SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
------------------
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 March 10, 1998: 57,861,176 shares
------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of January 31, 1998 and
October 31, 1997
Condensed Statements of Operations (Unaudited) for the three months
ended January 31, 1998 and January 31, 1997, and for the period from
November 5, 1982 (Inception) through January 31, 1998
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through January 31, 1998
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 1998 and January 31, 1997, and for the period from
November 5, 1982 (Inception) through January 31, 1998
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.
----------------------
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
January 31, October 31,
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$10,997,579 and $11,977,526, respectively) $11,186,456 $12,329,171
Marketable securities, at amortized cost - 997,173
Accrued interest receivable 12,837 18,429
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $4,627,000 and $4,304,000, respectively) 5,509,885 4,853,459
------------- ------------
16,709,178 18,198,232
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,133,767 and $1,062,949, respectively) 926,675 947,643
INVESTMENT IN JOINT VENTURE (Note 2) 586,587 723,166
OTHER ASSETS 105,197 119,166
DEFERRED TAX BENEFITS (net of valuation allowance of $29,107,000
and $28,295,000, respectively) - -
------------- -------------
$18,327,637 $19,988,207
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,305,621 $1,209,065
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; authorized 500,000 shares;
no shares outstanding - -
Common stock, par value $.01 per share; authorized 240,000,000 shares;
57,861,176 shares outstanding 578,612 578,612
Additional paid-in capital 52,939,185 52,759,485
Accumulated (deficit) during development stage (36,495,781) (34,558,955)
-------------- ---------------
17,022,016 18,779,142
-------------- ---------------
$18,327,637 $19,988,207
============== ===============
</TABLE>
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
For the three months November 5,1982
ended January 31, (inception)
---------------------------------------------- through
1998 1997 January 31, 1998
----------- ------------- -----------------
<S> <C> <C> <C>
SALES $ - $ - $ -
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES,
(including research and development
expenses of approximately $1,100,000,
$898,000 and $25,485,000,respectively) 1,958,397 1,562,504 40,316,974
------------- -------------- ----------------
LOSS FROM JOINT VENTURE 136,579 69,017 638,413
------------- -------------- ----------------
INTEREST INCOME 158,150 261,076 4,459,606
------------- -------------- ----------------
NET (LOSS) ($1,936,826) ($1,370,445) ($36,495,781)
============= ============== ================
NET (LOSS) PER SHARE OF COMMON STOCK ($0.03) ($0.02) ($0.79)
============= ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
57,861,176 57,423,102 46,097,326
============= ============== ================
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these statements.
<TABLE>
<CAPTION>
4
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 1998 (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>
<TABLE>
<CAPTION>
5
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 1998 (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 October 6, 1997 under stock option
plans, net of registration costs 875,200 8,752 3,042,519 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Stock options granted to consultants - - 179,700 -
Accumulated (deficit) during development stage - - - ($36,495,781)
------------ ------------- --------------- --------------
BALANCE, January 31, 1998 57,861,176 $578,612 $52,939,185 ($36,495,781)
============ ============= =============== ==============
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of this statement.
6
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the three
months ended For the period from
January 31, November 5, 1982
---------------------------------------------- (inception) through
1998 1997 January 31, 1998
-------------------- ------------------- -----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($2,049,250) ($2,925,181) ($43,246,748)
Interest received 190,107 300,941 4,446,769
-------------------- ------------------- -----------------------
Net cash (used in) operating activities (1,859,143) (2,624,240) (38,799,979)
-------------------- ------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (254,380) (225,653) (2,051,662)
Disbursements to acquire certificates of deposit and
corporate notes and bonds - - (13,045,999)
Proceeds from maturities of investments 970,808 - 13,045,999
Investment made in Joint Venture - - (1,225,000)
-------------------- ------------------- -----------------------
Net cash (used in) investing activities 716,428 (225,653) (3,276,662)
-------------------- ------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants, net of
underwriting discounts of $690,000 related to initial
public offering in October 1983 - - 17,647,369
Proceeds from exercise of stock options and warrants,
net of registration disbursements - 230,295 35,680,358
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 - 230,295 53,263,097
-------------------- ------------------- -----------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,142,715) (2,619,598) 11,186,456
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 12,329,171 22,165,892 -
-------------------- ------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $11,186,456 $19,546,294 $11,186,456
==================== =================== =======================
Continued
</TABLE>
<TABLE>
<CAPTION>
7
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
---------
For the three
months ended For the period from
January 31, November 5, 1982
--------------------------------------------- (inception) through
1998 1997 January 31, 1998
-------------------- -------------------- -------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ($1,936,826) ($1,370,445) ($36,495,781)
Stock options granted to consultants 179,700 - 179,700
Loss from Joint Venture 136,579 69,017 638,413
Depreciation and amortization 70,818 63,304 1,149,425
Decrease (Increase) in accrued interest
receivable 5,592 39,865 (12,837)
Amortization of discount on marketable
securities 26,365 - -
(Increase) in prepaid expenses and other
current assets (656,426) (1,106,365) (5,509,885)
Decrease (Increase) in other assets 13,969 55,223 (105,198)
Increase (Decrease) in accounts payable and
accrued liabilities related to operating
activities 301,086 (374,839) 1,356,184
-------------------- -------------------- -------------------------
Net cash (used in) operating activities ($1,859,143) ($2,624,240) ($38,799,979)
==================== ==================== =========================
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these statements.
8
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
JANUARY 31, 1998 (UNAUDITED)
----------------------------
(1) Summary of significant accounting policies and other disclosures:
---------------------------------------------------------------------------
CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982, is a
development stage enterprise whose principal activities include the development,
production and marketing of a telephone based multi-functional
telecommunications product, called MAGICOM(R) 2000, incorporating the Company's
ultra-high resolution E-Paper(TM) flat panel display 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
Developing Corp. ("SIT"). The Company also is continuing its research and
development activities for ultra-high resolution video and color flat panel
displays. SECC has agreed to assign its 35% interest in SCE to Shanghai
Instrumentation and Electronics Holding Group Company ("SIEC") and SIT. After
the assignments, SIEC will own 30%, SIT will own 15% and the Company's ownership
will remain at 55% of SCE. The assignment has been approved by the Company as
well as the board of directors of SCE; however, final approval is pending with
the Chinese government.
Reference is made to the October 31, 1997 audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1997, for more extensive disclosures than contained in these
condensed financial statements.
The Company is producing its telephone based multi-functional telecommunications
product, called MAGICOM(R) 2000, incorporating the Company's flat panel display,
called E-Paper(TM), and associated proprietary hardware and software technology
and marketing the product through its United States and international
distributor/dealer network The Company has also developed, in conjunction with a
Japanese company, a small portable printer called Magic Printer. The printer is
being produced for the Company by the Japanese company and is also being
marketed through the Company's marketing network, including in China, for use
with MAGICOM(R) 2000 or in conjunction with personal or laptop computers.
The success and profitability of the Company's products will depend upon many
factors, including those normally associated with any new product. These factors
include the capability of SCE and the Japanese company to produce sufficient
quantities of MAGICOM(R) 2000 and Magic Printer, respectively; the ability of
the Company and SCE to maintain an acceptable pricing level to end-users for the
products; long-term product performance and the capability of the Company, SCE
and its distributors to adequately service the products; the ability of
distributors to market their contracted quantities of the products in their
respective territories; political and economic stability in targeted marketing
territories; and the possible development of competitive products that could
render the Company's product obsolete or unmarketable.
The information contained herein for the three month periods ended January 31,
1998 and 1997 and for the period from November 5, 1982 (inception) through
January 31, 1998 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.
In March 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". This statement establishes standards for
computing and presenting earnings per share ("EPS"), replacing the presentation
of currently required primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation of
both Basic EPS and Diluted EPS on the face of the statement of operations. Under
this new standard, Basic EPS is computed based on weighted average shares
outstanding and excludes any potential dilution; Diluted EPS reflects potential
dilution from the exercise or conversion of securities into common stock and is
similar to the currently required fully diluted EPS. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The net loss per share reported by the Company is
only Basic EPS as the impact of any common stock equivalents would have an
anti-dulitive effect due to the net loss incurred in the period. The impact of
the adoption of this statement was not material to previously reported EPS
amounts.
The amounts due from the Joint Venture of approximately $4,627,000 and
$4,304,000, respectively, on the accompanying Condensed Balance Sheets
represents parts inventory, such as the flat panel assembly components,
purchased by the Company on behalf of SCE which are incorporated into the
MAGICOM(R) 2000 product.
9
<PAGE>
(2) Investment in Joint Venture:
----------------------------
The Company has contributed to SCE $1,225,000 in cash, and technology that has
been valued for purposes of the Joint Venture 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 and will recognize losses in SCE to the extent
of its cash investment.
Condensed financial information for SCE at January 31, 1998 and October 31, 1997
and for the three months ended January 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets January 31, October 31,
------------------------- 1998 1997
(Unaudited) ----------------- -------------------
<S> <C> <C>
Cash $ 44,718 $ 135,890
Inventories 4,715,542 4,830,461
Other current assets 62,929 31,988
Land occupancy rights, net of amortization; fixed assets,
net of depreciation and other non-current assets 2,165,525 2,197,169
----------------- -------------------
Total Assets $6,988,714 $7,195,508
================= ===================
Short term loans $ 499,964 $ 500,012
Accounts payable and accrued liabilities 222,440 504,269
Due to CopyTele, Inc. 4,627,061 4,303,652
Capital 1,639,249 1,887,575
================= ===================
Total Liabilities and Capital $6,988,714 $7,195,508
================= ===================
For the three months ended
-------------------------------------------
Condensed Statements of Operations January 31, January 31,
---------------------------------- 1998 1997
(Unaudited) ----------------- -------------------
Net Sales $ - $ -
Operating (Loss) (243,266) (129,653)
Other Income (Expense) (5,060) 4,167
================= ===================
Net (Loss) ($248,326) ($125,486)
================= ===================
</TABLE>
The short term loans from a Chinese bank bear interest at a floating rate which
is currently approximately 7.4% per annum adjustable quarterly. These loans were
extended in December 1997 and will mature May 1998 through August 1998. These
loans are secured by a land-use contract and equipment owned by SCE.
Included in accounts payable and accrued liabilities at January 31, 1998 and
October 31, 1997, are approximately $103,000 and $372,000, respectively, of
advances paid by the Company towards the purchase of products from SCE.
The cumulative net (loss) incurred by SCE since its inception on April 10, 1995
is ($1,160,751).
10
<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").
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 employee 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. In accordance with APB Opinion No. 25, no compensation
cost has been recognized by the Company, as all option grants to employees have
been made at the fair market value of the Company's stock on the date of grant.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended January 31, 1998 Ended January 31, 1997
-------------------------------- -------------------------------
<S> <C> <C>
Net Loss: As Reported ($1,936,826) ($1,370,445)
Pro Forma ($3,193,297) ($4,352,009)
Net Loss
Per Share: As Reported ($0.03) ($0.02)
Pro Forma ($0.06) ($0.08)
</TABLE>
Options granted to non-employee consultants are accounted for using the
fair-value method required by SFAS No. 123. Compensation expense for consultants
recognized in the three months ended January 31, 1998 was approximately
$180,000, and is included in general and administrative expenses for the period.
No such costs were incurred in the three month period ended January 31, 1997.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants for the three months ended January 31, 1998 and
1997, respectively: risk free interest rates of 5.50% and 6.24%; expected
dividend yields of 0%; expected lives of 2.86 and 1.62 years; and expected stock
price volatility of 68% and 73%. The weighted average fair value of options
granted under SFAS No. 123 for the three months ended January 31, 1998 and 1997
are $1.62 and $2.27, respectively.
11
<PAGE>
During the period from November 1, 1997 to January 31, 1998 there were no stock
options exercised, granted or canceled under the 1987 Plan. At January 31, 1998,
686,160 shares were under option, all of which are exercisable. The current
weighted average exercise price per share is $4.93.
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. Upon the approval of the 1993 Plan
by the Company's shareholders in July 1993, the 1987 Plan was terminated with
respect to the grant of future options.
The 1993 Plan was amended as of May 3, 1995 and May 10, 1996 to, among other
things, increase the number of shares of the Company's Common Stock available
for issuance pursuant to grants thereunder from 6 million to 20 million, as
adjusted for the two-for-one stock split declared in May 1996. Information
regarding the 1993 Plan from October 31, 1997 to January 31, 1998 is presented
in the table and narrative below:
<TABLE>
<CAPTION>
Current Weighted
Average Exercise
Shares Price Per Share
------------- -------------------
<S> <C> <C>
Shares Under Option at October 31, 1997 11,540,360 $5.19
Granted 1,360,000 $3.38
Canceled (120,000) $4.68
--------------
Shares Under Option at January 31, 1998 12,780,360 $5.01
==============
Options Exercisable at January 31, 1998 10,930,360 $5.20
==============
</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. At January 31, 1998, 2,150,000
options were available for future grants under the 1993 Plan.
(4) Warrants to purchase common stock:
----------------------------------
Warrants previously issued by the Company were 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. 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. At October 31, 1997, after adjustments for
anti-dilution provisions and all applicable stock splits, there were 96,000
shares covered by warrants with a weighted average exercise price of $5.07 per
share. During the period from November 1, 1997 to January 31, 1998, these
warrants expired, therefore at January 31, 1998, there were no shares covered by
warrants.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The Company is a development stage enterprise that was incorporated on November
5, 1982. The Company is producing its products and selling them to end-users
through its distributor/dealer network. Although limited sales to end-users have
been made to date by the distributors and dealers, the Company has deferred
revenue recognition on these sales to distributors and dealers pending sustained
acceptance of its products by the end-users. Prior to these limited sales the
Company had no revenues from sales to support its operations since its
inception. The Company's principal activities include the development,
production and marketing of a telephone based multi-functional
telecommunications product, called MAGICOM(R) 2000, incorporating the Company's
ultra-high resolution E-Paper(TM) Flat Panel Display technology and the
operations of SCE, the Company's 55% owned joint venture in Shanghai, China
which is accounted for under the equity method of accounting. The Company is
also marketing a small portable printer called Magic Printer and is continuing
its research and development activities for ultra-high resolution video and
color flat panel displays. There can be no assurance, however, that the
Company's efforts in these areas will be successful. There is also no assurance
that the Company will generate significant revenues in the future, will 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.
The Company announced in December of 1997 that it is engaged in preliminary
discussions with SIEC. The present intentions of the companies as set forth in a
non-binding letter of intent is to mutually cooperate to develop, produce and
market high technology products, under mutually acceptable terms, using the
Company's overall flat panel and associated technology. The parties also intend
to cooperate to mutually market certain of SIEC's products, to be enhanced by
the Company's technology, outside of China. In order to share in their
respective efforts, the companies are attempting to devise and agree upon a
means to share an interest in each other's company. It is presently contemplated
that the Company would issue common stock in an amount representing less than
20% of its currently outstanding shares in exchange for an interest in SIEC's
holdings. The companies are in discussions concerning the details of this
possible arrangement, although it is expected to take a number of months before
the parties could enter into a final, binding agreement. There can be no
assurance that the parties will be able to arrive at mutually acceptable
agreements or obtain the requisite governmental approvals. Among the issues to
be finalized are those concerning the valuation of CopyTele's shares, the form,
structure and valuation of the interest in SIEC's holdings that would be
exchanged for CopyTele's shares, the nature and structure of the venture, the
specific products to be developed for sale and the likely timetable for
implementing the venture. As previously disclosed, the Company entered into a
letter of intent in 1996 for the formation of a second joint venture with SECC.
In light of the Company's current discussions with SIEC, however, the Company
has determined that it is unlikely that it will pursue this second joint venture
if a definitive agreement is ultimately reached with SIEC.
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
- -------
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. See Note 1 to the condensed financial
statements in this Form 10-Q and "Business" and Note 1 to the Company's
Financial Statements contained in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997 for discussions regarding uncertainties
that may significantly affect the results of operations, future liquidity and
capital resources.
13
<PAGE>
Results of Operations
- ---------------------
Selling, general and administrative expenses including the loss from SCE, for
the three month periods ended January 31, 1998 and 1997 and for the period from
November 5, 1982 (inception) through January 31, 1998 were approximately
$2,095,000, $1,632,000, and $40,955,000, respectively. These amounts include
research, development and tooling costs of approximately $1,100,000, $898,000,
and $25,485,000 respectively, as well as normal operating expenses.
Selling, general and administrative expenses including the loss from SCE,
increased approximately $463,000 during the three months ended January 31, 1998
as compared to the same period in 1997 resulting primarily from increases in
expenses for salaries, losses from joint venture operations, costs associated
with stock based compensation to consultants, professional fees, engineering
costs, and to a lesser extent, communication costs and rents. Salaries increased
in the 1998 period over the 1997 period as a result of the Company hiring
additional marketing and engineering personnel. The Company's portion of SCE's
loss increased over the prior year from $69,000 in fiscal 1997 compared to
$137,000 in fiscal 1998 as a result of manufacturing costs being absorbed over a
limited quantity of product produced and initial marketing costs. Marketing
related costs, including travel, decreased in the current period as the
Company's higher start up costs were absorbed in the prior year's period.
Telecommunication costs and rents increased to a lesser extent over the prior
year's period as compared to other cost increases. Engineering supplies
increased primarily as a result of the implementation of engineering changes to
MAGICOM(R) 2000. Included in the increase was the cost to eliminate obsolete
components which was offset somewhat by reduced purchases of panels and chip
drivers used for testing and evaluation purposes, and the purchase of MAGICOM(R)
2000 units from SCE for similar purposes. A decrease in workers' compensation
costs was offset by an increase in pension and other group insurance cost as a
result of the addition of new personnel. Professional fees increased in the
aggregate during the 1998 fiscal year as a result of higher legal and accounting
expense associated with the Joint Venture and the Company's potential agreement
with SIEC, but were offset by a decrease in patent related costs. A non-cash
expense of approximately $180,000 was charged to earnings for stock based
compensation to consultants with an offset to Paid-In Capital.
While there are no formal agreements, the Company's Chairman of the Board and
its President have waived salary and related pension benefits for an
undetermined period of time commencing November 1985. Four other individuals,
including an officer and three senior level personnel, then employed at the
Company, waived salary and related pension benefits 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
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.
The decrease in interest income of approximately $103,000 during the three
months ended January 31, 1998 as compared to the same period in 1997 resulted
primarily from a decrease in average funds available for investment. Funds
available for investment during the fiscal 1998 and 1997 three month comparison,
on a monthly weighted average basis, were approximately $11,377,000 and
$20,204,000, respectively. The investment instruments selected by the Company
are principally money market accounts and commercial paper.
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily from the proceeds of 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, upon the exercise of
stock options pursuant to the 1987 Plan and the 1993 Plan and recently from the
sale of its products.
Working capital decreased by approximately $1,586,000 from approximately
$16,990,000 at October 31, 1997 to approximately $15,404,000 at January 31, 1998
as a result of the loss incurred for the period and the purchase of property and
equipment.
SCE required an initial aggregate capital investment of $3,500,000 from the
parties to the joint venture. The Joint Venture Agreement contemplates an
additional $3,500,000 investment which may be borrowed from banks of which
approximately $700,000 has been borrowed to date. 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 additional
capitalization of up to a total of $25 million, depending upon the nature and
extent of its business activities. 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 or SCE, including any future capital
contribution, if any, beyond the Company's initial capital contributions of
$1,225,000 to SCE, or that, if available, the Company and SCE will be able to
obtain such funds on favorable terms and conditions.
The Company believes that without taking into consideration potential revenues
from sales of MAGICOM(R) 2000 it will have sufficient funds into the first
quarter of fiscal 2000 to maintain its present level of development efforts.
This includes, among other things, the collection of the amounts due from SCE,
but excludes cash expenditures that may be required with the potential
transaction with SIEC. The amounts due from SCE are primarily costs related to
the purchase of components for SCE's use in MAGICOM(R) 2000 units. It is
expected that SCE will pay the Company during the current year through the sales
of units and financing from banks, although the amounts due may increase before
repayment begins.
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 following its initial capital contributions and to continue its research
and development activities.
15
<PAGE>
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 January 31, 1998.
16
<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 Executive
March 17, 1998 Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
March 17, 1998 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
March 17, 1998 and Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Form10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1998
<CASH> 11,186,456
<SECURITIES> 0
<RECEIVABLES> 167,439
<ALLOWANCES> 0
<INVENTORY> 577,823
<CURRENT-ASSETS> 16,709,178
<PP&E> 2,060,442
<DEPRECIATION> 1,133,767
<TOTAL-ASSETS> 18,327,637
<CURRENT-LIABILITIES> 1,305,621
<BONDS> 0
0
0
<COMMON> 578,612
<OTHER-SE> 16,443,404
<TOTAL-LIABILITY-AND-EQUITY> 18,327,637
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,094,976
<OTHER-EXPENSES> (158,150)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,936,826)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,936,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,936,826)
<EPS-PRIMARY> ($0.03)
<EPS-DILUTED> 0
</TABLE>
