SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
Commission file number 0-11254
COPYTELE, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
900 Walt Whitman Road
Huntington Station, NY 11746
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 549-5900
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, par value
$.01 per share, outstanding as of June 6, 1997: 57,764,176 shares
<PAGE>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of April 30, 1997 and October
31, 1996
Condensed Statements of Operations (Unaudited) for the six months ended
April 30, 1997 and April 30, 1996, and for the period from November 5,
1982 (Inception) through April 30, 1997
Condensed Statements of Operations (Unaudited) for the three months
ended April 30, 1997 and April 30, 1996
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through April 30, 1997
Condensed Statements of Cash Flows (Unaudited) for the six months ended
April 30, 1997 and April 30, 1996, and for the period from November 5,
1982 (Inception) through April 30, 1997
Condensed Statements of Cash Flows (Unaudited) for the three months
ended April 30, 1997 and April 30, 1996
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Signatures.
2
<PAGE>
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- -----------------------------
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED BALANCE SHEETS (UNAUDITED)
April 30, October 31,
1997 1996
------------- --------------
ASSETS
CURRENT ASSETS:
Cash (including cash equivalents and interest
bearing accounts of $18,469,216 and
$21,921,133,respectively) $18,475,690 $22,165,892
Accrued interest receivable 8,783 49,306
Prepaid expenses and other current assets
(including amounts due from Joint
Venture of approximately $2,100,000
and $240,000, respectively) 2,142,953 378,417
------------- --------------
20,627,426 22,593,615
PROPERTY AND EQUIPMENT (net of accumulated
depreciation and amortization of $939,980 and
$816,651, respectively) 857,756 830,606
INVESTMENT IN JOINT VENTURE (Note 2) 900,644 1,058,557
OTHER ASSETS 149,956 227,642
DEFERRED TAX BENEFITS (net of valuation
allowance of $26,220,000 and $25,308,000,
respectively) - -
------------- --------------
$22,535,782 $24,710,420
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,368,490 $ 1,960,147
------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share;
authorized 500,000 shares; no shares
outstanding - -
Common stock, par value $.01 per share;
authorized 120,000,000 shares; outstanding
57,739,176 and 57,404,656 shares,
respectively 577,392 574,047
Additional paid-in capital 52,329,705 50,934,606
Accumulated (deficit) during development stage (31,739,805) (28,758,380)
------------- --------------
21,167,292 22,750,273
------------- --------------
$22,535,782 $24,710,420
============= ==============
The accompanying notes to condensed financial statements are an integral part of
these balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the period
from November
For the six months 5,1982
ended April 30, (inception)
--------------------------------- through
1997 1996 April 30, 1997
-------------- -------------- ----------------
<S> <C> <C> <C>
SALES $ - $ - $ -
-------------- -------------- ----------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES,
(including research and
development expenses of
approximately $2,021,000,
$1,461,000 and $22,764,000
respectively) 3,337,796 2,175,145 35,318,005
-------------- -------------- ----------------
LOSS FROM JOINT VENTURE 157,913 28,396 324,356
-------------- -------------- ----------------
INTEREST INCOME 514,284 236,916 3,902,556
-------------- -------------- ----------------
NET (LOSS) ($2,981,425) ($1,966,625) ($31,739,805)
============== ============== ================
NET (LOSS) PER SHARE OF COMMON
STOCK ($0.05) ($0.04) ($0.70)
============== ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 57,535,605 52,879,050 45,485,417
============== ============== ================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
<PAGE>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months
ended April 30,
1997 1996
--------------- ---------------
SALES $ - $ -
--------------- ---------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES,
(including research and
development expenses of
approximately $1,123,000 and
$694,000 respectively) 1,775,292 1,099,749
--------------- ---------------
LOSS FROM JOINT VENTURE 88,896 15,524
--------------- ---------------
INTEREST INCOME 253,208 119,967
--------------- ---------------
NET (LOSS) ($1,610,980) ($995,306)
=============== ===============
NET (LOSS) PER SHARE OF COMMON
STOCK ($0.03) ($0.02)
=============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 57,651,900 53,434,728
=============== ===============
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH APRIL 30, 1997 (UNAUDITED)
Accumulated
(Deficit)
Additional During
Common Stock 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 - - (362,030) -
Common stock issued, at $12 per share,
upon exercise of 57,200 warrants from
February 5, 1985 to October 16, 1985,
net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by
individuals from January 29, 1985 to
October 4, 1985 under agreements with
the Company, net of costs incurred by
the Company - - 298,745 -
Restatement as of October 31, 1985 for
three-for-one stock split 5,714,400 57,144 (57,144) -
Common stock issued, at $4 per share,
upon exercise of 2,800 warrants in
December 1985 8,400 84 33,516 -
Sale of common stock, at market, to
officers on January 9, 1987 and April
22, 1987 and to members of their
immediate families on July 28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for
five-for-four stock split 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction
with five-for-four stock split - - (1,345) -
Sale of common stock, at market, to
members of officers' immediate families
from September 10,1987 to December 4,
1990 and to officers on October 29,
1987 and February 26, 1989 628,040 6,280 6,124,031 -
Sale of common stock, at market, to
senior level personnel on February 26, 1989 29,850 299 499,689 -
Continued
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH APRIL 30, 1997 (UNAUDITED)
Continued
Accumulated
(Deficit)
Additional During
Common Stock Paid-in Development
Shares Par Value Capital Stage
------------------------ ------------ --------------
<S> <C> <C> <C> <C>
Sale of common stock, at market, to
unrelated party on February 26,
1989 amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991
for two-for-one stock split 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to
members of officers' immediate
families from April 26, 1991 to
October 27, 1992 261,453 2,615 2,788,311 -
Common stock issued upon exercise of
warrants by members of officers'
immediate families on various
dates from September 1993 through
March 1996 579,800 5,798 2,651,462 -
Common stock issued upon exercise of
stock options from December 16,
1992 to June 12, 1996 4,535,340 45,353 28,197,223 -
Restatement as of June 17, 1996 for
two-for-one stock split 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of
warrants by members of officers'
immediate families on various
dates in July and October, 1996,
and March 1997 206,610 2,066 1,062,167 -
Common stock issued upon exercise of
stock options from July 8, 1996 to
March 13,1997 under stock option plans,
net of registration costs 768,200 7,682 2,687,589 -
Accumulated (deficit) during
development stage - - - (31,739,805)
---------- ----------- ------------ ---------------
BALANCE, April 30, 1997 57,739,176 $577,392 $52,329,705 ($31,739,805)
========== =========== ============ ===============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
this statement.
7
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the period
For the six from November
months ended 5, 1982
April 30, (inception)
------------------------------- through
1997 1996 April 30, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees
and consultants ($5,279,263) ($1,979,627) ($35,386,996)
Interest received 554,807 263,629 3,893,774
-------------- -------------- -----------------
Net cash (used in) operating activities (4,724,456) (1,715,998) (31,493,222)
-------------- -------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (364,190) (152,385) (1,713,185)
Disbursements to acquire certificates
of deposit and corporate notes and
bonds - - (12,075,191)
Proceeds from maturities of investments - - 12,075,191
Investment made in Joint Venture - (490,000) (1,225,000)
-------------- -------------- -----------------
Net cash (used in) investing activities (364,190) (642,385) (2,938,185)
-------------- -------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock
and warrants, net of underwriting
discounts of $690,000 related to
initial public offering in October
1983 - - 17,647,369
Proceeds from exercise of stock
options and warrants, net of
registration disbursements 1,398,444 7,402,671 35,324,358
Proceeds from sales of common stock
by individuals under agreements with the
Company, net of disbursements made by
the Company - - 298,745
Disbursements made in conjunction with
sales of stock - - (362,030)
Fractional share payments in
conjunction with stock split - - (1,345)
-------------- -------------- -----------------
Net cash provided by financing
activities 1,398,444 7,402,671 52,907,097
-------------- -------------- -----------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,690,202) 5,044,288 18,475,690
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 22,165,892 8,864,293 -
-------------- -------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $18,475,690 $13,908,581 $18,475,690
============== ============== =================
Continued
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Continued
For the period
For the six from November
months ended 5, 1982
April 30, (inception)
----------------------------- through
1997 1996 April 30, 1997
------------- ------------ ----------------
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net (loss) ($2,981,425) ($1,966,625) ($31,739,805)
Pro-rata share of Joint Venture
Company losses 157,913 28,396 324,356
Depreciation and amortization 123,329 46,371 944,621
Decrease (Increase) in accrued
interest receivable 40,523 26,713 (8,783)
(Increase) Decrease in prepaid
expenses and other current assets (1,764,536) 2,271 (2,142,953)
Decrease (Increase) in other assets 77,686 36,379 (149,956)
(Decrease) Increase in accounts
payable and accrued liabilities
related to operating activities (377,946) 110,497 1,279,298
------------- ------------ ----------------
Net cash (used in) operating activities ($4,724,456) ($1,715,998) ($31,493,222)
============= ============ ================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
9
<PAGE>
COPYTELE, INC.
(Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months
ended April 30,
-----------------------------------------
1997 1996
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees
and consultants ($2,354,082) ($1,100,515)
Interest received 253,866 134,133
------------------ -----------------
Net cash (used in) operating
activities (2,100,216) (966,382)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property
and equipment (138,537) (147,932)
------------------ -----------------
Net cash (used in) investing
activities (138,537) (147,932)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and warrants, net
of registration disbursements 1,168,149 4,844,957
------------------ -----------------
Net cash provided by financing
activities 1,168,149 4,844,957
------------------ -----------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,070,604) 3,730,643
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 19,546,294 10,177,938
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $18,475,690 $13,908,581
================== =================
RECONCILIATION OF NET (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net (loss) ($1,610,980) ($995,306)
Loss from Joint Venture 88,896 15,524
Depreciation and amortization 60,025 27,647
Increase in accrued interest
receivable 658 14,166
(Increase) Decrease in prepaid
expenses and other current assets (658,171) 4,587
Decrease in other assets 22,463 36,465
(Decrease) Increase in accounts
payable and accrued liabilities related
to operating activities (3,107) (69,465)
================== =================
Net cash (used in) operating
activities ($2,100,216) ($966,382)
================== =================
The accompanying notes to condensed financial statements are an integral part of
these statements.
10
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
APRIL 30, 1997 (UNAUDITED)
--------------------------
(1) Summary of significant accounting policies and
other disclosures:
------------------
CopyTele, Inc. (the "Company"), is a development stage enterprise whose
principal activities include the development of telephone based multi-functional
telecommunications products incorporating the Company's ultra-high resolution
flat panel display, the further expansion of its overall flat panel display
technology, and the operations of Shanghai CopyTele Electronics Co., Ltd.
("SCE"), its joint venture in China for the production of its telecommunication
products. The remaining 45% of SCE is owned by two Chinese companies, Shanghai
Electronic Components Corp. ("SECC") which owns 35% and Shanghai International
Trade and Investment Developing Corp. ("SIT") which owns 10%. Reference is made
to Note 2, Investment in SCE and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion involving
SCE. The Company and SECC have entered into a letter of intent with respect to a
second joint venture which would manufacture and sell electronic components and
parts used in SCE's products and in products of other manufacturers (the "Second
Joint Venture").
The Company has produced a multifunctional telephone-based product called
MAGICOM(R) 2000 that can send and receive handwritten communications as well as
simultaneous voice and electronic handwriting. This personal communications
product offers many features, including digital voice, fax with full page
transmission and paperless reception, full duplex speakerphone, e-mail
communications, data transmission, storage and computer interface, as well as
personal copying capabilities with the use of an optional Company printer,
called Magic Printer, and the ability to send alphanumeric messages to pagers
using a touch sensitive keyboard screen. MAGICOM(R) 2000 incorporates the
Company's patented high resolution flat panel display, called E-PAPER(TM),
representing "electronic paper".
Reference is made to the October 31, 1996 audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996, for more extensive disclosures than contained in these
condensed financial statements.
The Company, which controls four of the seven votes of SCE's board of directors,
has reflected its investment in SCE under the equity method of accounting in the
accompanying condensed financial statements. Under certain circumstances,
decisions involving SCE require either a unanimous or two-thirds vote of SCE's
board of directors.
The information contained herein for the six and three month periods ended April
30, 1997 and 1996 and for the period from November 5, 1982 (inception) through
April 30, 1997 is unaudited, but in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the results of operations for such periods have been
included. The results of operations for interim periods may not necessarily
reflect the annual operations of the Company.
The Company invests principally in short term highly liquid financial
instruments with maturities of less than three months, which have been
classified as cash equivalents in the accompanying condensed balance sheets.
The cost of these investments approximates market value.
11
<PAGE>
The Company has adopted all recently issued accounting standards which have a
material impact on its condensed financial statements. The Company has
implemented Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation" as disclosed in Note 3.
(2) Investment in SCE:
-----------------
The Company has contributed $1,225,000 in cash, and technology which has been
valued for purposes of SCE at $700,000. SCE does not reflect the $700,000 in
technology as an asset or equity investment in the condensed financial
statements presented below. The other parties have contributed cash aggregating
$1,575,000. The Company has reflected its investment in SCE under the equity
method of accounting (see Note 1, Summary of significant accounting policies and
other disclosures) and will recognize losses on SCE to the extent of its cash
investment.
Condensed Balance Sheets for SCE at April 30, 1997 and October 31, 1996 and
Condensed Statements of Operations for the six month periods ended April 30,
1997 and 1996 are as follows:
Condensed Balance Sheets
------------------------
(Unaudited)
April 30, October 31,
1997 1996
------------- -------------
Cash $ 114,249 $ 726,640
Inventories 2,870,520 -
Other current assets 128,556 266,409
Land occupancy rights, net 301,994 308,516
Fixed assets, net 1,775,651 145,643
Construction in progress - 878,533
Restricted cash - 275,245
Deposits - 184,601
------------- -------------
Total Assets $5,190,970 $2,785,587
============= =============
Short-term Loans $ 500,024 $
Accounts payable 2,400,276 -
Accrued expenses 80,408 288,210
Capital 2,210,262 2,497,377
------------- -------------
Total Liabilities and Capital $5,190,970 $2,785,587
============= =============
Condensed Statements of Operations
----------------------------------
(Unaudited)
For the six months ended
------------------------------
April 30, April 30,
1997 1996
------------- -------------
Net sales $ - $ -
Operating (loss) (287,502) (61,449)
Other income/(expense) 387 9,820
------------- -------------
Net (loss) ($287,115) ($51,629)
============= =============
12
<PAGE>
(3)Stock option plans:
-------------------
The Company has two stock option plans, the 1987 Stock Option Plan, adopted by
the Board of Directors on April 1, 1987 (the "1987 Plan"), and the CopyTele,
Inc. 1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993
(the "1993 Plan").
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Accordingly, under APB Opinion No.
25, no compensation cost has been recognized by the Company.
Had compensation cost for these plans been determined consistent with SFAS
Statement No. 123, the Company's net loss and net loss per share would have
increased to the following pro forma amounts:
For the six Months For the six Months
Ended April 30, 1997 Ended April 30, 1996
-------------------- --------------------
Net Loss: As Reported ($2,981,425) ($1,966,625)
Pro Forma ($9,432,417) ($4,701,769)
Net Loss
Per Share: As Reported ($0.05) ($0.04)
Pro Forma ($0.16) ($0.09)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants for the six months ended April 30, 1997 and 1996,
respectively: risk free interest rates of 5.61% and 5.99%; expected dividend
yields of 0% and 0%; expected lives of 2.56 and 1.99 years; and expected stock
price volatility of 69% and 70%. The weighted average fair value of options
granted under Statement 123 for the six months ended April 30, 1997 and 1996 are
$2.29 and $1.64, respectively.
Information regarding the 1987 Plan from October 31, 1996 to April 30, 1997,
after adjustments for all applicable stock splits, is presented in the table and
narrative below:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares under option at October 31,
1996 754,360 $4.75
Exercised (48,200) $3.01
-------------
Shares under option at April 30,
1997 706,160 $4.87
=============
Exercisable at April 30, 1997 706,160 $4.87
=============
13
<PAGE>
The exercise price with respect to each option granted under the 1987 Plan from
its inception was equal to at least the fair market value of the underlying
common stock of the Company (the "Common Stock") on the date of grant. Upon the
approval of the 1993 Plan by the Company's shareholders in July 1993, the 1987
Plan was terminated with respect to the grant of future options.
From May 1, 1997 through June 6, 1997, the Company received proceeds aggregating
approximately $55,000 relating to the exercise of options to purchase 20,000
shares of Common Stock pursuant to the 1987 Plan.
The 1993 Plan was amended as of May 3, 1995 and May 10, 1996 to, among other
things, increase the number of shares of the Company's Common Stock available
for issuance pursuant to grants thereunder from 6 million to 20 million, as
adjusted for the two-for-one stock split declared in May 1996. Information
regarding the 1993 Plan from October 31, 1996 to April 30, 1997 after
adjustments for all applicable stock splits, is presented in the table and
narrative below:
Current Weighted
Average Exercise
Shares Price Per Share
--------- ----------------
Shares under option at October 31,
1996 9,174,860 $5.32
Granted 2,300,500 $4.64
Exercised (187,500) $4.06
Canceled (113,000) $6.35
----------------
Shares under option at April 30,
1997 11,174,860 $5.19
================
Exercisable at April 30, 1997 8,249,360 $5.31
================
The exercise price with respect to each option granted under the 1993 Plan from
its inception was equal to at least the fair market value of the underlying
Common Stock on the date of grant. At April 30, 1997, 3,842,500 options were
available for future grants under the 1993 Plan.
From May 1, 1997 through June 6, 1997, the Company received proceeds aggregating
approximately $16,600 relating to the exercise of options to purchase 5,000
shares of Common Stock pursuant to the 1993 Plan.
As of June 6, 1997, 8,244,360 of the options to purchase shares of Common Stock
granted and outstanding under the 1993 Plan were exercisable.
14
<PAGE>
(4)Warrants to purchase common stock:
----------------------------------
Information from October 31, 1996 to April 30, 1997 regarding warrants
previously issued by the Company, primarily to members of the immediate families
of its Chairman of the Board and its President in conjunction with the sale of
its Common Stock, after adjustments for anti-dilution provisions and all
applicable stock splits, is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares covered by warrants at October
31, 1996 415,116 $5.11
Warrants exercised ( 98,820) $5.10
Warrants expired ( 97,296) $4.50
--------------
Shares covered by warrants at April 30,
1997 219,000 $5.35
==============
The exercise price of each warrant was equal to at least the fair market value
of the underlying Common Stock on the date of issuance of such warrant. As of
April 30, 1997, all of the warrants to purchase shares of Common Stock issued
and outstanding were exercisable.
(5)Stock Split:
------------
On May 24, 1996 the Company declared a two-for-one stock split, effected in the
form of a 100% stock dividend, payable on June 17, 1996 to shareholders of
record as of June 4, 1996. The weighted average number of shares outstanding and
net loss per share amounts in the accompanying financial statements have been
restated to reflect the stock split.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
------------------------------------
The Company, which is a development stage enterprise, was incorporated on
November 5, 1982 and has had no revenues to support its operations since its
inception. The Company's principal activities are the development of telephone
based multi-functional telecommunications products incorporating the Company's
ultra-high resolution flat panel display, the further expansion of its overall
flat panel technology, and the operations of SCE, the Company's 55% owned joint
venture in China for the production of its telecommunication products. The
Company's interest in SCE is accounted for under the equity method of accounting
(see Notes 1 and 2 to the Company's condensed financial statements). During the
past year, the Company also increased its efforts to develop ultra-high
resolution video and color capability for the further expansion of its overall
flat panel display technology. There can be no assurance, however, that the
Company's efforts in this area will be successful. There is also no assurance
that the Company will generate significant revenues in the future, will have
sufficient revenues to generate profits or that other products will not be
produced by other companies that will render the products of the Company or SCE
obsolete or unmarketable.
The Company has entered into marketing agreements with distributors in several
countries throughout the world. These agreements are for terms of three years
and provide for the purchase of the distributors' requirements of the Company's
MAGICOM(R) 2000 product in their respective territories. The agreements provide
for monthly purchase orders in increasing quantities, to be accompanied by
irrevocable bank letters of credit furnished by the distributors. The Company is
providing technical support to its distributors and has added features and made
changes in MAGICOM(R) 2000 in order to assist them in meeting their respective
governmental telecommunications approval and customer requirements. The Company
has commenced fulfilling initial orders from the distributors for MAGICOM(R)2000
units incorporating these features and changes, which are being produced by SCE.
The Company and SCE are in their initial stages of production and marketing. The
eventual success and profitability of their product will depend upon many
factors, including those normally associated with any new product. These factors
include the capability of SCE to produce sufficient quantities of MAGICOM(R)
2000; the ability of the Company and SCE to maintain an acceptable pricing level
to end-users for the product; long-term product performance and the capability
of the Company, SCE and its distributors to adequately service the product; the
ability of distributors to market their contracted quantities of the product in
their respective territories; political and economic stability in targeted
marketing territories; and the possible development of competitive products that
could render the product of the Company and SCE obsolete or unmarketable.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, reference is made to the Company's Condensed Financial
Statements and the notes thereto.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements relating to
future events which involve certain risks and uncertainties, including those
identified herein and in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996 (the "1996 10-K"). See "Business" and Note 1 to the
Company's Financial Statements contained in the 1996 10-K for discussions
regarding uncertainties that may significantly affect the results of operations,
future liquidity and capital resources.
16
<PAGE>
Results of Operations
- ---------------------
Selling, general and administrative expenses for the six and three month periods
ended April 30, 1997 and 1996 and for the period from November 5, 1982
(inception) through April 30, 1997 were approximately $3,338,000, $2,175,000,
$1,775,000, $1,100,000 and $35,318,000, respectively. These amounts include
research, development and tooling costs of approximately $2,021,000, $1,461,000,
$1,123,000, $694,000 and $22,764,000 respectively, as well as normal operating
expenses. The increase in selling, general and administrative expenses during
the six and three month periods ended April 30, 1997, of approximately
$1,163,000 and $675,000, respectively, resulted primarily from increases in
engineering supplies, compensation (including related costs), and marketing
costs necessitated by the present phase of the Company's development program and
related activities. Engineering supplies increased primarily as a result of
expensing components used for training purposes at SCE, and the Company
obtaining sample quantities of MAGICOM(R) 2000, produced by SCE, for evaluation
to insure product quality. Compensation, including payroll taxes and fringe
benefits, increased as a result of the staffing of a marketing department and
the addition of scientific personnel to increase the Company's efforts to
develop ultra-high resolution video and color capability for its overall flat
panel display technology. Other operating costs, including marketing, travel and
rent, also increased in the current periods. Marketing costs increased as a
result of the production of marketing brochures and videos, while travel costs
increased as a result of travel associated with selecting distributors and
attending trade shows. Travel expenses to China also increased due to the
Company's need to train SCE's technical personnel. The increase in rent was a
result of the Company increasing the size of its facilities. Professional fees
decreased in the aggregate as a result of significantly lower patent application
preparation fees in the current periods.
The Company's portion of SCE's loss increased during the six and three month
periods by $130,000 and $73,000, respectively, as compared to the same periods
in 1996. The increases in the losses were the result of progressively higher
costs as SCE approached and entered the initial stages of production of
MAGICOM(R) 2000.
Since November 1985, the Company's Chairman of the Board and its President have
waived salary and related pension benefits for an undetermined period of time.
Four other individuals, including a former officer and senior level personnel,
waived salary and related pension benefits from January 1987 through December
1990. Commencing in January 1991, these four individuals waived such rights for
an undetermined period of time and they did not receive salary or related
pension benefits through December 1992. The Company's Chairman of the Board, its
President and the three senior level personnel continued to waive such rights
commencing in January 1993 for an undetermined period of time. One additional
senior level employee also is currently waiving such salary and benefit rights
for an undetermined period of time.
The increase in interest income of approximately $277,000 and $133,000 during
the six and three months ended April 30, 1997 as compared to the same periods in
1996 primarily resulted from an increase in funds available for investment aided
by higher interest rates. Funds available for investment during the six and
three month periods ended April 30, 1997 and 1996, on a monthly weighted average
basis, were approximately $19,650,000, $10,690,000, $19,090,000 and $12,000,000,
respectively. The investment instruments selected by the Company are principally
money market accounts and commercial paper.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily from the proceeds of the sales of Common Stock in its initial
public offering, in private placements, upon exercise of warrants issued in
connection with the private placements and public offering, and upon exercise of
stock options pursuant to the 1987 Plan and the 1993 Plan.
From November 1, 1996 to April 30, 1997, the Company received proceeds
aggregating approximately $906,000 relating to the exercise of options to
purchase 235,700 shares of Common Stock under the 1987 and 1993 Plans. In
addition, from May 1, 1997 to June 6, 1997, the Company received proceeds
aggregating approximately $71,600 relating to the exercise of options to
purchase 25,000 shares of Common Stock under the 1987 and 1993 Plans.
17
<PAGE>
SCE contemplates an initial capitalization of $7,000,000, of which half is
expected to be borrowed from banks, and the balance of $3,500,000 has been
invested by the Company, SECC and SIT. The Company has contributed $1,225,000 in
cash, and technology valued for the purposes of SCE at $700,000, and SECC and
SIT have contributed $1,575,000 in cash to SCE (see Notes 1 and 2 to the
Company's condensed financial statements). SCE may require capitalization of up
to $25 million, depending upon the nature and extent of its business activities.
On April 17, 1996, the Company entered into a letter of intent for the formation
of a second joint venture with SECC. The parties are presently discussing
possible amendments to the letter of intent. As stipulated in the letter of
intent, unless otherwise amended, the Second Joint Venture is expected to have
an initial capitalization of approximately $2,000,000, of which half would
consist of bank borrowings. The Company would invest cash of approximately
$550,000 and SECC would contribute cash, equipment and technology collectively
valued at $450,000. The Second Joint Venture may require an ultimate
capitalization of up to $10 million depending on the nature and extent of its
business activities which, if necessary, is expected to be financed through a
combination of bank borrowings and equity investments contributed by the parties
in proportion to their equity interests and on terms to be agreed upon.
The Company believes that without taking into consideration revenues from sales
of MAGICOM(R) 2000 it will have sufficient funds through the first quarter of
fiscal 2000 to maintain its present level of development efforts and to make its
anticipated capital contribution of $550,000 to the Second Joint Venture.
The Company's estimated funding capacity indicated above assumes, although there
is no assurance, that the waiver of salary and pension benefits by the Chairman
of the Board, the President and senior level personnel will continue. The
Company anticipates that it may require additional funds in order to participate
in the joint ventures following its initial capital contributions and to
continue its research and development activities.
The National Association of Securities Dealers, Inc. ("NASD") requires that the
Company maintain a minimum of $4,000,000 of net tangible assets to maintain its
NASDAQ - NMS listing. The Company anticipates that it will seek additional
sources of funding, when necessary, in order to satisfy the NASD requirements.
The Company currently has no plans with respect to additional financing. There
can be no assurance that adequate funds will be available to the Company, SCE,
or the Second Joint Venture, including any future capital contribution, if any,
beyond its initial capital contributions of $1,225,000 to SCE and the
anticipated capital contribution of $550,000 to the Second Joint Venture, and
its NASD funding requirements, or that, if available, the Company, SCE, or the
Second Joint Venture, will be able to obtain such funds on favorable terms and
conditions.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed for the Company during
the quarter ended April 30, 1997.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CopyTele, Inc.
DENIS A. KRUSOS
---------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal
June 13, 1997 Executive Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
June 13, 1997 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance and
Chief Financial Officer and
Director (Principal Financial
June 13, 1997 and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -------------
27 - Financial Data Schedule
<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-Q and is qualified in
its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-30-1996
<PERIOD-END> APR-30-1997
<CASH> 18,475,690
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,627,426
<PP&E> 1,797,736
<DEPRECIATION> 939,980
<TOTAL-ASSETS> 22,535,782
<CURRENT-LIABILITIES> 1,368,490
<BONDS> 0
0
0
<COMMON> 577,392
<OTHER-SE> 20,589,900
<TOTAL-LIABILITY-AND-EQUITY> 22,535,782
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 3,495,709
<OTHER-EXPENSES> (514,284)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,981,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,981,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,981,425)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
