SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
------------------------------------------------
Commission file number 0-11254
--------------------------------------------------------
COPYTELE, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- ----------------------------- ----------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 549-5900
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, par value $.01 per share, outstanding as of
September 5, 1997: 57,810,176 shares
------------------
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of July 31, 1997 and
October 31, 1996
Condensed Statements of Operations (Unaudited)for the nine months ended
July 31, 1997 and July 31, 1996, and for the period from November 5,
1982 (Inception) through July 31, 1997
Condensed Statements of Operations (Unaudited) for the three months
ended July 31, 1997 and July 31, 1996
Condensed Statement of Shareholders' Equity (Unaudited) for the
period from November 5, 1982 (Inception) through July 31, 1997
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended July 31, 1997 and July 31, 1996, and for the period from
November 5, 1982 (Inception) through July 31, 1997
Condensed Statements of Cash Flows (Unaudited) for the three months
ended July 31, 1997 and July 31, 1996
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
Signatures.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED BALANCE SHEETS (UNAUDITED)
July 31, October 31,
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash (including cash equivalents and interest
bearing accounts of $15,293,882 and $21,921,133,
respectively) $ 15,810,924 $ 22,165,892
Accrued interest receivable 39,151 49,306
Prepaid expenses and other current assets (including
amounts due from Joint Venture of approximately
$3,378,000 and $240,000, respectively) 3,706,384 378,417
----------- -----------
19,556,459 22,593,615
PROPERTY AND EQUIPMENT ( net of accumulated depreciation
and amortization of $1,000,611 and $816,651,
respectively) 906,769 830,606
INVESTMENT IN JOINT VENTURE ( Note 2) 813,209 1,058,557
OTHER ASSETS 167,274 227,642
DEFERRED TAX BENEFITS ( net of valuation allowance of
$26,881,000 and $25,308,000, respectively) - -
----------- -----------
$ 21,443,711 $ 24,710,420
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,527,836 $ 1,960,147
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; authorized
500,000 shares; no shares outstanding - -
Common stock, par value $.01 per share; authorized
240,000,000 shares; outstanding 57,800,176 and
57,404,656 shares, respectively 578,002 574,047
Additional paid-in capital 52,545,221 50,934,606
Accumulated (deficit) during development stage (33,207,348) (28,758,380)
----------- -----------
19,915,875 22,750,273
----------- -----------
$ 21,443,711 $ 24,710,420
=========== ===========
The accompanying notes to condensed financial statements are an integral part of
these balance sheets.
3
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the period
from November
For the nine months 5,1982
ended July 31, (inception)
--------------------------- through
1997 1996 July 31, 1997
------------ ----------- ----------------
SALES $- $ - $-
----------- ------------- ----------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately $2,835,000,
$2,450,000 and $23,578,000, respectively) 4,935,838 3,811,250 36,916,047
----------- ------------- ----------------
LOSS FROM JOINT VENTURE 245,348 90,549 411,791
----------- ------------- ----------------
INTEREST INCOME 732,218 455,782 4,120,490
----------- ------------- ----------------
NET (LOSS) ($4,448,968) ($3,446,017) ($33,207,348)
=========== ============= ================
NET (LOSS) PER SHARE OF
COMMON STOCK ($0.08) ($0.06) ($0.73)
=========== ============= ================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 57,614,211 54,024,087 45,695,507
=========== ============= ================
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months
ended July 31,
---------------------------
1997 1996
---------------------------
SALES $ - $ -
------------- -------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately
$814,000 and $989,000, respectively) 1,598,042 1,636,105
-------------- -------------
LOSS FROM JOINT VENTURE 87,435 62,153
-------------- -------------
INTEREST INCOME 217,934 218,866
-------------- -------------
NET (LOSS) ($1,467,543) ($1,479,392)
============== =============
NET (LOSS) PER SHARE OF
COMMON STOCK ($0.03) ($0.03)
============== =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 57,768,861 56,289,270
============== =============
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 1997 (UNAUDITED)
Accumulated
Additional (Deficit) During
Common Stock Paid-in Development
Shares Par Value Capital Stage
------------------- ---------- ---------------
BALANCE, November 5, 1982 (inception) - $ - $ - $ -
Sale of common stock, at par, to incorporators
on November 8, 1982 1,470,000 14,700 - -
Sale of common stock, at $.10 per share, primarily to
officers and employees from November 9, 1982
to November 30, 1982 390,000 3,900 35,100 -
Sale of common stock, at $2 per share, in private
offering from January 24, 1983 to March 28, 1983 250,000 2,500 497,500 -
Sale of common stock, at $10 per share, in public
offering on October 6, 1983, net of underwriting
discounts of $1 per share 690,000 6,900 6,203,100 -
Sale of 60,000 warrants to representative of
underwriters, at $.001 each, in conjunction with
public offering - - 60 -
Costs incurred in conjunction with private and public
offerings - - (362,030) -
Common stock issued, at $12 per share, upon
exercise of 57,200 warrants from February 5, 1985
to October 16, 1985, net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by individuals
from January 29, 1985 to October 4, 1985 under
agreements with the Company, net of costs
incurred by the Company - - 298,745 -
Restatement as of October 31, 1985 for three-for-
one stock split 5,714,400 57,144 (57,144) -
Common stock issued, at $4 per share, upon
exercise of 2,800 warrants in December 1985 8,400 84 33,516 -
Sale of common stock, at market, to officers on
January 9, 1987 and April 22, 1987 and to
members of their immediate families on July 28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for five-for-four
stock split 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction with five-
for-four stock split - - (1,345) -
Sale of common stock, at market, to members of
officers' immediate families from September
10, 1987 to December 4, 1990 and to officers on
October 29, 1987 and February 26, 1989 628,040 6,280 6,124,031 -
Sale of common stock, at market, to senior level
personnel on February 26, 1989 29,850 299 499,689 -
Continued
6
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 1997 (UNAUDITED)
Continued
---------
Accumulated
Additional (Deficit) During
Common Stock Paid-in Development
Shares Par Value Capital Stage
------------------- ---------- ------------
Sale of common stock, at market, to
unrelated party on February 26, 1989
amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991 for
two-for-one stock split 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to
members of officers' immediate families
from April 26, 1991 to October 27, 1992 261,453 2,615 2,788,311 -
Common stock issued upon exercise of
warrants by members of officers' immediate
families on various dates from September
1993 through March 1996 579,800 5,798 2,651,462 -
Common stock issued upon exercise of stock
options from December 16, 1992 to June
12, 1996 4,535,340 45,353 28,197,223 -
Restatement as of June 17, 1996 for two-for-
one stock split 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of
warrants by members of officers' immediate
families on various dates in July
and October, 1996, and March 1997 206,610 2,066 1,062,167 -
Common stock issued upon exercise of stock
options from July, 8 1996 to July 18,
1997 under stock option plans, net of
registration costs 814,200 8,142 2,828,255 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Accumulated (deficit) during development
stage - - - ($33,207,348)
------------ --------- ------------- ---------------
BALANCE, July 31, 1997 57,800,176 $578,002 $52,545,221 ($33,207,348)
============ ========= ============= ===============
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the period
For the nine from November
months ended 5, 1982
July 31, (inception)
------------------------- through
1997 1996 July 31, 1997
---------- ---------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($8,210,504) ($3,493,258) ($38,318,237)
Interest received 742,373 455,445 4,081,340
------------ ------------ --------------
Net cash (used in) operating activities (7,468,131) (3,037,813) (34,236,897)
------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (426,407) (181,286) (1,775,402)
Disbursements to acquire certificates of
deposit and corporate notes and bonds - - (12,075,191)
Proceeds from maturities of investments - - 12,075,191
Investment made in Joint Venture - (857,500) (1,225,000)
------------ ------------ --------------
Net cash (used in) investing activities (426,407) (1,038,786) (3,000,402)
------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and
warrants, net of underwriting discounts of
$690,000 related to initial public offering
in October 1983 - - 17,647,369
Proceeds from exercise of stock options and
warrants, net of registration disbursements 1,539,570 16,656,899 35,465,484
Proceeds from sales of common stock by
individuals under agreements with the
Company, net of disbursements made by the
Company - - 298,745
Disbursements made in conjunction with sales
of stock - - (362,030)
Fractional share payments in conjunction with
stock split - - (1,345)
------------ ------------ --------------
Net cash provided by financing activities 1,539,570 16,656,899 53,048,223
------------ ------------ --------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (6,354,968) 12,580,300 15,810,924
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,165,892 8,864,293 -
------------ ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $15,810,924 $21,444,593 $15,810,924
============ ============ ==============
Continued
8
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Continued
---------
For the period
For the nine from November
months ended 5, 1982
July 31, (inception)
------------------------- through
1997 1996 July 31, 1997
------------ ----------- -----------------
RECONCILIATION OF NET (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net (loss) ($4,448,968) ($3,446,017) ($33,207,348)
Loss from Joint Venture 245,348 90,549 411,791
Depreciation and amortization 183,960 83,460 1,005,252
Decrease (Increase) in accrued interest
receivable 10,155 (337) (39,151)
(Increase) in prepaid expenses and other
current assets (3,327,967) (11,133) (3,706,384)
Decrease (Increase) in other assets 60,369 (16,947) (167,274)
(Decrease) Increase in accounts payable and
accrued liabilities related to operating
activities (191,028) 262,612 1,466,217
-------------- ------------ --------------
Net cash (used in) operating activities ($7,468,131) ($3,037,813) ($34,236,897)
============== ============ ==============
The accompanying notes to condensed financial statements are an integral part of
these statements.
9
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three
months ended
July 31,
-------------------------
1997 1996
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($2,931,241) ($1,513,631)
Interest received 187,566 191,816
------------- -----------
Net cash (used in) operating activities (2,743,675) (1,321,815)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (62,217) (28,901)
Investment made in joint venture subsidiary - (367,500)
------------- -----------
Net cash (used in) investing activities (62,217) (396,401)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and
warrants, net of registration disbursements 141,126 9,254,228
------------- -----------
Net cash provided by financing activities 141,126 9,254,228
------------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,664,766) 7,536,012
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 18,475,690 13,908,581
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $15,810,924 $21,444,593
============= ===========
RECONCILIATION OF NET (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net (loss) ($1,467,543) ($1,479,392)
Loss from Joint Venture 87,435 62,153
Depreciation and amortization 60,631 37,089
(Increase) in accrued interest receivable (30,368) (27,050)
(Increase) in prepaid expenses and other
current assets (1,563,431) (13,404)
(Increase) in other assets (17,317) (53,326)
Increase in accounts payable and accrued
accrued liabilities related to operating activities 186,918 152,115
---------- ----------
Net cash (used in) operating activities ($2,743,675) ($1,321,815)
========== ==========
The accompanying notes to condensed financial statements are an integral part of
these statements.
10
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
July 31, 1997 (UNAUDITED)
(1) Summary of significant accounting policies and other disclosures:
-----------------------------------------------------------------
CopyTele, Inc. (the "Company"), is a development stage enterprise whose
principal activities include the development of telephone based
multi-functional telecommunications products incorporating the Company's
ultra-high resolution flat panel display, the further expansion of its
overall flat panel display technology, and the operations of Shanghai
CopyTele Electronics Co., Ltd. ("SCE"), its 55% owned joint venture in
China, for the production of its telecommunication products. The remaining
45% of SCE is owned by two Chinese companies, Shanghai Electronic
Components Corp. ("SECC") which owns 35% and Shanghai International Trade
and Investment Developing Corp. ("SIT") which owns 10%. Reference is made
to Note 2, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for further discussion involving SCE. The
Company and SECC have entered into a letter of intent with respect to a
second joint venture which would manufacture and sell electronic components
and parts used in SCE's products and in products of other manufacturers
(the "Second Joint Venture").
The Company has produced a multi-functional telephone-based product called
MAGICOM(R) 2000 that can send and receive handwritten communications as
well as simultaneous voice and electronic handwriting over a single
telephone line. This personal communications product offers many features,
including digital voice, fax with full page transmission and paperless
reception, full duplex speakerphone, e-mail communications, data
transmission, storage and computer interface, as well as personal copying
capabilities with the use of an optional Company printer, called Magic
Printer, and the ability to send alphanumeric messages to pagers using a
touch sensitive keyboard screen. MAGICOM(R) 2000 incorporates the Company's
patented high resolution flat panel display, called E-PAPER(TM),
representing "electronic paper".
Reference is made to the October 31, 1996 audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1996, for more extensive disclosures than
contained in these condensed financial statements.
Since MAGICOM(R) 2000 is the Company's first product and is in its initial
sales stage, sales and related gross profit are being deferred at this time
as permitted under generally accepted accounting principles. Income from
sales, which was limited by product enhancements introduced late in the
quarter, is not material to these financial statements.
The Company, which controls four of the seven votes of SCE's board of
directors, has reflected its investment in SCE under the equity method of
accounting in the accompanying condensed financial statements. Under
certain circumstances, decisions involving SCE require either a unanimous
or two-thirds vote of SCE's board of directors.
The information contained herein for the nine and three month periods ended
July 31, 1997 and 1996 and for the period from November 5, 1982 (inception)
through July 31, 1997 is unaudited, but in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the results of operations for such
periods have been included. The results of operations for interim periods
may not necessarily reflect the annual operations of the Company.
11
The Company invests principally in short-term highly liquid financial
instruments with maturities of less than three months, which have been
classified as cash equivalents in the accompanying condensed balance
sheets. The cost of these investments approximates market value.
The Company has adopted all recently issued accounting standards which have
a material impact on its condensed financial statements. The Company has
implemented Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation" as disclosed in Note 3.
The amounts due from the Joint Venture of approximately $3,378,000 and
$240,000, respectively, on the accompanying Condensed Balance Sheets
represent certain parts, such as the flat panel assembly components,
purchased by the Company on behalf of SCE which are incorporated into the
MAGICOM(R) 2000 product.
(2) Investment in SCE:
------------------
The Company has contributed $1,225,000 in cash, and technology which has
been valued for purposes of SCE at $700,000. SCE does not reflect the
$700,000 in technology as an asset or equity investment in the condensed
financial statements presented below. The other parties have contributed
cash aggregating $1,575,000. The Company has reflected its investment in
SCE under the equity method of accounting (see Note 1) and will recognize
losses on SCE to the extent of its cash investment.
Condensed Balance Sheets for SCE at July 31, 1997 and October 31, 1996 and
Condensed Statements of Operations for the nine month periods ended July
31, 1997 and 1996 are as follows:
Condensed Balance Sheets
------------------------
(Unaudited)
July 31, October 31,
1997 1996
------------- -------------
Cash and other current assets $ 106,312 $ 993,049
Inventories 4,027,463 -
Fixed assets and land occupancy
rights, net, and other
non-current assets 2,229,973 1,792,538
------------- -------------
Total Assets $6,363,748 $2,785,587
============= =============
Short-term loans $ 500,235 $ -
Accounts payable and accrued
liabilities 3,812,224 288,210
Capital 2,051,289 2,497,377
------------- -------------
Total Liabilities and Capital $ 6,363,748 $2,785,587
============= =============
Condensed Statements of Operations
----------------------------------
(Unaudited)
For the nine months ended
------------------------------
July 31, 1997 July 31,1996
-------------- --------------
Net sales $ - $ -
Operating (loss) (440,470) (179,016)
Other income/(expense) (5,618) 14,381
============= =============
Net (loss) ($ 446,088) ($ 164,635)
============= =============
Amounts due the Company of approximately $3,378,000 and $240,000,
respectively, are included in accounts payable and accrued liabilities on
the Condensed Balance Sheets. Since MAGICOM(R) 2000 is also SCE's first
product and also in its initial sales stage, sales and related gross profit
are being deferred at this time as permitted under generally accepted
accounting principles.
12
(3) Stock option plans:
-------------------
The Company has two stock option plans, the 1987 Stock Option Plan, adopted
by the Board of Directors on April 1, 1987 (the "1987 Plan"), and the
CopyTele, Inc. 1993 Stock Option Plan, adopted by the Board of Directors on
April 28, 1993 (the "1993 Plan").
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock Based Compensation", encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. Accordingly, under APB Opinion No. 25, no
compensation cost has been recognized by the Company.
Had compensation cost for these plans been determined consistent with SFAS
Statement No. 123, the Company's net loss and net loss per share would have
increased to the following pro forma amounts:
For the nine Months For the nine Months
Ended July 31, 1997 Ended July 31, 1996
------------------- -------------------
Net Loss: As Reported ($ 4,448,968) ($3,446,017)
Pro Forma ($12,802,621) ($8,186,556)
Net Loss
Per Share: As Reported ($0.08) ($0.06)
Pro Forma ($0.22) ($0.15)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants for the nine months ended July 31, 1997 and
1996, respectively: risk free interest rates of 5.60% and 5.99%; expected
dividend yields of 0% and 0%; expected lives of 2.56 and 2 years; and
expected stock price volatility of 69% and 70%. The weighted average fair
value of options granted under SFAS Statement No. 123 for the nine months
ended July 31, 1997 and 1996 are $2.28 and $1.66, respectively.
Information regarding the 1987 Plan from October 31, 1996 to July 31, 1997,
after adjustments for all applicable stock splits, is presented in the
table and narrative below:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares under option at October 31,
1996 754,360 $4.75
Exercised (68,200) $2.93
-------------
Shares under option at July 31, 1997 686,160 $4.93
=============
Exercisable at July 31, 1997 686,160 $4.93
=============
13
The exercise price with respect to each option granted under the 1987 Plan
from its inception was equal to at least the fair market value of the
underlying common stock of the Company (the "Common Stock") on the date of
grant. Upon the approval of the 1993 Plan by the Company's shareholders in
July 1993, the 1987 Plan was terminated with respect to the grant of future
options.
The 1993 Plan was amended as of May 3, 1995 and May 10, 1996 to, among
other things, increase the number of shares of the Company's Common Stock
available for issuance pursuant to grants thereunder from 6 million to 20
million, as adjusted for the two-for-one stock split declared in May 1996.
Information regarding the 1993 Plan from October 31, 1996 to July 31, 1997
after adjustments for all applicable stock splits, is presented in the
table and narrative below:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares under option at October 31,
1996 9,174,860 $5.32
Granted 2,905,500 $4.73
Exercised (213,500) $3.97
Canceled (155,500) $6.34
----------------
Shares under option at July 31,
1997 11,711,360 $5.19
================
Exercisable at July 31, 1997 8,993,360 $5.22
================
The exercise price with respect to each option granted under the 1993 Plan
from its inception was equal to at least the fair market value of the
underlying Common Stock on the date of grant. At July 31, 1997, 3,280,000
options were available for future grants under the 1993 Plan.
From August 1, 1997 through September 5, 1997, the Company received
proceeds aggregating approximately $33,125 relating to the exercise of
options to purchase 10,000 shares of Common Stock pursuant to the 1993
Plan.
As of September 5, 1997, 8,983,360 of the options to purchase shares of
Common Stock granted and outstanding under the 1993 Plan were exercisable.
14
(4) Warrants to purchase common stock:
----------------------------------
Information from October 31, 1996 to July 31, 1997 regarding warrants
previously issued by the Company, primarily to members of the immediate
families of its Chairman of the Board and its President in conjunction with
the sale of its Common Stock, after adjustments for anti-dilution
provisions and all applicable stock splits, is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares covered by warrants at October
31, 1996 415,116 $5.11
Warrants exercised ( 98,820) $5.10
Warrants expired (169,296) $5.08
--------------
Shares covered by warrants at July 31,
1997 147,000 $5.10
==============
The exercise price of each warrant was equal to at least the fair market
value of the underlying Common Stock on the date of issuance of such
warrant. As of July 31, 1997, all of the warrants to purchase shares of
Common Stock issued and outstanding were exercisable.
(5) Subsequent Events:
------------------
On August 27, 1997, Mr. John E. Gillies, a Director of the Company since
1992, passed away. During his tenure as Director, Mr. Gillies provided the
Company with his guidance and support in all material aspects of the
Company's activities. Mr. Gillies also served on the Company's Audit
Committee where he interfaced with the Company's independent auditors.
On September 4, 1997, the remaining Directors elected Mr. George P.
Larounis to serve as an interim Director until the next annual meeting of
stockholders when the Board of Directors are elected or reelected. Mr.
Larounis has held numerous positions as a senior international executive of
Bendix International and Allied Signal and is a foreign patent attorney. He
has served on the Board of Directors of numerous affiliates of Allied
Signal in Europe, Asia and Australia. Prior to being elected to the
Company's Board of Directors, Mr. Larounis served as a consultant and an
advisor to the Company.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
----------------------
The Company, which is a development stage enterprise, was incorporated on
November 5, 1982 and has had no revenues, other than initial sales which
have been deferred, to support its operations since its inception. The
Company's principal activities are the development of telephone based
multi-functional telecommunications products incorporating the Company's
ultra-high resolution flat panel display, the further expansion of its
overall flat panel technology, and the operations of SCE, the Company's 55%
owned joint venture in China for the production of its telecommunication
products. The Company's interest in SCE is accounted for under the equity
method of accounting (see Notes 1 and 2 to the Company's condensed
financial statements). During the past year, the Company also increased its
efforts to develop ultra-high resolution video and color capability for the
further expansion of its overall flat panel display technology. There can
be no assurance, however, that the Company's efforts in this area will be
successful. There is also no assurance that the Company will generate
significant revenues in the future, will have sufficient revenues to
generate profits or that other products will not be produced by other
companies that will render the products of the Company or SCE obsolete or
unmarketable.
The Company has entered into marketing agreements with distributors in
several countries throughout the world. These agreements are for terms of
three years and provide for the purchase of the distributors' requirements
of the Company's MAGICOM(R) 2000 product in their respective territories.
The agreements provide for periodic purchase orders in increasing
quantities, to be accompanied by irrevocable bank letters of credit
furnished by the distributors. The Company is providing technical support
to its distributors and has added features and made changes in MAGICOM(R)
2000 in order to assist them in meeting their respective governmental
telecommunications approval and customer requirements. The Company has
commenced fulfilling initial orders from the distributors for MAGICOM(R)
2000 units incorporating these features and changes, which are being
produced by SCE.
The Company and SCE are in their initial stages of production and
marketing. The eventual success and profitability of their product will
depend upon many factors, including those normally associated with any new
product. These factors include the capability of SCE to produce sufficient
quantities of MAGICOM(R) 2000; the ability of the Company and SCE to
maintain an acceptable pricing level to end-users for the product;
long-term product performance and the capability of the Company, SCE and
its distributors to adequately service the product; the ability of
distributors to market their contracted quantities of the product in their
respective territories; political and economic stability in targeted
marketing territories; and the possible development of competitive products
that could render the product of the Company and SCE obsolete or
unmarketable.
In reviewing Management's Discussion and Analysis of Financial Condition
and Results of Operations, reference is made to the Company's Condensed
Financial Statements and the notes thereto.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
----
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q are forward-looking
statements relating to future events which involve certain risks and
uncertainties, including those identified herein and in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (the
"1996 10-K"). See "Business" and Note 1 to the Company's Financial
Statements contained in the 1996 10-K for discussions regarding
uncertainties that may significantly affect the results of operations,
future liquidity and capital resources.
16
Results of Operations
---------------------
Since MAGICOM(R) 2000 is the Company's first product and is in its initial
sales stage, sales and related gross profit are being deferred at this time
as permitted under generally accepted accounting principles. Income from
sales, which was limited by product enhancements introduced late in the
quarter, is not material to these financial statements. Selling, general
and administrative expenses for the nine and three month periods ended July
31, 1997 and 1996 and for the period from November 5, 1982 (inception)
through July 31, 1997 were approximately $4,936,000, $3,811,000,
$1,598,000, $1,636,000 and $36,916,000, respectively. These amounts include
research, development and tooling costs of approximately $2,835,000,
$2,450,000, $814,000, $989,000 and $23,578,000 respectively, as well as
normal operating expenses. The increase in selling, general and
administrative expenses during the comparative nine month period ended July
31, 1997, of approximately $1,125,000 resulted primarily from increases in
compensation (including related costs), engineering supplies, and marketing
costs necessitated by the present phase of the Company's development
program and related activities. Compensation expense increased as a result
of the staffing of a marketing department and the addition of scientific
personnel to increase the Company's efforts to develop ultra-high
resolution video and color capability for its overall flat panel display
technology. Engineering supplies increased primarily as a result of
expensing components used for training purposes at SCE, and the Company
obtaining sample quantities of MAGICOM(R) 2000, produced by SCE, for
evaluation to insure product quality. Other operating costs, including
marketing, travel, rent and communication costs, also increased in the
current period. Marketing costs increased as a result of the production of
marketing brochures and videos, while travel costs increased as a result of
travel associated with selecting distributors and attending trade shows.
Travel expenses to China also increased due to the Company's need to train
SCE's technical personnel. The increase in rent was a result of the Company
increasing the size of its facilities. Professional fees decreased in the
aggregate as a result of significantly lower patent application preparation
fees in the current period. The decrease in selling, general and
administrative expenses during the comparative three month period ended
July 31, 1997 of approximately $38,000 resulted primarily from decreases in
engineering supplies, payroll taxes associated with stock option exercises
and travel related costs to a lesser extent. Other operating costs such as
compensation and marketing costs increased in the current period.
The Company's portion of SCE's loss increased during the nine and three
month periods by $155,000 and $25,000, respectively, as compared to the
same periods in 1996. The increases in the losses were the result of
progressively higher costs as SCE approached and entered the initial stages
of production of MAGICOM(R) 2000.
Since November 1985, the Company's Chairman of the Board and its President
have waived salary and related pension benefits for an undetermined period
of time. Four other individuals, including a former officer and senior
level personnel, waived salary and related pension benefits from January
1987 through December 1990. Commencing in January 1991, these four
individuals waived such rights for an undetermined period of time and they
did not receive salary or related pension benefits through December 1992.
The Company's Chairman of the Board, its President and the three senior
level personnel continued to waive such rights commencing in January 1993
for an undetermined period of time. One additional senior level employee
also is currently waiving such salary and benefit rights for an
undetermined period of time.
The increase in interest income of approximately $276,000 during the nine
months ended July 31, 1997 as compared to the same period in 1996 primarily
resulted from an increase in funds available for investment aided by higher
interest rates. In the three month comparison, lower funds available for
investment were offset by higher interest rates. Funds available for
investment during the nine and three month periods ended July 31, 1997 and
1996, on a monthly weighted average basis, were approximately $18,600,000,
$14,638,000, $16,505,000 and $21,380,000, respectively. The investment
instruments selected by the Company are principally money market accounts
and commercial paper.
17
Liquidity and Capital Resources
-------------------------------
Since its inception, the Company has met its liquidity and capital
expenditure needs primarily from the proceeds of the sales of Common Stock
in its initial public offering, in private placements, upon exercise of
warrants issued in connection with the private placements and public
offering, and upon exercise of stock options pursuant to the 1987 Plan and
the 1993 Plan.
From November 1, 1996 to July 31, 1997, the Company received proceeds
aggregating approximately $1,047,000 relating to the exercise of options to
purchase 281,700 shares of Common Stock under the 1987 and 1993 Plans. In
addition, proceeds aggregating approximately $504,000 relating to the
exercise of warrants to purchase 98,820 shares of Common Stock were
received in the same period.
SCE contemplates an initial capitalization of $7,000,000, of which half is
expected to be borrowed from banks, and the balance of $3,500,000 has been
invested by the Company, SECC and SIT. The Company has contributed
$1,225,000 in cash, and technology valued for the purposes of SCE at
$700,000, and SECC and SIT have contributed $1,575,000 in cash to SCE (see
Notes 1 and 2 to the Company's condensed financial statements). SCE may
require capitalization of up to $25 million, depending upon the nature and
extent of its business activities.
On April 17, 1996, the Company entered into a letter of intent for the
formation of a second joint venture with SECC. The parties are presently
discussing possible amendments to the letter of intent. As stipulated in
the letter of intent, unless otherwise amended, the Second Joint Venture is
expected to have an initial capitalization of approximately $2,000,000, of
which half would consist of bank borrowings. The Company would invest cash
of approximately $550,000 and SECC would contribute cash, equipment and
technology collectively valued at $450,000. The Second Joint Venture may
require an ultimate capitalization of up to $10 million depending on the
nature and extent of its business activities which, if necessary, is
expected to be financed through a combination of bank borrowings and equity
investments contributed by the parties in proportion to their equity
interests and on terms to be agreed upon.
The Company believes that without taking into consideration revenues from
sales of MAGICOM(R) 2000 it will have sufficient funds through the first
quarter of fiscal 2000 to maintain its present level of development efforts
and to make its anticipated capital contribution of $550,000 to the Second
Joint Venture.
The Company's estimated funding capacity indicated above assumes, although
there is no assurance, that the waiver of salary and pension benefits by
the Chairman of the Board, the President and senior level personnel will
continue. The Company anticipates that it may require additional funds in
order to participate in the joint ventures following its initial capital
contributions and to continue its research and development activities.
The National Association of Securities Dealers, Inc. ("NASD") requires that
the Company maintain a minimum of $4,000,000 of net tangible assets to
maintain its NASDAQ - NMS listing. The Company anticipates that it will
seek additional sources of funding, when necessary, in order to satisfy the
NASD requirements.
The Company currently has no plans with respect to additional financing.
There can be no assurance that adequate funds will be available to the
Company, SCE, or the Second Joint Venture, including any future capital
contribution, if any, beyond its initial capital contributions of
$1,225,000 to SCE and the anticipated capital contribution of $550,000 to
the Second Joint Venture, and its NASD funding requirements, or that, if
available, the Company, SCE, or the Second Joint Venture, will be able to
obtain such funds on favorable terms and conditions.
18
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on July 23, 1997, five
directors were elected, an amendment to the CopyTele, Inc. Certificate of
Incorporation was approved and the selection of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of the
Company for the fiscal year ending October 31, 1997 was ratified. The
following is a tabulation of the voting with respect to the foregoing
matters:
(a) Election of Directors -
Nominee For Withheld
------- --- --------
Denis A. Krusos 52,136,871 560,907
Frank J. DiSanto 52,131,301 566,474
John R. Shonnard 51,948,457 749,318
John E. Gillies 51,952,487 745,288
Gerald J. Bentivegna 52,142,921 554,854
(b) Approval of Amendment to the CopyTele, Inc. Certificate of
Incorporation.
For Against Abstain
--- ------- -------
50,127,895 2,410,400 159,480
(c) Ratification of selection of Arthur Andersen LLP as Independent
Auditors for the Fiscal Year Ending October 31, 1997:
For Against Abstain
--- ------- -------
52,393,164 200,415 104,196
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Amendment to the Certificate of
Incorporation of CopyTele, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the Company during the quarter ended
July 31, 1997.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CopyTele, Inc.
DENIS A. KRUSOS
---------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal
September 12, 1997 Executive Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
September 12, 1997 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance and
Chief Financial Officer and
Director (Principal Financial
September 12, 1997 and Accounting Officer)
20
EXHIBIT INDEX
EXHIBIT No. Description
- ----------- ------------
3.1 Certificate of Amendment to the Certificate
of Incorporation of CopyTele, Inc.
27 - Financial Data Schedule
21
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
COPYTELE, INC.
Pursuant to Section 242 of the General Corporation Law
of the State of Delaware
THE UNDERSIGNED, DENIS A. KRUSOS, being the Chairman of the Board and Chief
Executive Officer of CopyTele, Inc., a corporation organized and existing
under laws of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY:
FIRST: That article FOURTH of the Certificate of Incorporation of the
Corporation is hereby amended to read as follows:
"FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is two hundred forty million five hundred thousand
(240,500,000), of which two hundred forty million (240,000,000) shall be
Common Stock of the par value of $.01 per share and five hundred thousand
(500,000) shall be Preferred Stock of the par value of $100 per share. The
500,000 shares of Preferred Stock may be issued from time to time in one or
more series, each of such series to have such voting powers, full or
limited, or no voting powers, designations, preferences and relative
participating, optional or other special rights and qualifications and
limitations or restrictions as are stated and expressed in the resolutions
providing for the issue of such series adopted by the Board of Directors as
hereinafter provided. Authority is hereby expressly granted to the Board of
Directors to establish and designate one or more series of Preferred Stock
and to fix the relative rights, preferences and limitations of each series,
including without limitation:
1. The number of shares to constitute such series and the
distinctive designations thereof;
2. The dividend rate to which such shares shall be entitled
and the restrictions, limitations and conditions upon the
payment of such dividends, whether dividends shall be
cumulative, the date or dates from which dividends (if cumulative)
shall accumulate and the dates on which dividends (if declared)
shall be payable;
3. Whether or not the shares of such series shall be redeemable
and, if so, the terms, limitations and restrictions with respect
to such redemption, including without limitation the manner of
selecting shares for redemption if less than all shares are to be
redeemed, and the amount, if any, in addition to any accrued
dividends thereon, which the holders of shares of such series
shallbe entitled to receive upon the redemption thereof, which
amount may vary at different redemption dates and may be different
with respect to shares redeemed through the operation of any
purchase, retirementof sinking fund and with respect to shares
otherwise redeemed;
4. The amount in addition to any accrued dividends thereon which
the holders of shares of such series shall be entitled to receive
upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, which amount may vary at different
dates and may vary depending on whether such liquidation,
dissolution or winding up is voluntary or involuntary;
22
5. Whether or not the shares of such series shall be subject to the
operation of a purchase, retirement or sinking fund and, if so,
the terms, limitations and restrictions with respect thereto,
including without limitation whether such purchase, retirement or
sinking fund shall be cumulative or non-cumulative, the extent to
and the manner in which such fund shall be applied to the
purchase, retirement or redemption of the shares of such series
for retirement or to other corporate purposes and the terms and
provisions relative to theoperation thereof;
6. Whether or not the shares of such series shall have conversion
privileges and, if so, prices or rates of conversion and the
method, if any, of adjusting the same;
7. The voting powers, if any, of such series; and
8. Any other relative rights, preferences and limitations
thereof as shall not be inconsistent with this Article."
SECOND: That this amendment to the Certificate of Incorporation of the
Corporation has been duly adopted by the Board of Directors of the
Corporation and by the affirmative vote of the holders of a majority of the
outstanding shares of the Corporation's common stock, par value $.01 per
share, in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Denis A. Krusos, Chairman of the Board and Chief
Executive Officer of the Corporation, has duly executed this Certificate of
Amendment this 23rd day of July, 1997 and affirms, under the penalties of
perjury, that the statements herein are true and correct.
/s/ Denis A. Krusos
-------------------
Denis A. Krusos
Chairman of the Board and
Chief Executive Officer
23