SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2004
Commission file number 0-11254
COPYTELE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-2622630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
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(Address of principal executive offices) (Zip Code)
(631) 549-5900
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On February 23, 2004, the registrant had outstanding 81,518,873 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets as of January 31, 2004 (Unaudited) and
October 31, 2003 3
Condensed Statements of Operations (Unaudited) for the three months
ended January 31, 2004 and 2003 4
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 2004 and 2003 5
Notes to Condensed Financial Statements (Unaudited) 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 11 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
Item 4. Controls and Procedures. 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
COPYTELE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
--------------
January 31, October 31,
ASSETS 2004 2003
------------------------ ------------- -----------
CURRENT ASSETS:
Cash and cash equivalents $868,175 $1,023,531
Accounts receivable, net of allowance for doubtful accounts of
$149,455 and $159,230, respectively 12,850 41,500
Other receivables 127,124 127,124
Inventories 1,036,276 1,044,875
Prepaid expenses and other current assets 44,920 47,972
-------------- --------------
Total current assets 2,089,345 2,285,002
PROPERTY AND EQUIPMENT, net 35,821 39,480
OTHER ASSETS 5,509 6,009
-------------- --------------
$2,130,675 $2,330,491
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $334,444 $316,865
Accrued liabilities 48,896 25,420
-------------- --------------
Total current liabilities 383,340 342,285
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; 81,332,938 and 80,151,478 shares issued
and outstanding, respectively 813,329 801,515
Additional paid-in capital 66,839,066 66,282,397
Accumulated deficit (65,905,060) (65,095,706)
-------------- --------------
1,747,335 1,988,206
-------------- --------------
$2,130,675 $2,330,491
============== ==============
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC.
--------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
---------------------------------------------
For the Three Months Ended
January 31,
-------------------------------
2004 2003
-------------- --------------
REVENUE $39,000 $91,339
COST OF REVENUE 14,599 62,025
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Gross profit 24,401 29,314
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OPERATING EXPENSES
Research and development expenses 484,543 491,627
Selling, general and administrative expenses 350,161 343,952
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Total operating expenses 834,704 835,579
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LOSS FROM OPERATIONS (810,303 ) (806,265)
INTEREST INCOME 949 1,669
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NET LOSS $(809,354) $(804,596)
============== ==============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $(0.01) $(0.01)
============== ==============
Shares used in computing net loss per share:
Basic and Diluted 80,615,351 71,048,761
============== ==============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------
For the Three Months Ended
January 31,
-------------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(332,301) $(309,797)
Cash received from customers 67,650 22,049
Interest received 949 1,669
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Net cash used in operating activities (263,702) (286,079)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (2,499) -
-------------- --------------
Net cash used in investing activities (2,499) -
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration costs 110,845 34,200
-------------- --------------
Net cash provided by financing activities 110,845 34,200
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (155,356) (251,879)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,023,531 854,822
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $868,175 $602,943
============== ==============
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $(809,354) $(804,596)
Stock awards granted to employees and consultants pursuant to stock
incentive plans 457,638 421,546
Provision for bad debts - 7,028
Depreciation and amortization 6,158 10,121
Change in operating assets and liabilities:
Accounts receivable and other receivables 28,650 (69,290)
Inventories 8,599 126,443
Prepaid expenses and other current assets 3,052 (25,089)
Other assets 500 145
Accounts payable and accrued liabilities 41,055 47,613
-------------- --------------
Net cash used in operating activities $(263,702) $(286,079)
============== ==============
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE AND DEVELOPMENT OF 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 three-month periods
ended January 31, 2004 and 2003. 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, 2003, 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,
scanners, and printers. We are continuing our research and development
activities for additional encryption products. We sell our encryption products
through a distributor/dealer network and to end-users. We have provided several
large organizations our hardware and software encryption solutions and they are
evaluating our solutions in connection with their security requirements.
6
We are also continuing our research and development activities with
respect to flat panel display technologies, including our thin flat high
brightness video displays. We have developed, in conjunction with Volga Svet
Ltd. ("Volga"), several engineering models of high-brightness, monochrome video
displays, including a 3.7-inch (diagonal) display having 160 x 80 pixels, a
5-inch (diagonal) display having 320 x 240 pixels, and a 3.5-inch (diagonal)
display having 320 x 160 pixels, and we believe that smaller and larger displays
can be made with our technology. We have been demonstrating our displays to a
number of companies involving applications where we believe our displays have
performance advantages over LCDs. These applications include use in outdoor
products which operate over wide air temperature ranges, require wide viewing
angles, and must operate under high and low light ambient conditions. We have
received an initial order for a seed quantity of our display modules to replace
LCDs in an existing product which displays operating instructions and operates
in an outdoor environment. Based on this requirement and 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. We have recently received from the U.S. patent office patents for
four 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.
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 products, and,
from June 2001 to January 2002, we received development payments from Futaba
Corporation of Japan.
During the three months ended January 31, 2004, our operating
activities used approximately $264,000 in cash. This resulted from payments to
suppliers, employees and consultants of approximately $332,000, which was offset
by cash of approximately $67,000 received from collections of accounts
receivable related to sales of encryption products and services and
approximately $1,000 of interest income received. In addition, we received
approximately $111,000 in cash upon the exercise of stock options and purchased
approximately $2,000 of equipment. As a result, our cash and cash equivalents at
January 31, 2004 decreased to approximately $868,000 from approximately
$1,024,000 at the end of fiscal 2003.
The auditor's report on our financial statements as of October 31, 2003
states that the net loss incurred during the year ended October 31, 2003, 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, 2003, raise substantial doubt about our ability to
continue as a going concern. The auditor's report on our financial statements
for the year ended October 31, 2002 contained a similar statement. 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.
7
Based on reductions in operating expenses that have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing cash and accounts receivable, together with cash flows from expected
sales of encryption products and flat panel displays, and other potential
sources of cash flows, will be sufficient to enable us to continue in operation
until at least the end of the first quarter of fiscal 2005. 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.
2. Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 adoption of SFAS No. 148 disclosure requirements, effective
February 1, 2003, had no effect on our financial position or results of
operations. 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 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
provisions of SFAS No. 123 and SFAS No. 148. 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 stock options granted to employees been
determined at fair value, consistent with SFAS No. 123, our net loss and net
loss per share would have increased to the following adjusted amounts:
8
For the Three Months Ended
January 31,
-----------------------------
2004 2003
-----------------------------
Net loss as reported $(809,354) $(804,596)
Add: Total stock-based employee compensation
expense, determined under fair value
based method, for all awards, net of
related tax effect (184,123) (2,874)
-----------------------------
Net loss as adjusted $(993,477) $(807,470)
=============================
Net loss per share, basic and diluted:
As reported $(0.01) $(0.01)
=============================
As adjusted $(0.01) $(0.01)
=============================
During the three-month periods ended January 31, 2004 and 2003, we granted
to employees options to purchase 610,000 shares and 190,000 shares,
respectively, pursuant to the CopyTele, Inc. 2000 Share Incentive Plan (the
"2000 Share Plan") and the Copytele, Inc. 2003 Share Incentive Plan (the "2003
Share Plan"). In addition, during the period from February 1, 2004 through
February 23, 2004, we granted options to purchase 500,000 shares and 150,000
shares to our Chairman of the Board and Chief Executive Officer and our
President, respectively, pursuant to the 2003 Plan. During the three-month
periods ended January 31, 2004 and 2003, stock options to purchase 219,500
shares and 190,000 shares, respectively, were exercised, with aggregate proceeds
of approximately $111,000 and $34,000, respectively. As of January 31, 2004,
2,548 shares and 4,863,169 shares, respectively, were available for future
grants under the 2000 Share Plan and the 2003 Share Plan.
During the three-month periods ended January 31, 2004 and 2003, we
issued 694,630 shares and 1,439,585 shares, respectively, of common stock to
certain employees for services rendered, principally in lieu of cash
compensation, pursuant to the 2000 Share Plan and the 2003 Share Plan. In
addition during the three-month periods ended January 31, 2004 and 2003, we
issued 267,330 shares and 547,130 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 market value per share of the common stock
issued was $0.48 and $0.21 during the three-month periods ended January 31, 2004
and 2003, respectively.
3. OTHER RECEIVABLES
In May and June 2002, we received restricted common stock from a
customer in connection with an outstanding accounts receivable of approximately
$323,000 and anticipated settling this accounts receivable through the ultimate
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. 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. As of January 31, 2004, we received aggregate proceeds of
approximately $14,000 from the sale of a portion of the restricted common stock
and we intend to sell the remaining portion of such stock during fiscal 2004. We
have made a provision, during the three-month period ended April 30, 2003, of
approximately $182,000 to reflect management's estimate of the net realizable
value of this receivable.
9
4. INVENTORIES
Inventories consist of the following as of:
January 31, October 31,
2004 2003
------------ -----------
Component parts $ 341,344 $ 341,344
Work-in-process 44,070 48,324
Finished products 650,862 655,207
----------- -------------
$ 1,036,276 $ 1,044,875
=========== =============
5. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
We comply with the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS No. 128, basic net income (loss) per common share ("Basic
EPS") is computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive common share equivalents and
convertible securities then outstanding. Diluted EPS for the three-month periods
ended January 31, 2004 and 2003 is the same as Basic EPS, as the inclusion of
the effect of common stock equivalents then outstanding would be anti-dilutive.
For this reason, excluded from the calculation of Diluted EPS for the
three-month periods ended January 31, 2004 and 2003 were options to purchase
15,853,546 shares and 14,660,776 shares, respectively.
6. 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
and services. The following represents selected financial information for our
segments for the three-month periods ended January 31, 2004 and 2003:
Encryption
Segment Data Flat-Panel Products and Total
Display Services
- --------------------------------- ----------------- ------------------ -----------------
Three Months Ended January 31,
2004:
Revenue $- $39,000 $39,000
Net loss (438,068) (371,286) (809,354)
Three Months Ended January 31,
2003:
Revenue $- $91,339 $91,339
Net loss (363,475) (441,121) (804,596)
10
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, 2003 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
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-based 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 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 the DCS-1800 Security Software
to encrypt voice and data in cellular and satellite phones, scanners, and
printers. We are continuing our research and development activities for
additional encryption products.
11
We are currently using several U.S.-based electronic production
contractors to produce the components for our encryption devices. We sell our
encryption products through a distributor/dealer network and to end-users. We
have provided several large organizations our hardware and software encryption
solutions and they are evaluating our solutions in connection with their
security requirements.
We have made significant advancements to develop and produce our thin
film video flat panel displays utilizing our electronic emission technology.
With Volga Svet Ltd. ("Volga"), a Russian display company that we have been
working with for more than six years, we have developed several engineering
models of high-brightness, monochrome video displays, including a 3.7-inch
(diagonal) display having 160 x 80 pixels, a 5-inch (diagonal) display having
320 x 240 pixels, and a 3.5-inch (diagonal) display having 320 x 160 pixels. We
are providing funding to Volga for this work; these development payments to
Volga are included in research and development expenses in the accompanying
condensed financial statements. Volga has agreed to produce an initial quantity
of these displays for commercial sales on a fixed price basis. We anticipate
that Volga may in the future produce additional quantities of displays for
commercial sales also on a fixed price basis, but we have not entered into any
agreements with Volga for such future production.
Currently, liquid crystal displays ("LCDs") are the most commonly used
flat panel displays in commercial products. We believe that our display has the
following advantages over LCD displays:
o No backlight (LCDs require a backlight that results in high power
consumption and contains mercury)
o No thermistor (LCDs require thermistors to control operation at
various temperatures)
o No polarizer (required in LCDs)
o No color filter (required in color LCDs)
o Almost hemispherical viewing angle (LCDs have limited viewing
angles)
o Higher contrast ratio
o Faster video response time
o Operates in a wider range of air temperatures
o Longer life
o Not affected by ultraviolet light (LCDs contain a liquid crystal
which may deteriorate after long exposure to direct sunlight)
o Safer (leakage of liquid crystal from LCDs may be dangerous)
12
We are initially pursuing applications for our display that we believe
will demonstrate these performance advantages. In particular, we have been
demonstrating our displays to a number of companies for use in outdoor products
made by them that operate over wide air temperature ranges and under high and
low light ambient conditions, and that require wide viewing angles.
We provided our display to a company to evaluate the display's
performance in a product produced by the company that operates over a wide air
temperature range in an outdoor environment. After successfully testing our
display, that company recently issued to us a purchase order for a seed quantity
of modules containing our display, to replace LCD modules in the company's
product. Another company has evaluated our display for a product the company is
developing in the field of emergency communication, and we are modifying our
display in response to the requirements of such product. Based on these
developments, we have, together with Volga, started to produce our 5-inch
(diagonal) high-brightness displays using Volga's current production facility.
In addition, we are pursuing other opportunities by demonstrating our
displays to companies having large quantity display applications, and we are in
the process of responding to their requests for pricing based on their display
specifications and quantity requirements. These companies' applications would
require large quantities of displays to be located in retail stores, airports,
vending machines and automobiles. For automobiles, the displays would be
required to have the capability to provide wide-screen or standard TV formats
for digital TV and DVD operation. To prepare for these opportunities, we are
working with several Asian companies to supplement Volga's production and to
produce larger size color displays.
We also are developing modifications to our display technology to
incorporate the matrix structure and drivers of LCDs into our display so that
our display may be produced more easily by facilities currently producing LCDs.
We have been working with an LCD manufacturing company, located in Asia, to
incorporate its LCD technology as part of our display. We have received samples
of that company's color LCDs which incorporate TFT (thin film technology) and
LCD driver technology, and we have performed tests to determine the
modifications necessary to that technology to meet to our display requirements.
From our test results, we believe that, with our modifications, that company can
produce part of the structure of our display using its current LCD production
facilities. We could then incorporate that structure and drivers to complete the
fabrication of our display either at that company's facilities, at Volga, or at
the facilities of another Asian company with which we are in discussions. We
believe that this process will enable us to be able to produce, as a first
objective, up to 6.5-inch (diagonal) color displays which could meet the
requirements of several companies' large quantity applications. There can be no
assurance that we can develop or produce color video displays or displays using
modified TFT technology or that we can produce larger display sizes or greater
quantities using such technology.
We have recently received from the U.S. patent office patents for four
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 continuing to apply for additional patents for our
video display technology.
13
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, or of the revenue we might derive from
sales of our displays.
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, 2003.
Revenue Recognition
Sales
Revenues from sales are recorded when all four of the
following criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred and title has transferred or
services have been rendered; (iii) our price to the buyer is fixed or
determinable; and (iv) collectibility is reasonably assured.
Sales Returns and Allowances
Revenues are recorded net of estimated sales returns.
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 (loss) is directly affected by management's estimate of
the realizability of inventories. 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.
14
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 net loss for the three-month periods ended January 31, 2004 and
2003 would have increased by approximately $184,000 and $3,000, respectively,
based on the fair value of the stock options granted to employees.
RESULTS OF OPERATIONS
Three months ended January 31, 2004 compared with three months ended January 31,
2003
Sales
Revenue. Revenue from sales decreased by approximately $52,000 in the
three-month period ended January 31, 2004, to approximately $39,000, as compared
to approximately $91,000 in the comparable prior-year period. All revenue during
both periods was from encryption products and services. The decrease in sales
was due to lower unit sales of our encryption products. Our encryption sales
have been limited and are sensitive to individual large transactions. We believe
that changes in sales between periods generally represent the nature of the
early stage of our product and sales channel development.
Gross Profit. Gross profit from sales of encryption products and
services decreased by approximately $5,000 in the three-month period ended
January 31, 2004, to approximately $24,000, as compared to approximately $29,000
in the comparable prior-year period. The decrease in gross profit was primarily
due to the decrease in revenue. Gross profit as a percent of revenue increased
to approximately 63% in the three-month period ended January 31, 2004, as
compared to approximately 32% in the comparable prior-year period. Because of
the limited number of transactions during each of the periods, gross profit
percentages are sensitive to individual transactions.
Research and Development Expenses
Research and development expenses decreased by approximately $7,000 in
the three-month period ended January 31, 2004, to approximately $485,000, from
approximately $492,000 in the comparable prior-year period. The decrease in
research and development expenses is principally due to a decrease in employee
compensation and related costs of approximately $18,000 and a decrease in patent
related expenses of approximately $14,000, offset by an increase in non-employee
consultant expense of approximately $15,000.
15
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$6,000 to approximately $350,000 in the three-month period ended January 31,
2004, from approximately $344,000 in the comparable prior-year period. The
increase in selling, general and administrative expenses is principally due to a
non-recurring insurance recovery of approximately $62,000 in the period-year
period, offset by a decrease in advertising expense of approximately $40,000 in
the current year.
Interest Income
The decrease in interest income in the three months ended January 31,
2004 to approximately $1,000 from approximately $2,000 in the comparable
prior-year period resulted primarily from a reduction in the prevailing interest
rates.
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 flows from sales of our products, and, from June
2001 to January 2002, we received development payments from Futaba Corporation
of Japan.
During the three months ended January 31, 2004, our operating
activities used approximately $264,000 in cash. This resulted from payments to
suppliers, employees and consultants of approximately $332,000, which was offset
by cash of approximately $67,000 received from collections of accounts
receivable related to sales of encryption products and services and
approximately $1,000 of interest income received. In addition, we received
approximately $111,000 in cash upon the exercise of stock options and purchased
approximately $2,000 of equipment. As a result, our cash and cash equivalents at
January 31, 2004 decreased to approximately $868,000 from approximately
$1,024,000 at the end of fiscal 2003.
Accounts receivable decreased by approximately $29,000 from
approximately $42,000 at the end of fiscal 2003 to approximately $13,000 at
January 31, 2004. The decrease in accounts receivable is a result of a decrease
in revenue and the timing of collections. Other receivables of approximately
$127,000 did not change between the periods. Inventories decreased approximately
$9,000 from approximately $1,045,000 at October 31, 2003 to approximately
$1,036,000 at January 31, 2004, as a result of the timing of shipments and
production schedules. Prepaid expenses and other current assets decreased by
approximately $3,000 from approximately $48,000 at the end of fiscal 2003 to
approximately $45,000 at January 31, 2004, as a result of the timing of
payments. Accounts payable and accrued liabilities increased by approximately
$41,000 from approximately $342,000 at the end of fiscal 2003 to approximately
$383,000 at January 31, 2004, as a result of the timing of payments.
16
As a result of these changes, working capital at January 31, 2004
decreased to approximately $1,706,000 from approximately $1,943,000 at the end
of fiscal 2003.
Our working capital includes inventory of approximately $1,036,000 at
January 31, 2004. 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.
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, 2003
states that the net loss incurred during the year ended October 31, 2003, 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, 2003, raise substantial doubt about our ability to
continue as a going concern. The auditor's report on our financial statements
for the year ended October 31, 2002 contained a similar statement. Our financial
statements have been prepared assuming we will continue as a going concern and
do not include any adjustments that might result from the outcome of this
uncertainty.
Based on reductions in operating expenses that have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing cash and accounts receivable, together with cash flows from expected
sales of encryption products and flat panel displays, and other potential
sources of cash flows, will be sufficient to enable us to continue in operation
until at least the end of the first quarter of fiscal 2005. 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 prior to the first quarter of fiscal 2005. 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 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 that market our
encryption products on a non-exclusive basis and to end-users. We have provided
several large organizations our hardware and software encryption solutions and
they are evaluating our solutions in connection with their security
requirements. We have also begun to market our flat panel video display products
to potential purchasers for incorporation into their products. During the
three-month period ended January 31, 2004, we have recognized revenue from sales
of approximately $39,000.
17
The following table presents our expected cash requirements for
contractual obligations outstanding as January 31, 2004:
Payments Due by Period
---------------------------------------------------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
- --------------------- ----------- ----------- -------- --------- ----------------
Noncancelable
Operating Leases $249,000 $344,000 - - $593,000
----------- ----------- -------- --------- ----------------
Total Contractual
Cash Obligations $249,000 $344,000 - - $593,000
=========== =========== ======== ========= ================
GENERAL RISKS AND UNCERTAINTIES
Our business involves a high degree of risk and uncertainty,
including, but not limited to, the following risks and uncertainties:
o We have experienced significant net losses and negative cash flows from
operations and they may continue.
We have had net losses and negative cash flows from operations in each
year since our inception and in the three months ended January 31, 2004, and we
may continue to incur substantial losses and experience substantial negative
cash flows from operations. We have incurred substantial costs and expenses in
developing our encryption and flat panel display technologies and in our efforts
to produce commercially marketable products incorporating our technology. We
have had limited sales of products to support our operations from inception
through January 31, 2004. We have set forth below our net losses, research and
development expenses and net cash used in operations for the three-month periods
ended January 31, 2004 and 2003, and for the fiscal years ended October 31, 2003
and 2002:
(Unaudited)
Three Months Ended Fiscal Years Ended
January 31, October 31,
-------------------------- ------------------------
2004 2003 2003 2002
-------------------------- ------------------------
Net loss $809,354 $804,596 $3,114,411 $3,285,240
Research and development expenses $484,543 $491,624 $1,807,742 $1,625,974
Net cash used in operations $263,702 $286,079 $958,501 $431,471
18
o 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, 2003 states that the net
loss incurred during the year ended October 31, 2003, 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, 2003, raise substantial doubt about our ability to continue as a going
concern. The auditor's report on our financial statements for the year ended
October 31, 2002 contained a similar statement. Our financial statements have
been prepared assuming we will continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.
Based on reductions in operating expenses that have been made and
additional reductions that may be implemented, if necessary, we believe that our
existing cash and accounts receivable, together with cash flows from expected
sales of encryption products and flat panel displays, and other potential
sources of cash flows, will be sufficient to enable us to continue in operation
until at least the end of the first quarter of fiscal 2005. 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 prior to the
first quarter of fiscal 2005. 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.
o 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) the development,
production and marketing of thin high-brightness flat panel video displays and
(ii) the development, production and marketing of multi-functional encryption
products that provide information security for domestic and international users
over virtually every communications media. We have only recently started to
produce monochrome versions of our high-brightness flat panel displays and our
encryption products are only in their initial stages of commercial production.
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:
19
o our ability to successfully market our line of thin high-brightness
flat panel video displays and encryption products;
o the capability of Volga to produce thin high-brightness monochrome
video displays and supply them to us;
o our ability to jointly develop with Volga and produce a full-color
video display;
o our production capabilities and those of our suppliers as required for
the production of our encryption products;
o long-term performance of our products;
o the capability of our dealers and distributors to adequately service
our encryption products;
o our ability to maintain an acceptable pricing level to end-users for
both our encryption and display products;
o the ability of suppliers to meet our requirements and schedule;
o our ability to successfully develop other new products under
development;
o rapidly changing consumer preferences;
o the possible development of competitive products that could render our
products obsolete or unmarketable;
o our future negotiations with Volga with respect to payments and other
arrangements under our Joint Cooperation Agreement with Volga.
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.
o 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.
o 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.
20
o Our common stock is subject to the SEC's penny stock rules which may
make our shares more difficult to sell.
Our stock fits the definition of a penny stock. The SEC rules regarding
penny stocks may have the effect of reducing trading activity in our common
stock and making it more difficult for investors to sell. The rules require a
broker to deliver a risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker must also give bid and offer quotations and broker and salesperson
compensation information to the customer orally or in writing prior to effecting
a transaction and in writing with the confirmation. The SEC rules also require a
broker to make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction before completion of the transaction. These
requirements may result in a lower trading volume of our common stock and lower
trading prices.
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
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 was no change in our internal control over financial reporting
during the quarter ended January 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
21
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
February 26, 2004.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
February 26, 2004.
32.1 Statement of Chief Executive Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated February
26, 2004.
32.2 Statement of Chief Financial Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated February
26, 2004.
(b) Reports on Form 8-K
We filed no Current Reports on Form 8-K during the quarter
ended January 31, 2004.
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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
February 26, 2004 (Principal Executive Officer)
By: /s/ Henry P. Herms
Henry P. Herms
Vice President - Finance and
Chief Financial Officer
February 26, 2004 (Principal Financial and Accounting Officer)
23