal 2001 of development efforts related to FED technology
during the term of the Futaba Agreement, as costs of revenues rather than as
research and development expenses. In addition, patent related expenses
decreased by approximately $195,000 and depreciation expense decreased by
approximately $65,000, offset by an increase in non-employee consulting expense
of approximately $107,000 and an increase in employee compensation and related
costs of approximately $52,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$827,000 to approximately $2,272,000 in fiscal 2001 from approximately
$3,099,000 in fiscal 2000. The decrease in selling, general and administrative
expenses reflects a write down in fiscal 2000 of the inventory carrying value of
Magicom products of approximately $475,000 and effective cost-cutting measures
during fiscal 2001. These cost-cutting measures included a reduction in
advertising and related expenses of approximately $390,000, a reduction in
non-employee consulting expense of approximately $135,000, and a reduction in
employee compensation and related costs of approximately $40,000, offset by an
increase in the provision for doubtful accounts of approximately $197,000, which
resulted from our experience with several slow-paying customers, and a charge of
$100,000, related to a determination by us as to the likelihood of the
realization of value of our commercial trade credits.
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.
27
Liquidity and Capital Resources
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, from
June 2001 to January 2002, we received development payments from Futaba under
the Futaba Agreement.
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.
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.
During fiscal 2002, our operating activities used approximately $431,000 in
cash. This resulted from payments to suppliers, employees and consultants of
approximately $4,137,000, which was offset by $3,000,000 in payments received
from Futaba, cash of approximately $682,000 received from collections of
accounts receivable related to sales of encryption products and approximately
$24,000 of interest income received. In addition, we received approximately
$8,000 in cash upon the exercise of stock options and purchased approximately
$39,000 of equipment. As a result, our cash and cash equivalents at October 31,
2002 decreased to approximately $855,000 from approximately $1,317,000 at the
end of fiscal 2001.
Accounts receivable and other receivables decreased by approximately
$136,000 from approximately $536,000 at the end of fiscal 2001 to approximately
$401,000 at October 31, 2002. The decrease in accounts receivable is a result of
the timing of collections and the increase in the allowance for doubtful
accounts, which resulted from our experience with respect to one slow paying
customer. Inventories decreased approximately $293,000 from approximately
28
$1,589,000 at October 31, 2001 to approximately $1,296,000 at October 31, 2002,
as a result of the timing of shipments and production schedules as well as an
increase to the provision for slow-moving inventory of approximately $100,000,
which resulted from management's experience with sales of our USS-900 product.
Prepaid expenses and other current assets decreased by approximately $34,000
from approximately $137,000 at the end of fiscal 2001 to approximately $103,000
at October 31, 2002. Accounts payable and accrued liabilities decreased by
approximately $440,000 from approximately $854,000 at the end of fiscal 2001 to
approximately $414,000 at October 31, 2002, as a result of the decrease in
operating expenses and the timing of payments. We recognized the cash received
from Futaba as income ratably over Phase I; accordingly, the portion not yet
recognized as income was recorded as deferred revenue. Deferred revenue related
to cash received from Futaba decreased from approximately $1,542,000 at October
31, 2001 to $0 at October 31, 2002.
As a result of these changes, working capital at October 31, 2002 increased
to approximately $2,240,000 from approximately $1,184,000 at the end of fiscal
2001.
Our working capital includes inventory of approximately $1,296,000 and
$1,589,000 at October, 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.
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.
The auditor's report on our financial statements as of October 31, 2002
states that the net loss incurred during the year ended October 31, 2002, our
accumulated deficit as of that date, and the other factors described in Note 1
to the Financial Statements raise substantial doubt about our ability to
continue as a going concern. Our financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
29
Based on reductions in operating expenses that have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing cash and accounts receivable, together with cash flows from expected
sales of encryption products and flat panel displays, and other potential
sources of cash flows, will be sufficient to enable us to continue in operation
until at least the end of the first quarter of fiscal 2004. We anticipate that,
thereafter, we will require additional funds to continue our marketing,
production, 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 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 fiscal 2002, we have recognized revenue from product
sales of approximately $645,000 and revenue 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 of at least $1 per share and that 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. Our stockholders' equity as of
October 31, 2002 was approximately $2,317,000. The closing bid price of our
common stock on February 6, 2003, was $0.17, 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 the bid price of our common stock fails to close at $1
per share or more for a minimum of 10 consecutive trading days prior to February
10, 2003. Since we did not regain compliance during that period, Nasdaq could
provide written notification that our securities will be delisted. Upon
receiving such notification we intend to request a hearing, which is usually
held within 45 days, during which time our common stock would remain listed on
The Nasdaq SmallCap Market. As a result of that hearing, our common stock could
be delisted. A delisting of our common stock could have an adverse affect on the
market price and liquidity of our common stock.
The following table presents our expected cash requirements for contractual
obligations outstanding as of October 31, 2002:
30
Payments Due by Period
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- ------------------------------- ------------- ------------ ---------- ----------- ------------
Operating Leases $228,000 $20,000 - - $248,000
------------- ------------ ---------- ----------- ------------
Total Contractual Cash
Obligations $228,000 $20,000 - - $248,000
============= ============ ========== =========== ============
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. The adoption of SFAS No. 141
had no effect 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.
31
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.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting and
reporting for recording expenses for the fair value of stock options. SFAS 148
provides alternative methods of transition for a voluntary change to fair value
based method of accounting for stock-based employee compensation. Additionally,
SFAS 148 requires more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002, with
early application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We do not believe the
adoption of SFAS No. 148 will have a material effect on our financial position
or results of operations.
32
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 instruments 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.
On June 6, 2002, we dismissed our independent certified public accountants,
Arthur Andersen LLP ("Arthur Andersen"), and engaged Grant Thornton LLP to serve
as its new independent certified public accountants for fiscal year 2002. The
change in accountants was effective immediately. This determination was approved
by our Audit Committee.
Arthur Andersen's reports on our financial statements for each of the years
ended October 31, 2001 and October 31, 2000 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal years ended October 31, 2001 and 2000 and the interim
period between October 31, 2001 and June 6, 2002, there were no disagreements
between us and Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to Arthur Andersen's satisfaction, would have caused them to
make reference to the subject matter of the disagreement in connection with
their report for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.
We provided Arthur Andersen with a copy of the foregoing disclosures.
Attached as Exhibit 16 is a copy of Arthur Andersen's letter, dated June 12,
33
2002, stating its agreement with such statements. During the years ended October
31, 2001 and 2000 and through June 6, 2002, neither CopyTele nor anyone acting
on its behalf consulted Grant Thornton LLP with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on CopyTele's financial
statements, or any other matters or reportable events listed in Items
304(a)(2)(i) and (ii) of Regulation S-K.
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 75 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 78 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 57 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 74 1997
- -----------------------------------------------------------------------------------------------------------
Anthony Bowers Director 45 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.
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.
34
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 Australia. He holds
a B.E.E. degree from the University of Michigan and a J.D. degree from New York
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.
Lewis H. Titterton served as one of our Directors from July 1999 until his
resignation from our Board of Directors, for personal reasons, on January 6,
2003. We are seeking to add a new Director to our Board to replace Mr.
Titterton.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors, executive officers and ten percent
stockholders to file initial reports of ownership and reports of changes in
ownership of our common stock with the Securities and Exchange Commission
("SEC"). Directors, executive officers and ten percent stockholders are required
to furnish us with copies of all Section 16(a) forms that they file. Based upon
a review of these filings, we believe that all required Section 16(a) fillings
were made on a timely basis during fiscal year 2002.
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 $100,000
during the fiscal year ended October 31, 2002. The following is compensation
information regarding Mr. Krusos for the fiscal years ended October 31, 2002,
2001 and 2000:
35
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Long-Term
Compensation Awards
Fiscal
Name and Year Annual Securities Underlying
Principal Position Ended Compensation Options (#)
- -------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/02 - -
Chairman of the Board, 10/31/01 - 500,000
Chief Executive Officer and Director 10/31/00 - 250,000
- -------------------------------------------------------------------------------------------------------
The following is information regarding stock options granted to Mr. Krusos
pursuant to the 2000 Share Incentive Plan, during the fiscal year ended October
31, 2002:
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Option Term
- -------------------------------------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to Exercise
Underlying Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------------------------------
Denis A. Krusos - - - - - -
- -------------------------------------------------------------------------------------------------------
The following is information regarding stock option exercises during fiscal
2002 by Mr. Krusos and the values of his options as of October 31, 2002:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
=======================================================================================================
Value Realized
Shares ($) Number of Securities Value of Unexercised
Acquired on Underlying Unexercised In-the-Money Options at
Name Exercise (#) Options at Fiscal Year End (#) Fiscal Year End ($)
-------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================
Denis A. Krusos - - 3,576,290 - - -
- ------------------------------------------------------------------------------------------------------------
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.
36
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 February 6, 2003 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
Ownership(1)(2) of Class
=======================================================================================================
Denis A. Krusos 5,940,600 7.82%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------
Frank J. DiSanto 3,897,505 5.15%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------
Henry P. Herms 250,000 *
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------
George P. Larounis 362,500 *
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------
Anthony Bowers 264,300 *
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (5 10,714,905 13.40%
persons)
- -------------------------------------------------------------------------------------------------------
* Less than 1%.
(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.
(2) Includes 3,576,290 shares, 3,254,290 shares, 250,000
shares, 362,500 shares, 90,000 shares and 7,533,080 shares as
to which Denis A. Krusos, Frank J. DiSanto, Henry P. Herms,
George P. Larounis, 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.
37
Equity Compensation Plan Information
The following is information as of October 31, 2002 about shares of our
common stock that may be issued upon the exercise of options, warrants and
rights under all equity compensation plans in effect as of that date, including
our 1987 Stock Option Plan, the 1993 Stock Option Plan and the 2000 Share
Incentive Plan. See Note 7 to Financial Statements for more information on these
plans.
Number of securities Number of securities
to be issued remaining available
upon under equity for future issuance
exercise of Weighted average compensation plans
outstanding exercise price of (excluding securities
options, warrants outstanding options, reflected in column (a))
Plan category and rights warrants and rights
- ---------------------------- --------------------- ----------------------- ------------------------
(a) (b) (c)
Equity compensation plans 14,705,743 $3.42 4,430,500
approved by security
holders
Equity compensation plans 0 0 0
not approved by security
holders
Total 14,705,743 $3.42 4,430,500
Item 13. Certain Relationships and Related Transactions.
None.
Item 14. Controls and Procedures.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman of the Board and Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 under the Exchange
Act. Based upon that evaluation, our Chairman of the Board and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us required to be included in our periodic SEC filings. There have
been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
38
PART IV
Item 15. 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 our
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 our 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 our
Proxy Statement dated June 10, 1993).
Amendment No. 1 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 4(d) to our Form S-8 dated September 6,
1995).
Amendment No. 2 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 10.32 to our 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
our Proxy Statement dated June 12, 2000).
Amendment No. 1 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 2001).
Amendment No. 2 to CopyTele, Inc. 2000 Share Incentive Plan
(b) Reports on Form 8-K
We filed no Current Report on Form 8-K during the fourth
quarter of our fiscal year ended October 31, 2002.
(c) Exhibits
3.1 Certificate of Incorporation, as amended.
(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.)
39
3.2 By-laws, as amended and restated. (Incorporated by
reference to Post-Effective Amendment No. 1 to Form
S-8 (Registration No. 33-49402) dated December 8,
1993.)
Amendment to By-laws. (Incorporated by reference to
Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.)
10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
(Incorporated by reference to Form 10-Q for the
fiscal quarter ended April 30, 1987.)
10.2 Amendment to Stock Option Plan, adopted on March 12,
1990 and approved by shareholders on May 24, 1990.
(Incorporated by reference to Form 10-K for the
fiscal year ended October 31, 1990.)
10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on July
14, 1993. (Incorporated by reference to Proxy
Statement dated June 10, 1993.)
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. (Incorporated by
reference to Form S-8 (Registration No. 33-62381)
dated September 6, 1995.)
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. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.)
10.6 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
January 31, 1999.)
10.7 Stock Subscription Agreement dated April 27, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to
Form 10-Q for the fiscal quarter ended April 30,
1999.)
10.8 Agreement dated July 28, 1999, among CopyTele, Inc.,
Harris Corporation and RF Communications.
(Incorporated by reference to Form 8-K dated July 28,
1999.)
10.9 Stock Subscription Agreement dated August 30, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to
Form 10-K for the fiscal year ended October 31,
1999.)
40
10.10 CopyTele, Inc. 2000 Share Incentive Plan.
(Incorporated by reference to Annex A of our Proxy
Statement dated June 12, 2000.)
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. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
July 31, 2001.)
10.12 Amendment No. 2 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 16, 2002 and approved
by shareholders on September 12, 2002. (Incorporated
by reference to Exhibit 4(e) to our Form S-8
(Registration No. 333-99717) dated September 18,
2002.)
10.13 Joint Cooperation Agreement for Field Emission
Displays, dated June 11, 2001, by and between
CopyTele, Inc. and Futaba Corporation. (Incorporated
by reference to Form 10-Q for the fiscal quarter
ended April 30, 2001.)
10.14 Letter Agreement between CopyTele, Inc. and Futaba
Corporation, dated January 11, 2002. (Incorporated by
reference to Exhibit 10.13 to our Form 10-K for the
fiscal year ended October 31, 2001.)
10.15 Amendment, dated May 10, 2001, to the Joint
Cooperation Agreement between CopyTele, Inc. and
Volga Svet Ltd. (Incorporated by reference to Exhibit
10.14 to our Form 10-K for the fiscal year ended
October 31, 2001.)
10.16 Letter Agreement between CopyTele, Inc. and Volga
Svet Ltd., dated as of February 1, 2002.
(Incorporated by reference to Exhibit 10.15 to our
Form 10-K for the fiscal year ended October 31,
2001.)
16 Letter from Arthur Andersen LLP regarding change in
certifying accountant. (Incorporated by reference to
Form 8-K dated June 6, 2002.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
23.2 Notice Regarding Consent of Arthur Andersen LLP.
(Filed herewith.)
99.1 Statement of Chief Executive Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
(Filed herewith.)
41
99.2 Statement of Chief Financial Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
(Filed herewith.)
42
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: /s/ Denis A. Krusos
--------------------------
Denis A. Krusos
Chairman of the Board and
February 13, 2003 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: /s/ Denis A. Krusos
-----------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer and
Director (Principal
Executive Officer)
February 13, 2003
By: /s/ Frank J. DiSanto
-----------------------------
Frank J. DiSanto
February 13, 2003 President and Director
By: /s/ Henry P. Herms
-----------------------------
Henry P. Herms
Vice President - Finance,
Chief Financial Officer and
Director (Principal
Financial and Accounting
Officer)
February 13, 2003
By: /s/ George P. Larounis
-----------------------------
George P. Larounis
February 13, 2003 Director
By: /s/ Anthony Bowers
----------------------------
Anthony Bowers
February 13, 2003 Director
43
CERTIFICATION
I, Denis A. Krusos, Chairman of the Board and Chief Executive Officer of
CopyTele, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CopyTele, Inc.;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
44
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Denis A. Krusos
--------------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
February 13, 2003 (Principal Executive Officer)
45
CERTIFICATION
I, Henry P. Herms, Vice President - Finance and Chief Financial Officer of
CopyTele, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CopyTele, Inc.;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
46
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Henry P. Herms
-------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
February 13, 2003
47
COPYTELE, INC.
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2002
Page
----
Report of Independent Certified Public Accountants: Grant Thornton LLP F-1
Report of Independent Public Accountants: Arthur Andersen LLP F-2
Balance Sheets as of October 31, 2002 and 2001 F-3
Statements of Operations for the years ended October 31, 2002, 2001 and 2000 F-4
Statement of Shareholders' Equity for the years ended October 31, 2002, 2001 and 2000 F-5
Statements of Cash Flows for the years ended October 31, 2002, 2001 and 2000 F-6
Notes to Financial Statements F-7 - F-22
Report of Independent Public Accountants on Schedule: Arthur Andersen LLP 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 CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CopyTele, Inc.
We have audited the accompanying balance sheet of CopyTele, Inc. (the "Company")
(a Delaware corporation) as of October 31, 2002, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. 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 audit. The financial statements of CopyTele, Inc. as of October 31, 2001,
and for the two years then ended, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated January 24, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred a net loss of approximately $3,285,000 during the year
ended October 31, 2002, and, as of that date, the Company has an accumulated
deficit of approximately $61,981,000. These and the other factors described in
Note 1 raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2) as of and for the year ended October 31, 2002. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
December 18, 2002
F-1
We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of
Regulation S-X, a copy of the prior year's Report of Independent Public
Accountants from our prior independent public accountants, Arthur Andersen LLP
("Andersen"). This report was previously issued by Andersen, for filing with our
Annual Report on Form 10-K for fiscal year 2001, and has not been reissued by
Andersen. Note that this previously issued Andersen report includes references
to certain fiscal years and periods, which are not required to be presented in
the accompanying financial statements as of and for the fiscal years ended
October 31, 2002.
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-2
COPYTELE, INC.
BALANCE SHEETS
October 31, October 31,
ASSETS 2002 2001
------
CURRENT ASSETS:
Cash and cash equivalents $ 854,822 $ 1,316,860
Accounts receivable, net of allowance for doubtful accounts of $325,505 and
$240,000, respectively 77,780 536,391
Other receivables 322,952 -
Inventories 1,296,199 1,589,350
Prepaid expenses and other current assets 102,519 136,902
---------------- ----------------
Total current assets 2,654,272 3,579,503
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$2,050,927 and $2,004,449, respectively 71,583 119,487
OTHER ASSETS 5,654 2,863,413
---------------- ----------------
$ 2,731,509 $ 6,562,403
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 379,169 $ 816,011
Accrued liabilities 34,850 38,199
Deferred revenue - 1,541,667
---------------- ----------------
Total current liabilities 414,019 2,395,877
COMMITMENTS AND CONTINGENCIES
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;
70,257,155 and 66,521,100 shares issued and outstanding, respectively 702,572 665,211
Additional paid-in capital 63,596,213 62,197,370
Accumulated deficit (61,981,295) (58,696,055)
---------------- ----------------
2,317,490 4,166,526
---------------- ----------------
$ 2,731,509 $ 6,562,403
================ ================
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended October 31,
2002 2001 2000
---- ----- ----
REVENUE
Product sales, net $645,027 $732,435 $1,471,998
Collaborative agreement 4,541,667 958,333 -
--------------- --------------- ---------------
Total revenue 5,186,694 1,690,768 1,471,998
COST OF REVENUE
Cost of product sales 427,056 323,705 725,438
Cost of collaborative agreement 1,444,002 373,934 -
--------------- --------------- ---------------
Total cost of revenue 1,871,058 697,639 725,438
Gross profit 3,315,636 993,129 746,560
--------------- --------------- ---------------
OPERATING EXPENSES
Research and development expenses 1,625,974 2,324,979 2,732,229
Selling, general and administrative expenses 2,177,608 2,272,386 3,099,483
Impairment loss on commercial trade barter credits 2,820,800 - -
--------------- --------------- ---------------
Total operating expenses 6,624,382 4,597,365 5,831,712
--------------- --------------- ---------------
LOSS FROM OPERATIONS (3,308,746) (3,604,236) (5,085,152)
INTEREST INCOME 23,506 32,279 120,979
--------------- --------------- ---------------
NET LOSS $ (3,285,240) $ (3,571,957) $ (4,964,173)
=============== =============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (.05 ) $ (.06) $ (.08)
=============== ============== ===============
Shares used in computing net loss per share:
Basic and Diluted 68,088,748 64,561,252 62,261,250
=============== =============== ===============
The accompanying notes are an integral part of these statements.
F-4
COPYTELE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Par Value Capital Deficit
----------- ------------ ----------- ---------------
BALANCE, November 1, 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, net of expenses 616,500 6,165 794,420 -
Common stock issued upon exercise of stock options under stock 2,267,400 22,674 3,003,050 -
option plans
Common stock issued upon exercise of warrants 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 1,457,034 14,570 805,189 -
option plans
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)
Common stock issued upon exercise of
stock options under stock option plans 20,000 200 7,800 -
Common stock issued to employees for services rendered 3,311,405 33,114 1,280,039 -
Common stock issued to consultants 404,650 4,047 111,004 -
Net loss - - - (3,285,240)
------------- ------------ ------------- -------------
BALANCE, October 31, 2002 70,257,155 $ 702,572 $ 63,596,213 $(61,981,295)
============= ============ ============= ============
The accompanying notes are an integral part of this statement.
F-5
STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
---------------------------------------------------
2002 2001 2000
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (4,136,913) $ (3,695,031) $ (5,769,836)
Cash received from customers 681,936 444,907 801,747
Cash received from collaborative agreement 3,000,000 2,500,000 -
Interest received 23,506 32,279 127,511
------------- ------------- ------------
Net cash used in operating activities (431,471) (717,845) (4,840,578)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (38,567) (15,972) (30,717)
Disbursements to acquire certificates of deposit and marketable securities - - (96,873)
Proceeds from maturities of investments - 96,873 488,038
------------- ------------- ------------
Net cash provided by (used in) investing activities (38,567) 80,901 360,448
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants, net of
registration disbursements 8,000 819,759 3,225,760
Proceeds from sale of common stock in private placements, net - - 800,585
------------- ------------- ------------
Net cash provided by financing activities 8,000 819,759 4,026,345
------------- ------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (462,038) 182,815 (453,785)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,316,860 1,134,045 1,587,830
------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 854,822 $ 1,316,860 $ 1,134,045
============= ============= ============
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $ (3,285,240) $ (3,571,957) $ (4,964,173)
Impairment loss on commercial trade barter credits 2,820,800 - -
Stock option compensation to consultants - 229,620 210,650
Stock awards granted to employees and consultants pursuant to stock
incentive plans 1,428,204 1,036,505 -
Stock issued to consultants for services rendered - 95,000 -
Provision for doubtful accounts 155,505 272,500 75,400
Provision for slow-moving inventory 100,000 - -
Depreciation and amortization 86,471 166,503 261,804
Loss on disposal of property and equipment - - 30,050
Change in operating assets and liabilities:
Accounts receivable and other receivables (19,846) (214,040) (670,251)
Inventories 193,151 179,935 (230,677)
Prepaid expenses and other current assets 34,383 (76,469) 6,666
Other assets 36,959 105,583 57,818
Accounts payable and accrued liabilities (440,191) (482,692) 382,135
Deferred revenue (1,541,667) 1,541,667 -
-------------- ------------- ------------
Net cash used in operating activities $ (431,471) $ (717,845) $ (4,840,578)
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Non-cash increase in other assets resulting from a barter transaction
including the exchange of certain inventory for commercial trade credits $ - $ - $ 3,000,000
============= ============= ============
The accompanying notes are an integral part of these statements.
F-6
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
Organization
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 of a full-color flat panel
video display and the development, production and marketing of multi-functional
encryption products that provide information security for domestic and
international users over virtually every communications media.
Products and Key Relationships
Our line of hardware-based encryption products are multi-functional, 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 have recently developed a software security
product for the encryption of data files and e-mail attachments in both desktop
and laptop computers utilizing Windows operating systems. We are continuing our
research and development activities for additional encryption products. We sell
our encryption products primarily through a distributor/dealer network and to
end-users, and recently we also began working with large organizations that are
adding security products to their existing product lines.
We have also continued 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, with the assistance of Volga Svet, Ltd. ("Volga") and together with
Futaba Corporation ("Futaba") pursuant to agreements with Volga and Futaba
described in Note 3, we have developed a 3-inch (diagonal) engineering model of
a full-color video FED and subsequently with Volga we developed a 5-inch
(diagonal) monochrome video FED. We have also worked with Volga to improve our
FED technology, developing technology that results in substantially higher
brightness than conventional CRTs and LCD or plasma flat panel displays.
Together with Volga, we have incorporated this high brightness technology into
engineering models of 3.7-inch (diagonal) and 5-inch (diagonal) monochrome video
displays. We believe that smaller and larger displays can be made with this
technology.
Funding and Management's Plans
From our inception through June 2001, we had 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 began to generate cash flows from sales of our encryption products, and, from
June 2001 to January 2002, we received development payments from Futaba.
F-7
During fiscal 2002, our operating activities used approximately $431,000 in
cash. This resulted from payments to suppliers, employees and consultants of
approximately $4,137,000, which was offset by $3,000,000 in payments received
from Futaba, cash of approximately $682,000 received from collections of
accounts receivable related to sales of encryption products and approximately
$24,000 of interest income received. In addition, we received approximately
$8,000 in cash upon the exercise of stock options and purchased approximately
$39,000 of equipment. As a result, our cash and cash equivalents at October 31,
2002 decreased to approximately $855,000 from approximately $1,317,000 at the
end of fiscal 2001.
Based on reductions in operating expenses that have been made and additional
reductions that may be implemented, if necessary, we believe that our existing
cash and accounts receivable, together with cash flows from expected sales of
encryption products and flat panel displays, and other potential sources of cash
flows, will be sufficient to enable us to continue in operation until at least
the end of the first quarter of fiscal 2004. However, our projections of future
cash needs and cash flows may differ from actual results. 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 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 of at least $1 per share and that 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. Our stockholders' equity as of
October 31, 2002 was approximately $2,317,000. The closing bid price of our
common stock has been below $1 since February 12, 2001. In August 2002, Nasdaq
notified us that our common stock is subject to delisting if the bid price of
our common stock fails to close at $1 per share or more for a minimum of 10
consecutive trading days prior to February 10, 2003. Since we did not regain
compliance during that period, Nasdaq could provide written notification that
our securities will be delisted. Upon receiving such notification we intend to
request a hearing, which is usually held within 45 days, during which time our
common stock would remain listed on The Nasdaq SmallCap Market. As a result of
that hearing, our common stock could be delisted. A delisting of our common
stock could have an adverse affect on the market price and liquidity of our
common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
F-8
Collaborative Agreement
The initial $2.5 million payment from Futaba pursuant to an agreement
with Futaba described in Note 3, has been recognized ratably over the
contractually defined one-year period of our commitment under this
portion of the agreement. The $3 million payment received from Futaba
under this agreement, during the three months ended January 31, 2002,
has been recognized ratably over the remaining term of the one-year
period.
Sales Returns and Allowances
Revenues are recorded net of sales returns. There were no sales returns
during fiscal 2002.
Deferred Revenue
Payments received from Futaba under the agreement with Futaba, which
are in excess of the amounts recognized as revenue, are recorded as
deferred revenue in the accompanying balance sheet. As of July 31,
2002, all payments received from Futaba have been recognized as
revenue.
Warranty Policy
We warrant that our 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. Management has recorded a nominal amount of warranty
liability as of October 31, 2002 and October 31, 2001, based upon historical
experience and management's best estimate of future warranty claims.
Statements of Cash Flows
Cash and cash equivalents consist of highly liquid instruments that are readily
convertible into cash and have original maturities of three months or less.
During the years ended October 31, 2002, 2001 and 2000, the Company did not pay
any interest or income taxes.
Inventories
Inventories are stated at the lower of cost, including material, labor and
overhead, 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.
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.
F-9
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 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 fair value
based upon the present value of estimate future cash flows, to reflect the
impairment. See Note 4.
Research and Development Expenses
Research and development expenses incurred by us are expensed in the year
incurred.
Income Taxes
We recognize deferred tax assets and liabilities for the estimated future tax
effects of events that have been recognized in our 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. A valuation allowance is established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Stock-Based Compensation
We comply 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 9).
Net Income (Loss) Per Share of Common Stock
We comply with the provisions of SFAS No. 128, "Earnings Per Share". In
accordance with SFAS 128, basic net income (loss) per common share ("Basic EPS")
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common share equivalents and convertible
securities then outstanding. 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. For this reason, excluded from the
calculation of Diluted EPS for the fiscal years ended October 31, 2002, 2001 and
2000, were options to purchase 14,705,746 shares, 14,935,746 shares and
13,363,860 shares, respectively, and warrants to purchase 0 shares, 715,500
shares and 1,241,500 shares, respectively.
F-10
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. The adoption of SFAS No. 141 had no
effect 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.
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 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.
F-11
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting and
reporting for recording expenses for the fair value of stock options. SFAS 148
provides alternative methods of transition for a voluntary change to fair value
based method of accounting for stock-based employee compensation. Additionally,
SFAS 148 requires more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002, with
early application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We do not believe the
adoption of SFAS No. 148 will have a material effect on our financial position
or results of operations.
Fair Value of Financial Instruments
We comply 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 management, the carrying value of all
financial instruments, consisting primarily of cash and cash equivalents,
accounts and other receivables and accounts payable, reflected in the
accompanying balance sheet, approximates fair value as of October 31, 2002 and
2001.
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.
3. COLLABORATIVE AGREEMENT
F-12
From June 2001 until June 2002, we worked with Futaba under a Joint Cooperating
Agreement for Field Emission Displays (the "Futaba Agreement") to jointly
develop and commercialize 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 have no further performance obligations with respect to this
agreement. We are now evaluating our options for further developing and
commercializing our technology.
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 1997, we entered into an agreement with Volga (the "Volga
Agreement") for certain development efforts in connection with the FED
technology. Under an amendment to this agreement in May 2001, we agreed to pay
Volga the sum of $180,000 per quarter for its development work during a one-year
period, 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.
4. 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 a component of other assets on
the accompanying 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 evaluated the carrying amount of this asset,
which was included in "Other assets" in the accompanying balance sheet, 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. This impairment loss relates to
our Encryption Products Segment.
F-13
5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of accounts receivable from sales in the ordinary
course of business. Management reviews our accounts receivable and other
receivables for potential doubtful accounts and maintains an allowance for
estimated uncollectible amounts. Futaba, in the Flat-Panel Display Segment,
represented 88% and 57% of total net revenues in fiscal 2002 and 2001,
respectively. Two customers, in the Encryption Products Segment, represented 38%
and 20%, respectively, of total net revenues in fiscal 2000. Two customers, in
the Encryption Products Segment, represented 66% and 14%, respectively, of gross
accounts receivable and other receivables as of October 31, 2002. Four
customers, in the Encryption Products Segment, represented 23%, 15%, 15% and 10%
of gross accounts receivable, respectively, as of October 31, 2001.
6. 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. This customer has agreed with us to cure
any deficiency between the proceeds from the sale of the restricted common stock
and the balance of the outstanding accounts receivable balance. In addition, the
customer's principal shareholder has personally agreed to cure any deficiency in
the event that the customer defaults on its agreement to cure such deficiency,
up to $292,000.
7. INVENTORIES
Inventories consist of the following as of:
October 31,
2002 2001
--------- ---------
Component parts $ 385,538 $ 411,111
Work-in-process 44,105 23,189
Finished products 866,556 1,155,050
---------------- ---------------
$ 1,296,199 $ 1,589,350
================ ===============
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
October 31,
2002 2001
--------- ---------
Accrued professional fees $ 7,992 $ 16,526
Accrued payroll and related expenses 7,014 7,346
Accrued other 19,844 14,327
------------- ---------------
$ 34,850 $ 38,199
============= ===============
F-14
9. SHAREHOLDERS' EQUITY
Common Stock Issuances
During fiscal years ended October 31, 2002, 2001 and 2000, we issued 3,311,405
shares, 1,707,725 shares and 0 shares, respectively, of common stock to certain
employees for services rendered, principally in lieu of cash compensation,
pursuant to our 2000 Share Incentive Plan (the "2000 Share Plan"). In addition
during fiscal 2002, 2001 and 2000, we issued 404,650 shares, 271,815 shares and
0 shares, respectively, of common stock to consultants for services rendered of
which 404,650 shares, 68,720 shares and 0 shares, respectively, were pursuant to
the 2000 Share Plan. The weighted-average fair value of the common stock issued
was $0.38 and $0.57 during fiscal 2002 and 2001, respectively.
Sales of Common Stock and Issuance of Warrants
During fiscal 2000, we sold 616,500 shares of our 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, we 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.
Warrants to purchase 716,500 shares of common stock issued and outstanding were
exercisable as of October 31, 2001, all of which expired, unexercised during
fiscal 2002. There are no outstanding warrants to purchase common stock at
October 31, 2002.
Preferred Stock
On May 29, 1986, our 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. As of October 31, 2002 and 2001, there is no preferred stock
issued and outstanding.
Stock Option Plans
We have 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
Plan, which were adopted by our Board of Directors on April 1, 1987, April 28,
1993, and May 8, 2000, respectively.
SFAS No. 123 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. 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.
62
Had compensation cost for these plans been determined at fair value, consistent
with SFAS No. 123, our net loss and net loss per share would have increased to
the following pro forma amounts:
For the Year Ended October 31,
------------------------------------------------
2002 2001 2000
----------- ------------ ------------
Net Loss: As Reported $(3,285,240) $(3,571,957) $(4,964,173)
Pro Forma $(3,568,148) $(4,903,739) $(6,295,955)
Basic and Diluted
Net Loss per share of common stock: As Reported $(.05) $(.06) $(.08)
Pro Forma $(.05) $(.08) $(.10)
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, 2002, 2001 and 2000,
respectively: risk free interest rates of 3.26%, 4.05% and 5.97%; expected
dividend yields of 0% for all periods; expected lives of 2.50 for all periods;
and expected stock price volatility of 93%, 62% and 85%. The weighted average
fair value of options granted under SFAS No. 123 for the fiscal years ended
October 31, 2002, 2001 and 2000 was $0.34, $0.55 and $0.58, respectively.
We account for options granted to non-employee consultants using the fair value
method required by SFAS No. 123. Compensation expense for consultants,
recognized in the fiscal years ended October 31, 2002, 2001 and 2000, was $0,
$229,620 and $210,650, 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 statements of operations.
In May 1987, our shareholders approved the 1987 Plan which, after giving
consideration to 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 our
common stock. 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, we registered the shares of common stock
covered by the 1987 Plan. Upon approval of the 1993 Plan by our shareholders in
July 1993, the 1987 Plan was terminated with respect to the grant of future
options.
F-16
Information regarding the 1987 Plan for the three years ended October 31, 2002
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ----------------
Shares Under Option and Exercisable at November 1, 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
Expired (140,000) $5.63
--------------
Shares Under Option and Exercisable at October 31, 2002 309,000 $5.63
==============
The following table summarizes information about stock options outstanding under
the 1987 Plan as of October 31, 2002:
Options Outstanding Options Exercisable
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Price at 10/31/02 Contractual Life Exercise Price at 10/31/02 Exercise Price
------------------- ----------------- ----------------------- ------------------ ---------------- ----------------
$5.63 309,000 3.17 $5.63 309,000 $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.
On July 14, 1993, our shareholders approved the 1993 Plan, which had been
adopted by our Board of Directors on April 28, 1993. The 1993 Plan was amended
as of May 3, 1995 and May 10, 1996 to, among other things, increase the number
of shares available for issuance thereunder from 6,000,000 shares to 20,000,000
shares, after giving consideration to stock splits. 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 our shareholders in July 2000, the 1993
Plan was terminated with respect to the grant of future options.
F-17
Information regarding the 1993 Plan for the three years ended October 31, 2002
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares Under Option at November 1, 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 at October 31, 2001 10,876,780 $4.23
Canceled $3.94
--------------
(80,000)
Shares Under Option and Exercisable at October 31, 2002 10,796,780 $4.26
==============
The following table summarizes information about stock options outstanding under
the 1993 Plan as of October 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/02 Contractual Life Exercise Price at 10/31/02 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$0.84 to $1.96 1,270,700 5.19 $1.26 1,270,700 $1.26
$2.19 to $3.16 1,099,500 4.96 $2.35 1,099,500 $2.35
$3.31 to $4.81 5,855,580 3.77 $4.24 5,855,580 $4.24
$5.75 to $6.88 2,571,000 1.36 $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.
On July 25, 2000, our shareholders approved the 2000 Share Plan. The maximum
number of shares of common stock that may be granted was 5,000,000 shares. On
July 6, 2001 and July 16, 2002, the 2000 Share Plan was amended by our Board of
Directors to increase the maximum number of shares of common stock that may be
granted to 10,000,000 shares and 15,000,000 shares, respectively. These
amendments were approved by our shareholders on August 16, 2001 and September
12, 2002, respectively. 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 subsequent
annual meeting of our shareholders at which they are elected to the Board of
Directors.
F-18
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 three years ended October 31,
2002 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares Under Option at November 1,1999 - -
Granted 1,144,000 $1.10
--------------
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
Granted 60,000 $0.34
Canceled (50,000) $0.75
Exercised (20,000) $0.40
---------------
Shares Under Option at October 31, 2002 3,599,966 $0.70
==============
Options Exercisable at October 31, 2002 3,539,966 $0.70
==============
The following table summarizes information about stock options outstanding under
the 2000 Share Plan as of October 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/02 Contractual Life Exercise Price at 10/31/02 Exercise Price
------------------- ----------------- -------------------- ------------------ ----------------- ------------------
$0.40 1,450,000 8.62 $0.40 1,390,000 $0.40
$0.44 - $0.94 1,042,966 7.71 $0.69 1,042,966 $0.69
$1.00 - $1.38 1,107,000 7.64 $1.09 1,107,000 $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, 2002, 4,430,500
shares were available for future grants under the 2000 Share Plan.
10. 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 $228,000 per annum with a 3% annual increase and an escalation
clause for increases in certain operating costs. This lease does not contain
provisions for its renewal.
F-19
Rent expense for the years ended October 31, 2002, 2001 and 2000, was
approximately $250,000, $284,000 and $332,000, respectively.
As of October 31, 2002, our noncancelable operating lease commitments are as
follows:
2003 $ 228,000
2004 20,000
----------------
$ 248,000
11. EMPLOYEE PENSION PLAN
We adopted a noncontributory defined contribution pension plan, effective
November 1, 1983, covering all of our present employees. Contributions, which
are made to a trust, are based upon specified percentages of compensation, as
defined in the plan. During fiscal 2001, we amended the plan to suspend benefit
accruals as of November 1, 2000. Pension expense of approximately $0, $0, and
$102,000 for the fiscal years ended October 31, 2002, 2001 and 2000,
respectively, had been accrued and funded on a current basis.
12. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended October 31,
------------------------------------------------
2002 2001 2000
---- ---- ----
Federal:
Current $ - $ - $ -
Deferred (19,000) (1,118,000) (2,101,000)
State:
Current - - -
Deferred (3,000) 79,000 2,590,000
Adjustment to valuation allowance related to net
deferred tax assets 22,000 1,039,000 (489,000)
---------------- --------------- ---------------
$ - $ - $ -
================ =============== ===============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset, net, at October 31, 2002 and 2001, are as follows:
F-20
2002 2001
---- ----
Long-term deferred tax assets:
Other assets $ 1,100,000 $ -
Federal and state NOL and tax credit carryforwards 32,424,000 33,496,000
Other 74,000 80,000
--------------- ---------------
Subtotal 33,598,000 33,576,000
Less: valuation allowance (33,598,000) (33,576,000)
---------------- ---------------
Deferred tax asset, net $ - $ -
=============== ===============
As of October 31, 2002, we had tax net operating loss and tax credit
carryforwards of approximately $78,416,000 and $1,835,000, respectively,
available, within statutory limits (expiring at various dates between 2003 and
2022), to offset any future regular Federal corporate taxable income and taxes
payable. If the tax benefits relating to deductions of option holders' income
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.
We had tax net operating loss and tax credit carryforwards of approximately
$78,545,000 and $126,000, respectively, as of October 31, 2002, 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 2003 and
2022 and the tax credit carryforwards expire between 2003 and 2017.
During the three years ended October 31, 2002, we incurred no Federal and no
material State income taxes.
13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While there is no formal agreement, our Chairman of the Board and Chief
Executive Officer and our President waived any and all rights to receive salary
and related pension benefits for an undetermined period of time beginning
November 1985. Since 1987, three other senior level personnel have also waived
salary and related pension benefits. The aggregate annual expenses for these
five individuals at the time of their respective initial waivers were
approximately $475,000. We do not anticipate the retroactive reinstatement of
any of the salary or related pension benefit waivers indicated above. We
compensate these individuals in the form of stock options.
14. 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 years ended October 31, 2002 and 2001:
F-21
Segment Data Flat-Panel Display Encryption Products Total
- ---------------------------------- ------------------ ------------------- -----------
Year Ended October 31, 2002:
Revenues $ 4,541,667 $ 645,027 $ 5,186,694
Net income (loss) 1,800,365 (5,085,605) (3,285,240)
Depreciation 29,676 56,795 86,471
Interest income 8,067 15,439 23,506
Impairment loss on
commercial trade barter credits - 2,820,800 2,820,800
Stock awards granted to
employees and consultants
pursuant to stock incentive plans 451,997 976,207 1,428,204
Total assets 355,061 2,376,448 2,731,509
Additions to long-lived assets 13,236 25,331 38,567
Year Ended October 31, 2001:
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
Interest income 3,963 28,316 32,279
Stock awards granted to
employees and consultants
pursuant to stock incentive plans 128,828 907,676 1,036,505
Total assets 538,445 6,023,958 6,562,403
Additions to long-lived assets 1,917 14,055 15,972
Geographic Information
We generate revenue both domestically (United States) and internationally.
International revenues are based on the country in which our customer
(distributor) is located. For the years ended October 31, 2002, 2001 and 2000,
and as of each respective year-end, sales and accounts receivable by geographic
area are as follows:
Geographic Data 2002 2001 2000
------------------------------------ ---- ---- ----
Revenue:
United States $ 622,144 $ 581,885 $ 1,433,918
Japan 4,541,667 958,333 -
Other international 22,883 150,550 38,080
--------------- ----------- --------------
$ 5,186,694 $ 1,690,768 $ 1,471,998
=============== =========== ==============
Accounts receivable:
United States $ 68,177 $ 468,716 $ 594,851
International 9,603 67,675 -
--------------- ----------- --------------
$ 77,780 $ 536,391 $ 594,851
=============== =========== ==============
F-22
15. QUARTERLY RESULTS AND SEASONALITY (UNAUDITED)
The following table sets forth unaudited financial data for each of our last
eight fiscal quarters:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended October 31, 2002:
Income Statement Data:
Revenue $ 1,277,189 $ 2,616,975 $ 1,253,859 $ 38,671
Gross profit
850,913 1,789,144 745,983 (70,404)
Net income (loss)
60,307 897,527 (3,029,184) (1,213,890)
Net income-(loss) per share of common stock-
basic and diluted $ 0.00 $ 0.01 $ (0.04) $ (0.02)
Year Ended October 31, 2001:
Income Statement Data:
Revenue $ 178,291 $ 245,014 $ 182,495 $ 126,635
Gross profit
104,041 150,798 304,248 434,042
Net (loss)
(1,130,136) (788,080) (946,307) (707,434)
Net (loss) per share of common stock -
basic and diluted $ (0.02) $ (0.01) $ (0.01) $ (0.01)
f-23
S-1
We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of
Regulation S-X, a copy of the prior year's Report of Independent Public
Accountants from our prior independent public accountants, Arthur Andersen LLP
("Andersen"). This report was previously issued by Andersen, for filing with our
Annual Report on Form 10-K for fiscal year 2001, and has not been reissued by
Andersen.
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.
SCHEDULE II
S-2
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
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
- -----------------------------------------------------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 240,000 $ 155,505 $ 70,000 $ 325,505
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ -
- -----------------------------------------------------------------------------------------------------------------------------------
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
S-2
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation, as amended.
(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.)
3.2 By-laws, as amended and restated. (Incorporated by
reference to Post-Effective Amendment No. 1 to Form
S-8 (Registration No. 33-49402) dated December 8,
1993.)
Amendment to By-laws. (Incorporated by reference to
Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.)
10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
(Incorporated by reference to Form 10-Q for the
fiscal quarter ended April 30, 1987.)
10.2 Amendment to Stock Option Plan, adopted on March 12,
1990 and approved by shareholders on May 24, 1990.
(Incorporated by reference to Form 10-K for the
fiscal year ended October 31, 1990.)
10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on July
14, 1993. (Incorporated by reference to Proxy
Statement dated June 10, 1993.)
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. (Incorporated by
reference to Form S-8 (Registration No. 33-62381)
dated September 6, 1995.)
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. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.)
10.6 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
January 31, 1999.)
10.7 Stock Subscription Agreement dated April 27, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to
Form 10-Q for the fiscal quarter ended April 30,
1999.)
10.8 Agreement dated July 28, 1999, among CopyTele, Inc.,
Harris Corporation and RF Communications.
(Incorporated by reference to Form 8-K dated July
28, 1999.)
10.9 Stock Subscription Agreement dated August 30, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to
Form 10-K for the fiscal year ended October 31,
1999.)
10.10 CopyTele, Inc. 2000 Share Incentive Plan.
(Incorporated by reference to Annex A of our Proxy
Statement dated June 12, 2000.)
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. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
July 31, 2001.)
10.12 Amendment No. 2 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 16, 2002 and approved
by shareholders on September 12, 2002. (Incorporated
by reference to Exhibit 4(e) to our Form S-8
(Registration No. 333-99717) dated September 18,
2002.)
10.13 Joint Cooperation Agreement for Field Emission
Displays, dated June 11, 2001, by and between
CopyTele, Inc. and Futaba Corporation. (Incorporated
by reference to Form 10-Q for the fiscal quarter
ended April 30, 2001.)
10.14 Letter Agreement between CopyTele, Inc. and Futaba
Corporation, dated January 11, 2002. (Incorporated by
reference to Exhibit 10.13 to our Form 10-K for the
fiscal year ended October 31, 2001.)
10.15 Amendment, dated May 10, 2001, to the Joint
Cooperation Agreement between CopyTele, Inc. and
Volga Svet Ltd. (Incorporated by reference to Exhibit
10.14 to our Form 10-K for the fiscal year ended
October 31, 2001.)
10.16 Letter Agreement between CopyTele, Inc. and Volga
Svet Ltd., dated as of February 1, 2002.
(Incorporated by reference to Exhibit 10.15 to our
Form 10-K for the fiscal year ended October 31,
2001.)
16 Letter from Arthur Andersen LLP regarding change in
certifying accountant. (Incorporated by reference to
Form 8-K dated June 6, 2002.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
23.2 Notice Regarding Consent of Arthur Andersen LLP.
(Filed herewith.)
99.1 Statement of Chief Executive Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
(Filed herewith.)
99.2 Statement of Chief Financial Officer Pursuant to
Section 1350 of Title 18 of the United States Code.
(Filed herewith.)