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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, 2004
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
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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 Identification No.)
Incorporation or Organization)
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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:
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Title of Each Class Name of Each Exchange
on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
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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].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x] No [_]
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of April 30, 2004 (the
last business day of the registrant's most recently completed second fiscal
quarter), computed by reference to the closing sale price of the registrant's
Common Stock on the Over-the-Counter Bulletin Board on such date ($1.08):
$87,364,065.
On January 10, 2005, the registrant had outstanding 86,794,198 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
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EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-K/A to our Annual Report on Form
10-K for the year ended October 31, 2004 to correct two typographical errors
contained in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Fiscal Year Ended October 31, 2004
Compared to Fiscal Year Ended October 31, 2003 - Sales - Revenue. For the
convenience of the reader, this Amendment No. 1 sets forth the complete text of
the Form 10-K as so amended. This Amendment No. 1 does not reflect events that
have occurred after the original filing of the Form 10-K or update the
information set forth in the Form 10-K subsequent to such original filing. In
connection with the filing of this Amendment No. 1, we are including as exhibits
currently dated certifications of our chief executive officer and chief
financial officer and a currently dated consent letter from our independent
registered public accounting firm.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
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Item 1. Business.
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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. 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 this Annual Report on Form
10-K under the heading "General Risks and Uncertainties" below. 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 Annual Report on Form 10-K.
Overview
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Our principal operations are the development, production and marketing of
multi-functional encryption products that provide information security for
domestic and international users over virtually every communications media and
the development, production and marketing of thin, high-brightness, flat panel
video displays.
Encryption Products
-------------------
We currently have 14 different products in our line of hardware-based
encryption solutions. Our encryption products are multi-functional, hardware
based digital encryption systems that provide high-grade voice, fax and data
encryption using either the Citadel(TM) CCX encryption cryptographic chip (which
is manufactured by the Harris Corporation) or the Triple DES or AES algorithm
(algorithms available in the public domain which are used by many U.S.
government agencies). In addition, we have developed two software-based security
products, one of which uses either the Triple DES or the AES algorithm to
encrypt data files and e-mail attachments in both desktop and laptop computers
utilizing Microsoft Windows operating systems, and the other of which can
encrypt voice and data in cellular and satellite phones, scanners, and printers.
We sell our encryption products directly to end-users and through dealers and
distributors.
We have developed modifications of our standard products for specific
applications. We have developed and are producing several products for use with
the satellite communications network of Thuraya Satellite Telecommunications
Company ("Thuraya"), a network built by Boeing Satellite Systems, Inc.
("Boeing") that provides communication in Europe, Africa, Russia, the Middle
East and Asia. Our products can encrypt voice communication, using a compact
encrypted module attached to the Thuraya handset, and automatically encrypt fax
communications over the Thuraya network. Additionally, we have developed two
products to provide satellite and cellular fax encryption. Our products thus
enable the Thuraya network to provide encrypted communications between satellite
phones, from satellite phones to desk-based phones, or between desk-based
phones.
1
In April 2004, we entered into an agreement with Boeing to provide our
encryption products for use over the Thuraya network. Under a September 2004
modification to the agreement, Boeing is the exclusive distributor of seven of
our products.
In connection with Boeing becoming the exclusive distributor of some of our
products, Boeing authorized us to use its name on our website. Accordingly,
customers desiring to purchase such products can find authorized Boeing sales
information on the "Encryption Products" page of our website, . In January 2005,
Boeing introduced, demonstrated and began marketing CopyTele's encryption
products to more than 100 Thuraya Service Providers. CopyTele assisted Boeing
with such demonstrations. The products introduced included two new encryption
products that CopyTele is selling to Boeing, the Thuraya DCS-1400 for voice
encryption and the Thuraya USS-900T for fax encryption. These products contain
the brand name of Thuraya and their operating controls are in the Arabic
language.
We also have developed modifications of our standard equipment for other
applications. We have provided modifications of our hardware and software
encryption solutions to several large organizations which are evaluating our
products in connection with their security requirements. A major U.S. defense
contractor has begun to purchase one of our products, which provides landline
fax encryption automatically with any standard fax machine, to secure its
worldwide fax communication. We have entered into an agreement with another
major U.S. company to supply a proof of concept encryption solution utilizing
another product that has been configured to interface with that company's
satellite global positioning system ("GPS") and data communication fleet
management network. Another major U.S. company is planning to sell our line of
encryption products on its website. We are also developing an encryption
solution to secure data links between that company's scanners and printers in
its multi-functional products.
We have recently received from the U.S. patent office two patent notices of
allowance for securing e-mail attachments in four of our products, and for three
other products. We are continuing to apply for additional patents for our
encryption technology.
Display Technology
------------------
We are continuing to work on our electron emission display ("Flat CRT")
technology. We believe that our unique low voltage and low power Flat CRT
display will be an important entry into the rapidly expanding flat panel field
for all applications, from cell phones to TV. Flat CRT technology is recognized
as one of the most promising candidates to replace the cathode ray tube ("CRT").
CRTs have been highly successful for decades, but are bulky and power hungry.
Flat CRT technology, by contrast, permits production of a display that preserves
the desirable characteristics of a CRT - including full-color; a wide viewing
angle; the ability to operate in severe environmental conditions; and a long
operational life - in a much more compact, energy-efficient flat panel display.
2
We have developed a Flat CRT that not only preserves the desirable
characteristics of a CRT but also achieves high brightness, has a unique low
voltage and power electron emission design and pixel structure with built-in
pixel memory, and has long life. Our Flat CRT displays:
o can be produced in a variety of sizes, permitting their use in many
applications from small hand-held devices to large high-definition TV
devices;
o function in a broad environmental range, similar to a CRT, including
operating at night or in sunlight and over a large temperature range;
o have low power consumption;
o can be viewed from a wide angle, similar to a CRT;
o have high brightness with video capability;
o have no picture geometric distortion - the phosphor in each pixel is
stimulated individually; and
o can display both wide-screen and standard TV formats for digital TV
and DVD operations.
Currently, liquid crystal displays ("LCDs") are the most commonly used flat
panel displays in commercial products. We believe that our display has a number
of advantages over LCD displays:
o No backlight (LCDs require a backlight that results in high power
consumption and contains mercury)
o No thermistor (LCDs require thermistors to control operation at
various temperatures)
o No polarizer (polarizers are required in LCDs)
o No color filter (LCDs require color filters)
o Almost hemispherical viewing angle (LCDs have limited viewing angles)
3
o Higher contrast ratio
o Faster video response time
o Operation over a wider range of ambient temperatures
o Longer life
o Not affected by ultraviolet light (LCDs contain a liquid crystal which
may deteriorate after long exposure to direct sunlight)
o Safer (leakage of liquid crystals from LCDs may be dangerous)
We have provided our display to a potential customer for evaluation of the
display's performance in a product which must operate over a wide ambient
temperature range in an outdoor environment. After successfully testing our
display, the customer ordered a seed quantity of modules containing our display,
to replace LCD modules in our customer's product. We have recently supplied the
customer with displays that the customer has installed in its product for field
evaluation. However, to be able to supply large quantities of displays to this
customer and other potential customers, we have been developing a Flat CRT
display based on our thin film technology ("TFT"). We have determined to produce
only these displays and we are planning to use these displays to supply this
customer's requirements.
We entered into an agreement, in June 2004, with an Asian company, which
currently mass produces TFT LCDs, to jointly produce prototypes of two modified
TFT color matrix pixel structures for our Flat CRT display based on our high
brightness technology. The two color matrix structures, which are components of
our displays, are a 7-inch (diagonal) with 1440 x 234 pixels and a 5.5 inch
(diagonal) with 960 x 234 pixels. As part of our TFT color matrix design, each
pixel contains memory to achieve high brightness at video rates. We have funded
the development of these prototypes, and may enter into a further agreement for
commercial production of the structures or the complete color displays. The
company has agreed to produce such structures only for us.
In October 2004, we developed, with the assistance of Volga Svet Ltd.
("Volga"), a Russian display company that we have been working with for over
seven years, prototype displays containing the modified TFT color matrix
structures we received under our agreement with the Asian company. Upon the
completion of our evaluation of the structures, we believe that Volga can supply
a limited production capability and we are planning to utilize either the Asian
company or other TFT LCD production companies to mass produce the display for
potential users. The prototype monochrome display Model CTDV-201 has a 5.5 inch
(diagonal) with 320 x 234 pixels and has the following specifications.
4
Display Technology: Proprietary CopyTele Flat Thin
High Brightness Video Display
Display Area: 113mm (H) x 87mm(V)
Display Diagonal: 140mm (5.5 inches)
No. of Pixels: 320 x 234
Pixel Pitch: .318mm x .318mm
Viewing Angle: Almost hemispherical
Response Time: 10 microseconds
We have also developed another prototype color display Model CTDV-202
having a 5.5-inch diagonal with 960 x 234 pixels, which has the following
specifications:
Display Technology: Proprietary CopyTele Flat Thin
High Brightness Video Display
Display Area: 113mm (H) x 87mm(V)
Display Diagonal: 140mm (5.5 inches)
No. of Pixels: 960 x 234
Pixel Pitch: .106mm x .318mm
Viewing Angle: Almost hemispherical
Response Time: 10 microseconds
We are also completing the assembly, with the assistance of Volga, of
another prototype display containing the modified TFT color matrix structures we
received under our agreement with the Asian company. The prototype color display
has a 7.0 inch (diagonal) with 1440 x 234 pixels, with the following
specifications:
Display Technology: Proprietary CopyTele Flat Thin
High Brightness Video Display
Display Area: 154mm (H) x 87mm(V)
Display Diagonal: 178mm (7.0 inches)
No. of Pixels: 1440 x 234
Pixel Pitch: .107mm x .372mm
Viewing Angle: Almost hemispherical
Response Time: 10 microseconds
5
To activate the red, green and blue phosphors contained in the modified TFT
color matrix pixel structure in our displays, we are using both our current
electron emission technology and a new nanotube technology we are developing in
cooperation with a U.S. company. The new technology consists of a unique array
of low voltage controllable nanotubes for electron emission. These nanotubes are
extremely small carbon elements, approximately 2,500 times thinner than the
width of a human hair, that emit electrons under controllable conditions. In
cooperation with that company, we have produced experimental design
configurations which demonstrate the feasibility of the nanotube technology
meeting our design requirements. We have the exclusive right to use this
company's nanotube technology for display applications.
We have recently received, from the U.S. patent office, patents for three
variations of our video display technology and a notice of allowance of the
claims contained in our patent application for one other variation of our video
display technology. We are continuing to apply for additional patents for our
video display technology.
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, our telephone number is 631-549-5900, and our Internet
website address is www.copytele.com. We make available free of charge on or
through our Internet website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the Securities and
Exchange Commission.
General Risks and Uncertainties
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Our business involves a high degree of risk and uncertainty, including, but
not limited to, the following risks and uncertainties:
o We have experienced significant net losses and negative cash flows
from operations and they may continue.
We have had net losses and negative cash flows from operations in each year
since our inception, and we may continue to incur substantial losses and
experience substantial negative cash flows from operations. Although payments
from Futaba Corporation ("Futaba") of Japan, under an agreement with Futaba,
provided substantial cash from operations during the year ended October 31,
2002, since the agreement with Futaba terminated in June 2002, we will not
receive any further payments under this agreement.
6
We have incurred substantial costs and expenses in developing our
encryption and flat panel display technologies and in our efforts to produce
commercially marketable products incorporating our technology. We have had
limited sales of products to support our operations from inception through
October 31, 2004. We have set forth below our net losses, research and
development expenses and net cash used in operations for the three fiscal years
ended October 31, 2004:
Fiscal Years Ended October 31,
------------------------------
2004 2003 2002
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Net loss.................................. $ 3,360,655 $ 3,114,411 $ 3,285,240
Research and development expenses......... 2,164,427 1,807,742 1,625,974
Net cash used in operations............... 1,025,122 958,501 431,471
o We may need additional funding in the future which may not be
available on acceptable terms and, if available, may result in
dilution to our stockholders, and our auditors have issued a "going
concern" audit opinion.
We anticipate that, if cash generated from operations is insufficient to
satisfy our requirements, we will require additional funding to continue our
research and development activities and market our products. The auditor's
report on our financial statements as of October 31, 2004 states that the net
loss incurred during the year ended October 31, 2004, our accumulated deficit as
of that date, and the other factors described in Note 1 to the Financial
Statements raise substantial doubt about our ability to continue as a going
concern. The auditor's report on our financial statements for the years ended
October 31, 2003 and 2002 contained a similar statement. Our financial
statements have been prepared assuming we will continue as a going concern and
do not include any adjustments that might result from the outcome of this
uncertainty.
We believe that our existing cash and accounts receivable, together with
cash flows from expected sales of encryption products and flat panel displays,
and other potential sources of cash flows, will be sufficient to enable us to
continue in operation until at least the end of the first quarter of fiscal
2006. We anticipate that, thereafter, we will require additional funds to
continue marketing, production, and research and development activities, and we
will require outside funding if cash generated from operations is insufficient
to satisfy our liquidity requirements. However, our projections of future cash
needs and cash flows may differ from actual results. If current cash and cash
that may be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit prior to the first quarter of fiscal 2006. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give 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 arrangements with respect
to additional financing.
7
o We may not generate sufficient revenue to support our operations in
the future or to generate profits.
We are engaged in two principal operations: (i) the development, production
and marketing of thin high-brightness flat panel video displays and (ii) the
development, production and marketing of multi-functional encryption products
that provide information security for domestic and international users over
virtually every communications media. We have only recently started to produce
monochrome versions of our high-brightness flat panel displays and our
encryption products are only in their initial stages of commercial production.
Our investments in research and development are considerable. Our ability to
generate sufficient revenues to support our operations in the future or to
generate profits will depend upon numerous factors, many of which are beyond our
control, including:
o our ability to successfully market our line of thin high-brightness
flat panel video displays and encryption products;
o the capability of Volga to produce thin high-brightness monochrome
video displays and supply them to us;
o our ability to jointly develop with Volga and produce a full-color
video display;
o our ability to develop and produce displays using controllable
nanotubes and modified TFT technology;
o our production capabilities and those of our suppliers as required for
the production of our encryption products;
o long-term performance of our products;
o the capability of our dealers and distributors to adequately service
our encryption products;
o our ability to maintain an acceptable pricing level to end-users for
both our encryption and display products;
o the ability of suppliers to meet our requirements and schedule;
o our ability to successfully develop other new products under
development;
o rapidly changing consumer preferences;
o the possible development of competitive products that could render our
products obsolete or unmarketable;
o our future negotiations with Volga with respect to payments and other
arrangements under our Joint Cooperation Agreement with Volga.
Because our revenue is subject to fluctuation, we may be unable to reduce
operating expenses quickly enough to offset any unexpected revenue shortfall. If
we have a shortfall in revenue in relation to expenses, our operating results
would suffer. Our operating results for any particular fiscal year may not be
indicative of future operating results. You should not rely on year-to-year
comparisons of results of operations as an indication of our future performance.
8
o We are dependent upon a few key executives and the loss of their
services could adversely affect us.
Our future success is dependent on our ability to hire, retain and motivate
highly qualified personnel. In particular, our success depends on the continued
efforts of our Chief Executive Officer, Denis A. Krusos, and our President,
Frank J. DiSanto, who founded our company in 1982 and are engaged in the
management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
o The small size of our accounting and financial staff has exposed us,
and may expose us in the future, to risks relating to our internal
control, and may limit our growth.
The small size of our accounting and financial staff has exposed us to
risks relating to our internal control over financial reporting. In particular,
as discussed under Item 9A, Controls and Procedures, in December 2004, we
discovered that an employee in our accounting staff had defrauded us of
approximately $189,000 (of which approximately $4,000 we believe was replaced)
during fiscal 2004 and the first month of fiscal 2005 and approximately $28,000
during the period from fiscal 2001 through fiscal 2003. While we have recovered
approximately $110,000 of such loss through insurance proceeds and will seek
additional recoveries from other parties, and we have taken steps to improve our
internal controls to prevent such activity in the future, there can be no
assurance that our controls and procedures will prevent all errors or fraud, or
that any future such losses would be insured or otherwise recoverable. We may
need to recruit additional staff to improve our internal controls or to support
growth of our business, the costs of which would reduce the funds available for
research and development and marketing activities.
o The very competitive markets for our encryption products and flat
panel display technology could have a harmful effect on our business
and operating results.
The markets for our encryption products and flat panel display technology
worldwide are highly competitive and subject to rapid technological changes.
Most of our competitors are larger than us and possess financial, research,
service support, marketing, manufacturing and other resources significantly
greater than ours. Competitive pressures may have a harmful effect on our
business and operating results.
o Our common stock is subject to the SEC's penny stock rules which may
make our shares more difficult to sell.
Our stock fits the definition of a penny stock. The SEC rules regarding
penny stocks may have the effect of reducing trading activity in our common
stock and making it more difficult for investors to sell. The rules require a
broker to deliver a risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker must also give bid and offer quotations and broker and salesperson
compensation information to the customer orally or in writing prior to effecting
a transaction and in writing with the confirmation. The SEC rules also require a
broker to make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction before completion of the transaction. These
requirements may result in a lower trading volume of our common stock and lower
trading prices.
9
Products
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Encryption Products
-------------------
We produce and market a line of high-grade, hardware and software based
encryption products that provide security for voice, fax and data transmissions
utilizing cellular, satellite, digital and analog communication media. Our
encryption technology products encode 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 that is used to encrypt the
information can be used to decrypt the information. Our products automatically
generate new secret keys electronically with each call. When communicating
encrypted information over a communications media, all of our products generally
are required at both the sending and receiving end.
The features common to our hardware communication products are as follows:
o Simple user operation.
o Every session uses a new secret encryption key to both encrypt and
decrypt information.
o Use of a hardware or software random number generator as part of the
secret key system.
o Encryption for point-to-point communication using one of our products
at each end.
o Export approval received from the U.S. Department of Commerce using
the Citadel(TM) CCX from Harris Corporation or Triple DES or AES
algorithms and a minimum 128-bit encryption key length.
o Small, lightweight and enclosed in a plastic case.
o Low power consumption.
A summary of our encryption products, and additional features of each, is
as follows:
10
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Product Features
- ----------------------------------------------------------------------------------------------
Voice Fax Data Comments
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DCS-1400* X Compact, lightweight, portable
encryption terminal for securing
voice communications when connected
to data capable digital cellular or
satellite telephones.
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Thuraya DCS-1400 **, *** X Secure voice communication for use
with Thuraya satellite telephones.
Compact, lightweight, portable
encryption terminal
- ----------------------------------------------------------------------------------------------
DCS-1200 *, *** X X Secure voice and data
communications when connected to
data capable digital cellular or
satellite telephones or virtually
any PBX phone.
- ----------------------------------------------------------------------------------------------
DCS-1400D **,*** X Integrated encryption docker for
the Thuraya handset.
- ----------------------------------------------------------------------------------------------
USS-900 * X X X Compact and portable high-grade
security hardware system capable of
encrypting voice, fax, data and
data storage when combined with a
telephone, fax machine, or
computer.
- ----------------------------------------------------------------------------------------------
USS-900 Narrowband * X X X Voice, fax and data option for
low-speed PSTN communication.
Compatible with DCS-1200 &
DCS-1400.
- ----------------------------------------------------------------------------------------------
USS-900T ** X Secure fax unit for direct
connection to the Thuraya handset
and an analog fax machine. Enhanced
Thuraya fax speed.
- ----------------------------------------------------------------------------------------------
Thuraya USS-900T **, *** X Secure Thuraya fax communication.
Encrypting fax unit for direct
connection to the Thuraya handset
and an analog fax machine. Enhanced
Thuraya fax speed.
- ----------------------------------------------------------------------------------------------
USS-900TL ** X Connect to analog fax machines and
PSTN line. Compatible with the
USS-900-T.
- ----------------------------------------------------------------------------------------------
USS-900WF ** X Secure low-speed fax for other
satellite and cellular networks
(Inmarsat, Globalstar, etc).
- ----------------------------------------------------------------------------------------------
USS-900WFL ** X Connect to analog fax machines and
PSTN line. Compatible with the
USS-900-WF.
- ----------------------------------------------------------------------------------------------
USS-900AF AutoFax X Compact high-grade security
hardware system automatically
encrypting fax communication when
connected to any G-3 fax machine.
Receive both secure and clear fax
messages automatically.
- ----------------------------------------------------------------------------------------------
STS-1500 X Easy to use secure voice
teleconferencing system that
provides simultaneous encrypted
voice communications with up to 5
locations.
- ----------------------------------------------------------------------------------------------
USS-900 Security X Protect individual files or entire
Software folders with just a few clicks of
the mouse. Send and receive
encrypted e-mail attachments.
Restrict unauthorized computer
access by preventing the Windows
Operating System from initiating
without proper identification.
----------------------------------------------------------------------------------------------
ULP-1 X Easy-to-use hardware based
encryption solution. Simply plug it
into laptop computers via the use
of a PCMCIA card. Protect the
integrity of your computer by
ensuring that your private and
confidential information stays that
way.
- ----------------------------------------------------------------------------------------------
DCS-1800 Encryption X X Developed for cellular and
Software satellite phone manufacturers for
easy inclusion of the DCS- 1800
Security Software directly into the
telephone, thus providing the
consumer with an operator friendly
self-contained secure wireless
phone for voice and data
communications.
- ----------------------------------------------------------------------------------------------
* Sold by Boeing
** Sold exclusively by Boeing
*** Sold by Boeing to Thuraya Services Providers under the Thuraya
brand name.
11
New Technologies Under Development
- ----------------------------------
Flat Panel Video Display Technology
-----------------------------------
During 2004, we continued to pursue our efforts to develop new technologies
for color, video flat panel displays.
We are further developing our display technology to incorporate our
modified matrix TFT pixel structure (which is based on our high brightness Flat
CRT technology and which we jointly produce with an Asian company that currently
mass produces TFT LCDs) and drivers of LCDs into our displays, so that our
displays may be produced by facilities currently producing LCDs. We have made
prototypes of a 5.5 inch (diagonal) display, with the assistance of Volga,
containing our modified TFT color matrix structure and having 320 x 234 and 960
x 234 pixels. We have also received color matrix structures from the Asian
company and are completing the assembly, with the assistance of Volga, of a
prototype display having a 7.0 inch (diagonal) with 1440 x 234 pixels. We have
incorporated in our prototype displays low temperature vacuum sealing and the
use of low voltages and power to conform to the requirements of our modified TFT
color matrix structures. Our prototypes utilize voltages comparable to a TFT LCD
and contain blue-green or red, green and blue phosphors to operate at these low
voltages.
We are continuing to further develop these Flat CRT displays to optimize
the low temperature vacuum sealing technologies and driver electronics for
production purposes. Our Flat CRT contains no backlight, color filter or
polarizer required in LCD displays which represent the major costs in producing
LCDs.
We are also developing, with the assistance of a U.S. company, a unique
nanotube technology for another electron emission that we are planning to use in
our Flat CRT. To conform with our color matrix structures, our nanotube design
utilizes low voltages and no focusing elements. The use of nanotube electron
emission reduces the power consumption of our display and can be incorporated in
hand-held and HDTV television products. The new technology consists of a unique
array of low voltage controllable nanotubes for electron emission. The nanotubes
are extremely small carbon elements, approximately 2,500 times thinner than the
width of a human hair, that emit electrons under controllable conditions.
12
In addition, we are developing a unique spacer technology which would
support the display glass substrates under vacuum. Our color matrix structures
contain no backlight, color filter or polarizer, and use a chip on glass ("COG")
matrix design, so that the overall display thickness is expected to be
approximately 1/16 of an inch, thinner than any LCD. There can be no assurance
that we can develop or produce color video displays or displays using modified
TFT technology or that we can produce larger display sizes or greater quantities
using such technology.
We are also utilizing our E-Paper(TM) technology in connection with
development of our unique nanotube electron emission technology. We are
currently investigating the possible licensing of our E-Paper(TM) display
technology and patents. We can give no assurance that we will license our
technology and patents.
Encryption Technology
---------------------
We are continually engaged in the development of additional capabilities
for our current product lines as well as the development of new products to meet
current and anticipated customer applications.
We are developing an encryption solution for encrypting data and GPS
information used in the fleet management of vehicles. We have made prototypes to
demonstrate the feasibility of our encryption solution. We are also developing
an encryption solution to secure data links between scanners and printers
contained in one company's multi-functional products.
We are continuing the process of obtaining U.S. federal government
certification for our encryption products. To obtain certification, we are
modifying our software and other technology to conform to the requirements of
the government's published standards. The certification would attest that our
products meet such standards and that the features described in our
specification sheets are actually implemented in our products.
Production
- ----------
Flat Panel Video Display Products
---------------------------------
Volga has produced, under our Joint Cooperation Agreement, monochrome
5-inch (diagonal) displays having 320 x 240 pixels. Volga used sources for the
required materials and components located in Russia, U.S., Europe, and Asia. The
displays produced by Volga were used to supply modules for evaluation by our
current customer. Also, the displays were used to determine the design and
specifications to modify the TFT color pixel structures supplied by the Asian
company. We are, with the assistance of Volga, producing the displays containing
the TFT color pixel structures. Upon the completion of our evaluation of the TFT
color based pixel structures, we believe that Volga can supply a limited
production capability and we are planning to utilize either the Asian company or
other TFT LCD production companies to mass produce the display for potential
users. There is no assurance that we can produce the displays or that we can
make suitable production arrangements with other companies.
13
Encryption Products
-------------------
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
four main electronic components - the Citadel(TM) CCX encryption chip or
hardware key generator chip; a digital signal processor; a vocoder; and modems -
are contained on a printed circuit board. We are currently using several
U.S.-based electronics-production contractors to procure the printed circuit
boards and mount the associated electronics components on the circuit board. We
currently use approximately a dozen primary component and printed circuit-board
suppliers and one production assembly contractor. Given normal lead times, we
anticipate having a readily available supply of all electronic 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 boards into the product 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. We currently produce
our line of products in quantities to meet marketing requirements.
Marketing and Sales
- -------------------
Flat Panel Video Display Products
---------------------------------
We are continuing to pursue marketing opportunities for our display
technology. We have utilized models of our monochrome 5-inch (diagonal) display
to demonstrate the capabilities of our display and its advantages over LCDs.
We have continued to work with one company to develop a plug-in module of
our 5-inch (diagonal) display to replace the LCDs in that company's product. Our
display passed the company's operating environment requirements and, as a
result, we have received a purchase order to provide the customer with a seed
quantity of such modules. Volga has produced the modules to meet part of this
purchaser's requirements. We are planning to utilize our modified TFT color
matrix pixel structures based displays for supplying the current customer
requirements and for other applications we are pursuing.
Some of these applications would require large size displays that include
the capability to provide a wide-screen or standard TV format for TV and DVD
operation. Our current Asian supplier is in the process of expanding its
facilities to produce larger size displays. Applications that we are pursuing
for incorporation of our displays include both outdoor and indoor informational
displays such as those located in parking meters and automobiles.
14
Encryption Products
-------------------
During the past year we have continued to direct our marketing efforts to
participate in the security opportunities created by the U.S. Department of
Homeland Security, by the enactment of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), and by the Defense Department. HIPAA
requires certain privacy protection for medical records and other health care
information for individuals. We have agreements with a number of large companies
to provide them with both our hardware and software solutions to meet their
security requirements.
We have a long term agreement with Boeing, which is distributing our line
of encryption products. These include voice, fax and data products on both an
exclusive and non-exclusive basis. In January 2005, Boeing introduced,
demonstrated and began marketing CopyTele's encryption products to more than 100
Thuraya Service Providers. CopyTele assisted Boeing with such demonstrations. We
have an agreement with a major defense contractor to supply its world-wide fax
security requirements. Other large organizations are evaluating our products in
connection with their security requirements, including one company that is
evaluating an interface with its satellite GPS and data communication fleet
management network and another company that is evaluating an encryption solution
to secure data links between scanners and printers in its multi-functional
products. The latter company is planning to sell our line of encryption products
on its website.
Through these efforts, we have recently begun receiving initial orders and
requests from city, state, U.S. government agencies and financial institutions.
We expect that these orders could result in requirements for larger quantities
of units for their security applications.
In addition, we presently use a network of distributors in the security
field and original equipment manufacturers which market our encryption products
on a non-exclusive basis. These distributors, along with our internal marketing
group, have sold and marketed our encryption products to multinational
corporations, U.S. and foreign governments and local and federal law enforcement
agencies.
We continue to provide training and technical support to our customers and
to our distributors and dealers.
Customers
- ---------
During fiscal 2004 we recognized approximately $300,000 in revenue from The
Boeing Company, or approximately 61% of total net revenue, and approximately
$93,000 in revenue from Outfitter Satellite, Inc., or approximately 19% of total
net revenue. All of such revenue was in our Encryption Products and Services
Segment. During fiscal 2003 we recognized approximately $60,000 and $31,000,
respectively, in revenue from two customers in the Encryption and Services
Segment, or approximately 25% and 13% of total net revenue. During fiscal 2002
we recognized approximately $4,542,000 in revenue from Futaba under an agreement
with Futaba, or approximately 88% of total revenue.
15
Competition
- -----------
The market for encryption products and flat panel displays 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 and there are many large companies that sell flat panel
displays. We believe, however, that the technology contained in our encryption
products and our flat panel displays have features that distinguish them from
the products being sold by our competitors. The encryption security and flat
panel display markets are likely to be characterized by rapid advances in
technology and the continuing introduction of new products that 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
and our flat panel displays.
Patents
- -------
We have received patents from the United States and certain foreign patent
offices, expiring at various dates between 2005 and 2022. We have also filed or
are planning to file patent applications for our video flat panel display
technologies currently under development, and for our encryption technologies.
We have recently received from the U.S. patent office patents for three
variations of our video display technology and a notice of allowance of the
claims contained in our patent application for one variation of our video
display technology. We have also received patents 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-Paper(TM) flat panel display, and for our solid state and thin film video
color display. We have recently also received two patents for certain of our
encryption technology.
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 any of our encryption products 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.
16
Research and Development
- ------------------------
Research and development expenses were approximately $2,164,000,
$1,808,000, and $1,626,000 for the fiscal years ended October 31, 2004, 2003 and
2002, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below and our Financial Statements.
Employees and Consultants
- -------------------------
We had 23 full-time employees and 22 consultants as of October 31, 2004.
Twenty of these 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. Nineteen individuals
are engaged in marketing and the remaining individuals are engaged in
administrative and financial functions for us. None of our employees is
represented by a labor organization or union.
Financial Information About Segments and Geographical Areas
- -----------------------------------------------------------
See our Financial Statements
Item 2. Properties.
-----------
We lease approximately 12,000 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, 2008. Our
base rent is approximately $255,000 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 or the entire lease as of May 31, 2006. 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 11 to our Financial Statements.
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.
17
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At our Annual Meeting of Stockholders, held on October 28, 2004, four
directors were elected and the selection of Grant Thornton LLP, independent
registered public accountants, as our independent auditors for the fiscal year
ending October 31, 2004 was ratified. The following is a tabulation of the
voting with respect to the foregoing matters:
(a) Election of Directors:
Nominee For Withheld
------- --- --------
Denis A. Krusos 78,409,567 575,046
Frank J. DiSanto 78,409,767 574,846
Henry P. Herms 78,413,517 571,096
George P. Larounis 78,578,882 405,731
(b) Ratification of selection of Grant Thornton LLP as independent auditors
for the fiscal year ending October 31, 2004:
For Against Abstain
--- ------- -------
78,734,151 229,250 21,212
18
PART II
-------
Item 5. Market for the Registrant's Common Equity and
---------------------------------------------
Related Stockholder Matters.
----------------------------
Our common stock has traded on the Over-the-Counter Bulletin Board, under
the symbol "COPY", since March 27, 2003. Prior to that date our common stock
traded on The Nasdaq Stock Market, Inc. On August 2, 2002 our listing was
transferred from the The Nasdaq National Market to The Nasdaq SmallCap Market.
The high and low sales prices as reported by the Over-the-Counter Bulletin Board
and The Nasdaq Stock Market, Inc. for each quarterly fiscal period during our
fiscal years ended October 31, 2003 and 2004 have been as follows:
- --------------------------------------------------------------------------------
Fiscal Period High Low
================================================================================
1st quarter 2003 $0.35 $0.15
2nd quarter 2003 0.41 0.12
3rd quarter 2003 0.75 0.22
4th quarter 2003 0.88 0.51
- --------------------------------------------------------------------------------
1st quarter 2004 0.63 0.31
2nd quarter 2004 1.32 0.26
3rd quarter 2004 1.10 0.55
4th quarter 2004 $1.27 $0.58
- --------------------------------------------------------------------------------
As of January 10, 2005, the approximate number of record holders of our
common stock was 1,400 and the closing price of our common stock was $0.86 per
share.
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.
19
Item 6. Selected Financial Data.
The following selected financial data has been derived from
our audited Financial Statements and should be read in conjunction with those
statements, and the notes related thereto, which are included in this report.
-----------------------------------------------------------------------------
As of and for the fiscal year ended October 31,
-----------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue
Sales, net $494,462 $244,221 $645,027 $732,435 $1,471,998
Collaborative agreement -- -- 4,541,667 958,333 --
Total revenue
494,462 244,221 5,186,694 1,690,768 1,471,998
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 318,350 68,277 3,315,636 993,129 746,560
- ----------------------------------------------------------------------------------------------------------------------------------
Research and Development Expenses 2,164,427 1,807,742 1,625,974 2,324,979 2,732,229
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 1,518,911 1,379,614 2,177,608 2,272,386 3,099,483
- ----------------------------------------------------------------------------------------------------------------------------------
Impairment Loss on Commercial Trade Barter Credits -- -- 2,820,800 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income 4,333 4,668 23,506 32,279 120,979
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss (3,360,655) (3,114,411) (3,285,240) (3,571,957) (4,964,173)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock - Basic and Diluted ($.04) ($.04) ($.05) ($.06) ($.08)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets 2,316,050 2,330,491 2,731,509 6,562,403 6,894,501
- ----------------------------------------------------------------------------------------------------------------------------------
Long Term Obligations -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 1,872,930 1,988,206 2,317,490 4,166,526 5,557,599
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share of Common Stock -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
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. 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 this Annual Report on Form
10-K under the heading "General Risks and Uncertainties" below. 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 Annual Report on Form 10-K.
20
General
- -------
Our principal operations are the development, production and
marketing of multi-functional hardware and software based encryption products
that provide information security for domestic and international users over
virtually every communications media and the development, production and
marketing of thin, high brightness, flat panel video displays.
We currently have 14 different products in our line of
hardware-based encryption solutions. Our encryption products are
multi-functional, hardware based digital encryption systems that provide
high-grade voice, fax and data encryption using either the Citadel(TM) CCX
encryption cryptographic chip (which is manufactured by the Harris Corporation)
or the Triple DES or AES algorithm (algorithms available in the public domain
which are used by many U.S. government agencies). In addition, we have developed
two software-based security products, one of which uses either the Triple DES or
the AES algorithm to encrypt data files and e-mail attachments in both desktop
and laptop computers utilizing Microsoft Windows operating systems, and the
other of which can encrypt voice and data in cellular and satellite phones,
scanners, and printers. We sell our encryption products directly to end-users
and through dealers and distributors.
We have developed modifications of our standard products for
specific applications. We have developed and are producing several products for
use with the satellite communications network of Thuraya Satellite
Telecommunications Company ("Thuraya"), a network built by Boeing Satellite
Systems, Inc. ("Boeing") that provides communication in Europe, Africa, Russia,
the Middle East and Asia. Our products can encrypt voice communication, using a
compact encrypted module attached to the Thuraya handset, and automatically
encrypt fax communications over the Thuraya network. Additionally, we have
developed two products to provide satellite and cellular fax encryption. Our
products thus enable the Thuraya network to provide encrypted communications
between satellite phones, from satellite phones to desk-based phones, or between
desk-based phones.
In April 2004, we entered into an agreement with Boeing to
provide our encryption products for use over the Thuraya network. Under a
September 2004 modification to the agreement, Boeing is the exclusive
distributor of seven of our products.
In connection with Boeing becoming the exclusive distributor of some of our
products, Boeing authorized us to use its name on our website. Accordingly,
customers desiring to purchase such products can find authorized Boeing sales
information on the "Encryption Products" page of our website, . In January 2005,
Boeing introduced, demonstrated and began marketing CopyTele's encryption
products to more than 100 Thuraya Service Providers. CopyTele assisted Boeing
with such demonstrations. The products introduced included two new encryption
products that CopyTele is selling to Boeing, the Thuraya DCS-1400 for voice
encryption and the Thuraya USS-900T for fax encryption. These products contain
the brand name of Thuraya and their operating controls are in the Arabic
language.
21
We also have developed modifications of our standard equipment
for other applications. We have provided modifications of our hardware and
software encryption solutions to several large organizations which are
evaluating our products in connection with their security requirements. A major
U.S. defense contractor has begun to purchase one of our products, which
provides landline fax encryption automatically with any standard fax machine, to
secure its worldwide fax communication. We have entered into an agreement with
another major U.S. company to supply a proof of concept encryption solution
utilizing another product that has been configured to interface with that
company's satellite global positioning system ("GPS") and data communication
fleet management network. Another major U.S. company is planning to sell our
line of encryption products on its website. We are also developing an encryption
solution to secure data links between that company's scanners and printers in
its multi-functional products.
We are also continuing our research and development work on
our electron emission display ("Flat CRT") technology. We have provided our
display to a potential customer for evaluation of the display's performance in a
product which must operate over a wide ambient temperature range in an outdoor
environment. After successfully testing our display, the customer ordered a seed
quantity of modules containing our display, to replace liquid crystal display
("LCD") modules in our customer's product. We have recently supplied the
customer with displays that the customer has installed in its product for field
evaluation. However, to be able to supply large quantities of displays to this
customer and other potential customers, we have been developing a Flat CRT
display based on our thin film technology ("TFT"). We have determined to produce
only these displays and we are planning to use these displays to supply this
customer's requirements.
We entered into an agreement, in June 2004, with an Asian
company, which currently mass produces TFT LCDs, to jointly produce prototypes
of two modified TFT color matrix pixel structures for our Flat CRT display based
on our high brightness technology. The two color matrix structures, which are
components of our displays, are a 7-inch (diagonal) with 1440 x 234 pixels and a
5.5 inch (diagonal) with 960 x 234 pixels. As part of our TFT color matrix
design, each pixel contains memory to achieve high brightness at video rates. We
have funded the development of these prototypes, and may enter into a further
agreement for commercial production of the structures or the complete color
displays. The company has agreed to produce such structures only for us.
In October 2004, we developed, with the assistance of Volga
Svet Ltd. ("Volga"), a Russian display company that we have been working with
for over seven years, prototype displays containing the modified TFT color
matrix structures we received under our agreement with the Asian company. The
prototype displays we have assembled are the 5.5 inch (diagonal) monochrome
Model CTDV-201 with 320 x 234 pixels and the 5.5 inch (diagonal) color Model
CTDV-202 with 960 x 234 pixels. We are also completing the assembly of a 7.0
inch (diagonal) prototype color display containing the modified TFT color matrix
structures with 1,440 x 234 pixels. Upon the completion of our evaluation of the
structures, we believe that Volga can supply a limited production capability and
we are planning to utilize either the Asian company or other TFT LCD production
companies to mass produce the display for potential users.
22
To activate the red, green and blue phosphors contained in the
modified TFT color matrix pixel structure in our displays, we are using both our
current electron emission technology and a new nanotube technology we are
developing in cooperation with a U.S. company. The new technology consists of a
unique array of low voltage controllable nanotubes for electron emission. These
nanotubes are extremely small carbon elements, approximately 2,500 times thinner
than the width of a human hair, that emit electrons under controllable
conditions. In cooperation with that company, we have produced experimental
design configurations which demonstrate the feasibility of the nanotube
technology meeting our design requirements. We have the exclusive right to use
this company's nanotube technology for display applications.
There can be no assurance that we can produce commercial
quality displays, that we can produce such displays in commercial quantities,
that we can successfully market our displays, or of the revenue we might derive
from sales of our displays. See "Business - General Risks and Uncertainties".
Our operations and the achievement of our objectives in
marketing, production, and research and development are dependent upon an
adequate cash flow. Accordingly, in monitoring our financial position and
results of operations, particular attention is given to cash and accounts
receivable balances and cash flows from operations. Since our initial public
offering, our cash flows have been primarily generated through the sales of
common stock in private placements and upon exercise of stock options. Since
1999 we have also generated cash flows from sales of our encryption products. In
an effort to generate sales, we have marketed our encryption products directly
to U.S. and international distributors, dealers and original equipment
manufacturers that market our encryption products and to end-users. We have also
been working with several large organizations to provide them with both our
hardware and software encryption solutions for them to evaluate whether the
solutions meet their security requirements and have begun supplying several
major U.S. companies with our encryption products. We have also begun to market
our flat panel video display products to potential purchasers for incorporation
into their products. We anticipate that current cash on hand, cash generated
from operations, and cash generated from the exercise of employee options will
be adequate to fund our operations at least through the end of the first quarter
of fiscal 2006.
In reviewing Management's Discussion and Analysis of Financial
Condition and Results of Operations, you should refer to our Financial
Statements and the notes thereto.
23
Critical Accounting Policies
- ----------------------------
Our financial statements are prepared in conformity with
accounting principles generally accepted in the United State of America. As
such, we are required to make certain estimates, judgments and assumptions that
management believes are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the
reporting periods.
We believe the following critical accounting polices affect
the more significant judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition
-------------------
Sales
-----
Revenues from sales are recorded when all four of the
following criteria are met: (i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred and title has transferred or services have been
rendered; (iii) our price to the buyer is fixed or determinable; and (iv)
collectibility is reasonably assured.
Collaborative Agreement
-----------------------
A $2.5 million payment received from Futaba Corporation
("Futaba") of Japan in June 2001, pursuant to an agreement with Futaba, has been
recognized ratably over the period between June 2001 and June 2002, the
contractually defined one-year period of our commitment under this agreement. A
subsequent $3 million payment received from Futaba under this agreement in
January 2002 has been recognized ratably over the remainder of the one-year
period.
Sales Returns
-------------
Revenues are recorded net of estimated sales returns.
Inventories
-----------
Inventories are stated at the lower of cost, including
material, labor and overhead, determined on a first-in, first-out basis, or
market, which represents our best estimate of market value. We regularly review
inventory quantities on hand, particularly finished goods, and record a
provision for excess and obsolete inventory based primarily on forecasts of
future product demand. Our net income (loss) is directly affected by
management's estimate of the realizability of inventories. To date, sales of our
products have been limited. Accordingly, there can be no assurance that we will
not be required to reduce the selling price of our inventory below our current
carrying value in the future.
24
Valuation of Long-Lived Assets
------------------------------
We assess the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review include a significant underperformance relative to expected historical or
projected future operating results and cash flows, a significant change in the
manner of the use of the asset or a significant negative industry or economic
trend. When management determines that the carrying value of long-lived asset
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the carrying amount of the asset would be written down
to fair value based upon the present value of estimated future cash flows, to
reflect the impairment.
During the year ended October 31, 2002, we recognized an
impairment loss in the amount of approximately $2,821,000 in connection with
unused commercial trade barter credits. These trade credits may be redeemed to
reduce the cost of advertising as well as other products and services. To
utilize these barter credits in exchange for advertising and purchase discounts,
we must pay between 65-70% of the transaction value in cash. Because our
anticipated cash flow was negatively affected by the termination of the
agreement with Futaba, our ability to make such payments and thereby utilize the
barter credits is uncertain. Such impairment loss is the only impairment of
long-lived assets recorded in the fiscal years ended October 31, 2004, 2003 and
2002.
Stock Based Compensation
------------------------
We account for stock options granted to employees using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Issued to Employees" and comply with the disclosure
provision of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock Based Compensation" and SFAS No. 148 "Accounting for Stock
Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123"
("SFAS No. 148"), effective February 1, 2003. If we were to include the cost of
employee stock option compensation in the financial statements, our net loss for
the fiscal years ended October 31, 2004, 2003 and 2002 would have increased by
approximately $2,909,000, $889,000 and $283,000, respectively, based on the fair
value of the stock options granted to employees. See "- Impact of Recent
Accounting Pronouncements"
25
Results of Operations
- ---------------------
Fiscal Year Ended October 31, 2004 Compared to Fiscal Year Ended
October 31, 2003
- ----------------------------------------------------------------
Sales
Revenue. Revenue from sales increased by approximately
$250,000 in fiscal 2004, to approximately $494,000, as compared to approximately
$244,000 in fiscal 2003. All revenue during both periods was from encryption
products and services. The increase in sales was principally due to an increase
in unit sales of our encryption products. Our encryption sales have been limited
and are sensitive to individual large transactions. We believe that changes in
sales between periods generally represent the nature of the early stage of our
product and sales channel development.
Gross Profit. Gross profit from sales of encryption products
and services increased by approximately $250,000 in fiscal 2004, to
approximately $318,000, as compared to approximately $68,000 in fiscal 2003. The
increase in gross profit was primarily due to the increase in revenue, to higher
gross profit percentages on certain transactions as compared to the prior-year
period, and the effect of a write down of Magicom inventory in fiscal 2003 of
approximately $53,000. Gross profit as a percent of revenue increased to
approximately 64% in fiscal 2004, as compared to approximately 28% in fiscal
2003. Because of the limited number of transactions during each of the periods,
gross profit percentages are sensitive to individual transactions.
Collaborative Agreement
Revenue. We recognized no collaborative agreement revenue in
fiscal 2004 and fiscal 2003.
Research and Development Expenses
Research and development expenses increased by approximately
$356,000 in fiscal 2004, to approximately $2,164,000, from approximately
$1,808,000 in fiscal 2003. The increase in research and development expenses was
principally due to an increase in employee compensation and related costs of
approximately $126,000 and an increase in outside research and development of
approximately $209,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
approximately $139,000 to approximately $1,519,000 in fiscal 2004 from
approximately $1,380,000 in fiscal 2003. The increase in selling, general and
administrative expenses was principally due to an in increase in consulting
expense of approximately $198,000, an increase in employee compensation and
related costs of approximately $116,000, an increase in shareholder relations
expense of approximately $31,000, an increase in professional fees of
approximately $24,000, and a charge to expense of approximately $75,000 in
fiscal 2004 related to a theft by a former employee (see "- Investigation and
Recovery Efforts Regarding Misappropriated Funds"), offset by a decrease in the
provision for bad debts of approximately $278,000 and a decrease in advertising
expense of approximately $34,000. The decrease in the provision for bad debts of
approximately $278,000 resulted from a provision for bad debts in the prior year
of approximately $205,000 and reversal in the current period of previously
reserved amounts of approximately $73,000 due to a partial collection of the
outstanding receivable to which the provision relates.
26
Interest Income
Interest income was approximately $4,000 in fiscal 2004,
compared to approximately $5,000 in fiscal 2003.
Fiscal Year Ended October 31, 2003 Compared to Fiscal Year Ended
October 31, 2002
- -----------------------------------------------------------------
Sales
Revenue. Revenue from sales of encryption products and
services decreased by approximately $401,000 in fiscal 2003, to approximately
$244,000, as compared to approximately $645,000 in fiscal 2002. The decrease in
sales was due to lower unit sales of our encryption products. Our encryption
sales have been limited and are sensitive to individual large transactions. We
believe that changes in sales between periods generally represent the nature of
the early stage of our product and sales channel development.
Gross Profit. Gross profit from sales of encryption products
and services decreased by approximately $150,000 in fiscal 2003, to
approximately $68,000, as compared to approximately $218,000 in fiscal 2002. The
decrease in gross profit was primarily due to the decrease in revenue. Gross
profit reflects a write down of Magicom inventory in fiscal 2003 of
approximately $53,000 and a provision for slow moving inventory relating to the
USS-900 in fiscal 2002 of approximately $100,000. Gross profit as a percent of
revenue decreased to approximately 28% in fiscal 2003, as compared to
approximately 34% in fiscal 2002.
Collaborative Agreement
Revenue. We recognized no collaborative agreement revenue in
fiscal 2003, as compared to approximately $4,542,000 in fiscal 2002. All
collaborative agreement revenue was revenue received from Futaba under an
agreement with Futaba. We recognized payments received from Futaba as income
ratably over the contractually defined one-year period of our commitment under
this agreement. Since the agreement with Futaba terminated in June 2002, we will
not receive any further payments under this agreement.
Gross Profit. We recognized no gross profit from collaborative
agreement in fiscal 2003, as compared to approximately $3,098,000 in fiscal
2002. Gross profit from collaborative agreement in fiscal 2002 was net of cost
of revenue of approximately $1,444,000, consisting of research and development
costs relating to display technology, including cost of revenue related to our
agreement with Volga of approximately $1,194,000. Research and development costs
relating to display technology were included in research and development
expenses prior to the commencement of our agreement with Futaba in June 2001 and
after its termination in June 2002.
27
Research and Development Expenses
Research and development expenses increased by approximately
$182,000 in fiscal 2003, to approximately $1,808,000, from approximately
$1,626,000 in fiscal 2002. The increase in research and development expenses
reflected the classification of development efforts related to display
technology during the term of our agreement with Futaba of approximately
$250,000 in fiscal 2002 as costs of revenue rather than as research and
development expenses. In addition, non-employee consultant expense increased by
approximately $235,000 and outside research and development increased by
approximately $68,000, offset by a decrease in employee compensation and related
costs of approximately $160,000, a decrease in depreciation expense of
approximately $49,000, a decrease in patent related expenses of approximately
$57,000 and a decrease in engineering supplies expense of approximately $56,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
approximately $798,000 to approximately $1,380,000 in fiscal 2003 from
approximately $2,178,000 in fiscal 2002. The decrease in selling, general and
administrative expenses reflects a decrease in professional fees of
approximately $372,000, a decrease in employee compensation and related costs of
approximately $203,000, the elimination of expenses related to listing on the
Nasdaq Stock Market of approximately $90,000, a decrease in other shareholder
relations expenses of approximately $44,000 and a decrease in advertising
expense of approximately $50,000, offset by the recovery in the prior-year
period of a previously recorded bad debt charge of approximately $60,000.
Interest Income
Interest income was approximately $5,000 in fiscal 2003,
compared to approximately $24,000 in fiscal 2002. The reduction in interest
income was the result of from a decrease in average funds available for
investment and a reduction in prevailing interest rates.
28
Liquidity and Capital Resources
- -------------------------------
From our inception through June 2001, we met our liquidity and
capital expenditure needs primarily through the proceeds from sales of common
stock in our initial public offering, in private placements, upon exercise of
warrants issued in connection with the private placements and public offering,
and upon the exercise of stock options. Commencing in the fourth quarter of
fiscal 1999, we also began to generate cash from sales of our encryption
products, and, from June 2001 to January 2002, we received development payments
from Futaba.
In June 2001 and January 2002, we received payments from
Futaba of $2,500,000 and $3,000,000, respectively, under an agreement with
Futaba. Additionally, under agreements with Volga, we paid Volga an aggregate of
$1,110,000 and $360,000 during fiscal 2002 and 2001, respectively, for
development efforts during the term of our agreement with Futaba, exclusive of
other costs incurred under the agreement with Futaba.
During fiscal 2004, our operating activities used
approximately $1,205,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $1,792,000, which was offset by cash
of approximately $583,000 received from collections of accounts receivable and
other receivables related to sales of encryption products and approximately
$4,000 of interest income received. In addition, during fiscal 2004, we received
approximately $1,200,000 in cash upon the exercise of stock options and
purchased approximately $16,000 of equipment. As a result, our cash and cash
equivalents at October 31, 2004 decreased to approximately $1,003,000 from
approximately $1,024,000 at the end of fiscal 2003.
Accounts receivable increased by approximately $21,000 from
approximately $42,000 at the end of fiscal 2003 to approximately $63,000 at
October 31, 2004. The increase in accounts receivable is a result of the
increase in revenue, the timing of collections and the decrease in the allowance
for doubtful accounts. Other receivables decreased by approximately $43,000 from
approximately $127,000 at the end of fiscal 2003 to approximately $84,000 at the
end of fiscal 2004. The decrease in other receivables is a result of proceeds
received from the sale of a portion of the common stock received from a customer
to settle this accounts receivable and other receipts from the customer
aggregating approximately $116,000, offset by a reduction of the provision for
bad debts related to this accounts receivable of approximately $73,000. The
reduction of the provision for bad debts is based on management's estimate of
the other receivables' net realizable value. Inventories decreased approximately
$46,000 from approximately $1,045,000 at October 31, 2003 to approximately
$999,000 at October 31, 2004, as a result of the timing of shipments and
production schedules. Prepaid expenses and other current assets increased by
approximately $74,000 from approximately $48,000 at the end of fiscal 2003 to
approximately $122,000 at October 31, 2004. The increase in prepaid expenses and
other assets is primarily due to a receivable of approximately $100,000 from
insurance companies related to a theft by a former employee (see "-
Investigation and Recovery Efforts Regarding Misappropriated Funds"). The
balance of the insurance proceeds we received of approximately $10,000 was
applied to fiscal 2005. Accounts payable and accrued liabilities increased by
approximately $101,000 from approximately $342,000 at the end of fiscal 2003 to
approximately $443,000 at October 31, 2004, as a result of the increase in
operating expenses and the timing of payments.
As a result of these changes, working capital at October 31,
2004 decreased to approximately $1,829,000 from approximately $1,943,000 at the
end of fiscal 2003.
Our working capital includes inventory of approximately
$999,000 and $1,045,000 at October 31, 2004 and 2003, respectively. 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.
29
During fiscal years ended October 31, 2004, 2003 and 2002, we
issued shares of common stock to certain employees for services rendered,
principally in lieu of cash compensation. Included in such shares issued during
fiscal 2004 were shares issued to our Chairman of the Board and Chief Executive
Officer. We recorded compensation expense for the fiscal years ended October 31,
2004, 2003 and 2002 of approximately $1,507,000, $1,292,000 and $ 1,313,000,
respectively, for shares of common stock issued to employees. In addition during
fiscal 2004, 2003 and 2002, we issued shares of common stock to consultants for
services rendered. We recorded consulting expense for the fiscal years ended
October 31, 2004, 2003 and 2002 of approximately $342,000, $360,000 and
$115,000, respectively, for shares of common stock issued to consultants.
Our plans and expectations for our working capital needs also
assume that our Chairman of the Board and Chief Executive Officer and our
President will continue to perform services without significant cash
compensation or pension benefits. While there are no formal agreements, our
Chairman of the Board and Chief Executive Officer and our President waived any
and all rights to receive salary and related pension benefits commencing
November 1985 through October 31, 2003. For the year ended October 31, 2004, our
Chairman of the Board and Chief Executive Officer received salary in the amount
of approximately $135,000 in the form of common stock and our President received
salary in the amount of approximately $37,000 in cash. There can be no assurance
that they will continue to provide such services under such compensation
arrangements.
The auditor's report on our financial statements as of October
31, 2004 states that the net loss incurred during the year ended October 31,
2004, our accumulated deficit as of that date, and the other factors described
in Note 1 to the Financial Statements raise substantial doubt about our ability
to continue as a going concern. The auditor's report on our financial statements
for the years ended October 31, 2003 and 2002 contained a similar statement. Our
financial statements have been prepared assuming we will continue as a going
concern and do not include any adjustments that might result from the outcome of
this uncertainty
We believe that our existing cash and accounts receivable,
together with cash flows from expected sales of encryption products and flat
panel displays, and other potential sources of cash flows, will be sufficient to
enable us to continue in operation until at least the end of the first quarter
of fiscal 2006. We anticipate that, thereafter, we will require additional funds
to continue our marketing, production, and research and development activities,
and we will require outside funding if cash generated from operations is
insufficient to satisfy our liquidity requirements. However, our projections of
future cash needs and cash flows may differ from actual results. If current cash
and cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we may seek to sell debt or equity securities or to
obtain a line of credit prior to the first quarter of fiscal 2006. The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing. There can be no assurance that we will generate sufficient revenues
in the future (through sales or otherwise) to improve our liquidity or sustain
future operations, that our production capabilities will be adequate, that other
products will not be produced by other companies that will render our products
obsolete, or that other sources of funding would be available, if needed, on
favorable terms or at all.
We are seeking to improve our liquidity through increased
sales or license of products and technology. In an effort to generate sales, we
have marketed our encryption products directly to U.S. and international
distributors, dealers and original equipment manufacturers that market our
encryption products and to end-users. We have been working with several large
organizations to provide them with both our hardware and software encryption
solutions for them to evaluate whether the solutions meet their security
requirements and have begun supplying several major U.S. companies with our
encryption products. We have also begun to market our flat panel video display
products to potential purchasers for incorporation into their products. During
fiscal 2004, we have recognized revenue from sales of encryption products of
approximately $494,000.
30
The following table presents our expected cash requirements
for contractual obligations outstanding as of October 31, 2004:
Payments Due by Period
-----------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- ---------------------------- ----------- ---------- ---------- ----------- ----------
Consulting-
Agreement $ 45,000 -- -- -- $ 45,000
Noncancelable
Operating Leases $255,000 $153,000 -- -- $ 408,000
----------- ---------- ---------- ----------- ----------
Total Contractual
Cash Obligations $ 300,000 $153,000 -- -- $ 453,000
=========== ========== ========== =========== ==========
Investigation and Recovery Efforts Regarding Misappropriated Funds
- ------------------------------------------------------------------
In December 2004, we determined that a former accounting
employee embezzled funds from us. We initially conducted an internal
investigation, and subsequently engaged an independent accounting firm to
conduct an independent investigation of this matter. Through our internal
investigation, we determined that the amount embezzled by the employee during
fiscal 2004 and the first month of fiscal 2005 was approximately $189,000. We
also discovered approximately $4,000 in deposits to our account during these
periods that we believe were made by the employee in an effort to conceal his
fraudulent activity, for a net loss to us during this period of approximately
$185,000. The independent accounting firm agreed with this conclusion. The
independent accounting firm determined that the employee had committed
additional fraudulent activity during fiscal 2003, and we subsequently conducted
a further internal review of activity by the employee since his hiring in 2001
and determined that the employee had committed additional fraudulent activity in
fiscal 2002 and fiscal 2001, as well. The total losses from such activity during
fiscal 2003, 2002 and 2001 was approximately $28,000. The independent accounting
firm also agreed with these conclusions.
We have recovered approximately $110,000 of the losses through
insurance proceeds. We have applied $100,000 of such recovery to fiscal 2004,
and have recorded a charge to expense of approximately $75,000 in fiscal 2004,
representing the remainder of the fiscal 2004 loss. We have applied $10,000 of
the recovery to the first quarter of fiscal 2005, representing the entire loss
identified in such period. The losses in fiscal 2001 through fiscal 2003 were
the result of false expenses for which no corresponding asset was received.
Accordingly, such amounts were previously expensed in the years such funds were
embezzled. We will seek additional recoveries from other parties which, if we
are successful in recovering additional amounts, will be recorded as recoveries
in future periods when they are received. Based on the amount and nature of the
embezzlement and the expected recoveries, we do not believe that the fraudulent
activity had a material effect on any of our previously issued financial
statements.
31
We have incurred approximately $45,000 of accounting and other
professional fees related to this matter during the first quarter of fiscal
2005.
In connection with the audit of our financial statements for
the year ended October 31, 2004, Grant Thornton LLP, our independent registered
public accounting firm, advised us that there were material weaknesses in our
internal controls that did not allow us to prevent or detect earlier such
fraudulent activities, and that such weaknesses are "material weaknesses", as
defined under standards established by the Public Company Accounting Oversight
Board. As a result, and in response also to recommendations made by the
independent accounting firm that conducted the investigation, to help ensure
against such fraudulent activity in the future we have implemented changes to
our cash processing and control procedures. We are also in the process of
implementing changes to our operating bank account. See Item 9A "Controls and
Procedures."
Impact of Recent Accounting Pronouncement
- -----------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Accounting
for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value
of such equity instruments be recognized as an expense in the historical
financial statements as services are performed. Prior to SFAS No. 123(R), only
certain pro forma disclosures of fair value were required. The provisions of
this Statement are effective for the first interim reporting period that begins
after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with
the quarter ending October 31, 2005. If we had included the cost of employee
stock option compensation in our financial statements, our net loss for the
fiscal years ended October 31, 2004, 2003 and 2002 would have increased by
approximately $2,909,000, $889,000 and $283,000, respectively. Accordingly, the
adoption of SFAS No. 123(R) is expected to have a material effect on our
financial statements.
32
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 instruments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on these securities could be affected at
the time of reinvestment, if any.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See accompanying "Index to Financial Statements."
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
-----------------------------------------------------------
None.
Item 9A. Controls and Procedures
-----------------------
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman of the Board and Chief
Executive Officer and our Chief Financial Officer and Vice President - Finance,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chairman of the Board and Chief
Executive Officer and the Chief Financial Officer and Vice President - Finance
concluded that, other than as described below, our disclosure controls and
procedures were effective as of the end of fiscal 2004.
There was no change in our internal control over financial reporting
during the fourth quarter of fiscal 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
33
Subsequent to the end of fiscal 2004, however, in connection with our
audit of our financial statements for the fiscal year ended October 31, 2004, we
determined that a former accounting employee embezzled funds from us. We
immediately conducted an internal investigation and, on December 17, 2004, we
filed with the SEC a Current Report on Form 8-K disclosing this determination.
In addition to our internal investigation, we discussed the matter with our
independent registered public accounting firm, Grant Thornton LLP, and also
engaged another independent accounting firm to conduct an independent
investigation of this matter. The independent accounting firm undertook to (i)
gain an understanding of the facts and circumstances surrounding the known
fraudulent activity related to the former employee's embezzlement of funds, (ii)
determine if the former employee engaged in fraudulent activities other than
what had already been identified by our internal investigation, (iii) identify
other employees or third parties, if any, that may have been associated with the
known fraudulent activity, (iv) with respect to fiscal 2004 and the first month
of fiscal 2005, gain an understanding of our internal controls as they relate to
the areas in which the employee was involved (such as cash receipts and
disbursements) and the responsibilities assigned to the former employee, test
these areas for fraud, identify any weaknesses in our internal controls relating
to these areas, make recommendations as to improvements in such internal
controls, and quantify potential misstatements to our financial statements, and
(v) for fiscal 2001 through fiscal 2003, review areas in which the employee was
involved for fraud.
Through our internal investigation and the independent accounting
firm's investigation, we have determined the following:
o Our internal investigation concluded that the former accounting
employee was the sole employee participating in the embezzlement. The
independent accounting firm agreed with this conclusion.
o The independent accounting firm was unable to determine whether any
non-employee third party aided or abetted the employee in his
fraudulent activity. We have no evidence, however, that any third
party aided or abetted him.
o Our internal investigation determined that, in fiscal 2004 and the
first month of fiscal 2005, the former employee wrote checks out to
himself using fraudulent authorized signatures, failed to deposit
several of his own checks which were paid to us, and concealed such
activities through the alteration of bank statements. We determined
that the amount embezzled by the employee during these periods was
approximately $189,000. We also discovered approximately $4,000 in
deposits to our account during these periods that we believe were made
by the employee in an effort to conceal his fraudulent activity, for a
net loss to us during this period of approximately $185,000. The
independent accounting firm agreed with these conclusions.
o The independent accounting firm determined that the employee had
committed additional fraudulent activity during fiscal 2003, resulting
a loss of approximately $4,500. We subsequently conducted a further
internal review of activity by the employee since his hiring in 2001
and determined that the employee had committed additional fraudulent
activity in fiscal 2002 and fiscal 2001, resulting in losses during
those periods of approximately $20,000 and $3,500, respectively. The
independent accounting firm agreed with these conclusions.
34
o The independent accounting firm concluded that, except for the
activity our internal investigation had revealed and the activity
between 2001 and 2003 described above, the former employee, in all
likelihood did not engage in any other fraudulent activity.
o Our internal investigation concluded, and the independent accounting
firm agreed, that the employee's responsibilities in other areas
(accounts receivable, sales, inventory and payroll) was very limited
and, therefore, the possibility of fraudulent activity in these areas,
by this employee, was remote.
We have terminated the employee and filed a criminal complaint against
him, and will seek to recover funds from him. We have recovered approximately
$110,000 of the losses through insurance proceeds. We have applied $100,000 of
such recovery to fiscal 2004, and have recorded a charge to expense of
approximately $75,000 in fiscal 2004, representing the remainder of the fiscal
2004 loss. We have applied $10,000 of the recovery to the first quarter of
fiscal 2005, representing the entire loss identified in such period. The losses
in fiscal 2001 through fiscal 2003 were the result of false expenses for which
no corresponding asset was received. Accordingly, such amounts were previously
expensed in the years such funds were embezzled. We will seek additional
recoveries from other parties which, if we are successful in recovering
additional amounts, will be recorded as recoveries in future periods when they
are received. Based on the amount and nature of the embezzlement and the
expected recoveries, we do not believe that the fraudulent activity had a
material effect on any of our previously issued financial statements.
We have incurred a total of approximately $45,000 of accounting and
other professional fees related to this matter through January 14, 2005.
In connection with the audit of the Company's financial statements for
the year ended October 31, 2004, Grant Thornton advised us that there was a
weakness in our internal control over financial reporting that did not allow us
to prevent or detect earlier such fraudulent activities. Specifically, Grant
Thornton found that there was a lack of procedures in place to effect an
adequate segregation of duties over cash and related cash processing. This
weakness caused the following deficiencies:
o inadequate control of processing of cash receipts,
o inadequate control over bank transfers,
o inadequate control over original bank statements and the
reconciliation process, and
o inadequate control over unused checks.
35
Grant Thornton advised us that these deficiencies constitute a
"material weakness" under standards established by the Public Company Accounting
Oversight Board.
As a result, and in response also to recommendations made by the
independent accounting firm that conducted the investigation, to help ensure
against such fraudulent activity in the future, we have implemented changes in
certain of our internal controls over financial reporting, as follows:
o an individual from management, rather than someone in the accounting
department, will open the bank statements as they are received from
the bank and review them for any unusual checks or other transactions
before providing the statements to the accounting department to
perform reconciliations;
o this individual will compare all of the cancelled checks returned with
the bank statement with our disbursement records to ensure that the
records reflect the information on the check and will review the
checks for unusual or unexpected endorsements; and
o mail will be opened by personnel outside the accounting department and
any checks will be immediately restrictively endorsed prior to being
given to the accounting department.
The independent accounting firm also recommended we adopt a "zero-base
balance" or a "sweep" account in our operating bank account to enable the bank
to transfer funds to the operating account only when checks are presented for
payment. We are in the process of implementing this recommendation. We are also
in the process of hiring a replacement for the former accounting employee. We
have also reviewed the segregation of duties in our accounting department and
will further segregate duties once such person is hired, taking into account our
staffing size and composition. Finally, the independent accounting firm also
recommended that, as our business grows, we consider using a lockbox system for
processing cash receipts, under which customers will be requested, via notations
on invoices or monthly statements or the use of preaddressed envelopes, to send
their payments to a post office box, which will be accessible only by (and will
be collected daily by) our bank. We will continue to evaluate the effectiveness
of our disclosure controls and procedures and our internal controls over
financial reporting on an ongoing basis, and will take further action as
appropriate. However, there can be no assurance that our controls and procedures
will prevent all errors or fraud.
Item 9B. Other Information.
------------------
None.
36
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 Age Executive Officer
Principal Occupation Since
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos Director, Chairman of the Board and Chief 77 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 80 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 59 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 76 1997
- -----------------------------------------------------------------------------------------------------------
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.
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 and as one of our Directors since August
2001. 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. Larounis has served as one of our Directors since
September 1997, prior to which he served as a consultant to us. Mr. Larounis is
currently retired. From 1960 to 1993, he held numerous positions as a senior
international executive of The Bendix Corporation and Allied Signal Inc., which
is now known as Honeywell International, Inc. He has also served on the Boards
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.
37
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires our directors, executive officers and ten
percent stockholders to file initial reports of ownership and reports of changes
in ownership of our common stock with the Securities and Exchange Commission
("SEC"). Directors, executive officers and ten percent stockholders are required
to furnish us with copies of all Section 16(a) forms that they file. Based upon
a review of these filings, we believe that all required Section 16(a) fillings
were made on a timely basis during fiscal year 2004.
Code of Ethics
As of the date of this report, we have not adopted a formal
code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller or persons
performing similar functions. Because of the small number of our employees, and
in particular the small number and long service of our senior management, our
Board of Directors has not believed it necessary to adopt a formal code of
ethics. However, our Board continues to evaluate this in light of recent
developments concerning governance of public companies generally, including
rules adopted by the Securities and Exchange Commission and the stock markets.
Audit Committee Financial Expert
The Securities and Exchange Commission has adopted rules
implementing Section 407 of the Sarbanes-Oxley Act of 2002 requiring public
companies to disclose information about "audit committee financial experts." We
do not have a standing Audit Committee. The functions of the Audit Committee
have been assumed by our full Board of Directors. Our Board of Directors has not
concluded that Mr. Larounis, the sole non-management director, meets the
definition of "audit committee financial expert." The Securities and Exchange
Commission's rules do not require us to have an audit committee financial
expert, and our Board of Directors has determined that it possesses sufficient
financial expertise to effectively discharge its obligations.
Item 11. Executive Compensation.
-----------------------
Messrs. Denis A. Krusos, Chairman of the Board, Chief
Executive Officer and Director, Frank J. DiSanto, President and Director, and
Henry P. Herms, Chief Financial Officer, Vice President - Finance and Director,
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 commencing November 1, 1985 through October 31, 2003.
As a result, Messrs. Krusos and DiSanto received no salary or bonus during
fiscal 2002 and 2003. Effective for fiscal 2004, Mr. Krusos began to receive
compensation in the form of common stock and Mr. DiSanto began to receive cash
compensation. Except for Mr. Krusos, no other executive officer received an
annual salary and bonus in excess of $100,000 during the fiscal year ended
October 31, 2004. The following is compensation information regarding Mr. Krusos
for the fiscal years ended October 31, 2004, 2003 and 2002:
38
- -----------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
Fiscal
Name and Year Annual Long-Term
Principal Position Ended Compensation Compensation Awards
Securities Underlying
Options (#)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/04 $135,075 1,750,000
Chairman of the Board, 10/31/03 - 1,500,000
Chief Executive Officer and Director 10/31/02 - -
- -----------------------------------------------------------------------------------------------------------
The following is information regarding stock options granted to Mr.
Krusos pursuant to the 2003 Share Incentive Plan, during the fiscal year ended
October 31, 2004:
- -----------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Individual Grants Assumed Annual Rates of Stock
Price Appreciation for Option
Term
- -----------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 500,000 (1) 8.66% $0.43 (2) 2/22/14 $135,212 $ 342,655
250,000 (1) 4.33% $0.71 (2) 5/10/14 $127,351 $ 322,733
1,000,000 (1) 17.32% $1.04 (2) 10/25/14 $654,050 $1,657,492
- -----------------------------------------------------------------------------------------------------------
(1) Options granted pursuant to the 2003 Share Incentive Plan, which
are exercisable in whole or in part on the date of grant. The
options are not issued in tandem with stock appreciation or
similar rights and are not transferable other than by will or the
laws of descent and distribution. The options terminate upon
termination of employment, except that in the case of death,
disability or termination for reasons other than cause, options
may be exercised for certain periods of time thereafter as set
forth in the 2003 Share Incentive Plan.
(2) The exercise price of these options was equal to the fair market
value (closing price) of the underlying common stock on the date
of grant. These options are nonqualified options.
39
The following is information regarding stock option exercises
during fiscal 2004 by Mr. Krusos and the values of his options as of October 31,
2004:
- ------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
============================================================================================================
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Value Options at Fiscal Year End (#) Fiscal Year End ($)(1)
Acquired on Realized -------------------------------------------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================
Denis A. Krusos - - 5,778,290 - $1,909,750 -
- ------------------------------------------------------------------------------------------------------------
(1) Such value was determined by multiplying the net difference
between the last sales price of the stock on October 31, 2004
and the exercise price for the options by 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 2003 Share Incentive Plan,
each non-employee director is entitled to receive nonqualified stock options to
purchase 60,000 shares of common stock each year that such director is elected
to the Board of Directors.
40
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 10, 2005 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 and executive officers, and
(c) all directors and executive officers as a group:
- -----------------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Percent of
Ownership(1)(2) Class
===========================================================================================================
Denis A. Krusos 7,747,600 8.37%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto 4,309,505 4.76%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 595,000 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
George P. Larounis 330,000 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (4 persons) 12,982,105 13.36%
- -----------------------------------------------------------------------------------------------------------
* Less than 1%.
(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.
(2) Includes 5,778,290 shares, 3,666,290 shares, 570,000 shares,
330,000 shares and 10,344,580 shares which Denis A. Krusos, Frank
J. DiSanto, Henry P. Herms, George P. Larounis, 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 Stock Option Plan, 2000 Share Incentive Plan
and the 2003 Share Incentive Plan.
41
Equity Compensation Plan Information
The following is information as of October 31, 2004 about
shares of our common stock that may be issued upon the exercise of options,
warrants and rights under all equity compensation plans in effect as of that
date, including our 1993 Stock Option Plan, our 2000 Share Incentive Plan and
our 2003 Share Incentive Plan. See Note 9 to Financial Statements for more
information on these plans.
Number of securities
Number of remaining available
securities to be for future issuance
issued upon under equity
exercise of Weighted average compensation plans
outstanding exercise price of (excluding securities
options, warrants outstanding options, reflected in column
Plan category and rights warrants and rights (a))
- ---------------------------- --------------------- ----------------------- ------------------------
(a) (b) (c)
Equity compensation plans 10,719,546 $2.93 773
approved by security
holders
Equity compensation plans 7,285,000 $0.62 12,566,129
not approved by security
holders
Total 18,004,546 $1.99 12,566,902
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
None.
Item 14. Principal Accountant Audit Fees and Services Fees.
--------------------------------------------------
The following table describes fees for professional audit
services rendered by Grant Thornton LLP, our present independent registered
public accounting firm and principal accountant, for the audit of our annual
financial statements and for other services for the years ended October 31,
2004, and 2003.
Type of Fee 2004 2003
----------- ------ ----
Audit Fees $127,460 $120,448
Audit Related Fees --
Tax Fees - Tax return review --
All Other Fees --
-------- --------
Total $127,460 $120,448
======== ========
42
Procedures For Board of Directors Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Auditor
Our Board of Directors is responsible for reviewing and
approving, in advance, any audit and any permissible non-audit engagement or
relationship between us and our independent registered public accounting firm.
Grant Thornton LLP's engagement to conduct our audit was approved by the Board
of Directors on September 17, 2004. We did not enter into any non-audit
engagement or relationship with Grant Thornton LLP during fiscal 2004.
43
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules
---------------------------------------
(a)(1)(2) Financial Statement Schedules
-----------------------------
See accompanying "Index to Financial Statements."
(a)(3) Executive Compensation Plans and Arrangements
---------------------------------------------
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to
our Proxy Statement dated June 10, 1993).
Amendment No. 1 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 4(d) to our Form S-8 dated September 6,
1995).
Amendment No. 2 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 10.32 to our 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
our Proxy Statement dated June 12, 2000).
Amendment No. 1 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 2001).
Amendment No. 2 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 4(e) to our Form S-8 dated September 18,
2002).
CopyTele, Inc. 2003 Share Incentive Plan (filed as Exhibit 4
to our Form S-8 dated May 5, 2003).
Amendment No. 1 to the CopyTele, Inc. 2003 Share Incentive
Plan (filed as Exhibit 4(e) to our Form S-8 dated November 9,
2005).
Form of Stock Option Agreement under CopyTele, Inc. 2003
Share Incentive Plan (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31,
2004).
Form of Stock Award Agreement under CopyTele, Inc. 2003 Share
Incentive Plan (filed as Exhibit 10.2 to our Quarterly Report
on Form 10-Q for the fiscal quarter ended July 31, 2004).
44
(b) Exhibits
3.1 Certificate of Incorporation, as amended. (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.)
3.2 By-laws, as amended and restated. (Incorporated by
reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.)
3.3 Amendment to By-laws. (Incorporated by reference to Form
10-Q for the fiscal quarter ended January 31, 2003.)
10.1 CopyTele, Inc. 1993 Stock Option Plan, adopted on April
28, 1993 and approved by shareholders on July 14, 1993.
(Incorporated by reference to Proxy Statement dated June
10, 1993.)
10.2 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 3, 1995 and approved by
shareholders on July 19, 1995. (Incorporated by
reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.)
10.3 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 10, 1996 and approved by
shareholders on July 24, 1996. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.)
10.4 Agreement dated March 3, 1999 between Harris Corporation
and CopyTele, Inc. (Incorporated by reference to Form
10-Q for the fiscal quarter ended January 31, 1999.)
10.5 Stock Subscription Agreement dated April 27, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to Form
10-Q for the fiscal quarter ended April 30, 1999.)
45
10.6 Agreement dated July 28, 1999, among CopyTele, Inc.,
Harris Corporation and RF Communications. (Incorporated
by reference to Form 8-K dated July 28, 1999.)
10.7 Stock Subscription Agreement dated August 30, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to Form
10-K for the fiscal year ended October 31, 1999.)
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated
by reference to Annex A of our Proxy Statement dated
June 12, 2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 6, 2001 and approved by
shareholders on August 16, 2001. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July
31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 16, 2002 and approved by
shareholders on September 12, 2002. (Incorporated by
reference to Exhibit 4(e) to our Form S-8 (Registration
No. 333-99717) dated September 18, 2002.)
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation
Agreement between CopyTele, Inc. and Volga Svet Ltd.
(Incorporated by reference to Exhibit 10.14 to our Form
10-K for the fiscal year ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet
Ltd., dated as of February 1, 2002. (Incorporated by
reference to Exhibit 10.15 to our Form 10-K for the
fiscal year ended October 31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan (Incorporated
by reference to Exhibit 4 to our Form S-8 dated May 5,
2003).
10.14 Amendment No. 1 to the CopyTele, Inc. 2003 Share
Incentive Plan (Incorporated by reference to Exhibit
4(e) to our Form S-8 dated November 9, 2005).
46
10.15 Form of Stock Option Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2004).
10.16 Form of Stock Award Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2004).
10.17 Long Term Agreement dated April 2, 2004 between
CopyTele, Inc. and Boeing Satellite Systems
International, Inc., as modified September 16, 2004.
(Previously Filed.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
January 18, 2005. (Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
January 18, 2005. (Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated January 18, 2005. (Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated January 18, 2005. (Filed herewith.)
47
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: /s/ Denis A. Krusos
-----------------------------
Denis A. Krusos
Chairman of the Board and
January 18, 2005 Chief Executive Officer
48
COPYTELE, INC.
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2004
Page
----
Report of Independent Registered Public Accounting Firm: Grant Thornton LLP F-1
Balance Sheets as of October 31, 2004 and 2003 F-2
Statements of Operations for the years ended October 31, 2004, 2003 and 2002 F-3
Statement of Shareholders' Equity for the years ended October 31, 2004, 2003 and 2002 F-4
Statements of Cash Flows for the years ended October 31, 2004, 2003 and 2002 F-5
Notes to Financial Statements F-6 - F-22
Schedule of Valuation and Qualifying Accounts S-1
Additional information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or notes
thereto.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
COPYTELE, INC.
We have audited the accompanying balance sheets of CopyTele, Inc. (the
"Company") (a Delaware corporation) as of October 31, 2004 and 2003, and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended October 31, 2004. 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 of the Public
Company Accounting Oversight Board (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, 2004 and 2003, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred a net loss of approximately $3,361,000 during the year
ended October 31, 2004, and, as of that date, the Company has an accumulated
deficit of approximately $68,456,000. These and the other factors described in
Note 1 raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2) as of October 31, 2004 and 2003 and for each of the three years in
the period ended October 31, 2004. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
/s/ GRANT THORNTON LLP
- -----------------------------------------
Melville, New York
January 4, 2005, except for Note 10 as to
which the date is January 12, 2005
F-1
COPYTELE, INC.
BALANCE SHEETS
October 31, October 31,
ASSETS 2004 2003
-------------- ---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,002,777 $ 1,023,531
Accounts receivable, net of allowance for doubtful accounts of $149,455
and $159,230, respectively 63,460 41,500
Other receivables, net of allowance for doubtful accounts of $108,793
and $181,952, respectively 84,308 127,124
Inventories 999,429 1,044,875
Prepaid expenses and other current assets 122,482 47,972
---------------- ----------------
Total current assets 2,272,456 2,285,002
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$2,101,008 and $2,084,010, respectively 38,085 39,480
OTHER ASSETS 5,509 6,009
---------------- ----------------
$ 2,316,050 $ 2,330,491
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 402,640 $ 316,865
Accrued liabilities 40,480 25,420
---------------- ----------------
Total current liabilities 443,120 342,285
COMMITMENTS AND CONTINGENCIES
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;
85,523,253 and 80,151,478 shares issued and outstanding, respectively 855,233 801,515
Additional paid-in capital 69,474,058 66,282,397
Accumulated deficit (68,456,361) (65,095,706)
---------------- ----------------
1,872,930 1,988,206
---------------- ----------------
$ 2,316,050 $ 2,330,491
================ ================
The accompanying notes are an integral part of these statements.
F-2
COPYTELE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended October 31,
-------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
REVENUE
Sales, net $ 494,462 $ 244,221 $ 645,027
Collaborative agreement -- -- 4,541,667
------------ ------------ ------------
Total revenue 494,462 244,221 5,186,694
COST OF REVENUE
Cost of sales 176,112 175,944 427,056
Cost of collaborative agreement -- -- 1,444,002
------------ ------------ ------------
Total cost of revenue 176,112 175,944 1,871,058
Gross profit 318,350 68,277 3,315,636
------------ ------------ ------------
OPERATING EXPENSES
Research and development expenses 2,164,427 1,807,742 1,625,974
Selling, general and administrative expenses 1,518,911 1,379,614 2,177,608
Impairment loss on commercial trade barter credits -- -- 2,820,800
------------ ------------ ------------
Total operating expenses 3,683,338 3,187,356 6,624,382
------------ ------------ ------------
LOSS FROM OPERATIONS (3,364,988) (3,119,079) (3,308,746)
INTEREST INCOME 4,333 4,668 23,506
------------ ------------ ------------
NET LOSS $ (3,360,655) $ (3,114,411) $ (3,285,240)
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (.04) $ (.04) $ (.05)
------------ ------------ ------------
Shares used in computing net loss per share:
Basic and Diluted 82,953,519 75,153,015 68,088,748
============ ============= ============
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit
----------- ---------- ----------- --------------
BALANCE, October 31, 2001 66,521,100 665,211 62,197,370 (58,696,055)
Common stock issued upon exercise of stock options under stock
option plans 20,000 200 7,800 --
Common stock issued to employees for services rendered 3,311,405 33,114 1,280,039 --
Common stock issued to consultants 404,650 4,047 111,004 --
Net loss -- -- -- (3,285,240)
---------- ---------- ----------- ------------
BALANCE, October 31, 2002 70,257,155 702,572 63,596,213 (61,981,295)
Stock option compensation to consultants -- -- 4,800 --
Common stock issued upon exercise of stock options under stock
option plans 4,046,500 40,465 1,087,725 --
Common stock issued to employees for services rendered 4,483,111 44,831 1,246,906 --
Common stock issued to consultants 1,364,712 13,647 346,753 --
Net loss -- -- -- (3,114,411)
---------- ---------- ----------- ------------
BALANCE, October 31, 2003 80,151,478 801,515 66,282,397 (65,095,706)
Stock option compensation to consultants -- -- 196,691 --
Common stock issued upon exercise of stock options under stock
option plans 2,236,500 22,365 1,177,605 --
Common stock issued to employees for services rendered 2,491,415 24,914 1,481,679 --
Common stock issued to consultants 643,860 6,439 335,686 --
Net loss -- -- -- (3,360,655)
---------- ---------- ----------- ------------
BALANCE, October 31, 2004 85,523,253 $855,233 $69,474,058 $(68,456,361)
========== ========== =========== ============
The accompanying notes are an integral part of this statement.
F-4
COPYTELE, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
--------------------------------------------------
2004 2003 2002
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(1,792,103) $(1,234,490) $(4,136,913)
Cash received from customers 582,648 271,321 681,936
Cash received from collaborative agreement -- -- 3,000,000
Interest received 4,333 4,668 23,506
---------------- --------------- ---------------
Net cash used in operating activities (1,205,122) (958,501) (431,471)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (15,602) (980) (38,567)
---------------- --------------- ---------------
Net cash used in investing activities (15,602) (980) (38,567)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration disbursements 1,199,970 1,128,190 8,000
---------------- --------------- ---------------
Net cash provided by financing activities 1,199,970 1,128,190 8,000
---------------- --------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,754) 168,709 (462,038)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,023,531 854,822 1,316,860
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,002,777 $ 1,023,531 $ 854,822
================ =============== ===============
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $(3,360,655) $(3,114,411) $(3,285,240)
Impairment loss on commercial trade barter credits -- -- 2,820,800
Stock option compensation to consultants 196,692 4,800 --
Stock awards granted to employees and consultants pursuant to stock
incentive plans 1,848,717 1,652,137 1,428,204
Provision for [recovery of] doubtful accounts (73,159) 205,011 155,505
Provision for slow-moving inventory -- -- 100,000
Depreciation and amortization 16,997 33,083 86,471
Change in operating assets and liabilities:
Accounts receivable and other receivables 94,015 27,097 (19,846)
Inventories 45,446 251,324 193,151
Prepaid expenses and other current assets (74,510) 54,547 34,383
Other assets 500 (355) 36,959
Accounts payable and accrued liabilities 100,835 (71,734) (440,191)
Deferred revenue -- -- (1,541,667)
---------------- --------------- ---------------
Net cash used in operating activities $(1,205,122) $ (958,501) $ (431,471)
================ =============== ===============
The accompanying notes are an integral part of these statements.
F-5
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
ORGANIZATION
CopyTele, Inc. was incorporated on November 5, 1982. Our principal
operations are the development, production and marketing of multi-functional
hardware and software based encryption products that provide information
security for domestic and international users over virtually every
communications media and the development, production and marketing of thin, high
brightness, flat panel video displays.
PRODUCTS
We currently have 14 different products in our line of hardware-based
encryption solutions. Our encryption products are multi-functional, hardware
based digital encryption systems that provide high-grade voice, fax and data
encryption using either the Citadel(TM) CCX encryption cryptographic chip (which
is manufactured by the Harris Corporation) or the Triple DES or AES algorithm
(algorithms available in the public domain which are used by many U.S.
government agencies). In addition, we have developed two software-based security
products, one of which uses either the Triple DES or the AES algorithm to
encrypt data files and e-mail attachments in both desktop and laptop computers
utilizing Microsoft Windows operating systems, and the other of which can
encrypt voice and data in cellular and satellite phones, scanners, and printers.
We sell our encryption products directly to end-users and through dealers and
distributors.
We are also continuing our research and development work on our
electron emission display ("Flat CRT") technology. We have been developing a
Flat CRT display based on our thin film technology ("TFT") and have produced
prototype displays containing TFT color matrix structures.
FUNDING AND MANAGEMENT'S PLANS
From our inception through June 2001, we had met our liquidity and
capital expenditure needs primarily through the proceeds from sales of common
stock in our initial public offering, in private placements, upon exercise of
warrants issued in connection with the private placements and public offering,
and upon the exercise of stock options. Commencing in the fourth quarter of
fiscal 1999, we began to generate cash flows from sales of our encryption
products, and, from June 2001 to January 2002, we received development payments
from Futaba Corporation ("Futaba") of Japan.
During fiscal 2004, our operating activities used approximately
$1,205,000 in cash. This resulted from payments to suppliers, employees and
consultants of approximately $1,792,000, which was offset by cash of
approximately $583,000 received from collections of accounts receivable and
other receivables related to sales of encryption products and approximately
$4,000 of interest income received. In addition, during fiscal 2004 we received
approximately $1,200,000 in cash upon the exercise of stock options and
purchased approximately $16,000 of equipment. As a result, our cash and cash
equivalents at October 31, 2004 decreased to approximately $1,003,000 from
approximately $1,024,000 at the end of fiscal 2003.
F-6
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
We believe that our existing cash and accounts receivable, together
with cash flows from expected sales of encryption products and flat panel
displays, and other potential sources of cash flows, will be sufficient to
enable us to continue in operation until at least the end of the first quarter
of fiscal 2006. We anticipate that, thereafter, we will require additional funds
to continue our marketing, production, and research and development activities,
and we will require outside funding if cash generated from operations is
insufficient to satisfy our liquidity requirements. However, our projections of
future cash needs and cash flows may differ from actual results. If current cash
and cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we may seek to sell debt or equity securities or to
obtain a line of credit prior to the first quarter of fiscal 2006. The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing. There can be no assurance that we will generate sufficient revenues
in the future (through sales or otherwise) to improve our liquidity or sustain
future operations, that our production capabilities will be adequate, that other
products will not be produced by other companies that will render our products
obsolete, or that other sources of funding would be available, if needed, on
favorable terms or at all.
The accompanying financial statements have been prepared assuming that
we will continue as a going concern. As shown in the accompanying financial
statements, we have incurred a net loss of approximately $3,361,000 during the
year ended October 31, 2004, and, as of that date, we have an accumulated
deficit of approximately $68,456,00. These and the other factors described
herein raise substantial doubt about our ability to continue as a going concern.
Management's plans in regard to these matters are set forth above. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
SALES
Revenues from sales are recorded when all four of the
following criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred and title has transferred or
services have been rendered; (iii) our price to the buyer is fixed or
determinable; and (iv) collectibility is reasonably assured.
COLLABORATIVE AGREEMENT
A $2.5 million payment received from Futaba in June 2001,
pursuant to an agreement with Futaba described in Note 3, was
recognized ratably over the period between June 2001 and June 2002, the
contractually defined one-year period of our commitment under this
agreement. A subsequent $3 million payment received from Futaba under
this agreement in January 2002 was recognized ratably over the
remainder of the one-year period.
SALES RETURNS
Revenues are recorded net of estimated sales returns.
F-7
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
WARRANTY POLICY
We warrant that our products are free from defects in material and
workmanship for a period of one year from the date of initial purchase. The
warranty does not cover any losses or damage that occur as a result of improper
installation, misuse or neglect. Management has recorded a nominal amount of
warranty liability as of October 31, 2004 and October 31, 2003, based upon
historical experience and management's best estimate of future warranty claims.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents consist of highly liquid instruments that are
readily convertible into cash and have original maturities of three months or
less. During the years ended October 31, 2004, 2003 and 2002, the Company did
not pay any interest or income taxes.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at amounts due from customers net of an
allowance for doubtful accounts. Management reviews our accounts receivable for
potential doubtful accounts and maintains an allowance for estimated
uncollectible amounts. Accounts receivable are written off when they became
uncollectible.
Changes in our allowance for doubtful accounts are as follows:
Year Ended October 31,
--------------------------
2004 2003
--------- --------
Beginning balance $ 159,230 $325,505
Provision for doubtful accounts receivable - 23,056
Accounts written off (9,775) (189,331)
--------- ---------
Ending balance $ 149,455 $ 159,230
========= =========
INVENTORIES
Inventories are stated at the lower of cost, including material, labor
and overhead, determined on a first-in, first-out basis, or market, which
represents our best estimate of market value. We regularly review inventory
quantities on hand, particularly finished goods, and record a provision for
excess and obsolete inventory based primarily on forecasts of future product
demand. Our net income (loss) is directly affected by management's estimate of
the realizability of inventories. To date, sales of our products have been
limited. Accordingly, there can be no assurance that we will not be required to
reduce the selling price of our inventory below our current carrying value.
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.
F-8
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
VALUATION OF LONG-LIVED ASSETS
We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review include a significant underperformance relative to expected historical or
projected future operating results and cash flows, a significant change in the
manner of the use of the asset or a significant negative industry or economic
trend. When management determines that the carrying value of long-lived asset
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the carrying amount of the asset would be written down
to fair value based upon the present value of estimate future cash flows, to
reflect the impairment. See Note 4.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed in the year incurred.
INCOME TAXES
We recognize deferred tax assets and liabilities for the estimated
future tax effects of events that have been recognized in our 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. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" ("SFAS No. 148"), which
addresses financial accounting and reporting for recording expenses for the fair
value of stock options. SFAS No. 148 provides alternative methods of transition
for a voluntary change to fair value based method of accounting for stock-based
employee compensation. Additionally, SFAS No. 148 requires more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The adoption of SFAS No. 148 disclosure requirements,
effective February 1, 2003, had no effect on our financial position or results
of operations. SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS No.
123") encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. We account for stock
options granted to employees using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees" ("APB Opinion No. 25") and comply with the disclosure provisions
of SFAS No. 123 and SFAS No. 148. Compensation cost for stock options issued to
employees and directors 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 or director
must pay to acquire the stock. In accordance with APB Opinion No. 25, we have
not recognized any compensation cost, as all option grants to employees and
directors have been made at the fair market value of our stock on the date of
grant.
F-9
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Had compensation cost for stock options granted to employees been
determined at fair value, consistent with SFAS No. 123, our net loss and net
loss per share would have increased to the following adjusted amounts:
For the Year Ended October 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net loss as reported $(3,360,655) $(3,114,411) $(3,285,240)
Add: Total stock-based employee compensation
expense, determined under fair value based
method, for all awards, net of related tax effect (2,909,217) (889,145) (282,908)
----------- ----------- -----------
Net loss as adjusted $(6,269,872) $(4,003,556) $(3,568,148)
=========== =========== ===========
Net loss per share, basic and diluted:
As reported $ (0.04) $ (0.04) $ (0.05)
=========== =========== ===========
As adjusted $ (0.08) $ (0.05) $ (0.05)
=========== =========== ===========
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, 2004, 2003 and
2002, respectively: risk free interest rates of 2.58%, 1.39% and 3.26%; expected
dividend yields of 0% for all periods; expected lives of 2.49 years, 1.49 years
and 2.50 years; and expected stock price volatility of 124%, 139% and 93%. The
weighted average fair value of options granted under SFAS No. 123 for the fiscal
years ended October 31, 2004, 2003 and 2002 was $0.55, $0.13 and $0.34,
respectively.
We account for options granted to non-employee consultants using the
fair value method required by SFAS No. 123. Compensation expense for
consultants, recognized in the fiscal years ended October 31, 2004, 2003 and
2002, was approximately $197,000, $5,000 and $0, 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 either research
and development expenses or selling, general and administrative expenses, as
applicable, in the accompanying statements of operations.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
We comply with the provisions of SFAS No. 128, "Earnings Per Share"
("SFAS No. 128"). In accordance with SFAS No. 128, basic net income (loss) per
common share ("Basic EPS") is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (loss)
per common share ("Diluted EPS") is computed by dividing net income (loss) by
the weighted average number of common shares and dilutive common share
equivalents and convertible securities then outstanding. Diluted EPS for 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. For this
reason, excluded from the calculation of Diluted EPS for the fiscal years ended
October 31, 2004, 2003 and 2002, were options to purchase 18,064,546 shares,
15,522,246 shares and 14,705,746 shares, respectively.
F-10
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
We comply with the provisions of SFAS No. 107, "Disclosure about Fair
Value of Financial Instruments," which requires disclosures about the fair value
of financial instruments. In the opinion of management, the carrying value of
all financial instruments, consisting primarily of cash and cash equivalents,
accounts and other receivables and accounts payable, reflected in the
accompanying balance sheet, approximates fair value as of October 31, 2004 and
2003, due to their short term nature.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
EFFECT OF RECENTLY ISSUED PRONOUNCEMENT
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value
of such equity instruments be recognized as an expense in the historical
financial statements as services are performed. Prior to SFAS No. 123(R), only
certain pro forma disclosures of fair value were required. The provisions of
this Statement are effective for the first interim reporting period that begins
after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with
the quarter ending October 31, 2005. If we had included the cost of employee
stock option compensation in our financial statements, our net loss for the
fiscal years ended October 31, 2004, 2003 and 2002 would have increased by
approximately $2,909,000, $889,000 and $283,000, respectively. Accordingly, the
adoption of SFAS No. 123(R) is expected to have a material effect on our
financial statements.
3. COLLABORATIVE AGREEMENT
From June 2001 until June 2002, pursuant to an agreement with Futaba,
we worked with Futaba to jointly develop and commercialize a full-color video
display utilizing our display technology. We received payments from Futaba
aggregating $5,500,000 during the term of this agreement. We have no further
performance obligations with respect to this agreement.
In 1997, we entered into an agreement with Volga for certain
development efforts in connection with our display technology. Under amendments
to this agreement, we paid Volga an aggregate of $1,110,000 during fiscal 2002
for development efforts during the term of our agreement with Futaba.
F-11
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
4. BARTER TRANSACTION AND ASSOCIATED IMPAIRMENT
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 Opinion 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 could have been 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 would have to pay a certain
percentage of the advertising or other expense in cash. 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 evaluated the carrying amount of this
asset.
Unused barter credits at May 1, 2002 aggregated approximately
$2,821,000. To utilize these barter credits in exchange for advertising and
purchase discounts, we would have to pay between 65-70% of the transaction value
in cash. Because our anticipated cash flow was negatively affected by the
termination of the agreement with Futaba, our ability to make such payments and
thereby utilize the barter credits was uncertain. Therefore, during fiscal 2002,
we wrote off all unused barter credits, thereby recognizing an impairment loss
in the amount of approximately $2,821,000. This impairment loss relates to our
Encryption Products Segment.
5. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. Management reviews our accounts receivable and
other receivables for potential doubtful accounts and maintains an allowance for
estimated uncollectible amounts. Generally, no collateral is received from
customers for our accounts receivable. During fiscal 2004, two customers in the
Encryption Products and Services Segment represented 61% and 19%, respectively,
of total net revenues. During fiscal 2003, two customers in the Encryption
Products and Services Segment represented 25% and 13%, respectively, of total
net revenues. Futaba, in the Flat Panel Display Segment, represented 88% of
total net revenues in fiscal 2002. At October 31, 2004, two customers in the
Encryption Products and Services Segment represented 48% and 44%, respectively,
of net accounts receivable. At October 31, 2003, two customers in the Encryption
Products and Services Segment represented 47% and 36%, respectively, of net
accounts receivable.
6. OTHER RECEIVABLES
In May and June 2002, we received restricted common stock from a
customer in connection with an outstanding accounts receivable of approximately
$323,000 and anticipated settling this accounts receivable through the ultimate
sale of the common stock. This customer has agreed with us to cure any
deficiency between the proceeds from the sale of the common stock and the
balance of the outstanding accounts receivable. In addition, the customer's
principal shareholder has personally agreed to cure any deficiency in the event
that the customer defaults on its agreement to cure such deficiency, up to
$292,000. During fiscal 2004 and 2003, we received aggregate proceeds of
approximately $110,000 and $14,000, respectively, from the sale of a portion of
the common stock. As of October 31, 2004, we hold 240,000 shares of common
stock, subject to no restrictions, with a fair value of approximately $72,000,
and we intend to sell the remaining portion of such stock during the next twelve
months to recover the receivable. This receivable is stated at management's
estimate of its net realizable value.
F-12
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
7. INVENTORIES
Inventories consist of the following as of:
October 31,
----------------------------------
2004 2003
---------------- ----------------
Component parts $ 304,862 $ 341,344
Work-in-process 114,075 48,324
Finished products 580,492 655,207
---------------- ---------------
$ 999,429 $ 1,044,875
================ ===============
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
October 31,
----------------------------------
2004 2003
------------- ----------------
Accrued professional fees $ 21,485 $ 7,000
Accrued payroll and related expenses 7,136 5,607
Accrued other 11,859 12,813
------------- -------------
$ 40,480 $ 25,420
============= =============
9. SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
During fiscal years ended October 31, 2004, 2003 and 2002, we issued
2,491,415 shares, 4,483,111 shares and 3,311,405 shares, respectively, of common
stock to certain employees for services rendered, principally in lieu of cash
compensation, pursuant to the CopyTele, Inc. 2000 Share Incentive Plan (the
"2000 Share Plan") and the CopyTele, Inc. 2003 Share Incentive Plan (the "2003
Share Plan"). Included in such shares issued during fiscal 2004 were 235,000
shares and 25,000 shares issued to Denis A. Krusos, our Chairman of the Board
and Chief Executive Officer, and Henry P. Herms, our Vice President-Finance and
Chief Financial Officer, respectively. We recorded compensation expense for the
fiscal years ended October 31, 2004, 2003 and 2002 of approximately $1,507,000,
$1,292,000 and $1,313,000, respectively, for shares of common stock issued to
employees. In addition during fiscal 2004, 2003 and 2002, we issued 643,860
shares, 1,364,712 shares and 404,650 shares, respectively, of common stock to
consultants for services rendered pursuant to the 2003 Share Plan and the 2000
Share Plan. We recorded consulting expense for the fiscal years ended October
31, 2004, 2003 and 2002 of approximately $342,000, $360,000 and $115,000,
respectively, for shares of common stock issued to consultants.
PREFERRED STOCK
On May 29, 1986, our 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. As of October 31, 2004 and 2003, there is
no preferred stock issued and outstanding.
F-13
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
STOCK OPTION PLANS
As of October 31, 2004, we have three stock option plans: the CopyTele,
Inc. 1993 Stock Option Plan (the "1993 Plan"), the 2000 Share Plan, and the 2003
Share Plan, which were adopted by our Board of Directors on April 28, 1993, May
8, 2000, and April 21, 2003, respectively. Stock options outstanding as of
October 31, 2002 of 309,000 shares under our 1987 Stock Option Plan expired
during fiscal 2003 and no shares are available for future grants under this
plan.
Information regarding the 1987 Plan for the three years ended October
31, 2004 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
--------------- -----------------
Shares Under Option and Exercisable at October 31, 2001 449,000 $5.63
Expired (140,000) $5.63
--------------
Shares Under Option and Exercisable at October 31, 2002 309,000 $5.63
Expired (309,000) $5.63
--------------
Shares Under Option and Exercisable at October 31, 2003 - $ -
==============
On July 14, 1993, our shareholders approved the 1993 Plan. The 1993
Plan was amended as of May 3, 1995 and May 10, 1996 to, among other things,
increase the number of shares available for issuance thereunder from 6,000,000
shares to 20,000,000 shares, after giving consideration to stock splits. 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. Since June 2004, the 1993 Plan has
been administered by the Board of Directors. 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 our
shareholders in July 2000, the 1993 Plan was terminated with respect to the
grant of future options.
F-14
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 1993 Plan for the three years ended October
31, 2004 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ----------------
Shares Under Option at October 31, 2001 10,876,780 $4.23
Canceled (80,000) $3.94
----------
Shares Under Option at October 31, 2002 10,796,780 $4.26
Canceled (1,973,000) $6.37
----------
Shares Under Option at October 31, 2003 8,823,780 $3.79
Canceled (956,700) $4.40
-----------
Shares Under Option and Exercisable at October 31, 2004 7,867,080 $3.72
===========
The following table summarizes information about stock options
outstanding under the 1993 Plan as of October 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/04 Contractual Life Exercise Price at 10/31/04 Exercise Price
--------------------- ---------------- ------------------- ----------------- --------------- -----------------
$0.84 to $1.96 1,126,500 3.45 $1.22 1,126,500 $1.22
$2.28 to $3.16 885,000 3.58 $2.31 885,000 $2.31
$3.31 to $4.81 5,460,580 1.80 $4.27 5,740,580 $4.27
$5.75 to $6.38 395,000 1.88 $6.38 845,000 $6.38
The exercise price with respect to all of the options granted under the
1993 Plan, since its inception, was equal to the fair market value of the
underlying common stock at the grant date.
On July 25, 2000, our shareholders approved the 2000 Share Plan. The
maximum number of shares of common stock that may be granted was 5,000,000
shares. On July 6, 2001 and July 16, 2002, the 2000 Share Plan was amended by
our Board of Directors to increase the maximum number of shares of common stock
that may be granted to 10,000,000 shares and 15,000,000 shares, respectively.
These amendments were approved by our shareholders on August 16, 2001 and
September 12, 2002, respectively. 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.
The 2000 Share Plan was administered by the Stock Option Committee
through June 2004 and since that date has been administered by the Board of
Directors, 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-15
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 2000 Share Plan for the three years ended
October 31, 2004 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
--------------- -----------------
Shares Under Option at October 31, 2001 3,609,966 $0.70
Granted 60,000 $0.34
Canceled (50,000) $0.75
Exercised (20,000) $0.40
---------------
Shares Under Option at October 31, 2002 3,599,966 $0.70
Granted 910,000 $0.23
Canceled (235,000) $0.63
Exercised (995,500) $0.25
---------------
Shares Under Option at October 31, 2003 3,279,466 $0.71
Canceled (39,500) $1.14
Exercised (387,500) $0.45
---------------
Shares Under Option and Exercisable at October 31, 2004 2,852,466 $0.74
==============
The following table summarizes information about stock options
outstanding under the 2000 Share Plan as of October 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/04 Contractual Life Exercise Price at 10/31/04 Exercise Price
--------------------- ---------------- -------------------- ----------------- -------------- -----------------
$0.15 - $0.40 990,000 6.65 $0.40 990,000 $0.40
$0.44 - $0.94 825,466 6.05 $0.71 825,466 $0.71
$1.00 - $1.38 1,037,000 5.82 $1.08 1,067,000 $1.08
The exercise price with respect to all of the options granted under the
2000 Share Plan since its inception, was equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2004, 773 shares
were available for future grants under the 2000 Share Plan.
The 2003 Share Plan provides for the grant of nonqualified stock
options, stock appreciation rights, stock awards, performance awards and stock
units to key employees and consultants of the Company. The maximum number of
shares of common stock available for issuance under the 2003 Share Plan
initially was 15,000,000 shares. On October 8, 2004, the 2003 Plan was amended
by our Board of Directors to increase the maximum number of shares of common
stock that may be granted to 30,000,000 shares. Current and future non-employee
directors are automatically granted nonqualified stock options to purchase
60,000 shares of common stock upon their initial election to the Board of
Directors and at the time of each subsequent annual meeting of our shareholders
at which they are elected to the Board of Directors. The 2003 Share Plan was
administered by the Stock Option Committee through June 2004 and since that date
has been administered by the Board of Directors, which determines the option
price, term and provisions of each option.
F-16
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 2003 Share Plan for the two years ended
October 31, 2004 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------------- ----------------
Shares Under Option at October 31, 2002 - $ -
Granted 6,470,000 $0.29
Exercised (3,051,000) $0.29
--------------
Shares Under Option at October 31, 2003 3,419,000 $0.30
Granted 5,775,000 $0.80
Exercised (1,849,000) $0.56
--------------
Shares Under Option at October 31, 2004 7,345,000 $0.63
==============
Options Exercisable at October 31, 2004 7,285,000 $0.62
==============
The following table summarizes information about stock options
outstanding under the 2003 Share Plan as of October 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Outstanding Average
Exercise Prices at 10/31/04 Contractual Life Exercise Price at 10/31/04 Exercise Price
------------------ ---------------- ------------------- ----------------- ----------------- ------------------
$0.25-$0.46 3,408,000 8.26 $0.29 3,408,000 $0.29
$0.51-$0.75 586,000 9.01 $0.57 586,000 $0.57
$0.81-$1.07 3,351,000 9.58 $0.92 3,291,000 $0.92
The exercise price with respect to all of the options granted under the
2003 Share Plan since its inception, was equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2004, 12,566,129
shares were available for future grants under the 2003 Share Plan.
10. INVESTIGATION AND RECOVERY EFFORTS REGARDING MISAPPROPRIATED FUNDS
During fiscal 2004 and the first month of fiscal 2005, a former
employee embezzled approximately $185,000 in cash of which approximately $10,000
relates to fiscal 2005. Subsequent to October 31, 2004, we recovered
approximately $110,000 of such loss through insurance proceeds, of which
approximately $100,000 is recorded as other current assets on the accompanying
balance sheet as of October 31, 2004. We have also recorded a charge to expense
in fiscal 2004 of approximately $75,000 related to this matter. During fiscal
2003 and 2002 the former employee committed additional fraudulent activities
aggregating approximately $25,000, which were expensed during such fiscal
periods. We will seek additional recoveries from other parties which, if we are
successful in recovering additional amounts, will be recorded as recoveries in
future periods when they are received.
F-17
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
LEASES
We lease space at our principal location for office and laboratory
research facilities. The current lease is for approximately 12,000 square feet
and expires on November 30, 2008. The lease contains base rentals of
approximately $255,000 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 or the entire lease as of May 31, 2006. This lease does not contain
provisions for its renewal.
Rent expense for the years ended October 31, 2004, 2003 and 2002, was
approximately $247,000, $235,000 and $250,000, respectively.
As of October 31, 2004, our noncancelable operating lease commitments are as
follows:
2005 $ 255,000
2006 153,000
----------------
$ 408,000
CONSULTING AGREEMENT
In addition, as of October 31, 2004 we had commitments under a
consulting agreement of approximately $45,000 payable during the first quarter
of fiscal 2005.
12. EMPLOYEE PENSION PLAN
We adopted a noncontributory defined contribution pension plan,
effective November 1, 1983, covering all of our present employees.
Contributions, which are made to a trust and have been funded on a current
basis, are based upon specified percentages of compensation, as defined in the
plan. During fiscal 2001, we amended the plan to suspend benefit accruals as of
November 1, 2000. Accordingly, we did not incur any pension expense for the
fiscal years ended October 31, 2004, 2003 and 2002.
F-18
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
13. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended October 31,
------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Federal:
Current $ - $ - $ -
Deferred (1,383,000) (1,499,000) (19,000)
State:
Current - - -
Deferred (203,000) (220,000) (3,000)
Adjustment to valuation allowance related
to net deferred tax assets 1,586,000 1,719,000 22,000
---------------- ---------------- ----------------
$ - $ - $ -
================ ================ ================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset, net, at October 31, 2004 and 2003, are as follows:
2004 2003
--------------- ----------------
Long-term deferred tax assets:
Other assets $ 1,128,000 $ 1,128,000
Federal and state NOL and tax credit carryforwards 35,673,000 34,147,000
Other 102,000 42,000
--------------- ---------------
Subtotal 36,903,000 35,317,000
Less: valuation allowance (36,903,000) (35,317,000)
--------------- ---------------
Deferred tax asset, net $ - $ -
=============== ===============
As of October 31, 2004, we had tax net operating loss and tax credit
carryforwards of approximately $84,249,000 and $1,840,000, respectively,
available, within statutory limits (expiring at various dates between 2005 and
2024), to offset any future regular Federal corporate taxable income and taxes
payable. 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.
We had tax net operating loss and tax credit carryforwards of
approximately $84,322,000 and $128,000, respectively, as of October 31, 2004,
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
2005 and 2024 and the tax credit carryforwards expire between 2005 and 2024.
During the three years ended October 31, 2004, we incurred no Federal
and no State income taxes.
F-19
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
14. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While there were no formal agreements, our Chairman of the Board and
Chief Executive Officer and our President waived any and all rights to receive
salary and related pension benefits commencing November 1985 through October 31,
2003. For the year ended October 31, 2004, our Chairman of the Board and Chief
Executive Officer received salary in the amount of approximately $135,000 in the
form of common stock and our President received salary in the amount of
approximately $37,000 in cash. From 1987 through July 31, 2003, three other
senior level personnel also waived salary and related pension benefits.
Commencing in August 2003, the three senior level personnel began receiving
compensation in the form of salary, which in the aggregate approximated $289,000
and $57,000 for the years ended October 31, 2004 and 2003, respectively.
15. SEGMENT INFORMATION
We follow the provisions of SFAS No. 131,"Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While our results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Flat-panel display and (ii)
Encryption products and services. The following represents selected financial
information for our segments for the years ended October 31, 2004, 2003 and
2002:
Encryption
Flat-Panel Products and
Segment Data Display Services Total
- ---------------------------------- --------------- ------------ ------------
Year Ended October 31, 2004:
Revenues $ -- $ 494,462 $ 494.462
Net loss (1,773,282) (1,587,373) (3,360,655)
Depreciation 8,192 8,805 16,997
Interest income 2,010 2,323 4,333
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 855,991 992,726 1,848,717
Total assets 563,363 1,752,687 2,316,050
Additions to long-lived assets 7,520 8,082 15,602
F-20
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Encryption
Flat-Panel Products and
Segment Data Display Services Total
- ---------------------------------- --------------- ------------ ------------
Year Ended October 31, 2003:
Revenues $ -- $ 224,221 $ 224,221
Net income (loss) (1,812,624) (1,301,787) (3,114,411)
Depreciation 18,534 14,549 33,083
Interest income 2,615 2,053 4,668
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 906,549 745,588 1,652,137
Total assets 625,774 1,704,717 2,330,491
Additions to long-lived assets 980 -- 980
Year Ended October 31, 2002:
Revenues $ 4,541,667 $ 645,027 $ 5,186,694
Net income (loss) 1,800,365 (5,085,605) (3,285,240)
Depreciation 29,676 56,795 86,471
Interest income 8,067 15,439 23,506
Impairment loss on
commercial trade barter
credits -- 2,820,800 2,820,800
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 451,997 976,207 1,428,204
Total assets 355,061 2,376,448 2,731,509
Additions to long-lived assets 13,236 25,331 38,567
F-21
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
GEOGRAPHIC INFORMATION
We generate revenue both domestically (United States) and
internationally. International revenues are based on the country in which our
customer (distributor) is located. For the years ended October 31, 2004, 2003
and 2002, and as of each respective year-end, sales and accounts receivable by
geographic area are as follows:
Geographic Data 2004 2003 2002
- ---------------------------- -------- ------------ ----------
Revenue:
United States $479,621 $ 199,810 $ 622,144
Japan -- -- 4,541,667
Other international 14,871 44,401 22,883
-------- ---------- ----------
$494,492 $ 244,211 $5,186,694
======== ========== ==========
Accounts receivable, net:
United States $ 63,460 $ 37,600 $ 68,177
International -- 3,900 9,603
-------- ---------- ----------
$ 63,460 $ 41,500 $ 77,780
======== ========== ==========
16. QUARTERLY RESULTS AND SEASONALITY (UNAUDITED)
The following table sets forth unaudited financial data for each of our
last eight fiscal quarters:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- ----------- ----------
Year Ended October 31, 2004:
Income Statement Data:
Revenue $ 39,000 $ 101,804 $ 216,447 $ 137,211
Gross profit 24,401 70,105 133,227 90,617
Net loss (809,354) (694,900) (1,034,212) (822,189)
Net loss per share of common stock-
basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Year Ended October 31, 2003:
Income Statement Data:
Revenue $ 91,339 $ 21,743 $ 83,240 $ 47,899
Gross profit 29,314 6,083 52,743 (19,863)
Net income (loss) (804,596) (970,024) (650,765) (689,026)
Net loss per share of common stock-
basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
F-22
COPYTELE, INC.
SCHEDULE II
S-1
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------------------------------------------
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 (1) end of period
- --------------------------------------------------------------------------------------------------------------------
2004
Allowance for doubtful accounts $ 159,230 $ - $ 9,775 $ 149,455
Reserve against Other receivables $ 181,952 $ - $ 73,159 $ 108,793
- --------------------------------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 325,505 $ 23,056 $ 189,331 $ 159,230
Reserve against Other receivables $ - $ 181,952 $ - $ 181,952
- --------------------------------------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 240,000 $ 155,505 $ 70,000 $ 325,505
- --------------------------------------------------------------------------------------------------------------------
(1) Represents write-offs of reserved balances or reductions in allowances
previously provided.
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
S-1
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation, as amended. (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.)
3.2 By-laws, as amended and restated. (Incorporated by
reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.)
3.3 Amendment to By-laws. (Incorporated by reference to Form
10-Q for the fiscal quarter ended January 31, 2003.)
10.1 CopyTele, Inc. 1993 Stock Option Plan, adopted on April
28, 1993 and approved by shareholders on July 14, 1993.
(Incorporated by reference to Proxy Statement dated June
10, 1993.)
10.2 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 3, 1995 and approved by
shareholders on July 19, 1995. (Incorporated by
reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.)
10.3 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 10, 1996 and approved by
shareholders on July 24, 1996. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.)
10.4 Agreement dated March 3, 1999 between Harris Corporation
and CopyTele, Inc. (Incorporated by reference to Form
10-Q for the fiscal quarter ended January 31, 1999.)
10.5 Stock Subscription Agreement dated April 27, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to Form
10-Q for the fiscal quarter ended April 30, 1999.)
10.6 Agreement dated July 28, 1999, among CopyTele, Inc.,
Harris Corporation and RF Communications. (Incorporated
by reference to Form 8-K dated July 28, 1999.)
10.7 Stock Subscription Agreement dated August 30, 1999,
including form of Warrant, between CopyTele, Inc. and
Lewis H. Titterton. (Incorporated by reference to Form
10-K for the fiscal year ended October 31, 1999.)
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated
by reference to Annex A of our Proxy Statement dated
June 12, 2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 6, 2001 and approved by
shareholders on August 16, 2001. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July
31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share
Incentive Plan, adopted on July 16, 2002 and approved by
shareholders on September 12, 2002. (Incorporated by
reference to Exhibit 4(e) to our Form S-8 (Registration
No. 333-99717) dated September 18, 2002.)
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation
Agreement between CopyTele, Inc. and Volga Svet Ltd.
(Incorporated by reference to Exhibit 10.14 to our Form
10-K for the fiscal year ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet
Ltd., dated as of February 1, 2002. (Incorporated by
reference to Exhibit 10.15 to our Form 10-K for the
fiscal year ended October 31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan (Incorporated
by reference to Exhibit 4 to our Form S-8 dated May 5,
2003).
10.14 Amendment No. 1 to the CopyTele, Inc. 2003 Share
Incentive Plan (Incorporated by reference to Exhibit
4(e) to our Form S-8 dated November 9, 2005).
10.15 Form of Stock Option Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2004).
10.16 Form of Stock Award Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2004).
10.17 Long Term Agreement dated April 2, 2004 between
CopyTele, Inc. and Boeing Satellite Systems
International, Inc., as modified September 16, 2004.
(Previously Filed.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
January 18, 2005. (Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
January 18, 2005. (Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated January 18, 2005. (Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated January 18, 2005. (Filed herewith.)