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, 2001
-------------
Commission file number 0-11254
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COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
- ---------------------------------------- ----------
(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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of common stock, par value
$.01 per share, outstanding as of September 7, 2001: 65,812,750 shares
------------------
TABLE OF CONTENTS
Part I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 2001 (Unaudited) and October
31, 2000
Condensed Statements of Operations (Unaudited) for the nine months
ended July 31, 2001 and 2000, and for the period from inception
(November 5, 1982) to July 31, 2001
Condensed Statements of Operations (Unaudited) for the three months
ended July 31, 2001 and 2000
Condensed Statement of Shareholders' Equity (Unaudited) for the
period from inception (November 5, 1982) to July 31, 2001
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended July 31, 2001 and 2000, and for the period from inception
(November 5, 1982) to July 31, 2001
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
2
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
---------------------
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(Unaudited)
July 31, October 31,
ASSETS 2001 2000
------ ---- ----
CURRENT ASSETS:
Cash, including cash equivalents and interest bearing accounts of
$1,912,983 and $1,119,516, respectively $ 2,015,514 $ 1,134,045
Marketable securities, at cost - 96,873
Accounts receivable, net of allowance for doubtful accounts of
$198,900 and $75,400, respectively 694,395 594,851
Inventories 1,619,844 1,769,285
Prepaid expenses and other current assets 219,200 60,433
-------------- --------------
Total current assets 4,548,953 3,655,487
PROPERTY AND EQUIPMENT, net 129,479 270,018
OTHER ASSETS 2,863,851 2,968,996
-------------- --------------
$ 7,542,283 $ 6,894,501
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 815,164 $ 1,035,749
Accrued liabilities 220,085 301,153
Deferred revenue 2,166,667 -
-------------- --------------
Total current liabilities 3,201,916 1,336,902
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; 65,561,625 and 63,084,526 shares issued
and outstanding, respectively 655,616 630,845
Additional paid-in capital 61,673,372 60,050,852
Deficit accumulated during the development stage (57,988,621) (55,124,098)
-------------- --------------
4,340,367 5,557,599
-------------- --------------
$ 7,542,283 $ 6,894,501
============== ==============
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Period from
For the nine months ended Inception
July 31, (November 5, 1982)
--------------------------------------- to
2001 2000 July 31, 2001
------------------ ------------------- ------------------------------
REVENUE $ 939,133 $ 1,190,588 $ 2,458,008
COST OF REVENUE 380,046 616,977 1,142,788
------------------ ------------------- ------------------------------
Gross profit 559,087 573,611 1,315,220
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately $1,654,000, $1,975,000
and $35,860,000, respectively) 3,443,415 4,222,846 63,149,978
------------------ ------------------- ------------------------------
LOSS FROM AND IMPAIRMENT OF
INVESTMENT IN JOINT VENTURE - - 1,225,000
------------------ ------------------- ------------------------------
INTEREST INCOME 19,805 94,330 5, 071,137
------------------ ------------------- ------------------------------
NET (LOSS) $(2,864,523) $ (3,554,905) $(57,988,621)
================== =================== ==============================
NET (LOSS) PER SHARE OF COMMON STOCK:
Basic and Diluted $ (0.04) $ (0.06) $ (1.19)
================== =================== ==============================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 64,078,349 61,984,822 48,824,903
================== =================== ==============================
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended
July 31,
-----------------------------------------------------
2001 2000
------------------------- --------------------------
REVENUE $ 515,828 $ 492,196
COST OF REVENUE 211,580 225,398
------------------------- --------------------------
Gross profit 304,248 266,798
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately $539,000 and $645,000,
respectively)
1,260,143 1,283,006
------------------------- --------------------------
LOSS FROM AND IMPAIRMENT OF
INVESTMENT IN JOINT VENTURE - -
------------------------- --------------------------
INTEREST INCOME 9,588 42,352
------------------------- --------------------------
NET (LOSS) $ (946,307) $ (973,856)
========================= ==========================
NET (LOSS) PER SHARE OF COMMON STOCK: Basic and Diluted
$ (0.01) $ (0.02)
========================= ==========================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and Diluted
65,009,379 63,074,654
========================= ==========================
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982)
THROUGH July 31, 2001 (UNAUDITED)
Deficit Accumulated
During the
Common Stock Additional Paid-in Development
Shares Par Value Capital Stage
------------------------------- ------------------- -------------------
BALANCE, Inception (November 5, 1982) - $ - $ - $ -
Sale of common stock, at par, to incorporators
on November 8, 1982 1,470,000 14,700 - -
Sale of common stock, at $.10 per share,
primarily to officers and employees from
November 9, 1982 to November 30, 1982 390,000 3,900 35,100 -
Sale of common stock, at $2 per share, in
private offering from January 24, 1983 to
March 28, 1983 250,000 2,500 497,500 -
Sale of common stock, at $10 per share, in
public offering on October 6, 1983, net of
underwriting discounts of $1 per share 690,000 6,900 6,203,100 -
Sale of 60,000 warrants to representative of
underwriters, at $.001 each, in conjunction
with public offering - - 60 -
Costs incurred in conjunction with private
and public offerings - - (362,030) -
Common stock issued, at $12 per share, upon
exercise of 57,200 warrants from February
5, 1985 to October 16, 1985, net of
registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by
individuals from January 29, 1985 to October 4,
1985 under agreements with the Company, net of
costs incurred by the Company - - 298,745 -
Restatement as of October 31, 1985 for
three-for-one stock split 5,714,400 57,144 (57,144) -
Common stock issued, at $4 per share, upon
exercise of 2,800 warrants in December 1985 8,400 84 33,516 -
Sale of common stock, at market, to officers on
January 9, 1987 and April 22, 1987 and to
members of their immediate families on July
28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for five-for-four
stock split 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction with
five-for-four stock split - - (1,345) -
Sale of common stock, at market, to members of
officers' immediate families from September 10,
1987 to December 4, 1990 and to officers on
October 29, 1987 and February 26, 1989 628,040 6,280 6,124,031 -
Continued
6
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982)
THROUGH July 31, 2001 (UNAUDITED)
Continued
Deficit Accumulated
During the
Common Stock Additional Paid-in Development
Shares Par Value Capital Stage
------------------------------- ------------------- -------------------
Sale of common stock, at market, to senior level
personnel on February 26, 1989 29,850 299 499,689 -
Sale of common stock, at market, to unrelated party
on February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991 for
two-for-one stock split 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members of
officers' immediate families from April 26, 1991 to
October 27, 1992 261,453 2,615 2,788,311 -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates from September 1993 through March 1996 579,800 5,798 2,651,462 -
Common stock issued upon exercise of stock options
from December 16, 1992 to June 12, 1996 4,535,340 45,353 28,197,223 -
Restatement as of June 17, 1996 for two-for-one stock
split 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates in July and October, 1996, and March 1997 206,610 2,066 1,062,167 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Common stock issued upon exercise of stock options
from July 1996 to October 1999 under stock
incentive plans, net of registration costs 1,771,400 17,714 4,414,412 -
Sale of common stock, at market, to a related party
and other unrelated parties in April and
September, 1999 1,300,000 13,000 1,461,500 -
Stock options granted to consultants - - 461,900 -
Common stock issued upon exercise of stock options
from November 1999 to April 2000 under stock
inventive plans
2,267,400 22,674 3,003,050 -
Sale of common stock, at market, to unrelated
parties in January and March 2000, net of
listing fees 616,500 6,165 794,420 -
Continued
7
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982)
THROUGH July 31, 2001 (UNAUDITED)
Continued
Deficit Accumulated
During the
Common Stock Additional Paid-in Development
Shares Par Value Capital Stage
------------------------------- ------------------- -------------------
Common stock issued upon exercise of warrants
in May 2000 143,250 1,432 198,604 -
Net (loss) for the period from inception (November
5, 1982) to October 31, 2000 - - - (55,124,098)
-------------- ------------- -------------------- ---------------------
BALANCE, October 31, 2000 63,084,526 630,845 60,050,852 (55,124,098)
Stock options granted to consultants - - 132,508 -
Common stock issued upon exercise of stock options
from January 2001 to May 2001 under stock
incentive plans, net of registration costs 1,457,034 14,571 805,189 -
Issuance of stock to consultants for services rendered 203,095 2,031 92,969 -
Common Stock issued upon grant of stock awards
from February 2001 to July 2001 under stock
incentive plans 816,970 8,169 591,854 -
Net (loss) for the nine months ended July 31, 2001 - - - (2,864,523)
-------------- ------------- -------------------- ---------------------
BALANCE, July 31, 2001 65,561,625 $655,616 $61,673,372 $(57,988,621)
============== ============= ==================== =====================
The accompanying notes are an integral part of these condensed statements.
8
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Period from
For the nine months ended Inception
July 31, (November 5, 1982)
----------------------------------------------- to
2001 2000 July 31, 2001
--------------------- ---------------------- --------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants $(2,921,753) $(4,179,428) $(64,786,776)
Cash received from customers 2,882,756 716,331 4,064,713
Interest received 19,805 102,299 5,068,151
--------------------- ---------------------- --------------------------
Net cash (used in) operating activities (19,192) (3,360,798) (55,653,912)
--------------------- ---------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,971) (23,821) (2,070,130)
Disbursements to acquire certificates of
deposit and marketable securities - (96,873) (13,630,910)
Proceeds from maturities of investments 96,873 488,038 13,630,910
Investment made in Joint Venture - - (1,225,000)
--------------------- ---------------------- --------------------------
Net cash provided by (used in) investing
activities 80,902 367,344 (3,295,130)
--------------------- ---------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and
warrants, net of underwriting discounts
of $690,000 related to initial public
offering in October 1983 - - 17,647,369
Proceeds from exercise of stock options
and warrants, net of registration costs 819,759 3,225,760 41,106,732
Proceeds from sales of common stock in private
placements, net - 800,585 2,275,085
Proceeds from sales of common stock by
individuals under agreements with the
Company, net of disbursements made by the
Company - - 298,745
Disbursements made in conjunction with sales
of stock - - (362,030)
Fractional share payments in conjunction with
stock split - - (1,345)
--------------------- ---------------------- --------------------------
Net cash provided by financing activities 819,759 4,026,345 60,964,556
--------------------- ---------------------- --------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 881,469 1,032,891 2,015,514
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,134,045 1,587,830 -
--------------------- ---------------------- --------------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,015,514 $2,620,721 $2,015,514
===================== ====================== ==========================
Continued
9
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Continued
For the Period from
For the nine months ended Inception
July 31, (November 5, 1982)
----------------------------------------------- to
2001 2000 July 31, 2001
--------------------- ---------------------- --------------------------
RECONCILIATION OF NET (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Net loss $(2,864,523) $(3,554,905) $(57,988,621)
Loss from Joint Venture - - 1,139,828
Stock option compensation to consultants 132,508 210,650 594,408
Stock issued to consultants for services rendered 95,000 - 95,000
Stock awards granted to employees and consultants 600,023 600,023
Provision for doubtful accounts 123,500 - 198,900
Depreciation and amortization 156,511 199,903 2,060,985
Loss from disposition of assets - 30,000 30,050
Impairment of investment in Joint Venture - - 85,172
Impairment of amounts due from Joint
Venture - - 1,407,461
Change in operating assets and liabilities:
Accounts receivable (223,044) (454,658) (893,295)
Inventories 149,441 (329,672) (4,619,844)
Prepaid expenses and other current assets (158,767) 17,638 (1,081,200)
Long term amount due from Joint Venture - - (1,407,461)
Other assets 105,145 1,723 136,149
Accounts payable and accrued liabilities (301,653) 518,523 1,821,866
Deferred revenue 2,166,667 - 2,166,667
--------------------- ---------------------- --------------------------
Net cash (used) in operating activities $(19,192) $(3,360,798) $(55,653,912)
===================== ====================== ==========================
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING ACTIVITIES:
Non-cash increase in other assets resulting
from a barter transaction including the
exchange of certain inventory for commercial
trade credits $ - $ - $ 3,000,000
===================== ====================== ==========================
The accompanying notes are an integral part of these condensed statements.
10
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
July 31, 2001 (UNAUDITED)
(1) Nature and Development of Business and Other Disclosures
Organization and Development of Business
CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982, is a
development stage enterprise whose principal activities include the development,
production and marketing of multi-functional encryption products that provide
information security for domestic and international users over virtually every
communications media. The Company's line of encryption products presently
includes the USS-900 (Universal Secure System), the DSS-1000 (Digital Security
System), the DCS-1200 (Digital Cellular/Satellite) and the ULP-1 (Ultimate
Laptop Privacy). The USS-900, DSS-1000, DCS-1200 and ULP-1 are multi-functional,
hardware-based digital encryption systems that incorporate the Harris
Corporation encryption cryptographic chip - the Citadel(TM) CCX - or the Triple
DES algorithm to provide high-grade encryption.
The Company is also continuing its research and development activities for
additional encryption products and flat panel display technologies, including
its thin film video color display (Field Emission Display or FED) and its
ultra-high resolution charged particle E-Paper(TM) flat panel display.
On June 13, 2001, the Company entered into a Joint Cooperation Agreement for
Field Emission Displays (the "Futaba Agreement") with Futaba Corporation
("Futaba") for the purpose of jointly developing and commercializing a
full-color video display utilizing the Company's field emission display
technology. The Company received the initial payment provided for by the Futaba
Agreement of $2,500,000 for the first phase ("Phase I") of development of a
prototype for a 320 x 240 pixel, 5-inch diagonal display in June 2001. During
the first phase of the Futaba Agreement, which is contractually defined as a
one-year period, the Company will be primarily responsible for developing
prototypes of the display and providing the required fabrication, to enable
Futaba to utilize its know-how and production facilities for the mass production
of the display. The Futaba Agreement further provides for negotiations between
the parties during the first six months of the Futaba Agreement regarding
potential additional compensation to the Company for use of the Company's
technology developed prior to the Futaba Agreement, which may include the
payment of royalties based on sales of products by Futaba. As part of the Futaba
Agreement, both parties would have the exclusive right to produce products, with
Futaba having the exclusive right to sell the products worldwide, excluding
Russia. Any intellectual property developed pursuant to the Futaba Agreement
will be jointly owned by Futaba and the Company. The Futaba Agreement also
provides for a term of three years with the terms of the project following the
first year being subject to future negotiations between the parties on a yearly
basis.
11
Funding and Management's Plans
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily through the proceeds from sales of its common stock in its
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.
In June 2001, the Company received the initial payment of $2,500,000 under the
Futaba Agreement. During the nine-month period ended July 31, 2001, the
Company's operating activities used approximately $19,000 in cash, after giving
effect to receipt of the Futaba payment. As of July 31, 2001, working capital
included approximately $2,016,000 of cash, $694,000 of accounts receivable,
$1,620,000 of inventory, $219,000 of prepaid expenses and other current assets
and approximately $1,035,000 of accounts payable and accrued liabilities, and
$2,167,000 of deferred revenue. The Company believes that its existing cash and
receivables, cash flows from future sales of encryption products and other
potential sources of cash flows, including the Futaba Agreement, will be
sufficient to enable it to continue in operation until at least the end of the
third quarter of fiscal 2002, after giving effect to certain reductions in
operating expenses, as necessary.
The Company is seeking to improve its liquidity through increased sales or
license of its products and technology. The Company may also seek to improve its
liquidity through sales of its common stock and additional exercise of stock
options and warrants. There can be no assurance that any of these plans will
materialize.
The Company has had limited sales of products to its dealers, distributors and
end-users since its inception, and during the nine and three-month periods ended
July 31, 2001, has recognized revenue from product sales of approximately
$606,000 and $182,000, respectively. During the three-month period ended July
31, 2001, the Company recognized revenue of approximately $333,000 in connection
with the Futaba Agreement. There can be no assurance that the Company will
generate significant revenues in the future (through sales or otherwise) to
improve its liquidity, that the Company will receive additional payments under
the Futaba Agreement, that the Company will have sufficient revenues to generate
a profit, that the Company will be able to expand its current distributor/dealer
network, that production capabilities will be adequate, or that other products
will not be produced by other companies that will render the products of the
Company obsolete.
The Chairman of the Board and Chief Executive Officer, the President, and an
outside Director have made a representation that it is their intention to
provide short term loans to the Company of up to $450,000, $450,000 and
$200,000, respectively, if the Company requires additional cash for its
operations during the period ending January 31, 2002. The loans would bear
interest at 9% per annum, would be secured by the Company's accounts receivable
and inventory and would mature on January 31, 2002. These amounts would be
reduced on a pro-rata basis by any other debt or equity financing obtained by
the Company and by the proceeds received from certain sales. The representation
of each individual is conditioned upon his not becoming incapacitated in a
manner that prevents him from performing his present responsibilities.
The National Association of Securities Dealers, Inc. requires that the Company
maintain a minimum of $4,000,000 of net tangible assets to maintain its Nasdaq
National Market listing. The Company anticipates that it will seek additional
12
sources of funding, when necessary, to satisfy such requirements or for other
purposes. There can be no assurance that such funding, if required, will be
obtained. The Company's estimated funding capacity indicated above assumes,
although there is no assurance, that the waiver of salary and pension benefits
by the Chairman of the Board, the President and certain senior level personnel,
will continue.
NASDAQ also requires that the Company maintain a minimum closing bid price of
$1.00 for continued listing. If at any time the bid price for the Company's
common stock falls below $1.00 per share for a period of thirty consecutive
business days, NASDAQ has the right to delist the Company's stock if within
ninety days thereafter the bid price for the stock is not at least $1.00 per
share for a minimum of ten consecutive business days. On June 28, 2001, the
Company received a NASDAQ Staff Determination that it failed to comply with the
minimum bid price requirements for continued listing and that its securities
are, therefore, subject to delisting from NASDAQ. The Company requested and
received a hearing before a NASDAQ Listings Qualifications Panel to review the
Staff Determination. The Company has not received a response from the Panel with
respect to its request for continued listing. During the appeal process, the
Company's securities will remain listed on NASDAQ. If the Company's stock were
delisted, the delisting could have an adverse affect on the price of its common
stock and could adversely affect the liquidity of the shares held by its
stockholders. The closing bid price for the Company's common stock on September
7, 2001 was $0.43.
Realizability of Assets
Management has recorded the Company's inventory at its current best estimate of
net realizable value, which is based upon the historic and future selling prices
of the Company's products. To date, sales of the Company's products have been
limited. Accordingly, there can be no assurance that the Company will not be
required to reduce the selling price of its inventory below its current carrying
value.
Furthermore, management believes its other assets, which consist principally of
commercial trade barter credits (See Note 2 - Barter Transaction), will be
realized through future usage, and accordingly are properly valued as of July
31, 2001 after giving effect to a current period charge of approximately
$100,000. The Company took this charge after it determined, through its
examination, that it was more likely than not that the Company would not realize
the first-year value of its commercial trade credits in accordance with its
original utilization plan. The Company will assess that utilization plan on a
quarterly basis.
Product Development
The success and profitability of the Company's products will depend upon many
factors, many of which are beyond its control. These factors include the
capability of the Company to market its products, the Company's continuing
ability to purchase the encryption chip for use in its encryption products,
long-term product performance and the capability of the Company's dealers and
distributors to adequately service the Company's products, the ability of the
Company to maintain an acceptable pricing level to its customers for its
products, the ability of suppliers to meet the Company's requirements and
schedule, the Company's ability to successfully develop its new products under
13
development, rapidly changing consumer preference, and the possible development
of competitive products that could render the Company's products obsolete or
unmarketable.
Basis of Presentation
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The information contained herein is for the nine and three-month periods ended
July 31, 2001 and 2000, and for the period from inception (November 5, 1982) to
July 31, 2001. In the opinion of the Company, 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
annual operations of the Company. Reference is made to the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2000, for more extensive disclosures
than contained in these condensed financial statements.
Revenue Recognition
The Company recognizes revenues in accordance with Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements," or other specific
authoritative literature, as applicable, as follows:
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) the Company's price to the buyer is fixed or determinable; and
(iv) collectibility is reasonably assured.
Collaborative Agreements
Revenue from the Futaba Agreement is being recognized ratably over
Phase I (See Organization and Development of Business, above) based
upon the Company's compliance with the requirements of Phase I.
Deferred revenue will be recognized ratably into revenue over the
remainder of Phase I.
Other Assets
Other assets consists primarily of a barter credit asset, which will be realized
by the Company through future redemption of barter credits to be applied towards
advertising and purchase discounts (See Realizability of Assets, above, and Note
2 - Barter Transaction).
14
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
(2) Barter Transaction
In August 2000, the Company entered into a nonmonetary barter transaction
whereby $3,000,000 of certain inventory was sold in exchange for an equal value
of commercial trade barter credits. The Company determined the fair value of the
exchanged inventory based on management's quarterly evaluation of the net
realizable value of all items in inventory. In accordance with Accounting
Principles Board ("APB") No. 29, "Accounting for Nonmonetary Transactions," the
Company recognized no gain or loss on the transaction as it is management's
opinion that this exchange was effected at fair market value. These trade
credits ($2,851,000 as of July 31, 2001, after giving effect to a $100,000
charge; See Note 1 - Organization and Development of Business --Realizability of
Assets), which are recorded as other assets on the accompanying balance sheet,
may be redeemed to reduce the cost of advertising as well as other products and
services.
The commercial trade barter credits, which can be utilized as cash or purchase
discounts on future advertising and commercial business products, do not have an
explicit contractual expiration date and can be used at the Company's discretion
for any of the products and services covered under the barter arrangement, but
will require significant funding in order to be fully realized by the Company.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," measurement of an impairment loss for the Company's long-lived
assets is based on the fair value of the specific asset. With respect to the
barter credit asset, the Company continually evaluates fair value based upon
estimates of its expected undiscounted future cash flows. The utilization of the
commercial trade credits included in the carrying value of the barter asset is
dependent upon the success of the Company's future operations and its ability to
fund advertising or product expenditures. Based on this evaluation, management
believes that the net carrying value of this asset is properly stated as of July
31, 2001.
(3) Shareholders' Equity
Stock Incentive Plans
The Company has three stock incentive plans: the 1987 Stock Option Plan (the
"1987 Plan"), the CopyTele, Inc. 1993 Stock Option Plan (the "1993 Plan"), and
15
the CopyTele, Inc. 2000 Share Incentive Plan (the "2000 Share Plan"), which were
adopted by the Board of Directors on April 1, 1987, April 28, 1993, and May 8,
2000, 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. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in APB No. 25. Compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. In accordance
with APB Opinion No. 25, no compensation cost has been recognized by the
Company, as all option grants have been made at the fair market value of the
Company's stock on the date of grant.
Options granted to non-employee consultants are accounted for using the fair
value method required by SFAS No. 123. Compensation expense for consultants
recognized in the nine month periods ended July 31, 2001 and 2000 and the period
from inception (November 5, 1982) to July 31, 2001 was approximately $133,000,
$211,000 and $594,000, respectively, and in the three-month periods ended July
31, 2001 and 2000 was approximately $30,000 and $76,000, respectively, which was
measured at the vesting date upon the Company's determination of performance
commitment achievement in accordance with Emerging Issues Task Force No. 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," and is included
in selling, general and administrative expenses for the periods.
During the nine-month period ended July 31, 2001, options to purchase 2,535,000
shares and stock awards for the issuance of 816,970 shares were granted, and
options to purchase 1,457,034 shares were exercised. As of July 31, 2001, stock
options to purchase 13,894,546 shares were outstanding, of which stock options
to purchase 13,869,546 shares were exercisable. During the period from July 1,
2001 through September 7, 2001, options to purchase 60,000 shares and stock
awards for the issuance of 251,125 shares were granted.
Warrants
As of July 31, 2001, warrants to purchase 1,373,250 shares of common stock were
outstanding and exercisable.
(4) Net (Loss) Per Share of Common Stock
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
In accordance with SFAS 128, basic net (loss) per common share ("Basic EPS") is
computed by dividing net (loss) by the weighted average number of common shares
outstanding. Diluted net (loss) per common share ("Diluted EPS") is computed by
dividing net (loss) by the weighted average number of common shares and dilutive
common share equivalents and convertible securities then outstanding. SFAS No.
128 requires the presentation of both Basic EPS and Diluted EPS on the face of
the statements of operations. Diluted EPS for all periods presented is the same
as Basic EPS, as the inclusion of the impact of common stock equivalents then
outstanding would be anti-dilutive.
16
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 known and unknown 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.
GENERAL
We have been a development-stage enterprise since our inception on November 5,
1982. Our principal activities include the development, production and marketing
of multi-functional, hardware-based, peripheral digital encryption devices.
These encryption devices provide high-grade security for domestic and
international users over virtually every communications media.
Our line of encryption products presently includes the USS-900 (Universal Secure
System), the DSS-1000 (Digital Security System), the DCS-1200 (Digital
Cellular/Satellite) and the ULP-1 (Ultimate Laptop Privacy), which are available
with either the high-grade strength of the Harris Corporation ("Harris") digital
cryptographic chip - the Citadel(TM) CCX - or the Triple DES algorithm to
provide high-grade encryption. Harris is supplying the chip at a negotiated
price under a three-year agreement entered into in 1999. Triple DES is an
algorithm available in the public domain, which has been incorporated into our
software. Triple DES is used by many U.S. government agencies.
We are continuing our research and development activities for additional
encryption products and flat panel display technologies, including our thin film
video color display (Field Emission Display or FED) and our ultra-high
resolution charged particle E-Paper(TM) flat panel display. We cannot assure
you, however, that our efforts in these areas will be successful. Effective June
13, 2001, we entered into a Joint Cooperation Agreement for Field Emission
Displays with Futaba Corporation ("Futaba Agreement") for the purpose of jointly
developing and commercializing a full-color video display utilizing our field
emission display technology. See "Liquidity and Capital Resources."
We are currently using several U.S.-based electronic production contractors to
produce the components for our encryption devices. We sell our products
primarily through a distributor/dealer network and also to end-users.
17
During fiscal 2000, we discontinued production of our Magicom(R) 2000
telecommunications product and our SCS-700 encryption product, which combined
the USS-900 with the Magicom(R) 2000, but we are continuing sales of our
remaining inventory of the SCS-700.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, please refer to our Financial Statements and the notes
thereto.
RESULTS OF OPERATIONS
Nine months ended July 31, 2001 compared with nine months ended July 31, 2000
Revenue -
Revenue decreased by approximately $252,000, or 21%, to approximately $939,000
in the nine months ended July 31, 2001, compared with approximately $1,191,000
in the comparable prior-year period.
Revenue from product sales decreased by approximately $585,000, to approximately
$606,000, as compared with approximately $1,190,000 in the prior year. This
decrease in product sales is a result of a decrease in SCS-700 system sales of
approximately $259,000 and a decrease in sales of other encryption products of
approximately $326,000. Revenue in the nine-month period ended July 31, 2001
related to the Futaba Agreement, which was entered into in June 2001, was
approximately $333,000 and partially offset the decrease in product sales.
Gross Profit-
Gross profit decreased by approximately $15,000 in the nine months ended July
31, 2001 to approximately $559,000, compared to approximately $574,000 in the
comparable prior-year period. Gross profit as a percentage of sales increased to
approximately 60% in the nine months ended July 31, 2001, compared to
approximately 48% in the comparable prior-year period. The increase in gross
profit as a percentage of revenue resulted primarily from the mix of encryption
products sold and from revenue related to the Futaba Agreement.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses decreased approximately $780,000,
or 18%, to approximately $3,443,000 for the nine-month period ended July 31,
2001, from approximately $4,223,000 for the comparable prior year period.
The decrease in selling, general and administrative expenses for the nine-month
period ended July 31, 2001, compared with the prior-year period is primarily a
result of effective cost-cutting measures, specifically a reduction in
engineering supplies of approximately $322,000, a reduction in advertising and
related expenses of approximately $260,000, a reduction in patent-related costs
of approximately $133,000, a reduction of the cost of facilities due to a
consolidation of operating locations of approximately $71,000, and a reduction
in employee compensation and related costs of approximately $58,000, offset by a
provision for doubtful accounts of approximately $124,000 and a charge of
$100,000 related to commercial trade credits.
18
Research and Development Expenses-
Research and development expenses, which are included in selling, general and
administrative expenses, decreased approximately $321,000 to $1,654,000 for the
nine months ended July 31, 2001, from approximately $1,975,000 for the
comparable prior-year period. The decrease in research and development expenses
is primarily a result of a reduction in engineering supplies and patent related
costs.
Interest Income-
Interest income decreased by approximately $74,000 to approximately $20,000 in
the nine-month period ended July 31, 2001 as compared to approximately $94,000
in the comparable period in the prior-year, primarily as a result of a reduction
in average funds available for investment.
Three months ended July 31, 2001 compared with three months ended July 31, 2000
Revenue -
Revenue increased by approximately $24,000, or 5%, to approximately $516,000 in
the three months ended July 31, 2001, compared with approximately $492,000 in
the comparable prior-year period.
Revenue from product sales decreased by approximately $310,000, to approximately
$182,000, as compared with approximately $492,000 in the prior year, as a result
of a decrease in the number of encryption units sold. Revenue in the three-month
period ended July 31, 2001 related to the Futaba Agreement, which was entered
into in June 2001, was approximately $333,000.
Gross Profit-
Gross profit increased by approximately $37,000 in the three months ended July
31, 2001 to approximately $304,000, compared to approximately $267,000 in the
comparable prior-year period. Gross profit as a percentage of sales increased to
approximately 59% in the three months ended July 31, 2001, compared to
approximately 54% in the comparable prior-year period. The increase in gross
profit as a percentage of revenue resulted primarily from the mix of encryption
products being sold and from revenue related to the Futaba Agreement.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses decreased approximately $23,000, or
2%, to approximately $1,260,000 for the three months ended July 31, 2001 from
approximately $1,283,000 for the comparable prior-year period.
The decrease in selling, general and administrative expenses for the three
months ended July 31, 2001, compared with the prior-year period is primarily a
result of effective cost-cutting measures, specifically a reduction in
advertising and related costs of approximately $157,000, and a reduction in
patent-related costs of approximately $48,000, offset by a provision for
doubtful accounts of approximately $124,000 and a charge of $100,000 related to
commercial trade credits.
19
Research and Development Expenses-
Research and development expenses, which are included in selling, general and
administrative expenses, were approximately $539,000 and $645,000 for the
three-month periods ended July 31, 2001 and 2000, respectively. The decrease in
research and development expenses of approximately $106,000 is primarily the
result of a reduction in patent related costs and a reduction in outside
research and development.
Interest Income-
Interest income decreased by approximately $32,000 to approximately $10,000 in
the three months ended July 31, 2001 as compared to approximately $42,000 in the
comparable period in the prior-year, primarily as a result of a reduction in
average funds available for investment.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have met our liquidity and capital expenditure needs
primarily from the proceeds of sales of our common stock in our initial public
offering, in private placements, upon exercise of warrants issued in connection
with the private placements and our initial public offering, and upon the
exercise of stock options pursuant to our 1987 and 1993 stock option plans and,
2000 share incentive plan (the "1987 Plan," the "1993 Plan," and the "2000 Share
Plan," respectively).
In June 2001, we received the initial payment provided for by the Futaba
Agreement of $2,500,000 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
ultra-bright screen. See Note 1 to Condensed Financial Statements -
"Organization and Development of Business." The technology being utilized is
based on the more than three-year joint development that we funded in our
previously disclosed relationship with Volga Svet Limited, a Russian display
company. We plan to continue to utilize Volga's assistance in the development
work under the Futaba Agreement and will fund Volga in accordance with the
existing relationship.
Working capital decreased by approximately $972,000 from approximately
$2,319,000 at October 31, 2000 to approximately $1,347,000 at July 31, 2001, as
a result of the decrease in inventories, the increase in deferred revenue,
offset by the increase in accounts receivable, the increase in prepaid expenses
and other current assets and the decrease in accounts payable and accrued
liabilities. Cash and marketable securities increased by approximately $785,000
from approximately $1,231,000 at October 31, 2000 to approximately $2,016,000 at
July 31, 2001, as a result of proceeds received in connection with the Futaba
Agreement, offset by funds used for operations. Prepaid expenses increased by
approximately $159,000 as a result of the timing of payments of prepaid items.
Accounts receivable increased by approximately $99,000 as a result of the timing
of collections. Accounts payable decreased by approximately $221,000 and accrued
liabilities decreased by approximately $81,000, primarily as a result of the
decrease in operating expenses.
During the nine months ended July 31, 2001 our operations used approximately
$19,000 in cash, after giving effect to receipt of the Futaba payment. As of
July 31, 2001, working capital included approximately $2,016,000 of cash,
20
$694,000 of accounts receivable, $1,620,000 of inventory, $219,000 of prepaid
expenses and other current assets and approximately $1,035,000 of accounts
payable and accrued liabilities and $2,167,000 of deferred revenue. We believe
that existing cash and receivables, cash flows from future sales of encryption
products and other potential sources of cash flows, including the Futaba
Agreement, will be sufficient to enable us to continue in operation until at
least the end of the third quarter of fiscal 2002, after giving effect to
certain reductions in operating expenses, as necessary. We anticipate that,
thereafter, we will require additional funds to continue our marketing and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
Our ability to fund continuing operations may depend in part upon the
availability of financing from our Chairman of the Board, our President, and an
outside Director, as described below. 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 will 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 we will receive
additional payments under the Futaba Agreement, that funds will be available to
us from debt or equity financings or that, if available, we will be able to
obtain such funds on favorable terms and conditions. We currently have no
definitive arrangements with respect to additional financing.
In connection with our annual audit for the fiscal year ended October 31, 2000,
our Chairman of the Board and Chief Executive Officer, our President, and an
outside Director have represented to our independent auditors that it is their
intention to provide short term loans to us of up to $450,000, $450,000 and
$200,000, respectively, if we require additional cash for our operations during
the period ending January 31, 2002. The loans would bear interest at 9% per
annum, would be secured by accounts receivable and inventory and would mature on
January 31, 2002. These amounts would be reduced on a pro-rata basis by any
other debt or equity financing obtained by us and by the proceeds received from
certain sales. The representation of each individual is conditioned upon his not
becoming incapacitated in a manner that prevents him from performing his present
responsibilities.
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 office equipment
distributors and dealers. During the nine months ended July 31, 2001, we have
recognized revenues from product sales of approximately $606,000 and revenues in
connection with the Futaba Agreement of approximately $333,000. We are hopeful,
although we can give you no assurance, that we will generate significant
revenues in the future (through sales or otherwise) to improve our liquidity.
The Nasdaq Stock Market ("NASDAQ") requires that we maintain a minimum of
$4,000,000 of net tangible assets to maintain our Nasdaq National Market
listing. If our stock were delisted, the delisting could potentially have an
adverse effect on the price of our common stock and could adversely affect the
liquidity of the shares held by our stockholders. Our net tangible assets as of
July 31, 2001 were approximately $4,340,000. We anticipate that we may require
additional funds to maintain NASDAQ's net tangible assets requirement. We can
give you no assurance that we will be able to generate adequate funds from
operations or that funds will be available to us from equity financings. We also
21
can offer no assurance that, if available, we will be able to obtain such funds
on favorable terms and conditions.
NASDAQ also requires that we maintain a minimum closing bid price of $1.00 for
continued listing. If at any time the bid price for our common stock falls below
$1.00 per share for a period of thirty consecutive business days, NASDAQ has the
right to delist our stock if within ninety days thereafter the bid price for the
stock is not at least $1.00 per share for a minimum of ten consecutive business
days. On June 28, 2001, we received a NASDAQ Staff Determination that we failed
to comply with the minimum bid price requirements for continued listing and that
our securities are, therefore, subject to delisting from NASDAQ. We requested
and received a hearing before a NASDAQ Listings Qualifications Panel to review
the Staff Determination. We have not received a response from the Panel with
respect to our request for continued listing. During the appeal process, our
securities will remain listed on NASDAQ. As we note above, if our stock were
delisted, the delisting could have an adverse affect on the price of our common
stock and could adversely affect the liquidity of the shares held by our
stockholders. The closing bid price for our common stock on September 7, 2001
was $0.43.
Management has recorded our inventory at its current best estimate of net
realizable value, which is based upon the historic and future selling prices of
the USS-900, DSS-1000, DCS-1200, UPL-1 and remaining SCS-700s. 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 its
current carrying value.
Furthermore, management believes its other assets, which consist principally of
commercial trade barter credits, will be realized through future usage, and
accordingly are properly valued as of July 31, 2001 after giving effect to a
current period charge of approximately $100,000. We took this charge after we
determined, through our examination, that it was more likely than not that we
would not realize the first-year value of our commercial trade credits in
accordance with our original utilization plan. We will assess that utilization
plan on a quarterly basis.
Our estimated funding capacity indicated above assumes, although there is no
assurance, that the waiver of salary and pension benefits by the Chairman of the
Board, the President and senior level personnel will continue.
GENERAL RISKS AND UNCERTAINTIES
o We have experienced significant net losses and negative cash flows from
operations since our inception and they may continue.
We have had net losses and negative cash flows from operations in each year
since our inception and we may continue to incur substantial losses and
experience substantial negative cash flows from operations. We have incurred
substantial costs and expenses since our inception in developing our flat panel
display and encryption technologies and in our efforts to produce commercially
marketable products incorporating our technology. We have had limited sales of
products to our dealers, distributors and other customers to support our
operations from inception through July 31, 2001. We have incurred net losses
aggregating approximately $57,989,000 during the same period. Research and
22
development expenses during that period aggregated approximately $35,860,000 and
negative cash flows from operations aggregated approximately $55,654,000. We
have set forth below our net losses, research and development expenses and
negative cash flows from operations for the fiscal years ended October 31, 2000
and 1999, and the nine-month periods ended July 31, 2001 and 2000:
(Unaudited)
Fiscal Years Ended Nine Months Ended
October 31, July 31,
----------------------------------- -----------------------------------
2000 1999 2001 2000
---- ---- ---- ----
Net Loss $4,964,173 $8,465,016 $2,864,523 $3,554,905
Research and Development $2,732,000 $3,163,000 $1,654,000 $1,975,000
Negative Cash Flows From Operations $4,840,578 $6,117,096 $ 19,192 $3,360,798
o We may need additional funding in the near future which may not be
available on acceptable terms and, if available, may result in dilution
to our stockholders.
We anticipate that we will require additional funding to continue our research
and development activities, market our products and satisfy NASDAQ's requirement
that we maintain a minimum of $4 million of net tangible assets to maintain our
Nasdaq National Market listing, if cash generated from operations is
insufficient to satisfy these requirements. Based on reductions in operating
expenses that we have made and additional reductions that we may implement, if
necessary, we believe that our cash resources, and other potential sources of
cash flows (see Note 1 to Condensed Financial Statements - "Organization and
Development of Business") will be sufficient to continue in operation until at
least the end of the third quarter of fiscal 2002. We anticipate that,
thereafter, we will require additional funds to continue our marketing and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
Our ability to fund continuing operations may depend in part upon the
availability of financing from our Chairman of the Board, our President and an
outside Director who represented to our independent auditors in connection with
our annual audit for fiscal year 2000 that it was their intention to provide
financing aggregating up to $1.1 million if we require additional cash for our
operations during the period ending January 31, 2002, as more fully described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources." 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 will 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 additional dilution to our stockholders. We can give you no
assurance that we will be able to generate adequate funds from operations, that
funds will be available to us from debt or equity financings or that, if
available, we will be able to obtain such funds on favorable terms and
conditions.
o We may not generate sufficient revenues to support our operations in
the future or to generate profits.
We are principally engaged in the production and marketing of hardware-based
peripheral digital encryption systems called the USS-900, the DSS-1000, the
DCS-1200 and the ULP-1. Our encryption products are only in their initial stages
23
of commercial production and marketing. 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:
o our ability to successfully market our line of encryption
products;
o our continuing ability to purchase the Citadel(TM)CCX
encryption chip from Harris Corporation for use in our
encryption products;
o our production capabilities and those of our suppliers as
required for the production of our encryption products;
o long-term product performance and the capability of our
dealers and distributors to adequately service our products;
o our ability to maintain an acceptable pricing level to
end-users for our products;
o the ability of suppliers to meet our requirements and
schedule;
o our ability to successfully develop our new products under
development, particularly our new encryption products;
o rapidly changing consumer preferences; and
o the possible development of competitive products that could
render our products obsolete or unmarketable.
o The Futaba Agreement may not continue beyond the first year.
The Futaba Agreement provides for a term of three years with the terms of the
project following the first year being subject to our ability to develop a
full-color video display in accordance with the Futaba Agreement, and to
negotiate subsequent phases of development on terms acceptable to both parties.
There can be no assurance that such negotiations will be successful or that the
project will continue beyond the first year.
o We are dependent upon a few key executives and the loss of their
services could adversely affect us.
Our Chief Executive Officer, Denis A. Krusos, and our President, Frank J.
DiSanto, founded our company in 1982 and are engaged in the management and
operations of our business, including all aspects of our development, production
and marketing of our products and flat panel display technology. Messrs. Krusos
and DiSanto, and other senior executives, are important to our future business
and financial arrangements. The loss of the services of any such persons may
have a material adverse effect on our business and prospects.
o We may not be able to compete successfully in the very competitive
market for our encryption products.
The market for our encryption products worldwide is 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. We cannot give any
assurance that we will be able to compete successfully in the market for our
encryption products.
24
o If we are unable to maintain our Nasdaq National Market listing, the
market price of our common stock could be adversely affected.
NASDAQ requires that we maintain a minimum of $4 million of net tangible assets
and a closing bid price of at least $1 per share in order to continue our Nasdaq
National Market listing. We have been notified by NASDAQ that we have failed to
comply with the minimum bid price requirements for continued listing and that
our securities are, therefore, subject to delisting from NASDAQ. We requested
and received a hearing before a NASDAQ Listing Qualification Panel to review
this decision. We have not received a response from the Panel with respect to
our request for continued listing. During the appeal process, our securities
will remain listed on NASDAQ. If our stock were delisted, it could have an
adverse affect on the market price of our common stock and the liquidity of our
shares. As of July 31, 2001, our net tangible assets were approximately
$4,340,000. The closing bid price of our common stock on September 7, 2001 was
$0.43.
25
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In July 2001, the Company issued 200,000 shares of Common Stock in partial
payment for services rendered by a consulting firm, which were valued on the
basis of the closing price of the Company's common stock on the date issued. The
shares of Common Stock were issued in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended,
relative to sales by an issuer not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on August 16, 2001, six
directors were elected and the amendment to the CopyTele, Inc. 2000 Share
Incentive Plan was approved. In addition, the selection of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of the Company
for the fiscal year ending October 31, 2001 was ratified. The following is a
tabulation of the voting with respect to the foregoing matters:
(a) Election of Directors -
Nominee For Withheld
------- --- --------
Denis A. Krusos 57,731,425 1,766,333
Frank J. DiSanto 57,750,509 1,747,249
Henry P. Herms 58,401,393 1,096,365
George P. Larounis 58,072,709 1,425,049
Lewis H. Titterton 58,427,093 1,070,665
Anthony Bowers 58,423,561 1,074,197
(b) Approval of the amendment to the CopyTele, Inc. 2000 Share Incentive Plan:
For Against Abstain
--- ------- -------
17,435,527 6,582,683 201,722
(c) Ratification of selection of Arthur Andersen LLP as independent auditors
for the fiscal year ending October 31, 2001:
For Against Abstain
--- ------- -------
58,767,831 431,325 298,602
26
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Amendment No. 1 to the CopyTele, Inc. 2000 Share
Incentive Plan
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K, dated June 13, 2001,
which included a copy of a Press Release issued by the Company
on the same date.
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: DENIS A. KRUSOS
--------------------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
September 14, 2001 (Principal Executive Officer)
By:
--------------------------------------
Frank J. DiSanto
September 14, 2001 President
By: HENRY P. HERMS
--------------------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
September 14, 2001 Financial and Accounting Officer)
27
EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------------------------------------------------------
10.1 Amendment No. 1 to the CopyTele, Inc. 2000 Share Incentive Plan
28