SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------ ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On March 10, 2003, the registrant had outstanding 73,210,635 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets as of January 31, 2003 (Unaudited) and
October 31, 2002 3
Condensed Statements of Operations (Unaudited) for the three months 4
ended January 31, 2003 and 2002
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 2003 and 2002 5
Notes to Condensed Financial Statements (Unaudited) 6 - 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 13 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25
Item 4. Controls and Procedures. 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 26
SIGNATURES 26
CERTIFICATIONS 27 - 30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
January 31, October 31,
ASSETS 2003 2002
------
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 602,943 $ 854,822
Accounts receivable, net of allowance for doubtful accounts of
$316,655 and $325,505, respectively 140,042 77,780
Other receivables 322,952 322,952
Inventories 1,169,756 1,296,199
Prepaid expenses and other current assets 127,608 102,519
------------------ ------------------
Total current assets 2,363,301 2,654,272
PROPERTY AND EQUIPMENT, net 61,462 71,583
OTHER ASSETS
5,509 5,654
------------------ ------------------
$ 2,430,272 $ 2,731,509
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 410,629 $ 379,169
Accrued liabilities 51,003 34,850
------------------ ------------------
Total current liabilities 461,632 414,019
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; 72,433,870 and 70,257,155 shares issued
and outstanding, respectively 724,339 702,572
Additional paid-in capital 64,030,192 63,596,213
Accumulated deficit (62,785,891) (61,981,295)
------------------ ------------------
1,968,640 2,317,490
------------------ ------------------
$ 2,430,272 $ 2,731,509
================== ==================
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended
--------------------------------------
January 31,
---------------------------------------
2003 2002
----------------- -----------------
REVENUE $ 91,339 $ 1,277,189
COST OF REVENUE 62,025 426,276
----------------- -----------------
Gross profit 29,314 850,913
----------------- -----------------
OPERATING EXPENSES
Research and development expenses 491,627 293,411
Selling, general and administrative expenses 343,952 501,796
----------------- -----------------
Total operating expenses 835,579 795,207
----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (806,265) 55,706
INTEREST INCOME 1,669 4,601
----------------- -----------------
NET INCOME (LOSS) $ (804,596) $ 60,307
================= =================
PER SHARE INFORMATION:
Net income (loss) per share:
Basic $ (0.01) $ 0.00
================= =================
Diluted $ (0.01) $ 0.00
================= =================
Shares used in computing net income (loss) per share:
Basic 71,048,761 66,950,508
================= =================
Diluted 71,048,761 67,269,479
================= =================
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended
January 31,
---------------------------------------
2003 2002
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (309,797) $(1,119,580)
Cash received from customers 22,049 278,081
Cash received from collaborative agreements - 3,000,000
Interest received 1,669 4,601
------------------ -----------------
Net cash (used in) provided by operating activities (286,079) 2,163,102
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment - (25,018)
------------------ -----------------
Net cash (used in) investing activities - (25,018)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration costs 34,200 -
------------------ -----------------
Net cash provided by financing activities 34,200 -
------------------ -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (251,879) 2,138,084
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 854,822 1,316,860
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 602,943 $ 3,454,944
================== =================
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $ (804,596) $ 60,307
Stock awards granted to employees and consultants pursuant to stock
incentive plans 421,546 396,593
Provision for doubtful accounts 7,028 (60,000)
Depreciation and amortization 10,121 23,916
Change in operating assets and liabilities:
Accounts receivable and other receivables (69,290) 33,892
Inventories 126,443 91,969
Prepaid expenses and other current assets (25,089) (101,669)
Other assets 145 436
Accounts payable and accrued liabilities 47,613 (249,342)
Deferred revenue - 1,967,000
----------------- -----------------
Net cash provided by (used in) operating activities $ (286,079) $ 2,163,102
================= =================
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE AND DEVELOPMENT OF BUSINESSAND FUNDING
Organization and Basis of Presentation
CopyTele, Inc. was incorporated on November 5, 1982. 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.
The condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") for interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by US GAAP for complete financial
statements. The information contained herein is for the three-month periods
ended January 31, 2003 and 2002. In management's opinion, all adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation of the results of operations for such periods) have been included
herein.
The results of operations for interim periods may not necessarily reflect the
results of operations for a full year. Reference is made to the audited
financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended October 31, 2002, for more extensive disclosures
than contained in these condensed financial statements.
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 also developed a software security
product, using either the Triple DES or the AES algorithm, 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 are also continuing our research and development activities with respect to
flat panel display technologies, including our thin flat video color display
("Field Emission Display" or "FED"). 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
6
video FED and subsequently with Volga we developed a 5-inch (diagonal)
monochrome video FED. We have also worked with Volga to improve our display
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.
During the three months ended January 31, 2003, our operating activities used
approximately $286,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $310,000, which was offset by cash of
approximately $22,000 received from collections of accounts receivable related
to sales of encryption products and approximately $2,000 of interest income
received. In addition, we received approximately $34,000 in cash upon the
exercise of stock options. As a result, our cash and cash equivalents at January
31, 2003 decreased to approximately $603,000 from approximately $855,000 at the
end of fiscal 2002.
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 included in our Annual Report on Form 10-K for the
year ended October 31, 2002, 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 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. We have engaged a
firm as an investment advisor and placement agent in connection with an
anticipated private placement of equity securities. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give you no assurance that funds will be available to us
7
from this equity financing or that, if available, we will be able to obtain such
funds on favorable terms and conditions.
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
January 31, 2003 was approximately $1,969,000. 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 failed to close at $1 per share or more for a minimum of 10
consecutive trading days prior to February 10, 2003. We did not achieve such
minimum closing bid price requirement by February 10, 2003. We have requested
that Nasdaq grant us an additional grace period to regain compliance with the
minimum bid price and the minimum stockholders' equity requirements. There can
be no assurance that Nasdaq will grant us any additional grace periods. A
delisting of our common stock could have an adverse affect on the market price
and liquidity of our common stock.
2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
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. The adoption of SFAS No. 143 had no 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. The
adoption of SFAS No. 144 had no 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. The
adoption of SFAS No. 145 has not had and is not expected to have a material
effect on our financial position or results of operations.
8
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. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 had no
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.
3. COLLABORATIVE AGREEMENT
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
9
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 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", 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.
5. 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.
6. INVENTORIES
Inventories consist of the following as of:
January 31, October 31,
2003 2002
----------------- -----------------
Component parts $ 358,520 $ 385,538
Work-in-process 39,548 44,105
Finished products 771,688 866,556
----------------- ----------------
$ 1,169,756 $ 1,296,199
================= ================
10
7. STOCK INCENTIVE PLANS
During the three-month periods ended January 31, 2003 and 2002, we issued
1,439,585 shares and 784,950 shares, respectively, of common stock to certain
employees for services rendered, principally in lieu of cash compensation,
pursuant to the CopyTele, Inc. 2000 Share Incentive Plan (the "2000 Share
Plan"). In addition during the three months ended January 31, 2003 and 2002, we
issued 547,130 shares and 15,000 shares, respectively, of common stock to
consultants for services rendered pursuant to the 2000 Share Plan. The
weighted-average fair value per share of the common stock issued was $0.21 and
$0.50 during the three-month periods ended January 31, 2003 and 2002,
respectively.
During the three-month periods ended January 31, 2003 and 2002, we granted to
employees options to purchase 190,000 shares and 0 shares, respectively,
pursuant to the 2000 Share Plan. During the three-month period ended January 31,
2003, 190,000 stock options were exercised, with aggregate proceeds of $34,200.
8. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
We comply with the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, basic net 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 the three months ended
January 31, 2003 is the same as Basic EPS, as the inclusion of the effect of
common stock equivalents then outstanding would be anti-dilutive. Excluded from
the calculation of Diluted EPS for the three-month periods ended January 31,
2003 and 2002 were options to purchase 14,660,776 shares and 13,482,246 shares,
respectively. Also excluded from the calculation of Diluted EPS for the
three-month period ended January 31, 2002 were warrants to purchase 153,250
shares.
The following table sets forth the computation of net income (loss) per share of
common stock:
Three-months ended
------------------------------
January 31, January 31,
2003 2002
---------------- ---------------
Net income (loss) $ (804,596) $60,307
---------------- ---------------
Shares used in computing net income (loss) per share:
Basic 71,048,761 66,950,508
Effect of stock options and warrants - 318,971
---------------- ---------------
Diluted 71,048,761 67,269,479
================ ===============
Net income (loss) per share:
Basic $ (0.01) $0.00
================ ===============
Diluted $ (0.01) $0.00
================ ===============
11
9. 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.
The following represents selected financial information for our segments for the
three-month periods ended January 31, 2003 and 2002:
Flat-Panel Encryption
Segment Data Display Products Total
Three Months Ended January 31, 2003:
Revenue $ - $ 91,339 $ 91,339
Net loss (363,475) (441,121) (804,596)
Three Months Ended January 31, 2002:
Revenue $ 1,033,000 $ 244,189 $ 1,277,189
Net income (loss) 660,139 (599,832) 60,307
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-Looking Statements
Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in "General Risks and
Uncertainties" below and Note 1 to Condensed Financial Statements. You should
read the following discussion and analysis along with our Annual Report on Form
10-K for the year ended October 31, 2002 and the condensed financial statements
included in this Report. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
Report.
GENERAL
CopyTele, Inc. was incorporated on November 5, 1982. 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.
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 also developed the USS-900 Security
Software, a software security product, using either the Triple DES or the AES
algorithm, 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 are currently using several U.S.-based electronic production contractors to
produce the components for our encryption devices. We sell our products
primarily through a distributor/dealer network and also to end-users, and
recently we also began working with large organizations that are adding security
products to their existing product lines.
We are also continuing our research and development activities with respect to
flat panel display technologies, including our thin flat video color display
("Field Emission Display" or "FED").
13
Using our planar edge emission technology, we have developed engineering
operational models of monochrome and full-color video Field Emission Displays.
We believe that our display:
- - can be produced in a variety of sizes, permitting its use for any
application from hand-held to HDTV devices;
- - can function in a broad environmental range, similar to a CRT;
- - has low power consumption requirements;
- - can be viewed from a wide angle, similar to a CRT; and
- - has high brightness with full color video capability.
From June 2001 until June 2002, we worked with Futaba Corporation ("Futaba")
under a Joint Cooperation Agreement for Field Emission Displays (the "Futaba
Agreement") to jointly develop and commercialize a full-color video display
utilizing our Field Emission Display technology. During that period, with the
additional assistance of Volga Svet, Ltd. ("Volga") pursuant to an agreement
with Volga (the "Volga Agreement"), we developed a 3-inch (diagonal) engineering
model of a full color video FED. 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 FED. We have also
worked with Volga to improve our display 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 have recently received, from the U.S.
patent office, a notice of allowance of the claims contained in our patent
application for three variations of our FED technology.
Using these engineering models, we have begun discussing commercial production
of our displays with potential purchasers for incorporation into their products.
We have made arrangements with Volga for Volga to produce up to 5-inch
(diagonal) high brightness displays using its current production facilities and
are working with a potential purchaser to incorporate our display into the
purchaser's portable product. 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.
CRITICAL ACCOUNTING POLICES
Our financial statements are prepared in conformity with accounting principles
generally accepted in the United State of America. As such, we are required to
make certain estimates, judgments and assumptions that management believes are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
14
We believe the following critical accounting polices affect the more significant
judgments and estimates used in the preparation of our financial statements. For
additional discussion on the application of these and other accounting polices,
refer to the financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended October 31, 2002.
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 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 the three-month periods ended January 31, 2003 and 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, 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. Our
net income is directly affected by management's estimate of the realizability of
inventories.
Valuation of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important that could trigger an impairment review include a
significant underperformance relative to expected historical or projected future
operating results and cash flows, a significant change in the manner of the use
15
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 three months ended July 31, 2002, we recognized an impairment loss in
the amount of approximately $2,821,000 in connection with unused commercial
trade barter credits. These trade credits may be redeemed to reduce the cost of
advertising as well as other products and services. To utilize these barter
credits in exchange for advertising and purchase discounts, we must pay between
65-70% of the transaction value in cash. Because our anticipated cash flow has
been negatively affected by the termination of the Futaba Agreement, our ability
to make such payments and thereby utilize the barter credits is uncertain.
Stock 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
Three months ended January 31, 2003 compared with three months ended January 31,
2002
Product Sales
Revenue
Revenue from product sales decreased by approximately $153,000, to approximately
$91,000 in the three-month period ended January 31, 2003, from approximately
$244,000 in the comparable prior-year period. All product sales are encryption
products and are net of sales returns. Our product sales have been limited and
are sensitive to individual large transactions. We believe that changes in
product sales between periods generally represent the nature of the early stage
of our product and sales channel development.
Gross Profit
Gross profit from product sales decreased by approximately $54,000 in the three
months ended January 31, 2003, to approximately $29,000, compared to
approximately $83,000 in the comparable prior-year period. Gross profit from
product sales as a percentage of revenue decreased to approximately 32% in the
three-month period ended January 31, 2003, compared to approximately 34% in the
comparable prior-year period.
16
Collaborative Agreement
Revenue
We recognized no collaborative agreement revenue in the three months ended
January 31, 2003, as compared to approximately $1,033,000 in the comparable
prior-year period. All collaborative agreement revenue is revenue received from
Futaba under the Futaba Agreement. We recognized payments received from Futaba
as income ratably over the contractually defined one-year period of our
commitment under this portion of the Futaba Agreement. As Futaba has terminated
the Futaba Agreement, we do not anticipate receiving any further revenue under
the Futaba Agreement.
Gross Profit
We recognized no gross profit from collaborative agreement in the three months
ended January 31, 2003, as compared to approximately $768,000 in the three
months ended January 31, 2002. Gross profit from collaborative agreement in the
three months ended January 31, 2002 was net of cost of revenue of approximately
$265,000, consisting of research and development costs relating to FED
technology, including cost of revenue related to the Volga Agreement of
approximately $180,000. 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 increased by approximately $199,000 in the
three months ended January 31, 2003, to approximately $492,000, from
approximately $293,000 in the comparable prior-year period. The increase 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,
non-employee consultant expense increased by approximately $102,000 and patent
related expenses increased by approximately $44,000, offset by a decrease in
employee compensation and related costs of approximately $42,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $158,000
to approximately $344,000 in the three months ended January 31, 2003 from
approximately $502,000 in the comparable prior-year period. The decrease in
selling, general and administrative expenses reflects a decrease in professional
fees of approximately $107,000, a decrease in employee compensation and related
costs of approximately $73,000 and the receipt of proceeds from the settlement
of a property insurance claim of approximately $62,000 net of expenses, offset
by an increase in advertising expense of approximately $30,000 and the recovery
in the prior-year period of a previously recorded bad debt charge of
approximately $60,000.
17
Interest Income
The decrease in interest income in the three months ended January 31, 2003 to
approximately $2,000 from approximately $5,000 in the comparable prior-year
period resulted primarily from the decrease in average funds available for
investment.
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 the three months ended January 31, 2003, our operating activities used
approximately $286,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $310,000, which was offset by cash of
approximately $22,000 received from collections of accounts receivable related
to sales of encryption products and approximately $2,000 of interest income
received. In addition, we received approximately $34,000 in cash upon the
exercise of stock options. As a result, our cash and cash equivalents at January
31, 2003 decreased to approximately $603,000 from approximately $855,000 at the
end of fiscal 2002.
Accounts receivable and other receivables increased by approximately $62,000
from approximately $401,000 at the end of fiscal 2002 to approximately $463,000
at January 31, 2003. The increase in accounts receivable is a result of the
timing of collections offset by an increase in the provision for doubtful
accounts. Inventories decreased approximately $126,000 from approximately
$1,296,000 at October 31, 2002 to approximately $1,170,000 at January 31, 2003,
18
as a result of the timing of shipments and production schedules as well as a
write down of Magicom inventory of approximately $55,000. We discontinued
production of Magicom products in fiscal 2000, but continue to sell our
remaining inventory. Prepaid expenses and other current assets increased by
approximately $25,000 from approximately $103,000 at the end of fiscal 2002 to
approximately $128,000 at January 31, 2003. Accounts payable and accrued
liabilities increased by approximately $48,000 from approximately $414,000 at
the end of fiscal 2002 to approximately $462,000 at January 31, 2003, as a
result of the timing of payments.
As a result of these changes, working capital at January 31, 2003 decreased to
approximately $1,902,000 from approximately $2,240,000 at the end of fiscal
2002.
Our working capital includes inventory of approximately $1,170,000 at January
31, 2003. 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 included in our Annual Report on Form 10-K for the
year ended October 31, 2002, 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 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. We have engaged a firm as an investment advisor and placement
agent in connection with an anticipated private placement of equity securities.
19
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 are also seeking to improve our liquidity through increased sales or license
of products and technology. In an effort to generate sales, we have marketed our
encryption products directly to U.S. and international distributors, dealers and
original equipment manufacturers who market our encryption products on a
non-exclusive basis. During the three-month periods ended January 31, 2003 and
2002, we have recognized revenue from product sales of approximately $91,000 and
$244,000, respectively, and revenue in connection with the Futaba Agreement of
approximately $0 and $1,033,000, respectively.
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
January 31, 2003 was approximately $1,969,000. 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 failed to close at $1 per share or more for a minimum of 10
consecutive trading days prior to February 10, 2003. We did not achieve such
minimum closing bid price requirement by February 10, 2003. We have requested
that Nasdaq grant us an additional grace period to regain compliance with the
minimum bid price and the minimum stockholders' equity requirements. There can
be no assurance that Nasdaq will grant us any additional grace periods. 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 January 31, 2003:
Payments Due by Period
-----------------------------------------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- --------------------------------- ------------- ------------- ------------- -------------- -------------
Operating Leases $ 190,000 - - - $ 190,000
------------- ------------- ------------- -------------- -------------
Total Contractual Cash
Obligations $ 190,000 - - - $ 190,000
============= ============= ============= ============== =============
20
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 in the three months ended January 31, 2003, 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 January 31, 2003. We
have set forth below our net (losses), research and development expenses and net
cash provided by (used in) operations for the three-month periods ended January
31, 2003 and 2002, and for the fiscal years ended October 31, 2002 and 2001:
(Unaudited)
Three Months Ended Fiscal Years Ended
January 31, October 31,
------------------------------- ------------------------------
2003 2002 2002 2001
---- ---- ---- ----
Net income (loss) $ (804,596) $ 60,307 $ (3,285,240) $(3,571,957)
Research and development $ 491,627 $ 293,411 $ 1,625,974 $ 2,324,979
Net cash (used in) provided by operations $ (286,079) $ 2,163,102 $ (431,471) $ (717,845)
- - 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
included in our Annual Report on Form 10-K for the year ended October 31, 2002,
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 until at least
21
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. We have engaged a firm as an investment advisor and placement
agent in connection with an anticipated private placement of equity securities.
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 may not generate sufficient revenues to support our operations in the
future or to generate profits.
We are engaged in two principal operations: (i) developing, manufacturing and
marketing encryption products for voice, fax, and data communications and (ii)
with Volga, developing an advanced flat panel video display technology. Our
encryption products are only in their initial stages of commercial production
and 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 revenues to support our operations in the future or to
generate profits will depend upon numerous factors, many of which are beyond our
control, including:
- - our ability to successfully market our line of encryption products;
- - our production capabilities and those of our suppliers as required for the
production of our encryption products;
- - long-term product performance and the capability of our dealers and
distributors to adequately service our products;
- - our ability to maintain an acceptable pricing level to end-users for our
products;
- - the ability of suppliers to meet our requirements and schedule;
- - our ability to successfully develop our new products under development;
- - rapidly changing consumer preferences;
- - the possible development of competitive products that could render our
products obsolete or unmarketable;
- - our ability to further develop and to commercialize our flat panel display
technology in light of the termination of the Futaba Agreement;
- - our ability to jointly develop with Volga a full-color video display that
can be successfully marketed; o the capability of Volga to produce video
displays and supply them to us; and o our future negotiations with Volga
with respect to payments and other arrangements under the Volga Agreement.
Because our revenue is subject to fluctuation, we may be unable to reduce
operating expenses quickly enough to offset any unexpected revenue shortfall. If
we have a shortfall in revenue in relation to expenses, our operating results
would suffer. Our operating results for any particular quarter may not be
indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of results of operations as an indication of our
future performance.
22
- - We are dependent upon a few key executives and the loss of their services
could adversely affect us.
Our future success is dependent on our ability to hire, retain and motivate
highly qualified personnel. In particular, our success depends on the continued
efforts of our Chief Executive Officer, Denis A. Krusos, and our President,
Frank J. DiSanto, who founded our company in 1982 and are engaged in the
management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
- - The very competitive markets for our encryption products and flat panel
display technology could have a harmful effect on our business and
operating results.
The markets for our encryption products and flat panel display technology
worldwide are highly competitive and subject to rapid technological changes.
Most of our competitors are larger than us and possess financial, research,
service support, marketing, manufacturing and other resources significantly
greater than ours. Competitive pressures may have a harmful effect on our
business and operating results.
- - If we are unable to maintain our Nasdaq Stock Market listing, the market
price of our common stock could be adversely affected.
Our common stock is listed on The Nasdaq SmallCap Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid 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
January 31, 2003 was approximately $1,969,000. 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 failed to close at $1 per share or more for a minimum of 10
consecutive trading days prior to February 10, 2003. We did not achieve such
minimum closing bid price requirement by February 10, 2003. We have requested
that Nasdaq grant us an additional grace period to regain compliance with the
minimum bid price and the minimum stockholders' equity requirements. There can
be no assurance that Nasdaq will grant us any additional grace periods. A
delisting of our common stock could have an adverse affect on the market price
and liquidity of our common stock.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
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
23
June 15, 2002. The adoption of SFAS No. 143 had no 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. The
adoption of SFAS No. 144 had no 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. The
adoption of SFAS No. 145 has not had and is not expected to 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. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 had no
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.
24
Item 3. 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 4. 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.
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.3 Amendment to By-Laws.
99.1 Statement of Chief Executive Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated March 17, 2003.
99.2 Statement of Chief Financial Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated March 17, 2003.
(b) Reports on Form 8-K
We filed no Current Report on Form 8-K during the quarter ended
January 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CopyTele, Inc.
By: /s/ Denis A. Krusos
----------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
March 17, 2003 (Principal Executive Officer)
By: /s/ Frank J. DiSanto
--------------------
Frank J. DiSanto
March 17, 2003 President
By: /s/ Henry P. Herms
---------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
March 17, 2003 Financial and Accounting Officer)
26
CERTIFICATION
I, Denis A. Krusos, Chairman of the Board and Chief Executive Officer of
CopyTele, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CopyTele, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of 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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
27
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
March 17, 2003 (Principal Executive Officer)
28
CERTIFICATION
I, Henry P. Herms, Vice President - Finance and Chief Financial Officer of
CopyTele, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CopyTele, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of 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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
29
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
March 17, 2003 Financial and Accounting Officer)
30
Exhibit 3.3
Amendment to By-laws
Article I, Section 10 of the Amended and Restated By-Laws of the Corporation is
hereby amended to read in its entirety as follows:
"SECTION 10. Business at Stockholders' Meetings.
(a) Except as otherwise provided by law, at any annual or special
meeting of stockholders only such business shall be conducted as shall have been
properly brought before the meeting in accordance with the provisions of the
Certificate of Incorporation and these By-laws of the Corporation. In order to
be properly brought before the meeting, such business must have either been (i)
specified in the written notice of the meeting (or any supplement thereto) given
to stockholders of record on the record date for such meeting by or at the
direction of the Board of Directors, (ii) brought before the meeting at the
direction of the Board of Directors or the Chairman of the meeting, or (iii)
specified in a written notice given by or on behalf of a stockholder of record
on the record date for such meeting entitled to vote thereat or a duly
authorized proxy for such stockholder, in accordance with all of the following
requirements. A notice referred to in clause (iii) of this Section must be
delivered personally to, or mailed to and received at, the principal executive
office of the Corporation, addressed to the attention of the Secretary, in the
case of business to be brought before a special meeting of stockholders, not
more than ten (10) days after the date of the initial notice referred to in
clause (i) of this Section, and, in the case of business to be brought before an
annual meeting of stockholders, not less than forty five (45) days prior to the
first anniversary date of the initial notice referred to in clause (i) of this
Section of the previous year's annual meeting; provided, however, that such
notice shall not be required to be given more than seventy-five (75) days prior
to the annual meeting of stockholders. Such notice referred to in clause (iii)
of this Section shall be set forth (A) a full description of each such item of
business proposed to be brought before the meeting, (B) the name and address of
the person proposing to bring such business before the meeting, (C) the class
and number of shares held of record, held beneficially and represented by proxy
by such person as of the record date for the meeting (if such date has then been
made publicly available) and as of the date of such notice, (D) if any item of
such business involves a nomination for director, all information regarding each
such nominee that would be required to be set forth in a definitive proxy
statement filed with the Securities and Exchange Commission pursuant to Section
14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor thereto, and the written consent of each such nominee to serve if
elected, and (E) all other information that would be required to be filed with
the Securities and Exchange Commission if, with respect to the business proposed
to be brought before the meeting, the person proposing such business were a
participant in a solicitation subject to Section 14 of the Exchange Act, or any
successor thereto. No business shall be brought before any annual or special
meeting of stockholders of the Corporation otherwise than as provided in the
Section 10".
Exhibit 99.1
Statement of Chief Executive Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code, the
undersigned, Denis A. Krusos, the Chairman of the Board and Chief Executive
Officer of CopyTele, Inc., hereby certifies that:
1. The Company's Form 10-Q Quarterly Report for the period ended January
31, 2003 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Denis A. Krusos
-----------------------
Denis A. Krusos
Chairman of the Board,
March 17, 2003 Chief Executive Officer
Exhibit 99.2
Statement of Chief Financial Officer
Pursuant to Section 1350 of Title 18 of the United States Code
Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned,
Henry P. Herms, the Vice President - Finance and Chief Financial Officer of
CopyTele, Inc., hereby certifies that:
1. The Company's Form 10-Q Quarterly Report for the period ended January
31, 2003 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Henry P. Herms
----------------------------
Henry P. Herms
Vice President - Finance and
March 17, 2003 Chief Financial Officer