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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period
from ___________ to ___________
Commission file number: 0-11254
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COPYTELE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices) Securities registered pursuant to
Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange
on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [x]
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of April 30, 2003 (the
last business day of the registrant's most recently completed second fiscal
quarter), computed by reference to the closing sale price of the registrant's
Common Stock on the Over-the-Counter Bulletin Board on such date ($0.26):
$18,529,753.
On December 15, 2003, the registrant had outstanding 80,611,673 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
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DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
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Item 1. Business.
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Forward-Looking Statements
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Information included in this Annual Report on Form 10-K may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will," and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in this Annual Report on Form
10-K under the heading "General Risks and Uncertainties" below. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. You are cautioned
not to unduly rely on such forward-looking statements when evaluating the
information presented in this Annual Report on Form 10-K.
Overview
- --------
Our principal operations include the development, production
and marketing of thin, high-brightness, flat panel video displays 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.
Our line of hardware encryption products presently includes
the USS-900, the DCS-1200, the DCS-1400, the STS-1500 and the ULP-1. These
encryption products are multi-functional, hardware based digital encryption
systems that provide high-grade encryption using either the Citadel(TM) CCX
encryption cryptographic chip (which is manufactured by the Harris Corporation)
or the Triple DES or the new AES algorithm (algorithms available in the public
domain which are used by many U.S. government agencies). In addition, we have
developed the USS-900 Security Software, a software security product, using
either the Triple DES or the AES algorithm, for the encryption of data files and
e-mail attachments in both desktop and laptop computers utilizing Microsoft
Windows operating systems. We have also developed the DCS-1800 Security Software
to encrypt voice and data in cellular and satellite phones, scanners, and
printers. We are continuing our research and development activities for
additional encryption products. We sell our encryption products through a
distributor/dealer network and to end-users. Recently, we also have begun
working with several large organizations to
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provide them with both our hardware and software encryption solutions for them
to evaluate whether the solutions meet their security requirements.
We have made significant advancements to develop and produce
our thin film video flat panel displays utilizing our electronic emission
technology. With Volga Svet Ltd. ("Volga"), a Russian display company that we
have been working with for more than six years, we have developed several
engineering models of high-brightness, monochrome video displays, including a
3.7-inch (diagonal) display having 160 x 80 pixels, a 5-inch (diagonal) display
having 320 x 240 pixels, and a 3.5-inch (diagonal) display having 320 x 160
pixels.
Currently, liquid crystal displays ("LCDs") are the most
commonly used flat panel displays in commercial products. We believe that our
display has the following advantages over LCD displays:
o No backlight (LCDs require a backlight that results in high power
consumption and contains mercury)
o No thermistor (LCDs require thermistors to control operation at various
temperatures)
o No polarizer (required in LCDs)
o No color filter (required in color LCDs)
o Almost hemispherical viewing angle (LCDs have limited viewing angles)
o Higher contrast ratio
o Faster video response time
o Operates in a wider range of air temperatures
o Longer life
o Not affected by ultraviolet light (LCDs contain a liquid crystal which may
deteriorate after long exposure to direct sunlight)
o Safer (leakage of liquid crystal from LCDs may be dangerous)
We are initially pursuing applications for our display that we
believe will demonstrate these performance advantages. In particular, we have
been demonstrating our displays to a number of companies for use in outdoor
products made by them that operate over wide air temperature ranges and under
high and low light ambient conditions, and that require wide viewing angles.
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We provided our display to a company to evaluate the display's
performance in a product produced by the company that operates over a wide air
temperature range in an outdoor environment. After successfully testing our
display, that company recently issued to us a purchase order for a seed quantity
of modules containing our display, to replace LCD modules in the company's
product. We have also provided our display to another company that is evaluating
it for a product the company is developing in the field of emergency
communication. Based on these developments, we have, together with Volga,
started to produce our 5-inch (diagonal) high-brightness displays using Volga's
current production facility.
In addition, we are pursuing other opportunities by
demonstrating our displays to companies having large quantity display
applications, and we are in the process of responding to their requests for
pricing based on their display specifications and quantity requirements. These
companies' applications would require large quantities of displays to be located
in retail stores, airports, vending machines and automobiles. For automobiles,
the displays would be required to have the capability to provide wide-screen or
standard TV formats for digital TV and DVD operation. To prepare for these
opportunities, we are working with several Asian companies to supplement Volga's
production and to produce larger size color displays.
We also are developing modifications to our display technology
to incorporate the matrix structure and drivers of LCDs into our display so that
our display may be produced more easily by facilities currently producing LCDs.
We have been working with an LCD manufacturing company, located in Asia, to
incorporate its LCD technology as part of our display. We have received samples
of that company's color LCDs which incorporate TFT (thin film technology) and
LCD driver technology, and we are performing tests to determine modifications
that would be necessary to that technology to perform to our display
requirements. From our test results, we believe that, with our modifications,
that company can produce part of the structure of our display using its current
LCD production facilities. We could then incorporate that structure and drivers
to complete the fabrication of our display either at that company's facilities,
at Volga, or at the facilities of another Asian company with which we are in
discussions. We believe that this process will enable us to be able to produce,
as a first objective, up to 6.5-inch (diagonal) color displays which could meet
the requirements of several companies' large quantity applications. There can be
no assurance that we can develop or produce color video displays or displays
using modified TFT technology or that we can produce larger display sizes or
greater quantities using such technology.
We have recently received from the U.S. patent office patents
for three variations of our video display technology and a notice of allowance
of the claims contained in our patent application for one other variation of our
video display technology. We are continuing to apply for additional patents for
our video display technology.
We were incorporated on November 5, 1982 under the laws of the
State of Delaware. Our principal executive offices are located at 900 Walt
Whitman Road, Melville, New York 11747 and our telephone number is 631-549-5900.
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General Risks and Uncertainties
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Our business involves a high degree of risk and uncertainty,
including, but not limited to, the following risks and uncertainties:
o We have experienced significant net losses and negative cash flows from
operations and they may continue.
We have had net losses and negative cash flows from operations
in each year since our inception, and we may continue to incur substantial
losses and experience substantial negative cash flows from operations. While
payments from Futaba Corporation ("Futaba") of Japan under an agreement with
Futaba provided substantial cash from operations during the year ended October
31, 2002, since the agreement with Futaba terminated in June 2002, we will not
receive any further payments under this agreement.
We have incurred substantial costs and expenses in developing
our encryption and flat panel display technologies and in our efforts to produce
commercially marketable products incorporating our technology. We have had
limited sales of products to support our operations from inception through
October 31, 2003. We have set forth below our net losses, research and
development expenses and net cash used in operations for the three fiscal years
ended October 31, 2003:
Fiscal Years Ended October 31,
------------------------------
2003 2002 2001
---- ---- ----
Net loss.............................................$ 3,114,411 $ 3,285,240 $ 3,571,957
Research and development expenses.................... 1,807,742 1,625,974 2,324,949
Net cash used in operations.......................... 958,501 431,471 717,845
o We may need additional funding in the future which may not be available on
acceptable terms and, if available, may result in dilution to our
stockholders, and our auditors have issued a "going concern" audit opinion.
We anticipate that, if cash generated from operations is
insufficient to satisfy our requirements, we will require additional funding to
continue our research and development activities and market our products. The
auditor's report on our financial statements as of October 31, 2003 states that
the net loss incurred during the year ended October 31, 2003, our accumulated
deficit as of that date, and the other factors described in Note 1 to the
Financial Statements raise substantial doubt about our ability to continue as a
going concern. The auditor's report on our financial statements for the year
ended October 31, 2002 contained a similar statement. Our financial statements
have been prepared assuming we will continue as a going concern and do not
include any adjustments that might result from the outcome of this uncertainty.
Based on reductions in operating expenses that have been made
and additional reductions that may be implemented, if necessary, we believe that
our existing
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cash and accounts receivable, together with cash flows from expected sales of
encryption products and flat panel displays, and other potential sources of cash
flows, will be sufficient to enable us to continue in operation until at least
the end of the first quarter of fiscal 2005. We anticipate that, thereafter, we
will require additional funds to continue marketing, production, and research
and development activities, and we will require outside funding if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However, our projections of future cash needs and cash flows may differ from
actual results. If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit prior to the first quarter of
fiscal 2005. The sale of additional equity securities or convertible debt could
result in dilution to our stockholders. We can give you no assurance that we
will be able to generate adequate funds from operations, that funds will be
available to us from debt or equity financings or that, if available, we will be
able to obtain such funds on favorable terms and conditions. We currently have
no arrangements with respect to additional financing.
o We may not generate sufficient revenue to support our operations in the
future or to generate profits.
We are engaged in two principal operations: (i) the
development, production and marketing of thin high-brightness flat panel video
displays and (ii) the development, production and marketing of multi-functional
encryption products that provide information security for domestic and
international users over virtually every communications media. We have only
recently started to produce monochrome versions of our high-brightness flat
panel displays and our encryption products are only in their initial stages of
commercial production. Our investments in research and development are
considerable. Our ability to generate sufficient revenues to support our
operations in the future or to generate profits will depend upon numerous
factors, many of which are beyond our control, including:
o our ability to successfully market our line of thin
high-brightness flat panel video displays and encryption
products;
o the capability of Volga to produce thin high-brightness
monochrome video displays and supply them to us;
o our ability to jointly develop with Volga and produce a
full-color video display;
o our production capabilities and those of our suppliers as
required for the production of our encryption products;
o long-term performance of our products;
o the capability of our dealers and distributors to adequately
service our encryption products;
o our ability to maintain an acceptable pricing level to end-users
for both our encryption and display products;
o the ability of suppliers to meet our requirements and schedule;
o our ability to successfully develop other new products under
development;
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o rapidly changing consumer preferences;
o the possible development of competitive products that could
render our products obsolete or unmarketable;
o our future negotiations with Volga with respect to payments and
other arrangements under our Joint Cooperation Agreement with
Volga.
Because our revenue is subject to fluctuation, we may be
unable to reduce operating expenses quickly enough to offset any unexpected
revenue shortfall. If we have a shortfall in revenue in relation to expenses,
our operating results would suffer. Our operating results for any particular
fiscal year may not be indicative of future operating results. You should not
rely on year-to-year comparisons of results of operations as an indication of
our future performance.
o We are dependent upon a few key executives and the loss of their services
could adversely affect us.
Our future success is dependent on our ability to hire, retain
and motivate highly qualified personnel. In particular, our success depends on
the continued efforts of our Chief Executive Officer, Denis A. Krusos, and our
President, Frank J. DiSanto, who founded our company in 1982 and are engaged in
the management and operations of our business, including all aspects of the
development, production and marketing of our encryption products and flat panel
display technology. In addition, Messrs. Krusos and DiSanto, as well as our
other skilled management and technical personnel, are important to our future
business and financial arrangements. The loss of the services of any such
persons could have a material adverse effect on our business and operating
results.
o The very competitive markets for our encryption products and flat panel
display technology could have a harmful effect on our business and
operating results.
The markets for our encryption products and flat panel display
technology worldwide are highly competitive and subject to rapid technological
changes. Most of our competitors are larger than us and possess financial,
research, service support, marketing, manufacturing and other resources
significantly greater than ours. Competitive pressures may have a harmful effect
on our business and operating results.
o Our common stock is subject to the SEC's penny stock rules which may make
our shares more difficult to sell.
Our stock fits the definition of a penny stock. The SEC rules
regarding penny stocks may have the effect of reducing trading activity in our
common stock and making it more difficult for investors to sell. The rules
require a broker to deliver a risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker must also give bid and offer quotations and broker and salesperson
compensation information to the customer orally or in writing prior to effecting
a transaction and in writing with the confirmation. The
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SEC rules also require a broker to make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction before completion of the
transaction. These requirements may result in a lower trading volume of our
common stock and lower trading prices.
Products
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High-brightness Thin Flat CRT Video Display
-------------------------------------------
Electron emission display ("Flat CRT") technology is
recognized as one of the most promising candidates to replace the cathode ray
tube ("CRT"). CRTs have been highly successful for decades, but are bulky and
power hungry. Flat CRT technology, by contrast, permits production of a display
that preserves the desirable characteristics of a CRT- including full-color; a
wide viewing angle; the ability to operate in severe environmental conditions;
and a long operational life - in a much more compact, energy-efficient, flat
panel display.
We have developed a Flat CRT that not only preserves the
desirable characteristics of a CRT but also achieves high-brightness, has a
unique electron emission and pixel structure with built-in pixel memory, and has
long life.
Other capabilities of our display technology include:
o our displays can be produced in a variety of sizes, permitting
its use in many applications from small hand-held devices to
large high-definition TV ("HDTV") devices;
o our displays can function in a broad environmental range similar
to a CRT;
o our displays have low power consumption;
o our displays can be viewed from a wide angle, similar to a CRT;
o our displays have high-brightness with video capability; and
o our displays have no picture geometric distortion - each phosphor
in a pixel is stimulated individually.
We are producing and marketing two types of our thin
high-brightness video displays, our Model CTVD-101 and our Model CTVD-102
displays.
Specifications for the CTVD-101 display are as follows:
o Display Area 73.9 mm(H) x 36.9mm(V)
o Display Size 104.0 mm x 52.5 mm
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o Number of Pixels 320 x 160
o Pixel Pitch 0.231 mm x 0.231 mm
o Pixel Size 0.205 mm x 0.205 mm
o Display Colors blue-green/black
o Viewing Angle 180 degrees vertical and 180 degrees
horizontal
o Response Time 10 microseconds
o Temperature Range -45 degrees C to 85 degrees C
o Humidity 95% RH
Specifications for the CTVD-102 display are as follows:
o Display Area 76.3 mm (3")(H) x 101.8 mm (4")(V)
o Display Size 92.5 mm (H) x 132.5 mm (V)
o Number of Pixels 320 x 240
o Pixel Pitch 0.318 mm x 0.318 mm
o Pixel Size 0.288 mm x 0.288 mm
o Display Colors blue-green/black
o Viewing Angle 180 degrees vertical and 180 degrees
horizontal
o Response Time 10 microseconds
o Temperature Range -45 degrees C to 85 degrees C
o Humidity 95% RH
Encryption Products
-------------------
We are producing and marketing a line of high-grade, hardware
and software based encryption products that provide security for voice, fax, and
data transmissions utilizing cellular, satellite, digital and analog
communication media. Our encryption technology products encode information
through a complex mathematical formula called an algorithm. The algorithm
requires a secret "key" to both encrypt and decrypt information. Only the secret
key that is used to encrypt the information can be used to decrypt the
information. Our products automatically generate new secret keys electronically
with each call. When communicating encrypted information over a
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communications media, all of our products are compatible with each other and
generally are required at both the sending and receiving end.
The features common to all our hardware communication products
are as follows:
o Simple, one button operation. Secure communication is indicated
by a blinking red light becoming solid red.
o Every session uses a new secret encryption key to both encrypt
and decrypt information.
o All units use a hardware random number generator as part of the
secret key system.
o Encryption from point-to-point communication utilizing one of our
products at each end.
o Export approval received from the U.S. Department of Commerce
using the Citadel(TM) CCX from Harris Corporation or Triple DES
or AES algorithms and a minimum 128-bit encryption key length.
o Small, lightweight, and enclosed in a plastic case.
o Low power consumption.
Our line of encryption products is as follows:
DCS-1800 Security Software
--------------------------
The DCS-1800 Security Software provides high-grade encryption
capabilities for cellular and satellite telephones, scanners, and printers. The
additional features and capabilities of this product include:
o Encrypts cellular and satellite voice and data communications.
o Encrypts scanners and printers.
o Secures all cellular platforms: CDMA, GSM, TDMA and others as
developed.
o Compatible with our desktop and wireless encryption systems.
o Automatic random key management system.
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DCS-1200
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The DCS-1200 is a compact, portable, digital
cellular/satellite encryption device for voice and data. It may be installed
with a RS232 port for digital cellular and satellite phones to provide encrypted
voice and data file transfer or with both digital and analog desktop telephone.
The additional features and capabilities of this product include:
o Battery or AC powered.
o Keypad for dialing a data connection through a cell or satellite
phone's RS232 port.
o Two RS232 ports, one for the phone and one for computer file
operations.
o Rechargeable lithium ion battery with an internal charger.
o Encrypts voice and data in the same phone call.
o Encrypts local files for privacy or for secure e-mail attachment
transmission.
o Encrypts e-mail addresses to guard against the spread of viruses.
o Connects between the handset and the base of digital PBX
telephones.
o Communication speeds from 2400 to 9600 BPS.
o Headset provided for private discrete communication.
o Small, portable device, weighing approximately 9 ounces and with
dimensions of 6" deep x 4.38" wide x 1.38" high.
DCS-1400
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The DCS-1400 is a compact, portable, digital
cellular/satellite encryption device for secure voice communication. The
additional features and capabilities of this product include:
o As a voice-only solution, the DCS-1400 has one RS232 port for
connection through a cell or satellite phone's data port.
o Battery or AC powered.
o Weighs approximately 3 ounces with dimensions of 5" deep x 2.2"
wide x .4" high.
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o Keypad for dialing a data connection through a cell or satellite
phone's RS232 port.
o Encrypts local files for privacy or for secure e-mail
attachments.
o Encrypts e-mail addresses to guard against the spread of viruses.
o Rechargeable lithium ion battery with an internal charger.
o Communication speeds from 2400 to 9600 BPS.
o Headset provided for private discrete communication.
STS-1500
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The STS-1500 is a secure teleconferencing system that can be
customized for specific applications. This device utilizes a combination of
DCS-1200, DCS-1400 and USS-900 equipment for use in remote locations, together
with a teleconferencing bridge at the hub. The additional features and
capabilities of this system include:
o Provides fully encrypted voice communication from remote
locations to a central teleconferencing center.
o Remote users can speak to hub participants as well as each other
over fully encrypted links.
o Complete point-to-point secure conversations can be easily
established.
o Can be used to encrypt voice calls made to cellular, satellite,
digital and analog telephones.
o Easy to install and operate and prevents third-party
intervention.
USS-900
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The USS-900 is a voice, data and fax desktop encryption
product that is designed to operate on analog telephone lines. This device also
operates over suitable voice, terrestrial and satellite links. The additional
features of this product include:
o Encrypts e-mail addresses to guard against the spread of viruses.
o Encrypts any computer file as an e-mail attachment that can be
sent over the Internet or an ordinary telephone line.
o Interfaces with virtually any analog telephone, allowing easy
encryption of voice communication.
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o Interfaces with virtually any analog fax machine attended or
unattended, ensuring cryptographic communication of information.
o Interfaces with a computer, ensuring cryptographic communication
of information between computers.
o Interfaces with virtually any computer with the utilization of a
self-contained CD ROM, to encrypt and decrypt computer files with
the use of a single device. The encrypted files can be stored on
the computer, on networks or on the Internet.
o Interfaces with a telephone and computer to allow secure
simultaneous voice communication and point-to-point file transfer
(SVD) over ordinary analog telephone lines with transmission
rates of 2,400 to 33,600 BPS.
o Interfaces with multiple telephone lines to provide multi-person
encrypted communications over ordinary telephone lines.
o Interfaces with telephones, fax machines and computers to perform
secure and encrypted voice, fax and point-to-point data
communication on the same phone call.
o Small, compact device weighing approximately 9 ounces and with
dimensions of 6" deep x 4.38" wide x 1.38" high.
We have also developed, for medical and governmental
applications, a version of the USS-900 which is designed to operate
automatically in the clear or the encrypted mode for fax applications only.
In addition, we have recently developed the USS-900 Security
Software, a stand-alone software security product derived from the USS-900
software, to secure data files and e-mail attachments in both desktop and laptop
computers utilizing Windows operating systems. This product is available at a
substantially lower cost than the ULP-1 and is aimed to address a larger
potential market.
ULP-1
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The ULP-1 is a hardware-based encryption Personal Computer
Memory Card International Association, or PCMCIA, card that plugs into notebook
or laptop computers. The ULP-1 is the size of a credit card and operates as an
encryption/decryption key to protect data files and e-mail attachments. The
ULP-1 also guards against the spread of viruses by encrypting e-mail addresses.
The ULP-1 can easily be removed when not in use, as a result of which the
encrypted data in the computer files cannot be decrypted and read by an
unauthorized person.
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New Technologies Under Development
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Flat Panel Video Display Technology
-----------------------------------
During 2003, we continued to pursue our efforts to develop new
technologies for color, video flat panel displays.
High-brightness Thin Flat CRT Video Display
-------------------------------------------
We are further developing our display technology to
incorporate the matrix TFT pixel structure and drivers of LCDs into our display
so that our display may be produced by facilities currently producing LCDs. We
believe that this approach will allow our displays to continue to have memory on
each pixel in the display so that the displays would maintain high-brightness.
For this development, an Asian company that currently produces LCDs with TFT
technology is supplying us with samples of its TFT pixel structure and drivers.
We are cooperating technically with this company to arrive at acceptable
modifications to its technology to conform to our display requirements. Based on
tests and evaluations performed by us and that company, we believe that, with
our modifications, that company would be able to produce part of the structure
of our display using its current LCD production facilities. We could then
incorporate that structure and drivers to complete the fabrication of our
display either at that company's facilities, at Volga, or at the facilities of
another Asian company with which we are in discussions. We believe that this
process will enable us to produce, as a first objective, up to 6.5-inch
(diagonal) color displays which could meet the requirements several companies'
large quantity applications. In addition, we are also developing, with Volga,
color video displays using technology similar to that used in our CTVD-102
display. There can be no assurance that we can develop or produce color video
displays or displays using modified TFT technology or that we can produce larger
display sizes or greater quantities using such technology.
E-Paper(TM) Flat Panel Display
------------------------------
We are continuing to develop the technology utilized in our
E-Paper(TM) ultra-high resolution display for possible application for mobile
devices. The E-Paper(TM) characteristics of low power consumption, flicker-free,
wide-angle viewing and high contrast are desirable features for mobile devices.
The original E-Paper(TM) display was primarily designed for ultra-high picture
quality, but required separate illumination. It was able to display information
such as a printed page, one at a time. We believe it is desirable to add
features for mobile devices so that displayed information can be continuously
updated and use only ambient light. The new design we are attempting to develop
would incorporate the individual control of the pixels to allow continuous
updating of displayed information, have a high contrast to allow viewing under
normal ambient light and, due to a simplified structure, result in lower
manufacturing cost. The basic design consists of two glass substrates that
contain our proprietary black and white charged particles in a clear suspension.
The viewing substrate is a clear glass so that individual black or white pixels
are displayed to form a high contrast image. The original design had a structure
in the viewing side substrate that reduced the contrast and thus
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required a lighting system. In the new design, a simplified pixel control
structure is located on the non-viewing substrate.
To further develop this technology, we are attempting to
optimize the ability of the flat panel to simultaneously control black and white
particles having approximately equal densities that are suspended in a clear
suspension without agglomerating. We cannot give you any assurance, however,
that we will be able to develop a commercially marketable display of this type.
Encryption Technology
---------------------
We are continually engaged in the development of additional
capabilities for our current product lines as well as the development of new
products to meet current and anticipated customer applications.
We have made software modifications to all our products to
accommodate the Citadel(TM) CCX, Triple DES, or AES algorithms. We have
developed software to provide additional features to the ULP-1, such as
safeguarding laptop computers by preventing them from powering up unless the
ULP-1 is inserted, and automating the encryption/decryption process to simplify
its use. We have also developed a software security product derived from the
USS-900 software. In addition, we have developed the DCS-1800 Security Software
which can encrypt cellular and satellite phones, scanners, and printers. This
software is useful to meeting the privacy protection for medical records and
other health care information for individuals mandated by the Health Insurance
Portability and Accounting Act ("HIPAA") .
We are continuing the process of obtaining U.S. federal
government certification for our encryption products. To obtain certification,
we are modifying our software and other technology to conform to the
requirements of the government's published standards. The certification would
attest that our products meet such standards and that the features described in
our specification sheets are actually implemented in our products.
Production
- ----------
Flat Panel Video Display Products
---------------------------------
Volga is producing, under our Joint Cooperation Agreement,
our Model CTVD-101 and our Model CTVD-102 displays. Volga is using sources for
its materials and components located in Russia, U.S., Europe, and Asia.
Given normal lead times, we anticipate Volga having a readily available supply
of materials and components. The Model CTVD-102 displays being produced by Volga
are being used to meet our current purchaser's requirements. The Model CTVD-101
displays are being produced for potential purchasers' and we believe that Volga
could also supply other interested purchasers from its current facilities, and
we anticipate working with Volga to meet those potential purchasers'
requirements.
14
Encryption Products
-------------------
Our encryption products consist of a printed circuit board
populated with electronic components and connectors enclosed in a plastic case.
We design all the hardware, software, packaging and operating manuals for our
products. The four main electronic components, the Citadel(TM) CCX encryption
chip or hardware key generator chip, a digital signal processor, vocoder, and
modems, are contained on a printed circuit board. We are currently using several
U.S.-based electronics-production contractors to procure the printed circuit
boards and mount the associated electronics components on the circuit board. We
currently use approximately a dozen primary component and printed circuit-board
suppliers and one production assembly contractor. Given normal lead times, we
anticipate having a readily available supply of all electronics components that
we require for assembling our encryption products.
Our production contractors produce and visually inspect the
completed circuit boards. We perform final assembly, including installation of
the software, by enclosing the completed printed circuit boards into the product
enclosure and performing functionality testing of all units at our premises at
Melville, New York prior to shipment to our customers. We test our finished
products using internally developed product assurance testing procedures. We
currently produce our line of products to meet marketing requirements.
Marketing and Sales
- -------------------
Flat Panel Video Display Products
---------------------------------
We are continuing to pursue marketing opportunities for our
display technology. We are utilizing models of our CTVD-101 and CTVD-102
displays to demonstrate the capabilities of our display and its advantages over
LCDs.
We have worked with one company this year to develop a
plug-in module with our CTVD-102 display to replace the LCDs in that company's
product. Our display passed the company's operating environment requirements
and, as a result, we have received a purchase order to provide the purchaser
with a seed quantity of such modules. Volga is in the process of producing the
modules to meet this purchaser's requirements. We are also in the process of
supplying CTVD-102 modules to another company which will evaluate our module for
a product it is developing.
In addition, we are pursuing other opportunities by working
with other companies to demonstrate that our displays may be incorporated into
their products. Some of these applications would require large size displays
that include the capability to provide a wide-screen or standard TV format for
TV and DVD operation. Our production capabilities would need to be expanded to
produce such displays. Applications that we are pursuing for incorporation of
our displays include both outdoor and indoor informational displays located in
retail stores, airports, vending machines, and automobiles.
15
Encryption Products
-------------------
During the past year we have continued to direct our marketing
efforts to participate in the security opportunities created by the U.S.
Department of Homeland Security, by the enactment of HIPAA, and by the Defense
Department. HIPAA requires certain privacy protection for medical records and
other health care information for individuals. We are working with several large
companies to provide them with both our hardware and software solutions for them
to evaluate whether these solutions meet their security requirements. This
includes, in particular, fax encryption utilizing our patented USS-900 and our
DCS-1800 security software to encrypt scanners and printers.
In addition, we received purchase orders from, and have
supplied initial quantities to, a number of governmental and commercial
organizations for our hardware encryption products for securing communication
networks. This could result in requirements for larger quantities of units for
their security applications. These applications include securing voice,
teleconferencing, fax, and data through cellular communication devices. We have
provided a Fortune 500 company with our teleconferencing and cellular encryption
products to secure the voice communication of its high level management. We have
also expanded our international marketing by making initial sales of our
hardware products in Canada, India, Middle East, Central and South America.
In addition, we presently use a network of distributors in the
security field and original equipment manufacturers who market our encryption
products on a non-exclusive basis. The distributors generally are parties to
one-year renewable agreements that do not contain significant minimum purchase
requirements. These distributors, along with our internal marketing group, have
sold and marketed our encryption products to multinational corporations, U.S.
and foreign governments, and local and federal law enforcement agencies.
We continue to provide training and technical support to our
customers and to our distributors and dealers and to display our encryption
products at major security and electronic trade shows.
Customers
- ---------
During fiscal 2003 we recognized approximately $60,000 and
$31,000, respectively, in revenue from two customers in the Encryption Products
and Services Segment, or approximately 25% and 13% of total net revenue. During
fiscal 2002 and 2001, we recognized approximately $4,542,000 and $958,000,
respectively, in revenue from Futaba under an agreement with Futaba, or
approximately 88% and 57% of total net revenue, respectively.
Competition
- -----------
The market for encryption products and flat panel displays
worldwide is highly competitive and subject to technological changes. Although
successful product and systems development is not necessarily dependent on
substantial financial resources,
16
most of our competitors are larger than us and possess financial, research,
service support, marketing, manufacturing and other resources significantly
greater than ours.
There are several other companies that sell hardware and/or
software encryption products and there are many large companies that sell flat
panel displays. We believe, however, that the technology contained in our
encryption products and our flat panel displays have features that distinguish
them from the products being sold by our competitors. The encryption security
and flat panel display markets are likely to be characterized by rapid advances
in technology and the continuing introduction of new products that could render
our products obsolete or non-competitive. We cannot give you any assurance that
we will be able to compete successfully in the market for our encryption
products and our flat panel displays.
Patents
- -------
We have received patents from the United States and certain
foreign patent offices, expiring at various dates between 2005 and 2022. At the
present time, additional patent applications are pending with the United States
and certain foreign patent offices. These patents are related to the design,
structure and method of construction of the E-Paper(TM) flat panel display,
methods of operating the display, particle generation, applications using the
E-Paper(TM) flat panel display, and for our solid state and thin film video
color display.
We have also filed or are planning to file patent applications
for our video and simplified E-Paper(TM) flat panel display technologies
currently under development, and for our encryption technologies. We have
recently received from the U.S. patent office patents for three variations of
our video display technology and a notice of allowance of the claims contained
in our patent application for one variation of our video display technology.
We cannot assure you that patents will be issued for any of
our pending applications. In addition, we cannot assure you that any patents
held or obtained will sufficiently protect us against our competitors. We are
not aware that any of our encryption products are infringing upon the patents of
others. We cannot assure you, however, that other products developed by us, if
any, will not infringe upon the patents of others, or that we will not have to
obtain licenses under the patents of others, although we are not aware of any
such infringement at this time.
We believe that the foregoing patents are significant to our
future operations.
Research and Development
- ------------------------
Research and development expenses were approximately
$1,808,000, $1,626,000 and $2,325,000 for the fiscal years ended October 31,
2003, 2002 and 2001, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and our Financial
Statements.
17
Employees and Consultants
- -------------------------
We had 23 full-time employees and 22 consultants as of October
31, 2003. Twenty of these individuals, including our Chairman of the Board and
our President, are engaged in research and development. Their backgrounds
include expertise in physics, chemistry, optics and electronics. Nineteen
individuals are engaged in marketing and the remaining individuals are engaged
in administrative and financial functions for us. None of our employees is
represented by a labor organization or union.
Financial Information About Segments and Geographical Areas
- -----------------------------------------------------------
See our Financial Statements.
Item 2. Properties.
-----------
We lease approximately 12,000 square feet of office and
laboratory research facilities at 900 Walt Whitman Road, Melville, New York (our
principal offices) from an unrelated party pursuant to a lease that expires
November 30, 2008. Our base rent is approximately $248,000 per annum with a 3%
annual increase and an escalation clause for increases in certain operating
costs. We have the right to cancel a portion or the entire lease as of May 31,
2006. This lease does not contain provisions for its renewal and management will
continue to evaluate the future adequacy of this facility. We anticipate
securing a lease renewal for this facility at the end of the lease term if we
determine to remain there. See Note 10 to our Financial Statements.
We believe that the facilities described above are adequate
for our current requirements.
Item 3. Legal Proceedings.
-----------------
We are not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of security holders during
the fourth quarter of our fiscal year ended October 31, 2003.
18
PART II
Item 5. Market for the Registrant's Common Equity and
---------------------------------------------
Related Stockholder Matters.
----------------------------
Our common stock has traded on the Over-the-Counter Bulletin
Board, under the symbol "COPY", since March 27, 2003. Prior to that date our
common stock traded on The Nasdaq Stock Market, Inc. On August 2, 2002 our
listing was transferred from the The Nasdaq National Market to The Nasdaq
SmallCap Market. The high and low sales prices as reported by the
Over-the-Counter Bulletin Board and The Nasdaq Stock Market, Inc. for each
quarterly fiscal period during our fiscal years ended October 31, 2002 and 2003
have been as follows:
- -----------------------------------------------------------------------------------------------------------
Fiscal Period High Low
- -----------------------------------------------------------------------------------------------------------
1st quarter 2002 $0.74 $0.36
2nd quarter 2002 0.58 0.43
3rd quarter 2002 0.94 0.27
4th quarter 2002 0.48 0.15
- -----------------------------------------------------------------------------------------------------------
1st quarter 2003 0.35 0.15
2nd quarter 2003 0.41 0.12
3rd quarter 2003 0.75 0.22
4th quarter 2003 $0.88 $0.51
- -----------------------------------------------------------------------------------------------------------
As of December 15, 2003, the approximate number of record
holders of our common stock was 1,400 and the closing price of our common stock
was $0.42 per share.
No cash dividends have been paid on our common stock since our
inception. We have no present intention to pay any cash dividends in the
foreseeable future.
19
Item 6. Selected Financial Data.
The following selected financial data has been derived from
our audited Financial Statements and should be read in conjunction with those
statements, and the notes related thereto, which are included in this report.
-------------------------------------------------------------------
As of and for the fiscal year ended October 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Revenue
Sales, net $ 244,221 $ 645,027 $ 732,435 $ 1,471,998 $ 46,877
Collaborative agreement - 4,541,667 958,333 - -
-------------------------------------------------------------------
Total revenue 244,221 5,186,694 1,690,768 1,471,998 46,877
- -----------------------------------------------------------------------------------------------------------
Gross Profit 68,277 3,315,636 993,129 746,560 9,573
- -----------------------------------------------------------------------------------------------------------
Research and Development Expenses 1,807,742 1,625,974 2,324,979 2,732,229 3,163,000
- -----------------------------------------------------------------------------------------------------------
Selling, General and Administrative 1,379,614 2,177,608 2,272,386 3,099,483 5,121,717
Expenses
- -----------------------------------------------------------------------------------------------------------
Impairment Loss on Commercial Trade
Barter Credits - 2,820,800 - - -
- -----------------------------------------------------------------------------------------------------------
Loss from and Impairment of Investment
in Joint Venture - - - - 345,947
- -----------------------------------------------------------------------------------------------------------
Interest Income 4,668 23,506 32,279 120,979 156,075
- -----------------------------------------------------------------------------------------------------------
Net Loss (3,114,411) (3,285,240) (3,571,957) (4,964,173) (8,465,016)
- -----------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock -
Basic and Diluted ($.04) ($.05) ($.06) ($.08) ($.14)
- -----------------------------------------------------------------------------------------------------------
Total Assets 2,330,491 2,731,509 6,562,403 6,894,501 7,239,544
- -----------------------------------------------------------------------------------------------------------
Long Term Obligations - - - - -
- -----------------------------------------------------------------------------------------------------------
Shareholders' Equity 1,988,206 2,317,490 4,166,526 5,557,599 6,284,777
- -----------------------------------------------------------------------------------------------------------
Cash Dividends Per Share of Common Stock - - - - -
- -----------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
Forward-Looking Statements
- --------------------------
Information included in this Annual Report on Form 10-K may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will," and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
20
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in this Annual Report on Form
10-K under the heading "General Risks and Uncertainties" below. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. You are cautioned
not to unduly rely on such forward-looking statements when evaluating the
information presented in this Annual Report on Form 10-K.
General
- -------
Copytele, Inc. was incorporated on November 5, 1982. Our
principal operations include the development, production and marketing of thin,
high-brightness, flat panel video displays 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.
Our line of hardware-based encryption products presently
includes the USS-900, the DCS-1200, the DCS-1400, the STS-1500 and the ULP-1.
These encryption products are multi-functional, hardware based digital
encryption systems that provide high-grade encryption using either the
Citadel(TM) CCX encryption cryptographic chip (which is manufactured by the
Harris Corporation) or the Triple DES or the new AES algorithm (algorithms
available in the public domain which are used by many U.S. government agencies).
In addition, we have developed the USS-900 Security Software, a software
security product for the encryption of data files and e-mail attachments in both
desktop and laptop computers utilizing Microsoft Windows operating systems,
using either the Triple DES or the AES algorithm. We have also developed the
DCS-1800 Security Software to encrypt voice and data in cellular and satellite
phones, scanners, and printers. We are continuing our research and development
activities for additional encryption products. (See "Business - New Technologies
Under Development").
We are currently using several U.S.-based electronic
production contractors to produce the components for our encryption devices.
(See "Business - Production"). We sell our encryption products through a
distributor/dealer network and to end-users. Recently, we also have begun
working with several large organizations to provide them with both our hardware
and software encryption solutions for them to evaluate whether the solutions
meet their security requirements. (See "Business - Marketing and Sales").
We have made significant advancements to develop and produce
our thin film video flat panel displays utilizing our electronic emission
technology. With Volga Svet Ltd. ("Volga"), a Russian display company that we
have been working with for more than six years, we have developed several
engineering models of high-brightness, monochrome video displays, including a
3.7-inch (diagonal) display having 160 x 80 pixels, a 5-inch (diagonal) display
having 320 x 240 pixels, and a 3.5-inch (diagonal) display having 320 x 160
pixels.
21
Currently, liquid crystal displays ("LCDs") are the most
commonly used flat panel displays in commercial products. We believe that our
display has the following advantages over LCD displays:
o No backlight (LCDs require a backlight that results in high
power consumption and contains mercury)
o No thermistor (LCDs require thermistors to control operation
at various temperatures)
o No polarizer (required in LCDs)
o No color filter (required in color LCDs)
o Almost hemispherical viewing angle (LCDs have limited
viewing angles)
o Higher contrast ratio
o Faster video response time
o Operates in a wider range of air temperatures
o Longer life
o Not affected by ultraviolet light (LCDs contain a liquid
crystal which may deteriorate after long exposure to direct
sunlight)
o Safer (leakage of liquid crystal from LCDs may be dangerous)
We are initially pursuing applications for our display that we
believe will demonstrate these performance advantages. In particular, we have
been demonstrating our displays to a number of companies for use in outdoor
products made by them that operate over wide air temperature ranges and under
high and low light ambient conditions, and that require wide viewing angles.
We provided our display to a company to evaluate the display's
performance in a product produced by the company that operates over a wide air
temperature range in an outdoor environment. After successfully testing our
display, that company recently issued to us a purchase order for a seed quantity
of modules containing our display, to replace LCD modules in the company's
product. We have also provided our display to another company that is evaluating
it for a product the company is developing in the field of emergency
communication. (See "Business - Marketing and Sales"). Based on these
developments, we have, together with Volga, started to produce our 5-inch
(diagonal) high-brightness displays using Volga's current production facility.
(See "Business - Production").
22
In addition, we are pursuing other opportunities by
demonstrating our displays to companies having large quantity display
applications, and we are in the process of responding to their requests for
pricing based on their display specifications and quantity requirements. These
companies' applications would require large quantities of displays to be located
in retail stores, airports, vending machines and automobiles. For automobiles,
the displays would be required to have the capability to provide wide-screen or
standard TV formats for digital TV and DVD operation. To prepare for these
opportunities, we are working with several Asian companies to supplement Volga's
production and to produce larger size color displays.
We also are developing modifications to our display technology
to incorporate the matrix structure and drivers of LCDs into our display so that
our display may be produced more easily by facilities currently producing LCDs.
We have been working with an LCD manufacturing company, located in Asia, to
incorporate its LCD technology as part of our display. We have received samples
of that company's color LCDs which incorporate TFT (thin film technology) and
LCD driver technology, and we are performing tests to determine modifications
that would be necessary to that technology to perform to our display
requirements. From our test results, we believe that, with our modifications,
that company can produce part of the structure of our display using its current
LCD production facilities. We could then incorporate that structure and drivers
to complete the fabrication of our display either at that company's facilities,
at Volga, or at the facilities of another Asian company with which we are in
discussions. We believe that this process will enable us to be able to produce,
as a first objective, up to 6.5-inch (diagonal) color displays which could meet
the requirements of several companies' large quantity applications. There can be
no assurance that we can develop or produce color video displays or displays
using modified TFT technology or that we can produce larger display sizes or
greater quantities using such technology.
We have recently received from the U.S. patent office patents
for three variations of our video display technology and a notice of allowance
of the claims contained in our patent application for one other variation of our
video display technology. We are continuing to apply for additional patents for
our video display technology.
There can be no assurance that we can produce commercial
quality displays, that we can produce such displays in commercial quantities,
that we can successfully market our displays, or of the revenue we might derive
from sales of our displays. (See "Business - General Risks and Uncertainties").
In reviewing Management's Discussion and Analysis of Financial
Condition and Results of Operations, you should refer to our Financial
Statements and the notes thereto.
Critical Accounting Policies
- ----------------------------
Our financial statements are prepared in conformity with
accounting principles generally accepted in the United State of America. As
such, we are required to
23
make certain estimates, judgments and assumptions that management believes are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
We believe the following critical accounting polices affect
the more significant judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition
-------------------
Sales
-----
Revenues from sales are recorded when all four of the
following criteria are met: (i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred and title has transferred or services have been
rendered; (iii) our price to the buyer is fixed or determinable; and (iv)
collectibility is reasonably assured.
Collaborative Agreement
-----------------------
A $2.5 million payment received from Futaba in June 2001,
pursuant to an agreement with Futaba, has been recognized ratably over the
period between June 2001 and June 2002, the contractually defined one-year
period of our commitment under this agreement. A subsequent $3 million payment
received from Futaba under this agreement in January 2002 has been recognized
ratably over the remainder of the one-year period.
Sales Returns
-------------
Revenues are recorded net of estimated sales returns.
Deferred Revenue
----------------
Payments received from Futaba under our agreement with Futaba,
which are in excess of the amounts recognized as revenue, are recorded as
deferred revenue. As of July 31, 2002, all payments received from Futaba have
been recognized as revenue.
Inventories
-----------
Inventories are stated at the lower of cost, including
material, labor and overhead, determined on a first-in, first-out basis, or
market, which represents our best estimate of market value. We regularly review
inventory quantities on hand, particularly finished goods, and record a
provision for excess and obsolete inventory based primarily on forecasts of
future product demand. Our net income (loss) is directly affected by
management's estimate of the realizability of inventories. To date, sales of our
products have been limited. Accordingly, there can be no assurance that we will
not be required to reduce the selling price of our inventory below our current
carrying value.
24
Valuation of Long-Lived Assets
------------------------------
We assess the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review include a significant underperformance relative to expected historical or
projected future operating results and cash flows, a significant change in the
manner of the use of the asset or a significant negative industry or economic
trend. When management determines that the carrying value of long-lived asset
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the carrying amount of the asset would be written down
to fair value based upon the present value of estimated future cash flows, to
reflect the impairment.
During the year ended October 31, 2002, we recognized an
impairment loss in the amount of approximately $2,821,000 in connection with
unused commercial trade barter credits. These trade credits may be redeemed to
reduce the cost of advertising as well as other products and services. To
utilize these barter credits in exchange for advertising and purchase discounts,
we must pay between 65-70% of the transaction value in cash. Because our
anticipated cash flow was negatively affected by the termination of the
agreement with Futaba, our ability to make such payments and thereby utilize the
barter credits is uncertain. Such impairment loss is the only impairment of
long-lived assets recorded in the fiscal years ended October 31, 2003, 2002 and
2001.
Stock Based Compensation
------------------------
We account for stock options granted to employees using the
intrinsic value method prescribed in APB Opinion No. 25 "Accounting for Stock
Issued to Employees" and comply with the disclosure provision of SFAS No. 123
"Accounting for Stock Based Compensation" and SFAS No. 148 "Accounting for Stock
Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123",
effective February 1, 2003. If we were to include the cost of employee stock
option compensation in the financial statements, our net loss for the fiscal
years ended October 31, 2003, 2002 and 2001 would have increased by
approximately $889,000, $283,000 and $1,332,000, respectively, based on the fair
value of the stock options granted to employees.
Results of Operations
- ---------------------
Fiscal Year Ended October 31, 2003 Compared to Fiscal Year
- ----------------------------------------------------------
Ended October 31, 2002
- ----------------------
Sales
Revenue. Revenue from sales of encryption products and
services decreased by approximately $401,000 in fiscal 2003, to approximately
$244,000, as compared to approximately $645,000 in fiscal 2002. The decrease in
sales was due to lower unit sales of our encryption products. Our encryption
sales have been limited and are sensitive to individual large transactions. We
believe that changes in sales between
25
periods generally represent the nature of the early stage of our product and
sales channel development.
Gross Profit. Gross profit from sales of encryption products
and services decreased by approximately $150,000 in fiscal 2003, to
approximately $68,000, as compared to approximately $218,000 in fiscal 2002. The
decrease in gross profit was primarily due to the decrease in revenue. Gross
profit reflects a write down of Magicom inventory in fiscal 2003 of
approximately $53,000 and a provision for slow moving inventory relating to the
USS-900 in fiscal 2002 of approximately $100,000. Gross profit as a percent of
revenue decreased to approximately 28% in fiscal 2003, as compared to
approximately 34% in fiscal 2002.
Collaborative Agreement
Revenue. We recognized no collaborative agreement revenue in
fiscal 2003, as compared to approximately $4,542,000 in fiscal 2002. All
collaborative agreement revenue was revenue received from Futaba under an
agreement with Futaba. We recognized payments received from Futaba as income
ratably over the contractually defined one-year period of our commitment under
this agreement. Since the agreement with Futaba terminated in June 2002, we will
not receive any further payments under this agreement.
Gross Profit. We recognized no gross profit from collaborative
agreement in fiscal 2003, as compared to approximately $3,098,000 in fiscal
2002. Gross profit from collaborative agreement in fiscal 2002 was net of cost
of revenue of approximately $1,444,000, consisting of research and development
costs relating to display technology, including cost of revenue related to our
agreement with Volga of approximately $1,194,000. Research and development costs
relating to display technology were included in research and development
expenses prior to the commencement of the agreement with Futaba in June 2001 and
after its termination in June 2002.
Research and Development Expenses
Research and development expenses increased by approximately
$182,000 in fiscal 2003, to approximately $1,808,000, from approximately
$1,626,000 in fiscal 2002. The increase in research and development expenses
reflected the classification of development efforts related to display
technology during the term of our agreement with Futaba of approximately
$250,000 in fiscal 2002 as costs of revenue rather than as research and
development expenses. In addition, non-employee consultant expense increased by
approximately $235,000 and outside research and development increased by
approximately $68,000, offset by a decrease in employee compensation and related
costs of approximately $160,000, a decrease in depreciation expense of
approximately $49,000, a decrease in patent related expenses of approximately
$57,000 and a decrease in engineering supplies expense of approximately $56,000.
26
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
approximately $798,000 to approximately $1,380,000 in fiscal 2003 from
approximately $2,178,000 in fiscal 2002. The decrease in selling, general and
administrative expenses reflects a decrease in professional fees of
approximately $372,000, a decrease in employee compensation and related costs of
approximately $203,000, the elimination of expenses related to listing on the
Nasdaq Stock Market of approximately $90,000, a decrease in other shareholder
relations expenses of approximately $44,000 and a decrease in advertising
expense of approximately $50,000, offset by the recovery in the prior-year
period of a previously recorded bad debt charge of approximately $60,000.
Interest Income
Interest income was approximately $5,000 in fiscal 2003,
compared to approximately $24,000 in fiscal 2002. The reduction in interest
income was the result of from a decrease in average funds available for
investment and a reduction in prevailing interest rates.
Fiscal Year Ended October 31, 2002 Compared to Fiscal Year
- ----------------------------------------------------------
Ended October 31, 2001
- ----------------------
Sales
Revenue. Sales decreased by approximately $87,000 in fiscal
2002, to approximately $645,000, as compared to approximately $732,000 in fiscal
2001. Sales included an increase in sales of Magicom products of approximately
$73,000 (from approximately $48,000 in fiscal 2001 to approximately $121,000 in
fiscal 2002), offset by a decline in sales of other products of approximately
$160,000 (from approximately $684,000 in fiscal 2001 to approximately $524,000
in fiscal 2002). We discontinued production of Magicom products in fiscal 2000,
but continue to sell our remaining inventory. All Magicom sales during fiscal
2002 and fiscal 2001 were made at our inventory carrying value. Our sales have
been limited and are sensitive to individual large transactions. We believe that
changes in sales between periods generally represents the nature of the early
stage of our product and sales channel development.
Gross Profit. Gross profit from sales decreased by
approximately $191,000 in fiscal 2002, to approximately $218,000, as compared to
approximately $409,000 in fiscal 2001. Sales gross profit as a percentage of
revenue decreased to approximately 34% in fiscal 2002, compared to approximately
56% in fiscal 2001. The decrease in sales gross profit as a percentage of
revenue was primarily the result of the provision for slow-moving inventory of
approximately $100,000 recorded in fiscal 2002 which represented approximately
16% of the 22% decrease in gross profit as a percentage of revenue. We took this
provision as a result of our experience with sales of our USS-900 inventory. The
decrease in sales gross profit as a percentage of revenue also reflected the
increase noted above in the portion of fiscal 2002 sales consisting of Magicom
products, as compared to fiscal 2001. Because we have discontinued the Magicom
products, we have reduced our selling prices for those products from our
27
original pricing, and accordingly our gross profit on sales of the Magicom
products is significantly lower than for our other products.
Collaborative Agreement
Revenue. We recognized collaborative agreement revenue of
approximately $4,542,000 in fiscal 2002, as compared to approximately $958,000
in fiscal 2001, an increase of approximately $3,584,000. All collaborative
agreement revenue was revenue received from Futaba under an agreement with
Futaba. We recognized payments received from Futaba as income ratably over the
period between June 2001 and June 2002, the contractually defined one-year
period of our commitment under this agreement. Since the agreement with Futaba
terminated in June 2002, we will not receive any further payments under this
agreement.
Gross Profit. Gross profit from collaborative agreement
increased by approximately $2,514,000 in fiscal 2002, to approximately
$3,098,000, as compared to approximately $584,000 in fiscal 2001. Gross profit
from collaborative agreement in fiscal 2002 was net of cost of revenue of
approximately $1,444,000, consisting of research and development costs relating
to display technology, including cost of revenue related to our agreement with
Volga of approximately $1,194,000. Collaborative agreement cost of revenue for
fiscal 2001 was approximately $374,000, including cost of revenue related to our
agreement with Volga of approximately $276,000. Research and development costs
relating to display technology were included in research and development
expenses prior to the commencement of our agreement with Futaba in June 2001 and
after its termination in June 2002.
Research and Development Expenses
Research and development expenses decreased by approximately
$699,000 in fiscal 2002, to approximately $1,626,000, from approximately
$2,325,000 in fiscal 2001. The decrease in research and development expenses
reflected the classification of development efforts related to display
technology during the term of our agreement with Futaba as costs of revenue
rather than as research and development expenses. In addition, employee
compensation and related costs were reduced by approximately $222,000,
non-employee consultant expense was reduced by approximately $104,000,
depreciation expense decreased by approximately $73,000, engineering supplies
expense decreased by approximately $38,000, patent related expenses decreased by
approximately $33,000, and rent expense decreased by approximately $28,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
approximately $94,000 to approximately $2,178,000 for fiscal 2002 from
approximately $2,272,000 for fiscal 2001. The decrease in selling, general and
administrative expenses reflected a decrease in the provision for doubtful
accounts of approximately $117,000, a decrease in non-employee consulting
expense of approximately $113,000, and a decrease in
28
employee compensation and related costs of by approximately $23,000, offset by
an increase in professional fees of approximately $77,000 and an increase in
advertising expense of approximately $66,000.
Impairment Loss on Commercial Trade Barter credits
In fiscal 2002, we wrote off all unused commercial trade
barter credits, thereby recognizing an impairment loss in the amount of
approximately $2,821,000. These barter credits may be redeemed to reduce the
cost of advertising as well as other products and services. To utilize these
barter credits in exchange for advertising and purchase discounts, we must pay
65-70% of the transaction value in cash. Because our anticipated cash flow has
been negatively affected by the termination of the agreement with Futaba, our
ability to make such payments and thereby utilize the barter credits is
uncertain.
Interest Income
Interest income was approximately $24,000 in fiscal 2002,
compared to approximately $32,000 in fiscal 2001. This resulted from an increase
in average funds available for investment offset by a reduction in prevailing
interest rates.
Liquidity and Capital Resources
- -------------------------------
From our inception through June 2001, we met our liquidity and
capital expenditure needs primarily through the proceeds from sales of common
stock in our initial public offering, in private placements, upon exercise of
warrants issued in connection with the private placements and public offering,
and upon the exercise of stock options. Commencing in the fourth quarter of
fiscal 1999, we also began to generate cash from sales of our encryption
products, and, from June 2001 to January 2002, we received development payments
from Futaba.
In June 2001 and January 2002, we received payments from
Futaba of $2,500,000 and $3,000,000, respectively, under an agreement with
Futaba. Additionally, under agreements with Volga, we paid Volga an aggregate of
$1,110,000 and $360,000 during fiscal 2002 and 2001, respectively, for
development efforts during the term of our agreement with Futaba.
During fiscal 2003, our operating activities used
approximately $959,000 in cash. This resulted from payments to suppliers,
employees and consultants of approximately $1,234,000, which was offset by cash
of approximately $271,000 received from collections of accounts receivable and
other receivables related to sales of encryption products and approximately
$5,000 of interest income received. In addition, during fiscal 2003, we received
approximately $1,128,000 in cash upon the exercise of stock options and
purchased approximately $1,000 of equipment. As a result, our cash and cash
equivalents at October 31, 2003 increased to approximately $1,024,000 from
approximately $855,000 at the end of fiscal 2002.
29
Accounts receivable and other receivables decreased by
approximately $232,000 from approximately $401,000 at the end of fiscal 2002 to
approximately $169,000 at October 31, 2003. The decrease in accounts receivable
and other receivables is a result of the decrease in revenue, the timing of
collections and the increase in the allowance for doubtful accounts, which
resulted primarily from our experience with respect to one slow paying customer.
Inventories decreased approximately $251,000 from approximately $1,296,000 at
October 31, 2002 to approximately $1,045,000 at October 31, 2003, as a result of
the timing of shipments and production schedules as well as a write down of
Magicom inventory. We discontinued production of Magicom products in fiscal
2000, but had continued to sell our remaining Magicom inventory until fiscal
2003. Prepaid expenses and other current assets decreased by approximately
$55,000 from approximately $103,000 at the end of fiscal 2002 to approximately
$48,000 at October 31, 2003. Accounts payable and accrued liabilities decreased
by approximately $72,000 from approximately $414,000 at the end of fiscal 2002
to approximately $342,000 at October 31, 2003, as a result of the decrease in
operating expenses and the timing of payments.
As a result of these changes, working capital at October 31,
2003 decreased to approximately $1,943,000 from approximately $2,240,000 at the
end of fiscal 2002.
Our working capital includes inventory of approximately
$1,045,000 and $1,296,000 at October 31, 2003 and 2002, respectively. Management
has recorded our inventory at the lower of cost or our current best estimate of
net realizable value. To date, sales of our products have been limited.
Accordingly, there can be no assurance that we will not be required to reduce
the selling price of our inventory below our current carrying value.
Our plans and expectations for our working capital needs also
assume that our Chairman of the Board, President will continue to perform
services without cash compensation or pension benefits. There can be no
assurance that they will continue to provide such services without such
compensation.
The auditor's report on our financial statements as of October
31, 2003 states that the net loss incurred during the year ended October 31,
2003, our accumulated deficit as of that date, and the other factors described
in Note 1 to the Financial Statements raise substantial doubt about our ability
to continue as a going concern. The auditor's report on our financial statements
for the year ended October 31, 2002
30
contained a similar statement. Our financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
Based on reductions in operating expenses that have been made
and additional reductions that may be implemented, if necessary, we believe that
our existing cash and accounts receivable, together with cash flows from
expected sales of encryption products and flat panel displays, and other
potential sources of cash flows, will be sufficient to enable us to continue in
operation until at least the end of the first quarter of fiscal 2005. We
anticipate that, thereafter, we will require additional funds to continue our
marketing, production, and research and development activities, and we will
require outside funding if cash generated from operations is insufficient to
satisfy our liquidity requirements. However, our projections of future cash
needs and cash flows may differ from actual results. If current cash and cash
that may be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit prior to the first quarter of fiscal 2005. The sale of additional
equity securities or convertible debt could result in dilution to our
stockholders. We can give you no assurance that we will be able to generate
adequate funds from operations, that funds will be available to us from debt or
equity financings or that, if available, we will be able to obtain such funds on
favorable terms and conditions. We currently have no arrangements with respect
to additional financing.
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 on a non-exclusive basis and to end-users. Recently we began
working with several large organizations to provide them with both our hardware
and software encryption solutions for them to evaluate whether the solutions
meet their security requirements. We have also begun to market our flat panel
video display products to potential purchasers for incorporation into their
products. During fiscal 2003, we have recognized revenue from sales of
approximately $244,000.
The following table presents our expected cash requirements
for contractual obligations outstanding as of October 31, 2003:
Payments Due by Period
----------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- ---------------------------- ------------- ------------- ---------- ----------- -------------
Noncancelable Operating
Leases $247,000 $406,000 - - $653,000
------------- ------------- ---------- ----------- -------------
Total Contractual
Cash Obligations $247,000 $406,000 - - $653,000
============= ============= ========== =========== =============
31
Impact of Recent Accounting Pronouncements
- ------------------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" which addresses
financial accounting and reporting for recording expenses for the fair value of
stock options. SFAS 148 provides alternative methods of transition for a
voluntary change to fair value based method of accounting for stock-based
employee compensation. Additionally, SFAS 148 requires more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. The provisions of this Statement are effective for fiscal years
ending after December 15, 2002, with early application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 on February 1, 2003, had no
effect on our financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
We have invested a portion of our cash on hand in short term,
fixed rate and highly liquid instruments that have historically been reinvested
when they mature throughout the year. Although our existing instruments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on these securities could be affected at
the time of reinvestment, if any.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See accompanying "Index to Financial Statements."
Item 9. Changes in and Disagreements With Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
-------------------------
None.
Item 9A. Controls and Procedures
-----------------------
We carried out an evaluation, under the supervision and with
the participation of our management including our Chairman of the Board and
Chief Executive Officer and our Chief Financial Officer and Vice President -
Finance, of the effectiveness of the design and operation of our disclosure
controls and procedures
32
pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as amended.
Based upon that evaluation, the Chairman of the Board and Chief Executive
Officer and the Chief Financial Officer and Vice President - Finance concluded
that our disclosure controls and procedures are effective as of the end of
fiscal 2003. There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
There was no change in our internal control over financial
reporting during the fourth quarter of fiscal 2003 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
33
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The following table sets forth certain information with
respect to all of our directors and executive officers:
- -----------------------------------------------------------------------------------------------------------
Director and/or
Name Position with the Company and Age Executive Officer
Principal Occupation Since
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos Director, Chairman of the Board and Chief 76 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 79 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 58 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 74 1997
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Richard J. Salute Director 58 2003
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Anthony Bowers Director 46 2000
- -----------------------------------------------------------------------------------------------------------
Mr. Krusos has served as one of our Directors and as our
Chairman of the Board and Chief Executive Officer since November 1982. He holds
an M.S.E.E. degree from Newark College of Engineering, a B.E.E. degree from City
College of New York and a J.D. degree from St. John's University.
Mr. DiSanto has served as one of our Directors and as our
President since November 1982. He holds a B.E.E. degree from Polytechnic
Institute of Brooklyn and an M.E.E. degree from New York University.
Mr. Herms has served as our Chief Financial Officer and Vice
President - Finance since November 2000 and as one of our Directors since August
2001. Prior to joining us, Mr. Herms was employed by takeoutmusic.com Holding
Corp. as Chief Financial Officer, from May 2000 to November 2000. Prior to that,
for approximately 12 years, Mr. Herms was a Principal, Director and Chief
Financial Officer of a group of affiliated, privately held companies operating
under the Ultratan trade name. Mr. Herms was also our Chief Financial Officer
from 1982 to 1987. He is also a former audit manager with the firm of Arthur
Andersen LLP and a CPA. He holds a B.B.A. degree from Adelphi University.
Mr. Larounis has served as one of our Directors since
September 1997, prior to which he served as a consultant to us. Mr. Larounis is
currently retired. From 1960 to 1993, he held numerous positions as a senior
international executive of The Bendix Corporation and Allied Signal Inc., which
is now known as Honeywell International, Inc. He has also served on the Boards
of Directors of numerous affiliates
34
of Allied Signal in Europe, Asia and Australia. He holds a B.E.E. degree from
the University of Michigan and a J.D. degree from New York University.
Mr. Salute has served as one of our Directors since March
2003. Mr. Salute is currently retired. From 1985 to December 2001, he was a
partner, and from 1973 to 1985 was employed, with the firm of Arthur Andersen
LLP. Mr. Salute is also a Director of AdStar, Inc., a company providing
technology services to the classified advertising industry. He is a CPA and
holds a B.B.A. from Adelphi University.
Mr. Bowers has served as one of our Directors since July 2000,
prior to which he served as a consultant to us. He has been a Partner of OTA
Limited Partnership, a broker-dealer headquartered in Purchase, New York, since
1997. He is responsible for marketing OTA's research to institutional investors.
Mr. Bowers was Director - Institutional Sales at Bear, Stearns International
Limited from 1994 to 1996 and Director - Institutional Sales at Goldman, Sachs
International from 1986 to 1994, each of which were in London, England. From
1979 to 1982, Mr. Bowers was Manager - Investor Relations for American Express
Company in New York. Mr. Bowers holds a B.A. degree from Amherst College and a
M.B.A. degree from the Wharton School of Business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires our directors, executive officers and ten
percent stockholders to file initial reports of ownership and reports of changes
in ownership of our common stock with the Securities and Exchange Commission
("SEC"). Directors, executive officers and ten percent stockholders are required
to furnish us with copies of all Section 16(a) forms that they file. Based upon
a review of these filings, we believe that all required Section 16(a) fillings
were made on a timely basis during fiscal year 2003.
Code of Ethics
As of the date of this report, we have not adopted a formal
code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller or persons
performing similar functions. Because of the small number of our employees, and
in particular the small number and long service of our senior management, our
Board of Directors has not believed it necessary to adopt a formal code of
ethics. However, our Board is currently evaluating this is light of recent
developments concerning governance of public companies generally, including
rules adopted by the Securities and Exchange Commission and the stock markets.
Audit Committee Financial Expert
The Securities and Exchange Commission has adopted rules
implementing Section 407 of the Sarbanes-Oxley Act of 2002 requiring public
companies to disclose information about "audit committee financial experts." Our
Board of Directors has not concluded that any of the three independent audit
committee members meet the definition of "audit committee financial expert." The
Securities and Exchange Commission's rules do not require us to have an audit
committee financial expert, and our Board of Directors
35
has determined that its Audit Committee possesses sufficient financial expertise
to effectively discharge its obligations.
Item 11. Executive Compensation.
-----------------------
Messrs. Denis A. Krusos, Chairman of the Board, Chief
Executive Officer and Director, Frank J. DiSanto, President and Director, and
Henry P. Herms, Chief Financial Officer, Vice President - Finance and Director,
are our executive officers. While there are no formal agreements, Denis A.
Krusos and Frank J. DiSanto waived any and all rights to receive salary and
related pension benefits for an undetermined period of time commencing November
1, 1985. As a result, Mr. Krusos received no salary or bonus during the last
three fiscal years. No executive officer received an annual salary and bonus in
excess of $100,000 during the fiscal year ended October 31, 2003. The following
is compensation information regarding Mr. Krusos for the fiscal years ended
October 31, 2003, 2002 and 2001:
- -----------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
Fiscal
Name and Year Annual Long-Term
Principal Position Ended Compensation Compensation Awards
Securities Underlying
Options (#)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/03 - 1,500,000
Chairman of the Board, 10/31/02 - -
Chief Executive Officer and Director 10/31/01 - 500,000
- -----------------------------------------------------------------------------------------------------------
The following is information regarding stock options granted to Mr.
Krusos pursuant to the 2003 Share Incentive Plan, during the fiscal year ended
October 31, 2003:
- -----------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Individual Grants Assumed Annual Rates of Stock
Price Appreciation for Option
Term
- -----------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 1,500,000 (1) 20.41% $0.25 (2) 5/5/13 $235,837 $597,653
- -----------------------------------------------------------------------------------------------------------
(1) Options granted pursuant to the 2003 Share Incentive Plan,
which are exercisable in whole or in part on the date of
grant. The options are not
36
issued in tandem with stock appreciation or similar rights
and are not transferable other than by will or the laws of
descent and distribution. The options terminate upon
termination of employment, except that in the case of death,
disability or termination for reasons other than cause,
options may be exercised for certain periods of time
thereafter as set forth in the 2003 Share Incentive Plan.
(2) The exercise price of these options was equal to the fair market
value (closing price) of the underlying common stock on the date
of grant. These options are nonqualified options.
The following is information regarding stock option exercises
during fiscal 2003 by Mr. Krusos and the values of his options as of October 31,
2003:
- ------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
============================================================================================================
Shares Value Realized Number of Securities Value of Unexercised
Acquired on ($) Underlying Unexercised In-the-Money Options at
Name Exercise (#) Options at Fiscal Year End (#) Fiscal Year End ($)(1)
-------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================
Denis A. Krusos - - 4,213,290 - $417,500 -
- ------------------------------------------------------------------------------------------------------------
(1) Such value was determined by multiplying the net difference
between the last sales price of the stock on October 31, 2003
and the exercise price for the options by the number of
unexercised in-the-money options held.
There is no present arrangement for cash compensation of
directors for services in that capacity. Under the 2003 Share Incentive Plan,
each non-employee director is entitled to receive nonqualified stock options to
purchase 60,000 shares of common stock each year that such director is elected
to the Board of Directors.
37
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth certain information with
respect to our common stock beneficially owned as of December 15, 2003 by (a)
each person who is known by us to be the beneficial owner of more than 5% of our
outstanding common stock, (b) each of our directors and executive officers, and
(c) all directors and executive officers as a group:
- -----------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Amount and Nature of Beneficial Percent of Class
Ownership(1)(2)
===========================================================================================================
Denis A. Krusos 6,277,600 7.40%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto 3,784,505 4.52%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 450,000 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
George P. Larounis 342,500 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Richard J. Salute - *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Anthony Bowers 249,300 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (5 11,103,905 12.50%
persons)
- -----------------------------------------------------------------------------------------------------------
* Less than 1%.
(1) A beneficial owner of a security includes any person who
directly or indirectly has or shares voting power and/or
investment power with respect to such security or has the
right to obtain such voting power and/or investment power
within sixty (60) days. Except as otherwise noted, each
designated beneficial owner in this report has sole voting
power and investment power with respect to the shares of our
common stock beneficially owned by such person.
(2) Includes 4,213,290 shares, 3,141,290 shares, 450,000 shares,
342,500 shares, 0 shares, 75,000 shares and 8,222,080 shares
which Denis A. Krusos, Frank J. DiSanto, Henry P. Herms,
George P. Larounis, Richard J.
38
Salute, Anthony Bowers, and all directors and executive
officers as a group, respectively, have the right to acquire
within 60 days upon exercise of options granted pursuant to
the 1993 Stock Option Plan, 2000 Share Incentive Plan and
the 2003 Share Incentive Plan.
Equity Compensation Plan Information
The following is information as of October 31, 2003 about
shares of our common stock that may be issued upon the exercise of options,
warrants and rights under all equity compensation plans in effect as of that
date, including our 1993 Stock Option Plan, our 2000 Share Incentive Plan and
our 2003 Share Incentive Plan. See Note 9 to Financial Statements for more
information on these plans.
Number of securities
Number of remaining available
securities to be for future issuance
issued upon under equity
exercise of Weighted average compensation plans
outstanding exercise price of (excluding securities
options, warrants outstanding options, reflected in column
Plan category and rights warrants and rights (a))
- ---------------------------- --------------------- ----------------------- ------------------------
(a) (b) (c)
Equity compensation plans 12,103,246 $2.96 2,548
approved by security
holders
Equity compensation plans 3,419,000 $0.30 6,435,129
not approved by security
holders
Total 15,522,246 $2.37 6,437,677
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
None.
39
Item 14. Principal Accountant Audit Fees and Services Fees.
--------------------------------------------------
The following table describes fees for professional audit
services rendered by Grant Thornton LLP, our present principal accountant, for
the audit of our annual financial statements for the years ended October 31,
2003, and October 31, 2002; and fees billed for other services rendered by Grant
Thornton LLP and by our prior principal accountants, Arthur Andersen LLP, during
those periods.
Type of Fee 2003 2002
----------- ------ -----
Audit Fees $ 115,500 $ 149,000
Audit Related Fees - -
Tax Fees - Tax return review - 750
All Other Fees - -
------------ -----------
-
Total $ 115,500 $ 149,750
=========== ===========
Procedures For Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor
Pursuant to its charter, the Audit Committee of our Board of
Directors is responsible for reviewing and approving, in advance, any audit and
any permissible non-audit engagement or relationship between us and our
independent auditors. Grant Thornton LLP's engagement to conduct our audit was
approved by the Audit Committee on September 11, 2003. We did not enter into any
non-audit engagement or relationship with Grant Thornton LLP during fiscal 2003.
40
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
--------------------------------------------
Reports on Form 8-K.
--------------------
(a)(1)(2) Financial Statement Schedules
-----------------------------
See accompanying "Index to Financial Statements."
(a)(3) Executive Compensation Plans and Arrangements
---------------------------------------------
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to our
Proxy Statement dated June 10, 1993).
Amendment No. 1 to CopyTele, Inc. 1993 Stock Option Plan (filed
as Exhibit 4(d) to our Form S-8 dated September 6, 1995).
Amendment No. 2 to CopyTele, Inc. 1993 Stock Option Plan (filed
as Exhibit 10.32 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1996).
CopyTele, Inc. 2000 Share Incentive Plan (filed as Annex A of our
Proxy Statement dated June 12, 2000).
Amendment No. 1 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2001).
Amendment No. 2 to CopyTele, Inc. 2000 Share Incentive Plan
CopyTele, Inc. 2003 Share Incentive Plan (filed as Exhibit 4 to
our Form S-8 dated May 5, 2003).
(b) Reports on Form 8-K
-------------------
We filed no Current Report on Form 8-K during the fourth quarter
of our fiscal year ended October 31, 2003.
(c) Exhibits
--------
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July 31, 1992
and to Form 10-Q for the fiscal quarter ended July 31, 1997.)
3.2 By-laws, as amended and restated. (Incorporated by reference to
Post-Effective Amendment No. 1 to Form S-8 (Registration No.
33-49402) dated December 8, 1993.)
41
3.3 Amendment to By-laws. (Incorporated by reference to Form 10-Q for
the fiscal quarter ended January 31, 2003.)
10.1 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28, 1993
and approved by shareholders on July 14, 1993. (Incorporated by
reference to Proxy Statement dated June 10, 1993.)
10.2 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved by shareholders on July 19,
1995. (Incorporated by reference to Form S-8 (Registration No.
33-62381) dated September 6, 1995.)
10.3 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved by shareholders on July 24,
1996. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.)
10.4 Agreement dated March 3, 1999 between Harris Corporation and
CopyTele, Inc. (Incorporated by reference to Form 10-Q for the
fiscal quarter ended January 31, 1999.)
10.5 Stock Subscription Agreement dated April 27, 1999, including form
of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-Q for the fiscal quarter
ended April 30, 1999.)
10.6 Agreement dated July 28, 1999, among CopyTele, Inc., Harris
Corporation and RF Communications. (Incorporated by reference to
Form 8-K dated July 28, 1999.)
10.7 Stock Subscription Agreement dated August 30, 1999, including
form of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1999.)
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated by
reference to Annex A of our Proxy Statement dated June 12, 2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 6, 2001 and approved by shareholders on August
16, 2001. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 16, 2002 and approved by shareholders on
September 12, 2002. (Incorporated by reference to Exhibit 4(e) to
our Form S-8 (Registration No. 333-99717) dated September 18,
2002.)
42
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation
Agreement between CopyTele, Inc. and Volga Svet Ltd.
(Incorporated by reference to Exhibit 10.14 to our Form 10-K for
the fiscal year ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet Ltd.,
dated as of February 1, 2002. (Incorporated by reference to
Exhibit 10.15 to our Form 10-K for the fiscal year ended October
31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan (Incorporated by
reference to Exhibit 4 to our Form S-8 dated May 5, 2003).
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
23.2 Notice Regarding Consent of Arthur Andersen LLP. (Filed
herewith.)
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated December 22, 2003.
(Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated December 22, 2003.
(Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated December 22, 2003.
(Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated December 22, 2003.
(Filed herewith.)
43
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COPYTELE, INC.
By: /s/ Denis A. Krusos
-------------------
Denis A. Krusos
Chairman of the Board and
December 22, 2003 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
By: /s/ Denis A. Krusos
---------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
December 22, 2003 Officer)
By /s/ Frank J. DiSanto
----------------------
Frank J. DiSanto
December 22, 2003 President and Director
By: /s/ Henry P. Herms
------------------
Henry P. Herms
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
December 22, 2003 and Accounting Officer)
By: /s/ George P. Larounis
--------------------------
George P. Larounis
December 22, 2003 Director
By: /s/ Richard J. Salute
----------------------
Richard J. Salute
December 22, 2003 Director
By: /s/ Anthony Bowers
-------------------
Anthony Bowers
December 22, 2003 Director
44
COPYTELE, INC.
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
Page
----
Report of Independent Certified Public Accountants: Grant Thornton LLP F-1
Report of Independent Public Accountants: Arthur Andersen LLP F-2
Balance Sheets as of October 31, 2003 and 2002 F-3
Statements of Operations for the years ended October 31, 2003, 2002 and 2001 F-4
Statement of Shareholders' Equity for the years ended October 31, 2003, 2002 and 2001 F-5
Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001 F-6
Notes to Financial Statements F-7 - F-22
Report of Independent Public Accountants on Schedule: Arthur Andersen LLP S-1
Schedule of Valuation and Qualifying Accounts S-2
Additional information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or notes
thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CopyTele, Inc.
We have audited the accompanying balance sheets of CopyTele, Inc. (the
"Company") (a Delaware corporation) as of October 31, 2003 and 2002, and the
related statements of operations, shareholders' equity and cash flows for each
of the years in the two year period ended October 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of CopyTele, Inc. for the year ended
October 31, 2001 were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements in
their report dated January 24, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CopyTele, Inc. as of October
31, 2003 and 2002, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred a net loss of approximately $3,114,000 during the year
ended October 31, 2003, and, as of that date, the Company has an accumulated
deficit of approximately $65,096,000. These and the other factors described in
Note 1 raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2) as of and for the years ended October 31, 2003 and 2002. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON LLP
Melville, New York
December 12, 2003
F-1
We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of
Regulation S-X, a copy of the prior year's Report of Independent Public
Accountants from our prior independent public accountants, Arthur Andersen LLP
("Andersen"). This report was previously issued by Andersen, for filing with our
Annual Report on Form 10-K for fiscal year 2001, and has not been reissued by
Andersen. Note that this previously issued Andersen report includes references
to certain fiscal years and periods, which are not required to be presented in
the accompanying financial statements as of and for the fiscal years ended
October 31, 2003.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CopyTele, Inc.:
We have audited the accompanying balance sheets of CopyTele, Inc. (a Delaware
corporation in the development stage - Note 1) as of October 31, 2001 and 2000,
the statements of operations for each of the three fiscal years in the period
ended October 31, 2001 and for the period from inception (November 5, 1982) to
October 31, 2001, the statements of shareholders' equity for the period from
inception (November 5, 1982) to October 31, 1983 and for each of the eighteen
fiscal years in the period ended October 31, 2001, and the statements of cash
flows for each of the three fiscal years in the period ended October 31, 2001
and for the period from inception (November 5, 1982) to October 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CopyTele, Inc. as of October
31, 2001 and 2000, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended October 31, 2001 and for the
period from inception (November 5, 1982) to October 31, 2001, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Melville, New York
January 24, 2002
F-2
COPYTELE, INC.
BALANCE SHEETS
October 31, October 31,
ASSETS 2003 2002
------ ---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,023,531 $ 854,822
Accounts receivable, net of allowance for doubtful accounts of $159,230
and $325,505, respectively 41,500 77,780
Other receivables, net of allowance for doubtful accounts of $181,952
in 2003 127,124 322,952
Inventories 1,044,875 1,296,199
Prepaid expenses and other current assets 47,972 102,519
---------------- ----------------
Total current assets 2,285,002 2,654,272
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$2,084,010 and $2,050,927, respectively 39,480 71,583
OTHER ASSETS 6,009 5,654
---------------- ----------------
$ 2,330,491 $ 2,731,509
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 316,865 $ 379,169
Accrued liabilities 25,420 34,850
---------------- ----------------
Total current liabilities 342,285 414,019
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000 shares authorized; no
shares issued or outstanding - -
Common stock, par value $.01 per share; 240,000,000 shares authorized;
80,151,478 and 70,257,155 shares issued and outstanding, respectively 801,515 702,572
Additional paid-in capital 66,282,397 63,596,213
Accumulated deficit (65,095,706) (61,981,295)
---------------- ----------------
1,988,206 2,317,490
---------------- ----------------
$ 2,330,491 $ 2,731,509
================ ================
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended October 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ----------------
REVENUE
Sales, net $ 244,221 $ 645,027 $ 732,435
Collaborative agreement - 4,541,667 958,333
--------------- --------------- ----------------
Total revenue 244,221 5,186,694 1,690,768
COST OF REVENUE
Cost of sales 175,944 427,056 323,705
Cost of collaborative agreement - 1,444,002 373,934
--------------- --------------- ----------------
Total cost of revenue 175,944 1,871,058 697,639
Gross profit 68,277 3,315,636 993,129
--------------- --------------- ----------------
OPERATING EXPENSES
Research and development expenses 1,807,742 1,625,974 2,324,979
Selling, general and administrative expenses 1,379,614 2,177,608 2,272,386
Impairment loss on commercial trade barter credits - 2,820,800 -
--------------- --------------- ----------------
Total operating expenses 3,187,356 6,624,382 4,597,365
--------------- --------------- ----------------
LOSS FROM OPERATIONS (3,119,079) (3,308,746) (3,604,236)
INTEREST INCOME 4,668 23,506 32,279
--------------- --------------- ----------------
NET LOSS $ (3,114,411) $ (3,285,240) $ (3,571,957)
=============== =============== ================
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (.04 ) $ (.05 ) $ (.06)
=============== =============== ================
Shares used in computing net loss per share:
Basic and Diluted 75,153,015 68,088,748 64,561,252
=============== =============== ================
The accompanying notes are an integral part of these statements.
F-4
COPYTELE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Common Stock Additional
------------------------------ Paid-in Accumulated
Shares Par Value Capital Deficit
-------------- ------------ ------------ ------------
BALANCE, October 31, 2000 63,084,526 $ 630,846 $ 60,050,852 $(55,124,098)
Stock option compensation to consultants - - 229,620 -
Common stock issued upon exercise of stock options under stock
option plans 1,457,034 14,570 805,189 -
Common stock issued to employees for services rendered 1,707,725 17,077 973,701 -
Common stock issued to consultants 271,815 2,718 138,008 -
Net loss - - - (3,571,957)
-------------- ------------ ------------ ------------
BALANCE, October 31, 2001 66,521,100 665,211 62,197,370 (58,696,055)
Common stock issued upon exercise of stock options under
stock option plans 20,000 200 7,800 -
Common stock issued to employees for services rendered 3,311,405 33,114 1,280,039 -
Common stock issued to consultants 404,650 4,047 111,004 -
Net loss - - - (3,285,240)
-------------- ------------ ------------ ------------
BALANCE, October 31, 2002 70,257,155 702,572 63,596,213 (61,981,295)
Stock option compensation to consultants - - 4,800 -
Common stock issued upon exercise of stock options under stock
option plans 4,046,500 40,465 1,087,725 -
Common stock issued to employees for services rendered 4,483,111 44,831 1,246,906 -
Common stock issued to consultants 1,364,712 13,647 346,753 -
Net loss - - - (3,114,411)
-------------- ------------ ------------ ------------
BALANCE, October 31, 2003 80,151,478 $ 801,515 $ 66,282,397 $(65,095,706)
============== ============ ============ ============
The accompanying notes are an integral part of this statement.
F-5
COPYTELE, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
-------------------------------------------------
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (1,234,490) $ (4,136,913) $ (3,695,031)
Cash received from customers 271,321 681,936 444,907
Cash received from collaborative agreement - 3,000,000 2,500,000
Interest received 4,668 23,506 32,279
------------- ------------- -------------
Net cash used in operating activities (958,501) (431,471) (717,845)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (980) (38,567) (15,972)
Proceeds from maturities of investments - - 96,873
------------- ------------- -------------
Net cash provided by (used in) investing activities (980) (38,567) 80,901
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of registration disbursements 1,128,190 8,000 819,759
------------- ------------- -------------
Net cash provided by financing activities 1,128,190 8,000 819,759
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 168,709 (462,038) 182,815
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 854,822 1,316,860 1,134,045
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,023,531 $ 854,822 $ 1,316,860
============= ============= =============
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $ (3,114,411) $ (3,285,240) $ (3,571,957)
Impairment loss on commercial trade barter credits - 2,820,800 -
Stock option compensation to consultants 4,800 - 229,620
Stock awards granted to employees and consultants pursuant to stock
incentive plans 1,652,137 1,428,204 1,036,505
Common stock issued to consultants for services rendered - - 95,000
Provision for doubtful accounts 205,011 155,505 272,500
Provision for slow-moving inventory - 100,000 -
Depreciation and amortization 33,083 86,471 166,503
Change in operating assets and liabilities:
Accounts receivable and other receivables 27,097 (19,846) (214,040)
Inventories 251,324 193,151 179,935
Prepaid expenses and other current assets 54,547 34,383 (76,469)
Other assets (355) 36,959 105,583
Accounts payable and accrued liabilities (71,734) (440,191) (482,692)
Deferred revenue - (1,541,667) 1,541,667
------------- ------------- -------------
Net cash used in operating activities $ (958,501) $ (431,471) $ (717,845)
============= ============= =============
The accompanying notes are an integral part of these statements.
F-6
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE AND DEVELOPMENT OF BUSINESS AND FUNDING
----------------------------------------------
Organization
- ------------
CopyTele, Inc. was incorporated on November 5, 1982. Our principal operations
include the development, production and marketing of thin, high-brightness, flat
panel video displays 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.
Products and Key Relationships
- ------------------------------
Our line of hardware-based encryption products are multi-functional, digital
encryption systems that provide high-grade encryption using either the
Citadel(TM) CCX encryption cryptographic chip (which is manufactured by the
Harris Corporation) or the Triple DES or the new Advanced Encryption Standard
("AES") algorithm (algorithms available in the public domain which are used by
many U.S. government agencies). In addition, we have developed a software
security product for the encryption of data files and e-mail attachments in both
desktop and laptop computers utilizing Microsoft Windows operating systems,
using either the Triple DES or the AES algorithm. We have also developed
security software to encrypt voice and data in cellular and satellite phones,
scanners, and printers. We are continuing our research and development
activities for additional encryption products. We sell our encryption products
through a distributor/dealer network and to end-users. Recently we also began
working with several large organizations to provide them with both our hardware
and software encryption solutions for them to evaluate whether the solutions
meet their security requirements.
We are also continuing our research and development activities with respect
to flat panel display technologies, including our thin flat high brightness
video displays. We have developed, in conjunction with Volga Svet Ltd.
("Volga"), high brightness monochrome video displays with a 3.5 inch (diagonal),
a 3.7-inch (diagonal) and a 5-inch (diagonal) and we believe that smaller and
larger displays can be made with our technology. We have been demonstrating our
displays to a number of companies involving applications where we believe our
displays have performance advantages over LCDs. These applications include use
in outdoor products which operate over wide air temperature ranges, require wide
viewing angles, and must operate under high and low light ambient conditions. We
have received an initial order for a seed quantity of our display modules to
replace LCDs in an existing product which displays operating instructions and
operates in an outdoor environment. Based on this requirement and the interest
of several potential purchasers, together with Volga, we have started to produce
monochrome versions of our high brightness displays using Volga's current
production facilities. We have recently received from the U.S. patent office
patents for three variations of our video display technology and a notice of
allowance of the claims contained in our patent application for one other
variation of our video display technology.
Funding and Management's Plans
- ------------------------------
From our inception through June 2001, we had met our liquidity and capital
expenditure needs primarily through the proceeds from sales of common stock in
our initial public offering, in private placements, upon exercise of warrants
issued in connection with the private placements and public offering, and upon
the exercise of stock options. Commencing in the fourth quarter of
F-7
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
fiscal 1999, we began to generate cash flows from sales of our encryption
products, and, from June 2001 to January 2002, we received development payments
from Futaba Corporation ("Futaba") of Japan.
During fiscal 2003, our operating activities used approximately $959,000 in
cash. This resulted from payments to suppliers, employees and consultants of
approximately $1,234,000, which was offset by cash of approximately $271,000
received from collections of accounts receivable and other receivables related
to sales of encryption products and approximately $5,000 of interest income
received. In addition, during fiscal 2003 we received approximately $1,128,000
in cash upon the exercise of stock options and purchased approximately $1,000 of
equipment. As a result, our cash and cash equivalents at October 31, 2003
increased to approximately $1,024,000 from approximately $855,000 at the end of
fiscal 2002.
Based on reductions in operating expenses that have been made and additional
reductions that may be implemented, if necessary, we believe that our existing
cash and accounts receivable, together with cash flows from expected sales of
encryption products and flat panel displays, and other potential sources of cash
flows, will be sufficient to enable us to continue in operation until at least
the end of the first quarter of fiscal 2005. However, our projections of future
cash needs and cash flows may differ from actual results. We are seeking to
improve our liquidity through increased sales or license of products and
technology and may also seek to improve our liquidity through sales of debt or
equity securities. We currently have no arrangements with respect to additional
financing. Despite the foregoing, there can be no assurance that we will
generate significant revenues in the future (through sales or otherwise) to
improve our liquidity, that we will generate sufficient revenues to sustain
future operations and/or profitability, that we will be able to expand our
current distributor/dealer network, that production capabilities will be
adequate, that other products will not be produced by other companies that will
render our products obsolete, or that other sources of funding would be
available, if needed, at terms that we would deem favorable.
The accompanying financial statements have been prepared assuming that we will
continue as a going concern. As shown in the financial statements, we have
incurred a net loss of approximately $3,114,000 during the year ended October
31, 2003, and, as of that date, we have an accumulated deficit of approximately
$65,096,000. These and the other factors described herein raise substantial
doubt about our ability to continue as a going concern. Management's plans in
regard to these matters are set forth above. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Revenue Recognition
- -------------------
Sales
-----
Revenues from sales are recorded when all four of the following criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) delivery
has occurred and title has transferred or services have been rendered;
(iii) our price to the buyer is fixed or determinable; and (iv)
collectibility is reasonably assured.
F-8
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Collaborative Agreement
-----------------------
A $2.5 million payment received from Futaba in June 2001, pursuant to an
agreement with Futaba described in Note 3, has been recognized ratably over
the period between June 2001 and June 2002, the contractually defined
one-year period of our commitment under this agreement. A subsequent $3
million payment received from Futaba under this agreement in January 2002
has been recognized ratably over the remainder of the one-year period.
Sales Returns
Revenues are recorded net of estimated sales returns.
Deferred Revenue
Payments received from Futaba under our agreement with Futaba, which are in
excess of the amounts recognized as revenue, are recorded as deferred
revenue. As of July 31, 2002, all payments received from Futaba have been
recognized as revenue.
Warranty Policy
- ---------------
We warrant that our products are free from defects in material and workmanship
for a period of one year from the date of initial purchase. The warranty does
not cover any losses or damage that occur as a result of improper installation,
misuse or neglect. Management has recorded a nominal amount of warranty
liability as of October 31, 2003 and October 31, 2002, based upon historical
experience and management's best estimate of future warranty claims.
Statements of Cash Flows
- ------------------------
Cash and cash equivalents consist of highly liquid instruments that are readily
convertible into cash and have original maturities of three months or less.
During the years ended October 31, 2003, 2002 and 2001, the Company did not pay
any interest or income taxes.
Accounts Receivable
- -------------------
Accounts receivable are stated at amounts due from customers net of an allowance
for doubtful accounts. Management reviews our accounts receivable for potential
doubtful accounts and maintains an allowance for estimated uncollectible
amounts. Accounts receivable are written off when they became uncollectible.
Changes in our allowance for doubtful accounts are as follows:
Year Ended October 31,
-----------------------------
2003 2002
-------------- -----------
Beginning balance $ 325,505 $ 240,000
Provision for doubtful accounts receivable 23,056 155,505
Accounts written off (189,331) (70,000)
-------- -------
Ending balance $ 159,230 $ 325,505
=========== =========
F-9
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Inventories
- -----------
Inventories are stated at the lower of cost, including material, labor and
overhead, determined on a first-in, first-out basis, or market, which represents
our best estimate of market value. We regularly review inventory quantities on
hand, particularly finished goods, and record a provision for excess and
obsolete inventory based primarily on forecasts of future product demand. Our
net income (loss) is directly affected by management's estimate of the
realizability of inventories. To date, sales of our products have been limited.
Accordingly, there can be no assurance that we will not be required to reduce
the selling price of our inventory below our current carrying value.
Property and Equipment
- ----------------------
Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets, primarily five years.
Valuation of Long-Lived Assets
- ------------------------------
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important that could trigger an impairment review include a
significant underperformance relative to expected historical or projected future
operating results and cash flows, a significant change in the manner of the use
of the asset or a significant negative industry or economic trend. When
management determines that the carrying value of long-lived asset may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the carrying amount of the asset would be written down to fair value
based upon the present value of estimate future cash flows, to reflect the
impairment. See Note 4.
Research and Development Expenses
- ---------------------------------
Research and development expenses are expensed in the year incurred.
Income Taxes
- ------------
We recognize deferred tax assets and liabilities for the estimated future tax
effects of events that have been recognized in our financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance is established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Stock-Based Compensation
- ------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which addresses financial
accounting and reporting for recording expenses for the fair value of stock
options. SFAS 148 provides alternative methods of transition for a voluntary
change to fair value based method of accounting for stock-based employee
compensation. Additionally, SFAS 148 requires more prominent and more frequent
disclosures
F-10
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
in financial statements about the effects of stock-based compensation. The
provisions of this Statement are effective for fiscal years ending after
December 15, 2002, with early application permitted in certain circumstances.
The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 on February 1, 2003 had no effect on our financial
position or results of operations.
SFAS No. 123 "Accounting for Stock Based Compensation" encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. We account for stock options granted to
employees using the intrinsic value method prescribed in APB Opinion No. 25
"Accounting for Stock Issued to Employees" and comply with the disclosure
provisions of SFAS No. 123 and SFAS No. 148. Compensation cost for stock options
is measured as the excess, if any, of the quoted market price of our stock at
the date of grant over the amount an employee must pay to acquire the stock. In
accordance with APB Opinion No. 25, we have not recognized any compensation
cost, as all option grants to employees have been made at the fair market value
of our stock on the date of grant.
Had compensation cost for stock options granted to employees been
determined at fair value, consistent with SFAS No. 123, our net loss and net
loss per share would have increased to the following pro forma amounts:
For the Year Ended October 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net loss as reported $ (3,114,411) $ (3,285,240) $ (3,571,957)
Add: Total stock-based employee compensation
expense, determined under fair value based
method, for all awards, net of related tax effect (889,145) (282,908) (1,331,782)
------------ ------------ ------------
Net loss as adjusted $ (4,003,556) $ (3,568,148) $ (4,903,739)
============ ============ ============
Net loss per share, basic and diluted:
As reported $ (0.04) $ (0.05) $ (0.06)
============ ============ ============
As adjusted $ (0.05) $ (0.05) $ (0.08)
============ ============ ============
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used for grants for the years ended October 31, 2003, 2002 and 2001,
respectively: risk free interest rates of 1.39%, 3.26% and 4.05%; expected
dividend yields of 0% for all periods; expected lives of 1.49 years, 2.50 years
and 2.50 years; and expected stock price volatility of 139%, 93% and 62%. The
weighted average fair value of options granted under SFAS No. 123 for the fiscal
years ended October 31, 2003, 2002 and 2001 was $0.13, $0.34 and $0.55,
respectively.
We account for options granted to non-employee consultants using the fair value
method required by SFAS No. 123. Compensation expense for consultants,
recognized in the fiscal years ended October 31, 2003, 2002 and 2001, was
$4,800, $0 and $229,620, respectively. Such compensation expense was recognized
in accordance with Emerging Issues Task Force Issue No. 00-08, "Accounting by a
Grantee for an Equity Instrument to be Received in Conjunction with Providing
Goods or Services" and No. 96-18 "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," and
F-11
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
is included in either research and development expenses or selling, general and
administrative expenses, as applicable, in the accompanying statements of
operations.
Net Income (Loss) Per Share of Common Stock
- -------------------------------------------
We comply with the provisions of SFAS No. 128, "Earnings Per Share". In
accordance with SFAS 128, basic net income (loss) per common share ("Basic EPS")
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average number
of common shares and dilutive common share equivalents and convertible
securities then outstanding. Diluted EPS for all years presented is the same as
Basic EPS, as the inclusion of the impact of common stock equivalents then
outstanding would be anti-dilutive. For this reason, excluded from the
calculation of Diluted EPS for the fiscal years ended October 31, 2003, 2002 and
2001, were options to purchase 15,522,246 shares, 14,705,746 shares and
14,935,746 shares, respectively, and warrants to purchase 715,500 shares in
2001.
Fair Value of Financial Instruments
- -----------------------------------
We comply with the provisions of SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments," which requires disclosures about the fair value of
financial instruments. In the opinion of management, the carrying value of all
financial instruments, consisting primarily of cash and cash equivalents,
accounts and other receivables and accounts payable, reflected in the
accompanying balance sheet, approximates fair value as of October 31, 2003 and
2002, due to their short term nature.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. COLLABORATIVE AGREEMENT
-----------------------
From June 2001 until June 2002, pursuant to an agreement with Futaba, we worked
with Futaba to jointly develop and commercialize a full-color video display
utilizing our display technology. We received payments from Futaba aggregating
$5,500,000 during the term of this agreement. We have no further performance
obligations with respect to this agreement.
In 1997, we entered into an agreement with Volga for certain development efforts
in connection with our display technology. Under amendments to this agreement,
we paid Volga an aggregate of $1,110,000 and $360,000 during fiscal 2002 and
2001, respectively, for development efforts during the term of our agreement
with Futaba.
4. BARTER TRANSACTION AND ASSOCIATED IMPAIRMENT
--------------------------------------------
In August 2000, we entered into a nonmonetary barter transaction in which we
sold $3,000,000 of certain inventory in exchange for an equal value of
commercial trade credits. In accordance with
F-12
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
APB No. 29, "Accounting for Non-Monetary Transactions," we recognized no gain or
loss on the transaction as it was management's opinion that this exchange was
effected at fair market value. These trade credits may be redeemed to reduce the
cost of advertising as well as other products and services. As is typical of
such arrangements, to utilize barter credits we must pay a certain percentage of
the advertising or other expense in cash. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," we continually evaluated the carrying amount of this asset.
Unused barter credits at May 1, 2002 aggregated approximately $2,821,000. To
utilize these barter credits in exchange for advertising and purchase discounts,
we must pay between 65-70% of the transaction value in cash. Because our
anticipated cash flow was negatively affected by the termination of the
agreement with Futaba, our ability to make such payments and thereby utilize the
barter credits was uncertain. Therefore, during the three months ended July 31,
2002, we wrote off all unused barter credits, thereby recognizing an impairment
loss in the amount of approximately $2,821,000. This impairment loss relates to
our Encryption Products Segment.
5. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of accounts receivable from sales in the ordinary
course of business. Management reviews our accounts receivable and other
receivables for potential doubtful accounts and maintains an allowance for
estimated uncollectible amounts. Two customers, in the Encryption Products and
Services Segment, represented 25% and 13%, respectively, of total net revenues
in fiscal 2003. Futaba, in the Flat Panel Display Segment, represented 88% and
57% of total net revenues in fiscal 2002 and 2001, respectively. One customer,
in the Encryption Products and Services Segment, represented 90% of gross
accounts receivable and other receivables as of October 31, 2003. Two customers,
in the Encryption Products and Services Segment, represented 66% and 14%,
respectively, of gross accounts receivable and other receivables as of October
31, 2002.
6. OTHER RECEIVABLES
-----------------
In May and June 2002, we received restricted common stock from a customer in
connection with an outstanding accounts receivable of approximately $323,000 and
anticipated settling this accounts receivable through the ultimate sale of the
restricted common stock. This customer has agreed with us to cure any deficiency
between the proceeds from the sale of the restricted common stock and the
balance of the outstanding accounts receivable. In addition, the customer's
principal shareholder has personally agreed to cure any deficiency in the event
that the customer defaults on its agreement to cure such deficiency, up to
$292,000. During fiscal 2003 we received aggregate proceeds of approximately
$14,000 from the sale of a portion of the restricted common stock. We have made
a provision, during fiscal 2003, of approximately $182,000 to reflect
management's estimate of the net realizable value of this receivable.
F-13
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
7. INVENTORIES
-----------
Inventories consist of the following as of:
October 31,
---------------------------------
2003 2002
---------------- ---------------
Component parts $ 341,344 $ 385,538
Work-in-process 48,324 44,105
Finished products 655,207 866,556
---------------- ---------------
$ 1,044,875 $ 1,296,199
================ ===============
8. ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following as of:
October 31,
-------------------------------
2003 2002
------------- -------------
Accrued professional fees $ 7,000 $ 7,992
Accrued payroll and related expenses 5,607 7,014
Accrued other 12,813 19,844
------------- -------------
$ 25,420 $ 34,850
============= =============
9. SHAREHOLDERS' EQUITY
--------------------
Common Stock Issuances
- ----------------------
During fiscal years ended October 31, 2003, 2002 and 2001, we issued
4,483,111 shares, 3,311,405 shares and 1,707,725 shares, respectively, of common
stock to certain employees for services rendered, principally in lieu of cash
compensation, pursuant to the CopyTele, Inc. 2000 Share Incentive Plan (the
"2000 Share Plan") and the Copytele, Inc. 2003 Share Incentive Plan (the "2003
Share Plan"). In addition during fiscal 2003, 2002 and 2001, we issued 1,364,712
shares, 404,650 shares and 271,815 shares, respectively, of common stock to
consultants for services rendered of which 1,364,712 shares, 404,650 shares,
68,720 shares, respectively, were pursuant to the 2003 Share Plan and the 2000
Share Plan. The weighted-average fair market value of the common stock issued
was $0.28, $0.38 and $0.57 during fiscal 2003, 2002 and 2001, respectively.
Preferred Stock
- ---------------
On May 29, 1986, our shareholders authorized 500,000 shares of preferred stock
with a par value of $100 per share. The shares of preferred stock may be issued
in series at the direction of the Board of Directors, and the relative rights,
preferences and limitations of such shares will all be determined by the Board
of Directors. As of October 31, 2003 and 2002, there is no preferred stock
issued and outstanding.
F-14
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Option Plans
- ------------------
As of October 31, 2003, we have three stock option plans: the CopyTele, Inc.
1993 Stock Option Plan (the "1993 Plan"), the 2000 Share Plan, and the 2003
Share Plan, which were adopted by our Board of Directors on April 28, 1993, May
8, 2000, and April 21, 2003, respectively. Stock options outstanding as of
October 31, 2002 of 309,000 shares under our 1987 Stock Option Plan expired
during fiscal 2003 and no shares are available for future grants under this
plan.
On July 14, 1993, our shareholders approved the 1993 Plan, which had been
adopted by our Board of Directors on April 28, 1993. 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 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.
Information regarding the 1993 Plan for the three years ended October 31, 2003
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ----------------
Shares Under Option at October 31, 2000 11,764,060 $4.23
Canceled (887,280) $3.90
----------
Shares Under Option at October 31, 2001 10,876,780 $4.23
Canceled (80,000) $3.94
----------
Shares Under Option at October 31, 2002 10,796,780 $4.26
Canceled (1,973,000) $6.37
----------
Shares Under Option and Exercisable at October 31, 2003 8,823,780 $3.79
==========
The following table summarizes information about stock options outstanding under
the 1993 Plan as of October 31, 2003:
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/03 Contractual Life Exercise Price at 10/31/03 Exercise Price
- ---------------- ----------- ---------------- -------------- ----------- --------------
$0.84 to $1.96 1,225,700 4.04 $1.25 1,225,700 $1.25
$2.28 to $3.16 1,012,500 4.24 $2.36 1,012,500 $2.36
$3.31 to $4.81 5,740,580 2.79 $4.25 5,740,580 $4.25
$5.75 to $6.38 845,000 1.50 $6.04 845,000 $6.04
F-15
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
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. Directors and future directors are automatically granted
nonqualified stock options to purchase 20,000 shares of common stock upon their
initial election to the Board of Directors and at the time of each subsequent
annual meeting of our shareholders at which they are elected to the Board of
Directors.
The 2000 Share Plan is administered by the Stock Option Committee, which
determines the option price, term and provisions of each option; however, the
purchase price of shares issuable upon the exercise of incentive stock options
will not be less than the fair market value of such shares and incentive stock
options will not be exercisable for more than 10 years.
Information regarding the 2000 Share Plan for the three years ended October 31,
2003 is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
---------- ----------------
Shares Under Option at October 31, 2000 1,144,000 $1.10
Granted 4,180,000 $0.55
Canceled (257,000) $0.75
Exercised (1,457,034) $0.57
----------
Shares Under Option at October 31, 2001 3,609,966 $0.70
Granted 60,000 $0.34
Canceled (50,000) $0.75
Exercised (20,000) $0.40
----------
Shares Under Option at October 31, 2002 3,599,966 $0.70
Granted 910,000 $0.23
Canceled (235,000) $0.63
Exercised (995,500) $0.25
----------
Shares Under Option at October 31, 2003 3,279,466 $0.71
----------
Options Exercisable at October 31, 2003 3,259,466 $0.71
==========
F-16
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding under
the 2000 Share Plan as of October 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/03 Contractual Life Exercise Price at 10/31/03 Exercise Price
- ----------------------------------------------------------------------------------------------------------------
$0.15 - $0.40 1,275,000 8.07 $0.39 1,255,000 $0.39
$0.44 - $0.94 937,466 6.88 $0.70 937,466 $0.70
$1.00 - $1.38 1,067,000 6.72 $1.09 1,067,000 $1.09
The exercise price with respect to all of the options granted under the 2000
Share Plan since its inception, was equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2003, 2,548 shares
were available for future grants under the 2000 Share Plan.
The 2003 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
maximum number of shares of common stock available for issuance under the 2003
Share Plan is 15,000,000 shares. Current and future non-employee directors are
automatically granted nonqualified stock options to purchase 60,000 shares of
common stock upon their initial election to the Board of Directors and at the
time of each subsequent annual meeting of our shareholders at which they are
elected to the Board of Directors.
The 2003 Share Plan is administered by the Stock Option Committee, which
determines the option price, term and provisions of each option; however, the
purchase price of shares issuable upon the exercise of incentive stock options
will not be less than the fair market value of such shares and incentive stock
options will not be exercisable for more than 10 years.
Information regarding the 2003 Share Plan for the year ended October 31, 2003 is
as follows:
Current Weighted
Average Exercise
Shares Price Per Share
--------- ---------------
Shares Under Option at October 31, 2002 - $ -
Granted 6,470,000 $0.29
Exercised (3,051,000) $0.29
---------
Shares Under Option and Exercisable at October 31, 2003 3,419,000 $0.30
=========
F-17
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding under
the 2003 Share Plan as of October 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 10/31/03 Contractual Life Exercise Price at 10/31/03 Exercise Price
- ----------------------------------------------------------------------------------------------------------------
$0.25 2,819,000 9.51 $0.25 2,819,000 $0.25
$0.51 - $0.57 600,000 9.98 $0.52 600,000 $0.52
The exercise price with respect to all of the options granted under the 2003
Share Plan since its inception, was equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2003, 6,435,129
shares were available for future grants under the 2003 Share Plan.
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
- ------
We lease space at our principal location for office and laboratory research
facilities. The current lease is for approximately 12,000 square feet and
expires on November 30, 2008. The lease contains base rentals of approximately
$248,000 per annum with a 3% annual increase and an escalation clause for
increases in certain operating costs. We have the right to cancel a portion or
the entire lease as of May 31, 2006. This lease does not contain provisions for
its renewal.
Rent expense for the years ended October 31, 2003, 2002 and 2001, was
approximately $235,000, $250,000 and $284,000, respectively.
As of October 31, 2003, our noncancelable operating lease commitments are as
follows:
2004 $ 247,000
2005 254,000
2006 152,000
------------
$ 653,000
============
11. EMPLOYEE PENSION PLAN
---------------------
We adopted a noncontributory defined contribution pension plan, effective
November 1, 1983, covering all of our present employees. Contributions, which
are made to a trust and have been funded on a current basis, are based upon
specified percentages of compensation, as defined in the plan. During fiscal
2001, we amended the plan to suspend benefit accruals as of November 1, 2000.
Accordingly, we did not incur any pension expense for the fiscal years ended
October 31, 2003, 2002 and 2001.
F-18
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES
------------
Income tax provision (benefit) consists of the following:
Year Ended October 31,
-----------------------------------------------------
2003 2002 2001
---------------- ---------------- --------------
Federal:
Current $ - $ - $ -
Deferred (1,499,000) (19,000) (1,118,000)
State:
Current - - -
Deferred (220,000) (3,000) 79,000
Adjustment to valuation allowance related to net
deferred tax assets 1,719,000 22,000 1,039,000
---------------- ---------------- --------------
$ - $ - $ -
================ ================ ==============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset, net, at October 31, 2003 and 2002, are as follows:
2003 2002
--------------- ---------------
Long-term deferred tax assets:
Other assets $ 1,128,000 $ 1,100,000
Federal and state NOL and tax credit carryforwards 34,147,000 32,424,000
Other 42,000 74,000
--------------- ---------------
Subtotal 35,317,000 33,598,000
Less: valuation allowance (35,317,000) (33,598,000)
--------------- ---------------
Deferred tax asset, net $ - $ -
=============== ===============
As of October 31, 2003, we had tax net operating loss and tax credit
carryforwards of approximately $80,593,000 and $1,774,000, respectively,
available, within statutory limits (expiring at various dates between 2004 and
2023), to offset any future regular Federal corporate taxable income and taxes
payable. If the tax benefits relating to deductions of option holders' income
are ultimately realized, those benefits will be credited directly to additional
paid-in capital. Certain changes in stock ownership can result in a limitation
on the amount of net operating loss and tax credit carryovers that can be
utilized each year.
We had tax net operating loss and tax credit carryforwards of approximately
$80,697,000 and $129,000, respectively, as of October 31, 2003, available,
within statutory limits, to offset future New York State corporate taxable
income and taxes payable, if any, under certain computations of such taxes. The
tax net operating loss carryforwards expire at various dates between 2004 and
2023 and the tax credit carryforwards expire between 2004 and 2023.
During the three years ended October 31, 2003, we incurred no Federal and no
State income taxes.
F-19
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
While there is no formal agreement, our Chairman of the Board and Chief
Executive Officer and our President waived any and all rights to receive salary
and related pension benefits for an undetermined period of time beginning
November 1985. Since 1987 through July, 31 2003, three other senior level
personnel have also waived salary and related pension benefits. We do not
anticipate the retroactive reinstatement of any of the salary or related pension
benefit waivers indicated above. The aggregate annual expenses for these five
individuals at the time of their respective initial waivers were approximately
$475,000. We compensate these individuals in the form of stock options.
Commencing in August 2003, the three senior level personnel began receiving
compensation in the form of salary, which approximated $57,000 for the year
ended October 31, 2003.
14. SEGMENT INFORMATION
-------------------
We follow the provisions of SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information." 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. Prior to commencement of our agreement with Futaba in June 2001,
we operated in one segment. The following represents selected financial
information for our segments for the years ended October 31, 2003, 2002 and
2001:
Encryption Products and
Segment Data Flat-Panel Display Services Total
- ---------------------------- ------------------ ----------------------- --------------
Year Ended October 31, 2003:
Revenues $ - $ 224,221 $ 224,221
Net loss (1,812,624) (1,301,787) (3,114,411)
Depreciation 18,534 14,549 33,083
Interest income 2,615 2,053 4,668
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 906,549 745,588 1,652,137
Total assets 625,774 1,704,717 2,330,491
Additions to long-lived assets 980 - 980
F-20
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
Encryption Products and
Segment Data Flat-Panel Display Services Total
- ---------------------------- ------------------ ----------------------- --------------
Year Ended October 31, 2002:
Revenues $ 4,541,667 $ 645,027 $ 5,186,694
Net income (loss) 1,800,365 (5,085,605) (3,285,240)
Depreciation 29,676 56,795 86,471
Interest income 8,067 15,439 23,506
Impairment loss on
commercial trade barter
credits - 2,820,800 2,820,800
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 451,997 976,207 1,428,204
Total assets 355,061 2,376,448 2,731,509
Additions to long-lived assets 13,236 25,331 38,567
Year Ended October 31, 2001:
Revenues $ 958,333 $ 732,435 $ 1,690,768
Net income (loss) 23,899 (3,595,856) (3,571,957)
Depreciation 13,331 153,172 166,503
Interest income 3,963 28,316 32,279
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 128,828 907,676 1,036,505
Total assets 538,445 6,023,958 6,562,403
Additions to long-lived assets 1,917 14,055 15,972
Geographic Information
- ----------------------
We generate revenue both domestically (United States) and internationally.
International revenues are based on the country in which our customer
(distributor) is located. For the years ended October 31, 2003, 2002 and 2001,
and as of each respective year-end, sales and accounts receivable by geographic
area are as follows:
Geographic Data 2003 2002 2001
- ---------------------------------------- -------------- -------------- ---------------
Revenue:
United States $ 199,810 $ 622,144 $ 581,885
Japan - 4,541,667 958,333
Other international 44,401 22,883 150,550
-------------- -------------- ---------------
$ 244,211 $ 5,186,694 $ 1,690,768
============== ============== ===============
Accounts receivable:
United States $ 37,600 $ 68,177 $ 468,716
International 3,900 9,603 67,675
-------------- -------------- ---------------
$ 41,500 $ 77,780 $ 536,391
============== ============== ===============
F-21
COPYTELE, INC.
NOTES TO FINANCIAL STATEMENTS
15. QUARTERLY RESULTS AND SEASONALITY (UNAUDITED)
---------------------------------------------
The following table sets forth unaudited financial data for each of our last
eight fiscal quarters:
First Second Third Fourth
----- ------ ----- ------
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended October 31, 2003:
Income Statement Data:
Revenue $ 91,339 $ 21,743 $ 83,240 $ 47,899
Gross profit 29,314 6,083 52,743 (19,863)
Net loss (804,596) (970,024) (650,765) (689,026)
Net loss per share of common stock-
basic and diluted $ (0.01) $ ( 0.01 ) $ (0.01) $ (0.01)
Year Ended October 31, 2002:
Income Statement Data:
Revenue $ 1,277,189 $ 2,616,975 $ 1,253,859 $ 38,671
Gross profit 850,913 1,789,144 745,983 (70,404)
Net income (loss) 60,307 897,527 (3,029,184) (1,213,890)
Net income (loss) per share of common stock -
basic and diluted $ 0.00 $ 0.01 $ (0.04) $ (0.02)
F-22
We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of
Regulation S-X, a copy of the prior year's Report of Independent Public
Accountants from our prior independent public accountants, Arthur Andersen LLP
("Andersen"). This report was previously issued by Andersen, for filing with our
Annual Report on Form 10-K for fiscal year 2001, and has not been reissued by
Andersen.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CopyTele, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of CopyTele, Inc. included in this Form
10-K and have issued our report thereon dated January 24, 2002. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. This schedule (Schedule II - Valuation and Qualifying
Accounts) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
January 24, 2002
S-1
COPYTELE, INC.
SCHEDULE II
S-2
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
Additions
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions end of period
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
2003
Allowance for doubtful accounts $ 325,505 $ 23,056 $ 189,331 $ 159,230
Reserve against Other receivables $ - $ 181,952 $ - $ 181,952
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
2002
Allowance for doubtful accounts $ 240,000 $ 155,505 $ 70,000 $ 325,505
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
2001
Allowance for doubtful accounts $ 75,400 $ 272,500 $ 107,900 $ 240,000
- ----------------------------------------- -------------------- --------------------- ------------------- -------------------------
This schedule should be read in conjunction with the accompanying financial statements and notes thereto.
EXHIBIT INDEX
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July 31, 1992
and to Form 10-Q for the fiscal quarter ended July 31, 1997.)
3.2 By-laws, as amended and restated. (Incorporated by reference to
Post-Effective Amendment No. 1 to Form S-8 (Registration No.
33-49402) dated December 8, 1993.)
3.3 Amendment to By-laws. (Incorporated by reference to Form 10-Q for
the fiscal quarter ended January 31, 2003.)
10.1 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28, 1993
and approved by shareholders on July 14, 1993. (Incorporated by
reference to Proxy Statement dated June 10, 1993.)
10.2 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved by shareholders on July 19,
1995. (Incorporated by reference to Form S-8 (Registration No.
33-62381) dated September 6, 1995.)
10.3 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved by shareholders on July 24,
1996. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.)
10.4 Agreement dated March 3, 1999 between Harris Corporation and
CopyTele, Inc. (Incorporated by reference to Form 10-Q for the
fiscal quarter ended January 31, 1999.)
10.5 Stock Subscription Agreement dated April 27, 1999, including form
of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-Q for the fiscal quarter
ended April 30, 1999.)
10.6 Agreement dated July 28, 1999, among CopyTele, Inc., Harris
Corporation and RF Communications. (Incorporated by reference to
Form 8-K dated July 28, 1999.)
10.7 Stock Subscription Agreement dated August 30, 1999, including
form of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1999.)
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated by
reference to Annex A of our Proxy Statement dated June 12, 2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 6, 2001 and approved by shareholders on August
16, 2001. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 16, 2002 and approved by shareholders on
September 12, 2002. (Incorporated by reference to Exhibit 4(e) to
our Form S-8 (Registration No. 333-99717) dated September 18,
2002.)
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation
Agreement between CopyTele, Inc. and Volga Svet Ltd.
(Incorporated by reference to Exhibit 10.14 to our Form 10-K for
the fiscal year ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet Ltd.,
dated as of February 1, 2002. (Incorporated by reference to
Exhibit 10.15 to our Form 10-K for the fiscal year ended October
31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan (Incorporated by
reference to Exhibit 4 to our Form S-8 dated May 5, 2003.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
23.2 Notice Regarding Consent of Arthur Andersen LLP. (Filed
herewith.)
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated December 22, 2003.
(Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated December 22, 2003.
(Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated December 22, 2003.
(Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
Title 18 of the United States Code, dated December 22, 2003.
(Filed herewith.)