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| COPY.OB > SEC Filings for COPY.OB > Form 10-K on 16-Jan-2009 | All Recent SEC Filings |
16-Jan-2009
Annual Report
Forward-Looking Statements
Information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, those factors set forth in this Annual Report on Form 10-K under the heading "Item 1A. Risk Factors." 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
Our principal operations are the development, production and marketing of thin, flat, low-voltage phosphor display technology and the development, production and marketing of multi-functional encryption products that provide information security for domestic and international users over virtually every communications media.
We have pioneered the basic development of an innovative new type of flat panel display technology, which is brighter, has higher contrast and consumes less power than our prior display technology. This new proprietary display is a color phosphor based display having a unique lower voltage electron emission system to excite the color phosphors. As with our prior display technology, the new technology emits light to display color images, such as movies from DVD players. In addition, we are also developing another version of our new type low voltage and low power display having a different matrix configuration and phosphor excitation system. These new type of displays are expected to be lower in cost than our prior displays.
In November 2007, we entered into a Technology License Agreement (as amended, the "License Agreement") with Videocon Industries Limited, an Indian company ("Videocon"). Under the License Agreement, we provide Videocon with a non-transferable, worldwide license of our technology for thin, flat, low voltage phosphor displays (the "Licensed Technology"), for Videocon (or a Videocon Group company) to produce and market products, including TVs, incorporating displays utilizing the Licensed Technology. Under the License Agreement, we will receive a license fee of $11 million from Videocon, payable in installments over a 27 month period and an agreed upon royalty from Videocon based on display sales by Videocon. In April 2008, the Indian Government approved the License Agreement and in May 2008, we received the first installment of the license fee of $2 million.
Videocon Industries Limited is the flagship company of the Videocon Group, one of India's leading business houses. Videocon Group is a fully integrated consumer electronics and home appliances enterprise with backward integration in plasma panel, CRT glass, color picture tubes and other key components for the consumer electronics, home appliances and components industries. The company also operates in the oil & gas sector. The Videocon Group has sales and service networks throughout India and operates facilities in Europe and elsewhere in the world.
CopyTele and Videocon are working together to implement our technology into production display modules. The display modules consist of our low voltage phosphor displays, the attached associated driver circuits, and controller circuits. Under the License Agreement, Videocon, with assistance from CopyTele, is to provide the design and process engineering required to produce such display modules, and also is to provide all tooling and fixtures required for the production process. Videocon has a group of qualified and experienced personnel assigned to this program. As part of our assistance to Videocon to produce such display modules, we have been exchanging information with this group of personnel so that they may understand the CopyTele technology. We are currently cooperating with Videocon to jointly implement the CopyTele technology to produce prototypes of the modules. Videocon is utilizing its display processing technology and facilities to produce our display matrix. The matrix is the main component of our display, since it contains the structure to accommodate our electron emission technology and the color phosphors that are used to illuminate our display. CopyTele and Videocon are also working together to incorporate advancements to our display technology. Improvements to the technology are to be jointly owned by CopyTele and Videocon.
Under the License Agreement we continue to have the right to produce and market products utilizing the Licensed Technology. We also continue to have the right to utilize Volga Svet Ltd., a Russian display company that we have been working with for more than eleven years ("Volga"), and an Asian company that CopyTele has been working with for more than five years, to produce and market, products utilizing the Licensed Technology. Additional licenses of the Licensed Technology to third parties require the joint agreement of CopyTele and Videocon.
In connection with the License Agreement, Videocon and CopyTele have each appointed one senior advisor to the other's board of directors to advise with respect to strategic planning and technology in the display field.
At the same time as we entered into the License Agreement, we entered into a Share Subscription Agreement with an affiliate of Videocon ("Mars Overseas") for Mars Overseas to purchase 20,000,000 shares of our common stock, and a subsidiary of ours, CopyTele International Ltd. ("CopyTele International"), entered into a GDR Purchase Agreement to purchase 1,495,845 global depository receipts ("GDRs") of Videocon. Both transactions were completed in our first fiscal quarter of fiscal 2008. See Note 1 to the Condensed Consolidated Financial Statements.
Our new technology improves on our prior carbon nanotube and proprietary low voltage color phosphor display technology. We have developed various engineering models using such prior technology, which demonstrated the display's ability to show movies from DVD players by controlling the brightness of selected individual pixels. The carbon nanotubes, which are supplied to us by a U.S. company, require a low voltage for electron emission and are extremely small - approximately 10,000 times thinner than the width of a human hair. The 5.5 inch (diagonal) display we developed has 960 x 234 pixels and utilizes a new memory-based active matrix thin film technology with each pixel phosphor activated by electrons emitted by a proprietary carbon nanotube network located approximately 10 microns (1/10th of a human hair) from the pixels. As a result, each pixel phosphor brightness is controlled using a maximum of only 40 volts. The carbon nanotubes and proprietary color phosphors are precisely placed and separated utilizing our proprietary nanotube and phosphor deposition technology. We have developed a process of maintaining uniform carbon nanotube deposition independent of phosphor deposition. We have also developed a method of enhancing nanotube electron emission to increase the brightness of this type of display.
Some other characteristics of our display technology are as follows:
o We have developed a proprietary system which allows us to evacuate
our display; to rapidly vacuum seal it at a low temperature to
accommodate the matrix; and to create lithographic type spacers to
assemble our display utilizing only 0.7mm glass. We thus obtain a
display thickness of approximately 1/16th of an inch, thinner than
LCD (liquid crystal) and PDP (plasma) displays.
o The display matrix, phosphor excitation system, and drivers are
all on one substrate.
o Our display is able to select and change the brightness of each
individual pixel, requiring only 40 volts on each pixel phosphor
to change the brightness from black to white. This compares to
thousands of volts required for other video phosphor based
displays, which leads to inherent breakdowns and short life.
o Our display has no backlight. Because power is only consumed when
a pixel is turned on, low power is needed to activate the whole
display. The display requires less power than an LCD. This lower
power consumption could potentially allow use of rechargeable
batteries to operate TV products for wireless applications and
extend the battery operation time for portable devices.
o The same basic display technology could potentially be utilized in
various size applications, from hand-held to TV size displays.
o Our proprietary matrix structures can be produced by existing mass
production TFT (thin film technology) LCD facilities, or portions
of these facilities.
o Our display eliminates display flicker.
o Our display has an approximately 1,000 times faster video response
time than an LCD, and matches the response time of a cathode ray
tube (CRT).
o Our display can be viewed with high contrast over approximately a
180 degree viewing angle, in both the horizontal and vertical
directions, which exceeds the viewing angle of LCDs.
o Also like CRTs, our display is capable of operating over a
temperature range (-40(degree)C to 85(degree)C) which exceeds the
range over which LCDs can operate, especially under cold
temperature conditions.
We believe our displays could potentially have a cost similar to a CRT and thus less than current LCD or PDP displays (our display does not contain a backlight, or color filter or polarizer, which represent a substantial portion of the cost of an LCD).
During the past year we have also continued to pursue our encryption business. We have sought encryption opportunities in both the commercial and government security markets.
Our government market has been primarily handled by The Boeing Company ("Boeing") and its large distributors of the Thuraya satellite phones. The Thuraya Satellite Network has grown as a communications provider due to its geographic coverage, quality of service and cost effective usage. The third Thuraya Geo-mobile satellite was successfully launched in January 2008, allowing Thuraya to embark on expansion plans to provide its mobile satellite services in the Asia-Pacific region.
Our three year agreement with Boeing continued during fiscal 2008. Boeing distributes 13 of our products, including our DCS-1400D (docker voice encryption device), USS-900T (satellite fax encryption device), USS-900TL (landline to satellite fax encryption device), USS-900WF (satellite and cellular fax encryption device), USS-900WFL (landline to satellite and cellular fax encryption device) and USS-900TC (satellite fax encryption to computer) products, which were specifically designed for the Thuraya network. Boeing sells these products under the brand name of Thuraya.
We are continuing to promote our Thuraya encryption solutions through other Thuraya developers and resellers beside Boeing. We offer a full line of voice, fax and data encryption products that secure these communications, and our products are being used by government agencies, military, as well as domestic and international non-governmental organizations (NGOs) in the Middle East, Europe, Far East and Africa.
Asia Pacific Satellite Industries ("APSI") has manufactured new Thuraya handsets and docking units that allow satellite communications both outdoors and indoors. CopyTele has developed connecting cables and compatibility arrangements that customers can easily set up and utilize to secure their communications over the Thuraya network and which are compatible with landline telephone systems. APSI's new FDU-3500 docking unit for its SO-2510 phone is now available in the market. This unit allows for outdoor and indoor operation of the satellite phone on the Thuraya network. Our new PA-3500 and PA-3500T products allow compatibility between our DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI FDU-3500 docking unit and SO-2510 phone.
Our products provide secure communications with many different satellite phones, including the Thuraya 7100/7101/SO-2510 handheld terminal ("HHT"), Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT, Globalstar GSP-2800/2900 fixed phone, Iridium 9500/9505/9505A HHT, Inmarsat M4 and Mini "M" HHT units from Thrane & Thrane and Nera. Through the use of our products, encrypted satellite communications are available for many Thuraya docking units, including Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APSI's FDU-2500 and FDU-3500 Fixed Docking Units, and Sattrans's SAT-OFFICE Fixed Docking Unit and SAT-VDA Hands-Free Car Kit.
We have added Voice over Internet Protocol (VoIP) functions to the DCS-1200 for corporate utilization over popular new telephone systems.
In the past year, we have uncovered new opportunities to market our products for securing landline and wireless voice and fax communications. Our USS-900AF, USS-900WF and USS-900WFL products are being evaluated for use by two Middle Eastern governments for encrypting fax communications. Also, a Far Eastern government is in the process of determining the system requirements necessary to encrypt voice communications utilizing our DCS-1200 and DCS-1400 products.
In the commercial field, we have licensed our encryption system for e-mail to Digital Info Security Co Inc. ("DISC"), located in Westminster, Colorado. The system, our DCS-2200, integrates into DISC's e-mail services and allows companies to encrypt all e-mail transactions in a manner transparent to the individual user.
Our operations and the achievement of our objectives in marketing, production, and research and development are dependent upon an adequate cash flow. Accordingly, in monitoring our financial position and results of operations, particular attention is given to cash and accounts receivable balances and cash flows from operations. Since our initial public offering, our cash flows have been primarily generated through the sales of common stock in private placements and upon exercise of stock options. Since 1999 we have also generated cash flows from sales of our encryption products and services. We are continuing to direct our encryption marketing efforts to opportunities in both the commercial and government security markets and have recently uncovered new opportunities to market products to Middle Eastern and Far Eastern governments to secure voice and fax communications. In addition, in fiscal 2008, we entered into the License Agreement with Videocon and in May 2008, we commenced receiving from Videocon license fees related to our display technology.
In reviewing Management's Discussion and Analysis of Financial Condition and Results of Operations, you should refer to our Consolidated Financial Statements and the notes thereto.
Critical Accounting Policies
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.
We believe the following critical accounting polices affect the more significant judgments and estimates used in the preparation of our financial statements.
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.
We have assessed the guidance of Emerging Issues Task Force No. 00-21 "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") to determine whether multiple deliverables in our arrangement with Videocon represent separate units of accounting. Under the License Agreement, CopyTele is required to: (a) disclose to Videocon the Licensed Technology and provide reasonable training of Videocon personnel; (b) jointly cooperate with Videocon to produce prototypes prior to production; and (c) assist Videocon in preparing for production. CopyTele has determined that these performance obligations do not have value to Videocon on a standalone basis, as defined in EITF 00-21, and accordingly they do not represent separate units of accounting.
We have established objective and reasonable evidence of fair value for the royalty to be earned during the production period based on analysis of the pricing for similar agreements. Accordingly, we have determined that the license fee of $11 million to be paid during the pre-production period and royalties on product sales reflects the established fair value for these deliverables. We will recognize the $11 million license fee over the estimated period that we expect to provide cooperation and assistance during the pre-production period, limiting the revenue recognized on a cumulative basis to the aggregate license fee payments received from Videocon. We will assess at each reporting period the progress and assistance provided and will continue to evaluate the period during which this fee will be recognized. On this basis, we have recognized license fee revenue during the year ended October 31, 2008 of approximately $1,687,000. License fee payments received from Videocon which are in excess of the amounts recognized as revenue (approximately $313,000 as of October 31, 2008) are recorded as non-refundable deferred revenue on the accompanying consolidated balance sheet.
We classify our investment securities in one of two categories:
available-for-sale or held-to-maturity. Available-for-sale securities are
recorded at fair value. Unrealized gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a component of accumulated other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. Held-to-maturity
securities, which are Investment securities that the company has the intent and
ability to hold to maturity, are carried at amortized cost. The amortization of
premiums and accretion of discounts are recorded on the level yield (interest)
method, over the period from the date of purchase to maturity. When sales do
occur, gains and losses are recognized at the time of sale and the determination
of cost of securities sold is based upon the specific identification method.
Dividend and interest income are recognized when earned.
We monitor the value of our investments for indicators of impairment, including changes in market conditions and the operating results of the underlying investment that may result in the inability to recover the carrying value of the investment. We will record an impairment charge if and when we believe any such investment has experienced a decline that is other than temporary.
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 we determine that they become uncollectible.
Inventories are stated at the lower of cost, including material, labor and overhead, determined on a first-in, first-out basis, or market, which represents our best estimate of market value. We regularly review inventory quantities on hand, particularly finished goods, and record a provision for excess and obsolete inventory based primarily on forecasts of future product demand. Our net loss is directly affected by management's estimate of the realizability of inventories. To date, sales of our products have been limited. Accordingly, there can be no assurance that we will not be required to reduce the selling price of our inventory below our current carrying value in the future.
We account for stock options granted to employees, directors and consultants using Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" (SFAS No.123R"). We recognize compensation expense for stock option awards on a straight-line basis over the requisite service period of the grant. We recorded stock-based compensation expense, related to stock options granted to employees and non-employee directors, of approximately $2,614,000, $1,081,000 and $2,973,000 during the years ended October 31, 2008, 2007 and 2006, respectively, in accordance with SFAS No. 123R. See Note 2 to the Consolidated Financial Statements for additional information.
Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. If factors change and we employ different assumptions in the application of SFAS No. 123R in future periods, the compensation expense that we record under SFAS No. 123R may differ significantly from what we have recorded in the current period.
Results of Operations
Net revenue increased by approximately $1,576,000 in fiscal 2008, to approximately $2,063,000, as compared to approximately $487,000 in fiscal 2007. Revenue recognized during fiscal 2008 included display technology license fees related to the License Agreement with Videocon of approximately $1,687,000 compared to none in fiscal 2007. Revenue from sales of encryption products increased by approximately $129,000 in fiscal 2008, to approximately $376,000, as compared to approximately $247,000 in fiscal 2007. The increase in revenue from encryption products sold was primarily due to an increase in unit shipments. Revenue from encryption services decreased from $240,000 in the fiscal 2007 to none in fiscal 2008. The revenue from encryption services in the prior year period resulted from engineering services billed to DISC. Our encryption revenue has been limited and is sensitive to individual large transactions. We believe that changes in revenue between periods generally represent the nature of the early stage of our product and sales channel development.
The cost of encryption products sold increased by approximately $22,000 in fiscal 2008, to approximately $96,000, as compared to approximately $74,000 in fiscal 2007. The increase in cost of encryption products sold was primarily due to an increase in unit shipments of encryption products as well as a reduction of cost of products sold in fiscal 2008 of approximately $19,000 resulting from the sale during fiscal 2008 of inventory for which a provision for excess inventory of that amount was recorded in prior periods.
The cost of encryption services decreased from $86,000 in fiscal 2007 to none in fiscal 2008 as there was no revenue from encryption services.
Research and development expenses increased by approximately $723,000 in fiscal 2008, to approximately $4,127,000, from approximately $3,404,000 in fiscal 2007. The increase in research and development expenses was principally due to an increase in employee stock option compensation expense of approximately $878,000, offset by a decrease outside research and development expense of approximately $55,000, a decrease in patent-related expenses of approximately $41,000, a decrease in employee compensation and related costs, other than stock option expense, of approximately $34,000, and a decrease in outside engineering services of approximately $32,000.
Selling, general and administrative expenses increased by approximately $1,415,000 to approximately $3,830,000 in fiscal 2008, from approximately $2,415,000 in fiscal 2007. The increase in selling, general and administrative expenses was principally due to an increase in employee stock option compensation expense of approximately $655,000, an increase in consultant stock option compensation expense of approximately $172,000, an increase in the provision for doubtful accounts of $223,000 of which $120,000 related to an accounts receivable in that amount from DISC, an increase in employee compensation and related costs, other than stock option expense, of approximately $90,000, an increase in professional fees of approximately $86,000, an increase in shareholder relations expense of approximately $72,000, an increase in travel expense of approximately $49,000, and an increase in consulting expense, other than consultant stock option compensation expense, of approximately $41,000.
Dividend income, which was received in connection with the Videocon GDRs we acquired in December 2007, was approximately $131,000 in fiscal 2008. We received no dividend income in fiscal 2007.
Interest income was approximately $37,000 in fiscal 2008, compared to approximately $34,000 in fiscal 2007. The interest income earned on the additional funds available for investment on the current period was offset by a reduction in prevailing interest rates.
Net Sales. Net sales decreased by approximately $22,000 in fiscal 2007, . . .
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