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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, 1996
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
COPYTELE, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation or Organization)
11-2622630
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(I.R.S. Employer Identification No.)
900 Walt Whitman Road
Huntington Station, NY 11746
(516) 549-5900
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(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:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of January 22, 1997,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($7.00): $336,882,112.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
On January 22, 1997, the registrant had 57,465,656 shares of Common Stock, par
value $.01 per share, which is the registrant's only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
Item 1. Business
General
CopyTele, Inc. (the "Company" or "CopyTele"), 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"), the Company's 55% owned joint venture in
Shanghai, China.
SCE was formed to produce and market multi-functional telecommunications
products in China, utilizing the Company's flat panel display and associated
proprietary hardware and software technology and to supply such products to
CopyTele for sale outside China. The first telecommunications product developed
by the Company is MAGICOM(R) 2000, a telephone based multi-functional product.
Initial production by SCE of this product commenced in December 1996.
During 1996, the Company increased its efforts to develop ultra-high resolution
video and color capability for its overall flat panel display technology. See
"Flat Panel Display Technology - Color and Video" below. There can be no
assurance, however, that the Company's efforts in this area will be successful.
To date, the Company has had no revenues to support its operations and has
expended approximately $20.7 million for research and development since its
inception in 1982. MAGICOM(R) 2000 is only in its initial stages of production
and marketing. The eventual success and profitability of the product will depend
upon many factors, including those normally associated with any new product. See
"MAGICOM(R) 2000 - General" below. Consequently, there is 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 and of SCE obsolete
or unmarketable.
The Company's Chief Executive Officer, Denis A. Krusos, its President, Frank J.
DiSanto, and other senior executives are engaged in the management and
operations of the Company and SCE, including all aspects of the development,
production and marketing of the Company's products and flat panel display
technology, and are important to the future business and financial arrangements
of the Company and SCE.
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The Company was incorporated on November 5, 1982, under the laws of the State of
Delaware. Its principal executive offices are located at 900 Walt Whitman Road,
Huntington Station, New York 11746 and its telephone number is 516-549-5900.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
relating to future events which involve certain risks and uncertainties.
MAGICOM(R) 2000
General
During 1996, the Company concentrated a significant portion of its efforts on
the development of MAGICOM(R) 2000 for SCE. The Company's strategy was to
incorporate its communications and imaging expertise and its advanced flat panel
display technology into a new generation of telephone based multi-functional
personal telecommunications products. This strategy included the development of
the proprietary software and hardware which provides the many functional
capabilities of MAGICOM(R) 2000.
MAGICOM(R) 2000 incorporates CopyTele's ultra-high resolution, patented,
advanced flat panel display, called E-PAPERTM (representing "electronic paper").
The product offers many features, including a dual-line telephone, digital voice
mail system, full duplex speakerphone, fax (full page transmission and paperless
reception), simultaneous voice and electronic handwriting, e-mail communication,
data transmission, storage and computer interface, as well as personal copying
capabilities with the use of an optional Company printer, called MAGIC
PRINTERTM, and the ability to send to a pager using a touch sensitive keyboard
screen, all in a compact easy-to-use desktop unit. MAGICOM(R) 2000 also has
other telecommunications capabilities, such as speed dialing, re-dial, flash,
electronic directory, date and time. It is capable of incorporating, on a
continuing basis, other functions that may be derived from the Company's
proprietary software development. The Company is continuing to develop
proprietary software to provide interfacing with on-line services and the
Internet. A more complete list of the main features of MAGICOM(R) 2000 is set
forth on Exhibit 99.1 to this Annual Report on Form 10-K.
CopyTele's patented flat panel display technology incorporated in MAGICOM(R)
2000 brings an advanced standard of readability to visually displayed electronic
information, since its display image forms in a manner closely resembling the
way a printed image forms on a page. Business documents, letters, diagrams,
written messages or notes, magazine articles and other forms of information that
can be received electronically can be read with the ease approaching that of a
printed page. Users can view in a single image an entire page of information.
The displayed images can be viewed from any angle under all lighting conditions.
Once an image is
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viewed on the display, it can be retained with minimal display power. This
provides additional user-friendliness since no refreshing is necessary to view
an image. Conventional displays, such as cathode ray tubes ("CRTs") and liquid
crystal displays ("LCDs"), require refresh (quick repetition of an image) which
is one reason why people find reading a printed page easier and more natural.
The display, in combination with a high quality writing screen and plastic tip
pen, allows writing with the ease approaching that of writing on paper. The
display- writing screen combination can be used to create and transmit
information and edit received documents. The Company has described these unique
display features as "electronic paper". In addition, the high resolution of its
display has enabled CopyTele to produce a compact, lightweight product capable
of displaying a full page of information, considerably smaller than conventional
lower resolution displays would allow. The product size is suitable for office
and home use.
MAGICOM(R) 2000 is only in its initial stages of production and marketing. The
eventual success and profitability of the 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 obsolete or unmarketable.
Joint Venture
SCE was formed on April 10, 1995 pursuant to a Joint Venture Agreement dated
March 28, 1995 ("the Joint Venture Agreement") between CopyTele and Shanghai
Electronic Components Corp. ("SECC"). With this Joint Venture Agreement, SCE was
formed as a limited liability company in Shanghai, China having a duration of 20
years. The Company has been advised that SECC is wholly-owned by the government
of China and is the largest electronic components company in China.
The Joint Venture Agreement contemplates an initial investment of $7 million, of
which half may be borrowed from banks, with a registered capital of $3.5
million. The parties have agreed in principle to increase the investment to a
maximum of $25 million, depending on the nature and extent of SCE's business.
CopyTele, which owns a 55% interest in SCE, has contributed $1,225,000 in cash,
and technology (valued for purposes of the Joint Venture Agreement at $700,000
and representing 20% of the registered capital) which has been licensed to SCE
pursuant to a Technology License Agreement, dated as of March 28, 1995, between
SCE and the Company (the "Technology License Agreement"). In accordance with
Chinese regulations, the maximum percentage of technology which can be
contributed as
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registered capital is 20%. SECC and Shanghai International Trade and Investment
Developing Corp. ("SIT") (which has acquired a 10% economic interest in SCE from
SECC) have contributed an aggregate of $1,575,000 in cash to SCE. The Board of
Directors of SCE is comprised of seven directors. In accordance with the Joint
Venture Agreement, CopyTele has appointed four directors, the Vice-Chairman and
the General Manager, and SECC and SIT jointly have appointed three directors,
the Chairman and the Vice-General Manager. The Company accounts for its
investment in SCE under the equity method of accounting. See Notes 2 and 3 to
the Company's Financial Statements.
It is contemplated that additional financing for SCE, if required, will be
obtained from a combination of third party borrowings and equity investments
contributed by the Company and the other parties to SCE in proportion to their
respective equity interests and on terms to be agreed upon. The Company may
require additional financing in order to participate in SCE following its
initial capital contributions and to continue its research and development
activities. There can be no assurance, however, that adequate financing will be
available to the Company or SCE, or that, if available, it will be available on
favorable terms and conditions.
CopyTele has licensed only the flat panel application technology to SCE for
exclusive use in China. SCE does not have the right to produce the thin film
coated glass for the Company's flat panel which is being supplied to SCE by the
Company. As a result of licensing the technology, CopyTele will receive
royalties for the duration of the Technology License Agreement on all net sales
by SCE, including sales to CopyTele for resale outside of China. Pursuant to the
Joint Venture Agreement, CopyTele is solely authorized to market and sell SCE's
products outside of China while SCE is responsible for marketing and sales
within China.
On July 10, 1995, an Assignment Agreement was entered into by CopyTele, SECC and
SIT whereby SECC assigned a 10% economic interest to SIT in the capital and
profits of SCE from SECC's original interest of 45%. SIT, an investment and
trade development company, is a state owned enterprise operating under the
leadership of the Shanghai Foreign Economic Relations and Trade Commission in
Shanghai, China. As a result of the assignment, SECC's interest in SCE was
reduced to 35%. SECC has retained all its duties and obligations under the Joint
Venture Agreement, but SIT assumed a 10% obligation with respect to the capital
contributions payable by SECC to SCE.
In December 1996, SCE commenced initial production of MAGICOM(R) 2000 in its
12,000 square foot leased facility in Shanghai, China (the "Leased Facility").
During 1996, SCE also completed construction of a 30,000 square foot facility
(the "Owned Facility") in the Shanghai Songjiang Industrial Zone (see
"Properties" below), and plans to commence production of MAGICOM(R) 2000 in this
facility and discontinue production in the Leased Facility during the first
calendar quarter of 1997. See "Production" below. The capital contributions made
to SCE were sufficient to enable SCE to cover the costs of building the new
facility, which
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totalled approximately U.S.$1 million in the aggregate. SCE has obtained a third
party loan of U.S. $220,000 secured by the land-use contract for the purpose of
purchasing production materials and supplies. Additional funding for the
purchase of additional production lines, if required, and working capital
requirements are expected to be financed through additional third party
borrowings.
Production
SCE utilizes multi-purpose production and assembly line equipment to produce
MAGICOM(R) 2000. The production process primarily involves a multi-station
assembly line for the sequential assembly of various sub-assemblies, including
the Company's flat panel display system. To date, approximately forty-five of
SCE's sixty employees are involved in the assembly and production of MAGICOM(R)
2000. However, the number of employees is subject to change depending upon SCE's
future production requirements. MAGICOM(R) 2000's main sub-assemblies include
printed circuit boards, which are automatically being populated with electronic
components, a document scanner, keypad and function controls, the flat panel
assembly and the case. The flat panel assembly includes automatic insertion and
bonding of the 128 driver output chips located on the flat panel, the
illumination system, and the touch screen. The Company is providing SCE with the
128 output chips, the flat panel fluid, and components of the flat panel which
are being produced by Hoya Corporation ("Hoya"), a major Japanese high
technology manufacturer of glass products, under agreements with the Company.
See "Flat Panel Display Technology -- General" below. The Company is also
receiving sample quantities of flat panels from Hoya to monitor their
performance. SCE is filling the flat panels with the fluid, mounting and
electrically connecting the 128 output chips to the flat panel, and integrating
the illumination system and touch screen to complete the flat panel assembly.
The Company has provided testing systems to SCE to check the operation of
MAGICOM(R) 2000 units as they are produced.
Prior to the commencement of production, the Company designed and installed in
its facilities in the United States production equipment for the assembly and
testing of its flat panel display system. This equipment was used to verify and
standardize the production process and to train SCE production personnel in the
use of the equipment. Based on these results, similar equipment capable of
larger production quantities was installed in the Leased Facility. The Company
is continuing to use its equipment in the United States to sample-test flat
panels supplied by Hoya and for development purposes. The Company is also
receiving, on a sampling basis, SCE produced MAGICOM(R) 2000 units to monitor
the quality of the production process.
Initial production of MAGICOM(R) 2000 commenced in the Leased Facility in
December 1996. During 1996, SCE also completed the construction of the Owned
Facility in the Shanghai Songjiang Industrial Zone. The Owned Facility has
warehouse space, administrative offices, and the capability to house multiple
production lines similar to the production line used in the
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Leased Facility. If additional production lines are purchased and multiple
shifts per line are utilized, the Company believes that the Owned Facility could
ultimately have the capability of producing up to a maximum of 700,000 units per
year, if necessary depending upon SCE's requirements for finished products. SCE
believes it currently has adequate management, technical and production
personnel to operate the facility and intends to increase personnel as needed.
See "Employees and Consultants". SCE currently is in the process of transferring
all of its production equipment and personnel from the Leased Facility to the
Owned Facility, and anticipates commencing production of MAGICOM(R) 2000 in this
facility and discontinuing production in the Leased Facility during the first
calendar quarter of 1997. A determination has been made by all parties to
terminate the lease covering the Leased Facility after the transfer of all
production equipment and personnel has been fully completed. See "Properties"
below.
MAGICOM(R) 2000 contains various electronic components. The commodity-type
components, such as resistors, capacitors and multi-purpose chips are available
and are being purchased from various vendors world-wide, including SECC. Special
purpose components, such as the fax and data chip set, the 128 output drive
chips and the flat panel's coated glass plates, are being purchased from single
vendors which represent the major suppliers of these components throughout the
telecommunications, consumer electronics and other industries. The Company does
not presently anticipate that it will experience any difficulty in obtaining the
required components for MAGICOM(R) 2000.
The Songjiang Industrial Zone is approximately 20 miles from downtown Shanghai,
30 miles from a deep harbor and 13 miles from an international airport. A
transportation system of connecting expressways, railroads and waterways provide
efficient routes to import raw materials and to export SCE's products to
world-wide markets.
Marketing
Pursuant to the Joint Venture Agreement, the Company is solely authorized to
purchase MAGICOM(R) 2000 from SCE for marketing and sale outside of China. In
1996, the Company established a Sales and Marketing Office and hired a marketing
team, including independent sales representatives, to implement its marketing
strategy. To date, the Company has hired four sales personnel in addition to
Frank W. Trischetta, Senior Vice-President Marketing and Sales, and has retained
nine independent representatives in several countries.
The Company's marketing strategy is to penetrate world-wide markets in
progressive stages, beginning with those markets which the Company believes to
have lower entry barriers and to be the least difficult to supply and service.
The Company has initially focused its efforts on North Africa and Egypt and
eventually plans to progress into other countries of the world, depending upon
the growth of SCE's production capabilities and the marketing success of
MAGICOM(R) 2000.
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As a result of these efforts, the Company has entered into distribution
agreements to date with three distributors to sell and service MAGICOM(R) 2000
in North Africa and Egypt for terms of three years. See "MAGICOM(R) 2000 -
General" above for certain risks associated with the success and profitability
of the product. The agreements provide for monthly purchase orders in increasing
quantities commencing in the first calendar quarter of 1997, to be accompanied
by irrevocable bank letters of credit, acceptable to the Company, furnished by
the distributors. The aggregate purchase price for the total quantities
contracted for sale under the three distribution agreements is approximately $90
million.
In North Africa, CopyTele entered into an agreement with a consortium of
companies in Tunisia whose territory includes the countries of Tunisia, Algeria
and Morocco. These companies are presently engaged in sales and service in the
fields of telecommunications, mobile communications, satellite systems, security
and office products.
In Egypt, CopyTele entered into agreements with two distributors that provide
sales and service to telecommunications customers in the public and private
sectors. One of the distributors specializes in telecommunications equipment for
banks, hotels, governmental, commercial and industrial customers while the other
specializes in the planning, implementation and maintenance of integrated public
and private telephone systems networks utilizing PBX's, modem telephones, cables
and accessories, within the governmental and commercial fields. Jointly, they
have been directly responsible for the software and hardware design,
installation and maintenance of over 300,000 local telephone lines in Egypt and
maintain an extensive sales network throughout Egypt which will be available for
distribution of MAGICOM(R) 2000.
The Company's distributors and independent sales representatives currently are
in the process of marketing MAGICOM(R) 2000 to telephone companies, government
agencies and industrial, professional and service entities. In an effort to
support its distributors and independent representatives and to facilitate the
opening of new markets, the Company has developed brochures, videos, exhibition
booths for trade shows, sales handbooks and other sales and marketing tools. The
Company and representatives of SCE also have participated in numerous
international trade shows and press conferences to promote the product.
SCE is solely responsible for marketing MAGICOM(R) 2000 in China. SCE has
featured MAGICOM(R) 2000 at several trade shows in China and has launched a
marketing program pursuant to which SCE has selected appropriate local sales
channels for the product and has initiated relationships with local
distributors. To date, however, no definitive agreements have been reached for
the distribution of MAGICOM(R) 2000 in China.
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Flat Panel Display Technology
General
The Company is continuing to enhance the characteristics of its compact,
ultra-high resolution charged particle flat panel display. The flat panel
possesses a combination of features that are not presently available in other
display screens, such as ultra-high resolution, compatibility with facsimile
terminals (200 lines per inch in the horizontal and vertical directions with up
to a full page of information with real-time display), a minimal amount of
inactive space between pixels or picture elements (allowing the image to appear
smoother), image retention without refreshing (eliminating the need for image
repetition with resulting flicker and operator fatigue), approximately 180
degree viewing angle, low power consumption for writing and image retention with
minimal power consumption. The Company has developed flat panels with viewing
areas whose diagonals are 7.8, 7.2 and 5.7 inches, and containing approximately
1,150,000, 800,000 and 630,000 pixels, respectively. The Company's 7.8 inch
diagonal flat panel is one of the principal features of the MAGICOM(R) 2000
product. This flat panel has 1,280 lines by 896 lines with a resolution of 200
lines per inch in both directions, and has an image area of approximately 6.4 x
4.5 inches.
The Company is continuing to purchase, for testing and demonstration purposes
and for incorporation into MAGICOM(R) 2000, production quality flat panels from
Hoya utilizing the Company's design and technology. The flat panels incorporate
the latest designs and improvements in production technology by reducing the
number of steps necessary to construct the flat panels, thereby allowing
multiple flat panels to be produced from a single primary glass substrate, while
achieving the enhancement of image brightness and contrast. Hoya is assembling
the flat panels. The overall size of the flat panel has been reduced while
maintaining the same image area, thereby allowing a larger number of flat panels
to be produced from a single glass substrate and reducing the size and
potentially the cost of the display. Also, the Company has installed in its
facilities in the United States the capability of handling large scale fluid
production and is supplying the fluid to SCE for insertion into the flat panel.
The Company's flat panel design is utilizing a new chip which has 128 outputs as
compared to the prior chip which had 64 outputs. The new chip is approximately
the same size, has substantially higher speed to accommodate faster panel
operation, and is capable of using minimal power when viewing an image. The new
chip is being purchased by the Company and is being supplied to SCE for
incorporation into production units.
The flat panel also utilizes fluids which were developed by the Company and
which are suitable for production processing. See "Fluid" below. The fluid
contains yellow particles suspended in a dark dye. Thus, the flat panel contains
a yellow background with black writing or vice versa.
Included as an integral part of the Company's flat panel display is a plastic
tip pen and touch writing screen. Due to the ultra-high resolution of the flat
panel display, any language may be clearly written with the use of the plastic
tip pen. In addition, with the use of the pen on a
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keyboard displayed on the screen of the flat panel, various modes of
communication can be initiated, such as fax, e-mail and access to information
services. An integrated front illumination system (see "Illumination" below) is
also incorporated into the flat panel. This system provides viewing of the flat
panel from nighttime to sunlight ambient light conditions. By incorporating
these capabilities, the Company's flat panel technology provides clear and
comfortable viewing, from any angle, of pictures, text in any language, and
graphics.
Color and Video
During 1996, in light of the new digital video standards that are being
formulated in the telecommunications industry, the Company increased its efforts
to develop digital video and color capability for its overall flat panel display
technology. In an effort to achieve these goals, the Company expanded its
technical staff with leading scientists in this field and acquired new
facilities and equipment. The Company believes that, if successful, the
technology under development, which involves unique proprietary solid state and
optical technology, will be most suitable to obtain ultra-high resolution in
color at video speeds, with minimal power, high contrast and long life. The
Company anticipates that color implementation would be achieved without the use
of the traditional color filters which are currently used in LCDs. The Company
already has fabricated feasibility models and has demonstrated the capability of
its technology in achieving the required video response time, contrast, color
and resolution. The Company believes that this technology has the fastest known
response time for any type of display, including CRTs and LCDs. The Company is
now in the process of fabricating flat panels incorporating this technology
having a resolution of approximately 240 lines per inch in both the horizontal
and vertical directions. The Company believes that if ultra-high resolution
video and color capability can be fully developed, the technology could be of
universal use in such products as computers, digital television, video
conferencing, multi-media devices, personal telecommunications and network
computers (NC), and for accessing on-line information services and the Internet.
The Company has filed for fundamental patent protection for this technology.
There can be no assurance, however, that the Company's efforts in this area will
be successful.
Illumination
As part of the Company's product strategy, an illumination system has been
developed and has been included in MAGICOM(R) 2000 to provide illumination from
nighttime to sunlight. The front illumination system has been integrated with
the flat panel assembly. The light is generated by cold cathode fluorescent
lamps. The design of these lamps was developed in conjunction with another
company in accordance with the Company's specifications. The Company determined
experimentally the dimensions, slit angle and phosphor color of the fluorescent
lamp. The development also included the design of the optical system, its
optical quality, mechanical mounting techniques and the generation of standards
for quality control of the systems, brightness, contrast and uniformity.
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The Company is continuing to pursue the development of new techniques designed
to further improve light output efficiency. These development activities involve
advanced optics and designs, such as light shaping diffusers, edge illuminated
holograms, pixellated illumination, and optical thin film coatings. This effort
complements the Company's front illumination system using conventional optical
light coupling and, if successful, could lead to lower cost, higher efficiency,
and improved uniformity.
Fluid
For fluid production purposes, an environmentally controlled chamber has been
installed at the Company's facilities. Using the chamber, environmental
parameters have been set to optimize desirable fluid properties. Additional
equipment has been procured to allow large batches of fluid to be produced.
Equipment has also been acquired to characterize batches and to assure fluid
consistency. Results of these tests have led to improved processing steps and
increased fluid quality control. Production quantities are now being made and
shipped to SCE for use in the production of MAGICOM(R) 2000.
Fluid development work has been expanded through the addition of equipment and
the expansion of the Company's facilities.With this expansion, the processing of
charged particles in the suspension is being further developed. A number of
coatings have been applied to the Company's pigment particles to increase
contrast, enhance stability and, by changing particle density, to broaden the
choice of solvents which may be used for its suspensions.
The Company believes that the display is environmentally comparable to a liquid
crystal display and the Company presently is not aware of any environmental
hazards associated with the small quantity of fluid medium inside the flat
panel.
Second Joint Venture
On April 17, 1996, the Company entered into a letter of intent for the formation
of a second joint venture with SECC to be called Shanghai CopyTele No. 2
Electronics Co., Ltd. (the "Second Joint Venture"). Pursuant to the terms of the
letter of intent, the main purpose of the Second Joint Venture will be to
manufacture and sell electronic components and parts used in SCE products, and
products of other manufacturers. Initially, however, the Second Joint Venture
will manufacture and market thick film circuits presently being produced by SECC
at one of its facilities.
The parties are presently discussing possible amendments to the letter of intent
to expand the scope of the proposed Second Joint Venture, to increase the
initial capitalization, and to add additional parties. See "Management's
Discussion and Analysis of Financial Condition and
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Results of Operations - Liquidity" below for a complete discussion of the
proposed capitalization, unless otherwise amended, of the Second Joint Venture.
The letter of intent, as amended, would represent solely the intentions of the
parties and would be subject to the execution of mutually acceptable agreements
and the receipt of all necessary governmental approvals. There can be no
assurance that the proposed Second Joint Venture will be formed or that, if
formed, it will be successful.
Competition
The telecommunications industry has a substantial number of competitors which
are significantly larger and possess financial resources significantly greater
than those of the Company or SCE. Certain competitive products contain displays
which primarily include LCDs. These products, however, have fewer features than
the Company's product and the displays have significantly less resolution and
information content capability than the Company's flat panel display. The
Company's flat panel is being utilized for the first time in the marketplace in
MAGICOM(R) 2000. The Company believes that telecommunications products
incorporating the Company's flat panel could have many commercial applications
and could combine many characteristics which the Company believes would be
desirable to potential customers.
MAGICOM(R) 2000, the first telecommunications product developed by the Company,
is a unique product that incorporates the features of many different products on
the market, such as computers, telephones and fax machines. The product allows
the user to talk and write on the machine at the same time as well as exchange
information, faxes and messages with other MAGICOM(R) 2000 units, terminals,
computers, fax machines and pagers. Other products currently available on the
market do not combine all these features together with a high resolution flat
panel display. Distinct features of the E-PAPERTM flat panel screen are its
readability from any angle up to 180 degrees, viewability under any lighting
conditions and its ability to display full pages of text and images. It is the
E-PAPERTM screen, with its associated features, that the Company believes
principally will distinguish MAGICOM(R) 2000 from other comparable products that
may be developed by other manufacturers in the future.
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However, there is no assurance that comparable or superior products or systems
to MAGICOM(R) 2000 will not be developed which would render MAGICOM(R) 2000 or
other products of the Company and SCE difficult to market or otherwise obsolete.
Patents
The Company has received seventy-nine (79) patents, including those from the
United States and certain foreign patent offices, expiring at various dates
between 2005 and 2015. At the present time, additional patent applications are
pending with the United States and certain foreign patent offices. The foregoing
patents are related to the design, structure and methods of construction of the
flat panel, methods of operating the flat panel, particle generation,
applications using the flat panel, and new applications for SCE's planned
products. The Company has been advised by its patent counsel that in their
opinion the subject matter of the pending applications contain patentable
material.
The Company has licensed a number of its patents covering the flat panel, but
excluding the flat panel manufacturing technology, to SCE on an exclusive basis
in China.
There is no assurance that patents will be obtained for any of the pending
applications. In addition, there is no assurance that any patents held or
obtained will protect the Company against competitors either with or without
litigation. The Company is not aware that MAGICOM(R) 2000 is infringing upon the
patents of others. There is no assurance, however, that other products developed
by the Company will not infringe upon the patents of others, or that the Company
and SCE will not have to obtain licenses under the patents of others.
The Company believes that the foregoing patents are significant to the future
operations of the Company.
Research and Development Expenses
Research and development expenses, which have comprised a significant portion of
the Company's selling, general and administrative expenses since its inception,
were approximately $3,858,000, $2,353,000, $2,677,000, and $20,743,000 for the
fiscal years ended October 31, 1996, 1995, 1994 and for the period from November
5, 1982 (inception) through October 31, 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below
and the Company's Financial Statements.
13
<PAGE>
Employees and Consultants
The Company had thirty-one employees and twenty consultants as of January 22,
1997. Twenty three of these individuals, including the Company's Chairman of the
Board and its President, are engaged in research and development. Their
backgrounds include expertise in chemistry, optics and electronics. Fifteen
individuals are engaged in marketing and the remaining individuals are engaged
in administrative and financial functions for the Company. None of the Company's
employees are represented by a labor organization or union.
To date, SCE has approximately sixty employees, of which forty-five are engaged
in production and fifteen are engaged in administrative and other functions.
Item 2. Properties.
The Company leases approximately 10,000 square feet of office and laboratory
research facilities at 900 Walt Whitman Road, Huntington Station, New York (its
principal offices) from an unrelated party pursuant to a lease which expires
November 30, 1998, for a base rent of approximately $166,000 per annum, as well
as escalation clauses for increases in certain operating costs, for a total cost
aggregating approximately $173,000 per annum. The Company has the right to
cancel portions of the lease as of November 30, 1997 and February 28, 1998,
respectively. This lease does not contain provisions for its renewal and
management will continue to evaluate the future adequacy of this facility. See
Note 8 to the Company's Financial Statements.
In February 1996, the Company entered into a five year lease with an unrelated
party for approximately 2,300 square feet of office space in Valhalla, New York.
The lease, which expires on June 30, 2001 and is non-renewable, has a base rent
of $51,175 per annum in years one and two and $55,775 per annum for the
remainder of the lease. In October 1996, the Company entered into a lease with
an unrelated party for approximately 2,000 square feet of office and laboratory
space near its principal offices. This lease, which expires on May 31, 1997,
provides for a base rent of $1,300 per month and contains a provision permitting
the Company to extend the term of the lease for up to an additional three years
with escalating rents.
SCE's Leased Facility consists of approximately 12,000 square feet of office and
production space in Shanghai, China, pursuant to a lease which expires by its
terms in April 1997. A determination has been made by all parties to terminate
this lease on such earlier date as the transfer of all production equipment and
personnel from this facility to the new facility described below has been fully
completed.
During 1996, SCE completed construction of a 30,000 square foot, one-story
office, warehouse and production facility owned by SCE in the Shanghai Songjiang
Industrial Zone, on land acquired pursuant to a land-use contract, dated October
11, 1995, with the Land Administration Bureau of Shanghai County having a term
of 50 years. SCE has obtained a one-year loan of U.S.$220,000 secured by the
land-use contract. See Note 3 to the Company's
14
<PAGE>
Financial Statements. SCE currently is in the process of transferring all of its
production equipment and personnel from the Leased Facility to this new
facility.
Management believes that the facilities described above, which are fully
utilized at the present time (other than SCE's recently constructed 30,000
square foot facility) are adequate for the Company's and SCE's current
requirements. It is anticipated that additional space may be needed in the
future depending upon the nature and extent of the Company's activities with SCE
and with the growth of the Company's and SCE's businesses.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the Company's fiscal year ended October 31, 1996,
no matters were submitted by the Company to a vote of its shareholders.
Executive Officers of the Company
The only executive officers of the Company are Denis A. Krusos, Frank J.
DiSanto, Frank W. Trischetta and Gerald J. Bentivegna. The information required
to be furnished with respect to these executive officers is set forth in, and
incorporated by reference from, Item 10 Part III of this Annual Report on Form
10-K.
15
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.
The common stock of the Company has been traded on the National Association of
Securities Dealers, Inc. Automated Quotation National Market System ("NASDAQ -
NMS"), the automated quotation system of the National Association of Securities
Dealers, Inc. ("NASD") under the symbol "COPY", since October 6, 1983, the date
public trading of the Company's common stock commenced. The high and low sales
prices, as reported by NASDAQ, for each quarterly fiscal period adjusted for the
two-for-one stock split declared in May, 1996, during the Company's fiscal years
ended October 31, 1995 and 1996 have been as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Period High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1st quarter 1995 $4.44 $2.38
2nd quarter 1995 4.13 2.82
3rd quarter 1995 5.50 3.19
4th quarter 1995 5.25 3.44
- --------------------------------------------------------------------------------
1st quarter 1996 5.56 4.06
2nd quarter 1996 6.06 4.63
3rd quarter 1996 9.88 5.25
4th quarter 1996 7.63 5.25
- --------------------------------------------------------------------------------
</TABLE>
As of January 22, 1997 the approximate number of record holders of common stock
of the Company was 1,025.
No cash dividends have been paid on the common stock of the Company since its
inception and the Company has no present intention to pay any cash dividends in
the foreseeable future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for information with respect to
certain minimum listing requirements for the NASDAQ - NMS.
16
<PAGE>
Item 6. Selected Financial Data.
The following data has been derived from the Financial Statements of the Company
and should be read in conjunction with those statements, and the notes related
thereto, which are included in this report.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
For the period
As of and for the year ended October 31, from November 5, 1982
(inception) through
October 31, 1996
---------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ - $ - $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
Selling General and
Administrative Expenses, and 6,166,210 3,350,125 3,651,334 2,925,627 1,978,444 32,146,652
Loss from SCE
- ----------------------------------------------------------------------------------------------------------------------------
Interest Income 722,800 356,226 223,817 162,778 151,088 3,388,272
- ----------------------------------------------------------------------------------------------------------------------------
Net (Loss) (5,443,410) (2,993,899) (3,427,517) (2,762,849) (1,827,356) ($28,758,380)
- ----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share of
Common Stock (a) ($0.10) ($0.06) ($0.07) ($0.06) ($0.04) ($0.64)
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets 24,710,420 9,695,398 6,614,332 8,686,241 4,358,874
- ----------------------------------------------------------------------------------------------------------------------------
Long Term Obligations $ - $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 22,750,273 9,436,708 6,415,233 8,244,925 4,083,800
- ----------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share $ - $ - $ - $ - $ - $ -
of Common Stock
- ----------------------------------------------------------------------------------------------------------------------------
--------------------
<FN>
(a) Adjusted for three-for-one stock split declared in October 1985,
five-for-four stock split declared in August 1987, two-for-one stock
split declared in February 1991 and two-for-one stock split declared in
May 1996.
</FN>
</TABLE>
Item 7. 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 "Business - New Developments" and Notes 2 and 3
to the Company's 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. See "Business - Flat Panel Display
Technology - Color and Video" above. 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
17
<PAGE>
have sufficient revenues to generate profit or that other products will not be
produced by other companies that will render the products of the Company or 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 Financial Statements
and the notes thereto.
Results of Operations
Selling, general and administrative expenses, including the loss from SCE, for
the fiscal years ended October 31, 1996, 1995 and 1994 and for the period from
November 5, 1982 (inception) through October 31, 1996 were approximately
$6,166,000, $3,350,000, $3,651,000 and $32,147,000, respectively. These amounts
include research, development and tooling costs of approximately $3,858,000,
$2,353,000, $2,677,000 and $20,743,000, respectively, as well as normal
operating expenses. Selling, general and administrative expenses, including the
loss from SCE, increased $2,816,000 during fiscal 1996 as compared to fiscal
1995 resulting primarily from increases in expenditures for engineering supplies
and services necessitated by the present phase of the Company's development
program and related activities. Professional fees increased during the fiscal
1996 period, especially patent application preparation and filing fees. Other
increases in professional fees, including accounting and shareholder services,
were offset by a decline in other legal fees which were not patent related.
Initial marketing costs were incurred during the fiscal 1996 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 and promotional
materials. Other expense categories also increased in fiscal 1996, including
compensation and related costs, rent and travel expenditures, as a result of
adding personnel in marketing and engineering, the rental of additional space
and facilities, and travel associated with marketing and supporting the joint
venture in China. The Company's portion of SCE's loss in fiscal 1996 of
approximately $149,000 as compared to the loss in fiscal 1995 of approximately
$18,000 was as a result of SCE expensing start up costs prior to production.
Selling, general and administrative expenses, including the loss from SCE,
decreased $301,000 during fiscal 1995 as compared to fiscal 1994 as a result of
the requirements of the Company's development program and related activities.
Engineering supplies purchases and patent application preparation and filing
fees decreased substantially during fiscal 1995, while professional fees
(excluding patent related fees) and business trip expenses increased. Consulting
and outside engineering services expenses increased during fiscal 1995 as
compared to fiscal 1994 as a result of costs incurred in connection with the
development of products for SCE.
18
<PAGE>
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 three 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. Since
February 1993, one additional employee is also currently waiving such salary and
benefit rights for an undetermined period of time. See "Executive Compensation"
and Note 11 to the Company's Financial Statements for a more complete discussion
regarding salary and related pension benefit waivers.
The increase in interest income during fiscal 1996 as compared to 1995 primarily
resulted from a significant increase in average funds available for investment
offset slightly by a decrease in interest rates. The increase in interest income
during fiscal 1995 as compared to fiscal 1994 primarily resulted from a small
increase in average funds available for investment, and an increase in interest
rates. Funds available for investment during 1996, 1995 and 1994, on a monthly
weighted average basis, were approximately $16,011,000, $7,175,000 and
$7,050,000, respectively. The investment instruments selected by the Company are
principally money market accounts and commercial paper.
During October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock Based
Compensation. This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
plans. However, SFAS No. 123 also permits the Company to continue to measure
compensation costs under preexisting accounting pronouncements. If the fair
market value based method of accounting is not adopted, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share. This statement will
be adopted by the Company during fiscal 1997. The Company is currently
evaluating the implications of SFAS No. 123 and, as a result, has not yet
determined how it would be applied in its financial statements. See Note 2 to
the Company's Financial Statements. The Company has adopted all other recently
issued accounting standards which have an impact on its financial statement.
See "Business" and Note 1 to the Company's Financial Statements for discussions
regarding uncertainties that may significantly affect results of future
operations.
19
<PAGE>
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 its 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 Company's 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 and
amended on May 3, 1995 and May 10, 1996 (the "1993 Plan").
During the fiscal year ended October 31, 1996, the Company received proceeds
aggregating approximately $17,667,500 from the exercise of options to purchase
5,110,100 shares of its common stock pursuant to the 1987 Plan and the 1993
Plan. In addition, during fiscal 1996 the Company received proceeds aggregating
approximately $1,089,500 from the exercise of warrants by members of the
immediate families of its Chairman of the Board and its President to purchase
384,350 shares of common stock. From the period November 1, 1996 through January
22, 1997 the Company received proceeds aggregating approximately $204,500 from
the exercise of stock options for 61,000 shares of the Company's common stock.
See "Certain Relationships and Related Transactions" below and the Company's
Financial Statements for a more complete discussion regarding sales of common
stock.
SCE contemplates an initial investment of $7,000,000, of which half is expected
to be borrowed from banks, and a 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, 2 and 3 to the Company's Financial Statements. SCE may require
capitalization of up to $25 million, depending upon the nature and extent of its
business activities.
As stipulated in a letter of intent signed with SECC, 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
20
<PAGE>
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 SCE or the Second Joint Venture following its initial capital contributions
and to continue its research and development activities.
The 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.
See "Business" and Note 1 to the Company's Financial Statements for discussions
regarding uncertainties that may significantly affect future liquidity and
capital resources.
Item 8. Financial Statements and Supplementary Data.
See accompanying "Index to Financial Statements".
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
21
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information with respect to all of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Director and/or
Position with the Company and Principal Executive Officer
Name Occupation Age Since
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denis A. Krusos Director, Chairman of the Board and 69 1982
Chief Executive Officer
- -------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 72 1982
- -------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna Director, Vice President - Finance and 47 1994
Chief Financial Officer
- -------------------------------------------------------------------------------------------------------
John E. Gillies Director 70 1992
- -------------------------------------------------------------------------------------------------------
John R. Shonnard Director 81 1988
- -------------------------------------------------------------------------------------------------------
Frank W. Trischetta Senior Vice President - Marketing and 56 1996
Sales
- -------------------------------------------------------------------------------------------------------
</TABLE>
Mr. Krusos has been a Director, Chairman of the Board and Chief Executive
Officer of the Company 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 Juris Doctor from St. John's University and is a member of the New York bar.
Mr. DiSanto has been a Director and President of the Company 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. Bentivegna has been Vice President - Finance and Chief Financial Officer
since September 1994 and was elected a Director in July 1995. Prior to joining
the Company, Mr. Bentivegna was employed at Marino Industries Corp. for
approximately 10 years, where he served as Controller, Treasurer and Chief
Financial Officer. He holds an M.B.A. degree from Long Island University and
a B.B.A. from Dowling College.
Mr. Gillies has been a Director of the Company since January 1992. He has been
an attorney for over forty years and formerly served as a Village Justice and
as a Village Attorney of the Incorporated Village of Farmingdale. He is also
Honorary President of
22
<PAGE>
St. Mary's Children and Family Services, a not-for-profit child care agency for
which he has served in various capacities for over twenty years.
Mr. Shonnard has been a Director of the Company since January 1988. He had been
a research consultant to the Company from August 1983 until his retirement in
May 1988. Mr. Shonnard was engaged in development engineering in the
communications field for over fifty years and has held numerous patents in the
communications field.
Mr. Trischetta has been Senior Vice President - Marketing and Sales since
February 1996. Prior to joining the Company, Mr. Trischetta was employed by
Panasonic Corporation for approximately 15 years where he served as General
Manager Marketing and Sales for Panasonic Office Automation Products. Prior to
that, Mr. Trischetta was employed by 3-M Company for approximately 17 years
where he advanced to a senior sales and marketing executive position. He holds a
B.B.A. from the University of Miami.
Item 11. Executive Compensation.
Messrs. Denis A. Krusos, Chairman of the Board, Chief Executive Officer and
Director, Frank J. DiSanto, President and Director, Frank W. Trischetta, Senior
Vice President - Marketing and Sales, and Gerald J. Bentivegna, Vice President -
Finance, Chief Financial Officer and Director, are the executive officers of the
Company. While there are no formal agreements, Denis A. Krusos and Frank J.
DiSanto waived any and all rights to receive salary and related pension benefits
for an undetermined period of time commencing November 1, 1985. As a result, Mr.
Krusos received no salary or bonus during the last three fiscal years. Except
for Mr. Trischetta, no other executive officer received a salary or bonus in
excess of $100,000 during the fiscal year ended October 31, 1996. The following
is compensation information regarding Mr. Krusos and Mr. Trischetta for the
fiscal years ended October 31, 1996, 1995 and 1994:
23
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term Annual
Fiscal Compensation Awards Compensation
Name and Year
Principal Position Ended
Securities Underlying
Options (#)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denis A. Krusos, 10/31/96 575,000 -
Chairman of the Board, 10/31/95 900,000 -
Chief Executive Officer and 10/31/94 200,000 -
Director
- ---------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 10/31/96 155,000 $117,600
Senior Vice President -
Marketing and Sales
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is information regarding stock options granted to Mr. Krusos and
Mr. Trischetta pursuant to the 1993 Plan during the fiscal year ended October
31, 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Granted Employees in Price Expiration
Name (#) (1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Denis A. Krusos 18,890 .41% $5.2938(2) 3/20/01 $ 16,026 $ 46,410
- ------------------------------------------------------------------------------------------------------------------------------------
181,110 3.96% $4.8125(3) 3/20/06 $548,139 $1,389,093
-----------------------------------------------------------------------------------------------------------------
200,000 4.37% $4.8125(3) 4/21/06 $605,311 $1,533,977
-----------------------------------------------------------------------------------------------------------------
175,000 3.82% $6.3750(3) 9/18/06 $701,611 $1,778,019
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. 20,778 .45% $4.8125 (2) 3/20/06 $ 62,886 $ 159,365
Trischetta
- ------------------------------------------------------------------------------------------------------------------------------------
29,222 .64% $4.8125 (3) 3/20/06 $ 88.442 $ 224,129
-----------------------------------------------------------------------------------------------------------------
70,000 1.53% $4.8125 (3) 4/21/06 $211,859 $ 536,892
-----------------------------------------------------------------------------------------------------------------
35,000 .76% $6.3750 (3) 9/18/06 $140,322 $ 355,604
-----------------------------------------------------------------------------------------------------------------
24
<PAGE>
<FN>
- -----------------
(1) The options are exercisable in whole or in part commencing one year
following the date of grant unless otherwise accelerated. The options are
not issued in tandem with stock appreciation or similar rights and are not
transferable other than by will or the laws of descent and distribution.
The options terminate upon termination of employment, except that in the
case of death, disability or termination for reasons other than cause,
options may be exercised for certain periods of time thereafter as set
forth in the 1993 Plan.
(2) The exercise price of these options was equal to 110% of the fair market
value of the underlying common stock on the date of grant for Mr. Krusos
and 100% of the fair market value of the underlying common stock on the
date of grant for Mr. Trischetta (fair market value being defined in the
1993 Plan as the last sales price of the Company's common stock on
NASDAQ-NMS on the date of grant). These options were granted as incentive
stock options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended.
(3) The exercise price of these options was equal to the fair market value of
the underlying common stock on the date of grant. These options are
nonqualified options.
</FN>
</TABLE>
The following is information regarding stock option exercises during fiscal 1996
by Mr. Krusos and Mr. Trischetta and the values of their options as of October
31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
=====================================================================================================================
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Options Money Options at Fiscal Year
at Fiscal Year End (#) End ($) (2)
Shares Acquired Value Realized
Name on Exercise (#) ($) (1)
------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Denis A. Krusos 1,099,820 $3,191,225 1,597,180 175,000 $1,472,300 $136,719
- ---------------------------------------------------------------------------------------------------------------------
Frank W. 142,000 $290,750 208,000 155,000 $783,875 $308,594
Trischetta
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Such value was determined by applying the net difference between the
selling price of the stock sold on day of exercise and the exercise
price for the options to the number of options exercised. The exercise
price of these options was equal to the fair market value of the
underlying common stock as defined in the applicable plan.
25
<PAGE>
(2) Such value was determined by applying the net difference between the
last sales price of the Company's common stock on October 31, 1996 and
the exercise price for the options to the number of unexercised
in-the-money options held. The exercise price of these options was at
least equal to the fair market value of the underlying common stock as
defined in the 1993 Plan.
</FN>
</TABLE>
There is no present arrangement for the compensation of directors for services
in that capacity. Upon the approval of the amendment of the 1993 Plan by the
Company's shareholders on July 24, 1996, each nonemployee director elected at
the 1996 Annual Meeting of Shareholders received nonqualified stock options to
purchase 40,000 shares of common stock and such nonemployee directors will
receive nonqualified stock options to purchase 40,000 shares of common stock
each subsequent year that such director is elected to the Board of Directors. In
addition, any future nonemployee director elected to the Board of Directors will
receive nonqualified stock options to purchase 20,000 shares of common stock
upon his initial election to the Board of Directors and 40,000 each subsequent
year that such director is elected to the Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth certain information with respect to the Company's
common stock beneficially owned as of January 22, 1997 by (a) each person who is
known by the management of the Company to be the beneficial owner of more than
5% of the Company's common stock, (b) each director or executive officer of the
Company and (c) all directors and executive officers as a group:
26
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Amount and Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)(2) Percent of
Class
========================================================================================
<S> <C> <C>
Denis A. Krusos 6,434,440 10.86%
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------------
Frank J. DiSanto 6,227,960 10.53%
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------------
Gerald J. Bentivegna 111,000 .19%
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------------
John E. Gillies 81,000 .14%
320 Conklin Street
Farmingdale, NY 11735
- ------------------------------------------------------------------------------------
John R. Shonnard 247,200(3) .43%
12521 Rios Road
San Diego, CA 92128
- ------------------------------------------------------------------------------------
Frank W. Trischetta 258,000 .45%
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group 13,359,600(3) 21.73%
(6 persons)
- ------------------------------------------------------------------------------------
- --------------------
<FN>
(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 the Company's common stock
beneficially owned by such person.
(2) Includes 1,772,180 shares, 1,682,180 shares, 110,000 shares, 80,000 shares,
117,600 shares, 258,000 shares and 4,019,960 shares as to which Denis A.
Krusos, Frank J. DiSanto, Gerald J. Bentivegna, John E. Gillies, John R.
Shonnard, Frank W. Trischetta
27
<PAGE>
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 1987 Plan and/or the 1993 Plan.
(3) Includes 129,600 shares of the Company's common stock, all of which are
held in a revocable trust by the Wells Fargo Bank (successor of the
First Interstate Bank), as trustee of such trust. Mr. Shonnard and his
wife, Janet L. Shonnard, are the beneficiaries of such trust and, under
certain circumstances, may exercise the voting power and investment
power of the trust jointly.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
In fiscal 1996, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto exercised
warrants to purchase 185,710, 185,710 and 12,930 shares of common stock,
respectively, at the weighted average exercise price of $2.83 per share of the
Company's common stock. Each exercise price represented the fair market value of
such stock on the date of issuance of these warrants, subsequently adjusted for
the two-for-one stock splits declared by the Company in February 1991 and May
1996 and the anti-dilution provisions of the warrants. The warrants were issued
in fiscal 1990 in conjunction with sales of common stock by the Company to the
foregoing individuals. Peri D. Krusos and Denis Z. Krusos are the daughter and
son, respectively, of Denis A. Krusos and Daniel A. DiSanto is the son of Frank
J. DiSanto.
As of January 22, 1997, after adjustments for the two-for-one stock split
declared in May 1996, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto each
held warrants to purchase 105,940 shares of common stock, all of which are
exercisable.
28
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a)(1)(2) Financial Statement Schedules
See accompanying "Index to Financial Statements".
(a)(3) Executive Compensation Plans and Arrangements
Stock Option Plan (1987) (filed as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit 10.69
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
Company's Proxy Statement dated June 10, 1993).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 4(d) to the Company's Form S-8 dated September 6,
1995).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q
for the fiscal year ended April 30, 1996.
(b) Reports on Form 8-K
No current report on Form 8-K was filed for the Company during
the fourth quarter of its fiscal year ended October 31, 1996.
(c) Exhibits
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987
and approved by shareholders on May 27, 1987.
29
<PAGE>
(d) 10.2 Amendment to Stock Option Plan, adopted on March 12,
1990 and approved by shareholders on May 24, 1990.
(e) 10.3 Stock Purchase Warrant, dated September 16, 1991,
between the Registrant and Denis Z. Krusos.
(e) 10.4 Stock Purchase Warrant, dated September 16, 1991,
between the Registrant and Daniel A. DiSanto.
(e) 10.5 Stock Purchase Warrant, dated September 16, 1991,
between the Registrant and Peri D. Krusos.
(e) 10.6 Stock Purchase Warrant, dated December 16, 1991,
between the Registrant and Denis Z. Krusos.
(e) 10.7 Stock Purchase Warrant, dated December 16, 1991,
between the Registrant and Daniel A. DiSanto.
(e) 10.8 Stock Purchase Warrant, dated December 16, 1991,
between the Registrant and Peri D. Krusos.
(f) 10.9 Stock Purchase Warrant, dated March 12, 1992, between
the Registrant and Denis Z. Krusos.
(f) 10.10 Stock Purchase Warrant, dated March 12, 1992, between
the Registrant and Daniel A. DiSanto.
(f) 10.11 Stock Purchase Warrant, dated March 12, 1992, between
the Registrant and Peri D. Krusos.
(a) 10.12 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Denis Z. Krusos.
(a) 10.13 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Daniel A. DiSanto.
(a) 10.14 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Peri D. Krusos.
(g) 10.15 Stock Purchase Warrant, dated October 27, 1992, between
the Registrant and Denis Z. Krusos.
30
<PAGE>
(g) 10.16 Stock Purchase Warrant, dated October 27, 1992, between
the Registrant and Daniel A. DiSanto.
(g) 10.17 Stock Purchase Warrant, dated October 27, 1992, between
the Registrant and Peri D. Krusos.
(h) 10.18 CopyTele, Inc. 1993 Stock Option Plan, adopted on April
28, 1993 and approved by shareholders on July 14, 1993.
(i) 10.19 Joint Venture Contract, dated as of March 28, 1995, by
and between Shanghai Electronic Components Corp. and
CopyTele, Inc.
(i) 10.20 Technology License Agreement, dated as of March 28,
1995, by and between Shanghai CopyTele Electronics
Co., Ltd. and CopyTele, Inc.
(j) 10.21 Amendment No. 1 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 3, 1995 and approved by
shareholders on July 19, 1995.
(k) 10.22 Assignment Agreement, dated as of July 10, 1995, by and
among Shanghai Electronic Components Corp., Shanghai
International Trade and Investment Developing Corp. and
CopyTele, Inc.
(l) 10.23 Amendment No. 2 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 10, 1996 and approved by
shareholders on July 24, 1996.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Description of Main Features of Magicom(R)2000.
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 1992.
31
<PAGE>
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form
S-8 (Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1990.
(e) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1991.
(f) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1992.
(g) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1992.
(h) Incorporated by reference to Proxy Statement dated June 10, 1993.
(i) Incorporated by reference to Form 8-K dated March 28, 1995.
(j) Incorporated by reference to Form S-8 (Registration No. 33-62381)
dated September 6, 1995.
(k) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1995.
(l) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
32
<PAGE>
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 29, 1997 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
By:/s/ Denis A. Krusos
----------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
January 29, 1997 Officer)
By:/s/ Frank J. DiSanto
-----------------------
Frank J. DiSanto
January 29, 1997 President and Director
By:/s/ Gerald J. Bentivegna
---------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
January 29, 1997 and Accounting Officer)
By:/s/ John R. Shonnard
-----------------------
John R. Shonnard
January 29, 1997 Director
By:/s/ John E. Gillies
----------------------
John E. Gillies
January 29, 1997 Director
33
<PAGE>
COPYTELE, INC.
(Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1996 and 1995 F-2
Statements of Operations for the three years ended October 31, 1996 and for the period
from November 5, 1982 (inception) through October 31, 1996 F-3
Statements of Shareholders' Equity for the period from November 5, 1982 (inception)
through October 31, 1983 and for the thirteen years ended October 31, 1996 F-4 - F-7
Statements of Cash Flows for the three years ended October 31, 1996 and for the
period from November 5, 1982 (inception) through October 31, 1996 F-8
Notes to Financial Statements F-9 - F-16
</TABLE>
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To CopyTele, Inc.:
We have audited the accompanying balance sheets of CopyTele, Inc. (a
Delaware corporation in the development stage -- Note 1) as of October 31, 1996
and 1995, and the related statements of operations and cash flows for each of
the three years in the period ended October 31, 1996 and for the period from
November 5, 1982 (inception) to October 31, 1996 and the statements of
shareholders' equity for the period from November 5, 1982 (inception) through
October 31, 1983 and for each of the thirteen years in the period ended October
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CopyTele, Inc. as of
October 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1996 and for the
period from November 5, 1982 (inception) to October 31, 1996, and the changes in
its shareholders' equity for the period from November 5, 1982 (inception)
through October 31, 1983 and for each of the thirteen years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 22, 1997
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
BALANCE SHEETS
October 31, October 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$21,921,133 and $8,786,210, respectively) $22,165,892 $ 8,864,293
Accrued interest receivable 49,306 36,206
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $240,000 at October 31, 1996) 378,417 52,451
----------- -----------
22,593,615 8,952,950
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $816,651 and $690,420, respectively) 830,606 235,201
INVESTMENT IN JOINT VENTURE (Notes 1, 2 and 3) 1,058,557 349,687
OTHER ASSETS 227,642 157,560
DEFERRED TAX BENEFITS (net of valuation allowance of $25,308,000
and $15,983,000, respectively) - -
----------- -----------
$24,710,420 $ 9,695,398
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,960,147 $ 258,690
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 5):
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 57,404,656 and 25,955,103 shares, respectively 574,047 259,551
Additional paid-in capital 50,934,606 32,492,127
Accumulated (deficit) during development stage (28,758,380) (23,314,970)
----------- -----------
22,750,273 9,436,708
----------- -----------
$24,710,420 $ 9,695,398
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF OPERATIONS
For the Period From
For the Years Ended October 31, November 5, 1982
------------------------------------------------------- (inception) through
1996 1995 1994 October 31, 1996
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
SALES $ - $ - $ - $ -
------------- ------------- -------------- ----------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately
$3,858,000, $2,353,000, $2,677,000
and $20,743,000, respectively) 6,017,580 3,332,312 3,651,334 31,980,209
------------- ------------- -------------- ----------------
LOSS FROM JOINT VENTURE (Notes 1, 2 and 3) 148,630 17,813 - 166,443
------------- ------------- -------------- ---------------
INTEREST INCOME 722,800 356,226 223,817 3,388,272
------------- ------------- -------------- ---------------
NET (LOSS) ($5,443,410) ($2,993,899) ($3,427,517) ($28,758,380)
============= ============= ============== ===============
NET (LOSS) PER SHARE OF COMMON STOCK ($.10) ($.06) ($.07) ($.64)
==== ==== ==== ====
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 54,771,891 50,514,568 49,377,392 45,058,256
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
THROUGH OCTOBER 31, 1983 AND
FOR THE THIRTEEN YEARS ENDED OCTOBER 31, 1996
Accumulated
(Deficit)
Common Stock Additional During
-------------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
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 - - (350,376) -
Net (loss) for the period - - - (976,919)
------------- ----------- -------------- -------------
BALANCE, October 31, 1983 2,800,000 28,000 6,385,384 (976,919)
Additional costs incurred in conjunction with public offering - - (11,654) -
Net (loss) for the period - - - (1,542,384)
------------- ----------- -------------- -------------
BALANCE, October 31, 1984 2,800,000 28,000 6,373,730 (2,519,303)
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 - - 362,365 -
Three-for-one stock split (A) 5,714,400 57,144 (57,144) -
Net (loss) for the period - - - (1,745,389)
------------- ----------- ------------- -------------
BALANCE, October 31, 1985 8,571,600 85,716 7,309,796 (4,264,692)
Common stock issued, at $4 per share, upon exercise of 2,800
warrants in December 1985 8,400 84 33,516 -
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company - - (62,146) -
Net (loss) for the period - - - (1,806,696)
------------- ----------- -------------- -------------
BALANCE, October 31, 1986 8,580,000 85,800 7,281,166 (6,071,388)
Continued
F-4
<PAGE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
THROUGH OCTOBER 31, 1983 AND
FOR THE THIRTEEN YEARS ENDED OCTOBER 31, 1996
Continued Accumulated
(Deficit)
Common Stock Additional During
-------------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
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 -
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company - - (1,474) -
Five-for-four stock split (A) 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 on September 10, 1987 and to officers on
October 29, 1987 64,740 647 309,601 -
Net (loss) for the period - - - (1,401,736)
-------------- ----------- ------------- -------------
BALANCE, October 31, 1987 10,873,825 108,738 8,428,057 (7,473,124)
Sale of common stock, at market, to members of officers'
immediate families from November 24, 1987 to June 29, 1988
and additional contributions by officers in January 1988
and March 1988 related to adjustments to sales price of common
stock on October 29, 1987 260,210 2,602 2,250,594 -
Net (loss) for the period - - - (1,317,305)
-------------- ---------- ------------- -------------
BALANCE, October 31, 1988 11,134,035 111,340 10,678,651 (8,790,429)
Sale of common stock, at market, to an officer on February 26,
1989 and to members of officers' immediate families from
February 26, 1989 (amended on March 10, 1989) to September
27, 1989 142,725 1,427 2,093,851 -
Sale of common stock, at market, to senior level personnel
on February 26, 1989 29,850 299 499,689 -
Sale of common stock, at market, to unrelated party on
February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Net (loss) for the period - - - (1,101,515)
-------------- ---------- ------------- -------------
BALANCE, October 31, 1989 11,342,430 113,424 13,871,818 (9,891,944)
Sale of common stock, at market, to members of officers'
immediate families from November 14, 1989 to October 15,
1990 117,825 1,179 1,140,725 -
Net (loss) for the period - - - (1,111,413)
------------- ---------- ------------- --------------
BALANCE, October 31, 1990 11,460,255 114,603 15,012,543 (11,003,357)
Continued
F-5
<PAGE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
THROUGH OCTOBER 31, 1983 AND
FOR THE THIRTEEN YEARS ENDED OCTOBER 31, 1996
Continued Accumulated
(Deficit)
Common Stock Additional During
-------------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
Sale of common stock, at market, to members of officers'
immediate families on December 4, 1990 42,540 425 329,260 -
Two-for-one stock split (A) 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members of officers'
immediate families from April 26, 1991 to September 16, 1991 102,543 1,025 1,033,981 -
Net (loss) for the period - - - (1,299,992)
-------------- ---------- -----------------------------
BALANCE, October 31, 1991 23,108,133 231,081 16,260,756 (12,303,349)
Sale of common stock, at market, to members of officers'
immediate families from December 16, 1991 to October
27, 1992 158,910 1,589 1,754,330 -
Costs incurred in conjunction with registration of stock
option plan - - (33,251) -
Net (loss) for the period - - - (1,827,356)
-------------- ----------- -------------- --------------
BALANCE, October 31, 1992 23,267,043 232,670 17,981,835 (14,130,705)
Common stock issued upon exercise of stock options from
December 16, 1992 to October 22, 1993 under stock option
plan 1,032,940 10,330 5,914,480 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in September 1993 239,000 2,390 996,774 -
Net (loss) for the period - - - (2,762,849)
-------------- ----------- -------------------------------
BALANCE, October 31, 1993 24,538,983 245,390 24,893,089 (16,893,554)
Cost incurred in connection with registration of stock
option plan - - (50,324) -
Common stock issued upon exercise of stock options from
December 22, 1993 to June 14, 1994 under stock option plan 233,200 2,332 1,273,411 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in July 1994 65,220 652 371,754 -
Net (loss) for the period - - - (3,427,517)
-------------- ----------- -------------------------------
BALANCE, October 31, 1994 24,837,403 248,374 26,487,930 (20,321,071)
Continued
F-6
<PAGE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
THROUGH OCTOBER 31, 1983 AND
FOR THE THIRTEEN YEARS ENDED OCTOBER 31, 1996
Continued
Accumulated
(Deficit)
Common Stock Additional During
-------------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
Cost incurred in connection with registration of stock
option plan - - (29,759) -
Common stock issued upon exercise of stock options from
February 17, 1995 to October 30, 1995 under stock option plans 980,400 9,804 5,278,824 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in February, July and
September 1995 137,300 1,373 755,132 -
Net (loss) for the period - - - (2,993,899)
-------------- ----------- --------------- ------------
BALANCE, October 31, 1995 25,955,103 259,551 32,492,127 (23,314,970)
Common stock issued upon exercise of stock options from
November 2, 1995 to June 12, 1996 under stock option plans 2,288,800 22,888 15,843,842 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in January and March, 1996 138,280 1,383 527,802 -
Two-for-one stock split (A) 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of stock option from
July 8, 1996 to October 30, 1996 under stock option plans 532,500 5,325 1,795,395 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in July and October, 1996 107,790 1,078 559,262 -
Net (loss) for the period - - - (5,443,410)
-------------- ----------- -------------- ------------
BALANCE, October 31, 1996 57,404,656 $574,047 $50,934,606 $(28,758,380)
============== =========== ============== ============
<FN>
(A) Reflects cumulative effect on all share data prior to splits described in
Note 5.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
For the Period from
For the Years Ended October 31, November 5, 1982
------------------------------------------------- (inception) through
1996 1995 1994 October 31, 1996
-------- ------ ------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants ($ 4,888,841) ($3,274,894) ($3,837,859) ($30,107,733)
Interest received 709,700 337,061 219,727 3,338,967
Interest paid - - - -
--------------- ------------- ------------- --------------
Net cash (used in) operating activities (4,179,141) (2,937,833) (3,618,132) (26,768,766)
--------------- ------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (418,733) (90,549) (51,902) (1,348,995)
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) (367,500) - (1,225,000)
--------------- -------------- -------------- ---------------
Net cash (used in) investing activities (1,276,233) (458,049) (51,902) (2,573,995)
--------------- -------------- -------------- ---------------
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 18,756,975 6,015,374 1,597,825 33,925,914
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 18,756,975 6,015,374 1,597,825 51,508,653
--------------- -------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 13,301,599 2,619,492 (2,072,209) 22,165,892
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 8,864,293 6,244,801 8,317,010 -
--------------- -------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,165,892 $8,864,293 $6,244,801 $22,165,892
=============== ============== ============== ===============
RECONCILIATION OF NET (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net (loss) ($ 5,443,410) ($2,993,899) ($3,427,517) ($28,758,380)
Loss from Joint Venture 148,630 17,813 - 166,443
Depreciation 126,231 62,518 56,002 821,292
(Increase) in accrued interest receivable (13,100) (19,165) (4,091) (49,306)
(Increase) decrease in prepaid expenses and other
current assets (325,966) (6,457) 1,950 (378,417)
(Increase) in other assets (70,082) (58,842) (1,951) (227,642)
Increase (decrease) in accounts payable and
accrued liabilities related to operating activities 1,398,554 60,199 (242,525) 1,657,244
---------------- -------------- -------------- ---------------
Net cash (used in) operating activities ($ 4,179,143) ($2,937,833) ($3,618,132) ($26,768,766)
================ ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
COPYTELE, INC.
(Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
(1) Nature of business and funding:
-----------------------------------
CopyTele, Inc. (the "Company"), which was incorporated on November 5,
1982, 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 technology and the operations of Shanghai CopyTele
Electronics Co., Ltd. (the "Joint Venture " or "SCE"), the Company's
55% owned joint venture in Shanghai, China, with Shanghai Electronic
Components Corp. ("SECC") and Shanghai International Trade and
Investment Developing Corp. ("SIT").
Since its inception, the Company has had no revenues to support its
operations. There is no assurance that the Company will generate
significant revenues in the future, will have sufficient
revenues to generate a profit or that other products will
not be produced by other companies that will render the products of
the Company and of the Joint Venture obsolete. The Chairman of the
Board, the President and other senior executives are engaged in the
management and operations of the Company and the Joint Venture,
including all aspects of the development, production and marketing of
the Company's products and flat panel technology, and are important
to the future business and financial arrangements of the Company and
the Joint Venture.
The Company has received seventy-nine patents from the United States
Patent and Trademark Office and certain foreign patent offices,
expiring at various dates between 2005 and 2015, related to the
design, structure and methods of construction of the flat panel,
methods of operating the flat panel, particle generation,
applications using the flat panel and new applications for SCE's
planned products. At the present time, additional patent applications
are pending with the United States and certain foreign patent
offices. There is no assurance that patents will be obtained for any
of the pending applications. In addition, there is no assurance that
any patents held or obtained will protect the Company against
competitors either with or without litigation. The Company is not
aware that MAGICOM(R) 2000 is infringing upon the patents of others.
There is also no assurance that, if the Company or the Joint Venture
successfully develops other products, such products will not infringe
upon the patents of others, or that the Company and the Joint Venture
will not have to obtain licenses under patents of others. The Company
believes that the aforementioned patents are significant to the
future operations of the Company.
During 1995, the Company signed a joint venture contract (the "Joint
Venture Contract") with SECC to form a joint venture in Shanghai,
China with a 20 year duration. With this agreement, the Joint
Venture, was formed with the Company owning a 55% share in capital,
profits and losses. The remaining 45% is owned by two Chinese
companies, SECC which owns 35% of the Joint Venture and SIT which
owns 10% as a result of an Assignment Agreement entered into by the
Company, SECC and SIT. Reference is made to Note 3 for a further
discussion regarding the Joint Venture. Pursuant to a Technology
License Agreement entered into on the same date as the Joint Venture
Contract, the Company 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
of China. The parties to the Joint Venture have agreed in
principle to increase the investment to a maximum of $25 million,
depending upon the nature and extent of business activities.
It is contemplated that this capitalization, if necessary, will be
financed through a combination of borrowings and equity investments
contributed by the Company, SECC and SIT in proportion to their
respective equity interests and on terms to be agreed upon. The
Company may require additional financing in order to participate in
the Joint Venture following its initial capital contributions. No
assurance can be given that the Company will be able to raise its
share of future capitalization, if necessary, or that adequate
financing will be available at terms and conditions favorable to
the Company.
F-9
<PAGE>
The Company has produced a telephone based multi-functional
telecommunications product, incorporating the Company's flat panel
and associated propriety 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. The
success and profitability of the 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 obsolete or
unmarketable.
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 (See Note 3). The National
Association of Securities Dealers, Inc. requires that the Company
maintain a minimum of $4,000,000 of net tangible assets to maintain
its National Association of Securities Dealers, Inc. Automated
Quotation National Market System listing. The Company anticipates
that it will seek additional sources of funding, when necessary, to
satisfy such requirements or for other purposes. There is no
assurance that such funding, if required, will be obtained. 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. See Note 11 for a more complete discussion
regarding such waivers.
(2) Summary of significant accounting policies:
-------------------------------------------
Cash equivalents-
-----------------
The Company classifies highly liquid investments with remaining
maturities of three months or less at their date of purchase by
the Company as cash equivalents. These cash equivalents are
recorded at cost, which approximates fair market value at October
31, 1996 and 1995, respectively.
Property and equipment-
-----------------------
Property and equipment, consisting primarily of engineering
equipment, is stated at cost. Depreciation is calculated on a
straight-line basis primarily over five years.
Investment in Joint Venture-
----------------------------
The Company controls four of seven votes of the Joint Venture's board
of directors. However, major issues involving the Joint Venture
require either a unanimous or two-thirds vote of the Joint
Venture's board of directors. Since the Company has significant
influence over the Joint Venture's operations but does not have
control, the Company has reflected its investment in the Joint
Venture under the equity method of accounting.
Research, development and tooling costs-
----------------------------------------
Research, development and tooling costs incurred by the Company are
included in selling, general and administrative expenses in the
year incurred.
Income taxes-
-------------
The Company recognizes deferred tax liabilities and assets for the
estimated future tax effects of events that have been recognized
in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets 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.
F-10
<PAGE>
Net (loss) per share of common stock-
-------------------------------------
Net(loss) per share of common stock has been computed based on the
weighted average number of shares outstanding during the periods.
Such amounts and shares have been restated for stock splits
declared since inception, as more fully described in Note 5.
Average common equivalent shares outstanding have not been
included, as the computation would not be dilutive.
Recently issued accounting standards-
-------------------------------------
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock Based Compensation. This statement
establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages
entities to adopt a fair value based method of accounting for
stock compensation plans. However, SFAS No. 123 also permits the
Company to continue to measure compensation costs under
preexisting accounting pronouncements. If the fair value based
method of accounting is not adopted, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share in the
notes to financial statements. The Company has not yet determined
how this pronouncement will be implemented and, accordingly, has
not determined what impact this pronouncement will have on the
Company's financial statements. This statement will be adopted by
the Company in the first quarter of fiscal 1997.
The Company has adopted all recently issued accounting standards
which are applicable, none of which were material to the financial
position or results of operations of the Company's financial
statements.
Use of estimates-
-----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and related notes to financial statements.
Actual results could differ from those estimates.
Reclassifications-
------------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(3) Investment in Joint Ventures:
-----------------------------
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 2) and will
recognize losses on the Joint Venture to the extent of its cash
investment.
Condensed financial information for Shanghai CopyTele Electronics Co.,
Ltd. at October 31, 1996 and 1995 and for the year ended October 31,
1996 and for the period from May 18, 1995 (inception) through
October 31, 1995, is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets 1996 1995
------------------------ ---- ----
<S> <C> <C>
Cash $ 726,640 $ 722,170
Other Current Assets 266,409 -
Land-Use Rights, net 308,516 309,507
Fixed Assets, net 145,643 8,257
Construction in Progress 878,533 8,178
Restricted Cash 275,245 -
Deposits 184,601 -
---------- ----------
Total Assets $2,785,587 $1,048,112
========== ==========
Accrued Expenses $ 288,210 $ 240,499
Capital 2,497,377 807,613
---------- ----------
Total Liabilities and Capital $2,785,587 $1,048,112
========== ==========
Condensed Statements of Operations
Net Sales $ - $ -
Operating (Loss) (289,447) (35,234)
Interest Income 19,211 2,847
---------- ----------
Net (Loss) $ (270,236) $ (32,387)
========== ==========
</TABLE>
F-11
<PAGE>
The restricted cash is securing letters of credit to purchase
equipment.
Subsequent to year end, the Joint Venture obtained a $220,000 loan
which bears interest at a rate of 7.3% per annum and matures in
December 1997. This loan is secured by the land-use rights.
Second Joint Venture-
---------------------
On April 17, 1996, the Company entered into a letter of intent for
the formation of a second joint venture with SECC to be called
Shanghai CopyTele No. 2 Electronics Co., Ltd. (the "Second Joint
Venture"). Pursuant to the terms of the letter of intent, the main
purpose of the Second Joint Venture will be to manufacture and
sell electronic components and parts used in SCE products, and
products of other manufacturers. Initially, however, the Second
Joint Venture will manufacture and market thick film circuits
presently being produced by SECC at one of its facilities.
As stipulated in the letter of intent signed with SECC, 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.
(4) Issuance of warrants:
---------------------
In conjunction with the sale of its common stock to members of the
immediate families of its Chairman of the Board and its President,
the Company issued warrants to these individuals. In addition, the
Company also issued warrants to an unrelated party (which expired in
May 1994) who purchased shares of the Company's common stock and to
its former Vice President - Finance. Information regarding these
warrants for the three years ended October 31, 1996, after
adjustments for anti-dilutive provisions and applicable stock splits,
is as follows:
<TABLE>
<CAPTION>
Current Weighted
Average Exercise
Shares Price per Share
------ ---------------
<S> <C> <C>
Shares covered by warrants at October 31, 1993 1,982,946 $ 3.64
Warrants exercised (130,440) $ 2.86
Warrants expired (513,840) $ 3.95
------------
Shares covered by warrants at October 31, 1994 1,338,666 $ 3.58
Warrants exercised (274,600) $ 2.76
Warrants expired (211,400) $ 2.91
------------
Shares covered by warrants at October 31, 1995 852,666 $ 3.90
Warrants exercised (384,350) $ 2.83
Warrants expired (53,200) $ 1.88
------------
Shares covered by warrants at October 31, 1996 415,116 $ 5.11
============ =====
</TABLE>
F-12
<PAGE>
The exercise price of all of the aforementioned warrants represented
the fair market value of the underlying common stock on the day
preceding issuance of such warrants. These warrants are exercisable
for five years commencing ninety days from the date of issuance. As
of October 31, 1996, all of the warrants to purchase shares of common
stock issued and outstanding were exercisable.
(5) Stock splits:
-------------
On October 4, 1985, the Company declared a three-for-one stock split,
effected in the form of a 200% stock dividend, payable on November 8,
1985 to shareholders of record as of October 15, 1985. On August 13,
1987, the Company declared a five-for-four stock split, effected in
the form of a 25% stock dividend, payable on September 15, 1987 to
shareholders of record as of August 31, 1987. On February 12, 1991,
the Company declared a two-for-one stock split, effected in the form
of a 100% stock dividend, payable on March 18, 1991 to shareholders
of record as of February 25, 1991. 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 splits.
(6) Preferred stock:
----------------
On May 29, 1986, the Company's 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. The Board of
Directors currently has no definitive plan or agreements for issuance
of any of the preferred stock.
(7) Stock option plans:
-------------------
In May 1987 the Company's shareholders approved a stock option plan
(the "1987 Plan") which, after giving consideration to the
five-for-four and two two-for-one stock splits described in Note 5 as
well as an amendment approved by shareholders in May 1990 to increase
the number of shares issuable under the 1987 Plan, provided for the
purchase of 9,000,000 shares of common stock. The 1987 Plan provided
for the granting of incentive stock options to key employees and
nonqualified options to key employees, consultants and directors of
the Company. The option price was determined by the Board of
Directors, but with respect to incentive stock options the option
price could not be less than the fair market value at the date of
grant. The stock options are exercisable over a period not to exceed
10 years, also as determined by the Board of Directors. In July 1992,
the Company registered the shares of common stock covered by the 1987
Plan. Upon the approval of the CopyTele, Inc. 1993 Stock Option Plan
(the "1993 Plan") by the Company's shareholders in July 1993, the
1987 Plan was terminated with respect to the grant of future options.
Information regarding the 1987 Plan for the three years ended October
31, 1996 is as follows:
<TABLE>
<CAPTION>
Range of Option
Shares Price per Share
------ ---------------
<S> <C> <C>
Shares under option at October 31, 1993 3,842,120 $ 1.94 - $ 6.94
Exercised (466,400) $ 2.47 - $ 2.75
--------------
Shares under option at October 31, 1994 3,375,720 $ 1.94 - $ 6.94
Exercised (1,262,000) $ 1.94 - $ 2.75
Canceled (345,600) $ 2.75 - $ 5.63
--------------
Shares under option at October 31, 1995 1,768,120 $ 2.09 - $ 6.94
Exercised (1,013,760) $ 2.09 - $ 5.63
--------------
Shares under option at October 31, 1996 754,360 $ 2.47 - $ 6.94
============== =================
</TABLE>
F-13
<PAGE>
The exercise price with respect to all of the options granted under the
1987 Plan from its inception was at least equal to the fair market
value of the underlying common stock on the date of grant. As of
October 31, 1996, all of the options to purchase shares of common
stock granted and outstanding under the 1987 Plan were exercisable.
From November 1, 1996 through January 22, 1997, options to purchase
15,000 shares of the Company's stock under the 1987 Plan were
exercised at a price of $2.75 per share.
On July 14, 1993, the Company's shareholders approved the 1993 Plan
which had been adopted by the Company's Board of Directors on April
28, 1993. The 1993 Plan was amended as of May 3, 1995 and May 10,
1996 to, among other things, increase the number of shares of the
Company's common stock available for issuance pursuant to grants
thereunder from 6 million shares to 20 million shares after giving
consideration to the two-for-one stock split in 1996. The 1993 Plan
provides for the granting of stock options to purchase shares of
common stock of the Company or stock appreciation rights up to the
aggregate of 20 million shares. Incentive options and rights may be
granted to key employees and nonqualified options and rights may be
granted to key employees and consultants of the Company. As amended,
nonqualified options to purchase 40,000 shares of common stock will
be granted annually to each re-elected nonemployee director of the
Company and 20,000 shares to each newly elected non employee
director. The 1993 Plan is administered by the Stock Option
Committee, which determines the option price, term and provisions of
each option; however, the purchase price of shares issuable upon the
exercise of incentive stock options will not be less than the fair
market value of such shares and incentive stock options will not be
exercisable for more than 10 years.
Information regarding the 1993 Plan for the three years ended October
31, 1996 is as follows:
<TABLE>
<CAPTION>
Range of Option
Shares Price per Share
------ ---------------
<S> <C> <C>
Shares under option at October 31, 1993 2,430,000 $ 6.88 - $ 8.50
Granted 2,442,000 $ 2.44 - $ 6.38
Canceled (410,000) $ 5.75 - $ 6.88
-------------
Shares under option at October 31, 1994 4,462,000 $ 2.44 - $ 8.50
Granted 5,250,000 $ 2.44 - $ 4.50
Exercised (698,800) $ 2.44 - $ 3.16
Canceled (120,000) $ 2.82 - $ 5.75
-------------
Shares under option at October 31, 1995 8,893,200 $ 2.44 - $ 8.50
Granted 4,578,000 $ 4.75 - $ 8.00
Exercised (4,096,340) $ 2.44 - $ 6.38
Canceled (200,000) $ 4.75 - $ 4.81
-------------
Shares under option at October 31, 1996 9,174,860 $ 2.81 - $ 8.50
============= =================
</TABLE>
The exercise price with respect to all of the options granted under the
1993 Plan from its inception was at least equal to the fair market
value of the underlying common stock on the grant date. As of October
31, 1996, 5,596,860 of the options to purchase shares of common stock
granted and outstanding under the 1993 Plan are exercisable. At
October 31, 1996, 6,030,000 options were available for future grants
under the 1993 Plan.
From November 1, 1996 through January 22, 1997, options to purchase
46,000 shares of the Company stock under the 1993 Plan were exercised
at a price range of $3.31 to $3.63 per share. From November 1, 1996
through January 22, 1997, the Company granted 1,785,500 options to
purchase the Company's common stock pursuant to the 1993 Plan.
F-14
<PAGE>
(8) Commitments and contingencies:
------------------------------
Leases-
-------
During 1996, the Company leased additional space at its principal
location for office and laboratory research facilities with its
landlord, an unrelated party. The current lease is for
approximately 10,000 square feet and expires on November 30, 1998.
The lease now contains base rentals of approximately $166,000 per
annum, as well as escalation clauses for increases in certain
operating costs, for a total cost aggregating approximately
$173,000 per annum. The Company has the right to cancel portions
of the lease as of November 30, 1997 and February 28, 1998,
respectively. Such cancellation would not result in any material
liabilities.
In February 1996, the Company entered into a five year lease with an
unrelated party for approximately 2,300 square feet of office
space. The lease expires on June 30, 2001 and is non-renewable. It
has a base rent of approximately $51,000, per annum, for the first
two years and approximately $56,000, per annum, thereafter. The
Company entered into a third lease with another unrelated party in
October 1996. This lease which expires on May 31, 1997 has a base
monthly rental of $1,300 and contains a provision to extend the
term of the lease for up to three years with escalating rents.
Rent expense for the years ended October 31, 1996, 1995, 1994 and for
the period from November 5, 1982 (inception) through October 31,
1996 was approximately $215,000 , $130,000, $120,000 and
$1,555,000, respectively.
Key-man life insurance-
-----------------------
The Company maintains key-man life insurance, aggregating $1,500,000
insuring the lives of its Chairman of the Board and its President.
The Company is the beneficiary under these policies. Annual
expenses relating to the maintenance of this insurance aggregated
approximately $30,000.
(9) Employees' pension plan:
------------------------
The Company adopted a noncontributory defined contribution pension
plan, effective November 1, 1983, covering all of its present
employees. Contributions, which are made to a trust, are based
upon specified percentages of compensation, as defined in the
plan. Pension cost, which approximated $70,000, $50,000 $43,000
and $443,000 for the years ended October 31, 1996, 1995 and 1994
and in the period from the inception of the plan through October
31, 1996, respectively, has been accrued and funded on a current
basis.
(10) Income taxes:
-------------
At October 31, 1996, the Company had tax net operating loss and tax
credit carryforwards of approximately $54,981,000 and $1,316,000
respectively, available, within statutory limits (expiring at
various dates between 1998 and 2011), to offset future regular
Federal corporate taxable income and taxes payable. The principle
differences between the net loss for financial statement purposes
and the tax net operating loss attributable to the year ended
October 31, 1996, were deductions for tax purposes of option
holders' income related to stock option exercises aggregating
approximately $15,569,000. If the tax benefits are ultimately
realized relating to deductions of option holders' income, 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.
The Company had tax net operating loss and tax credit carryforwards
of approximately $49,667,000 and $84,000 respectively, at October
31, 1996, 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 1998 and 2011
and the tax credit carryforwards expire between 1999 and 2006.
Deferred tax benefits at October 31, 1996 and 1995, which are fully
offset by valuation allowances, primarily represent the estimated
future tax effects of Federal and State net operating loss and tax
credit carryforwards aggregating approximately $25,308,000 and
$15,983,000, respectively.
F-15
<PAGE>
During the period from November 5, 1982 (inception) through October
31, 1996, the Company incurred no Federal and no material State
income taxes.
(11) Selling, general and administrative expenses:
---------------------------------------------
While there is no formal agreement, the Company's Chairman of the
Board and its President have waived any and all rights to receive
salary and related pension benefits for an undetermined period of
time commencing November 1985. The aggregate annual expenses for
these individuals at the time of such waivers was approximately
$325,000.
Four other individuals, including an officer and senior level
personnel, then employed at the Company, waived any and all rights
to receive salary and related pension benefits for the period from
January 1987 through December 1990. While there are no formal
agreements, commencing January 1991, these individuals waived such
rights for an undetermined period of time and they did not receive
salary or related pension benefits through December 1992. The
three senior level personnel continued to waive such rights
commencing in January 1993 for an undetermined period of time.
Since February 1993, one additional employee is also currently
waiving such salary and benefit rights for an undetermined period
of time. The aggregate annual expense for these five individuals,
then employed at the Company, at the time of their respective
initial waivers was approximately $440,000.
The Company does not contemplate the retroactive reinstatement of any
of the salary or related pension benefit waivers indicated above.
<PAGE>
EXHIBIT INDEX
Exhibit
Ref. Number Description
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and approved by
shareholders on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on March 12, 1990
and approved by shareholders on May 24, 1990.
(e) 10.3 Stock Purchase Warrant, dated September 16, 1991, between the
Registrant and Denis Z. Krusos.
(e) 10.4 Stock Purchase Warrant, dated September 16, 1991, between the
Registrant and Daniel A. DiSanto.
(e) 10.5 Stock Purchase Warrant, dated September 16, 1991, between the
Registrant and Peri D. Krusos.
(e) 10.6 Stock Purchase Warrant, dated December 16, 1991, between the
Registrant and Denis Z. Krusos.
(e) 10.7 Stock Purchase Warrant, dated December 16, 1991, between the
Registrant and Daniel A. DiSanto.
(e) 10.8 Stock Purchase Warrant, dated December 16, 1991, between the
Registrant and Peri D. Krusos.
(f) 10.9 Stock Purchase Warrant, dated March 12, 1992, between the
Registrant and Denis Z. Krusos.
(f) 10.10 Stock Purchase Warrant, dated March 12, 1992, between the
Registrant and Daniel A. DiSanto.
(f) 10.11 Stock Purchase Warrant, dated March 12, 1992, between the
Registrant and Peri D. Krusos.
34
<PAGE>
(a) 10.12 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Denis Z. Krusos.
(a) 10.13 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Daniel A. DiSanto.
(a) 10.14 Stock Purchase Warrant, dated July 24, 1992, between the
Registrant and Peri D. Krusos.
(g) 10.15 Stock Purchase Warrant, dated October 27, 1992, between the
Registrant and Denis Z. Krusos.
(g) 10.16 Stock Purchase Warrant, dated October 27, 1992, between the
Registrant and Daniel A. DiSanto.
(g) 10.17 Stock Purchase Warrant, dated October 27, 1992, between the
Registrant and Peri D. Krusos.
(h) 10.18 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28,
1993 and approved by shareholders on July 14, 1993.
(i) 10.19 Joint Venture Contract, dated as of March 28, 1995, by and
between Shanghai Electronic Components Corp. and CopyTele,
Inc.
(i) 10.20 Technology License Agreement, dated as of March 28, 1995, by
and between Shanghai CopyTele Electronics Co., Ltd. and
CopyTele, Inc.
(j) 10.21 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved by shareholders on July
19, 1995.
(k) 10.22 Assignment Agreement, dated as of July 10, 1995, by and among
Shanghai Electronic Components Corp., Shanghai International
Trade and Investment Developing Corp. and CopyTele, Inc.
(l) 10.23 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved by shareholders on
July 24, 1996.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
35
<PAGE>
99.1 Description of Main Features of MAGICOM(R)2000.
- --------------- -----------------------------------------------
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 1992.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1990.
(e) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1991.
(f) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1992.
(g) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1992.
(h) Incorporated by reference to Proxy Statement dated June 10, 1993.
(i) Incorporated by reference to Form 8-K dated March 28, 1995.
(j) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(k) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1995.
(l) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
36
38995\0001\2579\RPT1277V.160
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 22, 1997, included in this Form 10-K, into CopyTele,
Inc.'s previously filed Registration Statement on Form S-8, as amended, (File
No. 33-49402), Registration Statement on Form S-8 (File No. 33-72716),
Registration Statement on Form S-8 (File No. 33-62381) and Registration
Statement on Form S-8 (File No. 333-16933).
ARTHUR ANDERSEN LLP
New York, New York
January 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial
information extracted from the financial
statements contained in the body of the
accompanying Form 10-K and is qualified in
its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 22,165,892
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,593,615
<PP&E> 1,647,257
<DEPRECIATION> 816,651
<TOTAL-ASSETS> 24,710,420
<CURRENT-LIABILITIES> 1,960,147
<BONDS> 0
0
0
<COMMON> 574,047
<OTHER-SE> 22,176,226
<TOTAL-LIABILITY-AND-EQUITY> 24,710,420
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 6,166,210
<OTHER-EXPENSES> (722,800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,443,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,443,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,443,410)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
Description of Main Features of MAGICOM(R) 2000
-----------------------------------------------
MAGICOM(R) 2000 has the following main features:
o Compactness and ease of use.
o Simultaneous voice and electronic handwriting between two
MAGICOM(R) 2000's.
o Capability of displaying in a single image an entire page of
information.
o Flicker-free, ultra-high resolution display, 200 lines per
inch horizontal and vertical resolution, provides reading
capability similar to that of a printed page.
o Information easily readable from any direction, under sunlight
or nighttime light conditions.
o Capable of retaining an image on the display with minimal
power.
o Incorporates a scanner to send a fax or to input into a
computer and provides a copier capability by interfacing with
the Company developed optional printer, Magic Printer or any
other commercial compatible printers.
o Compatible with fax and PC computer terminals to send or
receive information.
o Fax and data modems to send to and receive from MAGICOM(R)
2000, fax, and computer terminals.
o Handwriting viewed on the Company's flat panel display
incorporating a writing screen and a plastic tip pen.
Handwriting information can be written clearly in any language
and can be printed or transmitted to other fax terminals.
o Capable of editing received information via use of the writing
screen and plastic tip pen and transmitting and/or printing
such edited information.
o Utilization of a touch screen sensitive keyboard to send
alphanumeric messages to pagers.
<PAGE>
o Utilization of electronic memory to scan documents before
transmission and for unattended reception.
o Capable of receiving information, such as faxes, e-mail,
handwriting and editing, which are sent via telephone,
satellite or cellular links.
o Capable of broadcasting information to multiple locations of
MAGICOM(R) 2000, computer or fax terminals.
o Capable of automatically extracting information from a remote
MAGICOM(R) 2000, computer, or fax terminal.
o Capable of interfacing with cordless and cellular phones.
o Digital voice mail.
o Voice communication via a telephone handset or via a
simultaneous, two-way digital speaker system.
o Utilization of an on-screen instruction manual for easy use.
