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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended October 31, 2005
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 Incorporation (I.R.S. Employer
or Organization) Identification No.)
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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:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [x]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [_] No [x]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [__] Accelerated filer [x] Non-accelerated filer [__]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [x]
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of April 29, 2005 (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 ($0.50):
$42,947,807
On January 25, 2006, the registrant had outstanding 93,759,406 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
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DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
INFORMATION INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K MAY
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE NOT STATEMENTS OF
HISTORICAL FACTS, BUT RATHER REFLECT OUR CURRENT EXPECTATIONS CONCERNING FUTURE
EVENTS AND RESULTS. WE GENERALLY USE THE WORDS "BELIEVES," "EXPECTS," "INTENDS,"
"PLANS," "ANTICIPATES," "LIKELY," "WILL" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. 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
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 CRT displays.
FLAT PANEL CRT DISPLAY
After more than eight years of developing our high-brightness,
thin, flat panel CRT display technology, we have achieved our goal of producing
a flat panel display ("Flat Panel CRT") that not only preserves many of the
beneficial characteristics of a cathode ray tube ("CRT") but is thin and
consumes less power. We achieved this goal by creating a TFT (thin film
technology) based pixel matrix electron control system ("PMECS") that can
operate with virtually any electron emission system. We have begun to market our
Flat Panel CRT by demonstrating it at flat panel display exhibitions and to
potential customers and licensees. We have produced models of full color thin
Flat Panel CRT displays that can be connected to a DVD player to show color or
black and white movies.
Our Flat Panel CRT displays incorporating PMECS consist of two
thin glass substrates which are vacuumed and sealed using our unique low
temperature technology. Our Flat Panel CRT displays can operate with virtually
any type of electron emission system, have gray scale and color or monochrome
capability, operate at low voltages, have no pixel cross-talk (i.e., the
operation of a pixel does not interfere with other pixels), and consume low
power. In addition, PMECS, in conjunction with our electron emission
technologies, is applicable to any size display from small hand-held devices to
large HDTV products. We believe that Flat Panel CRT displays with PMECS could
potentially have a cost similar to a CRT and thus cost less than current LCD or
plasma displays.
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The PMECS, which is located on one of the substrates, is being
exclusively produced for us by an Asian company utilizing its mass production
TFT liquid crystal display ("LCD") facilities. Our supplier has incorporated the
PMECS into 5.5 inch (diagonal) TFT color matrix structures with 960 x 234
pixels. We are now producing, with the assistance of Volga Svet Ltd. ("Volga"),
a Russian display company that we have been working with for more than eight
years, our CTVD-201 monochrome and CTVD-202 color displays using these
structures in combination with our proprietary electron emission technologies.
These emission technologies, which include carbon nanotubes, both reflective and
non-reflective planar edge, and thin filaments, are suitable for a variety of
display applications. In particular, we are incorporating our low voltage and
low power carbon nanotube electron emission system into our displays. These
carbon nanotubes are extremely small carbon elements, approximately 10,000 times
thinner than the width of a human hair, that emit electrons under controllable
conditions. We are working with one of our sources of nanotubes, a U.S. company,
to incorporate its carbon nanotubes into our 5.5 inch diagonal color and
monochrome displays.
We have successfully tested our Flat Panel CRT displays under
various environmental conditions. This included subjecting our displays to
shock, vibration, and operating temperatures from -40(degree)C to 85(degree)C.
Our displays are capable of operating under both sunlight and nighttime
conditions. As a result, we believe that our displays can meet performance
requirements for both outdoor and indoor applications. We have also reduced the
operating voltage requirements of our displays to further improve the
reliability and extend the life of our displays.
Currently, LCDs are the most commonly used flat panel displays
in commercial products. We believe that our Flat Panel CRT display utilizing
PMECS has a number of advantages over LCD displays:
o Potentially lower cost, since our Flat Panel CRT does
not contain a backlight, or color filter or
polarizer, which represent a substantial portion of
the cost of an LCD.
o Lower power, since our Flat Panel CRT has no
backlight.
o Approximately 1,000 times faster response time.
o Up to 10 times brighter.
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o Up to 20 times higher contrast.
o Capable of operating over a wider range of ambient
light conditions than LCDs, especially in bright
light conditions.
o Capable of operating over a temperature range of
-40(degree)C to 85(degree)C, which exceeds the range
over which LCDs can operate, especially under cold
temperature conditions.
o Can be viewed with high contrast over approximately a
180 degree viewing angle, in both the horizontal and
vertical directions, which exceeds the viewing angle
with high contrast of LCDs.
Also, our Flat Panel CRT operates at low voltages, similar to
an LCD, as compared to field emission displays which use voltages of up to
10,000 volts. A detailed summary of our color and monochrome display
specifications can be seen on our website, www.copytele.com.
ENCRYPTION PRODUCTS AND TECHNOLOGY
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.
Our line of encryption products consists mainly of our
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 that 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 another
that is able to encrypt voice and data transmitted between cellular and
satellite phones and among servers, scanners, and printers. We sell our
encryption products directly to end-users and through dealers and distributors.
The features common to our hardware communication products are
as follows:
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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.
Over the past year, we have expanded our encryption product
line and currently have 18 different products in our product line. We have
continued to direct our marketing efforts toward participation in the security
opportunities created by the U.S. Department of Homeland Security, the U.S.
Defense Department, the Health Insurance Portability and Accountability Act
("HIPAA"), the Sarbanes-Oxley Act, and the Gramm-Leach-Bliley Act. We have
entered into agreements with three major U.S. companies to supply them with our
encryption equipment, which is capable of securing fax, voice, and data
information over satellite, digital, and analog communication networks. We are
working with a company to develop an encryption product to secure e-mail
transactions, transparent to the individual user. If this product can be
successfully developed, we will seek to license our technology, non-exclusively,
to the company. We are also working with two companies to secure information
between corporate servers and printers, and between users and high speed
networks.
We have developed a line of products for use over the
satellite communications network of the Thuraya Satellite Telecommunications
Company ("Thuraya"), located in Dubai, United Arab Emirates. The Thuraya
network, developed by the Boeing Company ("Boeing"), provides satellite
communications in Europe, Africa, Russia, the Middle East and Asia. Our products
enable the Thuraya network to provide encrypted communications between satellite
phones, from satellite phones to desk-based phones, or between desk-based
phones. Our products can encrypt both data and, with our DCS-1400-D, which uses
a compact encryption module attached to the Thuraya handset, voice communication
over the Thuraya network. End-users benefiting from our encryption technology
include Thuraya customers served by Boeing in Iraq, U.S. military forces in the
Middle East, and other U.S. government personnel.
Several companies are distributing and marketing our line of
products for use with the Thuraya network. We have an agreement with Boeing
under which Boeing is a distributor of such products. In addition, a major
Thuraya service provider has also become a distributor of, and has purchased,
certain of such products. Thuraya itself has included 13 of our encryption
products sold by Boeing on the Boeing page of Thuraya's website,
http://www.thuraya.com/country/int_sp/boeing/products.htm. Our products are also
being marketed by another of Thuraya's international service providers, Fort
Info Technology FZC, located in Dubai, and are listed on Fort Info Technology's
website, www.forttel.com, under Secure Communications.
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Under our agreement with Boeing, Boeing is the exclusive
distributor of our DCS-1400-D (docker voice encryption device), USS-900T
(satellite fax encryption device), USS-900TL (landline to satellite fax
encryption device), USS-900WF (satellite and cellular fax encryption device),
USS-900WFL (landline to satellite and cellular fax encryption device) and
USS-900TC (satellite fax encryption to computer) products. We have expanded our
line of products distributed by Boeing, which now consists of 13 products. These
products contain the brand name of Thuraya and have operating controls in
Arabic. In addition, with funding provided by Boeing we have developed a
prototype of a docking unit containing the DCS-1400 system to encrypt the next
generation voice and data handset to operate over the Thuraya network. We are
also developing for Boeing, a voice product to operate over the Thuraya network
having a higher level of security. We are also developing additional encryption
products required for applications over the Thuraya network.
In connection with Boeing becoming the exclusive distributor
of certain of our products, Boeing authorized us to use its name on our website.
Accordingly, customers desiring to purchase these encryption products can find
authorized Boeing sales information on the "Encryption Products" page of our
website. In January 2005, Boeing introduced, demonstrated (with our assistance)
and began marketing our encryption products to more than 100 world-wide Thuraya
service providers.
Our encryption products can also be used to further encrypt
data over the Globalstar network. Globalstar provides a satellite voice and data
service throughout a world-wide coverage area. Our DCS-1200 and DCS-1400
encryption devices are included on the Globalstar webpage,
http://www.globalstarusa.com/en/products/encryption.php.
We are continuing to develop a hardware device to encrypt
Short Message Service ("SMS"), an inexpensive text message communication
protocol that is used in many cellular and satellite phones and networks. We
currently plan to utilize this encryption solution in conjunction with the
Thuraya handsets, but it can be used for data communications across other
platforms as well.
Our products provide secure communications with many different
satellite phones, including the Thuraya 7100/7101 handheld terminal ("HHT"),
Globalstar GPS-1600 HHT, Telit SAT-550/600 HHT, Globalstar GPS-2800/2900 fixed
phone, Iridium 9500/9505 HHT, Inmarsat M4 and Mini "M" HHT units from Thrane &
Thrane and Nera. Through the use of our products, encrypted satellite
communications are available for many Thuraya docking units, including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APsi's FDU-2500
Fixed Docking Unit, and Sattrans's SAT-OFFICE Fixed Docking Unit and SAT-VDA
Hands-Free Car Kit.
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We have also 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. We are
supplying our USS-900AF automatic fax encryption product to a major U.S. defense
contractor to secure its worldwide fax communication. We have entered into an
agreement with another major U.S. company and supplied an initial proof of
concept encryption solution utilizing another of our products that has been
configured to interface with that company's satellite global positioning system
("GPS") and data communication fleet management network.
We are supplying another major U.S. company with our USS-900AF
to secure fax communication of personal medical records. We are also providing
our DCS-1700 to several U.S. companies to encrypt the network data communication
links between corporate servers, scanners, and printers contained in
multi-functional products. The TCP/IP encryption provided by our DCS-1700 is
also being evaluated by firms that require secure data backup to meet HIPAA,
Sarbanes-Oxley, Gramm-Leach-Bliley and other corporate governance requirements.
There is continued interest in our encryption products by
governments located in the Americas, Europe, Africa, Asia and the Middle East.
Applications for these customers include voice, fax and data security using
land-line and wireless phones. Product evaluations by these customers are
usually thorough and take time to materialize into firm orders.
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
Our business involves a high degree of risk and uncertainty,
including 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. 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, 2005. 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, 2005:
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FISCAL YEARS ENDED OCTOBER 31,
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2005 2004 2003
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Net loss............................................. $4,451,257 $3,360,655 $3,114,411
Research and development expenses.................... 2,266,911 2,164,427 1,807,742
Net cash used in operations.......................... 1,720,332 1,205,122 958,501
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, 2005 states that
the net loss incurred during the year ended October 31, 2005, 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, 2004 and 2003 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 2007. 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 2007. 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. If we cannot obtain such funds if needed, we would need
to curtail or cease some or all of our operations.
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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 CRT
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 color and monochrome versions of our high-brightness
Flat Panel CRT 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 CRT displays and encryption
products;
o the capability of Volga to produce thin high-brightness color
and monochrome Flat Panel CRT displays and supply them to us;
o our ability to jointly develop with Volga and produce a color
Flat Panel CRT display with various electron emission systems;
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; and
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.
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o WE ARE DEPENDENT UPON A FEW KEY EXECUTIVES AND THE LOSS OF THEIR
SERVICES COULD ADVERSELY AFFECT US.
Our future success is dependent on our ability to hire, retain
and motivate highly qualified personnel. In particular, our success depends on
the continued efforts of our Chief Executive Officer, Denis A. Krusos, and our
President, Frank J. DiSanto, who founded our company in 1982 and are engaged in
the management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
o THE VERY COMPETITIVE MARKETS FOR OUR ENCRYPTION PRODUCTS AND FLAT PANEL
DISPLAY TECHNOLOGY COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS AND
OPERATING RESULTS.
The markets for our encryption products and flat panel display
technology worldwide are highly competitive and subject to rapid technological
changes. Most of our competitors are larger than us and possess financial,
research, service support, marketing, manufacturing and other resources
significantly greater than ours. Competitive pressures may have a harmful effect
on our business and operating results.
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 their shares.
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.
NEW TECHNOLOGIES UNDER DEVELOPMENT
FLAT PANEL CRT DISPLAY TECHNOLOGY
During 2005, we continued to pursue our efforts to develop new
technologies for our color and monochrome Flat Panel CRT displays. We are
currently focusing on developing two new technologies.
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First, we are further developing our Flat Panel CRT display
technology to incorporate in our displays our low voltage and low power carbon
nanotube electron emission system as part of PMECS. We are utilizing nanotubes
derived from three sources, including from a U.S. company. We have developed a
number of different configurations of carbon nanotube electron emission systems
to optimize the type of nanotube system necessary for PMECS. We are
incorporating our nanotube system in conjunction with PMECS into our Flat Panel
CRT displays and we are currently evaluating the performance characteristics of
the nanotube system operation. Our PMECS system incorporating carbon nanotubes
does not require a focusing element, operates at low voltages, and has low power
consumption. We are also utilizing our E-Paper(TM) technology in connection with
development of our PMECS incorporating our carbon nanotube electron emission
technology.
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. Accordingly, with
our use of chip on glass ("COG") matrix design, the overall display thickness
using PMECS with such spacer technology 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 displays using our PMECS with the spacer technology.
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 continued
to make prototypes of our encryption solution, including, recently, a more
compact version, to demonstrate our solution's feasibility.
10
We are further developing an encryption solution to secure
data links among corporate servers and scanners, include to secure data backup,
to meet HIPAA, Sabanes-Oxley, Gramm-Leach-Bliley, and other corporate government
requirements. We are also developing an encryption system to secure e-mail
services. The system will allow corporations or individuals to encrypt e-mail
transactions, transparent to the individual user. In addition, we are developing
for Boeing, a voice product to operate over the Thuraya network having a higher
level of security.
We are also developing and have produced a prototype of an
encryption product to encrypt the next generation voice and data handset over
the Thuraya network.
PRODUCTION
FLAT PANEL VIDEO DISPLAY PRODUCTS
We are producing models, with the assistance of Volga, both
color and monochrome Flat Panel CRT displays using the 5.5 inch (diagonal) TFT
color matrix structures with 960 x 234 pixels which incorporate PMECS supplied
to us by the Asian company. The displays also incorporate our hardware and
software to generate color and monochrome information on our displays. We have
updated our hardware and software in these displays to permit them to generate
video, such as color or black and white movies from a DVD player. Currently, we
can supply a limited quantity of displays and we are investigating utilizing
either the Asian company or other TFT LCD and CRT production companies to mass
produce the displays for our or their potential users. We are also investigating
licensing the technology to those companies, including the Asian company, for
their use in mass producing displays for their and our customers. There is no
assurance that we can mass produce the displays or that we can make suitable
mass production arrangements with other companies.
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 and licensing
opportunities for our display technology, however to date we have not had any
revenue from sales or licensing of our Flat Panel CRT. We have utilized models
of our 5.5 inch (diagonal) color and monochrome displays to demonstrate the
capabilities of our display and its advantages over LCD, Plasma and CRT
displays.
11
We have commenced displaying our Flat Panel CRT display at
exhibitions. In May 2005, we exhibited our Flat Panel CRT display to personnel
from more than one hundred companies and government agencies at the Society for
Information Display International Symposium, Seminar and Exhibition, the premier
international gathering of scientists, engineers, manufacturers and users for
the discussion, presentation, viewing and exhibiting of information display
technology. In October 2005, we also exhibited our Flat Panel CRT color displays
at the FPD International 2005 "Displaying the Future" exhibition in Yokohama
City, Japan, the leading international exhibition on flat panel displays. We are
following up with a number of companies that have expressed an interest in
utilizing our display technology for their products. Our strategy is to license
our display technology for use by major flat panel display companies for their
display products.
We have continued to work with one company to develop a
plug-in module of our 5.5-inch (diagonal) monochrome 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 monochrome Flat Panel CRT display incorporating our PMECS technology
to supply the current customer requirements.
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, the Defense Department, and the enactment of
laws such as HIPAA, the Sarbanes-Oxley Act, and Gramm-Leach-Bliley Act, which
mandate that government and private sector firms provide higher levels of
information privacy and security. For example, HIPAA requires certain privacy
protection for medical records and other health care information for
individuals. We are working with three companies on applications involving our
encryption technology that offer simple, straight-forward compliance measures
for these laws and we have agreements with several 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. We have an experienced
marketing representative located in Dubai to expand both our marketing and
customer support operations in the Middle East. We attended and supported Boeing
at the Thuraya Service Providers Forum in September 2005, which was attended by
more than 100 world-wide Thuraya service providers. Our encryption products
offered by Boeing were also displayed by three major companies at the Gulf
Information Technology Exhibition (GITEX) in Dubai in September 2005. GITEX 2005
is among the world's top IT exhibitions and celebrated its 25th anniversary this
year. We also have entered into an agreement with a major Thuraya service
provider to distribute our encryption equipment.
12
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. Upon completion of its evaluation,
the latter company would 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.
CUSTOMERS
During fiscal 2005, we recognized approximately $339,000 in
net sales from The Boeing Company, approximately 77% of our total net sales.
During fiscal 2004 we recognized approximately $300,000 in net sales from The
Boeing Company, or approximately 61% of total net sales, and approximately
$93,000 in net sales from Outfitter Satellite, Inc., or approximately 19% of
total net sales. During fiscal 2003 we recognized approximately $60,000 and
$31,000, respectively, in net sales from two customers, or approximately 25% and
13% of total net sales. All of such sales were in our Encryption Products and
Services Segment.
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.
13
PATENTS
We have received patents from the United States and certain
foreign patent offices, expiring at various dates between 2006 and 2022. We have
also filed or are planning to file patent applications for our Flat Panel CRT
panel display technologies, including our PMECS technology, and for our
encryption technologies.
We have received from the U.S. patent office patents for four
variations 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. In addition, two of our patent applications
describing our display technology have recently been published.
We have received from the U.S. patent office two patents
related to our encryption technology. Three other of our patent applications
describing our fax, voice and data encryption over satellite and cellular
communication networks have recently been published.
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.
RESEARCH AND DEVELOPMENT
Research and development expenses were approximately
$2,267,000, $2,164,000, and $1,808,000 for the fiscal years ended October 31,
2005, 2004 and 2003, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and our Financial
Statements.
14
EMPLOYEES AND CONSULTANTS
We had 22 full-time employees and 11 consultants as of October
31, 2005. Eighteen of these individuals, including our Chairman of the Board and
Chief Executive Office and our President, are engaged in research and
development. Their backgrounds include expertise in physics, chemistry, optics
and electronics. Seven 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 $260,000 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 9 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.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Stockholders, held on October 31,
2005, 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, 2005 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 81,316,734 994,832
Frank J. DiSanto 81,507,436 804,130
Henry P. Herms 81,344,944 966,572
George P. Larounis 81,581,679 729,887
(b) Ratification of selection of Grant Thornton LLP as independent
auditors for the fiscal year ending October 31, 2005:
FOR AGAINST ABSTAIN
81,767,227 400,110 144,229
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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 for each
quarterly fiscal period during our fiscal years ended October 31, 2004 and 2005
have been as follows:
- -------------------------------------------------------------------------------
Fiscal Period High Low
===============================================================================
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
- -------------------------------------------------------------------------------
1st quarter 2005 1.08 0.72
2nd quarter 2005 0.77 0.43
3rd quarter 2005 0.67 0.35
4th quarter 2005 $0.68 $0.44
- -------------------------------------------------------------------------------
As of January 25, 2006, the approximate number of record
holders of our common stock was 1,361 and the closing price of our common stock
was $0.85 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.
17
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 years ended October 31,
-------------------------------------------------------------------------
2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Revenue -
Net Sales $ 439,785 $ 494,462 $ 244,221 $ 645,027 $ 732,435
Collaborative agreement -- -- -- 4,541,667 958,333
-------------------------------------------------------------------------
Total revenue 439,785 494,462 244,221 5,186,694 1,690,768
-------------------------------------------------------------------------
Cost of revenue -
Cost of goods and services sold 132,966 176,112 123,140 327,056 323,705
Provision for excess inventory 586,662 -- 52,804 100,000 --
Collaborative agreement -- -- -- 1,444,002 373,934
-------------------------------------------------------------------------
Total cost of revenue 719,628 176,112 175,944 1,871,058 697,639
- --------------------------------------------------------------------------------------------------------------------------------
Gross Profit (Loss) (279,843) 318,350 68,277 3,315,636 993,129
- --------------------------------------------------------------------------------------------------------------------------------
Research and Development Expenses 2,266,911 2,164,427 1,807,742 1,625,974 2,324,979
- --------------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 1,919,010 1,518,911 1,379,614 2,177,608 2,272,386
- --------------------------------------------------------------------------------------------------------------------------------
Impairment Loss on Commercial Trade Barter Credits -- -- -- 2,820,800 --
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income 14,507 4,333 4,668 23,506 32,279
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss (4,451,257) (3,360,655) (3,114,411) (3,285,240) (3,571,957)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock - Basic and Diluted ($.05) ($.04) ($.04) ($.05) ($.06)
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets 1,466,253 2,316,050 2,330,491 2,731,509 6,562,403
- --------------------------------------------------------------------------------------------------------------------------------
Long Term Obligations -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 1,118,023 1,872,930 1,988,206 2,317,490 4,166,526
- --------------------------------------------------------------------------------------------------------------------------------
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 "ITEM 1. BUSINESS - GENERAL RISKS AND UNCERTAINTIES." 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.
18
GENERAL
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 CRT displays.
During 2005, we continued to pursue our efforts to develop new
technologies for our color and monochrome flat panel CRT displays. After more
than eight years of developing our high-brightness, thin, flat panel CRT display
technology, we have achieved our goal of producing a flat panel display ("Flat
Panel CRT") that not only preserves many of the beneficial characteristics of a
cathode ray tube ("CRT") but is thin and consumes less power. We achieved this
goal by creating a TFT (thin film technology) based pixel matrix electron
control system ("PMECS") that can operate with virtually any electron emission
system. We have begun to market our Flat Panel CRT by demonstrating it at flat
panel display exhibitions and to potential customers and licensees. We have
produced models of full color thin Flat Panel CRT displays that can be connected
to a DVD player to show color or black and white movies.
Our Flat Panel CRT displays incorporating PMECS consist of two
thin glass substrates which are vacuumed and sealed using our unique low
temperature technology. Our Flat Panel CRT displays can operate with virtually
any type of electron emission system, have gray scale and color or monochrome
capability, operate at low voltages, have no pixel cross-talk (i.e., the
operation of a pixel does not interfere with other pixels), and consume low
power. In addition, PMECS, in conjunction with our electron emission
technologies, is applicable to any size display from small hand-held devices to
large HDTV products. We believe that Flat Panel CRT displays with PMECS could
potentially have a cost similar to a CRT and thus cost less than current LCD or
plasma displays.
The PMECS, which is located on one of the substrates, is being
exclusively produced for us by an Asian company utilizing its mass production
TFT liquid crystal display ("LCD") facilities. Our supplier has incorporated the
PMECS into 5.5 inch (diagonal) TFT color matrix structures with 960 x 234
pixels. We are now producing, with the assistance of Volga Svet Ltd. ("Volga"),
a Russian display company that we have been working with for more than eight
years, our CTVD-201 monochrome and CTVD-202 color displays using these
structures in combination with our proprietary electron emission technologies.
These emission technologies, which include carbon nanotubes, both reflective and
non-reflective planar edge, and thin filaments, are suitable for a variety of
display applications. In particular, we are incorporating our low voltage and
low power carbon nanotube electron emission system into our displays. These
carbon nanotubes are extremely small carbon elements, approximately 10,000 times
thinner than the width of a human hair, that emit electrons under controllable
conditions. We are working with one of our sources of nanotubes, a U.S. company,
to incorporate its carbon nanotubes into our 5.5 inch diagonal color and
monochrome displays.
19
We have successfully tested our Flat Panel CRT displays under
various environmental conditions. This included subjecting our displays to
shock, vibration, and operating temperatures from -40(degree)C to 85(degree)C.
Our displays are capable of operating under both sunlight and nighttime
conditions. As a result, we believe that our displays can meet performance
requirements for both outdoor and indoor applications. We have also reduced the
operating voltage requirements of our displays to further improve the
reliability and extend the life of our displays.
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".
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.
Our line of encryption products consists mainly of our
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 that 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 another
that is able to encrypt voice and data transmitted between cellular and
satellite phones and among servers, scanners, and printers. We sell our
encryption products directly to end-users and through dealers and distributors.
20
Over the past year, we have expanded our encryption product
line and currently have 18 different products in our product line. We have
continued to direct our marketing efforts toward participation in the security
opportunities created by the U.S. Department of Homeland Security, the U.S.
Defense Department, the Health Insurance Portability and Accountability Act
("HIPAA"), the Sarbanes-Oxley Act, and the Gramm-Leach-Bliley Act. We have
entered into agreements with three major U.S. companies to supply them with our
encryption equipment, which is capable of securing fax, voice, and data
information over satellite, digital, and analog communication networks. We are
working with a company to develop an encryption product to secure e-mail
transactions, transparent to the individual user. If this product can be
successfully developed, we will seek to license our technology, non-exclusively,
to the company. We are also working with two companies to secure information
between corporate servers and printers, and between users and high speed
networks.
We have developed a line of products for use over the
satellite communications network of the Thuraya Satellite Telecommunications
Company ("Thuraya"), located in Dubai, United Arab Emirates. The Thuraya
network, developed by the Boeing Company ("Boeing"), provides satellite
communications in Europe, Africa, Russia, the Middle East and Asia. Our products
enable the Thuraya network to provide encrypted communications between satellite
phones, from satellite phones to desk-based phones, or between desk-based
phones. Our products can encrypt both data and, with our DCS-1400-D, which uses
a compact encryption module attached to the Thuraya handset, voice communication
over the Thuraya network. End-users benefiting from our encryption technology
include Thuraya customers served by Boeing in Iraq, U.S. military forces in the
Middle East, and other U.S. government personnel.
Several companies are distributing and marketing our line of
products for use with the Thuraya network. We have an agreement with Boeing
under which Boeing is a distributor of such products. In addition, a major
Thuraya service provider has also become a distributor of, and has purchased,
certain of such products. Thuraya itself has included 13 of our encryption
products sold by Boeing on the Boeing page of Thuraya's website,
http://www.thuraya.com/country/int_sp/boeing/products.htm. Our products are also
being marketed by another of Thuraya's international service providers, Fort
Info Technology FZC, located in Dubai, and are listed on Fort Info Technology's
website, www.forttel.com, under Secure Communications.
Under our agreement with Boeing, Boeing is the exclusive
distributor of our DCS-1400-D (docker voice encryption device), USS-900T
(satellite fax encryption device), USS-900TL (landline to satellite fax
encryption device), USS-900WF (satellite and cellular fax encryption device),
USS-900WFL (landline to satellite and cellular fax encryption device) and
USS-900TC (satellite fax encryption to computer) products. We have expanded our
line of products distributed by Boeing, which now consists of 13 products. These
products contain the brand name of Thuraya and have operating controls in
Arabic. In addition, with funding provided by Boeing we have developed a
prototype of a docking unit containing the DCS-1400 system to encrypt the next
generation voice and data handset to operate over the Thuraya network. We are
also developing for Boeing, a voice product to operate over the Thuraya network
having a higher level of security. We are also developing additional encryption
products required for applications over the Thuraya network.
21
In connection with Boeing becoming the exclusive distributor
of certain of our products, Boeing authorized us to use its name on our website.
Accordingly, customers desiring to purchase these encryption products can find
authorized Boeing sales information on the "Encryption Products" page of our
website. In January 2005, Boeing introduced, demonstrated (with our assistance)
and began marketing our encryption products to more than 100 world-wide Thuraya
service providers.
Our encryption products can also be used to further encrypt
data over the Globalstar network. Globalstar provides a satellite voice and data
service throughout a world-wide coverage area. Our DCS-1200 and DCS-1400
encryption devices are included on the Globalstar webpage,
http://www.globalstarusa.com/en/products/encryption.php.
We are continuing to develop a hardware device to encrypt
Short Message Service ("SMS"), an inexpensive text message communication
protocol that is used in many cellular and satellite phones and networks. We
currently plan to utilize this encryption solution in conjunction with the
Thuraya handsets, but it can be used for data communications across other
platforms as well.
Our products provide secure communications with many different
satellite phones, including the Thuraya 7100/7101 handheld terminal ("HHT"),
Globalstar GPS-1600 HHT, Telit SAT-550/600 HHT, Globalstar GPS-2800/2900 fixed
phone, Iridium 9500/9505 HHT, Inmarsat M4 and Mini "M" HHT units from Thrane &
Thrane and Nera. Through the use of our products, encrypted satellite
communications are available for many Thuraya docking units, including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APsi's FDU-2500
Fixed Docking Unit, and Sattrans's SAT-OFFICE Fixed Docking Unit and SAT-VDA
Hands-Free Car Kit.
We have also 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. We are
supplying our USS-900AF automatic fax encryption product to a major U.S. defense
contractor to secure its worldwide fax communication. We have entered into an
agreement with another major U.S. company and supplied an initial proof of
concept encryption solution utilizing another of our products that has been
configured to interface with that company's satellite global positioning system
("GPS") and data communication fleet management network.
We are supplying another major U.S. company with our USS-900AF
to secure fax communication of personal medical records. We are also providing
our DCS-1700 to several U.S. companies to encrypt the network data communication
links between corporate servers, scanners, and printers contained in
multi-functional products. The TCP/IP encryption provided by our DCS-1700 is
also being evaluated by firms that require secure data backup to meet HIPAA,
Sarbanes-Oxley, Gramm-Leach-Bliley and other corporate governance requirements.
22
There is continued interest in our encryption products by
governments located in the Americas, Europe, Africa, Asia and the Middle East.
Applications for these customers include voice, fax and data security using
land-line and wireless phones. Product evaluations by these customers are
usually thorough and take time to materialize into firm orders.
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 2007.
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.
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.
23
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.
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. During fiscal 2005, we recorded a provision for excess
inventory due to changes in product requirements of approximately $587,000. Our
net 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.
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, 2005, 2004 and 2003 would have increased by
approximately $2,804,000, $2,909,000 and $889,000, respectively, based on the
fair value of the stock options granted to employees. See "- Impact of Recent
Accounting Pronouncements"
RESULTS OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 2005 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
2004
NET SALES AND GROSS PROFIT
NET SALES. Net sales decreased by approximately $54,000 in
fiscal 2005, to approximately $440,000, as compared to approximately $494,000 in
fiscal 2004. All sales during both periods were from encryption products and
services. The decrease in net sales was principally due to a decrease in unit
sales of approximately $114,000, offset by an increase in revenue from
encryption services of approximately $60,000. Our encryption sales have been
limited and are sensitive to individual large transactions. We believe that
changes in sales of our encryption products between periods generally represent
the nature of the early stage of our product and sales channel development.
Revenue from sales of encryption services is generally non-recurring due to the
nature of the individual transactions.
24
GROSS PROFIT (LOSS). Gross profit (loss) from sales of encryption
products and services decreased by approximately $598,000 in fiscal 2005, to a
loss of approximately $280,000, as compared to a gross profit of approximately
$318,000 in fiscal 2004. The decrease in gross profit is primarily the result of
the provision for excess inventory due to changes in product requirements of
approximately $587,000 recorded in fiscal 2005. The decrease in gross profit
also resulted from the decrease in net sales, which was offset by the decrease
in cost of sales from goods and products sold to approximately $133,000 in
fiscal 2005, as compared to approximately $176,000 in fiscal 2004. Gross profit
as a percent of sales in fiscal 2004 was approximately 64%. Gross profit (loss)
as a percent of sales in fiscal 2005 is not meaningful, since we recorded a
loss, due to the inventory adjustment during the year. Because of the limited
number of transactions during each of the periods, gross profit percentages,
excluding the effect of inventory adjustments, are sensitive to individual
transactions.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by approximately
$103,000 in fiscal 2005, to approximately $2,267,000, from approximately
$2,164,000 in fiscal 2004. The increase in research and development expenses was
principally due to an increase in employee compensation and related costs of
approximately $262,000, primarily resulting from the grant of employee bonuses,
and an increase in patent related expenses of approximately $34,000, offset by a
decrease of approximately $192,000 in outside research and development expense
relating to our development of our Flat Panel CRT displays.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by
approximately $400,000 to approximately $1,919,000 in fiscal 2005 from
approximately $1,519,000 in fiscal 2004. The increase in selling, general and
administrative expenses was principally due to an increase in professional fees
of approximately $276,000, approximately $50,000 of which was incurred with
respect to a theft by a former employee (see "Investigation and Recovery Efforts
Regarding Misappropriated Funds"), an increase in employee compensation and
related costs of approximately $128,000 and a net increase in the provision for
doubtful accounts of approximately $111,000, offset a charge to expense of
approximately $75,000 in fiscal 2004 related to the theft by a former employee.
The net increase in the provision for doubtful accounts of approximately
$111,000 was due to a provision of approximately $38,000 in fiscal 2005 and a
decrease in the provision of approximately $73,000 in fiscal 2004 due to a
partial collection of the outstanding receivable to which the provision related.
25
INTEREST INCOME
Interest income was approximately $15,000 in fiscal 2005, compared to
approximately $4,000 in the comparable prior-year period. The increase in
interest income was principally due to an increase in prevailing interest rates
and the higher interest rates received on funds invested in certificates of
deposit in fiscal 2005.
FISCAL YEAR ENDED OCTOBER 31, 2004 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
2003
NET SALES AND GROSS PROFIT
NET SALES. Net sales increased by approximately $250,000 in
fiscal 2004, to approximately $494,000, as compared to approximately $244,000 in
fiscal 2003. All sales during both periods were from encryption products and
services. The increase in net 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 sales, 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 sales 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.
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 the theft by a former employee, 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
fiscal 2003 of approximately $205,000 and reversal in fiscal 2004 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.
LIQUIDITY AND CAPITAL RESOURCES
From our inception, we have met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and public offering, and upon
the exercise of stock options. In 2001 and 2002, we also received payments under
a technology development agreement. In addition, commencing in the fourth
quarter of fiscal 1999, we began to generate cash flows from sales of our
encryption products.
During fiscal 2005, our operating activities used approximately
$1,720,000 in cash. This resulted from payments to suppliers, employees and
consultants of approximately $2,216,000, which was offset by cash of
approximately $481,000 received from collections of accounts receivable and
other receivables related to sales of encryption products and approximately
$15,000 of interest income received. In addition, during fiscal 2005 we received
approximately $1,629,000 in cash upon the exercise of stock options, invested
approximately $401,000 in short-term investments consisting of certificates of
deposit and purchased approximately $4,000 of equipment. As a result, our cash,
cash equivalents, and short-term investments, at October 31, 2005 decreased to
approximately $907,000 from approximately $1,003,000 at the end of fiscal 2004.
Accounts receivable decreased by approximately $31,000 from
approximately $63,000 at the end of fiscal 2004 to approximately $32,000 at
October 31, 2005. The decrease in accounts receivable is a result of the timing
of collections. Other receivables decreased by approximately $54,000 from
approximately $84,000 at the end of fiscal 2004 to approximately $30,000 at the
end of fiscal 2005. 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 of approximately $21,000 and a provision for
bad debts related to this accounts receivable of approximately $33,000.
Inventories decreased approximately $614,000 from approximately $999,000 at
October 31, 2004 to approximately $385,000 at October 31, 2005, as a result of
the provision for excess inventory of approximately $587,000 due to changes in
product requirements, as well as timing of shipments and production schedules.
Prepaid expenses and other current assets decreased by approximately $42,000
from approximately $122,000 at the end of fiscal 2004 to approximately $80,000
at October 31, 2005. The decrease in prepaid expenses and other assets is
primarily due to the receipt of 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"), offset by prepaid
outside research and development expenses of approximately $50,000 as of October
31, 2005. Accounts payable and accrued liabilities decreased by approximately
$95,000 from approximately $443,000 at the end of fiscal 2004 to approximately
$348,000 at October 31, 2005, as a result of the issuance of restricted common
stock to settle a liability of approximately $115,000 and the timing of
payments.
27
As a result of these changes, working capital at October 31,
2005 decreased to approximately $1,086,000 from approximately $1,829,000 at the
end of fiscal 2004.
Our working capital includes inventory of approximately
$385,000 and $999,000 at October 31, 2005 and 2004, respectively. Management has
recorded our inventory at the lower of cost or our current best estimate of net
realizable value. During fiscal 2005, we recorded a provision for excess
inventory of approximately $587,000 due to changes in product requirements. 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.
During fiscal years ended October 31, 2005, 2004 and 2003, 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 2005
were shares issued to our Chairman of the Board and Chief Executive Officer. We
recorded compensation expense for the fiscal years ended October 31, 2005, 2004
and 2003 of approximately $1,822,000, $1,507,000 and $1,292,000, respectively,
for shares of common stock issued to employees. In addition during fiscal 2005,
2004 and 2003, we issued shares of common stock to consultants for services
rendered. We recorded consulting expense for the fiscal years ended October 31,
2005, 2004 and 2003 of approximately $37,000, $342,000 and $360,000,
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. Commencing in fiscal 2004, our Chairman
of the Board and Chief Executive Officer and our President began receiving
salary, which in the aggregate approximated $189,000 and $172,000 for the years
ended October 31, 2005 and 2004, respectively, of which approximately $97,000
and $135,000, respectively, was in the form of common stock. 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, 2005 states that the net loss incurred during the year ended October 31,
2005, 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, 2004 and 2003 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
28
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 2007. 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 2007. 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 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. If we cannot obtain such funds if needed, we would need to
curtail or cease some or all of our operations.
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 2005, we have recognized revenue from sales of encryption products of
approximately $440,000.
29
The following table presents our expected cash requirements
for contractual obligations outstanding as of October 31, 2005:
PAYMENTS DUE BY PERIOD
----------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- ------------------------- ---------- -------------- ------------ ------------- ----------
Consulting
Agreement $ 55,000 -- -- -- $ 55,000
Noncancelable Operating
Leases $ 151,000 -- -- -- $ 151,000
---------- -------------- ------------ ------------- ----------
Total Contractual
Cash Obligations $ 206,000 -- -- -- $ 206,000
========== ============== ============ ============= ==========
We have no variable interest entities or other off-balance
sheet obligation arrangements.
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 applied $100,000 of such recovery to fiscal 2004, and
recorded a charge to expense of approximately $75,000 in fiscal 2004,
representing the remainder of the fiscal 2004 loss. We applied the remaining
$10,000 of such recovery to fiscal 2005, representing the entire loss identified
in such period. During fiscal 2005, we also recovered approximately $4,000 from
financial institutions, which we recorded as a recovery when received. 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.
30
We incurred approximately $50,000 of accounting and other
professional fees related to this matter during fiscal 2005.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
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 were effective for the first interim reporting period beginning
after June 15, 2005. In April 2005, the Securities and Exchange Commission
announced a deferral of the effective date of SFAS No. 123(R) until the first
interim reporting period of the first fiscal year beginning after June 15, 2005.
Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending
January 31, 2006. We are currently evaluating the effect of SFAS No. 123(R). The
adoption of SFAS No. 123(R) is expected to have a material effect on our
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154"). SFAS 154 replaces the Accounting Principles
Board Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," to require retrospective application
to prior periods' financial statements of changes in accounting principle. The
provisions of SFAS 154 are effective for accounting changes made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 is not expected to
have a material effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have invested a portion of our cash on hand in short term,
fixed rate and highly liquid instruments that have historically been reinvested
when they mature throughout the year. Although our existing 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."
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE 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 our disclosure controls and procedures were effective as
of the end of fiscal 2005.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
the Securities and Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Our management has assessed the effectiveness of our internal
control over financial reporting as of October 31, 2005. This assessment of our
internal control over financial reporting used the criteria for effective
internal control established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, our management concluded that our internal control over
financial reporting was effective as of October 31, 2005.
Management's assessment of the effectiveness of our internal
control over financial reporting as of October 31, 2005, has been audited by
Grant Thornton LLP, an independent registered public accounting firm, as stated
in their report below.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting
during the fourth quarter of fiscal 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
COPYTELE, INC.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that CopyTele, Inc.
maintained effective internal control over financial reporting as of October 31,
2005, based on criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the "COSO criteria"). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
33
In our opinion, management's assessment that CopyTele, Inc. maintained effective
internal control over financial reporting as of October 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of October 31, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of the Company as
of October 31, 2005 and 2004, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 2005, and our report dated January 26, 2006 expressed an
unqualified opinion thereon and included an explanatory paragraph as to the
uncertainty of the Company's ability to continue as a going concern.
/s/ GRANT THORNTON LLP
Melville, New York
January 26, 2006
ITEM 9B. OTHER INFORMATION.
None.
34
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 78 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 81 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 60 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 77 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. 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.
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 2005.
35
CODE OF ETHICS
In July 2005, our Board of Directors 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. We will provide to any person without charge, upon request, a
copy of such code of ethics. Requests may be made in writing at CopyTele, Inc.,
900 Walt Whitman Road, Melville, New York 11747, Attn: Secretary, or by
telephone at 631-549-5900.
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 2003. Effective for fiscal 2004, Mr. Krusos and Mr. DiSanto began to
receive salary. The salary received by Mr. Krusos in fiscal 2005 and 2004
included approximately $97,000 and $135,000, respectively, which was paid in the
form of common stock. 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, 2005. The following is compensation information regarding Mr. Krusos
for the fiscal years ended October 31, 2005, 2004 and 2003:
36
- -----------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
Long-Term
Fiscal Annual Compensation Awards
Name and Year Compensation Securities Underlying
Principal Position Ended Salary Options(#)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/05 $147,200 2,500,000
Chairman of the Board, 10/31/04 $135,075 1,750,000
Chief Executive Officer and Director 10/31/03 -- 1,500,000
- -----------------------------------------------------------------------------------------------------------
The following is information regarding stock options granted to Mr.
Krusos pursuant to the 2003 Share Incentive Plan, during the fiscal year ended
October 31, 2005:
- -----------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Individual Grants Assumed Annual Rates of Stock
Price Appreciation for Option
Term
- -----------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 1,500,000 (1) 19.00% $0.65 (2) 2/17/15 $613,172 $1,553,900
1000,000 (1) 12.67% $0.52 (2) 10/30/15 $327,025 $ 828,746
- -----------------------------------------------------------------------------------------------------------
(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.
37
The following is information regarding stock option exercises
during fiscal 2005 by Mr. Krusos and the values of his options as of October 31,
2005:
- ------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION VALUES
============================================================================================================
Shares Value Realized Number of Securities Value of Unexercised
Acquired on ($) Underlying Unexercised In-the-Money Options at
Name Exercise (#) Options at Fiscal Year End (#) Fiscal Year End ($)(1)
-------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================
Denis A. Krusos - - 8,278,290 - $480,000 -
- ------------------------------------------------------------------------------------------------------------
(1) Such value was determined by multiplying the net difference
between the last sales price of the stock on October 31, 2005
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. Accordingly, Mr. Larounis was granted nonqualified
stock options to purchase 60,000 shares of common stock for services as a
director. In addition, Mr. Larounis was granted nonqualified stock options to
purchase 100,000 shares of common stock for services as a consultant.
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 25, 2006 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:
38
- -----------------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial Percent of
Name and Address of Beneficial Owner Ownership(1)(2) Class
===========================================================================================================
Denis A. Krusos 10,095,670 9.89%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto 4,809,505 4.91%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 781,575 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
George P. Larounis 410,000 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group
(4 persons) 16,096,750 14.99%
- -----------------------------------------------------------------------------------------------------------
* 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 8,278,290 shares, 4,166,290 shares, 770,000 shares,
410,000 shares and 13,624,580 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.
EQUITY COMPENSATION PLAN INFORMATION
The following is information as of October 31, 2005 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 7 to Financial Statements for more
information on these plans.
39
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 9,507,046 $2.94 45,773
approved by security
holders
Equity compensation plans 12,505,200 $0.61 1,221,644
not approved by security
holders
Total 22,012,246 $1.62 1,267,417
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTANT AUDIT FEES AND SERVICES.
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,
2005, and 2004.
TYPE OF FEE 2005 2004
-------------------------------------- --------- ---------
Audit Fees $ 219,854 $ 127,460
Audit Related Fees 7,800 -
Tax Fees - Tax return review - -
All Other Fees - -
Total $ 227,654 $ 127,460
40
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 30, 2005. We did not enter into any non-audit
engagement or relationship with Grant Thornton LLP during fiscal 2005.
41
PART IV
ITEM 15. EXHIBITS AND 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,
2004).
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).
42
(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. (Filed herewith.)
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.)
43
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, 2004).
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. (Incorporated by reference to Exhibit
10.17 to our Annual Report on Form 10-K for the fiscal year
ended October 31, 2004.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
44
31.1 Certification of Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated January 31, 2006.
(Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated January 31, 2006.
(Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section 1350
of Title 18 of the United States Code, dated January 31, 2006.
(Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section 1350
of Title 18 of the United States Code, dated January 31, 2006.
(Filed herewith.)
45
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 31, 2006 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
By: /s/ DENIS A. KRUSOS
---------------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
January 31, 2006 Officer)
By /s/ FRANK J. DISANTO
---------------------------------
Frank J. DiSanto
January 31, 2006 President and Director
By: /s/ HENRY P. HERMS
---------------------------------
Henry P. Herms
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
January 31, 2006 and Accounting Officer)
By: /s/ GEORGE P. LAROUNIS
---------------------------------
George P. Larounis
January 31, 2006 Director
46
COPYTELE, INC.
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2005
Page
-----
Report of Independent Registered Public Accounting Firm: Grant Thornton LLP F-1
Balance Sheets as of October 31, 2005 and 2004 F-2
Statements of Operations for the years ended October 31, 2005, 2004 and 2003 F-3
Statement of Shareholders' Equity for the years ended October 31, 2005, 2004 and 2003 F-4
Statements of Cash Flows for the years ended October 31, 2005, 2004 and 2003 F-5
Notes to Financial Statements F-6 - F-20
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
COPYTELE, INC.
We have audited the accompanying balance sheets of CopyTele, Inc. as of October
31, 2005 and 2004, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended October
31, 2005. We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of October 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
and our report dated January 26, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of internal control over financial
reporting and an unqualified opinion on the effectiveness of internal control
over financial reporting. 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, 2005 and 2004, and the results of its operations and cash flows for each of
the three years in the period ended October 31, 2005, 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 $4,451,000 during the year
ended October 31, 2005, and, as of that date, the Company has an accumulated
deficit of approximately $72,908,000. 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). In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
/s/ GRANT THORNTON LLP
Melville, New York
January 26, 2006
F-1
COPYTELE, INC.
BALANCE-SHEETS
October 31, October 31,
ASSETS 2005 2004
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 506,517 $ 1,002,777
Short-term investments 400,776 --
Accounts receivable, net of allowance for doubtful accounts of $0 and
$149,455, respectively 32,117 63,460
Other receivables, net of allowance for doubtful accounts of $141,511
and $108,793, respectively 30,000 84,308
Inventories 384,996 999,429
Prepaid expenses and other current assets 79,829 122,482
------------ ------------
Total current assets 1,434,235 2,272,456
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$2,115,714 and $2,101,008, respectively 27,131 38,085
OTHER ASSETS 4,887 5,509
------------ ------------
$ 1,466,253 $ 2,316,050
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 270,806 $ 402,640
Accrued liabilities 77,424 40,480
------------ ------------
Total current liabilities 348,230 443,120
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;
91,975,538 and 85,523,253 shares issued and outstanding, respectively 919,755 855,233
Additional paid-in capital 73,105,886 69,474,058
Accumulated deficit (72,907,618) (68,456,361)
------------ ------------
1,118,023 1,872,930
------------ ------------
$ 1,466,253 $ 2,316,050
============ ============
The accompanying notes are an integral part of these statements.
F-2
COPYTELE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended October 31,
---------------------------------------------
2005 2004 2003
------------ ------------ -------------
NET SALES $ 439,785 $ 494,462 $ 244,221
COST OF SALES
Cost of goods and services sold 132,966 176,112 123,140
Provision for excess inventory 586,662 -- 52,804
------------ ------------ ------------
Total costs of sales 719,628 176,112 175,944
------------ ------------ ------------
Gross profit (loss) (279,843) 318,350 68,277
OPERATING EXPENSES
Research and development expenses 2,266,911 2,164,427 1,807,742
Selling, general and administrative expenses 1,919,010 1,518,911 1,379,614
------------ ------------ ------------
Total operating expenses 4,185,921 3,683,338 3,187,356
------------ ------------ ------------
LOSS FROM OPERATIONS (4,465,764) (3,364,988) (3,119,079)
INTEREST INCOME 14,507 4,333 4,668
------------ ------------ ------------
NET LOSS $ (4,451,257) $ (3,360,655) $ (3,114,411)
============ ============ ============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $(.05 ) $(.04 ) $(.04 )
============ ============ ============
Shares used in computing net loss per share:
Basic and Diluted 88,480,379 82,953,519 75,153,015
============ ============ ============
The accompanying notes are an integral part of these statements.
F-3
COPYTELE
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Par Value Capital Deficit
----------- ---------- ----------- -------------
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 pursuant to stock incentive --
plans 4,483,111 44,831 1,246,906 --
Common stock issued to consultants pursuant to stock incentive
plans 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 pursuant to stock incentive
plans 2,491,415 24,914 1,481,679 --
Common stock issued to consultants pursuant to stock incentive
plans 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)
Stock option compensation to consultants -- -- 93,349 --
Common stock issued upon exercise of stock options under stock
option plans 3,083,800 30,838 1,597,762 --
Common stock issued to employees pursuant to stock incentive
plans 3,129,485 31,294 1,790,335 --
Common stock issued to consultants pursuant to stock incentive
plans 60,000 600 36,800 --
Unregistered common stock issued to consultants 179,000 1,790 113,582
Net loss -- -- -- (4,451,257)
---------- ---------- ----------- -------------
BALANCE, October 31, 2005 91,975,538 $ 919,755 $73,105,886 $(72,907,618)
========== ========== =========== =============
The accompanying notes are an integral part of this statement.
F-4
COPYTELE
STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
------------------------------------------
2005 2004 2003
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(2,216,270) $(1,792,103) $(1,234,490)
Cash received from customers 481,431 582,648 271,321
Interest received 14,507 4,333 4,668
----------- ----------- -----------
Net cash used in operating activities (1,720,332) (1,205,122) (958,501)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disbursements to acquire short-term investments (certificates of deposit) (400,776) -- --
Payments for purchases of property and equipment (3,752) (15,602) (980)
----------- ----------- -----------
Net cash used in investing activities (404,528) (15,602) (980)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration disbursements 1,628,600 1,199,970 1,128,190
----------- ----------- -----------
Net cash provided by financing activities 1,628,600 1,199,970 1,128,190
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (496,260) (20,754) 168,709
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,002,777 1,023,531 854,822
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 506,517 $ 1,002,777 $ 1,023,531
=========== =========== ===========
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $(4,451,257) $(3,360,655) $(3,114,411)
Stock option compensation to consultants 93,349 196,691 4,800
Stock awards granted to employees and consultants pursuant to stock
incentive plans 1,859,029 1,848,717 1,652,137
Provision for (recovery of) doubtful accounts 37,718 (73,159) 205,011
Provision for slow-moving inventory 586,662 -- 52,804
Depreciation and amortization 14,706 16,997 33,083
Change in operating assets and liabilities:
Accounts receivable and other receivables 47,933 94,016 27,097
Inventories 27,771 45,446 198,520
Prepaid expenses and other current assets 42,653 (74,510) 54,547
Other assets 622 500 (355)
Accounts payable and accrued liabilities 20,482 100,835 (71,734)
----------- ----------- -----------
Net cash used in operating activities $(1,720,332) $(1,205,122) $ (958,501)
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Unregistered common stock issued to settle a liability $ 115,372 $ -- $ --
=========== ========== ===========
The accompanying notes are an integral part of these statements.
F-5
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND FUNDING
DESCRIPTION OF BUSINESS
CopyTele, Inc. was incorporated on November 5, 1982. 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
CRT displays.
FUNDING AND MANAGEMENT'S PLANS
From our inception, we have met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and public offering, and upon
the exercise of stock options. In 2001 and 2002, we also received payments under
a technology development agreement. In addition, commencing in the fourth
quarter of fiscal 1999, we have generated cash flows from sales of our
encryption products.
During fiscal 2005, our operating activities used
approximately $1,720,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $2,216,000, which was offset by cash
of approximately $481,000 received from collections of accounts receivable and
other receivables related to sales of encryption products and approximately
$15,000 of interest income received. In addition, during fiscal 2005 we received
approximately $1,629,000 in cash upon the exercise of stock options, invested
approximately $401,000 in short-term investments consisting of certificates of
deposit and purchased approximately $4,000 of equipment. As a result, our cash,
cash equivalents, and short-term investments, at October 31, 2005 decreased to
approximately $907,000 from approximately $1,003,000 at the end of fiscal 2004.
We believe that our existing cash, cash equivalents,
short-term investments and accounts receivable, together with cash flows from
expected sales of encryption products and flat CRT 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 2007. 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 2007. 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.
F-6
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
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 $4,451,000
during the year ended October 31, 2005, and, as of that date, we have an
accumulated deficit of approximately $72,908,000. 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
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.
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, 2005 and 2004, 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, 2005, 2004 and 2003, the
Company did not pay any interest or income taxes.
SHORT-TERM INVESTMENTS
Short-term investments represent certificates of deposits,
carried at amortized cost, with maturities of less than twelve months. The fair
values of the certificates of deposits, including accrued interest, approximate
their carrying value due to their short maturities.
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.
F-7
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Changes in our allowance for doubtful accounts are as follows:
Year Ended October 31,
-----------------------
2005 2004
--------- ----------
Beginning balance $ 149,455 $ 159,230
Provision for doubtful accounts receivable 5,000 --
Accounts written off (154,455) (9,775)
--------- ----------
Ending balance $ -- $ 149,455
========= ==========
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. During fiscal 2005, we recorded a provision for excess
inventory of approximately $587,000 due to changes in product requirements. Our
net 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.
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-8
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,
-----------------------------------------------
2005 2004 2003
------------ ------------ -------------
Net loss as reported $ (4,451,257) $ (3,360,655) $ (3,114,411)
Add: Total stock-based employee compensation
expense, determined under fair value based
method, for all awards, net of related tax effect (2,804,466) (2,909,217) (889,145)
------------ ------------ ------------
Net loss as adjusted $ (7,255,723) $ (6,269,872) $ (4,003,556)
============ ============ ============
Net loss per share, basic and diluted:
As reported $ (0.05) $ (0.04) $ (0.04)
============ ============ ============
As adjusted $ (0.08) $ (0.08) $ (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, 2005, 2004 and 2003, respectively: risk free interest rates of 3.75%, 2.58%
and 1.39%; expected dividend yields of 0% for all periods; expected lives of
2.50 years, 2.49 years and 1.49 years; and expected stock price volatility of
106%, 124% and 139%. The weighted average fair value of options granted under
SFAS No. 123 for the fiscal years ended October 31, 2005, 2004 and 2003 was
$0.35, $0.55 and $0.13, 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 years ended October 31, 2005, 2004 and 2003, was
approximately $93,000, $197,000 and $5,000, respectively. Such compensation
expense is included in either research and development expenses or selling,
general and administrative expenses, as applicable, in the accompanying
statements of operations.
NET 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 loss per
common share ("Basic EPS") is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss by the weighted average number
of common shares and dilutive common share equivalents and convertible
securities then outstanding. 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 years ended October 31, 2005, 2004 and 2003,
were options to purchase 22,012,246 shares, 18,064,546 shares and 15,522,246
shares, respectively.
F-9
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, short-term investments, accounts and other receivables and accounts
payable, reflected in the accompanying balance sheets, approximates fair value
as of October 31, 2005 and 2004, 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
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 were effective for the first interim reporting period beginning
after June 15, 2005. In April 2005, the Securities and Exchange Commission
announced a deferral of the effective date of SFAS No. 123(R) until the first
interim reporting period of the first fiscal year beginning after June 15, 2005.
Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending
January 31, 2006. The adoption of SFAS No. 123(R) is expected to have a material
effect on our financial statements with respect to future options granted after
the adoption of this Statement.
F-10
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154"). SFAS 154 replaces the Accounting Principles
Board Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," to require retrospective application
to prior periods' financial statements of changes in accounting principle. The
provisions of SFAS 154 are effective for accounting changes made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 is not expected to
have a material effect on our financial statements.
3. 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 2005, one
customer in the Encryption Products and Services Segment represented 77% of
total net sales. During fiscal 2004, two customers in the Encryption Products
and Services Segment represented 61% and 19%, respectively, of total net sales.
During fiscal 2003, two customers in the Encryption Products and Services
Segment represented 25% and 13%, respectively, of total net sales. At October
31, 2005, one customer in the Encryption Products and Services Segment
represented 100% of net accounts receivable. At October 31, 2004, two customers
in the Encryption Products and Services Segment represented 48% and 44%,
respectively, of net accounts receivable.
4. 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 2005 and 2004, we received proceeds of approximately
$22,000 and $110,000, respectively, from the sale of a portion of the common
stock. As of October 31, 2005, we held 200,000 shares of common stock, subject
to no restrictions, with a fair value of approximately $16,000, and we intend to
sell the remaining portion of such stock during the next twelve months to
recover the receivable. This receivable is recorded on the accompanying balance
sheets at management's estimate of its net realizable value of approximately
$30,000 and $84,000 as of October 31, 2005 and 2004, respectively.
F-11
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
5. INVENTORIES
Inventories consist of the following as of:
October 31,
-------------------
2005 2004
--------- --------
Component parts $134,084 $304,862
Work-in-process 41,379 114,075
Finished products 209,533 580,492
-------- --------
$384,996 $999,429
======== ========
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
October 31,
------------------
2005 2004
--------- -------
Accrued professional fees $ 221 $21,485
Accrued payroll and related expenses 65,682 7,136
Accrued other 11,521 11,859
------- -------
$77,424 $40,480
======= =======
7. SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
During the years ended October 31, 2005, 2004 and 2003, we
issued 3,129,485 shares, 2,491,415 shares and 4,483,111 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 2005 and 2004 were
120,000 shares and 235,000 shares, respectively, issued to Denis A. Krusos, our
Chairman of the Board and Chief Executive Officer, and 16,025 shares and 25,000
shares, respectively, issued to Henry P. Herms, our Vice President-Finance and
Chief Financial Officer, respectively. We recorded compensation expense for the
years ended October 31, 2005, 2004 and 2003 of approximately $1,822,000,
$1,507,000 and $1,292,000, respectively, for shares of common stock issued to
employees. In addition during fiscal 2005, 2004 and 2003, we issued 60,000
shares, 643,860 shares and 1,364,712 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 years ended October 31, 2005,
2004 and 2003 of approximately $37,000, $342,000 and $360,000, respectively, for
shares of common stock issued to consultants.
During the year ended October 31, 2005, we issued 179,000
shares of unregistered common stock to settle a liability of approximately
$115,000.
F-12
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2005 and 2004, there is
no preferred stock issued and outstanding.
STOCK OPTION PLANS
As of October 31, 2005, 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, 2005 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
-------- ----------------
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 at the date of grant 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-13
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 1993 Plan for the three years ended
October 31, 2005 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ----------------
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 at October 31, 2004 7,867,080 $3.72
Canceled (1,078,500) $3.02
Exercised (70,000) $0.84
----------
Shares Under Option and Exercisable at October 31, 2005 6,718,580 $3.86
==========
The following table summarizes information about stock options
outstanding under the 1993 Plan as of October 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/05 Contractual Life Exercise Price at 10/31/05 Exercise Price
----------------- ----------------- ------------------------- ----------------------- --------------- -----------------
$0.84 to $1.56 784,000 4.04 $1.10 784,000 $1.10
$2.28 855,000 2.70 $2.28 855,000 $2.28
$3.38 to $4.81 4,684,580 1.03 $4.39 4,684,580 $4.39
$6.38 395,000 .88 $6.38 395,000 $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 at the date of grant and incentive stock options will not be exercisable
for more than 10 years.
F-14
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 2000 Share Plan for the three years
ended October 31, 2005 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ---------------
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 at October 31, 2004 2,852,466 $0.74
Canceled (45,000) $1.06
Exercised (19,000) $0.40
----------
Shares Under Option and Exercisable at October 31, 2005 2,788,466 $0.73
==========
The following table summarizes information about stock options
outstanding under the 2000 Share Plan as of October 31, 2005:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/05 Contractual Life Exercise Price at 10/31/05 Exercise Price
- ----------------- ------------- -------------------- --------------- --------------- ----------------
$0.34 - $0.40 961,000 5.65 $0.40 961,000 $0.40
$0.44 - $0.74 725,466 5.05 $0.68 725,466 $0.68
$0.94 - $1.09 1,102,000 4.93 $1.06 1,102,000 $1.06
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, 2005,
45,773 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-15
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding the 2003 Share Plan for the three years
ended October 31, 2005 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
Granted 8,195,000 $0.57
Canceled (40,000) $0.93
Exercised (2,994,800) $0.52
----------
Shares Under Option at October 31, 2005 12,505,200 $0.61
==========
Options Exercisable at October 31, 2005 12,445,200 $0.61
==========
The following table summarizes information about stock options
outstanding under the 2003 Share Plan as of October 31, 2005:
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Outstanding Average
Exercise Prices at 10/31/05 Contractual Life Exercise Price at 10/31/05 Exercise Price
- ----------------- ----------------- ---------------------- ----------------- ---------------- -----------------
$0.25 - $0.46 3,583,000 7.43 $0.29 3,583,000 $0.29
$0.51 - $0.77 5,611,200 9.37 $0.60 5,611,200 $0.60
$0.81 - $1.07 3,311,000 8.58 $0.92 3,251,000 $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, 2005,
1,221,644 shares were available for future grants under the 2003 Share Plan.
8. 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 related to fiscal 2005. During fiscal 2005, 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 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. During
fiscal 2005, we recovered approximately $4,000 from financial institutions which
was recorded as a recovery when received. If we are successful in recovering
additional amounts, such amounts up to approximately $71,000 will be recorded as
recoveries in future periods when and if any are received.
F-16
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
9. 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
$252,000 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. As of October 31, 2005, our noncancelable
operating lease commitments are approximately $151,000. This lease does not
contain provisions for its renewal.
Rent expense for the years ended October 31, 2005, 2004 and
2003, was approximately $252,000, $247,000 and $235,000, respectively.
CONSULTING AGREEMENT
In addition, as of October 31, 2005 we had commitments under a
consulting agreement of approximately $55,000, payable during the first quarter
of fiscal 2006.
10. 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, 2005, 2004 and 2003.
11. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended October 31,
-----------------------------------------
2005 2004 2003
------------ ----------- ----------
Federal:
Current $ -- $ -- $ --
Deferred (1,200,000) (1,383,000) (1,499,000)
State:
Current -- -- --
Deferred (177,000) (203,000) (220,000)
Adjustment to valuation allowance related
to net deferred tax assets 1,377,000 1,586,000 1,719,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-17
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
The tax effects of temporary differences that
give rise to significant portions of the deferred tax asset, net, at October 31,
2005 and 2004, are as follows:
2005 2004
------------ ------------
Long-term deferred tax assets:
Other assets $ 1,128,000 $ 1,128,000
Federal and state NOL and tax credit carryforwards 36,876,000 35,673,000
Other 276,000 102,000
------------ ------------
Subtotal 38,280,000 36,903,000
Less: valuation allowance (38,280,000) (36,903,000)
------------ ------------
Deferred tax asset, net $ - $ -
============ ============
As of October 31, 2005, we had tax net operating loss and tax
credit carryforwards of approximately $87,080,000 and $1,913,000, respectively,
available, within statutory limits (expiring at various dates between 2006 and
2025), 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 $87,140,000 and $128,000, respectively, as of October 31, 2005,
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
2006 and 2025 and the tax credit carryforwards expire between 2006 and 2020.
During the three years ended October 31, 2005, we incurred no
Federal and no State income taxes.
12. 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 2003. Commencing in fiscal 2004, our Chairman of the Board and Chief
Executive Officer and our President began receiving salary, which in the
aggregate approximated $189,000 and $172,000 for the years ended October 31,
2005 and 2004, respectively. From fiscal 1987 through July 31, 2003, three other
senior level personnel also waived salary and related pension benefits.
Commencing in fiscal 2003, the three senior level personnel began receiving
salary, which in the aggregate approximated $435,000, $289,000 and $57,000 for
the years ended October 31, 2005, 2004 and 2003, respectively.
13. 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
F-18
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
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,
2005, 2004 and 2003:
ENCRYPTION
FLAT-PANEL PRODUCTS AND
SEGMENT DATA DISPLAY SERVICES TOTAL
- ------------------------------- ------------ ------------ -------------
Year Ended October 31, 2005:
Net sales $ -- $ 439,785 $ 439,785
Net loss (1,764,610) (2,686,647) (4,451,257)
Depreciation 6,220 8,486 14,706
Interest income 5,793 8,714 14,507
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 661,425 1,197,604 1,859,029
Total assets 431,037 1,035,216 1,466,253
Additions to long-lived assets 1,587 2,165 3,752
Year Ended October 31, 2004:
Net sales $ -- $ 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
Year Ended October 31, 2003:
Net sales $ -- $ 244,221 $ 244,221
Net 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
F-19
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
GEOGRAPHIC INFORMATION
We generate revenue both domestically (United States) and
internationally. International sales are based on the country in which our
customer (distributor) is located. For the years ended October 31, 2005, 2004
and 2003, and as of each respective year-end, sales and accounts receivable by
geographic area are as follows:
Geographic Data 2005 2004 2003
------------------------ ---------- -------- ---------
Net sales:
United States $409,521 $479,621 $199,810
International 30,264 14,871 44,401
-------- -------- --------
$439,785 $494,492 $244,211
======== ======== ========
Accounts receivable, net:
United States $ 32,117 $ 63,460 $ 37,600
International -- -- 3,900
-------- -------- --------
$ 32,117 $ 63,460 $ 41,500
======== ======== ========
14. 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, 2005:
Income Statement Data:
Net sales $ 212,591 $ 46,709 $ 132,125 $ 48,360
Gross profit (loss) 148,018 (89,149) (222,703) (116,009)
Net loss (1,006,494) (1,179,995) (1,119,053) (1,145,715)
Net loss per share of common stock-
basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Year Ended October 31, 2004:
Income Statement Data:
Net sales $ 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)
F-20
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
COPYTELE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003
- -----------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
2005
-----
Allowance for doubtful accounts $149,455 $ 5,000 $ 154,455 $ --
Reserve against other receivables $108,793 $ 41,340 $ 8,622 141,511
Reserve for slow moving inventory $ -- $ 586,662 $ 44,131 $ 542,531
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
(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
NO. EXHIBIT
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. (Filed herewith.)
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, 2004).
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. (Incorporated by reference to Exhibit 10.17 to our Annual Report
on Form 10-K for the fiscal year ended October 31, 2004.)
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 31, 2006. (Filed
herewith.)
31.2 Certification of Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated January 31, 2006. (Filed
herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of Title
18 of the United States Code, January 31, 2006. (Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section 1350 of Title
18 of the United States Code, January 31, 2006. (Filed herewith.)