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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended October 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 0-11254
COPYTELE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal
Executive Offices) Securities registered pursuant
to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of January 19, 2001,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($1.13): $65,656,599.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
On January 19, 2001, the registrant had outstanding 63,804,060 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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NY2:\1010632\02\LNT402!.DOC\38995.0001
EXPLANATORY NOTE
This Amendment No. 1 on Form 10K/A to the Annual Report of CopyTele, Inc.
corrects typographical errors by inserting the name "Arthur Andersen LLP" on
o Report of Independent Public Accountants, Page F-1
o Report of Independent Public Accountants on Schedule, Page
F-20
o Consent of Independent Public Accountants, Exhibit 23.1
PART I
Item 1. Business.
Forward-Looking Statements
Information included in this Annual Report on Form 10-K 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. These forward-looking statements are subject to
risks and uncertainties and other factors, some of which are beyond our control,
that could cause actual results to differ materially from those forecast or
anticipated in the forward-looking statements. These risks, uncertainties and
factors include, but are not limited to, those factors set forth in this Annual
Report on Form 10-K under the heading "General Risks and Uncertainties" below.
Except as required by law, we undertake no obligation to update forward-looking
statements made in this Annual Report on Form 10-K or otherwise.
Overview
CopyTele, Inc. is a development-stage enterprise. In response to increased
commercial awareness of security needs, we are concentrating our activities on
the development, production and marketing of multi-functional encryption
products that provide high-grade information 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) and the ULP-1 (Ultimate Laptop Privacy).
The USS-900, DSS-1000 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.
We are also continuing our research and development activities for additional
encryption products and for flat panel displays, including display technologies
for simplified ultra-high resolution, charged particle E-Paper(TM) and thin film
designs suitable for low-cost plastic and field emission displays.
During fiscal 2000 we discontinued production of our Magicom(R) 2000
telecommunications product and our SCS-700 encryption product that combined the
USS-900 with the Magicom(R) 2000, but we are continuing sales of our remaining
inventory of the SCS-700. As a result, we terminated the operations of Shanghai
CopyTele Electronics Co. Ltd., our 55% owned joint venture in Shanghai, China,
which is in the process of being liquidated.
We were incorporated on November 5, 1982 under the laws of the State of
Delaware. Our principal executive offices are located at 900 Walt Whitman Road,
Melville, New York 11747 and our telephone number is 631-549-5900.
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 to
our dealers, distributors and other customers to support our operations from
inception through October 31, 2000. We have incurred net losses aggregating
$55,124,098 during the same period. Research and development expenses during
that period aggregated approximately $34,206,000 and negative cash flows from
operations aggregated $55,634,720. We have set forth below our net losses,
research and development expenses and negative cash flows from operations for
the three fiscal years ended October 31, 2000:
Fiscal Years Ended October 31,
-----------------------------
1998 1999 2000
---- ---- ----
Net Loss $7,135,954 $8,465,016 $4,964,173
Research and Development $3,926,000 $3,163,000 $2,732,000
Negative Cash Flows From Operations $7,736,211 $6,117,096 $4,840,578
o We may need additional funding in the near future which may not be
available on acceptable terms and 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 the National
Association of Securities Dealers, Inc. (NASD) 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, including cash received from November 1, 2000 to January 19,
2001, and other potential sources of cash flows will be sufficient to continue
operations until at least the end of the first quarter of fiscal 2002. We
anticipate that, thereafter, we will continue to 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. However, our projections of future cash
needs and cash flows may differ from actual results. If current cash and cash
that may be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit. The sale of additional equity securities or convertible debt could
2
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 and the
ULP-1. Our encryption products are only in their initial stages 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 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.
3
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.
o If we are unable to maintain our Nasdaq National Market listing, the market
price of our common stock could be adversely affected.
The NASD requires that we maintain a minimum of $4 million of net tangible
assets and a market price of at least $1 per share in order to continue our
Nasdaq National Market listing. 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 October 31, 2000, our net tangible assets were approximately
$5,558,000. The market price of our common stock on January 25, 2001 was $1.00
Products
Encryption Products
We are presently marketing the USS-900, the DSS-1000 and the ULP-1 under the
Cryptele(TM)brand name. The following is a brief description of our encryption
products.
USS-900
The USS-900 is a hardware-based peripheral digital encryption system which
incorporates the Harris digital cryptographic chip - the Citadel(TM) CCX - to
provide high-grade information encryption. We developed and are currently
producing the USS-900 in cooperation with Harris under a three-year agreement
entered into in July 1999. Under the terms of this agreement, we are responsible
for the production, development, manufacturing and marketing of the USS-900, and
Harris has agreed to sell us the Citadel(TM) CXX encryption chip at a negotiated
price. Harris also has agreed that all USS-900 units may be marked or labeled
with the designation "Secured by Harris." In addition, the agreement provides
that, for the term of the agreement, neither party will participate with any
other entity in the design, development or manufacture of a product functionally
equivalent to the USS-900 unless agreed upon by both parties.
The encryption technology of the USS-900 encodes information through a complex
mathematical formula called an algorithm. The algorithm requires a secret "key"
to both encrypt and decrypt information. Only the secret key used to encrypt the
information can be used to decrypt the information. This product automatically
generates new secret keys electronically with each call. It easily interfaces
with telephones, fax machines or
4
computers to encrypt information communicated over ordinary analog telephone
lines, via satellite or via the internet. When communicating encrypted
information over a communications media, a USS-900 or one of our other
compatible CopyTele products is required at both the sending and receiving end.
The USS-900 operates at transmission rates of 9,600 to 33,600 BPS (bits per
second.)
The USS-900 is a compact device that is 6" deep x 4.38" wide x 1.38" high and
weighs approximately 9 ounces. The three major components of the unit are the
Citadel(TM) CXX encryption chip, a digital signal processor and modems enclosed
in a plastic case. The unit is portable, has low power consumption and has UL,
FCC, CE and U.S. Commerce Department export approvals. The most significant
features of this product include the following:
o Virus Spread Control - encrypts e-mail addresses to guard against the
spread of viruses.
o Secure E-mail Attachments - encrypts any computer file to be utilized as an
e-mail attachment that can be sent over the Internet or an ordinary
telephone line.
o Secure Voice Communication - interfaces with virtually any analog
telephone, allowing easy encryption of voice communication.
o Secure Fax Communication - interfaces with any analog fax machine attended
or unattended, ensuring cryptographic communication of information.
o Secure Point-to-Point File Transfers - interfaces with a computer, ensuring
cryptographic communication of information between computers.
o File Storage - interfaces with virtually any computer, with the utilization
of a provided CD ROM, to encrypt and decrypt computer files with the use of
a single USS-900. The encrypted files can be stored on the computer, on
networks or on the Internet.
o Secure Simultaneous Voice and Data Communication (SVD) - interfaces with a
telephone and computer to allow secure simultaneous voice communication and
point-to-point file transfer over ordinary analog telephone lines with
transmission rates of 16,800 to 33,600 BPS.
o Secure Voice Teleconferencing - interfaces with multiple telephone lines to
provide multi-person encrypted communications over ordinary telephone
lines.
o Secure Multi-Capability - interfaces with telephones, fax machines and
computers to perform secure and encrypted voice, fax and point-to-point
data communication all on the same phone call.
o Tonal and Pulse Dialing - interfaces with telephones and fax machines that
have either tonal or pulse dialing systems to provide voice, fax or data
communications.
5
o Algorithm - capable of encrypting using either the Citadel(TM) CCX or
Triple DES algorithms.
o Encryption Key Length - 128 bit
DSS-1000
The DSS-1000 is a digital encryption device that can perform all the functions
of the USS-900, except for facsimile transmission and SVD, over digital or
analog telephone lines, via satellite or via the internet. The DSS-1000 has the
additional ability to interface with a telephone handset of a digital phone to
secure voice and data information over digital lines at transmission rates of
9,600 BPS. The DSS-1000 has the same size, weight and major components of the
USS-900 and is enclosed in a plastic case. The unit is also portable and has low
power consumption. We have received export approval for the DSS-1000 from the
U.S. Department of Commerce using the Citadel(TM) CCX or Triple DES algorithms
and a 128 bit encryption key length.
ULP-1
The ULP-1 is a hardware-based encryption PCMCIA (Personal Computer Memory Card
International Association) card that plugs into notebook or laptop computers.
The ULP-1 is the size of a credit card and operates as an encryption/decryption
key to protect data files and e-mail attachments. The ULP-1 also guards against
the spread of viruses by encrypting e-mail addresses. The ULP-1 can easily be
removed when not in use, as a result of which the encrypted data in the computer
files cannot be decrypted and read by an unauthorized person. We have received
export approval for the ULP-1 from the U.S. Department of Commerce using the
Citadel(TM) CCX or Triple DES algorithms and a 128-bit encryption key length.
New Products Under Development
Encryption Product
We are engaged in the development of a new encryption device that would be used
with digital cellular phones that are capable of transmitting both voice and
data. We are making hardware and software modifications to the basic USS-900
model in order to produce the device which will contain the Citadel CCX or
Triple DES algorithms. The device will be small, lightweight, portable and
battery powered. The device will interface with any digital cell phone that is
capable of transmitting data and will plug into digital cellular phones and into
a computer so that either voice or data can be encrypted. The device will have a
128 bit encryption key length. The new device would be available for sale in
both the industrial and retail markets as well as to U.S. and foreign government
agencies.
6
Flat-Panel Display Technology
During 2000, we continued to pursue our efforts to develop new technologies for
color and video flat-panel displays. We cannot give you any assurance, however,
that we will be able to successfully develop these technologies or that we will
be able to apply any of these technologies to commercially marketable products.
E-Paper(TM) Flat-Panel Display
The technology utilized in the E-Paper(TM) ultra-high resolution display that
was developed and incorporated into the SCS-700, which we are marketing from
units in inventory, is being further developed for possible application for
mobile devices. The E-Paper(TM) characteristics of low power consumption,
flicker-free, wide angle viewing and high contrast are desirable features for
mobile devices. The original E-Paper(TM) display was primarily designed for
ultra-high picture quality and required illumination. It was able to display
information like a printed page, one at a time. We believe it is desirable to
add features for mobile devices so that displayed information can be
continuously updated and use only ambient light. The new design we are
attempting to develop would incorporate the individual control of pixels to
allow continuous updating of displayed information, have a high contrast to
allow viewing under normal ambient light and, due to a simplified structure,
would result in lower manufacturing cost. The basic design consists of two glass
substrates, which contain our proprietary yellow and black charged particle
suspension. The viewing substrate is a clear glass so that individual yellow or
black pixels are displayed to form a high contrast image. The original design
had a structure in the viewing side substrate that reduced the contrast and thus
required a lighting system. In the new design, a simplified pixel control
structure is located on the non-viewing substrate.
To further develop this technology, we are using available silicon-based
substrates that contain pixels we developed from our solid state and optical
displays. The format is 320 x 240 pixels having a resolution of approximately
100 pixels per inch. These substrates are being modified to operate in
conjunction with our charged particles suspension and are being addressed using
the 128 output chip drivers used in the original E-Paper(TM) display. A newly
developed suspension is being utilized to conform to the chip driver's
capability and to control individual pixels at required higher speeds. We
believe that sufficient speeds could be achieved in order to accommodate the
requirements of most portable devices. The technology could possibly be modified
to use printing processes and plastic instead of the present silicone and glass
substrates. We cannot give you any assurance, however, that we will be able to
develop a commercially marketable display of this type.
Color and Video Flat Panels
Thin Film Video Color Display (Field Emission Display)
During 2000, we continued our relationship with Volga Svet, Limited, a Russian
display company, for the development of an ultra-high resolution thin film color
and video
7
emissive flat panel display called FED, or field emission display. We have been
working with Volga in developing engineering prototype models of the FED and we
are continuing to modify our designs to simplify the fabrication process and to
improve reliability. We are utilizing a unique design that reduces the
possibility of pixels being degraded by electrical or mechanical variations.
This new structure creates the video image utilizing film-edge, low voltage
phosphors on a single glass substrate. However, the film-edge, which emits
electrons when electrical impulses are applied thereby illuminating the phosphor
in a pixel, is electrically isolated from the phosphor so that electrical and
mechanical structural variations will not degrade the image on a pixel. We have
implemented this approach for both matrix and segmented numerical and
alphanumerical displays. As a result, Volga has started limited production of
the segmented displays. Volga is also developing structural design optimization
for the matrix display structure in an effort to yield full color at video
speed. We anticipate that prototypes of the matrix display of 320 by 240 pixels
at a resolution of approximately 100 pixels per inch could be developed by
mid-2001. We have applied for patent protection on the new matrix structure. We
expect to continue this development effort during the first half of 2001 in
order to optimize the operating performance required for manufacturing purposes.
If we are able to successfully develop the FED, the end product would be only
approximately one-third of an inch thick, would provide a full color and video
display with almost hemispherical viewing angle, and would be suitable for
television, computer and telecommunications devices. We believe that, because of
its simplified design, if we could successfully develop this display we would be
able to produce it using standard semi-conductor fabrication production
equipment, which, in turn, could potentially result in lower costs to end-users.
Solid State and Optical Display
During 2000, due to higher than expected fabrication difficulties in creating a
display having a matrix of static micro electromechanical systems pixels, we
changed the goal for the development of our solid state and optical display
technology. Our new objective is to utilize the basic technology to develop an
ultra-high speed optical modulator for use in encryption technology and to
process optical information. We believe that the advanced version of the
metalized optical modulator is simpler to fabricate and potentially has greater
application for the communications industry. We are still working with the
Center for Advanced Thin Film Technology at the State University of New York at
Albany on the technology. If we can successfully develop the new modulator, we
will attempt to attract major communications companies to incorporate this
technology into their systems.
Production
Our encryption products consist of a printed circuit board populated with
electronic components and connectors enclosed in a plastic case. We design all
the hardware, software, packaging and operating manuals for our products. The
three main electronic components, the Citadel(TM) CCX encryption chip, a digital
signal processor, and modems, are contained on a printed circuit board. We are
currently using several U.S.-based
8
electronics-production contractors to procure the printed circuit boards and
mount the associated electronics components on the circuit board. We currently
utilize approximately a dozen primary component and printed circuit-board
suppliers and two production assembly contractors. Given normal lead times, we
anticipate having a readily available supply of all electronics components that
we require for assembling our encryption products.
Our production contractors produce and visually inspect the completed circuit
boards. We perform final assembly, including installation of the software, by
enclosing the completed printed circuit board into the product enclosure and
performing functionality testing of all units at our premises at Melville, New
York prior to shipment to our customers. We test our finished products using
internally developed product assurance testing procedures.
As of October 31, 2000, we produced approximately 4,900 USS-900 units. We began
production of the DSS-1000 and the ULP-1 in December, 2000.
Marketing
We are focusing our marketing efforts on selling our encryption products to
selected distributors, dealers and original equipment manufacturers who have
marketing capabilities in the commercial encryption field. We currently have a
sales and marketing office consisting of five full-time employees who work
principally on a salaried basis and devote their efforts to sales and support
activities, and nine consultants. We are seeking to increase our sales force by
adding established manufacturer representative firms to bolster our effort to
expand into the retail market for one of our products.
We presently have 23 dealers and distributors worldwide who market our
encryption products on a non-exclusive basis along with one original equipment
manufacturer. The dealers and distributors generally are parties to one-year
renewable agreements that do not contain significant minimum purchase
requirements.
Our company and our dealer/distributor network presently are focusing marketing
efforts on the oil industry, financial firms, telecommunication companies,
healthcare and insurance industries, multinational corporations and U.S. and
foreign government agencies. A number of the dealers and distributors have been
in the security field for many years and have more recently focused on
encryption, providing products and services to multinational corporations and
foreign governments. Many of the dealers and distributors that are headquartered
in the United States also provide worldwide sales and service coverage. They are
located in prime sales territories such as New York, Maryland, Virginia, Texas,
Florida, Georgia, California, Tennessee, Oregon, Vermont and Minnesota. Our
international dealers and distributors provide sales and support service in
Europe, Asia, Africa and South America.
First launched at the American Society for Industrial Security Show in late
1999, the USS-900 was the center of our marketing effort in 2000, which focused
on the
9
commercial encryption market. With the introduction of the ULP-1 in November,
2000, a breakthrough encryption product that brings encryption to the notebook
and laptop computer market through the use of a removable PCMCIA Card, we are
now in a position to expand our marketing activities into the retail market
through the use of manufacturer representatives and direct sales.
We continue to provide marketing, service training and technical support to our
distributors and dealers. During 2000, we demonstrated our encryption products,
together with distributors and dealers, at approximately ten trade shows. The
USS-900 recently won two awards at the International Security Conference show in
New York. The USS-900 was chosen by the Security Industry Association (SIA) as
one of the "Security Industry's Finest-Recognized as One of the Finest in New
Product Development and Innovation" and also received the SIA's "Product
Achievement Award-Business Services."
As part of our effort to increase awareness of corporate vulnerability to
information assault and espionage, we ran a series of targeted television
commercials as well as advertisements in security magazines in 2000. We plan to
continue this advertising effort in 2001 in order to familiarize a broad
audience with our family of encryption products.
Competition
The market for encryption products worldwide is highly competitive and subject
to technological changes. Although successful product and systems development is
not necessarily dependent on substantial financial resources, most of our
competitors are larger than us and possess financial, research, service support,
marketing, manufacturing and other resources significantly greater than ours.
There are several other companies that sell hardware and/or software encryption
products. We believe, however, that the technology contained in our products and
the size and features of the units distinguish them from the products being sold
by our competitors. The encryption security market is likely to be characterized
by rapid advances in technology and the continuing introduction of new products
which could render our products obsolete or non-competitive. We cannot give you
any assurance that we will be able to compete successfully in the market for our
encryption products.
Patents
We have received approximately 221 patents, including those from the United
States and certain foreign patent offices, expiring at various dates between
2005 and 2018. At the present time, additional patent applications are pending
with the United States and certain foreign patent offices. These patents are
related to the design, structure and method of construction of the E-Paper(TM)
flat panel display, methods of operating the display, particle generation,
applications using the E-PaperTM flat panel display, and for our solid state and
thin film video and flat panel display.
10
We have also filed or are planning to file patent applications for our optical
encryption system, our FED and simplified E-Paper flat panel display
technologies currently under development, and for our USS-900, DSS-1000 and
ULP-1 encryption technologies.
We cannot assure you that patents will be issued for any of our pending
applications. In addition, we cannot assure you that any patents held or
obtained will sufficiently protect us against our competitors. We are not aware
that the USS-900, DSS-1000 or ULP-1 are infringing upon the patents of others.
We cannot assure you, however, that other products developed by us, if any, will
not infringe upon the patents of others, or that we will not have to obtain
licenses under the patents of others, although we are not aware of any such
infringement at this time.
We believe that the foregoing patents are significant to our future operations.
Research and Development Expenses
Research and development expenses, which have comprised a significant portion of
our selling, general and administrative expenses since our inception, were
approximately $2,732,000, $3,163,000, $3,926,000, and $34,206,000 for the fiscal
years ended October 31, 2000, 1999, 1998 and for the period from November 5,
1982 (inception) through October 31, 2000, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below
and our Financial Statements.
Employees and Consultants
We had thirty-one full-time employees and twenty-one consultants as of December
31, 2000. Twenty-seven of those individuals, including our Chairman of the Board
and our President, are engaged in research and development. Their backgrounds
include expertise in physics, chemistry, optics and electronics. Fourteen
individuals are engaged in marketing and the remaining individuals are engaged
in administrative and financial functions for us. None of our employees are
represented by a labor organization or union.
Item 2. Properties.
We lease approximately 12,900 square feet of office and laboratory research
facilities at 900 Walt Whitman Road, Melville, New York (our principal offices)
from an unrelated party pursuant to a lease that expires November 30, 2003. Our
base rent is approximately $243,000 per annum with a 3% annual increase and an
escalation clause for increases in certain operating costs. We have the right to
cancel a portion of the lease as of November 30, 2002. This lease does not
contain provisions for its renewal and management will continue to evaluate the
future adequacy of this facility. We anticipate securing a lease renewal for
this facility at the end of the lease term if we determine to remain there. See
Note 8 to our Financial Statements.
11
In February 1996, we entered into a five-year lease with an unrelated party for
approximately 2,300 square feet of office space in Valhalla, New York. The
lease, which expires on June 30, 2001 and is non-renewable, currently provides
for a base rent of approximately $56,000 per annum.
We believe that the facilities described above are adequate for our current
requirements.
Item 3. Legal Proceedings.
We are not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted by us to a vote of our shareholders during the fourth
quarter of our fiscal year ended October 31, 2000.
Executive Officers of the Company
Our only executive officers are Denis A. Krusos, Frank J. DiSanto, Frank W.
Trischetta and Henry P. Herms. The information required to be furnished with
respect to these executive officers is set forth in Item 10 of Part III of this
Annual Report on Form 10-K and is incorporated herein by reference.
12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has been traded on the Nasdaq Stock Market National Market (the
"Nasdaq National Market"), the automated quotation system of the NASD, under the
symbol "COPY," since October 6, 1983, the date public trading of our common
stock commenced. The high and low sales prices as reported by the Nasdaq
National Market for each quarterly fiscal period during our fiscal years ended
October 31, 1999 and 2000 have been as follows:
- --------------------------------------------------------------------------------
Fiscal Period High Low
- --------------------------------------------------------------------------------
1st quarter 1999 2.31 1.00
2nd quarter 1999 1.88 1.03
3rd quarter 1999 3.31 1.38
4th quarter 1999 1.53 0.69
- --------------------------------------------------------------------------------
1st quarter 2000 1.81 0.72
2nd quarter 2000 4.16 1.06
3rd quarter 2000 3.25 1.13
4th quarter 2000 2.25 0.97
- --------------------------------------------------------------------------------
As of January 19, 2001 the approximate number of record holders of our common
stock was 1,320.
No cash dividends have been paid on our common stock since our inception. We
have no present intention to pay any cash dividends in the foreseeable future.
13
Item 6. Selected Financial Data.
The following data has been derived from our Financial Statements and should be
read in conjunction with those statements, and the notes related thereto, which
are included in this report.
-----------------------------------------------------------------------------------------------
For the period
As of and for the fiscal year ended October 31, from November 5,
1982 (inception)
--------------------------------------------------------------------------- through
2000 1999 1998 1997 1996 October 31, 2000
====================================================================================================================================
Sales $1,471,998 $46,877 $ -- $ -- $ -- $1,518,875
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 746,560 9,573 -- -- -- 756,133
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses 5,831,712 8,284,717 7,231,557 6,378,368 6,017,580 59,706,563
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from and Impairment of -- 345,947 377,219 335,391 148,630 1,225,000
Investment in Joint Venture
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income 120,979 156,075 472,822 913,184 722,800 5,051,332
- ------------------------------------------------------------------------------------------------------------------------------------
Net (Loss) (4,964,173) (8,465,016) (7,135,954) (5,800,575) (5,443,410) (55,124,098)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share of Common
Stock - Basic and Diluted (a) ($.08) ($.14) ($.12) ($.10) ($.10) ($1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 6,894,501 7,239,544 13,334,972 19,988,207 24,710,420
- ------------------------------------------------------------------------------------------------------------------------------------
Long Term Obligations -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 5,557,599 6,284,777 11,860,913 18,779,142 22,750,273
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share -- -- -- -- -- --
of Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------
(a) Adjusted for three-for-one stock split declared in October 1985,
five-for-four stock split declared in August 1987, two-for-one stock split
declared in February 1991 and two-for-one stock split declared in May 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
Information included in this Annual Report on Form 10-K may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties and other factors, some of which are beyond our control,
that could cause actual results to differ materially from those forecast or
anticipated in the forward-looking statements. These risks, uncertainties and
factors include, but are not limited to, those factors set forth in this Annual
Report on Form 10-K under the heading "General Risks and Uncertainties".
14
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. (See "Business --
Encryption Products").
Our line of encryption products presently includes the USS-900, the DSS-1000 and
the ULP-1, 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.
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. As a result, we terminated the operations of
Shanghai CopyTele Electronics Co. Ltd, (the "Joint Venture") our 55% owned joint
venture in Shanghai, China, which is in the process of being liquidated.
We are also continuing our research and development activities for additional
encryption products and flat-panel displays, including our E-Paper ultra-high
resolution display and our thin film color and video field emission ultra-high
resolution display. In addition, during 2000 we redirected our development of
solid-state optical technology to the development of an ultra-high speed optical
modulator for use in encryption technology and to process optical information.
(See "Business - New Products Under Development"). We cannot assure you,
however, that our efforts in these areas will be successful. (See "Business -
General Risks and Uncertainties").
We are currently using several U.S.-based electronic production contractors to
produce the components for our encryption devices. (See "Business -
Production"). We sell our products primarily through a distributor/dealer
network and also to end-users. (See "Business - Marketing").
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, please refer to our Financial Statements and the notes
thereto.
15
Results of Operations
Fiscal Year Ended October 31, 2000 Compared to Fiscal Year Ended October 31,
1999
Sales -
Sales for fiscal 2000 increased to approximately $1,472,000 from approximately
$47,000 in fiscal 1999. Sales of the USS-900 increased in fiscal 2000 to
approximately $1,169,000, or 79% of total sales, from approximately $25,000 in
fiscal 1999. Sales of the SCS-700 increased in fiscal 2000 to approximately
$245,000, or 17% of total sales, from approximately $5,000 in fiscal 1999.
We are hopeful, although there is no assurance, that with an increased marketing
effort for our existing products and our new products under development, we will
procure sufficient sales during fiscal 2001 to emerge from the development
stage.
Gross Profit-
Gross profit increased in fiscal 2000 to $746,560, or 51% as a percentage of
sales, compared to $9,573 in fiscal 1999. The increase in gross profit is
primarily due to the increase in USS-900 sales.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses decreased approximately $2,453,000
or 30% to approximately $5,832,000 for the fiscal year ended October 31, 2000
from approximately $8,285,000 for the fiscal year ended October 31, 1999.
The fiscal 2000 decrease in selling, general and administrative expenses is
primarily a result of the timing of a $1,407,000 reserve for amounts due from
the Joint Venture, which was recorded in fiscal 1999. In addition, employee
compensation and related costs decreased by approximately $425,000 in fiscal
2000 as compared to fiscal 1999 as a result of certain personnel waiving a
portion or all of their salary and related pension benefits and certain sales
personnel becoming independent dealers and distributors. These decreases were
offset by an increase in advertising expense of approximately $279,000 as a
result of our efforts to increase awareness of corporate vulnerability to
information espionage.
Research and Development Expenses-
Research and development expenses, which are included in selling, general and
administrative expenses, were approximately $2,732,000 and $3,163,000 for the
fiscal years ended October 31, 2000 and 1999, respectively. Research and
development expenses decreased approximately $431,000, or 14%, in fiscal 2000 as
compared to fiscal 1999 due to a reduction in outside research and development
efforts, which we commenced performing in-house, and a reduction in engineering
supplies. These reductions in research and development expenses were partially
offset by an increase in patent related costs.
16
Loss from and Impairment of Investment in Joint Venture- During fiscal 2000 the
Joint Venture terminated operations and is now in the process of being
liquidated. Additional investments in the Joint Venture during fiscal 2000 were
not material to our operations and were expensed to selling, general and
administrative expenses.
Interest Income-
Interest income decreased by approximately $35,000 to approximately $121,000 in
fiscal 2000 as compared to approximately $156,000 in fiscal 1999, primarily as a
result of a reduction in average funds available for investment.
Fiscal Year Ended October 31, 1999 Compared to Fiscal Year Ended October 31,
1998
Sales -
We commenced recognizing sales in the fourth quarter of fiscal 1999. Sales for
the fiscal year ended October 31, 1999 of approximately $47,000 primarily
consisted of sales of the USS-900 of approximately $25,000 and the SCS-700 of
approximately $5,000.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses increased 15% to approximately
$8,285,000 for the fiscal year ended October 31, 1999 from approximately
$7,232,000 for the fiscal year ended October 31, 1998.
The fiscal 1999 increase in selling, general and administrative expenses is
primarily a result of the timing of a $1,407,000 reserve for amounts due from
the Joint Venture, which was recorded in fiscal 1999. In addition, we recorded
charges to earnings in fiscal 1999 to bring the valuation of inventory in line
with current estimates for obsolete and scrap parts, and other expenses. We also
incurred an increase of approximately $166,000 in employee compensation expense
in fiscal 1999 as a result of hiring additional sales and marketing employees to
support the sales of our encryption products.
Research and Development Expenses-
Research and development expenses, which are included in selling, general and
administrative expenses, were approximately $3,163,000 and $3,926,000 for the
fiscal years ended October 31, 1999 and 1998, respectively. Research and
development expenses decreased approximately $763,000, or 19%, in fiscal 1999 as
compared to fiscal 1998 due to a reduction in outside research and development
efforts, which we commenced performing in-house, a reduction in engineering
supplies and a reduction in patent related costs.
Loss from and Impairment of Investment in Joint Venture-
Loss from Joint Venture decreased to approximately $346,000 in fiscal 1999 as
compared to approximately $377,000 in fiscal 1998. This decrease was the result
of a decrease in our portion of the Joint Venture's loss for fiscal 1999 to
approximately $261,000 as compared to approximately $377,000 in fiscal 1998,
offset by a permanent impairment charge on our investment in the Joint Venture
recorded in fiscal 1999.
17
Interest Income-
Interest income decreased by approximately $317,000 to approximately $156,000 in
fiscal 1999, as compared to approximately $473,000 in fiscal 1998, primarily as
a result of a reduction in the average funds available for investment and a
decrease in interest rates.
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, 1993 and 2000 stock option plans
(the "1987 Plan," the "1993 Plan," and the "2000 Share Plan," respectively.)
During the fiscal years ended October 31, 2000, 1999 and 1998, we received
proceeds aggregating approximately $802,000, $47,000, and $0, respectively, in
payments from our customers for products sold. For the fiscal years ended
October 31, 2000, 1999 and 1998, we received proceeds aggregating approximately
$3,226,000, $1,353,000, and $28,000, respectively, from the exercise of stock
options and warrants to purchase shares of our common stock and the exercise of
warrants by members of the immediate families of our Chairman of the Board and
our President. During the fiscal years ended October 31, 2000 and 1999, we
received net proceeds aggregating approximately $801,000 and $1,475,000,
respectively, from sales of our common stock in private placements. During the
period from November 1, 2000 through January 19, 2001, we received proceeds
aggregating approximately $495,000 from the exercise of stock options pursuant
to the 2000 Share Plan.
Working capital decreased by approximately $3,408,000 from approximately
$5,727,000 at October 31, 1999 to approximately $2,319,000 at October 31, 2000
as a result of the decrease in inventory, the effect of the inventory related
barter transaction, the use of marketable securities to fund operations and the
increase in accounts payable offset by the increase in accounts receivable and
the decrease in accrued liabilities.
Our operations used approximately $4,841,000 in cash during fiscal 2000. As of
October 31, 2000, working capital included approximately $1,231,000 of cash and
marketable securities and approximately $1,337,000 of accounts payable and
accrued liabilities. Based on reductions in operating expenses that have been
made and additional reductions that may be implemented, if necessary, we believe
that these resources, including cash received from November 1, 2000 to January
19, 2001, and other potential sources of cash flows will be sufficient to
continue operations until at least the end of the first quarter of fiscal 2002.
We anticipate that, thereafter, we will continue to 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. 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
18
insufficient to satisfy our liquidity requirements, we may seek to sell debt or
equity securities or to obtain a line of credit. The sale of additional equity
securities or convertible debt could result in 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. We currently have no definitive arrangements
with respect to additional financing.
In connection with our annual audit, 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 of products. In
an effort to generate sales, we have marketed the USS-900 directly to U.S. and
international office equipment distributors and dealers and, during fiscal 2000,
we have recognized total revenues of approximately $1,472,000. We have also
recently commenced marketing the DSS-1000 and ULP-1. 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 NASD 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 October 31, 2000 were
approximately $5,558,000. We anticipate that we may require additional funds to
maintain the NASD 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 can offer no assurance
that, if available, we will be able to obtain such funds on favorable terms and
conditions.
The NASD also requires that we maintain a minimum 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, the NASD 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. 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. (See "Market for the Registrant's Common
Equity and Related Stockholder Matters").
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 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.
19
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. (See note 11 to
our Financial Statements).
Item 7A. 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 marketable securities 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 8. Financial Statements and Supplementary Data.
See accompanying "Index to Financial Statements."
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
20
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information with respect to all of our
directors and executive officers:
- ----------------------------------------------------------------------------------------------------------
Director and/or
Name Position with the Company and Principal Age Executive Officer
Occupation Since
- ----------------------------------------------------------------------------------------------------------
Denis A. Krusos Director, Chairman of the Board and Chief 73 1982
Executive Officer
- ----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 76 1982
- ----------------------------------------------------------------------------------------------------------
Henry P. Herms Chief Financial Officer and Vice President - 55 2000
Finance
- ----------------------------------------------------------------------------------------------------------
Frank W. Trischetta Senior Vice President - Marketing and Sales 60 1996
- ----------------------------------------------------------------------------------------------------------
George P. Larounis Director 72 1997
- ----------------------------------------------------------------------------------------------------------
Lewis H. Titterton Director 55 1999
- ----------------------------------------------------------------------------------------------------------
Anthony Bowers Director 43 2000
- ----------------------------------------------------------------------------------------------------------
Mr. Krusos has served as one of our Directors and as our Chairman of the Board
and Chief Executive Officer since November 1982. He holds an M.S.E.E. degree
from Newark College of Engineering, a B.E.E. degree from City College of New
York and a J.D. degree from St. John's University and is a member of the New
York bar.
Mr. DiSanto has served as one of our Directors and as our President since
November 1982. He holds a B.E.E. degree from Polytechnic Institute of Brooklyn
and an M.E.E. degree from New York University.
Mr. Herms has served as our Chief Financial Officer and Vice President - Finance
since November 2000. Prior to joining us, Mr. Herms was employed by
takeoutmusic.com Holding Corp. as Chief Financial Officer, from May 2000 to
November 2000. Prior to that, for approximately 12 years Mr. Herms was a
Principal, Director and Chief Financial Officer of a group of affiliated,
privately held companies operating under the Ultratan trade name. Mr. Herms was
also our Chief Financial Officer from 1982 to 1987. He is also a former audit
manager with the firm of Arthur Andersen LLP and a CPA. He holds a B.B.A. degree
from Adelphi University.
Mr. Trischetta has served as our Senior Vice President - Marketing and Sales
since February 1996. Prior to joining us, Mr. Trischetta was employed by
Panasonic Corporation for approximately 15 years where he served as General
Manager Marketing
21
and Sales for Panasonic Office Automation Products. Prior to that, Mr.
Trischetta was employed by 3-M Company for approximately 17 years where he
advanced to a senior sales and marketing executive position. He holds a B.B.A.
degree from the University of Miami.
Mr. Larounis has served as one of our Directors since September 1997 prior to
which he served as a consultant to us. Mr. Larounis held numerous positions as a
senior international executive of Bendix International and Allied Signal. He has
also served on the Board of Directors of numerous affiliates of Allied Signal in
Europe, Asia and Australia. He holds a B.E.E. degree from the University of
Michigan and a J.D. degree from New York University.
Mr. Titterton has served as one of our Directors since July 1999. Mr. Titterton
is currently Chief Executive Officer of NYMED, Inc. His background is in high
technology with an emphasis on health care and he has been with NYMED, Inc.
since 1989. Mr. Titterton founded MedE America, Inc. in 1986 and was Chief
Executive Officer of Management and Planning Services, Inc from 1978 to 1986. He
holds a M.B.A. degree from the State University of New York at Albany, and a
B.A. degree from Cornell University.
Mr. Bowers has served as one of our Directors since July 2000. Mr. Bowers is
currently a Partner of OTA Limited Partnership. He has been with OTA Limited
Partnership since 1997. Mr. Bowers was Director - Institutional Sales at Bear
Sterns International from 1994 to 1996 and Director - Institutional Sales at
Goldman Sachs International from 1986 to 1994, each of which were in London,
England. From 1979 to 1982, Mr. Bowers was Manager - Investor Relations for
American Express Company in New York. Mr. Bowers holds a B. A. degree from
Amherst College and a M.B.A. degree from the Wharton School of Business.
22
Item 11. Executive Compensation.
Messrs. Denis A. Krusos, Chairman of the Board, Chief Executive Officer and
Director, Frank J. DiSanto, President and Director, Frank W. Trischetta, Senior
Vice President - Marketing and Sales, and Henry P. Herms, Chief Financial
Officer and Vice President - Finance, are our executive officers. While there
are no formal agreements, Denis A. Krusos and Frank J. DiSanto waived any and
all rights to receive salary and related pension benefits for an undetermined
period of time commencing November 1, 1985. As a result, Mr. Krusos received no
salary or bonus during the last three fiscal years. Except for Mr. Trischetta,
no other executive officer received an annual salary and bonus in excess of
$100,000 during the fiscal year ended October 31, 2000. The following is
compensation information regarding Mr. Krusos and Mr. Trischetta for the fiscal
years ended October 31, 2000, 1999 and 1998:
- ------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
================================================================================================
Fiscal
Name and Year Annual Long-Term
Principal Position Ended Compensation Compensation Awards
------------------ ----- ------------ -------------------
Securities Underlying
Options (#)
================================================================================================
Denis A. Krusos, 10/31/00 -- 250,000
Chairman of the Board, 10/31/99 -- 50,000
Chief Executive Officer and Director 10/31/98 -- 600,000
================================================================================================
Frank W. Trischetta 10/31/00 $111,443 185,000(1)
Senior Vice President - 10/31/99 $153,289 25,000(1)
Marketing and Sales 10/31/98 $153,008 60,000(1)
- ------------------------------------------------------------------------------------------------
(1) Mr. Trischetta participates in the CopyTele, Inc. employees' pension plan,
a money purchase deferred compensation pension plan, and received
contributions in the amounts of $9,399, $13,216 and $13,516 for the years
2000, 1999, and 1998, respectively.
23
The following is information regarding stock options granted to Mr. Krusos and
Mr. Trischetta pursuant to the 1993 Stock Option Plan and the 2000 Share
Incentive Plan, during the fiscal year ended October 31, 2000:
- ------------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
====================================================================================================================================
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock Price
Appreciation for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to Exercise
Underlying Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
====================================================================================================================================
Denis A. Krusos 250,000(2) 8.11% $1.063 (3) 10/26/10 $167,129 $423,537
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 100,000(1) 3.24% $0.844 (3) 12/5/09 $53,079 $134,512
50,000(1) 1.62% $1.500(3) 4/23/10 $47,167 $119,531
35,000(2) 1.14% $1.094(4) 8/20/10 $24,080 $61,024
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Options granted pursuant to the 1993 Stock Option Plan, which are
exercisable in whole or in part commencing one year following the date
of grant unless otherwise accelerated. The options are not issued in
tandem with stock appreciation or similar rights and are not
transferable other than by will or the laws of descent and
distribution. The options terminate upon termination of employment,
except that in the case of death, disability or termination for
reasons other than cause, options may be exercised for certain periods
of time thereafter as set forth in the 1993 Stock Option Plan.
(2) Options granted pursuant to the 2000 Share Incentive Plan, which are
exercisable in whole or in part commencing six months following the
date of grant unless otherwise accelerated. The options are not issued
in tandem with stock appreciation or similar rights and are not
transferable other than by will or the laws of descent and
distribution. The options terminate upon termination of employment,
except that in the case of death, disability or termination for
reasons other than cause, options may be exercised for certain periods
of time thereafter as set forth in the 2000 Share Incentive Plan.
(3) The exercise price of these options was equal to the fair market value
of the underlying common stock on the date of grant. These options are
nonqualified options.
(4) The exercise price of these options was equal to the fair market value
of the underlying common stock on the date of grant. These options are
intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.
24
The following is information regarding stock option exercises during fiscal 2000
by Mr. Krusos and Mr. Trischetta and the values of their options as of October
31, 2000:
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
=========================================================================================================================
Number of Securities Underlying Value of Unexercised
Shares Acquired Value Realized Unexercised Options at Fiscal Year In-the-Money Options at Fiscal
Name on Exercise (#) ($)(1) End (#) Year End ($)(2)
--------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
=========================================================================================================================
Denis A. Krusos -- -- 2,845,180 250,000 -- --
--
Frank W 75,000 $59,375 553,000 35,000 $9,350 --
Trischetta
- -------------------------------------------------------------------------------------------------------------------------
(1) Such value was determined by applying the net difference between the
last sales price of the stock on the day of exercise and the exercise
price for the options to the number of options exercised.
(2) Such value was determined by applying the net difference between the
last sales price of the stock on October 31, 2000 and the exercise
price for the options to the number of unexercised in-the-money
options held.
There is no present arrangement for cash compensation of directors for services
in that capacity. Under the 2000 Share Incentive Plan, each non-employee
director is entitled to receive nonqualified stock options to purchase 20,000
shares of common stock each year that such director is elected to the Board of
Directors.
25
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to our common
stock beneficially owned as of January 19, 2001 by (a) each person who is known
by us to be the beneficial owner of more than 5% of our outstanding common
stock, (b) each of our directors or executive officers and (c) all directors and
executive officers as a group:
- --------------------------------------------------------------------------------------
Amount and Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)(2) Percent of Class
======================================================================================
Denis A. Krusos 7,089,040 10.56%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
Frank J. DiSanto 3,666,295 5.49%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
Henry P. Herms 50,000 0.08%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
Frank W. Trischetta 738,000 1.15%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
George P. Larounis 322,500 0.50%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
Lewis H. Titterton 1,559,600(3) 2.42%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
Anthony Bowers 224,300 0.35%
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group 13,649,735(3) 19.02%
(7 persons)
- --------------------------------------------------------------------------------------
(1) A beneficial owner of a security includes any person who directly or
indirectly has or shares voting power and/or investment power with
respect to such security or has the right to obtain such voting power
and/or investment power within sixty (60) days. Except as otherwise
noted, each designated beneficial owner in this report has sole voting
power and investment power with respect to the shares of our common
stock beneficially owned by such person.
26
(2) Includes 3,345,180 shares, 3,023,180 shares, 50,000 shares, 638,000
shares, 322,500 shares, 20,000 shares, 50,000 shares and 7,448,860
shares as to which Denis A. Krusos, Frank J. DiSanto, Henry P. Herms,
Frank W. Trischetta, George P. Larounis, Lewis H. Titterton, Anthony
Bowers, and all directors, and executive officers as a group,
respectively, have the right to acquire within 60 days upon exercise
of options granted pursuant to the 1993 Plan and 2000 Plan.
(3) Includes 500,000 shares, which Lewis H. Titterton has the right to
acquire upon the exercise of warrants.
Item 13. Certain Relationships and Related Transactions.
None.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(2) Financial Statement Schedules
See accompanying "Index to Financial Statements".
(a)(3) Executive Compensation Plans and Arrangements
Stock Option Plan (1987) (filed as Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April
30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit 10.69 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
Company's Proxy Statement dated June 10, 1993).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 4(d) to the Company's Form S-8 dated September 6, 1995).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 1996).
CopyTele, Inc. 2000 Share Incentive Plan (filed as Annex A of the
Company's Proxy Statement dated June 12, 2000).
(b) Reports on Form 8-K
No current report on Form 8-K was filed for the Company during
the fourth quarter of its fiscal year ended October 31, 2000.
(c) Exhibits
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
28
(d) 10.2 Amendment to Stock Option Plan, adopted on March
12, 1990 and approved by shareholders on May 24,
1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on
July 14, 1993.
(f) 10.4 Amendment No. 1 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 3, 1995 and approved
by shareholders on July 19, 1995.
(g) 10.5 Amendment No. 2 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 10, 1996 and approved
by shareholders on July 24, 1996.
(h) 10.6 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc.
(i) 10.7 Stock Subscription Agreement Dated April 27,
1999, including form of Warrant, between
CopyTele, Inc. and Lewis H. Titterton
(j) 10.8 Agreement dated July 28, 1999, among CopyTele,
Inc., Harris Corporation and RF Communications.
(k) 10.9 Stock Subscription Agreement Dated August 30,
1999, including form of Warrant, between
CopyTele, Inc. and Lewis H. Titterton
(l) 10.10 CopyTele, Inc. 2000 Share Incentive Plan
(m) 23.1 Consent of Arthur Andersen LLP
----------
(a) Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 1992 and to Form 10-Q for the fiscal
quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1
to Form S-8 (Registration No. 33-49402) dated December 8,
1993.
(c) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year
ended October 31, 1990.
29
(e) Incorporated by reference to Proxy Statement dated June 10,
1993.
(f) Incorporated by reference to Form S-8 (Registration No.
33-62381) dated September 6, 1995.
(g) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.
(h) Incorporated by reference to Form 10-Q for the fiscal
quarter ended January 31, 1999.
(i) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1999.
(j) Incorporated by reference to Form 8-K dated July 28, 1999.
(k) Incorporated by reference to Form 10-K for the fiscal year
ended October 31, 1999.
(l) Incorporated by reference to Annex A of the Company's Proxy
Statement dated June 12, 2000.
(m) Filed herewith.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 and
January 31, 2001 Chief Executive Officer
31
EXHIBIT INDEX
Exhibit
Ref. Number Description
- ---- ------- -----------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-Laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and approved by
shareholders on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on March 12, 1990 and
approved by shareholders on May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28, 1993
and approved by shareholders on July 14, 1993.
(f) 10.4 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved by shareholders on July 19,
1995.
(g) 10.5 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved by shareholders on July 24,
1996.
(h) 10.6 Agreement dated March 3, 1999 between Harris Corporation and
CopyTele, Inc.
(i) 10.7 Stock Subscription Agreement Dated April 27, 1999, including
form of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(j) 10.8 Agreement Dated July 28, 1999 among CopyTele, Inc., Harris
Corporation and RF Communications.
(k) 10.9 Stock Subscription Agreement Dated August 30, 1999, including
form of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(l) 10.10 CopyTele, Inc. 2000 Share Incentive Plan.
(m) 23.1 Consent of Arthur Andersen LLP.
- ----------
32
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended July
31, 1992 and the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended October
31, 1990.
(e) Incorporated by reference to Proxy Statement dated June 10, 1993.
(f) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(g) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1996.
(h) Incorporated by reference to Form 10-Q for the fiscal quarter ended January
31, 1999.
(i) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1999.
(j) Incorporated by reference to Form 8-K dated July 28, 1999.
(k) Incorporated by reference to Form 10-K for the fiscal year ended October
31, 1999.
(l) Incorporated by reference to Annex A of the Company's Proxy Statement dated
June 12, 2000.
(m) Filed herewith.
33
COPYTELE, INC.
(Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
Page
----
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 2000 and 1999 F-2
Statements of Operations for each of the three fiscal years in the period ended October 31, 2000
and for the period from inception (November 5, 1982) to October 31, 2000 F-3
Statements of Shareholders' Equity for the period from inception (November 5, 1982) to
October 31, 1983 and for each of the seventeen fiscal years in the period ended October 31, 2000 F-4 - F-7
Statements of Cash Flows for each of the three fiscal years in the period ended
October 31, 2000 and for the period from inception (November 5, 1982) to October 31, 2000 F-8
Notes to Financial Statements F-9 - F-19
Report of Independent Public Accountants on Schedule F-20
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CopyTele, Inc.:
We have audited the accompanying balance sheets of CopyTele, Inc. (a Delaware
corporation in the development stage - Note 1) as of October 31, 2000 and 1999,
and the related statements of operations, statements of shareholders' equity for
the period from inception (November 5, 1982) to October 31, 1983 and for each of
the seventeen fiscal years in the period ended October 31, 2000 and cash flows
for the each of the three fiscal years in the period ended October 31, 2000 and
for the period from inception (November 5, 1982) to October 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CopyTele, Inc. as of October
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended October 31, 2000 and for the
period from inception to October 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Melville, New York
January 19, 2001
F-1
COPYTELE, INC.
(Development Stage Enterprise)
BALANCE SHEETS
October 31, October 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash, including cash equivalents and interest bearing accounts of $1,119,516 and
$1,531,254, respectively $ 1,134,045 $ 1,587,830
Marketable securities, at cost 96,873 488,038
Accounts receivable, net of allowance for doubtful accounts of $75,400 594,851 --
Inventories 1,769,285 4,538,608
Prepaid expenses and other current assets 60,433 67,099
------------ ------------
Total current assets 3,655,487 6,681,575
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $1,837,946 and $1,627,012, respectively 270,018 531,155
OTHER ASSETS 2,968,996 26,814
------------ ------------
$ 6,894,501 $ 7,239,544
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,035,749 $ 366,258
Accrued liabilities 301,153 588,509
------------ ------------
Total current liabilities 1,336,902 954,767
COMMITMENTS AND CONTINGENCIES (Note 8)
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;
63,084,526 and 60,057,376 shares issued and outstanding, respectively 630,845 600,574
Additional paid-in capital 60,050,852 55,844,128
Deficit accumulated during the development stage (55,124,098) (50,159,925)
------------ ------------
5,557,599 6,284,777
------------ ------------
$ 6,894,501 $ 7,239,544
============ ============
The accompanying notes are an integral part of these balance sheets.
F-2
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF OPERATIONS
For the Period
from Inception
For the Fiscal Year Ended October 31, (November 5, 1982)
------------------------------------------ to
2000 1999 1998 October 31, 2000
------------ ------------ ------------ ----------------
SALES $ 1,471,998 $ 46,877 $ -- $ 1,518,875
COST OF SALES 725,438 37,304 -- 762,742
------------ ------------ ------------ ------------
Gross profit 746,560 9,573 -- 756,133
------------ ------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development expenses of approximately
$2,732,000, $3,163,000, $3,926,000 and $34,206,000, respectively) 5,831,712 8,284,717 7,231,557 59,706,563
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN JOINT VENTURE (Note 4) -- 345,947 377,219 1,225,000
------------ ------------ ------------ ------------
INTEREST INCOME 120,979 156,075 472,822 5,051,332
------------ ------------ ------------ ------------
NET (LOSS) $ (4,964,173) $ (8,465,016) $ (7,135,954) $(55,124,098)
============ ============ ============ ============
NET (LOSS) PER SHARE OF COMMON STOCK:
Basic and Diluted $ (.08) $ (.14) $ (.12) $ (1.14)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 62,261,250 58,792,745 57,865,834 48,193,117
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE SEVENTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2000
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-in Development
Shares Par Value Capital Stage
---------- --------- ---------- ------------
BALANCE, November 5, 1982 (inception) -- $ -- $ -- $ --
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 -- -- (350,376) --
Net (loss) for the period -- -- -- (976,919)
--------- ------- ----------- -----------
BALANCE, October 31, 1983 2,800,000 28,000 6,385,384 (976,919)
Additional costs incurred in conjunction with public offering -- -- (11,654) --
Net (loss) -- -- -- (1,542,384)
--------- ------- ----------- -----------
BALANCE, October 31, 1984 2,800,000 28,000 6,373,730 (2,519,303)
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 -- -- 362,365 --
Three-for-one stock split (A) 5,714,400 57,144 (57,144) --
Net (loss) -- -- -- (1,745,389)
--------- ------- ----------- -----------
BALANCE, October 31, 1985 8,571,600 85,716 7,309,796 (4,264,692)
Common stock issued, at $4 per share, upon exercise of 2,800
warrants in December 1985 8,400 84 33,516 --
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company -- -- (62,146) --
Net (loss) -- -- -- (1,806,696)
--------- ------- ----------- -----------
BALANCE, October 31, 1986 8,580,000 85,800 7,281,166 (6,071,388)
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 --
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company -- -- (1,474) --
Five-for-four stock split (A) 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 on September 10, 1987 and to officers on
October 29, 1987 64,740 647 309,601 --
Net (loss) -- -- -- (1,401,736)
--------- ------- ----------- -----------
F-4
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE SEVENTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2000
Continued
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-in Development
Shares Par Value Capital Stage
---------- --------- ---------- ------------
BALANCE, October 31, 1987 10,873,825 108,738 8,428,057 (7,473,124)
Sale of common stock, at market, to members of officers'
immediate families from November 24, 1987 to June 29, 1988
and additional contributions by officers in January 1988 and
March 1988 related to adjustments to sales price of common
stock on October 29, 1987 260,210 2,602 2,250,594 --
Net (loss) -- -- -- (1,317,305)
---------- ------- ----------- -----------
BALANCE, October 31, 1988 11,134,035 111,340 10,678,651 (8,790,429)
Sale of common stock, at market, to an officer on February 26,
1989 and to members of officers' immediate families from
February 26, 1989 (amended on March 10, 1989) to September
27, 1989 142,725 1,427 2,093,851 --
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 --
Net (loss) -- -- -- (1,101,515)
---------- ------- ----------- -----------
BALANCE, October 31, 1989 11,342,430 113,424 13,871,818 (9,891,944)
Sale of common stock, at market, to members of officers'
immediate families from November 14, 1989 to October 15,
1990 117,825 1,179 1,140,725 --
Net (loss) -- -- -- (1,111,413)
BALANCE, October 31, 1990 11,460,255 114,603 15,012,543 (11,003,357)
Sale of common stock, at market, to members of officers'
immediate families on December 4, 1990 42,540 425 329,260 --
Two-for-one stock split (A) 11,502,795 115,028 (115,028) --
Sale of common stock, at market, to members of officers'
immediate families from April 26, 1991 to September 16, 1991 102,543 1,025 1,033,981 --
---------- ------- ----------- -----------
Net (loss) -- -- -- (1,299,992)
BALANCE, October 31, 1991 23,108,133 231,081 16,260,756 (12,303,349)
Sale of common stock, at market, to members of officers'
immediate families from December 16, 1991 to October
27, 1992 158,910 1,589 1,754,330 --
Costs incurred in conjunction with registration of stock
option plan -- -- (33,251) --
Net (loss) -- -- -- (1,827,356)
---------- ------- ----------- -----------
F-5
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE SEVENTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2000
Continued
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-in Development
Shares Par Value Capital Stage
---------- --------- ---------- ------------
BALANCE, October 31, 1992 23,267,043 232,670 17,981,835 (14,130,705)
Common stock issued upon exercise of stock options from
December 16, 1992 to October 22, 1993 under stock option plan 1,032,940 10,330 5,914,480 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in September 1993 239,000 2,390 996,774 --
Net (loss) -- -- -- (2,762,849)
---------- ------- ----------- -----------
BALANCE, October 31, 1993 24,538,983 245,390 24,893,089 (16,893,554)
Costs incurred in connection with registration of stock option plan -- -- (50,324) --
Common stock issued upon exercise of stock options from
December 22, 1993 to June 14, 1994 under stock option plan 233,200 2,332 1,273,411 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in July 1994 65,220 652 371,754 --
Net (loss) -- -- -- (3,427,517)
---------- ------- ----------- -----------
BALANCE, October 31, 1994 24,837,403 248,374 26,487,930 (20,321,071)
Costs incurred in connection with registration of stock option plan -- -- (29,759) --
Common stock issued upon exercise of stock options from
February 17, 1995 to October 30, 1995 under stock option plans 980,400 9,804 5,278,824 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in February, July and
September 1995 137,300 1,373 755,132 --
Net (loss) -- -- -- (2,993,899)
---------- ------- ----------- -----------
BALANCE, October 31, 1995 25,955,103 259,551 32,492,127 (23,314,970)
Common stock issued upon exercise of stock options from
November 2, 1995 to June 12, 1996 under stock option plans 2,288,800 22,888 15,843,842 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in January and March, 1996 138,280 1,383 527,802 --
Two-for-one stock split (A) 28,382,183 283,822 (283,822) --
Common stock issued upon exercise of stock options from
July 8, 1996 to October 30, 1996 under stock option plans 532,500 5,325 1,795,395 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in July and October, 1996 107,790 1,078 559,262 --
Net (loss) -- -- -- (5,443,410)
---------- ------- ----------- -----------
BALANCE, October 31, 1996 57,404,656 574,047 50,934,606 (28,758,380)
Costs incurred in conjunction with registration of stock option -- -- (11,705) --
plan
Common stock issued upon exercise of stock options from
November 25, 1996 to October 6, 1997 under stock option plans 342,700 3,427 1,258,829 --
Common stock issued upon exercise of warrants by members
of officers' immediate families in March 1997 98,820 988 502,905 --
Common stock issued upon purchase of equipment 15,000 150 74,850 --
Net (loss) -- -- -- (5,800,575)
---------- ------- ----------- -----------
F-6
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
AND FOR EACH OF THE SEVENTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 2000
Continued
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-in Development
Shares Par Value Capital Stage
---------- --------- ---------- ------------
BALANCE, October 31, 1997 57,861,176 578,612 52,759,485 (34,558,955)
Stock option compensation to consultants -- -- 189,600 --
Common stock issued upon exercise of stock options in May 1998 10,000 100 28,025 --
Net (loss) -- -- -- (7,135,954)
---------- ---------- ----------- ------------
BALANCE, October 31, 1998 57,871,176 578,712 52,977,110 (41,694,909)
Stock option compensation to consultants -- -- 61,650 --
Common stock issued upon exercise of stock options between
886,200 8,862 1,343,868 --
January 15, 1999 and August 3, 1999
Common stock issued in private placements on April 30, 1999 and
September 8, 1999, net of expenses 1,300,000 13,000 1,461,500 --
Net (loss) -- -- -- (8,465,016)
---------- ---------- ----------- ------------
BALANCE, October 31, 1999 60,057,376 600,574 55,844,128 (50,159,925)
Stock option compensation to consultants -- -- 210,650 --
Common stock issued in private placements in January and March
2000, net of expenses 616,500 6,165 794,420 --
Common stock issued upon exercise of stock options from
January 2000 to May 2000 under stock option plans 2,267,400 22,674 3,003,050 --
Common stock issued upon exercise of warrants in May 2000 143,250 1,433 198,604 --
Net (loss) -- -- -- (4,964,173)
---------- ---------- ----------- ------------
BALANCE, October 31, 2000 63,084,526 $ 630,845 $60,050,852 $(55,124,098)
========== ========== =========== ============
(A) Reflects cumulative effect on all share data prior to splits described in
Note 7.
The accompanying notes are an integral part of these statements.
F-7
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
For the Period
from Inception
For the Fiscal Year Ended October 31, (November 5,1982)
------------------------------------------- to
2000 1999 1998 October 31, 2000
----------- ----------- ------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(5,769,836) $(6,314,512) $ (8,249,844) $(61,531,690)
Cash received from customers 801,747 46,877 -- 848,624
Interest received 127,511 150,539 513,633 5,048,346
----------- ----------- ------------ ------------
Net cash (used in) operating activities (4,840,578) (6,117,096) (7,736,211) (55,634,720)
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (30,717) (40,283) (185,876) (2,054,159)
Disbursements to acquire certificates of deposit and
marketable securities (96,873) (488,038) -- (13,630,910)
Proceeds from maturities of investments 488,038 -- 970,808 13,534,037
Investment made in Joint Venture -- -- -- (1,225,000)
----------- ----------- ------------ ------------
Net cash provided by (used in) investing activities 360,448 (528,321) 784,932 (3,376,032)
----------- ----------- ------------ ------------
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 disbursements 3,225,760 1,352,730 28,125 40,286,973
Proceeds from sale of common stock in private placements, net 800,585 1,474,500 -- 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 4,026,345 2,827,230 28,125 60,144,797
----------- ----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(453,785) (3,818,187) (6,923,154) 1,134,045
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,587,830 5,406,017 12,329,171 --
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,134,045 $ 1,587,830 $ 5,406,017 $ 1,134,045
=========== =========== ============ ============
RECONCILIATION OF NET (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net (loss) $(4,964,173) $(8,465,016) $ (7,135,954) $(55,124,098)
Stock option compensation to consultants 210,650 61,650 189,600 461,900
Loss from Joint Venture -- 260,775 377,219 1,139,828
Provision for doubtful accounts 75,400 -- -- 75,400
Depreciation and amortization 261,804 275,234 288,829 1,904,474
Impairment of investment in Joint Venture -- 85,172 -- 85,172
Impairment of amount due from Joint Venture -- 1,407,461 -- 1,407,461
Amortization of discount on marketable securities -- -- 26,365 --
Loss on disposal of property and equipment 30,050 -- -- 30,050
(Increase) decrease in accounts receivable (670,251) -- -- (670,251)
(Increase) decrease in inventories (230,677) (1,819,393) (2,587,717) (4,769,285)
Decrease (increase) in prepaid expenses and other current assets
6,666 (20,460) 3,831,751 (922,433)
Decrease (increase) in long-term amount due from joint venture -- 1,684,167 (3,091,628) (1,407,461)
(Increase) decrease in other assets 57,818 70,606 21,746 31,004
Increase (decrease) in accounts payable and accrued liabilities 382,135 342,708 343,578 2,123,519
----------- ----------- ------------ ------------
Net cash (used in) operating activities $(4,840,578) $(6,117,096) $ (7,736,211) $(55,634,720)
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Barter transaction (Note 5) $ 3,000,000 $ -- $ -- $ 3,000,000
=========== =========== ============ ============
The accompanying notes are an integral part of these statements.
F-8
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
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. The primary
encryption product the Company has produced is the USS-900 (Universal Secure
System). The USS-900 is a hardware-based peripheral digital encryption system
which incorporates a private label digital cryptographic chip to provide
high-grade information encryption. The Company has also developed a laptop
(personal computer) security encryption product - the ULP-1 (Ultimate Laptop
Privacy), and a digital version of the USS-900 - the DSS-1000 (Digital Security
System). The Company is also continuing its research and development activities
for additional encryption products and flat panel display technologies in
addition to its ultra-high resolution charged particle E-Paper(TM) flat panel
display.
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. The Company is hopeful, that with both the
development of its new products and its increased marketing efforts, it will
procure enough sales throughout fiscal 2001 to emerge from the development
stage. However, there can be no assurance that the Company will be able to do
so.
The Company's operations used approximately $4,841,000 in cash during fiscal
2000. As of October 31, 2000, working capital included approximately $1,231,000
of cash and marketable securities and approximately $1,337,000 of accounts
payable and accrued liabilities. The Company believes that these resources and
other sources of cash flows will be sufficient to enable it to continue in
operation until at least the end of the first quarter of fiscal 2002, after
giving effect to certain reductions in operating expenses, as necessary. As of
January 29, 2001, the Company had approximately $703,000 in cash and marketable
securities, which reflects, in part, the proceeds from both the collection of
outstanding accounts receivable and the exercise of employee stock options.
The Company is seeking to improve its liquidity through increased sales of its
products. The Company may also seek to improve its liquidity through sales of
its common stock and additional exercises of stock options and warrants. There
can be no assurance that any of these plans will materialize.
The Company has had limited sales to its dealers, distributors and end-users
since its inception, and during fiscal 2000 has recognized revenue of
approximately $1,472,000. Despite the foregoing, 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 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, and a minimum bid price of at least $1.00 per share in
order to maintain its Nasdaq listing. The Company anticipates that it will seek
additional 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 (Note 11).
F-9
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
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 barter credits, will be realized through future usage (Notes 2 and
5), and accordingly are properly valued as of October 31, 2000.
Product Development
The Company has received 221 patents, including those from the United States and
certain foreign patent offices, expiring at various dates between 2005 and 2018.
At the present time, additional patent applications are pending with the United
States and certain foreign patent offices. These patents are related to the
design, structure and method of construction of E-PaperTM flat panel display,
methods of operating the E-PaperTM flat panel display, particle generation,
applications using the E-PaperTM flat panel display, and for its solid state and
thin film video and flat panel display.
The Company also has filed, or is planning to file, patent applications for its
optical encryption system, its FED and simplified E-Paper flat panel display
technologies currently under development, and for its USS-900, DSS-1000, and
ULP-1 encryption technologies.
There can be no assurance that patents will be obtained for any of the pending
applications; however, the Company has been advised by its patent counsel that,
in their opinion, the subject matter of the pending applications contains
patentable material. In addition, there can be no assurance that any patents
held or obtained will protect the Company against competitors either with or
without litigation. The Company is not aware that any of its products are
infringing upon the patents of others. There can be no assurance, however, that
other products developed by the Company, if any, will not infringe upon the
patents of others, or that the Company will not have to obtain licenses under
the patents of others. The Company believes that the foregoing patents are
significant to the future operations of the Company.
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 the USS-900 and other
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 development, rapidly changing consumer preference, and the
possible development of competitive products that could render the Company's
products obsolete or unmarketable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue upon shipment and passage of title of its
products to its customers. The Company has not had any sales returns to date.
Accounts Receivable and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. The Company reviews its accounts receivable for
potential doubtful accounts and maintains a reserve for estimated uncollectible
amounts. Two customers represented 20% and 38% of sales throughout fiscal 2000,
respectively, and three customers represented 45%, 27% and 18% of accounts
receivable, respectively, as of October 31, 2000.
F-10
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
Cash Equivalents
Cash equivalents consist of investments that are readily convertible into cash
and have original maturities of three months or less.
Marketable Securities
The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company is required to classify each investment in marketable securities in one
of three categories: trading, available-for-sale, or held-to-maturity. The
Company's investments at October 31, 2000 and 1999, were classified as
held-to-maturity as the Company has the ability and intent to hold these
securities until they mature. As such, in accordance with SFAS No. 115, these
investments are presented in the accompanying balance sheet at cost as of
October 31, 2000 and 1999. Accrued interest income related to these investments
is included in earnings for the fiscal years ended October 31, 2000 and 1999.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market, which represents the Company's best estimate of market value.
Property and Equipment
Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets, primarily five years.
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 (Note 5). In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company continually evaluates the carrying amount of this
asset for any potential impairment. Based on this evaluation, management
believes that there is no impairment as of October 31, 2000.
Research and Development Expenses
Research and development expenses incurred by the Company are included in
selling, general and administrative expenses in the year incurred.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the estimated
future tax effects of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Stock-Based Compensation
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied (Note 7).
F-11
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
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 years presented is the same as
Basic EPS, as the inclusion of the impact of common stock equivalents then
outstanding would be anti-dilutive.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
Comprehensive income is the total of net income and all other non-owner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive and other comprehensive
income must be reported on the face of the annual financial statements or, in
the case of interim reporting, in the footnotes to the financial statements. The
Company's operations did not give rise to items includible in comprehensive
income (loss) which were not already included in net income (loss). Accordingly,
the Company's comprehensive income (loss) is the same as its net income (loss)
for all periods presented.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 2000 (as amended by SFAS No. 137) and will not require
retroactive restatement of prior period financial statements. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the balance sheet, measured at fair value. Derivative instruments
will be recognized as gains or losses in the period of change. If certain
conditions are met where the derivative instrument has been designated as a fair
value hedge, the hedge items may also be marked to market through earnings, thus
creating an offset. If the derivative is designed and qualifies as a cash flow
hedge, the changes in fair value of the derivative instrument may be recorded in
comprehensive income. The Company does not expect the adoption of SFAS No. 133
to have a material impact on its financial position or results of operations as
the Company does not presently make use of derivative instruments.
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.
F-12
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
3. INVENTORIES
Inventories consist of the following:
October 31,
-----------------------------
2000 1999
---------- ----------
Component parts $ 558,286 $2,113,917
Work-in-process 219,250 --
Finished products 991,749 2,424,691
---------- ----------
$1,769,285 $4,538,608
========== ==========
4. JOINT VENTURE
Shanghai CopyTele Electronics Co., Ltd. (the "Joint Venture" or "SCE"), the
Company's 55% owned joint venture in Shanghai, China, terminated operations
during fiscal 2000 and is in the process of being liquidated. In the opinion of
management and its legal counsel, the Company is not legally liable for any
obligations of SCE, and accordingly, the impending termination of SCE has not
had any impact on the operations of the Company. As such, the Company has not
presented any amounts due from Joint Venture and amounts due to Joint Venture in
the accompanying balance sheets, as these amounts have been offset. All other
related assets were previously reserved for in fiscal 1999.
The Company controlled four of seven votes of the Joint Venture's board of
directors. However, decisions involving the Joint Venture required either a
unanimous or two-thirds vote of the Joint Venture's board of directors. Since
the Company had significant influence over the Joint Venture's operations but
did not have control, the Company has historically reflected its investment in
the Joint Venture under the equity method of accounting.
During fiscal 1999, in accordance with SFAS No. 121, the Company recognized a
permanent impairment charge of approximately $85,000 on its previously recorded
investment in Joint Venture, due to the uncertainty of SCE generating enough
future undiscounted cash flows to cover the carrying amount of the investment.
Additional investments in SCE in fiscal 2000 were directly expensed to the
statement of operations. Such investments were not material to the Company's
fiscal 2000 statement of operations. In addition, due to the uncertainty of
realizing the amounts due from SCE, the Company reserved approximately
$1,407,000 on its previously recorded amounts due from SCE during fiscal 1999.
5. 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 credits. In accordance with APB No. 29, "Accounting for
Non-Monetary 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, ($2,954,000 as of October 31, 2000),
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.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
October 31,
-----------------------
2000 1999
-------- --------
Accrued professional fees $114,894 $275,283
Accrued pension 102,435 131,396
Accrued payroll 49,255 70,553
Accrued equipment purchases -- 35,625
Accrued other 34,569 75,652
-------- --------
$301,153 $588,509
======== ========
F-13
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
7. SHAREHOLDERS' EQUITY
Sales of Common Stock and Issuance of Warrants
During fiscal 2000, the Company sold 616,500 shares of its common stock in four
private placements at an average price of $1.31 per share, for an aggregate of
$800,585 net of expenses. In conjunction with the sales of common stock, the
Company issued warrants to purchase 616,500 shares of common stock at exercise
prices equal to the fair market value of the common stock on the respective
dates of issuance, expiring on various dates through March 22, 2002.
During fiscal 1999, the Company sold 1,300,000 shares of its common stock in
eight private placements at an average price of $1.15 per share, or an aggregate
of $1,500,000 net of expenses, of which 500,000 shares were sold to an
individual who became a director of the Company in July 1999. In conjunction
with the sales of common stock, the Company issued warrants to purchase
1,300,000 shares of common stock at an average exercise price of $1.15 per
share, which expire on various dates through September 8, 2001.
As of October 31, 2000 and 1999, all of the warrants to purchase shares of
common stock issued and outstanding were exercisable. At October 31, 1998, there
were no outstanding warrants.
Stock Splits
On October 4, 1985, the Company declared a three-for-one stock split, effected
in the form of a 200% stock dividend, payable on November 8, 1985 to
shareholders of record as of October 15, 1985.
On August 13, 1987, the Company declared a five-for-four stock split, effected
in the form of a 25% stock dividend, payable on September 15, 1987 to
shareholders of record as of August 31, 1987.
On February 12, 1991, the Company declared a two-for-one stock split, effected
in the form of a 100% stock dividend, payable on March 18, 1991 to shareholders
of record as of February 25, 1991.
On May 24, 1996 the Company declared a two-for-one stock split, effected in the
form of a 100% stock dividend, payable on June 17, 1996 to shareholders of
record as of June 4, 1996.
The weighted average number of shares outstanding and net loss per share amounts
in the accompanying financial statements have been restated to reflect these
stock splits.
Preferred Stock
On May 29, 1986, the Company's shareholders authorized 500,000 shares of
preferred stock with a par value of $100 per share. The shares of preferred
stock may be issued in series at the direction of the Board of Directors, and
the relative rights, preferences and limitations of such shares will all be
determined by the Board of Directors.
Stock Option Plans
The Company has three stock option plans: the 1987 Stock Option Plan (the "1987
Plan"), the CopyTele, Inc. 1993 Stock Option Plan (the "1993 Plan"), and the
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.
F-14
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
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.
Had compensation cost for these plans been determined at fair value, consistent
with SFAS No. 123, the Company's net loss and net loss per share would have
increased to the following pro forma amounts:
For the Year Ended October 31,
-----------------------------------------------
2000 1999 1998
------------ ------------- -------------
Net (Loss): As Reported $ (4,064,173) $ (8,465,016) $ (7,135,954)
Pro Forma $ (6,295,955) $ (10,560,690) $ (11,041,940)
Basic and Diluted
Net (Loss) Per Share of common stock: As Reported $ (.08) $ (.14) $ (.12)
Pro Forma $ (.10) $ (.18) $ (.19)
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used for grants for the years ended October 31, 2000, 1999 and 1998,
respectively: risk free interest rates of 5.97%, 5.50% and 5.50%; expected
dividend yields of 0%; expected lives of 2.50, 3.53 and 3.23 years; and expected
stock price volatility of 85%, 78% and 69%. The weighted average fair value of
options granted under SFAS No. 123 for the years ended October 31, 2000, 1999
and 1998 was $0.58, $1.46 and $1.47, respectively.
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 years ended October 31, 2000, 1999, 1998 and the period from
inception (November 5, 1982) to October 31, 2000 was $210,650, $61,650, $189,600
and $461,900, 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 on the accompanying statements of operations.
In May 1987, the Company's shareholders approved the 1987 Plan which, after
giving consideration to the five-for-four and the two two-for-one stock splits,
as well as an amendment approved by shareholders in May 1990 to increase the
number of shares issuable under the 1987 Plan, provided for the granting of
stock options to purchase 9,000,000 shares of common stock of the Company. The
1987 Plan provided for the granting of incentive stock options to key employees,
and nonqualified stock options to key employees, consultants and directors of
the Company. The option prices were determined by the Board of Directors, but
with respect to incentive stock options, the option price could not be less than
the fair market value at the date of grant. The stock options are exercisable
over a period not to exceed 10 years, also as determined by the Board of
Directors. In July 1992, the Company registered the shares of common stock
covered by the 1987 Plan. Upon approval of the 1993 Plan by the Company's
shareholders in July 1993, the 1987 Plan was terminated with respect to the
grant of future options.
F-15
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
Information regarding the 1987 Plan for the three years ended October 31, 2000
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares Under Option at October 31, 1997 686,160 $4.93
Expired (37,600) $2.47
-------
Shares Under Option and Exercisable at October 31, 1998 648,560 $5.08
Expired (67,760) $5.00
-------
Shares Under Option and Exercisable at October 31, 1999 580,800 $5.09
Expired (125,000) $3.20
-------
Shares Under Option and Exercisable at October 31, 2000 455,800 $5.41
=======
The following table summarizes information about stock options outstanding under
the 1987 Plan as of October 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/00 Contractual Life Exercise Price at 10/31/00 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$4.25 6,800 0.79 $4.25 6,800 $4.25
$5.63 449,000 2.32 $5.42 449,000 $5.42
The exercise price with respect to all of the options granted under the 1987
Plan since its inception, was at least equal to the fair market value of the
underlying common stock at the date of grant. As of October 31, 2000, all of the
options to purchase shares of common stock granted and outstanding under the
1987 Plan were exercisable.
On July 14, 1993, the Company's shareholders approved the 1993 Plan, which had
been adopted by the Company's Board of Directors on April 28, 1993. The 1993
Plan provided for the granting of incentive stock options and stock appreciation
rights to key employees, and non-qualified stock options and stock appreciation
rights to key employees and consultants of the Company. The 1993 Plan was
administered by the Stock Option Committee, which determined the option price,
term and provisions of each option. However, the purchase price of shares
issuable upon the exercise of incentive stock options could not be less than the
fair market value of such shares and incentive stock options are not exercisable
for more than 10 years. Upon approval of the 2000 Share Plan by the Company's
shareholders in July 2000, the 1993 Plan was terminated with respect to the
grant of future options.
F-16
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
Information regarding the 1993 Plan for the three years ended October 31, 2000
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ----------------
Shares Under Option at October 31, 1997 11,540,360 $5.19
----------
Granted 2,758,000 $2.82
Canceled (400,000) $5.02
Expired (184,000) $6.16
Exercised (10,000) $2.81
----------
Shares Under Option at October 31, 1998 13,704,360 $4.71
----------
Granted 2,421,000 $1.46
Canceled (1,938,000) $5.34
Expired (50,000) $5.37
Exercised (886,200) $1.53
----------
Shares Under Option at October 31, 1999 13,251,160 $4.22
----------
Granted 1,939,000 $4.72
Canceled (1,118,700) $4.65
Expired (40,000) $4.47
Exercised (2,267,400) $1.03
----------
Shares Under Option at October 31, 2000 11,764,060 $4.23
==========
Options Exercisable at October 31, 2000 11,471,060 $4.30
==========
The following table summarizes information about stock options outstanding under
the 1993 Plan as of October 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/00 Contractual Life Exercise Price at 10/31/00 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$0.84 to $1.96 1,357,700 6.11 $1.27 1,079,700 $1.16
$2.19 to $3.16 1,225,500 6.83 $2.34 1,210,500 $2.34
$3.31 to $4.81 6,467,080 5.98 $4.24 6,467,080 $4.24
$5.25 to $6.88 2,713,780 4.30 $6.55 2,713,780 $6.55
The exercise price with respect to all of the options granted under the 1993
Plan since its inception, was at least equal to the fair market value of the
underlying common stock at the grant date.
On July 25, 2000, the Company's shareholders approved the 2000 Share Plan. The
maximum number of shares of common stock that may be granted is 5,000,000
shares. The 2000 Share Plan provides for the grant of incentive stock options,
nonqualified stock options, stock appreciation rights, stock awards, performance
awards and stock units to key employees and consultants of the Company.
Directors and future directors shall automatically be granted nonqualified stock
options to purchase 20,000 shares of common stock upon their initial election to
the Board of Directors and at the time of each subsequent annual meeting of the
Company's stockholders at which such director is elected to the Board of
Directors.
The 2000 Share Plan is administered by the Stock Option Committee, which
determines the option price, term and provisions of each option; however, the
purchase price of shares issuable upon the exercise of incentive stock options
will not be less than the fair market value of such shares and incentive stock
options will not be exercisable for more than 10 years.
F-17
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
Information regarding the 2000 Share Plan for the year ended October 31, 2000 is
as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares Under Option at October 31, 1999 -- $--
Granted 1,144,000 $1.10
---------
Shares Under Option at October 31, 2000 1,144,000 $1.10
=========
The following table summarizes information about stock options outstanding under
the 2000 Share Plan as of October 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/00 Contractual Life Exercise Price at 10/31/00 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$1.06 to $1.38 1,144,000 9.37 $1.10 -- $-
The exercise price with respect to all of the options granted under the 2000
Share Plan since its inception, was at least equal to the fair market value of
the underlying common stock at the grant date. As of October 31, 2000, 3,856,000
options were available for future grants under the 2000 Share Plan.
During the period from November 1, 2000 through January 19, 2001, the Company
granted an additional 1,710,000 options under the 2000 Share Plan. During this
period, options to purchase 719,500 shares of the Company's common stock were
exercised for an aggregate amount of approximately $495,000.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases space at its principal location for office and laboratory
research facilities. The current lease is for approximately 12,900 square feet
and expires on November 30, 2003. The lease contains base rentals of
approximately $243,000 per annum with a 3% annual increase and an escalation
clause for increases in certain operating costs. The Company has the right to
cancel a portion of the lease as of November 30, 2002. This lease does not
contain provisions for its renewal.
In February 1996, the Company entered into a five-year lease for approximately
2,300 square feet of office space. The lease, which expires on June 30, 2001 and
is non-renewable, currently provides for a base rent of approximately $56,000
per annum.
Rent expense for the years ended October 31, 2000, 1999, 1998 and for the period
from inception (November 5, 1982) to October 31, 2000, was approximately
$332,000, $313,000, $287,000 and $2,756,000, respectively.
9. EMPLOYEE PENSION PLAN
The Company adopted a noncontributory defined contribution pension plan,
effective November 1, 1983, covering all of its present employees.
Contributions, which are made to a trust, are based upon specified percentages
of compensation, as defined in the plan. Pension cost, which was approximately
$102,000, $137,000, $123,000 and $907,000 for the fiscal years ended October 31,
2000, 1999, 1998 and for the period from the inception of the plan to October
31, 2000, respectively, has been accrued and funded on a current basis.
F-18
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
10. INCOME TAXES
At October 31, 2000, the Company had tax net operating loss and tax credit
carryforwards of approximately $78,246,000 and $1,684,000, respectively,
available, within statutory limits (expiring at various dates between 2001 and
2020), to offset any future regular Federal corporate taxable income and taxes
payable. The principal differences between the net loss for financial statement
purposes and the tax net operating loss attributable to the year ended October
31, 2000, were nondeductible expenses for tax purposes of joint venture
receivable reserves and impairment. If the tax benefits relating to deductions
of option holders' income are ultimately realized, those benefits will be
credited directly to additional paid-in capital. Certain changes in stock
ownership can result in a limitation on the amount of net operating loss and tax
credit carryovers that can be utilized each year.
The Company had tax net operating loss and tax credit carryforwards of
approximately $78,398,000 and $124,000, respectively, at October 31, 2000,
available, within statutory limits, to offset future New York State corporate
taxable income and taxes payable, if any, under certain computations of such
taxes. The tax net operating loss carryforwards expire at various dates between
2001 and 2020 and the tax credit carryforwards expire between 2001 and 2010.
Deferred tax benefits at October 31, 2000 and 1999, which are fully offset by
valuation allowances, primarily represent the estimated future tax effects of
Federal and State net operating loss and tax credit carryforwards aggregating
approximately $32,537,000 and $33,026,000, respectively.
During the period from inception (November 5, 1982) to October 31, 2000, the
Company incurred no Federal and no material State income taxes.
11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While there is no formal agreement, the Company's Chairman of the Board and its
President waived any and all rights to receive salary and related pension
benefits for an undetermined period of time beginning November 1985. The
aggregate annual expenses for these individuals at the time of such waivers were
approximately $325,000.
Four other individuals, including an officer and three senior level personnel
then employed at the Company, waived salary and related pension benefits from
January 1987 through December 1990. While there are no formal agreements,
commencing January 1991, these individuals waived such rights for an
undetermined period of time and did not receive salary or related pension
benefits through December 1992. The Company's Chairman of the Board, its
President, and the three senior level personnel, continued to waive such rights
beginning in January 1993, for an undetermined period of time. From February
1993 to September 1998, one additional employee also waived such salary and
benefit rights. The aggregate annual expenses for these five individuals, then
employed at the Company, at the time of their respective initial waivers were
approximately $440,000. The Company does not anticipate the retroactive
reinstatement of any of the salary or related pension benefit waivers indicated
above.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CopyTele, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of CopyTele, Inc. included in this registration statement
and have issued our report thereon dated January 19, 2001. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The schedule of valuation and qualifying accounts is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
January 19, 2001
F-20
SCHEDULE II
COPYTELE, INC
(Development Stage Enterprise)
VALUATION AND QUALIFYING ACCOUNTS
(rounded to the nearest thousand)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------
Additions
- --------------------------------------------------------------------------------------------------------------------
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions end of period
- --------------------------------------------------------------------------------------------------------------------
2000
Allowance for doubtful accounts $ -- $ 75,400 $ -- $ 75,400
Reserve on amounts due from Joint Venture $1,407,000 $ 862,000 $2,269,000 $ --
- --------------------------------------------------------------------------------------------------------------------
1999
Allowance for doubtful accounts $ -- $ -- $ -- $ --
Reserve on amounts due from Joint Venture $ -- $1,407,000 $ -- $1,407,000
- --------------------------------------------------------------------------------------------------------------------
1998
Allowance for doubtful accounts $ -- $ -- $ -- $ --
Reserve on amounts due from Joint Venture $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
F-21