SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
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(Address of principal executive offices) (Zip Code)
(631) 549-5900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On March 11, 2002, the registrant had outstanding 67,575,560 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
TABLE OF CONTENTS
Part I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 31, 2002 (Unaudited) and
October 31, 2001
Condensed Statements of Operations (Unaudited) for the three months
ended January 31, 2002 and 2001
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 2002 and 2001
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
January 31, October 31,
ASSETS 2002 2001
------ ------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,454,944 $ 1,316,860
Accounts receivable, net of allowance for doubtful accounts of
$180,000 and $240,000, respectively 562,499 536,391
Inventories 1,497,381 1,589,350
Prepaid expenses and other current assets 238,571 136,902
------------------ ------------------
Total current assets 5,753,395 3,579,503
PROPERTY AND EQUIPMENT, net 120,589 119,487
OTHER ASSETS 2,862,977 2,863,413
------------------ ------------------
$ 8,736,961 $ 6,562,403
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 548,308 $ 816,011
Accrued liabilities 56,560 38,199
Deferred revenue 3,508,667 1,541,667
------------------ ------------------
Total current liabilities 4,113,535 2,395,877
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000 shares authorized;
no shares issued or outstanding - -
Common stock, par value $.01 per share; 240,000,000 shares
authorized; 67,321,050 and 66,521,100 shares issued
and outstanding, respectively 673,211 665,211
Additional paid-in capital 62,585,963 62,197,370
Accumulated deficit (58,635,748) (58,696,055)
------------------ ------------------
4,623,426 4,166,526
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$ 8,736,961 $ 6,562,403
================== ==================
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended
January 31,
----------------------------------
2002 2001
REVENUES $ 1,277,189 $ 178,291
COST OF REVENUES 426,276 74,250
------------ ----------
Gross profit 850,913 104,041
RESEARCH AND DEVELOPMENT EXPENSES 293,411 633,470
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 501,796 608,569
------------ ----------
Income (loss) from operations 55,706 (1,137,998)
INTEREST INCOME 4,601 7,862
------------ ----------
INCOME (LOSS) BRFORE PROVISION FOR INCOME TAXES 60,307 (1,130,136)
PROVISION FOR INCOME TAXES - -
------------ ------------
Net income (loss) $ 60,307 $ (1,130,136)
============ ============
PER SHARE INFORMATION:
Net income (loss) per share:
Basic $ 0.00 $ (0.02)
============ ============
Diluted $ 0.00 $ (0.02)
============ ============
Shares used in computing net income
(loss) per share:
Basic 66,950,508 63,219,271
============ ============
Diluted 67,269,479 63,219,271
============ ============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended
January 31,
---------------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees
and consultants $(1,119,580) $(1,244,205)
Cash received from customers 278,081 212,209
Cash received from collaborative
agreements 3,000,000 -
Interest received 4,601 7,892
------------ ------------
Net cash provided by (used in)
operating activities 2,163,102 (1,024,104)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property
and equipment (25,018) (3,071)
Proceeds from maturities of investments - 96,873
------------ ------------
Net cash provided by (used in)
investing activities (25,018) 93,802
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options, net of registration costs - 499,380
------------ ------------
Net cash provided by
financing activities - 499,380
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,138,084 (430,922)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,316,860 1,134,045
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $3,454,944 $ 703,123
=========== ============
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $ 60,307 $(1,130,136)
Stock option compensation to consultants - 102,919
Stock awards granted to employees and
consultants pursuant to stock
incentive plans 396,593 -
Stock issued to consultants for
services rendered - 3,000
Provision for doubtful accounts (60,000) -
Depreciation and amortization 23,916 60,796
Change in operating assets and liabilities:
Accounts receivable 33,892 33,918
Inventories 91,969 (64,665)
Prepaid expenses and other
current assets (101,669) 37,372
Other assets 436 437
Accounts payable and
accrued liabilities (249,342) (67,745)
Deferred revenue 1,967,000 -
------------ -------------
Net cash provided by (used in)
operating activities $ 2,163,102 $(1,024,104)
============ =============
The accompanying notes are an integral part of these condensed statements.
5
COPYTELE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
January 31, 2002 (UNAUDITED)
(1) Nature and Development of Business and Other Disclosures
Organization and Development of Business
CopyTele, Inc. was incorporated on November 5, 1982 and was a development stage
enterprise from inception through our fiscal year ended October 31, 2001. In the
quarter ended January 31, 2002, we met the Statement of Financial Accounting
Standards ("SFAS") No. 7 requirements to no longer present our financial
statements as a development stage enterprise.
Our principal operations include jointly developing with Futaba Corporation
(`Futaba") a full-color video display and our own development, production and
marketing of multi-functional encryption products that provide information
security for domestic and international users over virtually every
communications media. Our line of encryption products presently includes the
USS-900 (Universal Secure System), the DSS-1000 (Digital Security System), the
DCS-1200 and DSC-1400 (Digital Cellular/Satellite), the STS-1500 (Secure
Teleconferencing System) and the ULP-1 (Ultimate Laptop Privacy). These
encryption products 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 flat panel display technologies, including our thin film
video color display ("Field Emission Display" or "FED") and our ultra-high
resolution charged particle E-Paper(TM) flat panel display.
In June 2001, we entered into a Joint Cooperation Agreement for Field Emission
Displays with Futaba (the "Futaba Agreement") for the purpose of jointly
developing and commercializing a full-color video display utilizing our Field
Emission Display technology. We received the initial payment provided for by the
Futaba Agreement of $2,500,000 for the first phase of development ("Phase I") of
a prototype for a 320 x 240 pixel, 5-inch diagonal display in June 2001. During
the first phase of the Futaba Agreement, which is contractually defined as a
one-year period, we will be primarily responsible for developing prototypes of
the display and providing the required fabrication, to enable Futaba to utilize
its know-how and production facilities for the possible mass production of the
display. The Futaba Agreement further provided for negotiations between the
parties during the first six months of the Futaba Agreement regarding potential
additional payments to us for partial compensation for use of our technology
developed prior to the Futaba Agreement, which may ultimately include the
payment of royalties based on sales of products by Futaba. In accordance with
this provision, in January 2002, we received an additional payment of $3,000,000
relating to Phase I. As part of the Futaba Agreement, both parties would have
the exclusive right to produce products, with Futaba having the exclusive right
to sell the products worldwide, excluding Russia. Under the Futaba Agreement,
any intellectual property developed during the term of the agreement will be
jointly owned or cross licensed by Futaba and us. The Futaba Agreement provides
for a possible total term of three years with the terms of the project following
Phase I being subject to future negotiations between the parties.
6
Additionally, in May 2001, we entered into an agreement with Volga Svet, Ltd.
("Volga") for certain development efforts in connection with the FED technology.
Under this agreement, we have agreed to pay Volga the sum of $180,000 per
quarter for its development work during the first year of the Volga Agreement,
of which $540,000 had been paid through January 31, 2002. In connection with the
additional $3 million payment received from Futaba, we entered into a letter
agreement, effective as of February 1, 2002, to pay Volga a total of $750,000
(payable during the three months ended April 30, 2002 and July 31, 2002, in the
amounts of $450,000 and $300,00, respectively) to continue development under
Phase I of the Futaba Agreement. Further, should the technology being developed
under the Futaba Agreement ultimately be commercialized, it is expected that
Volga will receive further consideration (e.g. cash payment, license fees or
ongoing royalties) for their rights to such technology.
Funding and Management's Plans
From our inception through June 2001, we have met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and public offering, and upon
the exercise of stock options. Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash from sales of our encryption products, and,
commencing in June 2001, we began to receive development payments from Futaba
under the Futaba Agreement.
During the first quarter of fiscal 2002, our operating activities provided
approximately $2,163,000 in cash. This resulted primarily from $3,000,000 in
payments received from Futaba and cash of approximately $278,000 received from
sales of encryption products, which was offset by payments to suppliers,
employees and consultants of approximately $1,120,000. Primarily as a result of
the receipt of the payment from Futaba in January 2002, our cash and cash
equivalents at January 31, 2002 increased to approximately $3,455,000 from
approximately $1,317,000 at the end of fiscal 2001.
We believe that our existing cash and net accounts receivable, together with
cash flows from future sales of encryption products and other potential sources
of cash flows, including payments under the Futaba Agreement, will be sufficient
to enable us to continue in operation until at least the end of the first
quarter of fiscal 2003.
We are seeking to improve our liquidity through increased sales or license of
products and technology and may also seek to improve our liquidity through sales
of debt or equity securities. Despite the foregoing, there can be no assurance
that we will generate significant revenues in the future (through sales or
otherwise) to improve our liquidity, that we will receive additional payments
under the Futaba Agreement, that we will generate sufficient revenues to sustain
future operations and/or profitability, that we will be able to expand our
current distributor/dealer network, that production capabilities will be
adequate, or that other products will not be produced by other companies that
will render our products obsolete, or that other sources of funding would be
available, if needed, at terms that we would deem favorable.
7
Our common stock is listed on the Nasdaq National Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid price of at least $1 per share and we maintain either stockholders'
equity of at least $10,000,000 or net tangible assets of at least $4,000,000.
Commencing November 1, 2002, we will be required to comply with the $10,000,000
stockholders' equity requirement. The closing bid price of our common stock on
March 11, 2002, was $0.45, and the bid price has been below $1 since February
12, 2001. Nasdaq has notified us that, as a result of such failure to meet the
bid price standard (and the expiration of a recent Nasdaq moratorium on
enforcement of that standard), our common stock may be delisted from the Nasdaq
National Market unless the bid price meets the required $1 level for at least 10
consecutive trading days at any time before May 15, 2002. If our common stock is
delisted for failure to meet the bid price requirement, we may apply for
transfer of the listing to the Nasdaq SmallCap Market if we meet its continued
listing standards, including stockholders' equity of $2,500,000. The Nasdaq
SmallCap Market also requires a $1 bid price, but provides 90 additional
calendar days (or until August 13, 2002) to regain compliance (which period may
be extended for an additional 180 calendar days if we meet the initial listing
standards, including stockholders' equity of $5,000,000, or market
capitalization of $50,000,000, or net income in the last completed fiscal year
of $750,000). A delisting of our common stock could have an adverse effect on
the market price and liquidity of our common stock.
Basis of Presentation
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The information contained herein is for the three-month periods ended January
31, 2002 and 2001. In management's opinion, all adjustments (consisting only of
normal recurring adjustments considered necessary for a fair presentation of the
results of operations for such periods) have been included herein.
The results of operations for interim periods may not necessarily reflect the
results of operations for a full year. Reference is made to the audited
financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended October 31, 2001, for more extensive disclosures
than contained in these condensed financial statements.
Realizability of Assets
Management has recorded inventory at the lower of cost or management's current
best estimate of net realizable value, which is based upon the historic and/or
expected future selling prices of our products. 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.
Management believes our other assets, which consist principally of commercial
trade barter credits (see Note 2), will be realized through future usage in
accordance with our original utilization plan, and accordingly are properly
valued as of January 31, 2002. We will continue to assess that utilization plan
on a quarterly basis. Our ability to utilize all of our available barter credit
under our plan is dependent upon significant growth in our product sales or
revenues under the Futaba Agreement.
8
Product Development
The success and profitability of our products will depend upon many factors,
many of which are beyond our control. These factors include our ability to
market our products; long-term product performance; the ability of our dealers
and distributors to adequately service our products; our ability to maintain an
acceptable pricing level to our customers; the ability of suppliers to meet our
requirements and schedule; our ability to successfully develop new products;
rapidly changing consumer preferences; and the possible development of
competitive products that could render our products obsolete or unmarketable.
Revenue Recognition
We recognize revenues from product sales, net of sales returns, and
collaborative agreements in accordance with Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements," or other specific authoritative
literature, as applicable, as follows:
Product Sales
Revenues from product sales are recorded when all four of the following
criteria are met:
(i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) our price to the buyer
is fixed or determinable; and (iv) collectibility is reasonably
assured. Consequently, revenues from product sales are generally
recognized at the time products are shipped and title has passed to
customers.
Collaborative Agreement
The initial $2.5 million payment from Futaba under the Futaba Agreement
is being recognized ratably over Phase I, the period of our commitment
under this portion of the contract. The $3 million payment received
from Futaba under the Futaba Agreement during the three months ended
January 31, 2002 is being recognized ratably over the remaining term of
Phase I (through June 12, 2002).
Sales Returns and Allowances
Revenues are recorded net of sales returns. There were no sales returns
during the three month periods ended January 31, 2002 and 2001. Based
upon a specific review and in accordance with our contractual return
policy, management believes that no reserve for anticipated sales
returns is required as of January 31, 2002.
Deferred Revenue
Payments received from Futaba under the Futaba Agreement which are in
excess of the amounts recognized as revenue (approximately $3,509,000
as of January 31, 2002) are recorded as deferred revenue on the
accompanying condensed balance sheet. The portion of deferred revenue
as of January 31, 2002 which will be recognized as revenue during the
three month periods ended April 30, 2002 and July 31, 2002, are
expected to be approximately $2,425,000 and $1,084,000, respectively.
9
Other Assets
Other assets consists primarily of a barter credit asset, which we will realize
through future redemption of barter credits to be applied toward advertising and
purchase discounts (Note 2). In accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," we continually evaluate the carrying amount of this asset for any potential
impairment. Based on this evaluation, management believes that there is no
impairment as of January 31, 2002
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
(2) Barter Transaction
In August 2000, we entered into a nonmonetary barter transaction in which we
sold $3,000,000 of certain inventory in exchange for an equal value of
commercial trade credits. In accordance with APB No. 29, "Accounting for
Non-Monetary Transactions," we recognized no gain or loss on the transaction as
it was management's opinion that this exchange was effected at fair market
value. These trade credits ($2,853,000 as of January 31, 2002 - Note 1), which
are recorded as other assets on the accompanying condensed balance sheet, may be
redeemed to reduce the cost of advertising as well as other products and
services. As is typical of such arrangements, to utilize barter credits we must
pay a certain percentage of the advertising or other expense in cash. We
evaluate the ultimate realizability of these commercial trade credits based on a
plan of usage relative to our various products. Based on our current plan, we
believe that a portion of the credits will be utilized in fiscal 2002 and the
remaining credits will be utilized through fiscal 2006.
(3) Shareholders' Equity
Stock Incentive Plans
We have three stock incentive plans: the 1987 Stock Option Plan, the CopyTele,
Inc. 1993 Stock Option Plan, and the CopyTele, Inc. 2000 Share Incentive Plan
(the "2000 Share Plan"), which were adopted by our Board of Directors on April
1, 1987, April 28, 1993, and May 8, 2000, respectively.
SFAS No. 123, "Accounting for Stock Based Compensation," encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. We have 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 our stock at the date of grant over the
amount an employee must pay to acquire the stock. In accordance with APB Opinion
No. 25, we have not recognized any compensation cost, as all option grants have
been made at the fair market value of our stock on the date of grant.
10
We account for options granted to non-employee consultants using the fair value
method required by SFAS No. 123. Such compensation expense for consultant's
options in the three-month periods ended January 31, 2002 and 2001, was
approximately $0 and $103,000, respectively. Such compensation expense was
recognized in accordance with Emerging Issues Task Force Issue No. 00-08,
"Accounting by a Grantee for an Equity Instrument to be Received in Conjunction
with Providing Goods or Services" and 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 in the accompanying condensed statements of
operations.
During the three-month period ended January 31, 2002, we granted options to
purchase 59,000 shares and stock awards of 799,950 shares, all pursuant to the
2000 Share Plan. As of January 31, 2002, options to purchase 14,994,746 shares
were outstanding, of which stock options to purchase 14,275,746 shares were
exercisable, pursuant to our stock incentive plans.
Warrants
As of January 31, 2002, warrants to purchase 153,250 shares of common stock,
which expire on various dates in March 2002, were outstanding and exercisable.
(4) Net Income (Loss) Per Share of Common Stock
We comply with the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with SFAS 128, basic net income (loss) per common share ("Basic EPS")
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common share equivalents and convertible
securities then outstanding. SFAS No. 128 requires the presentation of both
Basic EPS and Diluted EPS on the face of the statements of operations.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-Looking Statements
Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in "General Risks and
Uncertainties" below and Note 1 to Condensed Financial Statements. You should
read the following discussion and analysis along with our Annual Report on Form
10-K for the year ended October 31, 2001 and the condensed financial statements
included in this Report. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
Report.
GENERAL
Our principal operations include jointly developing with Futaba Corporation
("Futaba") a full-color video display and our own development, production and
marketing of multi-functional, hardware-based, peripheral digital encryption
devices. These encryption devices provide high-grade security for domestic and
international users over virtually every communications media.
Our line of encryption products presently includes the USS-900, the DSS-1000,
the DCS-1200, the DCS-1400, the STS-1500 and the ULP-1. Our encryption products
are available with either the high-grade strength of the Harris Corporation
digital cryptographic chip - the Citadel(TM) CCX - or the Triple DES algorithm
to provide high-grade encryption. Triple DES, which is used by many U.S.
government agencies, is an algorithm available in the public domain that has
been incorporated into our software.
We are continuing our research and development activities for additional
encryption products and flat panel display technologies, including our thin film
video color display ("Field Emission Display" or "FED") and our ultra-high
resolution charged particle E-Paper(TM) flat panel display. On June 13, 2001, we
entered into a Joint Cooperation Agreement for Field Emission Displays with
Futaba ("Futaba Agreement") for the purpose of jointly developing and
commercializing a full-color video display utilizing our FED technology. See
"Liquidity and Capital Resources."
We are currently using several U.S.-based electronic production contractors to
produce the components for our encryption devices. We sell our products
primarily through a distributor/dealer network and also to end-users.
12
RESULTS OF OPERATIONS
Three months ended January 31, 2002 compared with three months ended January 31,
2001
Revenue
Revenue increased by approximately $1,099,000, to approximately $1,277,000, in
the three-month period ended January 31, 2002, compared with approximately
$178,000 in the comparable prior-year period.
The revenue increase was primarily attributable to revenues from collaborative
agreements related to the Futaba Agreement, which we entered into in June 2001.
We recognized revenue of $1,033,000 under the Futaba Agreement in the three
months ended January 31, 2002, as compared to no such revenues in the comparable
prior year period. We recognize payments received from Futaba as income ratably
over Phase I of the Futaba Agreement; accordingly, additional revenue from
payments received from Futaba as of January 31, 2002 is expected to be
recognized in the three month periods ended April 30, 2002 and July 31, 2002, in
the amounts of approximately $2,425,000 and $1,084,000, respectively.
In addition, revenue from product sales increased by approximately $66,000, to
approximately $244,000, from approximately $178,000 in the prior year. The
increase in product sales was due to higher unit sales.
Cost of Revenue
Cost of revenues increased by approximately $352,000 in the three months ended
January 31, 2002, to approximately $426,000, compared to approximately $74,000
in the comparable prior year period. Cost of revenues in the three months ended
January 31, 2002 included research and development costs relating to the FED
technology of approximately $265,000. Such costs were included in research and
development expense in the prior year period.
Gross Profit
Gross profit increased by approximately $747,000 in the three months ended
January 31, 2002, to approximately $851,000, compared to approximately $104,000
in the comparable prior year period. Gross profit from product sales decreased
by approximately $21,000, in the first quarter of fiscal 2002, to approximately
$83,000, compared to approximately $104,000 in the comparable prior year period.
The decrease in product sales gross profit resulted primarily from the mix of
products sold, which included discontinued products which were sold at inventory
carrying value during the first quarter of fiscal 2002. Gross profit from
collaborative agreements was approximately $768,000 in the three months ended
January 31, 2002 as a result of revenues recognized under the Futaba Agreement,
as compared to no such gross profit in the comparable prior year period.
Research and Development Expenses
Research and development expenses decreased approximately $340,000 to $293,000
for the three months ended January 31, 2002, from approximately $633,000 for the
comparable prior-year period. The decrease in research and development expenses
reflects the classification as costs of revenues of development efforts related
to FED technology in the first quarter of 2002, rather than research and
development expense as in the prior year period. In addition, outside R&D costs
were reduced by approximately $67,000, patent related costs were reduced by
approximately $64,000, and employee compensation and related costs were reduced
by approximately $60,000.
13
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $107,000
to approximately $502,000 for the three-month period ended January 31, 2002 from
approximately $609,000 for the three-month period ended January 31, 2001. The
decrease in selling, general and administrative expenses for the three months
ended January 31, 2002 as compared with the prior year period reflects favorable
collection experience resulting in the recovery of a previously recorded bad
debt charge of $60,000 and effective cost-cutting measures, most significantly
the cost saving associated with the consolidation of operating locations in June
2001, offset by an increase in employee compensation and related costs of
approximately $60,000.
Interest Income
Interest income decreased by approximately $3,000 to approximately $5,000 in the
three months ended January 31, 2002 as compared to approximately $8,000 in the
comparable period in the prior-year, primarily as a result of a reduction in
prevailing interest rates.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we received the initial payment provided for by the Futaba
Agreement of $2,500,000 for the first phase of development of a prototype for a
320 x 240 pixel, 5-inch diagonal display having numerous advanced features,
including wide viewing angle, low power consumption, high-resolution and an
ultra-bright screen. The Futaba Agreement further provides for negotiations
between the parties regarding additional compensation to us for the use of our
technology developed prior to entering into the Futaba Agreement, which may
include the payment of royalties based on sales of products by Futaba. In
January 2002, Futaba paid us an additional $3 million as partial compensation
for the use of this technology. The technology being utilized is based on our
joint development program with Volga. We are continuing to utilize Volga's
assistance in the development work under the Futaba Agreement and to fund Volga
in accordance with the Volga Agreement. We have agreed to pay Volga the sum of
$180,000 per quarter for its development work during the first year of the Volga
Agreement, of which $540,000 had been paid as of January 31, 2002. Volga is
required to grant us licenses for background technology, and for technology
developed under the Volga Agreement, upon the payment of amounts to be
negotiated between the parties, which may include the payment of royalties based
on sales of products resulting from the development activities under the Volga
Agreement. We entered into a letter agreement with Volga, effective as of
February 1, 2002, pursuant to which we will make payments to Volga totaling
$750,000 in connection with the $3 million we received from Futaba in January
2002. The sum of $750,000 is payable in installments over a five-month period
ending in June 2002. The funds to be received by Volga are required to be used
primarily for research and development and for purchasing facilities and
production areas for FED technology.
14
From our inception through June 2001, we have met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and public offering, and upon
the exercise of stock options. Commencing in the fourth quarter of fiscal 1999,
we also began to generate cash from sales of our encryption products, and,
commencing in June 2001, we began to receive development payments from Futaba
under the Futaba Agreement.
During the first quarter of fiscal 2002, our operating activities provided
approximately $2,163,000 in cash. This resulted primarily from $3,000,000 in
payments received from Futaba and cash of approximately $278,000 received from
sales of encryption products, which was offset by payments to suppliers,
employees and consultants of approximately $1,120,000.
Primarily as a result of the receipt of the payment from Futaba in January 2002,
our cash and cash equivalents at January 31, 2002 increased to approximately
$3,455,000 from approximately $1,317,000 at the end of fiscal 2001. Accounts
receivable increased by approximately $26,000 as a result of the timing of
collections and reduction in the allowance for doubtful accounts. Prepaid
expenses and other assets increased by approximately $102,000 as a result of the
timing of payments of prepaid items such as insurance and membership fees.
Accounts payable and accrued liabilities decreased by approximately $249,000,
primarily as a result of the decrease in operating expenses and the timing of
payments. We recognize the cash received from Futaba as income ratably over
Phase I; accordingly, deferred revenue represents the portion not yet recognized
as income. As a result of the January 2002 payment, deferred revenue increased
to approximately $3,509,000 at January 31, 2002.
As a result of these changes, working capital at January 31, 2002 increased to
approximately $1,640,000 from approximately $1,184,000 at the end of fiscal
2001.
Our working capital includes inventory of approximately $1,497,000. Management
has recorded our inventory at the lower of cost or our current best estimate of
net realizable value. To date, sales of our products have been limited.
Accordingly, there can be no assurance that we will not be required to reduce
the selling price of our inventory below our current carrying value.
Management believes its other assets, which consist principally of commercial
trade barter credits, will be realized through future usage in accordance with
our original utilization plan, and accordingly are properly valued as of January
31, 2002. We will continue to assess that utilization plan on a quarterly basis.
In addition to the current liabilities recorded on our balance sheet, we are
subject to various contractual commitments, including payments to Volga during
the three month periods ended April 30, 2002 and July 31, 2002 of approximately
$630,000 and $300,000, respectively. Our plans and expectations for our working
capital needs also assume that our Chairman of the Board, President and other
senior level personnel will continue to perform services without cash
compensation or pension benefits. There can be no assurance that such personnel
will continue to provide such services without such compensation.
We believe that our existing cash and net accounts receivable, together with
cash flows from future sales of encryption products and other potential sources
of cash flows, including payments under the Futaba Agreement, will be sufficient
to enable us to continue in operation until at least the end of the first
quarter of fiscal 2003. We anticipate that, thereafter, we will require
additional funds to continue our marketing and research and development
activities, and we will require outside funding if cash generated from
operations is insufficient to satisfy our liquidity requirements. However, our
projections of future cash needs and cash flows may differ from actual results.
If current cash and cash that may be generated from operations are insufficient
to satisfy our liquidity requirements, we may seek to sell debt or equity
securities or to obtain a line of credit. The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. We
can give you no assurance that we will be able to generate adequate funds from
operations, that we will receive additional payments under the Futaba Agreement,
that funds will be available to us from debt or equity financings or that, if
available, we will be able to obtain such funds on favorable terms and
conditions. We currently have no definitive arrangements with respect to
additional financing.
15
We are seeking to improve our liquidity through increased sales or license of
products and technology. In an effort to generate sales, we have marketed our
encryption products directly to U.S. and international distributors, dealers and
original equipment manufacturers who market our encryption products on a
non-exclusive basis. During the first quarter of fiscal 2002, we have recognized
revenues from product sales of approximately $244,000 and revenues in connection
with the Futaba Agreement of approximately $1,033,000.
Our common stock is listed on the Nasdaq National Market. To maintain that
listing, Nasdaq requires, among other things, that our stock maintain a minimum
closing bid price of at least $1 per share and we maintain either stockholders'
equity of at least $10,000,000 or net tangible assets of at least $4,000,000.
Commencing November 1, 2002, we will be required to comply with the $10,000,000
stockholders' equity requirement. The closing bid price of our common stock on
March 11, 2002, was $0.45, and the bid price has been below $1 since February
12, 2001. Nasdaq has notified us that, as a result of such failure to meet the
bid price standard (and the expiration of a recent Nasdaq moratorium on
enforcement of that standard), our common stock may be delisted from the Nasdaq
National Market unless the bid price meets the required $1 level for at least 10
consecutive trading days at any time before May 15, 2002. If our common stock is
delisted for failure to meet the bid price requirement, we may apply for
transfer of the listing to the Nasdaq SmallCap Market if we meet its continued
listing standards, including stockholders' equity of $2,500,000. The Nasdaq
SmallCap Market also requires a $1 bid price, but provides 90 additional
calendar days (or until August 13, 2002) to regain compliance (which period may
be extended for an additional 180 calendar days if we meet the initial listing
standards, including stockholders' equity of $5,000,000, or market
capitalization of $50,000,000, or net income in the last completed fiscal year
of $750,000). A delisting of our common stock could have an adverse effect on
the market price and liquidity of our common stock.
16
GENERAL RISKS AND UNCERTAINTIES
Our business involves a high degree of risk and uncertainty, including, but not
limited to, the following risks and uncertainties:
- -- In prior periods we had experienced significant net losses and negative cash
flows from operations and they may occur again.
Although we had a net profit for the three-month period ended January 31, 2002,
in prior periods we had net losses and negative cash flows from operations. We
may incur substantial losses and experience substantial negative cash flows from
operations in the future. Our net profit for the three-month period ended
January 31, 2002 resulted largely from payments from Futaba under the Futaba
Agreement. We will continue through June 2002 to recognize as income portions of
the payments from Futaba we have received to date. The amount and timing of any
further payments from Futaba is uncertain and subject to negotiation. If we do
not receive substantial further payments from Futaba, it is likely that we will
again incur substantial net losses.
We have incurred substantial costs and expenses in developing our encryption and
flat panel display technologies and in our efforts to produce commercially
marketable products incorporating our technology. We have had limited sales of
products, and revenues under the Futaba Agreement are subject to future
negotiations for the second and third phases of development of FED technology.
We have set forth below our net income (losses), research and development
expenses and net cash provided by (used in) operations for the fiscal years
ended October 31, 2001 and 2000, and the three-month periods ended January 31,
2002 and 2001:
(Unaudited)
Fiscal Years Ended Three Months Ended
October 31, January 31,
------------------------------ ------------------------------
2001 2000 2002 2001
---- ---- ---- ----
Net income (loss) $(3,571,957) $(4,964,173) $ 60,272 $(1,130,136)
Research and development $ 2,325,000 $ 2,732,000 $ 293,411 $ 633,470
Net cash provided by (used in) operations $ (717,845) $(4,840,578) $ 2,163,102 $(1,024,104)
- -- We may need additional funding in the future which may not be available
on acceptable terms and, if available, may result in dilution to our
stockholders.
We anticipate that, if cash generated from operations is insufficient to satisfy
our requirements, we will require additional funding to continue our research
and development activities, market our products and satisfy the
continued-listing standards for the Nasdaq Stock Market (see Note 1 to the
Condensed Financial Statements). We believe that our existing cash and net
accounts receivable, together with cash flows from sales of encryption products
and other potential sources of cash flows, including payments under the Futaba
Agreement, will be sufficient to enable us to continue in operation until at
least the end of the first quarter of fiscal 2003. We anticipate that,
thereafter, we will require additional funds to continue our marketing and
research and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However, our projections of future cash needs and cash flows may differ from
actual results. If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give you no assurance that we will be able to generate
adequate funds from operations, that we will receive additional payments under
the Futaba Agreement, that funds will be available to us from debt or equity
financings or that, if available, we will be able to obtain such funds on
favorable terms and conditions. We currently have no definitive arrangements
with respect to additional financing.
17
- -- We may not generate sufficient revenues to support our operations in the
future or to generate profits.
We are engaged in two principal operations: (i) developing, manufacturing and
marketing encryption products for voice, fax, and data communications and (ii)
with Futaba and Volga, developing an advanced flat panel video display
technology. Our encryption products are only in their initial stages of
commercial production and our flat panel display technology is still in the
research and development stage. Our investments in research and development are
considerable. Our ability to generate sufficient revenues to support our
operations in the future or to generate profits will depend upon numerous
factors, many of which are beyond our control, including:
-- our ability to jointly develop with Futaba and Volga a full-color
video display that can be successfully marketed;
-- our future negotiations with Futaba and Volga with respect to payments
and other arrangements under the Futaba Agreement and Volga Agreement;
-- if Futaba determines that the FED technology is commercially viable,
the ability of Futaba to produce and market the display;
-- our ability to successfully market our line of encryption products;
-- our production capabilities and those of our suppliers as required for
the production of our encryption products;
-- long-term product performance and the capability of our dealers and
distributors to adequately service our products;
-- our ability to maintain an acceptable pricing level to end-users for
our products;
-- the ability of suppliers to meet our requirements and schedule;
-- our ability to successfully develop our new products under
development;
-- rapidly changing consumer preferences; and
-- the possible development of competitive products that could render our
products obsolete or unmarketable.
Because our revenue is subject to fluctuation, we may be unable to reduce
operating expenses quickly enough to offset any unexpected revenue shortfall. If
we have a shortfall in revenue in relation to expenses, our operating results
would suffer. Our operating results for any particular quarter may not be
indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of results of operations as an indication of our
future performance.
- -- We are dependent upon a few key executives and the loss of their services
could adversely affect us.
Our future success is dependent on our ability to hire, retain and motivate
highly qualified personnel. In particular, our success depends on the continued
efforts of our Chief Executive Officer, Denis A. Krusos, and our President,
Frank J. DiSanto, who founded our company in 1982 and are engaged in the
management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
18
- -- The very competitive markets for our encryption products and flat panel
display technology could have a harmful effect on our business and
operating results.
The markets for our encryption products and flat panel display technology
worldwide are highly competitive and subject to rapid technological changes.
Most of our competitors are larger than us and possess financial, research,
service support, marketing, manufacturing and other resources significantly
greater than ours. Competitive pressures may have a harmful effect on our
business and operating results.
- -- If we are unable to maintain our Nasdaq National Market listing, the
market price of our common stock could be adversely affected.
As set forth under Note 1 to the Condensed Financial Statements, to maintain our
listing on the Nasdaq National Market, Nasdaq requires, among other things, that
our stock maintain a minimum closing bid price of at least $1 per share and we
maintain either stockholders' equity of at least $10,000,000 or net tangible
assets of at least $4,000,000. Commencing November 1, 2002, we will be required
to comply with the $10,000,000 stockholders' equity requirement. The closing bid
price of our common stock on March 11, 2002, was $0.45, and the bid price has
been below $1 since February 12, 2001. Nasdaq has notified us that, as a result
of such failure to meet the bid price standard (and the expiration of a recent
Nasdaq moratorium on enforcement of that standard), our common stock may be
delisted from the Nasdaq National Market unless the bid price meets the required
$1 level for at least 10 consecutive trading days at any time before May 15,
2002. If our common stock is delisted for failure to meet the bid price
requirement, we may apply for transfer of the listing to the Nasdaq SmallCap
Market if we meet the requirements for that listing, including stockholders'
equity of $2,500,000. The Nasdaq SmallCap Market also requires a $1 bid price,
but provides an additional 90 calendar-day grace period to regain compliance
(which may be extended for an additional 180 calendar days if we meet the
initial listing standards, including stockholders' equity of $5,000,000, or
market capitalization of $50,000,000, or net income in the last completed fiscal
year of $750,000). A delisting of our common stock could have an adverse effect
on the market price and liquidity of our common stock.
19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
No current report on Form 8-K was filed for the Company during
the quarter ended January 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CopyTele, Inc.
By:/s/ Denis A. Krusos
----------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
March 14, 2002 (Principal Executive Officer)
By:/s/ Frank J. DiSanto
-----------------------
Frank J. DiSanto
March 14, 2002 President
By:/s/ Henry P. Herms
---------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
March 14, 2002 Financial and Accounting Officer)
20