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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 April 30, 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 June 9, 2003, the registrant had outstanding 75,744,667 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 April 30, 2003 (Unaudited) and
October 31, 2002 3
Condensed Statements of Operations (Unaudited) for the six months 4
ended April 30, 2003 and 2002
Condensed Statements of Operations (Unaudited) for the three months 5
ended April 30, 2003 and 2002
Condensed Statements of Cash Flows (Unaudited) for the six months 6
ended April 30, 2003 and 2002
Notes to Condensed Financial Statements (Unaudited) 7 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 15 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28
Item 4. Controls and Procedures. 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 29
SIGNATURES 29
CERTIFICATIONS 30 - 33
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
COPYTELE, INC.
CONDENSED BALANCE SHEETS
------------------------
(Unaudited)
April 30, October 31,
ASSETS 2003 2002
------ ----------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 407,794 $ 854,822
Accounts receivable, net of allowance for doubtful accounts of
$230,337 and $325,505, respectively 73,886 77,780
Other receivables 141,000 322,952
Inventories 1,032,152 1,296,199
Prepaid expenses and other current assets 113,003 102,519
------------------- --------------------
Total current assets 1,767,835 2,654,272
PROPERTY AND EQUIPMENT, net 52,656 71,583
OTHER ASSETS 5,509 5,654
------------------- --------------------
$ 1,826,000 $ 2,731,509
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 379,583 $ 379,169
Accrued liabilities 41,628 34,850
------------------- --------------------
Total current liabilities 421,211 414,019
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; 74,450,107 and 70,257,155 shares issued
and outstanding, respectively 744,501 702,572
Additional paid-in capital 64,416,203 63,596,213
Accumulated deficit (63,755,915) (61,981,295)
------------------- --------------------
1,404,789 2,317,490
------------------- --------------------
$ 1,826,000 $ 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 six months ended
April 30,
---------------------------------------
2003 2002
--------------- --------------
REVENUE $ 113,082 $ 3,894,164
COST OF REVENUE 77,685 1,254,107
--------------- --------------
Gross profit 35,397 2,640,057
--------------- --------------
OPERATING EXPENSES
Research and development expenses 894,747 693,691
Selling, general and administrative expenses 917,838 1,003,039
--------------- --------------
Total operating expenses 1,812,585 1,696,730
--------------- --------------
INCOME (LOSS) FROM OPERATIONS (1,777,188) 943,327
INTEREST INCOME 2,568 14,507
--------------- --------------
NET INCOME (LOSS) $(1,774,620) $ 957,834
=============== ===============
PER SHARE INFORMATION:
Net income (loss) per share:
Basic $ (0.02) $ 0.01
=============== ===============
Diluted $ (0.02) $ 0.01
=============== ===============
Shares used in computing net income (loss) per share:
Basic 72,213,599 67,305,726
=============== ===============
Diluted 72,213,599 67,586,003
=============== ===============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended
April 30,
-------------------------------------
2003 2002
--------------- --------------
REVENUE $ 21,743 $ 2,616,975
COST OF REVENUE 15,660 827,831
--------------- --------------
Gross profit 6,083 1,789,144
--------------- --------------
OPERATING EXPENSES
Research and development expenses 403,120 400,280
Selling, general and administrative expenses 573,886 501,243
--------------- --------------
Total operating expenses 977,006 901,523
--------------- --------------
INCOME (LOSS) FROM OPERATIONS (970,923) 887,621
INTEREST INCOME 899 9,906
--------------- --------------
NET INCOME (LOSS) $ (970,024) $ 897,527
=============== ===============
PER SHARE INFORMATION:
Net income (loss) per share:
Basic $ (0.01) $ 0.01
=============== ===============
Diluted $ (0.01) $ 0.01
=============== ===============
Shares used in computing net income (loss) per share:
Basic 73,417,701 67,672,917
=============== ===============
Diluted 73,417,701 67,914,500
=============== ===============
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended
April 30,
-------------------------------------
2003 2002
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (631,616) $(2,681,487)
Cash received from customers 92,306 525,086
Cash received from collaborative agreements - 3,000,000
Interest received 2,568 14,505
--------------- --------------
Net cash (used in) provided by operating activities (536,742) 858,104
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment - (32,911)
--------------- --------------
Net cash (used in) investing activities - (32,911)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration costs 89,714 -
--------------- --------------
Net cash provided by financing activities 89,714 -
--------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (447,028) 825,193
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 854,822 1,316,860
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 407,794 $ 2,142,053
=============== ==============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net income (loss) $ (1,774,620) $ 957,834
Stock awards granted to employees and
consultants pursuant to stock incentive plans 772,205 721,301
Provision for bad debts 206,622 (60,000)
Depreciation and amortization 18,927 48,998
Change in operating assets and liabilities:
Accounts receivable and other receivables (20,776) 88,922
Inventories 264,047 (12,048)
Prepaid expenses and other current assets (10,484) (56,843)
Other assets 145 30,874
Accounts payable and accrued liabilities 7,192 (402,934)
Deferred revenue - (458,000)
--------------- --------------
Net cash (used in) provided by operating activities $ (536,742) $ 858,104
=============== ==============
The accompanying notes are an integral part of these condensed statements.
6
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 six-month and
three-month periods ended April 30, 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). In addition, we have 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, using either
the Triple DES or the AES algorithm. We have also developed security software to
encrypt voice and data in cellular and satellite phones. 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
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 our
technology.
7
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 six months ended April 30, 2003, our operating activities used
approximately $537,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $632,000, which was offset by cash of
approximately $92,000 received from collections of accounts receivable related
to sales of encryption products and approximately $3,000 of interest income
received. In addition, we received approximately $99,000 in cash upon the
exercise of stock options and incurred approximately $9,000 in registration
costs relating to stock incentive plans. As a result, our cash and cash
equivalents at April 30, 2003 decreased to approximately $408,000 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 second 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. We currently have no arrangements with respect to
additional financing. 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.
8
2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("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.
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. The adoption of SFAS No.
148 had no effect on our financial position or results of operations.
9
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective for the
year ended December 31, 2003. We do not believe the adoption of SFAS No. 150
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
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.
10
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 and anticipated 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. This receivable is stated at management's estimate of its net
realizable value.
6. INVENTORIES
Inventories consist of the following as of:
April 30, October 31,
2003 2002
------------ ------------
Component parts $ 341,727 $ 385,538
Work-in-process 41,521 44,105
Finished products 648,904 866,556
------------ ------------
$ 1,032,152 $ 1,296,199
============ ============
11
7. STOCK INCENTIVE PLANS
We have three stock option plans: the 1993 Stock Option Plan, the Copytele, Inc.
2000 Share Incentive Plan (the "2000 Share Plan"), and the Copytele, Inc. 2003
Share Incentive Plan (the "2003 Share Plan"), which were adopted by our Board of
Directors on April 28, 1993, May 8, 2000, and April 21, 2003, respectively.
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. We have chosen to continue to account for
stock options granted to employees using the intrinsic value method prescribed
in APB Opinion No. 25 "Accounting for Stock Issued to Employees," and have
adopted the disclosure provisions of SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123".
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.
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:
Six Months Ended Three Months Ended
April 30, April 30,
---------------------------------------- -----------------------------------
2003 2002 2003 2002
------------ ------------- ------------- ------------
Net income (loss), as reported $ (1,774,620) $ 957,834 $ (970,024) $ 897,527
Less: Total stock-based employee
compensation expense
determined under fair
value-based method for all awards (5,955) (271,749) (3,081) (96,939)
------------ ------------- ------------- ------------
Pro Forma net income (loss) $ (1,780,575) $ 686,085 $ (973,105) $ 800,588
============ ============= ============ ============
Net income (loss) per share:
As Reported-
Basic $ (0.02) $ 0.01 $ (0.01) $ 0.01
============ ============= ============ ===========
Diluted $ (0.02) $ 0.01 $ (0.01) $ 0.01
============ ============= ============ ===========
Pro Forma-
Basic $ (0.02) $ 0.01 $ (0.01) $ 0.01
============ ============= ============ ===========
Diluted $ (0.02) $ 0.01 $ (0.01) $ 0.01
============ ============= ============ ===========
During the six-month periods ended April 30, 2003 and 2002, we granted options
to employees to purchase 460,000 shares and 0 shares, respectively, pursuant to
the 2000 Share Plan. During the six-month period ended April 30, 2003, stock
options to purchase 440,000 shares were exercised, with aggregate proceeds of
approximately $99,000. No stock options were exercised during the six-month
period ended April 30, 2002.
During the period from May 1, 2003 through June 9, 2003, we granted to employees
and a consultant options to purchase 5,870,000 shares pursuant to the 2000 Share
Plan and the 2003 Share Plan, including options to purchase 1,500,000 shares and
750,000 shares granted to our Chairman of the Board and Chief Executive Officer
and our President, respectively. 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. In determining the number of stock options to be
granted, the Stock Option Committee of our Board of Directors gives
consideration to those individuals who have waived such benefits.
12
During the six-month periods ended April 30, 2003 and 2002, we issued 2,761,175
shares and 1,458,910 shares, respectively, of common stock to certain employees
for services rendered, principally in lieu of cash compensation, pursuant to the
2000 Share Plan. In addition during the six months ended April 30, 2003 and
2002, we issued 991,777 shares and 30,000 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
$0.48 during the six-month periods ended April 30, 2003 and 2002, respectively.
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 six-month and
three-month periods ended April 30, 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 six-month
and three-month periods ended April 30, 2003 were options to purchase 14,004,746
shares. In the six-month and three-month periods ended April 30, 2002, options
to purchase 13,417,246 shares of common stock were outstanding but were not
included in the computation of Diluted EPS because the options' exercise prices
were greater than the average market price of the common shares during the
respective periods. The following table sets forth the computation of net income
(loss) per share of common stock:
Six-months ended Three-months ended
-------------------------------------------- -------------------------------------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
-------------------- ------------------- ------------------- -------------------
Net income (loss) $(1,774,620) $ 957,834 $ (970,024) $ 897,527
-------------------- ------------------- ------------------- -------------------
Shares used in computing
net income (loss) per share:
Basic 72,213,599 67,305,726 73,417,701 67,672,917
Effect of stock
options and warrants - 280,277 - 241,583
-------------------- ------------------- ------------------- --------------------
Diluted 72,213,599 67,586,003 73,417,701 67,914,500
==================== =================== =================== ====================
Net income (loss) per share:
Basic $ (0.02) $0.01 $ (0.01) $0.01
==================== =================== =================== ====================
Diluted $ (0.02) $0.01 $ (0.01) $0.01
==================== =================== =================== ====================
13
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
six-month and three-month periods ended April 30, 2003 and 2002:
Flat-Panel Encryption
Segment Data Display Products Total
------------ ------------- ----------------- --------------
Six Months Ended April 30, 2003:
Revenue $ - $ 113,082 $ 113,082
Net (loss) (788,798) (985,822) (1,774,620)
Six Months Ended April 30, 2002:
Revenue $ 3,458,000 $ 436,164 $ 3,894,164
Net income (loss) 2,094,868 (1,137,034) 957,834
Three Months Ended April 30, 2003:
Revenue $ - $ 21,743 $ 21,743
Net (loss) (425,323) (544,701) (970,024)
Three Months Ended April 30, 2002:
Revenue $ 2,425,000 $ 191,975 $ 2,616,975
Net income (loss) 1,434,729 (537,202) 897,527
14
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). In addition, we have 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 have
also developed the DCS-1800 Security Software to encrypt voice and data in
cellular and satellite phones. 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 encryption
products primarily through a distributor/dealer network and to end-users.
Recently, we also have begun working with large organizations that are adding
security products to their existing product lines.
15
We are also continuing our research and development activities with respect to
flat panel display technologies, including our thin flat high brightness video
displays. Using our planar technology, we have developed engineering operational
models of monochrome and full-color video displays. Our displays:
- - can function in a broad environmental range, similar to a CRT;
- - has low power consumption requirements;
- - can be viewed from a wide angle, similar to a CRT; and
- - has high brightness with full color video capability.
We have been working with Volga Svet, Ltd. ("Volga") on the development of our
flat panel display technology. With the assistance of Volga we have developed
technology that results in substantially higher brightness than conventional
CRTs and LCD or plasma flat panel displays. Together with Volga, we 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 technology.
We have discussed with potential purchasers the sale of monochrome versions
of our high brightness displays. While we have not yet made any definitive
arrangements for commercial sales of such displays, based on this interest,
together with Volga, we have started to produce such displays using Volga's
current production facilities, to be utilized for incorporation into potential
purchasers' products. There can be no assurance that we can produce commercial
quality displays, that we can produce such displays in commercial quantities,
that we can successfully market our displays to achieve any sales, 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.
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.
16
Collaborative Agreement
A $2.5 million payment from Futaba Corporation ("Futaba") pursuant to
an agreement with Futaba (the "Futaba Agreement") has been recognized
ratably over the period between June 2001 and June 2002, the
contractually defined one-year period of our commitment under this
portion of the agreement. A subsequent $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 six-month periods ended April 30, 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
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.
17
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" and SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123". 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. The amount of employee stock option
compensation determined under the fair value method in the six-month periods
ended April 30, 2003 and 2002 was approximately $6,000 and $272,000,
respectively, and in the three-month periods ended April 30, 2003 and 2002 was
approximately $3,000 and $97,000, respectively,
RESULTS OF OPERATIONS
Six months ended April 30, 2003 compared with six months ended April 30, 2002
Product Sales
Revenue
Revenue from product sales decreased by approximately $323,000, to approximately
$113,000 in the six-month period ended April 30, 2003, from approximately
$436,000 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 $177,000 in the six
months ended April 30, 2003, to approximately $35,000, compared to approximately
$212,000 in the comparable prior-year period. Gross profit from product sales as
a percentage of revenue from product sales decreased to approximately 31% in the
six-month period ended April 30, 2003, compared to approximately 49% in the
comparable prior-year period.
Collaborative Agreement
Revenue
We recognized no collaborative agreement revenue in the six months ended April
30, 2003, as compared to approximately $3,458,000 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.
18
Gross Profit
We recognized no gross profit from collaborative agreement in the six months
ended April 30, 2003, as compared to approximately $2,428,000 in the six months
ended April 30, 2002. Gross profit from collaborative agreement in the six
months ended April 30, 2002 was net of cost of revenue of approximately
$1,030,000, consisting of research and development costs relating to FED
technology, including cost of revenue related to our agreement with Volga (the
"Volga Agreement") of approximately $839,000. 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 $201,000 in the six
months ended April 30, 2003, to approximately $895,000, from approximately
$694,000 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 of approximately
$191,000 as costs of revenue rather than as research and development expenses.
In addition, non-employee consultant expense increased by approximately $175,000
and outside R&D increased by approximately $45,000, offset by a decrease in
employee compensation and related costs of approximately $165,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $85,000
to approximately $918,000 in the six months ended April 30, 2003 from
approximately $1,003,000 in the comparable prior-year period. The decrease in
selling, general and administrative expenses reflects a decrease in professional
fees of approximately $213,000 and a decrease in employee compensation and
related costs of approximately $168,000, offset by a provision for bad debts of
approximately $207,000, a write down of Magicom inventory of approximately
$58,000 and the recovery in the prior-year period of a previously recorded bad
debt charge of approximately $60,000.
Interest Income
The decrease in interest income in the six months ended April 30, 2003 to
approximately $3,000 from approximately $15,000 in the comparable prior-year
period resulted primarily from the decrease in average funds available for
investment.
19
Three months ended April 30, 2003 compared with three months ended April 30,
2002
Product Sales
Revenue
Revenue from product sales decreased by approximately $170,000, to approximately
$22,000 in the three-month period ended April 30, 2003, from approximately
$192,000 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 $123,000 in the three
months ended April 30, 2003, to approximately $6,000, compared to approximately
$129,000 in the comparable prior-year period. Gross profit from product sales as
a percentage of revenue from product sales decreased to approximately 28% in the
six-month period ended April 30, 2003, compared to approximately 67% in the
comparable prior-year period.
Collaborative Agreement
Revenue
We recognized no collaborative agreement revenue in the three months ended April
30, 2003, as compared to approximately $2,425,000 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 April 30, 2003, as compared to approximately $1,660,000 in the three
months ended April 30, 2002. Gross profit from collaborative agreement in the
three months ended April 30, 2002 was net of cost of revenue of approximately
$765,000, consisting of research and development costs relating to FED
technology, including cost of revenue related to the Volga Agreement of
approximately $659,000. 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 $3,000 in the three
months ended April 30, 2003, to approximately $403,000, from approximately
$400,000 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 of approximately
$106,000 as costs of revenue rather than as research and development expenses.
In addition, non-employee consultant expense increased by approximately $73,000
and outside R&D increased by approximately $23,000, offset by a decrease in
employee compensation and related costs of approximately $123,000 and a decrease
in patent related expenses of approximately $48,000.
20
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately $73,000
to approximately $574,000 in the three months ended April 30, 2003 from
approximately $501,000 in the comparable prior-year period. The increase in
selling, general and administrative expenses reflects a provision for bad debts
of approximately $200,000 and a write down of Magicom inventory of approximately
$58,000, offset by a decrease in professional fees of approximately $106,000 and
a decrease in employee compensation and related costs of approximately $95,000.
Interest Income
The decrease in interest income in the three months ended April 30, 2003 to
approximately $1,000 from approximately $10,000 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.
21
During the six months ended April 30, 2003, our operating activities used
approximately $537,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $632,000, which was offset by cash of
approximately $92,000 received from collections of accounts receivable related
to sales of encryption products and approximately $3,000 of interest income
received. In addition, we received approximately $99,000 in cash upon the
exercise of stock options and incurred approximately $9,000 in registration
costs relating to stock incentive plans. As a result, our cash and cash
equivalents at April 30, 2003 decreased to approximately $408,000 from
approximately $855,000 at the end of fiscal 2002.
Accounts receivable and other receivables decreased by approximately $186,000
from approximately $401,000 at the end of fiscal 2002 to approximately $215,000
at April 30, 2003. The decrease in accounts receivable and other receivables is
a result of the timing of collections and an increase in the provision for bad
debts. Inventories decreased approximately $264,000 from approximately
$1,296,000 at October 31, 2002 to approximately $1,032,000 at April 30, 2003, as
a result of the timing of shipments and production schedules as well as a write
down of Magicom inventory. 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 $10,000 from approximately
$103,000 at the end of fiscal 2002 to approximately $113,000 at April 30, 2003.
Accounts payable and accrued liabilities increased by approximately $7,000 from
approximately $414,000 at the end of fiscal 2002 to approximately $421,000 at
April 30, 2003, as a result of the timing of payments.
As a result of these changes, working capital at April 30, 2003 decreased to
approximately $1,347,000 from approximately $2,240,000 at the end of fiscal
2002.
Our working capital includes inventory of approximately $1,032,000 at April 30,
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.
22
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 second 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 a line of credit 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 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 six-month periods ended April 30, 2003 and 2002,
we have recognized revenue from product sales of approximately $113,000 and
$436,000, respectively, and revenue in connection with the Futaba Agreement of
approximately $0 and $3,458,000, respectively.
The following table presents our expected cash requirements for contractual
obligations outstanding as April 30, 2003:
Payments Due by Period
----------------------------------------------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- --------------------------------------- ----------- ---------------- --------------- ------------ ----------------
Operating Leases $ 132,000 - - - $ 132,000
----------- ---------------- --------------- ------------ ----------------
Total Contractual Cash
Obligations $ 132,000 - - - $ 132,000
=========== ================ =============== ============ ================
23
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 six months ended April 30, 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 during the year ended October 31,
2002, since the Futaba Agreement terminated in June 2002, we do not anticipate
receiving any further payments under the Futaba agreement.
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 April 30, 2003. We
have set forth below our net (losses), research and development expenses and net
cash provided by (used in) operations for the six-month periods ended April 30,
2003 and 2002, and for the fiscal years ended October 31, 2002 and 2001:
(Unaudited)
Six Months Ended Fiscal Years Ended
April 30, October 31,
------------------------------------ ----------------------------
2003 2002 2002 2001
---- ---- ---- ----
Net income (loss) $ (1,774,620) $ 957,834 $(3,285,240) $(3,571,957)
Research and development $ 894,747 $ 693,691 $ 1,625,974 $ 2,324,979
Net cash (used in) provided by operations $ (536,742) $ 858,104 $ (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 and market our products. 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 second 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 a line of credit 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.
24
- - 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;
- - the capability of Volga to produce video displays and supply them to us;
and
- - our future negotiations with Volga with respect to payments and other
arrangements under the Volga Agreement.
Because our revenue is subject to fluctuation, we may be unable to reduce
operating expenses quickly enough to offset any unexpected revenue shortfall. If
we have a shortfall in revenue in relation to expenses, our operating results
would suffer. Our operating results for any particular quarter may not be
indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of results of operations as an indication of our
future performance.
25
- - 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.
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.
26
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. The adoption of SFAS No.
148 had no effect on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective for the
year ended December 31, 2003. We do not believe the adoption of SFAS No. 150
will have a material effect on our financial position or results of operations.
27
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.
28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Statement of Chief Executive Officer pursuant to Section
1350 of Title 18 of the United States Code, dated June 16,
2003.
99.2 Statement of Chief Financial Officer pursuant to Section
1350 of Title 18 of the United States Code, dated June 16,
2003.
(b) Reports on Form 8-K
We filed one Current Report on Form 8-K, dated March 25, 2003,
during the quarter ended April 30, 2003, which reported that our
common stock was being delisted from The Nasdaq SmallCap Market
effective March 27, 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
June 16, 2003 (Principal Executive Officer)
By: /s/ Frank J. DiSanto
-------------------------------
Frank J. DiSanto
June 16, 2003 President
By: /s/ Henry P. Herms
-------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
June 16, 2003 Financial and Accounting Officer)
29
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 internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
30
/s/ Denis A. Krusos
-------------------------------
Denis A, Krusos
Chairman of the Board,
Chief Executive Officer
June 16, 2003 (Principal Executive Officer)
31
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 internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
32
/s/ Henry P. Herms
------------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
June 16, 2003 Financial and Accounting Officer)
33
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 April 30,
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,
June 16, 2003 Chief Executive Officer
34
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 April 30,
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
June 16, 2003 Chief Financial Officer
35