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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 July 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 September 8, 2003, the registrant had outstanding 79,677,367 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 July 31, 2003 (Unaudited) and
October 31, 2002 3
Condensed Statements of Operations (Unaudited) for the nine months 4
ended July 31, 2003 and 2002
Condensed Statements of Operations (Unaudited) for the three months 5
ended July 31, 2003 and 2002
Condensed Statements of Cash Flows (Unaudited) for the nine months 6
ended July 31, 2003 and 2002
Notes to Condensed Financial Statements (Unaudited) 7 - 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 13 - 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24
Item 4. Controls and Procedures. 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 26
SIGNATURES 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC.
CONDENSED BALANCE SHEETS
------------------------
(Unaudited)
---------
July 31, October 31,
ASSETS 2003 2002
------ ------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,056,628 $ 854,822
Accounts receivable, net of allowance for doubtful accounts of
$230,337 and $325,505, respectively 36,496 77,780
Other receivables 141,000 322,952
Inventories 1,028,176 1,296,199
Prepaid expenses and other current assets 17,212 102,519
------------- ------------
Total current assets 2,279,512 2,654,272
PROPERTY AND EQUIPMENT, net 46,147 71,583
OTHER ASSETS 5,509 5,654
------------- ------------
$ 2,331,168 $ 2,731,509
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 352,672 $ 379,169
Accrued liabilities 37,147 34,850
------------- ------------
Total current liabilities 389,819 414,019
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; 78,843,907 and 70,257,155 shares issued
and outstanding, respectively 788,439 702,572
Additional paid-in capital 65,559,590 63,596,213
Accumulated deficit (64,406,680) (61,981,295)
------------- ------------
1,941,349 2,317,490
------------- ------------
$ 2,331,168 $ 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 nine months ended
July 31,
-------------------------------------
2003 2002
--------------- ---------------
REVENUE $ 196,322 $ 5,148,023
COST OF REVENUE 108,182 1,761,983
------------ -------------
Gross profit 88,140 3,386,040
------------ -------------
OPERATING EXPENSES
Research and development expenses 1,351,072 1,075,274
Selling, general and administrative expenses 1,165,789 1,581,517
Impairment loss on commercial trade barter credits - 2,820,800
------------ -------------
Total operating expenses 2,516,861 5,477,591
------------ -------------
LOSS FROM OPERATIONS (2,428,721) (2,901,551)
INTEREST INCOME 3,336 20,201
------------ -------------
NET LOSS $(2,425,385) $ (2,071,350)
=========== ============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.03) $ (0.03)
=========== ============
Shares used in computing net loss per share:
Basic and Diluted 73,641,139 67,657,539
=========== ============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months ended
July 31,
-------------------------------------
2003 2002
--------------- ---------------
REVENUE $ 83,240 $ 1,253,859
COST OF REVENUE 30,497 507,876
------------ -------------
Gross profit 52,743 745,983
------------ -------------
OPERATING EXPENSES
Research and development expenses 456,325 381,583
Selling, general and administrative expenses 247,951 578,478
Impairment loss on commercial trade barter credits - 2,820,800
------------ -------------
Total operating expenses 704,276 3,780,861
------------ -------------
LOSS FROM OPERATIONS (651,533) (3,034,878)
INTEREST INCOME 768 5,694
------------ -------------
NET LOSS $ (650,765) $ (3,029,184)
=========== ============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.01) $ (0.04)
=========== ============
Shares used in computing net loss per share:
Basic and Diluted 76,449,699 68,349,693
=========== ============
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the nine months ended
July 31,
-------------------------------------
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (831,699) $(3,650,574)
Cash received from customers 212,936 642,852
Cash received from collaborative agreement - 3,000,000
Interest received 3,336 20,201
------------ -----------
Net cash (used in) provided by operating activities (615,427) 12,479
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (981) (35,591)
------------ -----------
Net cash used in investing activities (981) (35,591)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration costs 818,214 8,000
------------ -----------
Net cash provided by financing activities 818,214 8,000
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 201,806 (15,112)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 854,822 1,316,860
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,056,628 $ 1,301,748
=========== ===========
RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (2,425,385) $(2,071,350)
Impairment loss on commercial trade barter credits - 2,820,800
Stock awards granted to employees and consultants pursuant to stock incentive plans 1,231,030 1,078,525
Provision for bad debts 206,622 (25,000)
Depreciation and amortization 26,417 70,798
Change in operating assets and liabilities:
Accounts receivable and other receivables 16,614 36,496
Inventories 268,023 72,797
Prepaid expenses and other current assets 85,307 233
Other assets 145 31,311
Accounts payable and accrued liabilities (24,200) (460,464)
Deferred revenue - (1,541,667)
------------ -----------
Net cash (used in) provided by operating activities $ (615,427) $ 12,479
=========== ===========
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 BUSINESS AND FUNDING
Organization and Basis of Presentation
- --------------------------------------
CopyTele, Inc. was incorporated on November 5, 1982. Our principal operations
include the development, production and marketing of thin high brightness flat
panel video displays 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 nine-month and
three-month periods ended July 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). 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 Microsoft 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 high brightness video
displays. Working with Volga Svet, Ltd. ("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 have incorporated this
high brightness technology into engineering models of 3.7-inch (diagonal) and
5-inch (diagonal) monochrome video displays and we believe that smaller and
larger displays can be made with our technology. Based on the interest of
several potential purchasers, together with Volga, we have started to produce
monochrome versions of our high brightness displays using Volga's current
production facilities, to be utilized for incorporation into potential
purchasers' products. We have recently received from the U.S. patent office
patents for two variations of our video display technology and a notice of
allowance of the claims contained in our patent application for one other
variation of our video display 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 nine months ended July 31, 2003, our operating activities used
approximately $615,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $832,000, which was offset by cash of
approximately $213,000 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 $827,000 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 July 31, 2003 increased to approximately $1,057,000 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 third 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, 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 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.
3. 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.
4. INVENTORIES
-----------
Inventories consist of the following as of:
July 31, October 31,
2003 2002
----------- -----------
Component parts $ 336,732 $ 385,538
Work-in-process 39,543 44,105
Finished products 651,901 866,556
----------- -----------
$ 1,028,176 $ 1,296,199
=========== ===========
5. 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.
9
Had compensation cost for these plans been determined at fair value, consistent
with SFAS No. 123 and SFAS No. 148, our net loss and net loss per share would
have increased to the following pro forma amounts:
Nine Months Ended Three Months Ended
July 31, July 31,
---------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- ---------------- ---------------
Net loss, as reported $ (2,425,385) $(2,071,350) $ (650,765) $(3,029,184)
Less: Total stock-based employee
compensation expense determined
under fair value-based
method for all awards (664,884) (279,999) (658,929) (8,250)
--------------- --------------- ---------------- ---------------
Pro Forma net loss $ (3,090,269) $(2,351,349) $ (1,309,694) $(3,037,434)
=============== =============== ================ ===============
Net loss per share:
As Reported-
Basic and Diluted $ (0.03) $ (0.03) $ (0.01) $ (0.04)
=============== =============== ================ ===============
Pro Forma-
Basic and Diluted $ (0.04) $ (0.03) $ (0.02) $ (0.04)
=============== =============== ================ ===============
During the nine-month periods ended July 31, 2003 and 2002, we granted to
employees and a consultant options to purchase 6,330,000 shares and 0 shares,
respectively, pursuant to the 2000 Share Plan and the 2003 Share Plan. During
the nine-month periods ended July 31, 2003 and 2002, stock options to purchase
3,409,000 shares and 20,000 shares, respectively, were exercised, with aggregate
proceeds of approximately $827,000 and $8,000, respectively.
Options granted during the nine-month period ended July 31, 2003 included
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. 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.
During the nine-month periods ended July 31, 2003 and 2002, we issued 3,961,175
shares and 2,188,760 shares, respectively, of common stock to certain employees
for services rendered pursuant to the 2000 Share Plan and the 2003 Share Plan.
In addition during the nine months ended July 31, 2003 and 2002, we issued
1,216,577 shares and 109,285 shares, respectively, of common stock to
consultants for services rendered pursuant to the 2000 Share Plan and the 2003
Share Plan The weighted-average fair value per share of the common stock issued
was $0.24 and $0.47 during the nine-month periods ended July 31, 2003 and 2002,
respectively.
10
6. 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 nine-month and
three-month periods ended July 31, 2003 and 2002 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
nine-month and three-month periods ended July 31, 2003 and 2002 were options to
purchase 16,835,746 shares and 14,704,746 shares, respectively.
The following table sets forth the computation of net loss per share of common
stock:
Nine-months ended Three-months ended
July 31, July 31,
------------------------------------- -------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Net loss $(2,425,385) $ (2,071,350) $ (650,765) $ (3,029,184)
------------ ------------ ------------- -------------
Shares used in computing net loss per share:
Basic 73,641,139 67,657,539 76,449,699 68,349,693
Effect of stock options
and warrants - - - -
------------ ------------ ------------- -------------
Diluted 73,641,139 67,657,539 76,449,699 68,349,693
============ ============ ============= =============
Net income (loss) per share:
Basic $ (0.03) $ (0.03) $ (0.01) $ (0.04)
============ ============ ============= =============
Diluted $ (0.03) $ (0.03) $ (0.01) $ (0.04)
============ ============ ============= =============
7. SEGMENT INFORMATION
-------------------
We follow the provisions of SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information." Reportable operating segments are
determined based on management`s approach. The management approach, as defined
by SFAS No. 131, is based on the way that the chief operating decision-maker
organizes the segments within an enterprise for making operating decisions and
assessing performance. While our results of operations are primarily reviewed on
a consolidated basis, the chief operating decision-maker also manages the
enterprise in two segments: (i) Flat-panel display and (ii) Encryption products.
11
The following represents selected financial information for our segments for the
nine-month and three-month periods ended July 31, 2003 and 2002:
Flat-Panel Encryption
Segment Data Display Products Total
------------ ---------- ---------- ----------
Nine Months Ended July 31, 2003:
Revenue $ - $ 196,322 $ 196,322
Net (loss) (1,234,356) (1,191,029) (2,425,385)
Nine Months Ended July 31, 2002:
Revenue $ 4,541,667 $ 606,356 $ 5,148,023
Net income (loss) 2,374,332 (4,445,682) (2,071,350)
Three Months Ended July 31, 2003:
Revenue $ - $ 83,240 $ 83,240
(445,558) (205,207) (650,765)
Net (loss)
Three Months Ended July 31, 2002:
Revenue $ 1,083,667 $ 170,192 $ 1,253,859
Net income (loss) 279,464 (3,308,648) (3,029,184)
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, production and marketing of thin high brightness flat
panel video displays 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 Microsoft 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.
13
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 and we believe that smaller and
larger displays can be made with our technology. We have recently received from
the U.S. patent office patents for two variations of our video display
technology and a notice of allowance of the claims contained in our patent
application for one other variation of our video display technology.
We are in discussions to supply monochrome versions of our high brightness
displays to several potential purchasers. 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.
14
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 nine-month periods ended July 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.
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 nine-month periods
ended July 31, 2003 and 2002 was approximately $665,000 and $280,000,
respectively, and in the three-month periods ended July 31, 2003 and 2002 was
approximately $659,000 and $8,000, respectively,
RESULTS OF OPERATIONS
- ---------------------
Nine months ended July 31, 2003 compared with nine months ended July 31, 2002
- -----------------------------------------------------------------------------
Product Sales
- -------------
Revenue
Revenue from product sales decreased by approximately $410,000, to approximately
$196,000 in the nine-month period ended July 31, 2003, from approximately
$606,000 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.
15
Gross Profit
Gross profit from product sales decreased by approximately $200,000 in the nine
months ended July 31, 2003, to approximately $88,000, compared to approximately
$288,000 in the comparable prior-year period. The decrease was primarily due to
the decrease in sales. Gross profit from product sales as a percentage of
revenue from product sales decreased to approximately 45% in the nine-month
period ended July 31, 2003, compared to approximately 48% in the comparable
prior-year period. The decrease in gross profit as a percentage of revenue
resulted primarily from a change in the mix of products sold.
Collaborative Agreement
- -----------------------
Revenue
We recognized no collaborative agreement revenue in the nine months ended July
31, 2003, as compared to approximately $4,542,000 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 nine months
ended July 31, 2003, as compared to approximately $3,098,000 in the nine months
ended July 31, 2002. Gross profit from collaborative agreement in the nine
months ended July 31, 2002 was net of cost of revenue of approximately
$1,444,000, consisting of research and development costs relating to FED
technology, including cost of revenue related to our agreement with Volga (the
"Volga Agreement") of approximately $1,194,000. 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 $276,000 in the
nine months ended July 31, 2003, to approximately $1,351,000, from approximately
$1,075,000 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
$250,000 as costs of revenue rather than as research and development expenses.
In addition, non-employee consultant expense increased by approximately $227,000
and outside R&D increased by approximately $64,000, offset by a decrease in
employee compensation and related costs of approximately $152,000, a decrease in
depreciation expense of approximately $40,000 and a decrease in patent related
expenses of approximately $33,000.
16
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by approximately $416,000
to approximately $1,166,000 in the nine months ended July 31, 2003 from
approximately $1,582,000 in the comparable prior-year period. The decrease in
selling, general and administrative expenses reflects a decrease in professional
fees of approximately $372,000, a decrease in employee compensation and related
costs of approximately $188,000 and the elimination of expenses related to
listing on the Nasdaq Stock Market of approximately $32,000, offset by an
increase in the provision for bad debts of approximately $172,000, 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.
Impairment Loss on Commercial Trade Barter credits
- --------------------------------------------------
In the nine 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 barter credits may be redeemed to reduce the cost of
advertising as well as other products and services. To utilize these barter
credits in exchange for advertising and purchase discounts, we must pay 65-70%
of the transaction value in cash. Because our anticipated cash flow was
negatively affected by the termination of the Futaba Agreement, our ability to
make such payments and thereby utilize the barter credits is uncertain.
Interest Income
- ---------------
The decrease in interest income in the nine months ended July 31, 2003 to
approximately $3,000 from approximately $20,000 in the comparable prior-year
period resulted primarily from the decrease in average funds available for
investment.
Three months ended July 31, 2003 compared with three months ended July 31, 2002
- -------------------------------------------------------------------------------
Product Sales
- -------------
Revenue
Revenue from product sales decreased by approximately $87,000, to approximately
$83,000 in the three-month period ended July 31, 2003, from approximately
$170,000 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 $24,000 in the three
months ended July 31, 2003, to approximately $53,000, compared to approximately
$77,000 in the comparable prior-year period. The decrease was primarily due to
the decrease in sales. Gross profit from product sales as a percentage of
revenue from product sales increased to approximately 63% in the three-month
period ended July 31, 2003, compared to approximately 45% in the comparable
prior-year period. The increase in gross profit as a percentage of revenue
resulted primarily from a change in the mix of products sold.
17
Collaborative Agreement
- -----------------------
Revenue
We recognized no collaborative agreement revenue in the three months ended July
31, 2003, as compared to approximately $1,084,000 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 July 31, 2003, as compared to approximately $669,000 in the three months
ended July 31, 2002. Gross profit from collaborative agreement in the three
months ended July 31, 2002 was net of cost of revenue of approximately $415,000,
consisting of research and development costs relating to FED technology,
including cost of revenue related to the Volga Agreement of approximately
$356,000. 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 $75,000 in the
three months ended July 31, 2003, to approximately $456,000, from approximately
$382,000 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
$59,000 as costs of revenue rather than as research and development expenses. In
addition, non-employee consultant expense increased by approximately $51,000 and
outside R&D increased by approximately $19,000, offset by a decrease in patent
related expenses of approximately $29,000.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by approximately $330,000
to approximately $248,000 in the three months ended July 31, 2003 from
approximately $578,000 in the comparable prior-year period. The decrease in
selling, general and administrative expenses reflects a decrease in professional
fees of approximately $159,000 and the elimination of expenses related to
listing on the Nasdaq Stock Market of approximately $39,000, a decrease in the
provision for bad debts of approximately $35,000, a decrease in advertising
expense of approximately $22,000 and a decrease in employee compensation and
related costs of approximately $20,000.
18
Impairment Loss on Commercial Trade Barter credits
- --------------------------------------------------
In 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 barter credits may be redeemed to reduce the cost of
advertising as well as other products and services. To utilize these barter
credits in exchange for advertising and purchase discounts, we must pay 65-70%
of the transaction value in cash. Because our anticipated cash flow was
negatively affected by the termination of the Futaba Agreement, our ability to
make such payments and thereby utilize the barter credits is uncertain.
Interest Income
- ---------------
The decrease in interest income in the three months ended July 31, 2003 to
approximately $1,000 from approximately $6,000 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 nine months ended July 31, 2003, our operating activities used
approximately $615,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $832,000, which was offset by cash of
approximately $213,000 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 $827,000 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 July 31, 2003 increased to approximately $1,057,000 from
approximately $855,000 at the end of fiscal 2002.
19
Accounts receivable and other receivables decreased by approximately $224,000
from approximately $401,000 at the end of fiscal 2002 to approximately $177,000
at July 31, 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 $268,000 from approximately
$1,296,000 at October 31, 2002 to approximately $1,028,000 at July 31, 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 continued to sell our remaining inventory. Prepaid expenses and
other current assets decreased by approximately $86,000 from approximately
$103,000 at the end of fiscal 2002 to approximately $17,000 at July 31, 2003, as
a result of the timing of payments. Accounts payable and accrued liabilities
decreased by approximately $24,000 from approximately $414,000 at the end of
fiscal 2002 to approximately $390,000 at July 31, 2003, as a result of the
timing of payments.
As a result of these changes, working capital at July 31, 2003 decreased to
approximately $1,890,000 from approximately $2,240,000 at the end of fiscal
2002.
Our working capital includes inventory of approximately $1,028,000 at July 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 and Chief Executive Officer and our President will
continue to perform services without cash compensation or pension benefits.
There can be no assurance that they 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.
20
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 third 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 and we also have started marketing our thin high brightness
video displays to potential purchasers for incorporation into the purchaser's
products. During the nine-month periods ended July 31, 2003 and 2002, we have
recognized revenue from product sales of approximately $196,000 and $606,000,
respectively, and revenue in connection with the Futaba Agreement of
approximately $0 and $4,542,000, respectively.
The following table presents our expected cash requirements for contractual
obligations outstanding as July 31, 2003:
Payments Due by Period
-----------------------------------------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- --------------------------------- ------------- ------------- ------------- -------------- -------------
Operating Leases $ 75,000 - - - $ 75,000
------------- ------------- ------------- -------------- -------------
Total Contractual Cash
Obligations $ 75,000 - - - $ 75,000
============= ============= ============= ============== =============
21
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 nine months ended July 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 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 July 31, 2003. We have
set forth below our net losses, research and development expenses and net cash
provided by (used in) operations for the nine-month periods ended July 31, 2003
and 2002, and for the fiscal years ended October 31, 2002 and 2001:
(Unaudited)
Nine Months Ended Fiscal Years Ended
July 31, October 31,
-------------------------------- ------------------------------
2003 2002 2002 2001
---- ---- ---- ----
Net loss $ (2,425,385) $ (2,071,350) $(3,285,240) $(3,571,957)
Research and development $ 1,351,072 $ 1,075,274 $ 1,625,974 $ 2,324,979
Net cash (used in) provided by operations $ (615,427) $ 12,479 $ (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 third 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.
22
- - 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 jointly develop with Volga a full-color video display that
can be successfully marketed;
- - the capability of Volga to produce thin high brightness monochrome 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.
23
- - 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 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.
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.
24
Item 4. Controls and Procedures
-----------------------
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 Vice President - Finance and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our Chairman of the Board and Chief
Executive Officer and our Vice President - Finance and Chief Financial Officer
concluded that our disclosure controls and procedures are effective as of the
end of the period covered by this report. There were no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation
There was no change in our internal control over financial reporting during the
quarter ended July 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated September 15, 2003.
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated September 15, 2003.
32.1 Statement of Chief Executive Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated September 15, 2003.
32.2 Statement of Chief Financial Officer pursuant to Section 1350 of
Title 18 of the United States Code, dated September 15, 2003.
(b) Reports on Form 8-K
-------------------
We filed no Current Reports on Form 8-K during the quarter ended July
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
September 15, 2003 (Principal Executive Officer)
By: /s/ Frank J. DiSanto
----------------------------------
Frank J. DiSanto
September 15, 2003 President
By: /s/ Henry P. Herms
----------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
September 15, 2003 Financial and Accounting Officer)
26