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 January 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
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(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
March 10, 1997: 57,590,356 shares
-----------------
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of January 31, 1997 and
October 31, 1996
Condensed Statements of Operations (Unaudited) for the three months
ended January 31, 1997 and January 31, 1996, and for the period from
November 5, 1982 (Inception) through January 31, 1997
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through January 31, 1997
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 1997 and January 31, 1996, and for the period from
November 5, 1982 (Inception) through January 31, 1997
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 6. Exhibits and Reports on Form 8-K.
Signatures.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED BALANCE SHEETS (UNAUDITED)
January 31, 1997 October 31, 1996
------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$19,339,936 and $21,921,133, respectively) $19,546,294 $22,165,892
Accrued interest receivable 9,441 49,306
Prepaid expenses and other current assets 1,484,782 378,417
------------------- -------------------
21,040,517 22,593,615
PROPERTY AND EQUIPMENT (net of accumulated depreciation and
amortization of $879,955 and $816,651, respectively)
880,054 830,606
INVESTMENT IN JOINT VENTURE (Note 2) 989,540 1,058,557
OTHER ASSETS 172,419 227,642
DEFERRED TAX BENEFITS (net of valuation allowance of $25,174,000 and
$25,308,000, respectively) - -
------------------- -------------------
$23,082,530 $24,710,420
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,472,407 $ 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 120,000,000 shares;
outstanding 57,478,656 and 57,404,656 shares, respectively
574,787 574,047
Additional paid-in capital 51,164,161 50,934,606
Accumulated (deficit) during development stage (30,128,825) (28,758,380)
------------------- -------------------
21,610,123 22,750,273
------------------- -------------------
$23,082,530 $24,710,420
=================== ===================
The accompanying notes to condensed financial statements are an integral part of
these balance sheets.
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months For the period from
ended January 31, November 5,1982
------------------------------------------------- (inception) through
1997 1996 January 31, 1997
--------------------- --------------------- ------------------------
SALES $ - $ - $ -
--------------------- --------------------- ------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES,
(including research and development
expenses of approximately $898,000,
$767,000 and $21,641,000, respectively) 1,562,504 1,075,396 33,542,713
--------------------- --------------------- ------------------------
LOSS FROM JOINT VENTURE 69,017 12,872 235,460
--------------------- --------------------- ------------------------
INTEREST INCOME 261,076 116,949 3,649,348
--------------------- --------------------- ------------------------
NET (LOSS) ($1,370,445) ($971,319) ($30,128,825)
===================== ===================== ========================
NET (LOSS) PER SHARE OF COMMON STOCK ($0.02) ($0.02) ($0.67)
===================== ===================== ========================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 57,423,102 52,335,450 45,277,367
===================== ===================== ========================
The accompanying notes to condensed financial statements are an integral part of
these statements.
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 1997 (UNAUDITED)
Accumulated
(Deficit)
Additional 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
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 1997 (UNAUDITED)
Continued
Accumulated
(Deficit)
Common Stock Additional During Development
Shares Par Value Paid-in 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 107,790 1,078 559,262 -
Common stock issued upon exercise of stock
options from July 8, 1996 to January 31, 1997
under stock option plans, net of registration costs 606,500 6,065 2,024,950 -
Accumulated (deficit) during development stage - - - (30,128,825)
----------------- ---------------- ------------------- -------------------
BALANCE, January 31, 1997 57,478,656 $ 574,787 $51,164,161 ($30,128,825)
================= ================ =================== ===================
The accompanying notes to condensed financial statements are an integral part of
this statement.
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three
months ended For the period from
January 31, November 5, 1982
---------------------------------------------- (inception) through
1997 1996 January 31, 1997
-------------------- ------------------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($2,925,181) ($879,112) ($33,032,914)
Interest received 300,941 129,496 3,639,908
-------------------- ------------------- -------------------------
Net cash (used in) operating activities (2,624,240) (749,616) (29,393,006)
-------------------- ------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (225,653) (4,453) (1,574,648)
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 - (490,000) (1,225,000)
-------------------- ------------------- -------------------------
Net cash (used in) investing activities (225,653) (494,453) (2,799,648)
-------------------- ------------------- -------------------------
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 230,295 2,557,714 34,156,209
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 230,295 2,557,714 51,738,948
-------------------- ------------------- -------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,619,598) 1,313,645 19,546,294
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,165,892 8,864,293 -
-------------------- ------------------- -------------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $19,546,294 $10,177,938 $19,546,294
==================== =================== =========================
Continued
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Continued
For the three
months ended For the period from
January 31, November 5, 1982
------------------------------------------ (inception) through
1997 1996 January 31, 1997
------------------- ----------------- -----------------------
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ($1,370,445) ($971,319) ($30,128,825)
Loss from Joint Venture 69,017 12,872 235,460
Depreciation and amortization 63,304 18,724 884,596
Increase (Decrease) in accrued interest receivable 39,865 12,547 (9,441)
(Increase) in prepaid expenses and other current assets (1,106,365) (2,316) (1,484,782)
(Increase) Decrease in other assets 55,223 (86) (172,419)
Increase (Decrease) in accounts payable and accrued
liabilities related to operating activities (374,839) 179,962 1,282,405
------------------- ----------------- -----------------------
Net cash (used in) operating activities ($2,624,240) ($749,616) ($29,393,006)
=================== ================= =======================
The accompanying notes to condensed financial statements are an integral part of
these statements.
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 1997 (UNAUDITED)
(1) Summary of significant accounting policies and other disclosures:
The Company is a party to a joint venture located in Shanghai, China
with Shanghai Electronic Components Corp. ("SECC") and Shanghai
International Trade and Investment Developing Corp. ("SIT"). The
Company owns a 55% interest in the capital, profits and losses of the
joint venture, Shanghai CopyTele Electronics Co., Ltd. ("SCE" or "Joint
Venture"). The remaining 45% is owned by two Chinese companies, SECC
which owns 35% of the Joint Venture and SIT which owns 10%. (See Note
2, Investment in Joint Venture). The Company, pursuant to a Technology
License Agreement, has licensed its flat panel application technology
to the Joint Venture for exclusive use in China. The Company is solely
authorized to market Joint Venture products outside China. Reference is
made to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for further discussion involving the Joint
Venture. The Company and SECC have signed 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 telephone based multi-functional
telecommunications product, incorporating the Company's flat panel and
associated proprietary hardware and software technology called
MAGICOM(R) 2000. The product can enable users to have a personal
information center in a single unit which integrates voice
communication, digital messaging, fax (transmission and paperless
reception), copier, electronic handwriting, touch sensitive screen,
data storage and transmission, and computer interfacing.
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.
The Company, which controls four of the seven votes of SCE's board of
directors, has reflected its investment in the Joint Venture under the
equity method of accounting in the accompanying condensed financial
statements. Under certain circumstances, decisions involving the Joint
Venture require either a unanimous or two-thirds vote of SCE's board of
directors.
The information contained herein for the three month periods ended
January 31, 1997 and 1996 and for the period from November 5, 1982
(inception) through January 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.
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
9
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.
(2) Investment in Joint Venture:
The Company has contributed $1,225,000 in cash, and technology which
has been valued for purposes of the Joint Venture at $700,000. The
Joint Venture does not reflect the $700,000 in technology as an asset
or equity investment in the condensed financial statements presented
below. SECC and SIT have contributed cash aggregating $1,575,000. The
Company has reflected its investment in the Joint Venture under the
equity method of accounting (see Note 1, Summary of significant
accounting policies and other disclosures) and will recognize losses on
the Joint Venture to the extent of its cash investment.
Condensed Balance Sheets for SCE at January 31, 1997 and October 31,
1996 and Condensed Statements of Operations for the three month periods
ended January 31, 1997 and 1996 is as follows:
Condensed Balance Sheets
------------------------
(Unaudited)
January 31, 1997 October 31, 1996
------------------- --------------------
Cash $ 75,260 $ 726,640
Inventories 1,057,397 -
Other current assets 54,622 266,409
Land occupancy rights, net 303,586 308,516
Fixed assets, net 915,730 145,643
Construction in progress 840,486 878,533
Restricted cash - 275,245
Deposits 237,035 184,601
------------------- --------------------
Total Assets $3,484,116 $2,785,587
=================== ====================
Notes payable $ 220,011 $ -
Accounts payable 839,825
Accrued expenses 52,389 288,210
Capital 2,371,891 2,497,377
------------------- --------------------
Total Liabilities and Capital $3,484,116 $2,785,587
=================== ===================
Condensed Statements of Operations
----------------------------------
(Unaudited)
For the three months ended
--------------------------------------------
January 31, 1997 January 31, 1996
------------------- -------------------
Net sales $ - $ -
Operating (loss) (129,653) (26,793)
Other income/(expense) 4,167 3,390
------------------- -------------------
Net (loss) ($125,486) ($23,403)
=================== ===================
10
(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 Three Months Ended For the Three Months Ended
January 31, 1997 January 31, 1996
---------------- ----------------
Net Loss: As Reported ($1,370,445) ($971,319)
Pro Forma ($4,352,009) ($2,156,712)
Net Loss
Per Share: As Reported ($0.02) ($0.02)
Pro Forma ($0.08) ($0.04)
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 three months ended
January 31, 1997 and 1996, respectively: risk free interest rates of
6.24% and 5.62%; expected dividend yields of 0% and 0%; expected lives
of 1.62 and 2.56 years; and expected stock price volatility of 73% and
69%. The weighted average fair value of options granted under Statement
123 for the three months ended January 31, 1997 and 1996 are $2.27 and
$2.19, respectively.
Information regarding the 1987 Plan from October 31, 1996 to January
31, 1997, after adjustments for the two-for-one stock split declared in
May 1996, is presented in the table and narrative below:
Current Weighted Average
Shares Exercise Price Per Share
------ ------------------------
Shares under option at October 31, 1996 754,360 $4.75
Exercised (25,000) $2.75
-------------------
Shares under option at January 31, 1997 729,360 $4.82
Exercisable at January 31, 1997 729,360 $4.82
===================
11
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.
From February 1, 1997 through March 10, 1997, the Company received
proceeds aggregating approximately $76,100 relating to the exercise of
options to purchase 23,200 shares of Common Stock pursuant to the 1987
Plan.
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 January 31, 1997 after adjustments for the two-for-one
stock split declared in May 1996, is presented in the table and
narrative below:
Current Weighted Average
Shares Exercise Price Per Share
------ ------------------------
Shares under option at October 31, 1996 9,174,860 $5.32
Granted 1,785,500 $4.72
Exercised (49,000) $3.54
Canceled (13,000) $5.17
----------------------
Shares under option at January 31, 1997 10,898,360 $5.34
Exercisable at January 31, 1997 5,767,860 $5.34
======================
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 January 31, 1997,
4,257,500 options were available for future grants under the 1993 Plan.
From February 1, 1997 through March 10, 1997, the Company received
proceeds aggregating approximately $374,407 relating to the exercise of
options to purchase 88,500 shares of Common Stock pursuant to the 1993
Plan.
As of March 10, 1997, 5,679,360 of the options to purchase shares of
Common Stock granted and outstanding under the 1993 Plan were
exercisable.
(4) Warrants to purchase common stock:
Information from October 31, 1996 to January 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-dilutive provisions and the two-for-one stock split declared in
May 1996, is as follows:
12
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares covered by warrants at October 31, 1996 415,116 $ 5.11
Warrants exercised - $ -
Warrants expired ( 97,296) $ 4.50
------------------
Shares covered by warrants at January 31, 1997 317,820 $ 5.27
==================
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 January 31, 1997, all of the warrants to purchase
shares of Common Stock issued and outstanding were exercisable.
(5) Stock Split:
On May 24, 1996 the Company declared a two-for-one stock split,
effected in the form of a 100% stock dividend, payable on June 17, 1996
to shareholders of record as of June 4, 1996. The weighted average
number of shares outstanding and net loss per share amounts in the
accompanying financial statements have been restated to reflect the
stock split.
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 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. 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 1996, the Company also increased its
efforts to develop ultra-high resolution video and color capability for
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 monthly purchase
orders in increasing quantities, to be accompanied by irrevocable bank
letters of credit furnished by the distributors.
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;
13
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.
Results of Operations
Selling, general and administrative expenses for the three month
periods ended January 31, 1997 and 1996 and for the period from
November 5, 1982 (inception) through January 31, 1997 were
approximately $1,563,000, $1,075,000, and $33,543,000, respectively.
These amounts include research, development and tooling costs of
approximately $898,000, $767,000, and $21,641,000, respectively, as
well as normal operating expenses. The increase of approximately
$488,000 in selling, general and administrative expenses during the
three months ended January 31, 1997 as compared to the same period in
1996 resulted primarily from increases in marketing expenses and
compensation (and related costs) necessitated by the present phase of
the Company's development program and related activities. Marketing
costs increased during the fiscal 1997 period as a result of the
opening and staffing of a marketing office, retention of public
relations and advertising firms and the production of advertising
materials. Compensation and related costs, rent and travel expenditures
increased for the fiscal 1997 period as a result of the Company's
adding personnel in marketing and engineering and increasing the size
of its facilities. Professional fees, especially patent application
preparation and filing fees, decreased during the fiscal 1997 period.
The Company's portion of SCE's loss during the fiscal 1997 period
increased by approximately $56,000, from approximately $13,000 in the
1996 period, to approximately $69,000 in the fiscal 1997 period, as a
result of SCE's commencing 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.
14
The increase in interest income of $144,000 during the three months
ended January 31, 1997 as compared to the same period in 1996 primarily
resulted from an increase in funds available for investment aided by
slightly higher interest rates. Funds available for investment during
the three month periods ended January 31, 1997 and 1996, on a monthly
weighted average basis, were approximately $20,204,000 and $9,377,000,
respectively. The investment instruments selected by the Company are
principally money market accounts and commercial paper.
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 January 31, 1997, the Company received
proceeds aggregating approximately $242,000 relating to the exercise of
options to purchase 74,000 shares of Common Stock under the 1987 and
1993 Plans. In addition, from February 1, 1997 to March 10, 1997, the
Company received proceeds aggregating approximately $451,000 relating
to the exercise of options to purchase 111,700 shares of Common Stock
under the 1987 and 1993 Plans.
SCE contemplates an initial investment of $7,000,000, of which half is
expected to be borrowed from banks, and capital investment of
$3,500,000. 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). The Joint Venture 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 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
15
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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10 - Contract Granting Land-Use Rights, dated
October 11, 1995, between the Land
Administration Bureau Songjiang County and
Shanghai CopyTele Electronics Co., Ltd.
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 January 31, 1997.
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
March 14, 1997 Executive Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
March 14, 1997 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance and
Chief Financial Officer and
Director (Principal Financial
March 14, 1997 and Accounting Officer)
16
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10 - Contract Granting Land-Use Rights, dated October 11, 1995, between the
Land Administration Bureau Songjiang County and Shanghai CopyTele
Electronics Co., Ltd.
27 - Financial Data Schedule