SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2008
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
-------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
900 Walt Whitman Road
Melville, NY 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ]
Non-accelerated filer [ ] Smaller Reporting Company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On June 4, 2008, the registrant had outstanding 130,159,351 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of April 30, 2008 (Unaudited)
and October 31, 2007 3
Condensed Consolidated Statements of Operations (Unaudited) for the six
months ended April 30, 2008 and 2007 4
Condensed Consolidated Statements of Operations (Unaudited) for the three
months ended April 30, 2008 and 2007 5
Condensed Consolidated Statement of Shareholder's Equity (Unaudited)
for the six months ended April 30, 2008 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six
months ended April 30, 2008 and 2007 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8 - 21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 22 - 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 33 - 34
Item 4. Controls and Procedures. 34
PART II. OTHER INFORMATION
Item 1A. Risk Factors. 35
Item 6. Exhibits. 35
SIGNATURES 35
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
---------------------
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
----------------
April 30, October 31,
ASSETS 2008 2007*
------ ---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 763,752 $ 669,141
Short-term investments 441,000 400,000
Accounts receivable, net of allowance for doubtful accounts of $60,000
and $-0-, respectively 190,500 120,000
Inventories 196,308 191,923
Prepaid expenses and other current assets 30,329 34,555
---------------- ----------------
Total current assets 1,621,889 1,415,619
INVESTMENT in Videocon Industries Limited global depository receipts,
at fair value 14,120,777 -
INVESTMENT in Digital Info Security Co. Inc. common stock, at cost 417,000 417,000
LOAN RECEIVABLE 5,000,000 -
PROPERTY AND EQUIPMENT, net 32,975 26,653
OTHER ASSETS 10,887 10,887
---------------- ----------------
$ 21,203,528 $ 1,870,159
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 424,190 $ 347,141
Accrued liabilities 59,059 331,668
---------------- ----------------
Total current liabilities 483,249 678,809
LOAN PAYABLE 5,000,000 -
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;
130,022,696 and 106,911,315 shares issued and outstanding, respectively 1,300,227 1,069,113
Additional paid-in capital 106,992,688 86,088,974
Accumulated deficit (90,493,413) (85,966,737)
Accumulated other comprehensive loss (2,079,223) -
---------------- ----------------
15,720,279 1,191,350
---------------- ----------------
$ 21,203,528 $ 1,870,159
================ ================
* Derived from audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2007.
The accompanying notes are an integral part of these condensed balance sheets.
3
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
For the Six Months Ended
April 30,
---------------------------------
2008 2007
--------------- ---------------
NET SALES
Sales of encryption products, net $ 217,580 $ 107,177
Sales of encryption services, net - 120,000
--------------- ---------------
217,580 227,177
--------------- ---------------
COST OF SALES
Cost of encryption products sold 50,170 32,438
Cost of encryption services sold - 44,365
--------------- ---------------
50,170 76,803
--------------- ---------------
Gross profit 167,410 150,374
OPERATING EXPENSES
Research and development expenses 2,444,004 1,919,214
Selling, general and administrative expenses 2,379,092 1,454,359
--------------- ---------------
Total operating expenses 4,823,096 3,373,573
--------------- ---------------
LOSS FROM OPERATIONS (4,655,686) (3,223,199)
DIVIDEND INCOME 130,887 -
INTEREST INCOME 13,081 17,869
--------------- ---------------
LOSS BEFORE INCOME TAX EXPENSE (4,511,718) (3,205,330)
INCOME TAX EXPENSE 14,958 -
--------------- ---------------
NET LOSS $ (4,526,676) $ (3,205,330)
=============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.04) $ (0.03)
=============== ===============
Shares used in computing net loss per share:
Basic and Diluted 127,984,960 101,589,288
=============== ===============
The accompanying notes are an integral part of these condensed statements.
4
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
For the Three Months Ended
April 30,
---------------------------------
2008 2007
--------------- ---------------
NET SALES
Sales of encryption products, net $ 165,355 $ 36,427
Sales of encryption services, net - 60,000
--------------- ---------------
165,355 96,427
--------------- ---------------
COST OF SALES
Cost of encryption products sold 37,272 12,147
Cost of encryption services sold - 23,460
--------------- ---------------
37,272 35,607
--------------- ---------------
Gross profit 128,083 60,820
OPERATING EXPENSES
Research and development expenses 1,131,302 916,283
Selling, general and administrative expenses 959,935 584,648
--------------- ---------------
Total operating expenses 2,091,237 1,500,931
--------------- ---------------
LOSS FROM OPERATIONS (1,963,154) (1,440,111)
DIVIDEND INCOME 130,887 -
INTEREST INCOME 5,874 8,215
--------------- ---------------
LOSS BEFORE INCOME TAX EXPENSE (1,826,393) (1,431,896)
INCOME TAX EXPENSE 14,958 -
--------------- ---------------
NET LOSS $ (1,841,351) $ (1,431,896)
=============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (0.01) $ (0.01)
=============== ===============
Shares used in computing net loss per share:
Basic and Diluted 129,258,495 102,287,372
=============== ===============
The accompanying notes are an integral part of these condensed statements.
5
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------
FOR THE SIX MONTHS APRIL 30, 2008 (UNAUDITED)
---------------------------------------------
Accumulated
Common Stock Additional Other
-------------------------- Paid-in Accumulated Comprehensive
Shares Par Value Capital Deficit Loss
------------ ------------- ------------- -------------- ----------------
BALANCE, October 31, 2007 106,911,315 $1,069,113 $ 86,088,974 $ (85,966,737) $ -
Stock option compensation to employees - - 1,909,771 - -
Stock option compensation to consultants - - 210,282 - -
Common stock issued upon exercise of stock options under
stock option plans 2,094,200 20,942 1,677,663 - -
Common stock issued to employees pursuant to stock
incentive plans 954,875 9,549 1,031,468 - -
Common stock issued to consultants pursuant to stock
incentive plans 62,306 623 74,530 - -
Unregistered common stock issued to Videocon Industries
Limited 20,000,000 200,000 16,000,000 - -
Unrealized loss on investment in Videocon Industries
Limited global depository receipts - - - - (2,079,223)
Net loss - - - (4,526,676) -
------------ ------------- ------------- -------------- ----------------
BALANCE, April 30, 2008 130,022,696 $1,300,227 $106,992,688 $ (90,493,413) $ (2,079,223)
============ ============= ============= ============== ================
The accompanying notes are an integral part of this statement.
6
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
For the Six Months Ended
April 30,
---------------------------------------
2008 2007
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(1,782,720) $ (1,518,281)
Cash received from customers 87,080 177,342
Dividend received 130,887 -
Interest received 13,081 17,869
------------------ -----------------
Net cash used in operating activities (1,551,672) (1,323,070)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disbursements to acquire Videocon Industries Limited global depository
receipts (16,200,000) -
Disbursement to acquire loan receivable (5,000,000) -
Proceeds from maturities of short-term investments (certificates of deposit) 400,000 38,000
Disbursements to acquire short-term investments (certificates of deposit) (441,000) (425,000)
Payments for purchases of property and equipment (11,322) (7,694)
------------------ -----------------
Net cash used in investing activities (21,252,322) (394,694)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to Videocon Industries Limited 16,200,000 -
Proceeds from issuance of loan payable 5,000,000 -
Proceeds from exercise of stock options 1,698,605 1,202,099
------------------ -----------------
Net cash provided by financing activities 22,898,605 1,202,099
------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 94,611 (515,665)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 669,141 1,281,660
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 763,752 $ 765,995
================== =================
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $ (4,526,676) $ (3,205,330)
Stock option compensation to employees 1,909,771 986,354
Stock option compensation to consultants 210,282 -
Stock awards granted to employees pursuant to stock incentive plans 1,041,017 1,068,472
Stock awards granted to consultants pursuant to stock incentive plans 75,153 105,744
Provision for doubtful accounts 60,000 -
Recovery of slow-moving inventory reserve (16,440) -
Depreciation and amortization 5,000 5,499
Change in operating assets and liabilities:
Accounts receivable (130,500) (49,835)
Inventories 12,055 29,775
Prepaid expenses and other current assets 4,226 (9,764)
Other assets - -
Accounts payable and accrued liabilities (195,560) (253,985)
----------------- -----------------
Net cash used in operating activities $(1,551,672) $( 1,323,070)
================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Unregistered common stock issued in connection with investment in
Digital Info Security Co., Inc. $ - $ 210,000
================= =================
The accompanying notes are an integral part of this statement.
7
COPYTELE, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
1. BUSINESS AND FUNDING
--------------------
Description of Business and Basis of Presentation
- -------------------------------------------------
Our principal operations are the development, production and marketing
of thin, flat, low-voltage phosphor display technology and the development,
production and marketing of multi-functional encryption products that provide
information security for domestic and international users over virtually every
communications media.
The condensed consolidated financial statements are unaudited, and have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial reporting, and with
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by US GAAP for complete financial statements.
The information contained herein is for the six-month and three-month periods
ended April 30, 2008 and 2007. In management's opinion, all adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation of the results of operations for such periods) have been included
herein. Certain prior year amounts have been reclassified to conform with
current year presentation.
The condensed consolidated financial statements include the accounts of
CopyTele, Inc. and its wholly owned subsidiaries, CopyTele International Ltd.
("CopyTele International") and CopyTele Marketing Inc. ("CopyTele Marketing").
CopyTele International and CopyTele Marketing were incorporated in the British
Virgin Islands in July 2007 and September 2007, respectively. CopyTele
International was formed for the purpose of holding an investment in global
depository receipts of Videocon Industries Limited, an Indian company
("Videocon"). As of April 30, 2008, CopyTele Marketing was inactive. All
significant intercompany transactions have been eliminated in consolidation.
The results of operations for interim periods presented are not
necessarily indicative of the results that may be expected for a full year or
any interim period. Reference is made to the audited financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended October 31, 2007, for more extensive disclosures than contained in these
condensed financial statements.
Technology License Agreement with Videocon Industries Limited
- -------------------------------------------------------------
In November 2007, we entered into a Technology License Agreement (as
amended, the "License Agreement") with Videocon. Under the License Agreement, we
8
provide Videocon with a non-transferable, worldwide license of our technology
for thin, flat, low voltage phosphor displays (the "Licensed Technology"), for
Videocon (or a Videocon Group company) to produce and market products, including
TVs, incorporating displays utilizing the Licensed Technology. Under the License
Agreement, we will receive a license fee of $11 million from Videocon, payable
in installments over a 27 month period and an agreed upon royalty from Videocon
based on display sales by Videocon. In April 2008, the Indian Government
approved the License Agreement and in May 2008, we received the first
installment of the license fee of $2 million.
We will continue to have the right to produce and market, and to
utilize Volga Svet Ltd., a Russian display company that we have been working
with for more than ten years, and an Asian company that we have been working
with for more than four years, to produce and market, products utilizing the
Licensed Technology. Additional licenses of the Licensed Technology to third
parties require our joint agreement with Videocon.
In November 2007, we also entered into a Share Subscription Agreement
(the "Subscription Agreement") with Mars Overseas Limited, an affiliate of
Videocon ("Mars Overseas"). Under the Subscription Agreement, Mars Overseas
purchased 20,000,000 shares of our common stock (the "CopyTele Shares") from us
for an aggregate purchase price of $16,200,000. The purchase of the CopyTele
Shares pursuant to the Subscription Agreement closed in November 2007.
Also in November 2007, our wholly-owned British Virgin Islands
subsidiary, CopyTele International, entered into a GDR Purchase Agreement (the
"Purchase Agreement") with Global EPC Ventures Limited ("Global"), for CopyTele
International to purchase from Global 1,495,845 global depository receipts of
Videocon (the "Videocon GDRs") for an aggregate purchase price of $16,200,000.
Videocon's global depository receipts are listed on the Luxembourg Stock
Exchange. The purchase of the Videocon GDRs pursuant to the Purchase Agreement
closed in December 2007.
For the purpose of effecting a lock up of the Videocon GDRs and
CopyTele Shares (collectively, the "Securities") for a period of seven years,
and therefore restricting both parties from selling or transferring the
Securities during such period, CopyTele International and Mars Overseas entered
into two Loan and Pledge Agreements in November 2007. The Videocon GDRs are to
be held as security for a loan in principal amount of $5,000,000 from Mars
Overseas to CopyTele International, and the CopyTele Shares are similarly held
as security for a loan in principal amount of $5,000,000 from CopyTele
International to Mars Overseas. The loans are for a term of seven years and do
not bear interest. Prepayment of each loan requires payment of a premium by the
borrower and, in any event, the lien on the Securities securing the prepaid loan
will not be released until the seventh anniversary of the closing of the loans
and the prepaid amount would be held in escrow until such date. The loan
agreements required the parties to enter into an escrow agreement under which
the parties deposited the Securities with an escrow agent for the term of the
loans. The loan agreements also provide for customary events of default which
may result in forfeiture of the Securities by the defaulting party. The loan and
escrow agreements also provide for the transfer to the respective parties, free
and clear of any encumbrances under the agreements, any dividends,
9
distributions, rights or other proceeds or benefits received by the escrow agent
in respect of the Securities. The closing of the loans took place in December
2007.
Investment in Videocon
- ----------------------
Although the Videocon GDRs are held as security for the loan payable to
Mars Overseas and prepayment of the loan will not release the Videocon GDRs
securing the loan until the seventh anniversary of the closing of the loan, our
investment in Videocon is classified as an "available-for-sale security" and
reported at fair value, with unrealized gains and losses excluded from
operations and reported as a component of accumulated other comprehensive
income, net of the related tax effects, in shareholders' equity. Cost is
determined using the specific identification method. The fair value of the
Videocon GDRs is based on the underlying price of Videocon's equity shares which
are traded on stock exchanges in India with prices quoted in rupees. The cost,
unrealized loss and fair value of our investment in Videocon as of April 30,
2008 are as follows:
April 30,
2008
-------------------
Cost $16,200,000
Unrealized loss (2,079,223)
-------------------
Fair Value $14,120,777
===================
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 addition, commencing in the fourth quarter of
fiscal 1999, we have generated cash flows from sales of our encryption products
and in May 2008 we commenced receiving license fees related to our display
technology from Videocon pursuant to the License Agreement.
During the six months ended April 30, 2008, our cash used in operating
activities was approximately $1,552,000. This resulted from payments to
suppliers, employees and consultants of approximately $1,783,000, which was
offset by cash of approximately $87,000 received from collections of accounts
receivable related to sales of encryption products, and approximately $13,000 of
interest income and $131,000 of dividend income received. Our cash used in
investing activities during the six months ended April 30, 2008 was
approximately $21,252,000, which resulted from a disbursement of $16,200,000 for
the purchase of Videocon GDRs, a disbursement $5,000,000 to issue a loan to Mars
Overseas, purchases of short-term investments consisting of certificates of
deposit of $441,000 and purchases of approximately $11,000 of equipment, offset
by $400,000 received upon maturities of short-term investments consisting of
certificates of deposit. Our cash provided by financing activities during the
six months ended April 30, 2008 was approximately $22,899,000, which resulted
from the sale of our common stock to Videocon for $16,200,000, the proceeds
received of $5,000,000 upon obtaining a loan from Mars Overseas and cash
received upon the exercise of stock options of approximately $1,699,000.
10
Accordingly, during the six months ended April 30, 2008, our cash and cash
equivalents increased by approximately $95,000 and our short-term investments
increased by $41,000. As a result, our cash, cash equivalents, and short-term
investments, at April 30, 2008 increased to approximately $1,205,000 from
approximately $1,069,000 at the end of fiscal 2007.
We believe that our existing cash, cash equivalents, short-term
investments and accounts receivable, together with cash flows from expected
sales of our encryption products and revenue relating to our thin, flat,
low-voltage phosphor display technology, including license fees and royalties
from Videocon, and other potential sources of cash flows, will be sufficient to
enable us to continue our marketing, production, and research and development
activities. However, our projections of future cash needs and cash flows may
differ from actual results. It is management's intention to continue to
compensate employees by issuing stock or stock options. If current cash and cash
equivalents, and cash that may be generated from operations are insufficient to
satisfy our liquidity requirements, we may seek to sell debt or equity
securities or to obtain a line of credit. The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. We
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, license fees and royalties, 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. If we cannot obtain such funds if needed,
we would need to curtail or cease some or all of our operations.
2. STOCK-BASED COMPENSATION
------------------------
We maintain stock equity incentive plans under which we may grant
non-qualified stock options, incentive stock options, stock appreciation rights,
stock awards, performance and performance-based awards, or stock units to
employees, non-employee directors and consultants.
Stock Option Compensation Expense
- ---------------------------------
We account for stock options granted to employees and directors using
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R").
We recognize compensation expense for stock option awards on a straight-line
basis over the requisite service period of the grant. We recorded stock-based
compensation expense, related to stock options granted to employees and
non-employee directors, of approximately $1,910,000 and $986,000 during the
six-month periods ended April 30, 2008 and 2007, respectively, and of
approximately $821,000 and $278,000 during the three-month periods ended April
30, 2008 and 2007, respectively, in accordance with SFAS 123R. Such compensation
expense is included in the accompanying condensed consolidated statements of
operations in either research and development expenses or selling, general and
administrative expenses, as applicable based on the functions performed by such
employees and directors. Such stock-based compensation expense increased both
basic and diluted net loss per share for the six-month periods ended April 30,
2008 and 2007 by $0.01 and $0.01, respectively, and for the three-month periods
ended April 30, 2008 and April 30, 2007 by $0.01 and $0.00, respectively.
11
Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the six-month periods ended
April 30, 2008 and 2007 was approximately $-0- and $13,000, respectively, and
during the three-month periods ended April 30, 2008 and 2007 was approximately
$-0- and $6,000, respectively, of expense related to the amortization of
compensation cost for stock options granted prior to, but not yet vested as of,
the end of the prior fiscal year. As of April 30, 2008, there was approximately
$300,000 of unrecognized compensation cost related to non-vested share-based
compensation arrangements for stock options granted to employees and directors.
Approximately $127,000 of this unrecognized cost is expected to be amortized
over the remaining portion of the current fiscal year and approximately
$121,000, $51,000, and $1,000 of this unrecognized cost is expected to be
amortized during fiscal 2009, 2010 and 2011, respectively.
We also account for stock options granted to consultants using SFAS
123R. We recognized consulting expense for options granted to non-employee
consultants, during the six-month periods ended April 30, 2008 and 2007, of
approximately $210,000, and $-0-, respectively, and during the three-month
periods ended April 30, 2008 and 2007, of approximately $3,000, and $-0-,
respectively. As of April 30, 2008, there was approximately $20,000 of
unrecognized consulting expense related to non-vested share-based compensation
arrangements for stock options granted to consultants. Approximately $7,000 of
this unrecognized consulting expense is expected to be amortized over the
remaining portion of the current fiscal year and approximately $13,000 is
expected to be amortized during fiscal 2009. Such consulting expense is included
in the accompanying condensed consolidated statements of operations in either
research and development expenses or selling, general and administrative
expenses, as applicable based on the functions performed by such consultants.
Fair Value Determination
- ------------------------
In accordance with SFAS No. 123R, we estimate the fair value of stock
options granted to employees, non-employee directors and consultants on the date
of grant using the Black-Scholes pricing model. We separate the individuals we
grant stock options to into three relatively homogenous groups, based on
exercise and post-vesting employment termination behaviors. To determine the
weighted average fair value of stock options on the date of grant, we take a
weighted average of the assumptions used for each of these groups. Stock options
we granted during the six-month period ended April 30, 2008 consisted of awards
of options with 10-year terms which vested either immediately or over future
periods of from three months to three years. All of the stock options we granted
during the six-month period ended April 30, 2007 consisted of awards of options
with 10-year terms which vested immediately.
12
We estimated the fair value of stock option awards using the following
assumptions:
For the Six Months For the Three Months
Ended April 30, Ended April 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- -------
Expected term (in years) 3.9 3.3 1.7 2.0
Volatility 92% 94% 87% 84%
Risk-free interest rate 3.44% 4.61% 1.51% 4.60%
Dividend yield 0 0 0 0
Weighted average fair value at grant date $0.63 $0.39 $0.33 $0.37
The expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. Because we consider
our options to be "plain vanilla", we estimated the expected term using a
modified version of the simplified method of calculation, as prescribed by Staff
Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). This modified
calculation uses the actual life for options that have been settled, and a
uniform distribution assumption for the options still outstanding. Under SAB
107, options are considered to be "plain vanilla" if they have the following
basic characteristics: granted "at-the-money"; exercisability is conditioned
upon service through the vesting date; termination of service prior to vesting
results in forfeiture; limited exercise period following termination of service;
and options are non-transferable and non-hedgeable. In December 2007, the
Securities and Exchange Commission ("SEC") staff issued Staff Accounting
Bulletin No. 110, "Share-Based Payment" ("SAB 110"). SAB 110 permits the use of
the simplified method in SAB 107 for employee option grants after December 31,
2007 for companies whose historical data about their employees' exercise
behavior does not provide a reasonable basis for estimating the expected term of
the options. We have adopted SAB 110 and continued to use the simplified method
to estimate the expected term for options granted after December 2007, as
adequate historical experience is not available to provide a reasonable
estimate. We intend to continue applying the simplified method until enough
historical experience is readily available to provide a reasonable estimate of
the expected term for employee option grants.
We estimated the expected volatility of our shares of common stock
based upon the historical volatility of our share price over a period of time
equal to the expected life of the options.
We estimated the risk-free interest rate based on the implied yield
available on the applicable grant date of a U.S. Treasury note with a term equal
to the expected term of the underlying grants.
We made the dividend yield assumption based on our history of not
paying dividends and our expectation not to pay dividends in the future.
Under SFAS No. 123R, the amount of stock-based compensation expense
recognized is based on the portion of the awards that are ultimately expected to
vest. Accordingly, we reduce the fair value of the stock option awards for
expected forfeitures, which are forfeitures of the unvested portion of
surrendered options. We estimate expected forfeitures based on our historical
experience.
13
We will reconsider use of the Black-Scholes pricing model if additional
information becomes available in the future that indicates another model would
be more appropriate, or if grants issued in future periods have characteristics
that cannot be reasonably estimated using this model.
Stock Option Activity
- ---------------------
During the six-month periods ended April 30, 2008 and 2007, we granted
options to purchase 3,875,000 shares and 2,505,000 shares, respectively, to
employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $.98 and $.67 per share, respectively, pursuant to
the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share Plan"). During the
six-month periods ended April 30, 2008 and 2007, stock options to purchase
2,094,200 shares and 2,277,230 shares, respectively, of common stock were
exercised with aggregate proceeds of approximately $1,699,000 and $1,202,000,
respectively.
Stock Option Plans
- ------------------
As of April 30, 2008, we have three stock option plans: the CopyTele,
Inc. 1993 Stock Option Plan (the "1993 Plan"), the CopyTele, Inc. 2000 Share
Incentive 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.
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. 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. Since June 2004, the
1993 Plan has been administered by the Board of Directors.
14
Information regarding the 1993 Plan for the six months ended April 30,
2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
-------------- -------------------- --------------
Shares Under Option at October 31, 2007 2,614,000 $2.33
Expired (975,000) $3.38
Exercised (5,000) $1.31
--------------
Shares Under Option and Exercisable at
April 30, 2008 1,634,000 $1.72 $13,550
--------------
The following table summarizes information about stock options
outstanding under the 1993 Plan as of April 30, 2008:
Options Outstanding and Exercisable
--------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price
----------------------------------------------------------------------
$0.84 to $1.56 779,000 1.54 $1.10
$2.28 855,000 0.20 $2.28
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.
15
Information regarding the 2000 Share Plan for the six months ended
April 30, 2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
-------------- -------------------- --------------
Shares Under Option at October 31, 2007 2,182,466 $0.82
Exercised (410,000) $0.95
--------------
Shares Under Option and Exercisable at
April 30, 2008 1,772,466 $0.79 $441,910
--------------
The following table summarizes information about stock options
outstanding under the 2000 Share Plan as of April 30, 2008:
Options Outstanding and Exercisable
-----------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price
----------------------------------------------------------------------
$0.40 445,000 3.39 $0.40
$0.69 505,466 2.67 $0.69
$0.94 - $1.09 822,000 1.81 $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 April 30, 2008, 21,508 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, February 9, 2006 and August
22, 2007, 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, 45,000,000 shares and 55,000,000 shares, respectively. 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.
16
Information regarding the 2003 Share Plan for the six months ended April
30, 2008 is as follows:
Current Weighted Aggregate
Average Exercise Intrinsic
Shares Price Per Share Value
------------- ----------------- ----------
Shares Under Option at October 31, 2007 14,476,245 $0.74
Expired (60,000) $0.84
Granted 3,875,000 $0.98
Exercised (1,679,200) $0.78
-------------
Shares Under Option at April 30, 2008 16,612,045 $0.80 $3,897,464
-------------
Options Exercisable at April 30, 2008 15,127,045 $0.76 $3,888,964
-------------
The following table summarizes information about stock options
outstanding under the 2003 Share Plan as of April 30, 2008:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
----------------------------------------------------------------------------------------------------------------------
$0.25 - $0.43 1,170,000 5.45 $0.33 1,170,000 5.45 $0.33
$0.52 - $0.77 5,375,970 7.16 $0.63 5,375,970 7.16 $0.63
$0.81 - $1.46 10,066,075 7.93 $0.94 8,581,075 7.65 $0.90
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 April 30, 2008, 5,512,906
shares were available for future grants under the 2003 Share Plan.
Stock Grants
- ------------
We account for stock awards granted to employees and consultants based
on their grant date fair value. During the six-month periods ended April 30,
2008 and 2007, we issued 954,875 shares and 1,509,580 shares, respectively, of
common stock to certain employees for services rendered, principally in lieu of
cash compensation, pursuant to the 2003 Share Plan. We recorded compensation
expense for the six-month periods ended April 30, 2008 and 2007 of approximately
$1,041,000 and $1,068,000, respectively, and for the three-month periods ended
April 30, 2008 and 2007 of approximately $484,000 and $647,000, respectively,
for the shares of common stock issued to employees. In addition, during the
six-month periods ended April 30, 2008 and 2007, we issued 62,306 shares and
149,020 shares, respectively, of common stock to consultants for services
rendered pursuant to the 2003 Share Plan. We recorded consulting expense for the
six-month periods ended April 30, 2008 and 2007 of approximately $75,000 and
$106,000, respectively, and for the three-month periods ended April 30, 2008 and
2007 of approximately $15,000 and $11,000, respectively, for the shares of
common stock issued to consultants.
17
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 the six months ended April 30,
2008, one customer in the Encryption Products and Services Segment represented
60% of total net sales. During the six months ended April 30, 2007, two
customers in the Encryption Products and Services Segment represented 53% and
24%, respectively, of total net sales. At April 30, 2008 two customers in the
Encryption Products and Services Segment represented 69% and 31%, respectively,
of net accounts receivable and at October 31, 2007, one customer in the
Encryption Products and Services Segment represented 100% of net accounts
receivable.
4. 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.
5. INVESTMENT IN AND RELATED PARTY TRANSACTIONS WITH DIGITAL INFO SECURITY CO.
-----------------------------------------------------------------------------
INC.
- ----
In February 2006, we entered into a Software License and Distribution
Agreement (the "DISC License Agreement") to license to Digital Info Security Co.
Inc. ("DISC"), an encryption system that integrates our encryption technology
into DISC's e-mail services. The system allows companies to encrypt all e-mail
transactions in a manner transparent to the individual user. Concurrently with
entering into the DISC License Agreement with DISC, we acquired a minority
interest in DISC by exchanging 100,000 unregistered shares of our common stock
for 5,000,000 shares of DISC's common stock. In May and July 2006, we purchased
an additional 1,000,000 shares and 1,200,000 shares, respectively, of DISC's
common stock for $50,000 and $60,000 in cash, respectively. In November 2006, we
acquired an additional 5,000,000 shares of DISC's common stock in exchange for
300,000 unregistered shares of our common stock. Accordingly, as of April 30,
2008, we held 12,200,000 shares of DISC's common stock, all of which were
restricted securities. DISC's common stock is not registered under the
Securities Exchange Act of 1934, but is quoted on the Pink Sheets. According to
DISC's most recent public financial report, as of December 31, 2007 we held
approximately 12% of the outstanding common stock of DISC. Our investment in
DISC as of April 30, 2008, is recorded in the accompanying consolidated balance
sheet at cost of $417,000, based on the closing price of our common stock on the
dates we acquired DISC common stock in exchange for our common stock, and the
price paid for the shares purchased for cash.
Net sales for the six months ended April 30, 2007 included billings to
DISC for engineering services of $120,000. We had no net sales relating to DISC
for the six months ended April 30, 2008. Net accounts receivable at April 30,
2008 and October 31, 2007 include $60,000 and $120,000, respectively, from DISC.
18
6. INVENTORIES
-----------
Inventories consist of the following as of:
April 30, October 31,
2008 2007
----------- -------------
Component parts $ 95,071 $ 113,458
Work-in-process 8,184 26,597
Finished products 93,053 51,868
----------- -------------
$ 196,308 $ 191,923
=========== =============
7. NET LOSS PER SHARE OF COMMON STOCK
----------------------------------
In accordance with SFAS No. 128, "Earnings Per Share" ("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 periods
presented is the same as Basic EPS, as the inclusion of the effect of common
stock equivalents then outstanding would be anti-dilutive. For this reason,
excluded from the calculation of Diluted EPS for the six month and three-month
periods ended April 30, 2008 and 2007, were options to purchase 20,018,511
shares and 21,202,711 shares, respectively.
8. EFFECT OF RECENTLY ISSUED PRONOUNCEMENTS
----------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
provisions of SFAS 157 are effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 157 will have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 159 will have on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" ("SFAS 141R"), which changes how an entity accounts for
the acquisition of a business. When effective, SFAS 141R will replace existing
SFAS No. 141, "Business Combinations" ("SFAS 141"), in its entirety. SFAS 141R
carries forward the existing requirements to account for all business
combinations using the acquisition method (formerly called the purchase method).
In general, SFAS 141R will require acquisition-date fair value measurement of
identifiable assets acquired, liabilities assumed, and noncontrolling interest
19
in the acquired entity. SFAS 141R will eliminate the current cost-based purchase
method under SFAS 141. SFAS 141R is effective for fiscal years and interim
periods within those fiscal years beginning on or after December 15, 2008. The
adoption of SFAS 141R is not expected to have a material effect on our financial
statements.
9. INCOME TAXES
------------
Income tax expense for the six-month and three-month periods ended
April 30, 2008 represents income taxes withheld by India on dividends paid by
Videocon related to the Videocon GDRs we hold. We did not incur any income tax
expense in fiscal 2007. We file Federal and New York State income tax returns.
Due to net operating losses, the statute of limitations remains open since the
fiscal year ended October 31, 1992. We account for interest and penalties
related to income tax matters in selling, general and administrative expenses.
On November 1, 2007, we adopted FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprise's financial statements. There were no unrecognized
tax benefits as of the date of our adoption of FIN 48 and its adoption did not
have a material effect on our financial statements.
10. SEGMENT INFORMATION
-------------------
We follow the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While our results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Flat-panel display and (ii)
Encryption products and services. The following represents selected financial
information for our segments for the six-month and three-month periods ended
April 30, 2008 and 2007:
Encryption Products
Segment Data Flat-Panel Display and Services Total
- --------------------------------- ------------------- -------------------- -------------------
Six Months Ended April 30, 2008:
Net sales $ - $ 217,580 $ 217,580
Net loss ( 2,551,223) (1,975,453) (4,526,676)
Six Months Ended April 30, 2007:
Net sales $ - $ 227,177 $ 227,177
Net loss (1,596,106) (1,609,224) (3,205,330)
20
Encryption Products
Segment Data Flat-Panel Display and Services Total
- --------------------------------- ------------------- -------------------- -------------------
Three Months Ended April 30, 2008:
Net sales $ - $ 165,355 $ 165,355
Net loss (1,054,950) (786,401) (1,841,351)
Three Months Ended April 30, 2007:
Net sales $ - $ 96,427 $ 96,427
Net loss (661,765) (770,131) (1,431,896)
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
GENERAL
- -------
Our principal operations are the development, production and marketing
of thin, flat, low-voltage phosphor display technology and 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 pioneered the basic development of an innovative new type of
flat panel display technology, which is brighter, has higher contrast and
consumes less power than our prior display technology. This new proprietary
display is a color phosphor based display having a unique lower voltage electron
emission system to excite the color phosphors. As with our prior display
technology, the new technology emits light to display color images, such as
movies from DVD players. In addition, we are also developing another version of
our new type low voltage and low power display having a different matrix
configuration and phosphor excitation system. These new type of displays are
expected to be lower in cost than our prior displays.
In November 2007, we entered into a Technology License Agreement (the
"License Agreement") with Videocon Industries Limited, an Indian company
("Videocon"). Under the License Agreement, we provide Videocon with a
non-transferable, worldwide license of our technology for thin, flat, low
voltage phosphor displays (the "Licensed Technology"), for Videocon (or a
Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing the Licensed Technology. Under the License
Agreement, we will receive a license fee of $11 million from Videocon, payable
in installments over a 27 month period and an agreed upon royalty from Videocon
based on display sales by Videocon. In April 2008, the Indian Government
approved the License Agreement and in May 2008, we received the first
installment of the license fee of $2 million.
Videocon Industries Limited is the $3.5 billion flagship company of the
Videocon Group, one of India's leading business houses. Videocon Group is a
fully integrated consumer electronics and home appliances enterprise with
backward integration in plasma panel, CRT glass, color picture tubes and other
key components for the consumer electronics, home appliances and components
industries. The company also operates in the oil & gas sector through its 25%
participating interest in Ravva Oil Field which produces 50,000 barrels of oil
per day. The group also has participating interests in exploration activities in
Oman, Timor, Brazil, and Australia. The Videocon Group has sales and service
networks throughout India supporting seventeen locally-based factories. In
addition, the Videocon Group operates facilities in Italy, Poland, Oman, China
and Mexico. For more information on Videocon, visit www.videoconworld.com.
CopyTele and Videocon are working together to implement our technology
into production displays. Under the License Agreement, Videocon, with assistance
from CopyTele, is to provide the design and process engineering required to
produce display modules based on our technology and has a dedicated group of
display specialists assigned to this program. In addition, Videocon also is to
22
provide all tooling and fixtures required for the production process. CopyTele
and Videocon are also working together to incorporate advancements to our
display technology for various sizes of displays. Improvements to the technology
will be jointly owned by CopyTele and Videocon.
We will continue to have the right to produce and market, and to
utilize Volga Svet Ltd., a Russian display company that we have been working
with for more than ten years ("Volga"), and an Asian company that CopyTele has
been working with for more than four years, to produce and market, products
utilizing our technology. Additional licenses of our technology to third parties
require the joint agreement of CopyTele and Videocon.
In connection with the License Agreement, for the term of the license
granted under the License Agreement, Videocon and CopyTele have each appointed
one senior advisor to the other's board of directors to advise with respect to
strategic planning and technology in the display field.
At the same time as we entered into the License Agreement, we entered
into a Share Subscription Agreement with an affiliate of Videocon ("Mars
Overseas") for Mars Overseas to purchase 20,000,000 shares of our common stock,
and a subsidiary of ours, CopyTele International Ltd. ("CopyTele
International"), entered into a GDR Purchase Agreement to purchase 1,495,845
global depository receipts ("GDRs") of Videocon. Both transactions were
completed in our first fiscal quarter of fiscal 2008. See Note 1 to the
Condensed Consolidated Financial Statements.
Our new display technology has been incorporated into display modules
which are brighter, have higher contrast and consume less power than our prior
carbon nanotube and proprietary low voltage color phosphor display technology.
We have developed various engineering models using such prior technology, which
demonstrated the display's ability to show movies from DVD players by
controlling the brightness of selected individual pixels. The carbon nanotubes,
which are supplied to us by a U.S. company, require a low voltage for electron
emission and are extremely small - approximately 10,000 times thinner than the
width of a human hair. The 5.5 inch (diagonal) display we developed has 960 x
234 pixels and utilizes a new memory-based active matrix thin film technology
with each pixel phosphor activated by electrons emitted by a proprietary carbon
nanotube network located approximately 10 microns (1/10th of a human hair) from
the pixels. As a result, each pixel phosphor brightness is controlled using a
maximum of only 40 volts. The carbon nanotubes and proprietary color phosphors
are precisely placed and separated utilizing our proprietary nanotube and
phosphor deposition technology. We have developed a process of maintaining
uniform carbon nanotube deposition independent of phosphor deposition. We have
also developed a method of enhancing nanotube electron emission to increase the
brightness of this type of display.
Some other characteristics of our display technology are as follows:
o We have developed a proprietary system which allows us to
evacuate our display; to rapidly vacuum seal it at a low
temperature to accommodate the matrix; and to create lithographic
type spacers to assemble our display utilizing only 0.7mm glass.
23
We thus obtain a display thickness of approximately 1/16th of an
inch, thinner than LCD (liquid crystal) and PDP (plasma)
displays.
o The display matrix, phosphor excitation system, and drivers are
all on one substrate.
o Our display is able to select and change the brightness of each
individual pixel, requiring only 40 volts on each pixel phosphor
to change the brightness from black to white. This compares to
thousands of volts required for other video phosphor based
displays, which leads to inherent breakdowns and short life.
o Our display has no backlight. Because power is only consumed when
a pixel is turned on, low power is needed to activate the whole
display. The display requires less power than an LCD. This lower
power consumption could potentially allow use of rechargeable
batteries to operate TV products for wireless applications and
extend the battery operation time for portable devices.
o The same basic display technology could potentially be utilized
in various size applications, from hand-held to TV size displays.
o Our proprietary matrix structures can be produced by existing
mass production TFT (thin film technology) LCD facilities, or
portions of these facilities.
o Our display eliminates display flicker.
o Our display has an approximately 1,000 times faster video
response time than an LCD, and matches the response time of a
cathode ray tube (CRT).
o Our display 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 of LCDs.
o Also like CRTs, our display is capable of operating over a
temperature range (-40(degree)C to 85(degree)C) which exceeds the
range over which LCDs can operate, especially under cold
temperature conditions.
We believe our displays could potentially have a cost similar to a CRT
and thus less than current LCD or PDP displays (our display does not contain a
backlight, or color filter or polarizer, which represent a substantial portion
of the cost of an LCD).
We have actively continued to pursue our encryption business. We have
sought encryption opportunities in both the commercial and government security
markets.
Our government market has been primarily handled by The Boeing Company
("Boeing") and its large distributors of the Thuraya satellite phones. The
Thuraya Satellite Network has grown as a communications provider due to its
geographic coverage, quality of service and cost effective usage. The third
Thuraya Geo-mobile satellite was successfully launched in January 2008, allowing
Thuraya to embark on major expansion plans to provide their mobile satellite
services in the Asia-Pacific region, thus potentially opening new markets for
CopyTele security solutions that are designed for the Thuraya network.
During fiscal 2007, we entered into a new three year agreement with
Boeing. Boeing now distributes 13 of our products, including our DCS-1400D
(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
24
computer) products, which were specifically designed for the Thuraya network.
Boeing sells these products under the brand name of Thuraya.
We are continuing to promote our Thuraya encryption solutions through
other Thuraya developers and resellers beside Boeing, including Asia Pacific
Satellite Industries ("APSI"). We offer a full line of voice, fax and data
encryption products that secure these communications, and our products are being
used by government agencies, military, and domestic and international
non-governmental organizations (NGOs) in the Middle East, Europe, Far East and
Africa.
APSI has manufactured new Thuraya handsets and docking units that allow
satellite and GSM cellular communications both outdoors and indoors. CopyTele
and APSI have developed connecting cables and compatibility arrangements that
customers can easily set up and utilize to secure their communications over the
Thuraya network and which are compatible with landline telephone systems. APSI's
new FDU-3500 docking unit for its SO-2510 phone is now available in the market.
This unit allows for outdoor and indoor operation of the satellite phone on the
Thuraya network. Our new PA-3500 and PA-3500T products allow compatibility
between our DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI
FDU-3500 docking unit and SO-2510 phone. We have continued to work on further
designs for encrypting the SO-2510 phone that we believe will increase customer
attraction to security by reducing the size of the encryption unit and greatly
improving the customer's graphical interface.
Our products provide secure communications with many different
satellite phones, including the Thuraya 7100/7101/SO-2510 handheld terminal
("HHT"), Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT, Globalstar
GSP-2800/2900 fixed phone, Iridium 9500/9505/9505A 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 and FDU-3500 Fixed Docking Units, and Sattrans's SAT-OFFICE
Fixed Docking Unit and SAT-VDA Hands-Free Car Kit.
We have recently uncovered new opportunities to secure landline and
wireless voice and fax communications. Our USS-900AF, USS-900WF and USS-900WFL
products are being evaluated for use by two Middle Eastern governments for
encrypting fax communications. Also, a Far Eastern government is in the process
of determining the system requirements necessary to encrypt voice communications
utilizing our DCS-1200 and DCS-1400 products.
In the commercial field, the Voice over Internet Protocol (VoIP)
function that has been added to the DCS-1200 is now being evaluated for rollout
by a large commercial organization in South America.
We also licensed our encryption system for e-mail to Digital Info
Security Co. Inc. ("DISC"), located in Westminster, Colorado. The system, our
DCS-2200, integrates into DISC's e-mail services and allows companies to encrypt
all e-mail transactions in a manner transparent to the individual user. In
furtherance of our relationship with DISC, during fiscal 2006 and 2007, we
acquired shares of DISC's common stock constituting, according to DISC's most
recent public financial report, as of December 31, 2007, approximately 12% of
25
the outstanding shares. More information on DISC can be obtained on their
website www.disecurityco.com. See Note 5 to the Condensed Consolidated Financial
Statements.
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 and services. We are
continuing to direct our encryption marketing efforts to opportunities in both
the commercial and government security markets and have recently uncovered new
opportunities with Middle Eastern and Far Eastern governments to secure voice
and fax communications. In addition, in fiscal 2008, we entered into the License
Agreement with Videocon and in May 2008, we commenced receiving from Videocon
license fees related to our display technology.
CRITICAL ACCOUNTING POLICES
- ---------------------------
Our financial statements are prepared in conformity with accounting
principles generally accepted in the United States 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. For additional discussion on the application of these and other
accounting polices, refer to the financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended October 31, 2007.
Revenue Recognition
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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
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Inventories are stated at the lower of cost, including material, labor
and overhead, determined on a first-in, first-out basis, or market, which
represents our best estimate of market value. We regularly review inventory
quantities on hand, particularly finished goods, and record a provision for
excess and obsolete inventory based primarily on forecasts of future product
demand. Our net 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
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the selling price of our inventory below our current carrying value in the
future.
Stock Based Compensation
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We account for stock options granted to employees, directors and
consultants using Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS
123R"). We recognize compensation expense for stock option awards on a
straight-line basis over the requisite service period of the grant. Determining
the appropriate fair value model and calculating the fair value of stock-based
awards requires judgment, including estimating stock price volatility,
forfeiture rates and expected life. If factors change and we employ different
assumptions in the application of SFAS No. 123R in future periods, the
compensation expense that we record under SFAS No. 123R may differ significantly
from what we have recorded in the current period.
RESULTS OF OPERATIONS
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Six months ended April 30, 2008 compared with six months ended April 30, 2007
- -----------------------------------------------------------------------------
Net Sales and Gross Profit
Net Sales. Net sales decreased by approximately $9,000 in the six-month
period ended April 30, 2008, to approximately $218,000, as compared to
approximately $227,000 in the comparable prior-year period. Revenue during the
current period was from encryption products, while revenue during the prior year
period was from encryption products and services. The increase in net sales
resulted from an increase in unit sales of approximately $111,000, to
approximately $218,000, as compared to approximately $107,000 in the comparable
prior-year period and a decrease in revenue from encryption services from
$120,000 in the comparable prior-year period to none in the current period. The
revenue from encryption services in the prior year period resulted from
engineering services billed to DISC. 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 net sales of encryption products and
services increased by approximately $17,000 in the six-month period ended April
30, 2008, to approximately $167,000, as compared to a gross profit of
approximately $150,000 in the comparable prior-year period. The increase in
gross profit is primarily due to sales during the current period including
inventory having a cost of approximately $19,000 for which a provision for
excess inventory was recorded in prior periods and accordingly, the cost of
encryption products sold during the current period was reduced by that amount.
Gross profit as a percent of net sales in the six-month period ended April 30,
2008 was approximately 77%, as compared to approximately 66% in the comparable
prior-year period. The increase in gross profit as a percent of net sales is
primarily due to the sale during the current period of inventory for which a
provision for excess inventory was recorded in prior periods. Because of the
limited number of transactions during each of the periods, gross profit
percentages are sensitive to individual transactions.
27
Research and Development Expenses
Research and development expenses increased by approximately $525,000
in the six-month period ended April 30, 2008, to approximately $2,444,000, from
approximately $1,919,000 in the comparable prior-year period. The increase in
research and development expenses was principally due to an increase in employee
stock option compensation expense of approximately $450,000, an increase in
outside research and development expense of approximately $75,000 and an
increase in consultant stock option compensation expense of approximately
$45,000, offset by a decrease in employee compensation and related costs, other
than stock option expense, of approximately $31,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$925,000 to approximately $2,379,000 in the six-month period ended April 30,
2008, from approximately $1,454,000 in the comparable prior-year period. The
increase in selling, general and administrative expenses was principally due to
an increase in employee stock option compensation expense of approximately
$473,000, an increase in consultant stock option compensation expense of
approximately $165,000, an increase in professional fees of approximately
$117,000, an increase in the provision for doubtful accounts of $60,000, an
increase in travel expense of approximately $41,000 and an increase in employee
compensation and related costs, other than stock option expense, of
approximately $39,000.
Dividend Income
Dividend income, which was received in connection with the Videocon
GDRs we acquired in December 2007, was approximately $131,000 in the six months
ended April 30, 2008. We received no dividend income in the prior-year period.
Interest Income
Interest income was approximately $13,000 in the six-month period ended
April 30, 2008, compared to approximately $18,000 in the comparable prior-year
period. The decrease in interest income was primarily due to a reduction in
prevailing interest rates.
Income Tax Expense
Income tax expense for the six-month period ended April 30, 2008 of
approximately $15,000 represents income taxes withheld by India on the dividends
paid by Videocon related to the Videocon GDRs we hold. We did not record any
income tax expense in the prior-year period.
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Three months ended April 30, 2008 compared with three months ended April 30,
- ----------------------------------------------------------------------------
2007
- ----
Net Sales and Gross Profit
Net Sales. Net sales increased by approximately $69,000 in the
three-month period ended April 30, 2008, to approximately $165,000, as compared
to approximately $96,000 in the comparable prior-year period. Revenue during the
current period was from encryption products, while revenue during the prior year
period was from encryption products and services. The increase in net sales
resulted from an increase in unit sales of approximately $129,000, to
approximately $165,000, as compared to approximately $36,000 in the comparable
prior-year period and a decrease in revenue from encryption services from
$60,000 in the comparable prior-year period to none in the current period. The
revenue from encryption services in the prior year period resulted from
engineering services billed to DISC. 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 net sales of encryption products and
services increased by approximately $67,000 in the three-month period ended
April 30, 2008, to approximately $128,000, as compared to a gross profit of
approximately $61,000 in the comparable prior-year period. The increase in gross
profit is primarily due to the increase in net sales. The increase in gross
profit also reflected sales during the current period including inventory having
a cost of approximately $15,000 for which a provision for excess inventory was
recorded in prior periods and accordingly, the cost of encryption products sold
during the current period was reduced by that amount. Gross profit as a percent
of net sales in the three-month period ended April 30, 2008 was approximately
78%, as compared to approximately 63% in the comparable prior-year period. The
increase in gross profit as a percent of net sales is primarily due to the sale
during the current period of inventory for which a provision for excess
inventory was recorded in prior periods and also results from encryption
services in the prior period having a gross profit percentage of less than
encryption products. 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 $215,000
in the three-month period ended April 30, 2008, to approximately $1,131,000,
from approximately $916,000 in the comparable prior-year period. The increase in
research and development expenses was principally due to an increase in employee
stock option compensation expense of approximately $245,000 and an increase in
outside research and development of approximately $59,000, offset by a decrease
in employee compensation and related costs, other than stock option expense, of
approximately $99,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$375,000 to approximately $960,000 in the three-month period ended April 30,
2008, from approximately $585,000 in the comparable prior-year period. The
29
increase in selling, general and administrative expenses was principally due to
an increase in employee stock option compensation expense of approximately
$298,000, an increase in travel expense of approximately $45,000 and an increase
in professional fees of approximately $42,000, offset by a decrease in employee
compensation and related costs, other than stock option expense, of
approximately $43,000.
Dividend Income
Dividend income, which was received in connection with the Videocon
GDRs we acquirer in December 2007, was approximately $131,000 in the three
months ended April 30, 2008. We received no dividend income in the prior-year
period.
Interest Income
Interest income was approximately $6,000 in the three-month period
ended April 30, 2008, compared to approximately $8,000 in the comparable
prior-year period. The decrease in interest income was primarily due to a
reduction in prevailing interest rates.
Income Tax Expense
Income tax expense for the three-month period ended April 30, 2008 of
approximately $15,000 represents income taxes withheld by India on the dividends
paid by Videocon related to the Videocon GDRs we hold. We did not record any
income tax expense in the prior year period.
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 addition, commencing in the fourth quarter of
fiscal 1999, we have generated cash flows from sales of our encryption products
and in May 2008, we commenced receiving license fees related to our display
technology from Videocon pursuant to the License Agreement.
During the six months ended April 30, 2008, our cash used in operating
activities was approximately $1,552,000. This resulted from payments to
suppliers, employees and consultants of approximately $1,783,000, which was
offset by cash of approximately $87,000 received from collections of accounts
receivable related to sales of encryption products, and approximately $13,000 of
interest income and $131,000 of dividend income received. Our cash used in
investing activities during the six months ended April 30, 2008 was
approximately $21,252,000, which resulted from a disbursement of $16,200,000 for
the purchase of Videocon GDRs, a disbursement $5,000,000 to issue a loan to Mars
Overseas, purchases of short-term investments consisting of certificates of
deposit of $441,000 and purchases of approximately $11,000 of equipment, offset
by $400,000 received upon maturities of short-term investments consisting of
certificates of deposit. Our cash provided by financing activities during the
six months ended April 30, 2008 was approximately $22,899,000, which resulted
from the sale of our common stock to Videocon for $16,200,000, the proceeds
received of $5,000,000 upon obtaining a loan from Mars Overseas and cash
30
received upon the exercise of stock options of approximately $1,699,000.
Accordingly, during the six months ended April 30, 2008, our cash and cash
equivalents increased by approximately $95,000 and our short-term investments
increased by $41,000. As a result, our cash, cash equivalents, and short-term
investments, at April 30, 2008 increased to approximately $1,205,000 from
approximately $1,069,000 at the end of fiscal 2007.
Net accounts receivable increased by approximately $71,000, from
$120,000 at the end of fiscal 2007 to approximately $191,000 at April 30, 2008.
The increase is a result of an account receivable from one customer of
approximately $131,000, offset by a provision for doubtful accounts of $60,000
related to $120,000 of accounts receivable from DISC. Inventories increased by
approximately $4,000 from approximately $192,000 at October 31, 2007 to
approximately $196,000 at April 30, 2008, primarily as a result of the timing of
shipments and production schedules. Investment in Videocon is recorded at fair
value and increased to $14,121,000 at April 30, 2008 from zero at the end of
fiscal 2007, as a result of our purchase of Videocon global depository receipts
for $16,200,000 in December 2007 and the recording of an unrealized loss of
approximately $2,079,000 as of April 30, 2008. Investment in DISC is recorded at
cost of $417,000 and has not changed at April 30, 2008 from the end of fiscal
2007. Loan receivable increased to $5,000,000 at April 30, 2008 from zero at the
end of fiscal 2007, as a result of issuing a loan in that amount to Mars
Overseas in December 2007. Accounts payable and accrued liabilities decreased by
approximately $196,000 from approximately $679,000 at the end of fiscal 2007 to
approximately $483,000 at April 30, 2008, as a result the timing of payments.
Loan payable increased to $5,000,000 at April 30, 2008 from zero at the end of
fiscal 2007, as a result obtaining a loan from Mars Overseas in December 2007.
Working capital at April 30, 2008 increased to approximately $1,139,000
from approximately $737,000 at the end of fiscal 2007. Our working capital
includes inventory of approximately $196,000 at April 30, 2008. Management has
recorded our inventory at the lower of cost or our current best estimate of net
realizable value. To date, sales of our products have been limited. Accordingly,
there can be no assurance that we will not be required to reduce the selling
price of our inventory below our current carrying value.
During the six-month periods ended April 30, 2008 and 2007, we issued
954,875 shares and 1,509,580 shares, respectively, of common stock to certain
employees for services rendered, principally in lieu of cash compensation,
pursuant to the CopyTele, Inc. 2003 Share Incentive Plan (the "2003 Share
Plan"). We recorded compensation expense for the six-month periods ended April
30, 2008 and 2007 of approximately $1,041,000 and $1,068,000, respectively, and
for the three-month periods ended April 30, 2008 and 2007 of approximately
$484,000 and $647,000, respectively for the shares of common stock issued to
employees. In addition, during the six-month periods ended April 30, 2008 and
2007, we issued 62,306 shares and 149,020 shares, respectively, of common stock
to consultants for services rendered pursuant to the 2003 Share Plan. We
recorded consulting expense for the six-month periods ended April 30, 2008 and
2007 of approximately $75,000 and $106,000, respectively, and for the
three-month period ended April 30, 2008 and 2007 of $15,000 and approximately
$11,000, respectively, for the shares of common stock issued to consultants.
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During the six-month periods ended April 30, 2008 and 2007, we granted
options to purchase 3,875,000 shares and 2,505,000 shares, respectively, to
employees, non-employee directors and consultants of common stock at weighted
average exercise prices of $.98 and $.67 per share, respectively, pursuant to
the 2003 Share Plan. During the six-month periods ended April 30, 2008 and 2007,
stock options to purchase 2,094,200 shares and 2,277,230 shares, respectively,
of common stock were exercised with aggregate proceeds of approximately
$1,699,000 and $1,202,000, respectively.
During the six-month period ended April 30, 2008, we issued 20,000,000
shares of our common stock to an affiliate of Videocon for an aggregate purchase
price of $16,200,000 and we purchased 1,495,845 Videocon GDRs for an aggregate
purchase price of $16,200,000. In April 2008, we received a dividend of
approximately $131,000 on the Videocon GDRs we hold. While the Videocon GDRs are
held as security for the loan payable to Mars Overseas, the agreement governing
such loan provides that any dividends, distributions, rights or other proceeds
or benefits in respect of the Videocon GDRs shall be promptly transferred to us
free and clear of any encumbrances under the agreements.
We believe that our existing cash, cash equivalents, short-term
investments and accounts receivable, together with cash flows from expected
sales of our encryption products and revenue relating to our thin, flat,
low-voltage phosphor display technology, including license fees and royalties
from Videocon, and other potential sources of cash flows, will be sufficient to
enable us to continue our marketing, production, and research and development
activities. However, our projections of future cash needs and cash flows may
differ from actual results. It is management's intention to continue to
compensate their employees by issuing stock or stock options. If current cash
and cash equivalents, and cash that may be generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell debt or
equity securities or to obtain a line of credit. The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. We
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, license fees and royalties, 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. 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. In fiscal 2008, we entered into the
License Agreement with Videocon. Under the License Agreement, we will receive a
license fee of $11 million from Videocon, payable in installments over a 27
month period and an agreed upon royalty from Videocon based on display sales by
Videocon. During the six-month period ended April 30, 2008, we have recognized
revenue from sales of encryption products of approximately $218,000 and in May
2008, we received the first installment of the license fee from Videocon of
$2,000,000.
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The following table presents our expected cash requirements for
contractual obligations outstanding as of April 30, 2008:
Payments Due by Period
----------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
Consulting
Agreement $ 42,500 - - - $ 42,500
Noncancelable Operating
Leases $ 162,197 - - - $ 162,197
Loan Payable - - - $5,000,000 $ 5,000,000
------------- ------------- ------------ ---------------- --------------
Total Contractual
Cash Obligations $ 204,697 - - $5,000,000 $ 5,204,697
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FORWARD-LOOKING STATEMENTS
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Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will" and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in Part II, Item 1A - "Risk
Factors" below and Note 1 to Condensed Financial Statements. You should read
this discussion and analysis along with our Annual Report on Form 10-K for the
year ended October 31, 2007 and the condensed financial statements included in
this Report. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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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
33
these instruments, our rate of return on these securities could be affected at
the time of reinvestment, if any.
At April 30, 2008, our investment in Videocon GDRs is recorded at fair
value of approximately $14,121,000 including an unrealized loss of approximately
$2,079,000 and has exposure to price risk. The fair value of the Videocon GDRs
is based on the underlying price of Videocon's equity shares which are traded on
stock exchanges in India with prices quoted in rupees. Accordingly, the fair
value of the Videocon GDRs is subject to price risk and foreign exchange risk.
The potential loss in fair value resulting from a hypothetical 10% adverse
change in prices of Videocon equity shares quoted by Indian stock exchanges and
in foreign currency exchange rates, as of April 30, 2008 amounts to
approximately $1,412,000.
Item 4. 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 Vice President - Finance and Chief Financial Officer,
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, our Chairman of the Board and Chief
Executive Officer and our Vice President - Finance and Chief Financial Officer
concluded that our disclosure controls and procedures are effective as of the
end of the period covered by this report.
There was no change in our internal control over financial reporting
during the quarter ended April 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
--------------------------
Item 1A. Risk Factors.
------------
There have been no material changes in our risk factors from those
disclosed in our Annual Report on Form 10-K for the year ended October 31, 2007.
Item 6. Exhibits.
---------
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
June 9, 2008.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
June 9, 2008.
32.1 Statement of Chief Executive Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated June 9, 2008.
32.2 Statement of Chief Financial Officer, pursuant to
Section 1350 of Title 18 of the United States Code,
dated June 9, 2008.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COPYTELE, INC.
By: /s/ Denis A. Krusos
----------------------------
Denis A. Krusos
Chairman of the Board and
Chief Executive Officer
June 9, 2008 (Principal Executive Officer)
By: /s/ Henry P. Herms
----------------------------
Henry P. Herms
Vice President - Finance and
Chief Financial Officer (Principal
June 9, 2008 Financial and Accounting Officer)
35