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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, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period
from ___________ to ___________
Commission file number: 0-11254
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COPYTELE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
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900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [x]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [_] No [x]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [__] Accelerated filer [x] Non-accelerated filer [__]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [x]
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of April 30, 2007 (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 ($0.65):
$66,146,288
On January 10, 2008, the registrant had outstanding 128,131,651 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
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 "Item 1A. - Risk Factors" below. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented in this Annual Report on Form 10-K.
Overview
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Our principal operations are the development, production and marketing of
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.
Display Technology
------------------
We have pioneered the basic development of an innovative new type of flat
panel display technology, which improves on our prior display technology. This
new proprietary display is a color phosphor based display having a unique low
voltage phosphor excitation system. 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.
On November 2, 2007, we entered into a Technology License Agreement (the
"License Agreement") with Videocon Industries Limited, an Indian company
("Videocon"). Under the License Agreement, we licensed to Videocon our
technology for thin, flat, low voltage phosphor displays, for Videocon (or a
Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing our technology.
1
CopyTele and Videocon will jointly cooperate to implement our technology into
production displays. Improvements to the technology will be jointly owned by
CopyTele and Videocon, and the parties will jointly decide whether to pursue
patents for any improvements. The license of our technology is non-transferable
and worldwide. Under the License Agreement, Videocon will pay us a license fee
of US$ 11 million, payable in installments over a 27 month period. The first
installment of $2 million will be paid after the License Agreement is effective.
The License Agreement will be effective after Videocon has obtained the
necessary regulatory approvals in India for the payment of the license fees and
royalties. Videocon has filed for approval with the Indian government. Videocon
will also pay us an agreed upon royalty based on display sales by Videocon.
We will continue to have the right to produce and market, and to utilize
Volga Svet Ltd., a Russian display company that we have been working with for
more than ten years ("Volga"), and an Asian company that CopyTele has been
working with for more than four years, to produce and market, products utilizing
our technology. Additional licenses of our technology to third parties require
the joint agreement of CopyTele and Videocon.
In connection with the License Agreement, for the term of the license
granted under the License Agreement, Videocon and CopyTele will each appoint 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 Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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.
2
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 than 20% the power required by an LCD. This
low 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).
3
Encryption Products and Technology
----------------------------------
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. With Thuraya's
planned expansion, including the addition of another satellite this year,
Thuraya should continue its growth.
During fiscal 2007, we entered into a new three year agreement with Boeing.
Boeing now distributes 13 of our products, including our DCS-1400D (docker voice
encryption device), USS-900T (satellite fax encryption device), USS-900TL
(landline to satellite fax encryption device), USS-900WF (satellite and cellular
fax encryption device), USS-900WFL (landline to satellite and cellular fax
encryption device) and USS-900TC (satellite fax encryption to computer)
products, which were specifically designed for the Thuraya network. Boeing sells
these products under the brand name of Thuraya.
We are continuing to promote our Thuraya encryption solutions through other
Thuraya developers and resellers beside Boeing, including Asia Pacific Satellite
Industries ("APSI"). We offer a full line of voice, fax and data encryption
products that secure these communications, and our products are being used by
government agencies, military, and domestic and international non-governmental
organizations (NGOs) in the Middle East, Europe, Far East and Africa.
APSI has manufactured new Thuraya handsets and docking units that allow
satellite and GSM cellular communications both outdoors and indoors. CopyTele
and APSI have developed connecting cables and compatibility arrangements that
customers can easily set up and utilize to secure their communications over the
Thuraya network and which are compatible with landline telephone systems. APSI's
new FDU-3500 docking unit for its SO-2510 phone is now available in the market.
This unit allows for outdoor and indoor operation of the satellite phone on the
Thuraya network. Our new PA-3500 and PA-3500T products allow compatibility
between our DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI
FDU-3500 docking unit and SO-2510 phone. We are working on further designs for
encrypting the SO-2510 phone that we believe will increase customer attraction
to security by reducing the size of the encryption unit and greatly improving
the customer's graphical interface.
Our products provide secure communications with many different satellite
phones, including the Thuraya 7100/7101/SO-2510 handheld terminal ("HHT"),
Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT, Globalstar GSP-2800/2900 fixed
phone, Iridium 9500/9505/9505A HHT, Inmarsat M4 and Mini "M" HHT units from
Thrane & Thrane and Nera. Through the use of our products, encrypted satellite
communications are available for many Thuraya docking units, including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APSI's FDU-2500
and FDU-3500 Fixed Docking Units, and Sattrans's SAT-OFFICE Fixed Docking Unit
and SAT-VDA Hands-Free Car Kit.
4
We have also added Voice over Internet Protocol (VoIP) functions to the
DCS-1200 for corporate utilization over popular new telephone systems.
In the commercial field, we 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.
General
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We were incorporated on November 5, 1982 under the laws of the State of
Delaware. Our principal executive offices are located at 900 Walt Whitman Road,
Melville, New York 11747, our telephone number is 631-549-5900, and our Internet
website address is www.copytele.com. We make available free of charge on or
through our Internet website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the Securities and
Exchange Commission.
New Technologies Under Development
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Display Technology
------------------
We are continuing to pursue our efforts to develop new technologies for our
color displays. We are continuing to develop another version of our new type low
voltage and low power display having a different matrix configuration and
phosphor excitation system. This new type of display is covered under the
license provided to Videocon and is expected to be lower in cost to produce than
our prior displays.
Encryption Technology
---------------------
We are continually engaged in the development of additional capabilities
for our current product lines as well as the development of new products to meet
current and anticipated customer applications. We are further developing
encryption products and pursuing commercial security opportunities created by
the Health Insurance Portability and Accountability Act ("HIPAA"), the
Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act and other corporate governance
requirements.
Other products under development include the following:
o A voice encryption device for integration into the APSI SO-2510
handset that takes advantage of the Thuraya voice network. This
application simplifies the customer's security configuration while
reducing the utilization costs.
5
o Advancing our compatibility with Universal Serial Bus (USB) connected
cellular and satellite phones and our DCS-1200, DCS-1400 and USS-900T
products. The additional services will expand our wireless
compatibility domestically and abroad.
Production
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Flat Panel Video Display Products
---------------------------------
Under our License Agreement with Videocon, Videocon (or a Videocon Group
company) is to produce products incorporating displays utilizing our technology.
Upon the Indian government's approval of the payment of the license fees and
royalties, we will be working with Videocon to implement our display technology
for Videocon to produce the displays. We are also producing color displays, with
the assistance of Volga and the Asian company, which incorporate the new type of
matrix and phosphor excitation system described above.
Encryption Products
-------------------
Our encryption products consist of a printed circuit board populated with
electronic components and connectors enclosed in a plastic case. We design all
the hardware, software, packaging and operating manuals for our products. The
four main electronic components - the Citadel(TM) CCX encryption chip or
hardware key generator chip; a digital signal processor; a vocoder; and modems -
are contained on a printed circuit board. We are currently using several
U.S.-based electronics-production contractors to procure the printed circuit
boards and mount the associated electronics components on the circuit board. We
currently use approximately a dozen primary component and printed circuit-board
suppliers and one production assembly contractor. Given normal lead times, we
anticipate having a readily available supply of all electronic components that
we require for assembling our encryption products.
Our production contractors produce and visually inspect the completed
circuit boards. We perform final assembly, including installation of the
software, by enclosing the completed printed circuit boards into the product and
performing functionality testing of all units at our premises at Melville, New
York prior to shipment to our customers. We test our finished products using
internally developed product assurance testing procedures. We currently produce
our line of products in quantities to meet marketing requirements.
Marketing and Sales
- -------------------
Flat Panel Video Display Products
---------------------------------
Under our License Agreement with Videocon, Videocon (or a Videocon Group
company) is to market the products it produces that incorporate displays
utilizing our technology.
6
Upon the Indian government's approval of the payment of the license fees and
royalties, we will be cooperating with Videocon to implement our display
technology for Videocon to produce such products, including TV's.
Encryption Products
-------------------
During the past year we have continued to direct our marketing efforts to
participate in the security opportunities created by the U.S. Department of
Homeland Security, the Defense Department, and the enactment of laws such as
HIPAA, the Sarbanes-Oxley Act, and Gramm-Leach-Bliley Act, which mandate that
government and private sector firms provide higher levels of information privacy
and security. For example, HIPAA requires certain privacy protection for medical
records and other health care information for individuals. We are working on
applications involving our encryption technology that offer simple,
straight-forward compliance measures for these laws. We have licensed to DISC an
encryption system that integrates our encryption technology into DISC's secure
e-mail services.
We have extended our long term agreement with Boeing, which is distributing
our line of encryption products. These include voice, fax and data products on a
non-exclusive basis. We also have entered into agreements with Thuraya service
providers to distribute our encryption equipment abroad.
In addition, we presently use a network of distributors in the security
field and original equipment manufacturers which market our encryption products
on a non-exclusive basis. These distributors, along with our internal marketing
group, have sold and marketed our encryption products to multinational
corporations, U.S. and foreign governments and local and federal law enforcement
agencies.
We continue to provide training and technical support to our customers and
to our distributors and dealers.
Customers
- ---------
During Fiscal 2007, we recognized $240,000 in net sales from DISC,
approximately 49% of our total net sales, and approximately $143,000 in net
sales from Delta Bridge, Inc, approximately 29% of total net sales. During
fiscal 2006, we recognized approximately $204,000 in net sales from GloCall
Middle East FZE, a subsidiary of France Telecom Mobile Satellite Communications
and a Thuraya service provider, approximately 40% of our total net sales. During
fiscal 2005, we recognized approximately $339,000 in net sales from The Boeing
Company, approximately 77% of our total net sales. All of such sales were in our
Encryption Products and Services Segment.
Competition
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The market for encryption products and flat panel displays worldwide is
highly competitive and subject to technological changes.
7
Although successful product and systems development is not necessarily dependent
on substantial financial resources, most of our competitors are larger than us
and possess financial, research, service support, marketing, manufacturing and
other resources significantly greater than ours.
There are several other companies that sell hardware and/or software
encryption products and there are many large companies that sell flat panel
displays. We believe, however, that the technology contained in our encryption
products and our flat panel displays have features that distinguish them from
the products being sold by our competitors. The encryption security and flat
panel display markets are likely to be characterized by rapid advances in
technology and the continuing introduction of new products that could render our
products obsolete or non-competitive. We cannot give you any assurance that we
will be able to compete successfully in the market for our encryption products
and our flat panel displays.
Patents
- -------
We have received patents from the United States and certain foreign patent
offices, expiring at various dates between 2009 and 2024. We have also filed or
are planning to file patent applications for our display technologies and for
our encryption technologies.
We have received from the U.S. patent office patents for six variations of
our video display technology. We have also received patents related to the
design, structure and method of construction of the E-Paper(TM) flat panel
display, methods of operating the display, particle generation, applications
using the E-Paper(TM) flat panel display, and for our solid state and thin film
video color display. In addition, one of our patent applications describing our
display technology has been published. We have received from the U.S. patent
office six patents related to our encryption technology.
We cannot assure you that patents will be issued for any of our pending
applications. In addition, we cannot assure you that any patents held or
obtained will sufficiently protect us against our competitors. We are not aware
that any of our encryption products are infringing upon the patents of others.
We cannot assure you, however, that other products developed by us, if any, will
not infringe upon the patents of others, or that we will not have to obtain
licenses under the patents of others, although we are not aware of any such
infringement at this time.
We believe that the foregoing patents are significant to our future
operations.
Research and Development
- ------------------------
Research and development expenses were approximately $3,404,000,
$4,614,000, and $2,267,000 for the fiscal years ended October 31, 2007, 2006 and
2005, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below and our Financial Statements.
8
Employees and Consultants
- -------------------------
We had 20 full-t-ime and 1 part-time employees and 12 consultants as of
October 31, 2007. Nineteen of these individuals, including our Chairman of the
Board and Chief Executive Office and our President, are engaged in research and
development. Their backgrounds include expertise in physics, chemistry, optics
and electronics. Six 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 1A. Risk Factors.
-------------
Our business involves a high degree of risk and uncertainty, including the
following risks and uncertainties:
o We have experienced significant net losses and negative cash flows from
operations and they may continue.
We have had net losses and negative cash flows from operations in each year
since our inception, and we may continue to incur substantial losses and
experience substantial negative cash flows from operations. We have incurred
substantial costs and expenses in developing our encryption and flat panel
display technologies and in our efforts to produce commercially marketable
products incorporating our technology. We have had limited sales of products to
support our operations from inception through October 31, 2007. 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, 2007:
Fiscal Years Ended October 31,
------------------------------
2007 2006 2005
---- ---- ----
Net loss................................................ $5,458,218 $7,600,901 $4,451,257
Research and development expenses....................... 3,403,943 4,614,300 2,266,911
Net cash used in operations............................. 2,396,859 1,847,108 1,720,332
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.
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. We believe that our
existing cash, cash equivalents, short-term investments and accounts receivable,
together with cash flows from expected sales of our encryption products and
revenue relating to our thin, flat, low-voltage phosphor display technology,
including license fees we expect to receive from Videocon after Videocon has
obtained the necessary regulatory approvals in India for such payments, 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
2009. 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 2009.
9
The sale of additional equity securities or convertible debt could result
in dilution to our stockholders. We currently have no arrangements with
respect to additional financing. There can be no assurance that we will
generate sufficient revenues in the future (through sales or otherwise) to
improve our liquidity or sustain future operations, that the necessary
regulatory approvals in India for payments of license fees by Videocon to
us will be obtained, that our production capabilities will be adequate,
that other products will not be produced by other companies that will
render our products obsolete, or that other sources of funding would be
available, if needed, on favorable terms or at all. If we cannot obtain
such funds if needed, we would need to curtail or cease some or all of our
operations.
o We may not generate sufficient revenue to support our operations in the
future or to generate profits.
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 pursued and are continuing to pursue marketing and
licensing opportunities for our display technology. To date we have not received
any revenue from sales or licensing of our display technology; however,
commencing in fiscal 2008 we expect to receive license fees from Videocon after
Videocon has obtained the necessary regulatory approvals in India for such
payments. 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 Videocon obtaining approval from the Indian government for the
payment of the license fees and royalties to us under the License
Agreement.
o Our and Videocon's ability to implement our technology for Videocon to
produce and market products containing our displays.
o The capability of Volga Svet Ltd. ("Volga"), a Russian display company
that we have been working with for ten years, to produce color and
monochrome displays and supply them to us.
o Our ability to successfully market our line of encryption products.
10
o Our production capabilities and those of our suppliers as required for
the production of our encryption products.
o Long-term performance of our products.
o The capability of our dealers and distributors to adequately service
our encryption products.
o Our ability to maintain an acceptable pricing level to end-users for
both our encryption and display products.
o The ability of suppliers to meet our requirements and schedule.
o Our ability to successfully develop other new products under
development.
o Rapidly changing consumer preferences.
o The possible development of competitive products that could render our
products obsolete or unmarketable.
o Our future negotiations with Volga with respect to payments and other
arrangements 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 Our arrangements with Videocon involve market risks.
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 (the "CopyTele
Shares"), and a subsidiary of ours, CopyTele International, entered into a GDR
Purchase Agreement to purchase 1,495,845 GDRs of Videocon (the "Videocon GDRs").
The Videocon GDRs are listed on the Luxembourg Stock Exchange. The value of the
Videocon GDRs owned by us depends upon, among other things, the value of
Videocon's securities in its home market of India, as well as exchange rates
between the U.S. dollar and Indian rupee (the currency in which Videocon's
securities are traded in its home market).
In addition, for the purpose of effecting a lock up of the Videocon GDRs
and CopyTele Shares (collectively, the "Securities") for a period of seven
years, and therefore restricting both parties from selling or transferring the
Securities during such period, CopyTele International and Mars Overseas have
entered into two Loan and Pledge Agreements. The Videocon GDRs are to be held as
security for a loan in principal amount of $5,000,000 from Mars Overseas to
CopyTele International, and the CopyTele Shares are similarly held as security
for a loan in principal amount of $5,000,000 from CopyTele International to Mars
Overseas. The loans are for a term of seven years and do not bear interest. The
loan agreements also provide for customary events of default which may result in
forfeiture of the Securities by the defaulting party. There can be no assurance
that the respective parties receiving such loans will not default on such loan.
11
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. We do not have employment agreements with,
nor do we maintain "key person" life insurance on, either Mr. Krusos or Mr.
DiSanto. The loss of the services of any such persons could have a material
adverse effect on our business and operating results.
o The very competitive markets for our encryption products and flat
panel display technology could have a harmful effect on our business
and operating results.
The markets for our encryption products and flat panel display technology
worldwide are highly competitive and subject to rapid technological changes.
Most of our competitors are larger than us and possess financial, research,
service support, marketing, manufacturing and other resources significantly
greater than ours. Competitive pressures may have a harmful effect on our
business and operating results.
o Our common stock is subject to the SEC's penny stock rules which may
make our shares more difficult to sell.
Our stock fits the definition of a penny stock. The SEC rules regarding
penny stocks may have the effect of reducing trading activity in our common
stock and making it more difficult for investors to sell their shares. The rules
require a broker to deliver a risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker must also give bid and offer quotations and broker and salesperson
compensation information to the customer orally or in writing prior to effecting
a transaction and in writing with the confirmation. The SEC rules also require a
broker to make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction before completion of the transaction. These
requirements may result in a lower trading volume of our common stock and lower
trading prices.
Item 1B. Unresolved Staff Comments.
--------------------------
None.
12
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 $270,000 per annum with a 3% annual increase and an
escalation clause for increases in certain operating costs. This lease does not
contain provisions for its renewal and management will continue to evaluate the
future adequacy of this facility. We anticipate securing a lease renewal for
this facility at the end of the lease term if we determine to remain there. See
Note 9 to our Financial Statements.
We believe that the facilities described above are adequate for our current
requirements.
Item 3. Legal Proceedings.
------------------
We are not a party to any material 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, 2007.
13
PART II
-------
Item 5. Market for the Registrant's Common Equity, Related Stockholder
--------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities.
--------------------------------------------------
Our common stock is traded on the Over-the-Counter Bulletin Board, under
the symbol "COPY". The high and low sales prices as reported by the
Over-the-Counter Bulletin Board for each quarterly fiscal period during our
fiscal years ended October 31, 2006 and 2007 have been as follows:
- -----------------------------------------------------------------------------------------------------------
Fiscal Period High Low
- -----------------------------------------------------------------------------------------------------------
1st quarter 2006 $1.06 $0.52
2nd quarter 2006 1.09 0.73
3rd quarter 2006 1.00 0.62
4th quarter 2006 0.70 0.51
- -----------------------------------------------------------------------------------------------------------
1st quarter 2007 1.01 0.50
2nd quarter 2007 0.94 0.56
3rd quarter 2007 0.75 0.46
4th quarter 2007 $0.96 $0.51
- -----------------------------------------------------------------------------------------------------------
As of January 10, 2008, the approximate number of record holders of our
common stock was 1,337 and the closing price of our common stock was $1.28 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.
14
Item 6. Selected Financial Data.
------------------------
The following selected financial data has been derived from our audited
Financial Statements and should be read in conjunction with those statements,
and the notes related thereto, which are included in this report.
-------------------------------------------------------------------
As of and for the years ended October 31,
-------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------------------------------------------------------------------------------------------------
Net Sales $ 486,852 $ 508,651 $ 439,785 $ 494,462 $ 244,221
----------------------------------------------------------------------------------------------------------
Cost of revenue -
Cost of goods and services sold 160,360 156,446 132,966 176,112 123,140
Provision for excess inventory - - 586,662 - 52,804
-------------------------------------------------------------------
Total cost of revenue 160,360 156,446 719,628 176,112 175,944
----------------------------------------------------------------------------------------------------------
Gross Profit (Loss) 326,492 352,205 (279,843) 318,350 68,277
----------------------------------------------------------------------------------------------------------
Research and Development Expenses 3,403,943 4,614,300 2,266,911 2,164,427 1,807,742
----------------------------------------------------------------------------------------------------------
Selling, General and Administrative 2,414,916 3,365,521 1,919,010 1,518,911 1,379,614
Expenses
----------------------------------------------------------------------------------------------------------
Interest Income 34,149 26,715 14,507 4,333 4,668
----------------------------------------------------------------------------------------------------------
Net Loss (5,458,218) (7,600,901) (4,451,257) (3,360,655) (3,114,411)
----------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock -
Basic and Diluted ($.05) ($.08) ($.05) ($.04) ($.04)
----------------------------------------------------------------------------------------------------------
Total Assets 1,870,159 1,863,629 1,466,253 2,316,050 2,330,491
----------------------------------------------------------------------------------------------------------
Long Term Obligations - - - - -
----------------------------------------------------------------------------------------------------------
Shareholders' Equity 1,191,350 1,281,841 1,118,023 1,872,930 1,988,206
----------------------------------------------------------------------------------------------------------
Cash Dividends Per Share of Common - - - - -
Stock
----------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
Forward-Looking Statements
- --------------------------
Information included in this Annual Report on Form 10-K may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes," "expects," "intends,"
"plans," "anticipates," "likely," "will," and similar expressions to identify
forward-looking statements. Such forward-looking statements, including those
concerning our expectations, involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These risks, uncertainties and factors include,
but are not limited to, those factors set forth in this Annual Report on Form
10-K under the heading "Item 1A. Risk Factors."
15
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 improves on our prior display technology. This
new proprietary display is a color phosphor based display having a unique low
voltage phosphor excitation system. 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.
On November 2, 2007, we entered into a Technology License Agreement (the
"License Agreement") with Videocon Industries Limited, an Indian company
("Videocon"). Under the License Agreement, we licensed to Videocon our
technology for thin, flat, low voltage phosphor displays, for Videocon (or a
Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing out technology. CopyTele and Videocon will
jointly cooperate to implement our technology into production displays.
Improvements to the technology will be jointly owned by CopyTele and Videocon,
and the parties will jointly decide whether to pursue patents for any
improvements. The license of our technology is non-transferable and worldwide.
Under the License Agreement, Videocon will pay us a license fee of US$ 11
million, payable in installments over a 27 month period. The first installment
of $2 million will be paid after the License Agreement is effective. The License
Agreement will be effective after Videocon has obtained the necessary regulatory
approvals in India for the payment of the license fees and royalties. Videocon
has filed for approval with the Indian government. Videocon will also pay us an
agreed upon royalty based on display sales by Videocon.
We will continue to have the right to produce and market, and to utilize
Volga Svet Ltd., a Russian display company that we have been working with for
more than ten years ("Volga"), and an Asian company that CopyTele has been
working with for more than four years, to produce and market, products utilizing
our technology. Additional licenses of our technology to third parties require
the joint agreement of CopyTele and Videocon.
In connection with the License Agreement, for the term of the license
granted under the License Agreement, Videocon and CopyTele will each appoint one
senior advisor to the other's board of directors to advise with respect to
strategic planning and technology in the display field.
16
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 "--Subsequent Events."
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 than 20% the power required by an LCD. This
low 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.
17
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. With Thuraya's
planned expansion, including the addition of another satellite next year,
Thuraya should continue its growth.
During fiscal 2007, we entered into a new three year agreement with Boeing.
Boeing now distributes 13 of our products, including our DCS-1400D (docker voice
encryption device), USS-900T (satellite fax encryption device), USS-900TL
(landline to satellite fax encryption device), USS-900WF (satellite and cellular
fax encryption device), USS-900WFL (landline to satellite and cellular fax
encryption device) and USS-900TC (satellite fax encryption to computer)
products, which were specifically designed for the Thuraya network. Boeing sells
these products under the brand name of Thuraya.
We are continuing to promote our Thuraya encryption solutions through other
Thuraya developers and resellers beside Boeing, including Asia Pacific Satellite
Industries ("APSI"). We offer a full line of voice, fax and data encryption
products that secure these communications, and our products are being used by
government agencies, military, and domestic and international non-governmental
organizations (NGOs) in the Middle East, Europe, Far East and Africa.
18
APSI has manufactured new Thuraya handsets and docking units that allow
satellite and GSM cellular communications both outdoors and indoors. CopyTele
and APSI have developed connecting cables and compatibility arrangements that
customers can easily set up and utilize to secure their communications over the
Thuraya network and which are compatible with landline telephone systems. APSI's
new FDU-3500 docking unit for its SO-2510 phone is now available in the market.
This unit allows for outdoor and indoor operation of the satellite phone on the
Thuraya network. Our new PA-3500 and PA-3500T products allow compatibility
between our DCS-1200, DCS-1400 and USS-900T encryption devices and the APSI
FDU-3500 docking unit and SO-2510 phone. We are working on further designs for
encrypting the SO-2510 phone that we believe will increase customer attraction
to security by reducing the size of the encryption unit and greatly improving
the customer's graphical interface.
Our products provide secure communications with many different satellite
phones, including the Thuraya 7100/7101/SO-2510 handheld terminal ("HHT"),
Globalstar GSP-1600 HHT, Telit SAT-550/600 HHT, Globalstar GSP-2800/2900 fixed
phone, Iridium 9500/9505/9505A HHT, Inmarsat M4 and Mini "M" HHT units from
Thrane & Thrane and Nera. Through the use of our products, encrypted satellite
communications are available for many Thuraya docking units, including
Teknobil's Next Thuraya Docker, Thuraya's Fixed Docking Adapter, APSI's FDU-2500
and FDU-3500 Fixed Docking Units, and Sattrans's SAT-OFFICE Fixed Docking Unit
and SAT-VDA Hands-Free Car Kit.
We have also added Voice over Internet Protocol (VoIP) functions to the
DCS-1200 for corporate utilization over popular new telephone systems.
In the commercial field, we licensed our encryption system for e-mail to
Digital Info Security Co Inc. ("DISC"), located in Westminster, Colorado. The
system, our DCS-2200, integrates into DISC's e-mail services and allows
companies to encrypt all e-mail transactions in a manner transparent to the
individual user.
In furtherance of our relationship with DISC, during fiscal 2006 we
acquired 7,200,000 shares of DISC's common stock. On November 27, 2006, we
acquired an additional 5,000,000 shares of DISC's common stock in exchange for
300,000 unregistered shares of our common stock. Accordingly, as of October 31,
2007, we held 12,200,000 shares of DISC's common stock, all of which were
restricted securities. DISC's common stock is not registered under the
Securities Exchange Act of 1934, but is quoted on the Pink Sheets. According to
DISC's most recent public financial report, as of September 30, 2007 we held
approximately 12% of the outstanding common stock of DISC. More information on
DISC can be obtained on their website www.disecurityco.com.
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.
19
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 in fiscal 2008 we expect to commence receiving license
fees from Videocon after Videocon has obtained the necessary regulatory
approvals in India for such payments. During the past year we have continued to
direct our encryption marketing efforts to participate in the security
opportunities created by the U.S. Department of Homeland Security, the Defense
Department, and the enactment of laws such as HIPAA, the Sarbanes-Oxley Act, and
Gramm-Leach-Bliley Act, which mandate that government and private sector firms
provide higher levels of information privacy and security. We have pursued and
are continuing to pursue marketing and licensing opportunities for our display
technology. To date we have not received any revenue from sales or licensing of
our display technology; however, commencing in fiscal 2008 we expect to receive
license fees from Videocon after Videocon has obtained the necessary regulatory
approvals in India for such payments. We anticipate that current cash on hand,
cash generated from operations, and cash generated from the exercise of employee
options will be adequate to fund our operations at least through the end of the
first quarter of fiscal 2009.
In reviewing Management's Discussion and Analysis of Financial Condition
and Results of Operations, you should refer to our Financial Statements and the
notes thereto.
Critical Accounting Policies
- ----------------------------
Our financial statements are prepared in conformity with accounting
principles generally accepted in the United State of America. As such, we are
required to make certain estimates, judgments and assumptions that management
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods.
We believe the following critical accounting polices affect the more
significant judgments and estimates used in the preparation of our financial
statements.
Revenue Recognition
-------------------
Revenues from sales are recorded when all four of the following criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred and title has transferred or services have been rendered; (iii) our
price to the buyer is fixed or determinable; and (iv) collectibility is
reasonably assured.
Inventories
-----------
Inventories are stated at the lower of cost, including material, labor and
overhead, determined on a first-in, first-out basis, or market, which represents
our best estimate of market value. We regularly review inventory quantities on
hand, particularly finished goods, and record a provision for excess and
obsolete inventory based primarily on forecasts of future product demand. During
fiscal 2005, we recorded a provision for excess inventory due to changes in
product requirements of approximately $587,000. Our net loss is directly
affected by management's estimate of the realizability of inventories. To date,
sales of our products have been limited. Accordingly, there can be no assurance
that we will not be required to reduce the selling price of our inventory below
our current carrying value in the future.
20
Stock-Based Compensation
------------------------
Prior to November 1, 2005, we accounted for stock options granted to
employees and directors using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees" ("APB Opinion No. 25") and complied with the disclosure provision
of Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock Based Compensation" and SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123". In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic value method and requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in the
statement of operations.
Effective November 1, 2005, we adopted SFAS No. 123R. Under the fair value
recognition provisions of SFAS No. 123R, stock-based compensation cost is
estimated at the grant date based on the fair value of the award and is
recognized as an expense ratably over the requisite service period of the award.
We recorded approximately $1,081,000 and $2,973,000 of stock-based compensation
expense, related to stock options granted to employees and directors, for the
years ended October 31, 2007 and 2006, respectively. Under the accounting method
we followed prior to November 1, 2005, we did not record any stock-based
compensation expense related to stock options granted to employees and directors
for the year ended October 31, 2005. If we had included the cost of employee
stock option compensation in the financial statements for the year ended October
31, 2005, our net loss would have increased by approximately $2,804,000 based on
the fair value of the stock options granted to employees. 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.
21
Results of Operations
- ---------------------
Fiscal Year Ended October 31, 2007 Compared to Fiscal Year Ended
----------------------------------------------------------------
October 31, 2006
----------------
Net Sales and Gross Profit
Net Sales. Net sales decreased by approximately $22,000 in fiscal 2007, to
approximately $487,000, as compared to approximately $509,000 in fiscal 2006.
All sales during both periods were from encryption products and services. The
decrease in net sales resulted from a reduction in unit sales of approximately
$131,000, to approximately $247,000, as compared to approximately $378,000 in
fiscal 2006, offset by an increase in revenue from encryption services of
$109,000, to $240,000, as compared to $131,000 in fiscal 2006. The revenue from
encryption services in both periods resulted from engineering services billed to
DISC. Our encryption sales have been limited and are sensitive to individual
large transactions. We believe that changes in sales of our encryption products
between periods generally represent the nature of the early stage of our product
and sales channel development. Revenue from sales of encryption services is
generally non-recurring due to the nature of the individual transactions.
Gross Profit. Gross profit from net sales of encryption products and
services decreased by approximately $26,000 in fiscal 2007, to approximately
$326,000, as compared to approximately $352,000 in fiscal 2006. The decrease in
gross profit is primarily due to the decrease in sales. Gross profit as a
percent of net sales in fiscal 2007 was approximately 67%, as compared to
approximately 69% in fiscal 2006. Because of the limited number of transactions
during each of the periods, gross profit percentages are sensitive to individual
transactions.
Research and Development Expenses
Research and development expenses decreased by approximately $1,210,000 in
fiscal 2007, to approximately $3,404,000, from approximately $4,614,000 in
fiscal 2006. The decrease in research and development expenses was principally
due to a decrease in employee stock option compensation expense of approximately
$1,421,000, to approximately $607,000 in fiscal 2007 compared to approximately
$2,028,000 in fiscal 2006, offset by an increase of approximately $153,000 in
outside research and development expense primarily relating to development of
our display technology and an increase in employee compensation, other than
stock option expense, and related costs of approximately $77,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$951,000 to approximately $2,415,000 in fiscal 2007 from approximately
$3,366,000 in fiscal 2006.
22
The decrease in selling, general and administrative expenses was principally due
to a decrease in employee stock option compensation expense of approximately
$471,000, to approximately $474,000 in fiscal 2007 compared to approximately
$945,000 in fiscal 2006, a decrease in professional fees of approximately
$312,000, a decrease in consulting services of approximately $118,000 and a
decrease in shareholder relations expense of approximately $64,000, offset by an
increase in employee compensation, other than stock option expense, and related
costs of approximately $59,000.
Interest Income
Interest income was approximately $34,000 in fiscal 2007, compared to
approximately $27,000 in the comparable prior-year period. The increase in
interest income was principally due to an increase in prevailing interest rates.
Fiscal Year Ended October 31, 2006 Compared to Fiscal Year Ended
----------------------------------------------------------------
October 31, 2005
----------------
Net Sales and Gross Profit
Net Sales. Net sales increased by approximately $69,000 in fiscal 2006, to
approximately $509,000, as compared to approximately $440,000 in fiscal 2005.
All sales during both periods were from encryption products and services. The
increase in net sales was due to an increase in revenue from encryption services
of approximately $71,000 to approximately $131,000 in fiscal 2006, offset by a
decrease in unit sales of encryption products of approximately $2,000 to
approximately $378,000 in fiscal 2006. The revenue from encryption services in
fiscal 2006 resulted from engineering services billed to DISC. Our encryption
sales have been limited and are sensitive to individual large transactions. We
believe that changes in sales of our encryption products between periods
generally represent the nature of the early stage of our product and sales
channel development. Revenue from sales of encryption services is generally
non-recurring due to the nature of the individual transactions.
Gross Profit (Loss). Gross profit (loss) from net sales of encryption
products and services increased by approximately $632,000 in fiscal 2006, to a
profit of approximately $352,000, as compared to a loss of approximately
$280,000 in fiscal 2005. The increase in gross profit is primarily the result of
the provision for excess inventory due to changes in product requirements of
approximately $587,000 recorded in fiscal 2005, compared to no such provision in
fiscal 2006, and the increased revenue from encryption services in fiscal 2006.
Gross profit as a percentage of net sales in fiscal 2006 was approximately 69%.
Gross profit (loss) as a percent of net sales in fiscal 2005 is not meaningful,
since we recorded a loss, due to the inventory adjustment during the year.
Because of the limited number of transactions during each of the periods, gross
profit percentages, excluding the effect of inventory adjustments, are sensitive
to individual transactions.
Research and Development Expenses
Research and development expenses increased by approximately $2,347,000 in
fiscal 2006, to approximately $4,614,000, from approximately $2,267,000 in
fiscal 2005.
23
The increase in research and development expenses was principally due to
employee stock option compensation expense of approximately $2,028,000 in fiscal
2006 compared to $-0- in fiscal 2005, an increase of approximately $157,000 in
outside research and development expense primarily relating to development of
our display technology, an increase in patent related expenses of approximately
$102,000 and an increase in employee compensation, other than stock option
expense, and related costs of approximately $68,000. The employee stock option
compensation expense included in our financial statements in fiscal 2006 is a
result of our adopting SFAS No. 123R, effective November 1, 2005.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$1,447,000 to approximately $3,366,000 in fiscal 2006 from approximately
$1,919,000 in fiscal 2005. The increase in selling, general and administrative
expenses was principally due to employee stock option compensation expense of
approximately $945,000 in fiscal 2006 compared to $-0- in fiscal 2005, an
increase in professional fees of approximately $372,000 and an increase in
employee compensation, other than stock option expense, and related costs of
approximately $112,000. The employee stock option compensation expense included
in our financial statements in fiscal 2006 is a result of our adopting SFAS No.
123R, effective November 1, 2005.
Interest Income
Interest income was approximately $27,000 in fiscal 2006, compared to
approximately $15,000 in the comparable prior-year period. The increase in
interest income was principally due to an increase in prevailing interest rates.
Liquidity and Capital Resources
- -------------------------------
From our inception, we have met our liquidity and capital expenditure needs
primarily through the proceeds from sales of common stock in our initial public
offering, in private placements, upon exercise of warrants issued in connection
with the private placements and public offering, and upon the exercise of stock
options. In 2001 and 2002, we also received payments under a technology
development agreement. In addition, commencing in the fourth quarter of fiscal
1999, we have generated cash flows from sales of our encryption products and in
fiscal 2008 we expect to commence receiving license fees from Videocon after
Videocon has obtained the necessary regulatory approvals in India for such
payments.
During fiscal 2007, our cash used in operating activities was approximately
$2,397,000. This resulted from payments to suppliers, employees and consultants
of approximately $2,808,000, which was offset by cash of approximately $377,000
received from collections of accounts receivable and other receivables related
to sales of encryption products and services, and approximately $34,000 of
interest income received.
24
Our cash used by investing activities during fiscal 2007 was approximately
$375,000, which resulted from purchases of short-term investments consisting of
certificates of deposit of approximately $825,000 and purchases of approximately
$13,000 of equipment, offset by approximately $463,000 received upon maturities
of short-term investments consisting of certificates of deposit. Our cash
provided by financing activities during fiscal 2007 of approximately $2,160,000
resulted from cash received upon the exercise of stock options. Accordingly,
during fiscal 2007 our cash and cash equivalents decreased by approximately
$613,000 and our short-term investments increased by approximately $362,000. As
a result, our cash, cash equivalents, and short-term investments, at October 31,
2007 decreased to approximately $1,069,000 from approximately $1,320,000 at the
end of fiscal 2006.
Accounts receivable increased by approximately $110,000 from approximately
$10,000 at the end of fiscal 2006 to $120,000 at October 31, 2007. The increase
in accounts receivable is a result of the timing of collections. Inventories
decreased approximately $69,000 from approximately $261,000 at October 31, 2006
to approximately $192,000 at October 31, 2007, as a result of the timing of
shipments and production schedules. Investments at cost increased to $417,000 at
October 31, 2007 compared to $207,000 at the end of fiscal 2006, due to an
additional non-cash investment in DISC. Accounts payable and accrued liabilities
increased by approximately $97,000 from approximately $582,000 at the end of
fiscal 2006 to approximately $679,000 at October 31, 2007, primarily as a result
of an increase in accrued salaries in fiscal 2007 of approximately $279,000
offset by a decrease in accounts payable of approximately $185,000. The decrease
in accounts payable was primarily due to a decrease in legal and auditing fees
payable and the timing of payments.
As a result of these changes, working capital at October 31, 2007 decreased
to approximately $737,000 from approximately $1,041,000 at the end of fiscal
2006.
Our working capital includes inventory of approximately $192,000 and
$261,000 at October 31, 2007 and 2006, respectively. Management has recorded our
inventory at the lower of cost or our current best estimate of net realizable
value. During fiscal 2005, we recorded a provision for excess inventory of
approximately $587,000 due to changes in product requirements. To date, sales of
our products have been limited. Accordingly, there can be no assurance that we
will not be required to reduce the selling price of our inventory below our
current carrying value.
During fiscal years ended October 31, 2007, 2006 and 2005, we issued shares
of common stock to certain employees for services rendered, principally in lieu
of cash compensation. We recorded compensation expense for the fiscal years
ended October 31, 2007, 2006 and 2005 of approximately $1,735,000, $1,897,000
and $1,822,000, respectively, for shares of common stock issued to employees. In
addition during fiscal 2007, 2006 and 2005, we issued shares of common stock to
consultants for services rendered. We recorded consulting expense for the fiscal
years ended October 31, 2007, 2006 and 2005 of approximately $182,000, $287,000
and $37,000, respectively, for shares of common stock issued to consultants.
We recorded approximately $1,081,000 and $2,973,000 of stock-based
compensation expense, related to stock options granted to employees and
directors, during the years ended October 31, 2007 and 2006, respectively, in
accordance with SFAS No. 123R.
25
Under the accounting method we followed prior to November 1, 2005, we did not
record any stock-based compensation expense related to stock options granted to
employees and directors for the year ended October 31, 2005. If we had included
the cost of employee stock option compensation in the financial statements for
the year ended October 31, 2005, our net loss would have increased by
approximately $2,804,000 based on the fair value of the stock options granted to
employees.
We believe that our existing cash, cash equivalents, short-term investments
and accounts receivable, together with cash flows from expected sales of our
encryption products and revenue relating to our thin, flat, low-voltage phosphor
display technology, including license fees we expect to receive from Videocon
after Videocon has obtained the necessary regulatory approvals in India for such
payments, 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 2009. 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 2009. The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing. There can be no assurance that we will generate sufficient revenues
in the future (through sales or otherwise) to improve our liquidity or sustain
future operations, that the necessary regulatory approvals in India for payments
of license fees by Videocon to us will be obtained, that our production
capabilities will be adequate, that other products will not be produced by other
companies that will render our products obsolete, or that other sources of
funding would be available, if needed, on favorable terms or at all. If we
cannot obtain such funds if needed, we would need to curtail or cease some or
all of our operations.
We are seeking to improve our liquidity through increased sales or license
of products and technology. In an effort to generate sales, we have marketed our
encryption products directly to U.S. and international distributors, dealers and
original equipment manufacturers that market our encryption products and to
end-users. We have been working with several large organizations to provide them
with both our hardware and software encryption solutions for them to evaluate
whether the solutions meet their security requirements and have begun supplying
several major U.S. companies with our encryption products. We have pursued and
are continuing to pursue marketing and licensing opportunities for our display
technology. To date we have not received any revenue from sales or licensing of
our display technology; however, commencing in fiscal 2008 we expect to receive
license fees from Videocon after Videocon has obtained the necessary regulatory
approvals in India for such payments. During fiscal 2007, we have recognized
revenue from sales of encryption products and services of approximately
$487,000.
26
The following table presents our expected cash requirements for contractual
obligations outstanding as of October 31, 2007:
Payments Due by Period
----------------------
Less
Contractual than 1-3 4-5 After
Obligations 1 year years years 5 years Total
- ------------------------- ------------- -------------- ------------ ------------- -------------
Consulting Agreement $ 43,000 - - - $ 43,000
Noncancelable
Operating Leases $ 277,000 $ 23,000 - - $ 300,000
------------- -------------- ------------ ------------- -------------
Total Contractual
Cash Obligations $ 320,000 $ 23,000 - - $ 343,000
============= ============== ============ ============= =============
We have no variable interest entities or other off-balance sheet obligation
arrangements.
Effect of Recent Accounting Pronouncements
- ------------------------------------------
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprise's financial statements. The interpretation requires
that the Company determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authority.
If a tax position meets the more likely than not recognition criteria, FIN 48
requires the tax position be measured at the largest amount of benefit greater
than 50 percent likely of being realized upon ultimate settlement. This
accounting standard is effective for fiscal years beginning after December 15,
2006. We are currently evaluating the effect, if any, that the adoption of FIN
48 will have on our financial statements.
In September 2006, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides interpretative guidance on how
public companies quantify financial statement misstatements. There have been two
common approaches used to quantify such errors. Under an income statement
approach (the "roll-over" method) the error is quantified as the amount by which
the current year income statement is misstated. Alternatively, under a balance
sheet approach (the "iron curtain" method) the error is quantified as the
cumulative amount by which the current year balance sheet is misstated. In SAB
No. 108, the SEC established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatements on
each of the company's financial statements and the related financial statement
disclosures. This model is commonly referred to as a "dual approach" because it
requires quantification of errors under both the roll-over and iron curtain
methods. SAB No. 108 is effective for annual financial statements covering the
first fiscal year ending after November 15, 2006. The adoption of SAB No. 108
did not have a material effect on our financial statements.
27
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the effect, if any, that the adoption of SFAS 157 will
have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 159 will have on our financial statements.
Subsequent Events
- -----------------
On November 2, 2007, we entered into the License Agreement with 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, with the first installment of $2 million payable 15 days after the
License Agreement is effective. The License Agreement will be effective after
Videocon has obtained the necessary regulatory approvals in India for the
payment of the license fees and royalties and may be terminated if the required
approvals are not obtained in a reasonable period of time. We will also receive
an agreed upon royalty from Videocon based on display sales by Videocon.
We will continue to have the right to produce and market, and to utilize
Volga and an Asian company that we have been working with for more than four
years, to produce and market, products utilizing the Licensed Technology.
Additional licenses of the Licensed Technology to third parties require our
joint agreement with Videocon.
On November 2, 2007, we also entered into a Share Subscription Agreement
(the "Subscription Agreement") with Mars Overseas, an affiliate of Videocon.
Under the Subscription Agreement, Mars Overseas agreed to purchase from us
20,000,000 shares of our common stock (the "CopyTele Shares") for an aggregate
purchase price of $16,200,000. The purchase of the CopyTele Shares pursuant to
the Subscription Agreement closed on November 6, 2007.
28
Also on November 2, 2007, our wholly-owned British Virgin Islands
subsidiary, CopyTele International, entered into a GDR Purchase Agreement (the
"Purchase Agreement") with Global EPC Ventures Limited ("Global"), for CopyTele
International to purchase from Global 1,495,845 GDRs of Videocon (the "Videocon
GDRs") for an aggregate purchase price of $16,200,000. Videocon's GDRs are
listed on the Luxembourg Stock Exchange. The purchase of the Videocon GDRs
pursuant to the Purchase Agreement closed on December 19, 2007.
For the purpose of effecting a lock up of the Videocon GDRs and CopyTele
Shares (collectively, the "Securities") for a period of seven years, and
therefore restricting both parties from selling or transferring the Securities
during such period, CopyTele International and Mars Overseas have entered into
two Loan and Pledge Agreements dated November 2, 2007. The Videocon GDRs are to
be held as security for a loan in principal amount of $5,000,000 from Mars
Overseas to CopyTele International, and the CopyTele Shares are similarly held
as security for a loan in principal amount of $5,000,000 from CopyTele
International to Mars Overseas. The loans are for a term of seven years and do
not bear interest. Prepayment of each loan requires payment of a premium by the
borrower and, in any event, the lien on the Securities securing the loan which
is prepaid will not be released until the seventh anniversary of the closing of
the loans and the prepaid amount would be held in escrow until such date. The
loan agreements required the parties to enter into an escrow agreement under
which the parties deposited the Securities with an escrow agent for the term of
the loans. The loan agreements also provide for customary events of default
which may result in forfeiture of the Securities by the defaulting party. The
loan agreements also provide for the transfer to the respective parties, free
and clear of any encumbrances under the agreements, any dividends,
distributions, rights or other proceeds or benefits received by the escrow agent
in respect of Securities. The closing of the loans took place on December 19,
2007.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
As of October 31, 2007, we had investments 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.
29
Item 9A. Controls and Procedures
-----------------------
Disclosure Controls and Procedures
- ----------------------------------
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman of the Board and Chief
Executive Officer and our Chief Financial Officer and Vice President - Finance,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chairman of the Board and Chief
Executive Officer and the Chief Financial Officer and Vice President - Finance
concluded that our disclosure controls and procedures were effective as of the
end of fiscal 2007.
Management's Report on Internal Control Over Financial Reporting
- ----------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in the
Securities and Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
Our management has assessed the effectiveness of our internal control over
financial reporting as of October 31, 2007. This assessment of our internal
control over financial reporting used the criteria for effective internal
control established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our management concluded that our internal control over financial
reporting was effective as of October 31, 2007.
The effectiveness of our internal control over financial reporting as of
October 31, 2007, has been audited by Grant Thornton LLP, an independent
registered public accounting firm, as stated in their report below.
Change in Internal Control Over Financial Reporting
- ---------------------------------------------------
There was no change in our internal control over financial reporting during
the fourth quarter of fiscal 2007 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CopyTele, Inc. and Subsidiaries
We have audited the effectiveness of CopyTele, Inc. and Subsidiaries' (the
"Company") internal control over financial reporting as of October 31, 2007,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, CopyTele, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of October 31,
2007, based on criteria established in Internal Control -- Integrated Framework
issued by COSO.
31
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of October 31, 2007 and 2006, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 2007 and our report dated January
14, 2008 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Melville, New York
January 14, 2008
Item 9B. Other Information.
------------------
None.
32
PART III
--------
Item 10. Directors, Executive Officers and Corporate Governance.
-------------------------------------------------------
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
Principal Occupation Officer Since
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos Director, Chairman of the Board and Chief 80 1982
Executive Officer
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 83 1982
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms Director, Chief Financial Officer and Vice 62 2000
President - Finance
- -----------------------------------------------------------------------------------------------------------
George P. Larounis Director 79 1997
- -----------------------------------------------------------------------------------------------------------
Mr. Krusos has served as one of our Directors and as our Chairman of the
Board and Chief Executive Officer since November 1982. He holds an M.S.E.E.
degree from Newark College of Engineering, a B.E.E. degree from City College of
New York and a J.D. degree from St. John's University.
Mr. DiSanto has served as one of our Directors and as our President since
November 1982. He holds a B.E.E. degree from Polytechnic Institute of Brooklyn
and an M.E.E. degree from New York University.
Mr. Herms has served as our Chief Financial Officer and Vice President -
Finance since November 2000 and as one of our Directors since August 2001. Mr.
Herms was also our Chief Financial Officer from 1982 to 1987. He is also a
former audit manager and CPA with the firm of Arthur Andersen LLP. He holds a
B.B.A. degree from Adelphi University.
Mr. Larounis has served as one of our Directors since September 1997, prior
to which he served as a consultant to us. Mr. Larounis is currently retired.
From 1960 to 1993, he held numerous positions as a senior international
executive of The Bendix Corporation and Allied Signal Inc., which is now known
as Honeywell International, Inc. He has also served on the Boards of Directors
of numerous affiliates of Allied Signal in Europe, Asia and Australia. He holds
a B.E.E. degree from the University of Michigan and a J.D. degree from New York
University.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors, executive officers and ten percent
stockholders to file initial reports of ownership and reports of changes in
ownership of our common stock with the Securities and Exchange Commission
("SEC").
33
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) reports were
made on a timely basis during fiscal year 2007, except that Frank J. DiSanto
failed to timely file reports with respect to eight transactions during the
period from November 1, 2006 through November 30, 2006. Such transactions
involved shares sold at the direction of Edward A. Ambrosino, a receiver for
certain of Mr. DiSanto's assets appointed in a divorce proceeding, pursuant to a
court order authorizing Mr. Ambrosino to cause the sale of such shares. Although
Mr. DiSanto made numerous requests of Mr. Ambrosino to provide the information
necessary for filing on a timely basis, the information was first provided by
Mr. Ambrosino on December 5, 2006, at which date Mr. DiSanto completed the
filing.
Code of Ethics
- --------------
In July 2005, our Board of Directors adopted a formal code of ethics that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar
functions. We will provide to any person without charge, upon request, a copy of
such code of ethics. Requests may be made in writing at CopyTele, Inc., 900 Walt
Whitman Road, Melville, New York 11747, Attn: Secretary, or by telephone at
631-549-5900.
Nomination Procedures
- ---------------------
There were no changes to the procedures by which security holders may
recommend nominations to our Board of Directors during our fiscal year 2007.
Audit Committee Financial Expert
- --------------------------------
The Securities and Exchange Commission has adopted rules implementing
Section 407 of the Sarbanes-Oxley Act of 2002 requiring public companies to
disclose information about "audit committee financial experts." We do not have a
standing Audit Committee. The functions of the Audit Committee have been assumed
by our full Board of Directors. Our Board of Directors has not concluded that
Mr. Larounis, the sole non-management director, meets the definition of "audit
committee financial expert." The Securities and Exchange Commission's rules do
not require us to have an audit committee financial expert, and our Board of
Directors has determined that it possesses sufficient financial expertise to
effectively discharge its obligations.
Item 11. Executive Compensation.
-----------------------
Compensation Discussion and Analysis
- ------------------------------------
The following provides an overview and analysis of our executive
compensation programs and policies:
34
Compensation Program Philosophy and Objectives
----------------------------------------------
Our vision is to develop, produce and market our thin, flat, low-voltage
phosphor display and the development, production and marketing of our
multi-functional encryption products that provide information security for
domestic and international users over virtually every communication media.
Competition for talented executives in the display and encryption industry is
intense. Our ability to attract and retain executives with the requisite skills
and experience to grow our business and achieve our business strategies is
crucial to our ability to realize this vision. Accordingly, we have designed our
executive compensation program to meet the following objectives:
o Attract, motivate and retain highly qualified executives;
o Align management interests with those of shareholders; and
o Reward and encourage superior performance.
To attain these objectives, our executive compensation program contains
both short-term and long term incentives rewarding individual and company
performance that generates returns for our shareholders.
Role of the Board of Directors
------------------------------
The Board of Directors is primarily responsible for overseeing our
compensation and employee benefit plans and practices. In determining the
compensation of our senior management, the Board of Directors decisions are
influenced by each individual's experience level and scope of responsibility,
and the overall performance of the Company and the individual.
The Board of Directors takes into account each person's performance in
helping the Company achieve certain goals, including the following: (i)
development of its flat panel technology, (ii) making business arrangements for
licensing its technology, (iii) development of encryption products, (iv) and
making business arrangements to license and market its encryption products. The
Board of Directors evaluates the performance of our Chief executive Officer, Mr.
Denis A. Krusos, directly. Mr. Krusos is not present during the Board of
Directors deliberations as to his compensation. With respect to senior
management other than Mr. Krusos, the Board of Directors relies upon the
recommendation of Mr. Krusos, as the person in the best position to judge the
respective performances of such individuals.
Because the market for talented executives is extremely competitive, the
Board of Directors also considers, from time to time, the form and amount of
compensation paid to executives of other companies, compiled from publicly
available information. While the Board of Directors can engage compensation
consultants to assist with this task, it did not engage any such consultants in
fiscal 2007. The Board of Directors does not target a specific benchmark for
compensation from the other companies whose compensation it reviews, but rather
uses the information in light of the other factors.
35
Elements of executive Compensation
----------------------------------
Our executive compensation consists primarily of two elements: base salary
and stock options under our stock equity incentive plans, which provides
long-term equity incentives.
Base Salary-
------------
We determine base salaries for our executives based on, among other things,
job responsibilities, their tenure with and individual contribution to the
Company, and their prior relevant background and experience. We also take
account competitive market data, but do not target base salary at any particular
level in comparison to the market. Our Board of Directors reviews base salaries
annually. To maintain flexibility, we do not target base salary at any
particular percent of total compensation.
Stock Options-
--------------
The Board of Directors believes it is important to provide our senior
management with stock-based incentive compensation that increases in value in
direct correlation with improvement in the performance of our common stock. This
aligns management's interests with those of our stockholders and supports the
creation of long-term shareholder value. The fundamental philosophy is to link
the amount of compensation for an executive to his or her contribution to the
Company's success in achieving financial and other objectives. In general, we
grant stock options under stock equity incentive plans to directors, officers,
and other employees upon commencement of their employment with us and
periodically thereafter. We generally grant stock options at regularly scheduled
Board meetings.
As with other elements of compensation, the Board of Directors considers a
combination of factors, such as job responsibility, individual contribution and
market competition, in establishing the amount of compensation provided by
options to each individual executive. Equity incentives are not set at any
particular percentage of total compensation.
The option awards are granted at an exercise price equal to the closing
price of common stock on the grant date (the date the grant is approved.)
Options for directors and officers generally vest on the date of grant or after
a 6 or 12 month period following the grant date, provided the grantee remains
employed on the vesting date, so that such compensation is at risk of forfeiture
based on the executive's continued service with us. The stock equity incentive
plans also provide for the award of restricted stock, although such awards have
not been used in any material respect. No restricted stock was awarded during
fiscal 2007.
Other Benefits-
---------------
We provide our executives with customary, board-based benefits that are
provided to all employees, including medical insurance, life, and disability
insurance.
36
We also provide our executives with certain perquisites which are not a
significant element of executive compensation.
Policy on Ownership of Stock and Options
----------------------------------------
We do not have any policy regarding levels of equity ownership (stock or
options) by our executive officers or directors.
Policy on Deductibility of Compensation
---------------------------------------
Section 162(m) of the Internal revenue Code limits the deductibility of
compensation in excess of $1 million paid to certain executive officers named in
the proxy statement, unless certain requirements are met. To maintain
flexibility in compensating executive officers in a manner designed to aid in
retention and promote varying corporate performance objectives, the Board of
Directors has not adopted a policy of meeting the section 162(m) requirements.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
As disclosed above, the Board of Directors is primarily responsible for
overseeing our compensation and employee benefit plans and practices. We do not
have a compensation committee or other Board committee that performs equivalent
functions.
Board of Directors Report on Executive Compensation
- ---------------------------------------------------
We have reviewed and discussed the above "Compensation Discussion and
Analysis" with management. Based upon this review and discussion, we have
recommended that the "Compensation Discussion and Analysis" be included in this
Annual Report on Form 10-K.
Denis A Krusos
Frank J. DiSanto
Henry P. Herms
George P. Larounis
Executive Compensation
- ----------------------
The following table sets forth certain information for our fiscal year
ended October 31, 2007, or fiscal 2007, with respect to compensation awarded to,
earned by or paid to our Chief Executive Officer and our Chief Financial Officer
(the "Named Executives"). No other executive officer received total compensation
in excess of $100,000 during fiscal 2007.
- -----------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
Option All Other Total
Name and Salary Awards Compensation Compensation
Principal Position Year ($) ($) (1) ($) (2) ($)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos, 2007 $250,000 $422,170 $28,532 $700,702
Chairman of the Board,
Chief Executive Officer and Director
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 2007 $100,000 $30,155 $14,300 $144,455
Chief Financial Officer, Vice
President- Finance and Director
- -----------------------------------------------------------------------------------------------------------
(1) Amounts in the Option Awards column represent the dollar
amounts recognized for financial statement reporting purposes for
fiscal 2007 for each Named Executive in accordance with Statement
of Financial Accounting Standards No. 123 (revised 2004). A
discussion of assumptions used in valuation of option awards may
be found in Note 2 to our Consolidated Financial Statements for
the year ended October 31, 2007, included elsewhere in this
Annual Report on Form 10-K.
(2) Amounts in the All Other Compensation column reflect, for
each Named Executive, the sum of the incremental cost to us of
all perquisites and personal benefits, which consisted solely of
auto allowance and related expenses for fiscal 2007.
37
The following table sets forth certain information with respect to grants
of stock options to the Named Executives during fiscal 2007:
- -----------------------------------------------------------------------------------------------------------
GRANTS OF PLAN BASED AWARDS
- -----------------------------------------------------------------------------------------------------------
All Other Option
Awards: Number of
Securities Underlying Exercise Price of Grant Date
Option Options Awards Fair Value
Name Grant Date (#) ($/Sh) ($)
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 11/26/06 700,000 $0.70 $422,170
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 11/26/06 50,000 $0.70 $30,155
- -----------------------------------------------------------------------------------------------------------
38
The following table sets forth certain information with respect to
unexercised stock options held by the Named Executives outstanding on October
31, 2007:
- -----------------------------------------------------------------------------------------------------------
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
- -----------------------------------------------------------------------------------------------------------
Option Awards (1)
- -----------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised
Options (#) Option Exercise Price
Name Exercisable ($) Option Expiration Date
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 300,000 $3.750 11/11/2007
300,000 $2.281 7/13/2008
50,000 $1.313 4/8/2009
250,000 $1.063 10/26/2010
250,000 $0.688 1/1/2011
250,000 $0.400 9/19/2011
500,000 $0.250 5/5/2013
500,000 $0.430 2/22/2014
250,000 $0.810 5/10/2014
1,000,000 $1.040 10/25/2014
1,500,000 $0.650 2/17/2015
1,000,000 $0.520 10/30/2015
1,000,000 $0.830 5/31/2016
700,000 $0.700 11/20/16
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 100,000 $0.938 11/19/2010
50,000 $0.688 1/1/2011
100,000 $0.400 9/19/2011
50,000 $0.810 5/10/2014
70,000 $1.040 10/25/2014
100,000 $0.650 2/17/2015
100,000 $0.520 10/30/2015
50,000 $0.830 5/31/2016
50,000 $0.700 11/20/2016
- -----------------------------------------------------------------------------------------------------------
(1) There are no un-exercisable stock options held by Named
Executives as of October 31, 2007.
39
The following table summarizes the exercise of stock options during fiscal
2007 by Named Executives:
- ----------------------------------------------------------------------------------------------------------
OPTION EXERCISES AND STOCK VESTED TABLE
- ----------------------------------------------------------------------------------------------------------
Name Option Awards
- ----------------------------------------------------------------------------------------------------------
Number of Shares Acquired Value Realized
on Exercise on Exercise
(#) ($) (1)
- ----------------------------------------------------------------------------------------------------------
Denis A. Krusos 1,000,000 $340,000
- ----------------------------------------------------------------------------------------------------------
Henry P. Herms 200,000 $68,000
- ----------------------------------------------------------------------------------------------------------
(1) The value realized on exercise is calculated based on the
difference between the exercise price of the options and the
market price of the stock at the time of exercise.
Director's Compensation
- -----------------------
There is no present arrangement for cash compensation of directors for
services in that capacity. Under the 2003 Share Incentive Plan, each
non-employee director is entitled to receive nonqualified stock options to
purchase 60,000 shares of common stock each year that such director is elected
to the Board of Directors. Since the Company did not hold a shareholder's
meeting during fiscal 2007, Mr. Larounis did not receive a stock option in
fiscal 2007 upon his election to the Board of Directors.
Our employee directors, Denis A. Krusos, Frank J. DiSanto and Henry P.
Herms do not receive any additional compensation for services provided as a
director. The following table sets forth compensation of George P. Larounis, our
sole non-employee director for fiscal 2007:
- ----------------------------------------------------------------------------------------------------------
DIRECTORS COMPENSATION
- ----------------------------------------------------------------------------------------------------------
All Other
Option Awards Compensation
Name ($) (1) ($)
- ----------------------------------------------------------------------------------------------------------
George P. Larounis $25,749 -
- ----------------------------------------------------------------------------------------------------------
(1) Amounts in the Option Awards column represent the dollar
amounts recognized for financial statement reporting purposes for
fiscal 2007 for Mr. Larounis in accordance with Statement of
Financial Accounting Standards No. 123 (revised 2004). These
amounts related to awards granted in prior years. A discussion of
assumptions used in valuation of option awards may be found in
Note 2 to our Consolidated Financial Statements for the year
ended October 31, 2007, included elsewhere in this Annual Report
on Form 10-K. At October 31, 2007, Mr. Larounis held unexercised
stock options to purchase 600,000 shares of our common stock.
40
Item 12. Security Ownership of Certain Beneficial Owners and Management
---------------------------------------------------------------
and Related Stockholder Matters.
--------------------------------
The following table sets forth certain information with respect to our
common stock beneficially owned as of January 10, 2008 by (a) each person who is
known by us to be the beneficial owner of more than 5% of our outstanding common
stock, (b) each of our directors and executive officers, and (c) all directors
and executive officers as a group:
- -----------------------------------------------------------------------------------------------------------
Amount and Nature of Beneficial Percent of
Name and Address of Beneficial Owner Ownership(1)(2) Class
===========================================================================================================
Mars Overseas Limited (3) 20,000,000 15.6%
P.O. Box 309, GI Ugland House
South Church Street, George Town
Grand Cayman, Cayman Islands
- -----------------------------------------------------------------------------------------------------------
Denis A. Krusos 9,719,880 7.16%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Frank J. DiSanto 1,443,000 1.11%
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
Henry P. Herms 881,575 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
George P. Larounis 620,000 *
900 Walt Whitman Road
Melville, NY 11747
- -----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group 12,664,455 9.15%
(4 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 7,550,000 shares, 1,443,000 shares, 670,000 shares,
600,000 shares and 10,263,000 shares which Denis A. Krusos, Frank J.
DiSanto, Henry P. Herms, George P. Larounis, and all directors and
executive officers as a group, respectively, have the right to acquire
within 60 days upon exercise of options granted pursuant to the 1993
Stock Option Plan, 2000 Share Incentive Plan and the 2003 Share
Incentive Plan.
(3) Based on the information provided in a Schedule 13G for such entity
filed with the Securities and Exchange Commission on November 9, 2007.
41
Equity Compensation Plan Information
- ------------------------------------
The following is information as of October 31, 2007 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 8 to Financial Statements for more information on these
plans.
Number of securities
Number of remaining available for
securities future issuance under
to be issued upon Weighted average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- -------------------------- ---------------------- ----------------------- --------------------------
(a) (b) (c)
Equity compensation 4,797,466 $1.64 21,508
plans approved by
security holders
Equity compensation 14,476,245 $0.74 10,345,087
plans not approved by
security holders
Total 19,273,711 $0.97 10,366,595
Item 13. Certain Relationships and Related Transactions, and Director
------------------------------------------------------------
Independence
------------
Related Person Transaction Approval Policy
Our Board of Directors review and approve all transactions between us and a
related person, to the extent required by applicable rules and regulations.
Generally, management would present to the Board of Directors for approval at
the next regularly scheduled Board meeting any related person transactions
proposed to be entered into by us.
Director Independence
Our Board of Directors oversees the activities of our management in the
handling of the business and affairs of our company. None of our directors are
"independent" under the rules applicable to the Nasdaq Stock Market.
Item 14. Principal Accountant Audit Fees and Services.
---------------------------------------------
The following table describes fees for professional audit services rendered
by Grant Thornton LLP, our present independent registered public accounting firm
and principal accountant, for the audit of our annual financial statements and
for other services for the years ended October 31, 2007, and 2006.
Type of Fee 2007 2006
----------- ---- ----
Audit Fees $ 272,620 $ 414,896
Audit Related Fees - -
Tax Fees - Tax consulting services 6,098 -
All Other Fees - -
--------- ---------
Total $ 278,718 $ 414,896
========= =========
42
Procedures For Board of Directors Pre-Approval of Audit and Permissible
- -----------------------------------------------------------------------
Non-Audit Services of Independent Auditor
- -----------------------------------------
Our Board of Directors is responsible for reviewing and approving, in
advance, any audit and any permissible non-audit engagement or relationship
between us and our independent registered public accounting firm. Grant Thornton
LLP's engagement to conduct our audit was approved by the Board of Directors on
September 10, 2007. We did not enter into any non-audit engagement or
relationship with Grant Thornton LLP during fiscal 2007.
43
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a)(1)(2) Financial Statement Schedules
-----------------------------
See accompanying "Index to Financial Statements."
(a)(3) Executive Compensation Plans and Arrangements
---------------------------------------------
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to
our Proxy Statement dated June 10, 1993).
Amendment No. 1 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 4(d) to our Form S-8 dated September 6,
1995).
Amendment No. 2 to CopyTele, Inc. 1993 Stock Option Plan
(filed as Exhibit 10.32 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1996).
CopyTele, Inc. 2000 Share Incentive Plan (filed as Annex A
of our Proxy Statement dated June 12, 2000).
Amendment No. 1 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 2001).
Amendment No. 2 to CopyTele, Inc. 2000 Share Incentive Plan
(filed as Exhibit 4(e) to our Form S-8 dated September 18,
2002).
CopyTele, Inc. 2003 Share Incentive Plan (filed as Exhibit 4
to our Form S-8 dated May 5, 2003).
Amendment No. 1 to the CopyTele, Inc. 2003 Share Incentive
Plan (filed as Exhibit 4(e) to our Form S-8 dated November
9, 2004).
Amendment No. 2 to the CopyTele, Inc. 2003 Share Incentive
Plan (filed as Exhibit 10.1 to our Quarterly Report on Form
10-Q for the fiscal quarter ended January 31, 2006).
Amendment No. 3 to the CopyTele, Inc. 2003 Share Incentive
Plan (filed as Exhibit 10.2 to our Quarterly Report on Form
10-Q for the fiscal quarter ended January 31, 2006).
44
Form of Stock Option Agreement under CopyTele, Inc. 2003
Share Incentive Plan (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31,
2004).
Form of Stock Award Agreement under CopyTele, Inc. 2003
Share Incentive Plan (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31,
2004).
(b) Exhibits
--------
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July 31,
1992 and to Form 10-Q for the fiscal quarter ended July 31,
1997.)
3.2 By-laws, as amended. (Incorporated by reference to Exhibit
3.2 to our Form 10-K for the fiscal year ended October 31,
2005.)
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.)
45
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated by
reference to Annex A of our Proxy Statement dated June 12,
2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share Incentive
Plan, adopted on July 6, 2001 and approved by shareholders
on August 16, 2001. (Incorporated by reference to Form 10-Q
for the fiscal quarter ended July 31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share Incentive
Plan, adopted on July 16, 2002 and approved by shareholders
on September 12, 2002. (Incorporated by reference to Exhibit
4(e) to our Form S-8 (Registration No. 333-99717) dated
September 18, 2002.)
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation
Agreement between CopyTele, Inc. and Volga Svet Ltd.
(Incorporated by reference to Exhibit 10.14 to our Form 10-K
for the fiscal year ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet Ltd.,
dated as of February 1, 2002. (Incorporated by reference to
Exhibit 10.15 to our Form 10-K for the fiscal year ended
October 31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan. (Incorporated by
reference to Exhibit 4 to our Form S-8 dated May 5, 2003).
10.14 Amendment No. 1 to the CopyTele, Inc. 2003 Share Incentive
Plan. (Incorporated by reference to Exhibit 4(e) to our Form
S-8 dated November 9, 2004).
10.15 Amendment No. 2 to the CopyTele, Inc. 2003 Share Incentive
Plan. (Incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2005).
10.16 Amendment No. 3 to the CopyTele, Inc. 2003 Share Incentive
Plan. (Incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2005).
10.17 Form of Stock Option Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 2004).
46
10.18 Form of Stock Award Agreement under CopyTele, Inc. 2003
Share Incentive Plan (Incorporated by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 2004).
10.19 Long Term Agreement dated May 23, 2007, between the Boeing
Company and CopyTele, Inc. (Incorporated by reference to
Exhibit 10.1 to our Form 8-K dated May 23, 2007.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated January
14, 2008. (Filed herewith.)
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated January
14, 20087. (Filed herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated January
14, 2008. (Filed herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section
1350 of Title 18 of the United States Code, dated January
14, 2008. (Filed herewith.)
47
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COPYTELE, INC.
By: /s/ Denis A. Krusos
-----------------------
Denis A. Krusos
Chairman of the Board and
January 14, 2008 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
January 14, 2008 Executive Officer)
By /s/ Frank J. DiSanto
-----------------------
Frank J. DiSanto
January 14, 2008 President and Director
By: /s/ Henry P. Herms
-----------------------
Henry P. Herms
Vice President - Finance,
Chief Financial Officer and
Director (Principal
Financial and Accounting
January 14, 2008 Officer)
By: /s/ George P. Larounis
-----------------------
George P. Larounis
January 14, 2008 Director
48
COPYTELE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2007
Page
---------------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of October 31, 2007 and 2006 F-2
Consolidated Statements of Operations for the years ended October 31, 2007, 2006 and 2005 F-3
Consolidated Statement of Shareholder' Equity for the years ended October 31, 2007, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the years ended October 31, 2007, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6 - F-24
Schedule of Valuation and Qualifying Accounts S-1
Additional information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or notes
thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Shareholders
CopyTele, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of CopyTele, Inc.
and Subsidiaries (the "Company") as of October 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended October 31, 2007. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CopyTele, Inc. and
Subsidiaries as of October 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2007, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation as of November 1,
2005.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II -- Valuation and Qualifying
Accounts is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of October 31, 2007, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated January 14, 2008 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
Melville, New York
January 14, 2008
F-1
COPYTELE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, October 31,
ASSETS 2007 2006
----------------------- ---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 669,141 $ 1,281,660
Short-term investments 400,000 38,000
Accounts receivable 120,000 10,165
Inventories 191,923 260,823
Prepaid expenses and other current assets 34,555 32,011
---------------- ----------------
Total current assets 1,415,619 1,622,659
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$2,140,675 and $2,130,786, respectively 26,653 23,083
INVESTMENT, at cost 417,000 207,000
OTHER ASSETS 10,887 10,887
---------------- ----------------
$ 1,870,159 $ 1,863,629
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 347,141 $ 532,707
Accrued liabilities 331,668 49,081
---------------- ----------------
Total current liabilities 678,809 581,788
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;
106,911,315 and 99,260,395 shares issued and outstanding, respectively 1,069,113 992,604
Additional paid-in capital 86,088,974 80,797,756
Accumulated deficit (85,966,737) (80,508,519)
---------------- ----------------
1,191,350 1,281,841
---------------- ----------------
$ 1,870,159 $ 1,863,629
================ ================
The accompanying notes are an integral part of these statements.
F-2
COPYTELE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31,
--------------------------------------------------
2007 2006 2005
--------------- --------------- ---------------
NET SALES
Sales of encryption products, net $ 246,852 $ 377,651 $ 379,785
Sales of encryption services, net 240,000 131,000 60,000
--------------- --------------- ---------------
Total net sales 486,852 508,651 439,785
--------------- --------------- ---------------
COST OF SALES
Cost of encryption products sold 73,953 104,672 112,321
Cost of encryption services sold 86,407 51,774 20,645
Provision for excess inventory - - 586,662
--------------- --------------- ---------------
Total costs of sales 160,360 156,446 719,628
--------------- --------------- ---------------
Gross profit (loss) 326,492 352,205 (279,843)
OPERATING EXPENSES
Research and development expenses 3,403,943 4,614,300 2,266,911
Selling, general and administrative expenses 2,414,916 3,365,521 1,919,010
--------------- --------------- ---------------
Total operating expenses 5,818,859 7,979,821 4,185,921
--------------- --------------- ---------------
LOSS FROM OPERATIONS (5,492,367) (7,627,616) (4,465,764)
INTEREST INCOME 34,149 26,715 14,507
--------------- --------------- ---------------
NET LOSS $ (5,458,218) $ (7,600,901) $ (4,451,257)
=============== =============== ===============
PER SHARE INFORMATION:
Net loss per share:
Basic and Diluted $ (.05 ) $ (.08 ) $ (.05 )
=============== =============== ===============
Shares used in computing net loss per share:
Basic and Diluted 103,487,032 95,291,780 88,480,379
=============== =============== ===============
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2007, 2006 AND 2005
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit
------------ ------------ ------------- ------------
BALANCE, October 31, 2004 85,523,253 $ 855,233 $ 69,474,058 $(68,456,361)
Stock option compensation to consultants - - 93,349 -
Common stock issued upon exercise of stock options under stock
option plans 3,083,800 30,838 1,597,762 -
Common stock issued to employees pursuant to stock incentive
plans 3,129,485 31,294 1,790,335 -
Common stock issued to consultants pursuant to stock incentive
plans 60,000 600 36,800 -
Unregistered common stock issued to consultants 179,000 1,790 113,582 -
Net loss - - - (4,451,257)
------------ ------------ ------------- ------------
BALANCE, October 31, 2005 91,975,538 919,755 73,105,886 (72,907,618)
Stock option compensation to employees - - 2,972,793 -
Stock option compensation to consultants - - 130,724 -
Common stock issued upon exercise of stock options under stock
option plans 4,147,725 41,478 2,339,021 -
Common stock issued to employees pursuant to stock incentive
plans 2,670,010 26,700 1,869,879 -
Common stock issued to consultants pursuant to stock incentive
plans 367,122 3,671 283,453 -
Unregistered common stock issued to Digital Info Security Co., Inc. 100,000 1,000 96,000 -
Net loss - - - (7,600,901)
------------ ------------ ------------- ------------
BALANCE, October 31, 2006 99,260,395 992,604 80,797,756 (80,508,519)
Stock option compensation to employees - - 1,080,882 -
Common stock issued upon exercise of stock options under stock
option plans 4,582,230 45,822 2,113,977 -
Common stock issued to employees pursuant to stock incentive
plans 2,528,365 25,284 1,709,657 -
Common stock issued to consultants pursuant to stock incentive
plans 240,325 2,403 179,702 -
Unregistered common stock issued to Digital Info Security Co., Inc. 300,000 3,000 207,000 -
Net loss - - - (5,458,218)
------------ ------------ ------------- ------------
BALANCE, October 31, 2007 106,911,315 $ 1,069,113 $ 86,088,974 $(85,966,737)
============ ============ ============= ============
The accompanying notes are an integral part of this statement.
F-4
COPYTELE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31,
------------------------------------------------
2007 2006 2005
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (2,808,025) $ (2,398,142) $ (2,216,270)
Cash received from customers 377,017 524,319 481,431
Interest received 34,149 26,715 14,507
-------------- ------------- -------------
Net cash used in operating activities (2,396,859) (1,847,108) (1,720,332)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments (certificates of deposit) 463,000 760,776 -
Disbursements to acquire short-term investments (certificates of deposit) (825,000) (398,000) (400,776)
Disbursements to acquire Digital Info Security Co., Inc. common stock - (110,000) -
Payments for purchases of property and equipment (13,459) (11,024) (3,752)
-------------- ------------- -------------
Net cash (used in) provided by investing activities (375,459) 241,752 (404,528)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,159,799 2,380,499 1,628,600
-------------- ------------- -------------
Net cash provided by financing activities 2,159,799 2,380,499 1,628,600
-------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (612,519) 775,143 (496,260)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,281,660 506,517 1,002,777
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 669,141 $ 1,281,660 $ 506,517
============== ============= =============
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $ (5,458,218) $ (7,600,901) $ (4,451,257)
Stock option compensation to employees 1,080,882 2,972,793 -
Stock option compensation to consultants - 130,724 93,349
Stock awards granted to employees pursuant to stock incentive plans 1,734,941 1,896,579 1,821,629
Stock awards granted to consultants pursuant to stock incentive plans 182,105 287,124 37,400
Provision for (recovery of) doubtful accounts and other receivables - 30,287 37,718
Provision for slow-moving inventory - - 586,662
Depreciation and amortization 9,889 15,072 14,706
Change in operating assets and liabilities:
Accounts receivable (109,835) 21,952 26,343
Inventories 68,900 124,173 27,771
Prepaid expenses and other current assets (2,544) 47,818 42,653
Other assets - (6,287) 22,212
Accounts payable and accrued liabilities 97,021 233,558 20,482
-------------- ------------- -------------
Net cash used in operating activities $ (2,396,859) $ (1,847,108) $ (1,720,332)
============== ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Unregistered common stock issued in connection with investment in
Digital Info Security Co., Inc. $ 210,000 $ 97,000 $ -
============== ============= =============
Unregistered common stock issued to settle a liability $ - $ - $ 115,372
============== ============= =============
The accompanying notes are an integral part of these statements.
F-5
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FUNDING
--------------------
Description of Business
- -----------------------
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.
Subsequent Event - Technology License Agreement with Videocon Industries Limited
- --------------------------------------------------------------------------------
On November 2, 2007, we entered into a Technology License Agreement (the
"License Agreement") with Videocon Industries Limited, an Indian company
("Videocon"). Under the License Agreement, we provide Videocon with a
non-transferable, worldwide license of our technology for thin, flat, low
voltage phosphor displays (the "Licensed Technology"), for Videocon (or a
Videocon Group company) to produce and market products, including TVs,
incorporating displays utilizing the Licensed Technology. Under the License
Agreement, we will receive a license fee of $11 million from Videocon, payable
in installments over a 27 month period, with the first installment of $2 million
payable 15 days after the License Agreement is effective. The License Agreement
will be effective after Videocon has obtained the necessary regulatory approvals
in India for the payment of the license fees and royalties and may be terminated
if the required approvals are not obtained in a reasonable period of time. We
will also receive an agreed upon royalty from Videocon based on display sales by
Videocon.
We will continue to have the right to produce and market, and to utilize
Volga Svet Ltd., a Russian display company that we have been working with for
more than ten years, and an Asian company that we have been working with for
more than four years, to produce and market, products utilizing the Licensed
Technology. Additional licenses of the Licensed Technology to third parties
require our joint agreement with Videocon.
On November 2, 2007, we also entered into a Share Subscription Agreement
(the "Subscription Agreement") with Mars Overseas Limited, an affiliate of
Videocon ("Mars Overseas"). Under the Subscription Agreement, Mars Overseas
agreed to purchase from us 20,000,000 shares of our common stock (the "CopyTele
Shares") for an aggregate purchase price of $16,200,000. The purchase of the
CopyTele Shares pursuant to the Subscription Agreement closed on November 6,
2007.
Also on November 2, 2007, our wholly-owned British Virgin Islands
subsidiary, CopyTele International Ltd. ("CopyTele International"), entered into
a GDR Purchase Agreement (the "Purchase Agreement") with Global EPC Ventures
Limited ("Global"), for CopyTele International to purchase from Global 1,495,845
global depository receipts of Videocon (the "Videocon GDRs") for an aggregate
purchase price of $16,200,000. Videocon's global depository receipts are listed
on the Luxembourg Stock Exchange. The purchase of the Videocon GDRs pursuant to
the Purchase Agreement closed on December 19, 2007.
For the purpose of effecting a lock up of the Videocon GDRs and CopyTele
Shares (collectively, the "Securities") for a period of seven years, and
therefore restricting both parties from selling or transferring the Securities
during such period, CopyTele International and Mars Overseas have entered into
two Loan and Pledge Agreements dated November 2, 2007. The Videocon GDRs are to
be held as security for a loan in principal amount of $5,000,000 from Mars
Overseas to CopyTele International, and the CopyTele Shares are similarly held
as security for a loan in principal amount of $5,000,000 from CopyTele
International to Mars Overseas.
F-6
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loans are for a term of seven years and do not bear interest. Prepayment of
each loan requires payment of a premium by the borrower and, in any event, the
lien on the Securities securing the prepaid loan will not be released until the
seventh anniversary of the closing of the loans and the prepaid amount would be
held in escrow until such date. The loan agreements required the parties to
enter into an escrow agreement under which the parties deposited the Securities
with an escrow agent for the term of the loans. The loan agreements also provide
for customary events of default which may result in forfeiture of the Securities
by the defaulting party. The loan and escrow agreements also provide for the
transfer to the respective parties, free and clear of any encumbrances under the
agreements, any dividends, distributions, rights or other proceeds or benefits
received by the escrow agent in respect of the Securities. The closing of the
loans took place on December 19, 2007.
Funding and Management's Plans
- ------------------------------
From our inception, we have met our liquidity and capital expenditure needs
primarily through the proceeds from sales of common stock in our initial public
offering, in private placements, upon exercise of warrants issued in connection
with the private placements and public offering, and upon the exercise of stock
options. In 2001 and 2002, we also received payments under a technology
development agreement. In addition, commencing in the fourth quarter of fiscal
1999, we have generated cash flows from sales of our encryption products and in
fiscal 2008 we expect to commence receiving license fees from Videocon after
Videocon has obtained the necessary regulatory approvals in India for such
payments.
Total employee compensation expense during fiscal 2007, 2006 and 2005 was
approximately $3,661,000, $5,416,000 and $2,264,000, respectively. During fiscal
2007, 2006 and 2005, a significant portion of employee compensation consisted
of the issuance of stock and stock options to employees in lieu of cash
compensation. We recorded compensation expense for the fiscal years ended
October 31, 2007, 2006 and 2005 of approximately $1,735,000, $1,897,000 and
$1,822,000, respectively, for shares of common stock issued to employees. We
recorded approximately $1,081,000 and $2,973,000 of stock-based compensation
expense, related to stock options granted to employees and directors, during the
years ended October 31, 2007 and 2006, respectively. Under the accounting method
we followed prior to November 1, 2005, we did not record any stock-based
compensation expense related to stock options granted to employees and directors
for the year ended October 31, 2005. If we had included the cost of employee
stock option compensation in the financial statements for the year ended October
31,2005, our net loss would have increased by approximately $2,804,000 based on
the fair value of the stock options granted to employees. It is managements'
intention to continue to compensate their employees by issuing stock or stock
options.
During fiscal 2007, our cash used in operating activities was approximately
$2,397,000. This resulted from payments to suppliers, employees and consultants
of approximately $2,808,000, which was offset by cash of approximately $377,000
received from collections of accounts receivable and other receivables related
to sales of encryption products and services, and approximately $34,000 of
interest income received. Our cash used by investing activities during fiscal
2007 was approximately $375,000, which resulted from purchases of short-term
investments consisting of certificates of deposit of approximately $825,000 and
purchases of approximately $13,000 of equipment, offset by approximately
$463,000 received upon maturities of short-term investments consisting of
certificates of deposit. Our cash provided by financing activities during fiscal
2007 of approximately $2,160,000 resulted from cash received upon the exercise
of stock options. Accordingly, during fiscal 2007 our cash and cash equivalents
decreased by approximately $613,000 and our short-term investments increased by
approximately $362,000. As a result, our cash, cash equivalents, and short-term
investments, at October 31, 2007 decreased to approximately $1,069,000 from
approximately $1,320,000 at the end of fiscal 2006.
F-7
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We believe that our existing cash, cash equivalents, short-term investments
and accounts receivable, together with cash flows from expected sales of our
encryption products and revenue relating to our thin, flat, low-voltage phosphor
display technology, including license fees we expect to receive from Videocon
once Videocon has obtained the necessary regulatory approvals in India for such
payments, 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 2009. 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 2009. The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing. There can be no assurance that we will generate sufficient revenues
in the future (through sales or otherwise) to improve our liquidity or sustain
future operations, that the necessary regulatory approvals in India for payments
of license fees by Videocon to us will be obtained, that our production
capabilities will be adequate, that other products will not be produced by other
companies that will render our products obsolete, or that other sources of
funding would be available, if needed, on favorable terms or at all. If we
cannot obtain such funds if needed, we would need to curtail or cease some or
all of our operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of CopyTele,
Inc. and its wholly owned subsidiaries, CopyTele International Ltd. and CopyTele
Marketing Inc. CopyTele International Ltd. and CopyTele Marketing Inc. were
incorporated in the British Virgin Islands on July 12, 2007 and September 5,
2007, respectively. As of October 31, 2007, both subsidiaries were inactive. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues from sales are recorded when all four of the following criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred and title has transferred or services have been rendered; (iii) our
price to the buyer is fixed or determinable; and (iv) collectibility is
reasonably assured.
Warranty Policy
- ---------------
We warrant that our products are free from defects in material and
workmanship for a period of one year from the date of initial purchase. The
warranty does not cover any losses or damage that occur as a result of improper
installation, misuse or neglect. Management has recorded a nominal amount of
warranty liability as of October 31, 2007 and 2006, based upon historical
experience and management's best estimate of future warranty claims.
F-8
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2007, 2006 and 2005, we did not pay any
interest or income taxes.
Short-term investments
- ----------------------
Short-term investments represent certificates of deposits, carried at
amortized cost, with maturities of less than twelve months. The fair values of
the certificates of deposits, including accrued interest, approximate their
carrying value due to their short maturities.
Accounts Receivable
- -------------------
Accounts receivable are stated at amounts due from customers net of an
allowance for doubtful accounts. Management reviews our accounts receivable for
potential doubtful accounts and maintains an allowance for estimated
uncollectible amounts. Accounts receivable are written off when they became
uncollectible.
Inventories
- -----------
Inventories are stated at the lower of cost, including material, labor and
overhead, determined on a first-in, first-out basis, or market, which represents
our best estimate of market value. We regularly review inventory quantities on
hand, particularly finished goods, and record a provision for excess and
obsolete inventory based primarily on forecasts of future product demand. During
fiscal 2005, we recorded a provision for excess inventory of approximately
$587,000 due to changes in product requirements. Our net loss was 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 less accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets,
primarily five years. We capitalize items in excess of $500. Minor replacements
and maintenance and repair items are charged to expense as incurred. Upon
disposal or retirement of assets, the cost and related accumulated depreciation
are removed from our balance sheet.
Investment Valuation
- --------------------
We monitor the value of our cost method 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.
Research and Development Expenses
- ---------------------------------
Research and development expenses are expensed in the year incurred.
F-9
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Expense
- -------------------
Advertising expense is included in the accompanying statements of
operations in selling, general and administrative expenses in the year incurred.
Advertising expense for the years ended October 31, 2007, 2006 and 2005, was
approximately $2,000, $27,000, and $-0-, respectively.
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
- ------------------------
We maintain stock equity incentive plans under which we may grant
non-qualified stock options, incentive stock options, stock appreciation rights,
stock awards, performance and performance-based awards, or stock units to
employees, non-employee directors and consultants.
Prior to November 1, 2005, we followed Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No.
148"), which addressed financial accounting and reporting for recording expenses
for the fair value of stock options. SFAS No. 148 required prominent disclosures
in financial statements about the effects of stock-based compensation and
provided alternative methods of transition for a voluntary change to fair
value-based method of accounting for stock-based employee compensation. SFAS No.
123 "Accounting for Stock Based Compensation" ("SFAS No. 123") encouraged but
did not require companies to record compensation cost for stock-based employee
compensation plans at fair value. During this period, we accounted for stock
options granted to employees and directors using the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") and complied with the
disclosure provisions of SFAS No. 123 and SFAS No. 148 through October 31, 2005.
Compensation cost for stock options issued to employees and directors was
measured as the excess, if any, of the quoted market price of our stock at the
date of grant over the amount an employee or director must pay to acquire the
stock. In accordance with APB Opinion No. 25, we did not recognize any
compensation cost for stock options issued to employees and directors for the
year ended October 31, 2005, as all option grants to employees and directors
during such periods were made at the fair market value of our stock on the date
of grant.
Had compensation cost for stock options granted to employees and directors
been determined at fair value, consistent with SFAS No. 123, our net loss and
net loss per share for the year ended October 31, 2005 would have increased to
the following adjusted amounts:
F-10
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended
October 31, 2005
-------------------
Net loss as reported $ (4,451,257)
Add: Total stock-based employee compensation expense, determined under
fair value based method, for all awards, net of related tax effect (2,804,466)
------------
Net loss as adjusted $ (7,255,723)
============
Net loss per share, basic and diluted:
As reported $ (0.05)
============
As adjusted $ (0.08)
============
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R") which addressed the accounting for share-based
payment transactions in which a company receives employee services in exchange
for either equity instruments of the company or liabilities that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R eliminated the ability to
account for share-based compensation transactions using the intrinsic value
method and requires, instead, that such transactions be accounted for using a
fair-value-based method and recognized as expense in the statement of
operations. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB No. 107") relating to SFAS No. 123R.
Effective November 1, 2005, the beginning of our first quarter of fiscal
2006, we adopted SFAS No. 123R. We have elected to use the modified prospective
transition method as permitted by SFAS No. 123R and therefore, our financial
statements for prior periods have not been restated to reflect, and do not
include, the effect of SFAS No. 123R. Under this transition method, we apply the
provisions of SFAS No. 123R to new awards and to awards modified, repurchased,
or cancelled after October 31, 2005. We recognize compensation expense for stock
option awards on a straight-line basis over the requisite service period of the
grant. Additionally, we recognize compensation cost for the portion of awards
that were outstanding, but for which the requisite service had not been rendered
(unvested awards), as of October 31, 2005, as the remaining service is rendered.
Stock Option Compensation Expense
---------------------------------
We recorded approximately $1,081,000 and $2,973,000 of stock-based
compensation expense, related to stock options granted to employees and
directors, during the years ended October 31, 2007 and 2006, respectively, in
accordance with SFAS No. 123R. Such compensation expense is included in the
accompanying statements of operations in either research and development
expenses or selling, general and administrative expenses, as applicable based on
the functions performed by such employees and directors. Such stock-based
compensation expense increased both basic and diluted net loss per share for the
years ended October 31, 2007 and 2006 by $0.01 and $0.03, respectively.
Included in the stock-based compensation cost related to stock options
granted to employees and directors recorded during the years ended October 31,
2007 and 2006 was approximately $26,000 and $19,000, respectively, of expense
related to the amortization of compensation cost for stock options granted in
prior periods but not yet vested. As of October 31, 2007, there was no
unrecognized compensation cost related to non-vested share-based compensation
arrangements.
F-11
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We account for options granted to non-employee consultants using the fair
value method required by SFAS No. 123R. We recognized consulting expense for
options granted to consultants, during the years ended October 31, 2007, 2006
and 2005, of approximately $ -0-, $131,000 and $93,000, respectively. Such
consulting expense is included in the accompanying statements of operations in
either research and development expenses or selling, general and administrative
expenses, as applicable based on the functions performed by such consultants.
Fair Value Determination
------------------------
In accordance with SFAS No. 123R, we estimate the fair value of stock
options granted to employees on the date of grant using the Black-Scholes
pricing model. We also used this method prior to the adoption of SFAS No. 123R
to estimate the fair value of stock options granted to employees for purposes of
the pro forma financial information set forth in our financial statements in
accordance with SFAS No. 123.
Upon the adoption of SFAS No. 123R, we separated the individuals we grant
stock options to into three relatively homogenous groups, based on exercise and
post-vesting employment termination behaviors. To determine the weighted average
fair value of stock options granted to employees on the date of grant, we take a
weighted average of the assumptions used for each of these groups. Stock options
granted during the years ended October 31, 2007 and 2006 consisted of awards of
options with either 5-year terms, which vested over one year, or 10-year terms,
which vested immediately.
We estimated the fair value of stock option awards using the following
assumptions:
For the Year Ended October 31,
----------------------------------------------------------
2005
2007 2006 (pro forma)
------------ -------------- -------------------
Expected term (in years) 3.0 2.9 2.5
Volatility 92% 98% 106%
Risk-free interest rate 4.64% 4.38% 3.75%
Dividend yield 0 0 0
Weighted average fair value at grant date $0.37 $0.43 $0.35
Discussion of assumptions for fair value of stock option awards under SFAS
No. 123R.
The expected term of stock options represents the weighted average period
the stock options are expected to remain outstanding. Because we consider our
options to be "plain vanilla", we estimated the expected term using a modified
version of the simplified method of calculation, as prescribed by SAB No. 107.
This modified calculation uses the actual life for options that have been
settled, and a uniform distribution assumption for the options still
outstanding. Under SAB No. 107, options are considered to be "plain vanilla" if
they have the following basic characteristics: granted "at-the-money";
exercisability is conditioned upon service through the vesting date; termination
of service prior to vesting results in forfeiture; limited exercise period
following termination of service; and options are non-transferable and
non-hedgeable
F-12
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We estimated the expected volatility of our shares of common stock based
upon the historical volatility of our share price over a period of time equal to
the expected life of the options.
We estimated the risk-free interest rate based on the implied yield
available on the applicable grant date of a U.S. Treasury note with a term equal
to the expected term of the underlying grants.
We made the dividend yield assumption based on our history of not paying
dividends and our expectation not to pay dividends in the future.
Under SFAS No. 123R, the amount of stock-based compensation expense
recognized is based on the portion of the awards that are ultimately expected to
vest. Accordingly, we have reduced the fair value of the stock option awards for
expected forfeitures, which are forfeitures of the unvested portion of
surrendered options. We estimated expected forfeitures based on our historical
experience.
Discussion of assumptions for fair value of stock option awards under SFAS
No. 123.
Prior to adoption of SFAS 123R, we used similar assumptions to estimate the
fair value of stock options granted to employees for purposes of the pro forma
financial information set forth in our Financial Statements in accordance with
SFAS No. 123, except that forfeitures were accounted for as they occurred and we
did not separate the individuals we grant options to into separate groups.
We will reconsider use of the Black-Scholes pricing model if additional
information becomes available in the future that indicates another model would
be more appropriate, or if grants issued in future periods have characteristics
that cannot be reasonably estimated using this model.
Net Loss Per Share of Common Stock
- ----------------------------------
In accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"),
basic net loss per common share ("Basic EPS") is computed by dividing net loss
by the weighted average number of common shares outstanding. Diluted net loss
per common share ("Diluted EPS") is computed by dividing net loss by the
weighted average number of common shares and dilutive common share equivalents
and convertible securities then outstanding. Diluted EPS for all years presented
is the same as Basic EPS, as the inclusion of the effect of common share
equivalents then outstanding would be anti-dilutive. For this reason, excluded
from the calculation of Diluted EPS for the years ended October 31, 2007, 2006
and 2005, were options to purchase 19,272,711 shares, 22,527,941 shares and
22,012,246 shares, respectively.
Fair Value of Financial Instruments
- -----------------------------------
In the opinion of management, the carrying value of all financial
instruments, consisting primarily of cash and cash equivalents, short-term
investments, accounts and other receivables and accounts payable, reflected in
the accompanying balance sheets, approximates fair value as of October 31, 2007
and 2006, due to their short term nature.
F-13
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with current
year presentation.
Effect of Recently Issued Pronouncements
- ----------------------------------------
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprise's financial statements. The interpretation requires
that the Company determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authority.
If a tax position meets the more likely than not recognition criteria, FIN 48
requires the tax position be measured at the largest amount of benefit greater
than 50 percent likely of being realized upon ultimate settlement. This
accounting standard is effective for fiscal years beginning after December 15,
2006. We are currently evaluating the effect, if any, that the adoption of FIN
48 will have on our financial statements.
In September 2006, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides interpretative guidance on how
public companies quantify financial statement misstatements. There have been two
common approaches used to quantify such errors. Under an income statement
approach (the "roll-over" method) the error is quantified as the amount by which
the current year income statement is misstated. Alternatively, under a balance
sheet approach (the "iron curtain" method) the error is quantified as the
cumulative amount by which the current year balance sheet is misstated. In SAB
No. 108, the SEC established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatements on
each of the company's financial statements and the related financial statement
disclosures. This model is commonly referred to as a "dual approach" because it
requires quantification of errors under both the roll-over and iron curtain
methods. SAB No. 108 is effective for annual financial statements covering the
first fiscal year ending after November 15, 2006. The adoption of SAB No. 108
did not have a material effect on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the effect, if any, that the adoption of SFAS 157 will
have on our financial statements.
F-14
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the effect, if any, that the adoption of
SFAS 159 will have on our financial statements.
3. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable from sales in the
ordinary course of business. Management reviews our accounts receivable and
other receivables for potential doubtful accounts and maintains an allowance for
estimated uncollectible amounts. Generally, no collateral is received from
customers for our accounts receivable. During fiscal 2007, two customers in the
Encryption Products and Services Segment represented 49% and 29%, respectively,
of total net sales. During fiscal 2006, two customers in the Encryption Products
and Services Segment represented 40% and 26%, respectively, of total net sales.
During fiscal 2005, one customer in the Encryption Products and Services Segment
represented 77% of total net sales. At October 31, 2007, one customer in the
Encryption Products and Services Segment represented 100% of net accounts
receivable. At October 31, 2006, two customers in the Encryption Products and
Services Segment represented 89% and 11%, respectively, of net accounts
receivable.
4. INVESTMENT IN AND RELATED PARTY TRANSACTIONS WITH DIGITAL
---------------------------------------------------------
INFO SECURITY CO., INC.
-----------------------
On February 13, 2006, we entered into a Software License and Distribution
Agreement (the "DISC License Agreement") to license to Digital Info Security Co.
Inc. ("DISC"), an encryption system that integrates our encryption technology
into DISC's e-mail services. The system allows companies to encrypt all e-mail
transactions in a manner transparent to the individual user. Concurrently with
entering into the DISC License Agreement with DISC, we acquired a minority
interest in DISC by exchanging 100,000 unregistered shares of our common stock
for 5,000,000 shares of DISC's common stock. On May 17, 2006 and July 14, 2006,
we purchased an additional 1,000,000 shares and 1,200,000 shares, respectively,
of DISC's common stock for $50,000 and $60,000 in cash, respectively. On
November 27, 2006, we acquired an additional 5,000,000 shares of DISC's common
stock in exchange for 300,000 unregistered shares of our common stock.
Accordingly, as of October 31, 2007, we held 12,200,000 shares of DISC's common
stock, all of which were restricted securities. DISC's common stock is not
registered under the Securities Exchange Act of 1934, but is quoted on the Pink
Sheets. According to DISC's most recent public financial report, as of September
30, 2007 we held approximately 12% of the outstanding common stock of DISC.
Our investment in DISC as of October 31, 2007, is recorded in the
accompanying consolidated balance sheet at cost of $417,000, based on the
closing price of our common stock on the dates we acquired DISC common stock in
exchange for our common stock, and the price paid for the shares purchased for
cash. Net sales for the years ended October 31, 2007 and 2006 included billings
to DISC for engineering services of $240,000 and $131,000, respectively.
Accounts receivable at October 31, 2007 include $120,000 from DISC.
F-15
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
-----------
Inventories consist of the following as of:
October 31,
---------------------------------
2007 2006
---------------- ---------------
Component parts $ 113,458 $ 117,040
Work-in-process 26,597 43,135
Finished products 51,868 100,648
---------------- ---------------
$ 191,923 $ 260,823
================ ===============
6. ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following as of:
October 31,
---------------------------------
2007 2006
---------------- ---------------
Accrued professional fees $ 24,600 $ 25,000
Accrued payroll and related expenses 289,564 10,888
Accrued other 17,504 13,193
---------------- ---------------
$ 331,668 $ 49,081
================ ===============
7. SHAREHOLDERS' EQUITY
--------------------
Common Stock Issuances
- ----------------------
We account for stock grants to employees and consultants based on their
grant date fair value. During the years ended October 31, 2007, 2006 and 2005,
we issued 2,528,365 shares, 2,670,010 shares and 3,129,485 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"). We recorded compensation expense for the years ended October
31, 2007, 2006 and 2005 of approximately $1,735,000, $1,897,000 and $1,822,000,
respectively, for shares of common stock issued to employees. In addition during
fiscal 2007, 2006 and 2005, we issued 240,325 shares, 367,122 shares and 60,000
shares, respectively, of common stock to consultants for services rendered
pursuant to the 2003 Share Plan. We recorded consulting expense for the years
ended October 31, 2007, 2006 and 2005 of approximately $ 182,000, $287,000 and
$37,000, respectively, for shares of common stock issued to consultants.
During the years ended October 31, 2007 and 2006, we issued 300,000 shares
and 100,000 shares, respectively, of unregistered common stock to acquire
Digital Info Security Co., Inc. common stock. During the year ended October 31,
2005, we issued 179,000 shares of unregistered common stock to settle a
liability of approximately $115,000.
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, 2007, 2006 and 2005, there is no preferred
stock issued and outstanding.
F-16
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
- ------------------
As of October 31, 2007, 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.
On July 14, 1993, our shareholders approved the 1993 Plan. The 1993 Plan
was amended as of May 3, 1995 and May 10, 1996 to, among other things, increase
the number of shares available for issuance thereunder from 6,000,000 shares to
20,000,000 shares, after giving consideration to stock splits. The 1993 Plan
provided for the granting of incentive stock options and stock appreciation
rights to key employees, and non-qualified stock options and stock appreciation
rights to key employees and consultants of the Company.
The 1993 Plan was administered by the Stock Option Committee, which
determined the option price, term and provisions of each option. However, the
purchase price of shares issuable upon the exercise of incentive stock options
could not be less than the fair market value of such shares at the date of grant
and incentive stock options are not exercisable for more than 10 years. Upon
approval of the 2000 Share Plan by our shareholders in July 2000, the 1993 Plan
was terminated with respect to the grant of future options. Since June 2004, the
1993 Plan has been administered by the Board of Directors.
Information regarding the 1993 Plan for the three years ended October 31,
2007 is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
------------ ---------------- ---------------
Shares Under Option at October 31, 2004 7,867,080 $3.72
Expired (1,078,500) $3.02
Exercised (70,000) $0.84
------------
Shares Under Option at October 31, 2005 6,718,580 $3.86
Expired (2,551,580) $5.05
------------
Shares Under Option at October 31, 2006 4,167,000 $3.13
Expired (1,553,000) $4.46
------------
Shares Under Option and Exercisable at October
31, 2007 2,614,000 $2.33 $-0-
============
The following table summarizes information about stock options outstanding
under the 1993 Plan as of October 31, 2007:
F-17
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
- ----------------------------------------------------------------------------------------------------------------------------
$0.84 to $1.56 784,000 2.04 $1.10 784,000 2.04 $1.10
$2.28 855,000 .70 $2.28 855,000 .70 $2.28
$3.38 975,000 .03 $3.38 975,000 .03 $3.38
The exercise price with respect to all of the options granted under the
1993 Plan, since its inception, was equal to the fair market value of the
underlying common stock at the grant date.
On July 25, 2000, our shareholders approved the 2000 Share Plan. The
maximum number of shares of common stock that may be granted was 5,000,000
shares. On July 6, 2001 and July 16, 2002, the 2000 Share Plan was amended by
our Board of Directors to increase the maximum number of shares of common stock
that may be granted to 10,000,000 shares and 15,000,000 shares, respectively.
These amendments were approved by our shareholders on August 16, 2001 and
September 12, 2002, respectively. The 2000 Share Plan provides for the grant of
incentive stock options, nonqualified stock options, stock appreciation rights,
stock awards, performance awards and stock units to key employees and
consultants of the Company.
The 2000 Share Plan was administered by the Stock Option Committee through
June 2004 and since that date has been administered by the Board of Directors,
which determines the option price, term and provisions of each option; however,
the purchase price of shares issuable upon the exercise of incentive stock
options will not be less than the fair market value of such shares at the date
of grant and incentive stock options will not be exercisable for more than 10
years.
Information regarding the 2000 Share Plan for the three years ended October
31, 2007 is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
------------ ----------------------- ---------------
Shares Under Option at October 31, 2004 2,852,466 $0.74
Forfeited (25,000) $0.82
Expired (20,000) $1.38
Exercised (19,000) $0.40
------------
Shares Under Option at October 31, 2005 2,788,466 $0.73
Expired (20,000) $0.74
Exercised (500,000) $0.42
------------
Shares Under Option at October 31, 2006 2,268,466 $0.80
Exercised (86,000) $0.39
------------
Shares Under Option and Exercisable at October
31, 2007 2,182,466 $0.82 $179,231
============
The following table summarizes information about stock options outstanding
under the 2000 Share Plan as of October 31, 2007:
F-18
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
------------------------------------------------------------------------------------------------------------
$0.40 445,000 3.89 $0.40 445,000 3.89 $0.40
$0.69 635,466 3.17 $0.69 635,466 3.17 $0.69
$0.94 - $1.09 1,102,000 2.93 $1.06 1,102,000 2.93 $1.06
The exercise price with respect to all of the options granted under the
2000 Share Plan since its inception, was equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 2007, 21,508 shares
were available for future grants under the 2000 Share Plan.
The 2003 Share Plan provides for the grant of nonqualified stock options,
stock appreciation rights, stock awards, performance awards and stock units to
key employees and consultants of the Company. The maximum number of shares of
common stock available for issuance under the 2003 Share Plan initially was
15,000,000 shares. On October 8, 2004, February 9, 2006 and August 22, 2007, the
2003 Plan was amended by our Board of Directors to increase the maximum number
of shares of common stock that may be granted to 30,000,000 shares, 45,000,000
shares and 55,000,000 shares, respectively. Current and future non-employee
directors are automatically granted nonqualified stock options to purchase
60,000 shares of common stock upon their initial election to the Board of
Directors and at the time of each subsequent annual meeting of our shareholders
at which they are elected to the Board of Directors. The 2003 Share Plan was
administered by the Stock Option Committee through June 2004 and since that date
has been administered by the Board of Directors, which determines the option
price, term and provisions of each option.
Information regarding the 2003 Share Plan for the three years ended October
31, 2007 is as follows:
Current Weighted
Average Exercise Aggregate
Shares Price Per Share Intrinsic Value
-------------- ---------------- ----------------
Shares Under Option at October 31, 2004 7,345,000 $0.63
Granted 8,195,000 $0.57
Forfeited (40,000) $0.93
Exercised (2,994,800) $0.52
--------------
Shares Under Option at October 31, 2005 12,505,200 $0.61
Granted 7,235,000 $0.76
Exercised (3,647,725) $0.59
--------------
Shares Under Option at October 31, 2006 16,092,475 $0.68
Granted 2,880,000 $0.66
Exercised (4,496,230) $0.47
--------------
Shares Under Option and Exercisable at October
31, 2007 14,476,245 $0.74 $2,269,489
==============
F-19
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
under the 2003 Share Plan as of October 31, 2007:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
------------------------------------------------------------------------------------------------------------
$0.25 - $0.46 1,305,000 5.99 $0.33 1,305,000 5.99 $0.33
$0.52 - $0.77 5,750,170 7.68 $0.63 5,750,170 7.68 $0.63
$0.81 - $1.07 7,421,075 7.77 $0.91 7,421,075 7.77 $0.91
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, 2007, 10,345,087
shares were available for future grants under the 2003 Share Plan.
8. 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
$270,000 per annum with a 3% annual increase and an escalation clause for
increases in certain operating costs. As of October 31, 2007, our noncancelable
operating lease commitments are approximately $300,000. This lease does not
contain provisions for its renewal.
Rent expense for the years ended October 31, 2007, 2006 and 2005, was
approximately $269,000, $261,000 and $252,000, respectively.
Consulting Agreement
- --------------------
In addition, as of October 31, 2007 we had commitments under a consulting
agreement of approximately $43,000, payable during the first quarter of fiscal
2008.
9. 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, 2007, 2006 and 2005.
F-20
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
------------
Income tax provision (benefit) consists of the following:
Year Ended October 31,
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Federal:
Current $ -- $ -- $ --
Deferred (1,505,000) (2,309,000) (1,200,000)
State:
Current -- --
Deferred 4,393,000 (340,000) (177,000)
Adjustment to valuation allowance related
to net deferred tax assets (2,888,000) 2,649,000 1,377,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at October 31, 2007 and 2006, are as
follows:
2007 2006
------------ ------------
Long-term deferred tax assets:
Barter Credits $ 999,000 $ 1,128,000
Federal and state NOL and tax credit carryforwards 35,435,000 38,321,000
Deferred Compensation 1,357,000 1,192,000
Other 250,000 288,000
------------ ------------
Subtotal 38,041,000 40,929,000
Less: valuation allowance (38,041,000) (40,929,000)
------------ ------------
Deferred tax asset, net $ -- $ --
============ ============
As of October 31, 2007, we had tax net operating loss and tax credit
carryforwards of approximately $93,941,000 and $2,039,000, respectively,
available, within statutory limits (expiring at various dates between 2008 and
2027), 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 $93,970,000 and $122,000, respectively, as of October 31, 2007,
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
2008 and 2027 and the tax credit carryforwards expire between 2008 and 2022.
We have provided a valuation allowance against our deferred tax asset
due to our current and historical pre-tax losses and the uncertainty regarding
their realizability. The primary differences from the Federal statutory rate of
34% and the effective rate of 1.88% is attributable to certain permanent
differences and a change in the valuation allowance. The following is a
reconciliation of income taxes at the Federal statutory tax rate to income tax
expense (benefit):
Year Ended October 31,
-----------------------------------------------------------------------
2007 2006 2005
--------------------- --------------------- ---------------------
Income tax benefit at U.S.
Federal statutory income $(1,854,000) 34% $(2,584,000) 34% $(1,513,000) 34%
tax rate
State income taxes (88,000) 1.62% (464,000) 6.10% (264,000) 5.93%
Permanent differences (228,000) 4.19% (49,000) (.64%) 36,000 (.81%)
Credits (117,000) 2.15% (100,000) 1.31% (73,000) 1.64%
Expiring net operating
losses and credits 728,000 (13.35%) 548,000 (7.21%) 437,000 (9.83%)
Change in New York State
tax law 4,447,000 (81.56%) -- 0% -- 0%
Change in valuation
allowance (2,888,000) 52.95% 2,649,000 (34.84%) 1,377,000 (30.93%)
----------- ----------- -----------
Income tax provision $ -- 0% $ -- 0% $ -- 0%
=========== =========== ===========
During the three years ended October 31, 2007, we incurred no Federal and no State
income taxes.
F-21
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT INFORMATION
-------------------
We follow the provisions of SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). Reportable operating
segments are determined based on management's approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. While our results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Flat-panel display and (ii)
Encryption products and services. The following represents selected financial
information for our segments for the years ended October 31, 2007, 2006 and
2005:
Encryption
Products and
Segment Data Flat-Panel Display Services Total
- ------------------------------------- -------------------- --------------------- ------------------
Year Ended October 31, 2007:
Net sales $ - $ 486,852 $ 486,852
Net loss (2,932,179) (2,526,039) (5,458,218)
Depreciation 4,743 5,146 9,889
Interest income 14,798 19,351 34,149
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 800,119 1,116,927 1,917,046
Total assets 547,409 1,322,750 1,870,159
Additions to long-lived assets 6,455 7,003 13,458
Year Ended October 31, 2006:
Net sales $ - $ 508,651 $ 508,651
Net loss (3,570,993) (4,029,908) (7,600,901)
Depreciation 6,769 8,303 15,072
Interest income 12,708 14,007 26,715
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 885,893 1,297,810 2,183,703
Total assets 619,590 1,244,039 1,863,629
Additions to long-lived assets 4,951 6,073 11,024
F-22
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Encryption
Products and
Segment Data Flat-Panel Display Services Total
- ------------------------------------- -------------------- --------------------- ------------------
Year Ended October 31, 2005:
Net sales $ - $ 439,785 $ 439,785
Net loss (1,764,610) (2,686,647) (4,451,257)
Depreciation 6,220 8,486 14,706
Interest income 5,793 8,714 14,507
Stock awards granted to
employees and consultants
pursuant to stock incentive
plans 661,425 1,197,604 1,859,029
Total assets 431,037 1,035,216 1,466,253
Additions to long-lived assets 1,587 2,165 3,752
Geographic Information
- ----------------------
We generate revenue both domestically (United States) and internationally.
International sales are based on the country in which our customer (distributor)
is located. For the years ended October 31, 2007, 2006 and 2005, and as of each
respective year-end, sales and accounts receivable by geographic area are as
follows:
Geographic Data 2007 2006 2005
- --------------------------------------------- -------------- --------------- ----------------
Net sales:
United States $ 447,940 $ 269,221 $ 409,521
United Arab Emirates - 204,325 -
Other International 38,912 35,105 30,264
-------------- --------------- ----------------
$ 486,852 $ 508,651 $ 439,785
============== =============== ================
Accounts receivable, net:
United States $ 120,000 $ 9,040 $ 32,117
International - 1,125 -
-------------- --------------- ----------------
$ 120,000 $ 10,165 $ 32,117
============== =============== ================
F-23
COPYTELE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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, 2007:
Income Statement Data:
Net sales $ 130,750 $ 96,427 $ 114,000 $ 145,675
Gross profit (loss) 89,554 60,820 77,038 99,080
Net loss (1,773,434) (1,431,896) (1,055,521) (1,197,367)
Net loss per share of common stock-
basic and diluted $ (0.02) $ (0.01) $ (0.01) $ (0.01)
Year Ended October 31, 2006:
Income Statement Data:
Net sales $ 195,390 $ 71,538 $ 130,845 $ 110,878
Gross profit 139,932 45,683 91,600 74,990
Net loss (1,239,557) (2,412,879) (2,147,275) (1,801,190)
Net loss per share of common stock-
basic and diluted $ (0.01) $ (0.03) $ (0.02) $ (0.02)
F-24
COPYTELE, INC. AND SUSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2007, 2006 AND 2005
- -----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions (1) end of period
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
2007
----
Allowance for $ - $ - $ - $ -
doubtful accounts
Reserve against $ 171,798 $ - $ - $ 171,798
other receivables
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
2006
----
Allowance for $ - $ - $ - $ -
doubtful accounts
Reserve against $ 141,511 $ 30,287 $ - $ 171,798
other receivables
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
2005
----
Allowance for $ 149,455 $ 5,000 $ 154,455 $ -
doubtful accounts
Reserve against $ 108,793 $ 41,340 $ 8,622 $ 141,511
other receivables
- -----------------------------------------------------------------------------------------------------------------------------
(1) Represents write-offs to reserved balances or reductions in allowances
previously provided.
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
S-1
EXHIBIT INDEX
-------------
No. Exhibit
- --- -------
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Form 10-Q for the fiscal quarter ended July 31, 1992
and to Form 10-Q for the fiscal quarter ended July 31, 1997.)
3.2 By-laws, as amended. (Incorporated by reference to Exhibit 3.2 to
Form 10-K for the fiscal year ended October 31, 2005.)
10.1 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28, 1993
and approved by shareholders on July 14, 1993. (Incorporated by
reference to Proxy Statement dated June 10, 1993.)
10.2 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved by shareholders on July 19,
1995. (Incorporated by reference to Form S-8 (Registration No.
33-62381) dated September 6, 1995.)
10.3 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved by shareholders on July 24,
1996. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.)
10.4 Agreement dated March 3, 1999 between Harris Corporation and
CopyTele, Inc. (Incorporated by reference to Form 10-Q for the
fiscal quarter ended January 31, 1999.)
10.5 Stock Subscription Agreement dated April 27, 1999, including form
of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-Q for the fiscal quarter
ended April 30, 1999.)
10.6 Agreement dated July 28, 1999, among CopyTele, Inc., Harris
Corporation and RF Communications. (Incorporated by reference to
Form 8-K dated July 28, 1999.)
10.7 Stock Subscription Agreement dated August 30, 1999, including
form of Warrant, between CopyTele, Inc. and Lewis H. Titterton.
(Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1999.)
10.8 CopyTele, Inc. 2000 Share Incentive Plan. (Incorporated by
reference to Annex A of our Proxy Statement dated June 12, 2000.)
10.9 Amendment No. 1 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 6, 2001 and approved by shareholders on August
16, 2001. (Incorporated by reference to Form 10-Q for the fiscal
quarter ended July 31, 2001.)
10.10 Amendment No. 2 to the CopyTele, Inc. 2000 Share Incentive Plan,
adopted on July 16, 2002 and approved by shareholders on
September 12, 2002. (Incorporated by reference to Exhibit 4(e) to
our Form S-8 (Registration No. 333-99717) dated September 18,
2002.)
10.11 Amendment, dated May 10, 2001, to the Joint Cooperation Agreement
between CopyTele, Inc. and Volga Svet Ltd. (Incorporated by
reference to Exhibit 10.14 to our Form 10-K for the fiscal year
ended October 31, 2001.)
10.12 Letter Agreement between CopyTele, Inc. and Volga Svet Ltd.,
dated as of February 1, 2002. (Incorporated by reference to
Exhibit 10.15 to our Form 10-K for the fiscal year ended October
31, 2001.)
10.13 CopyTele, Inc. 2003 Share Incentive Plan. (Incorporated by
reference to Exhibit 4 to our Form S-8 dated May 5, 2003).
10.14 Amendment No. 1 to the CopyTele, Inc. 2003 Share Incentive Plan.
(Incorporated by reference to Exhibit 4(e) to our Form S-8 dated
November 9, 2004).
10.15 Amendment No. 2 to the CopyTele, Inc. 2003 Share Incentive Plan.
(Incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended January 31,
2005).
10.16 Amendment No. 3 to the CopyTele, Inc. 2003 Share Incentive Plan.
(Incorporated by reference to Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended January 31,
2005).
10.17 Form of Stock Option Agreement under CopyTele, Inc. 2003 Share
Incentive Plan (Incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended July
31, 2004).
10.18 Form of Stock Award Agreement under CopyTele, Inc. 2003 Share
Incentive Plan (Incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended July
31, 2004).
10.19 Long Term Agreement dated May 23, 2007, between the Boeing
Company and CopyTele, Inc. (Incorporated by reference to Exhibit
10.1 to our Form 8-K dated May 23, 2007.)
23.1 Consent of Grant Thornton LLP. (Filed herewith.)
31.1 Certification of Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated January 14, 2008. (Filed
herewith.)
31.2 Certification of Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated January 14, 2008. (Filed
herewith.)
32.1 Statement of Chief Executive Officer, pursuant to Section 1350 of
Title 18 of the United States Code, January 14, 2008. (Filed
herewith.)
31.2 Statement of Chief Financial Officer, pursuant to Section 1350 of
Title 18 of the United States Code, January 14, 2008. (Filed
herewith.)