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, 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 June 5, 1998: 57,871,176 shares
------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) as of April 30, 1998 and
October 31, 1997
Condensed Statements of Operations (Unaudited) for the six months ended
April 30, 1998 and April 30, 1997, and for the period from November 5,
1982 (Inception) through April 30, 1998
Condensed Statements of Operations (Unaudited) for the three months
ended April 30, 1998 and April 30, 1997
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through April 30, 1998
Condensed Statements of Cash Flows (Unaudited) for the six months ended
April 30, 1998 and April 30, 1997, and for the period from November 5,
1982 (Inception) through April 30, 1998
Condensed Statements of Cash Flows (Unaudited) for the three months
ended April 30, 1998 and April 30, 1997
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
April 30, October 31,
ASSETS 1998 1997
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$7,895,195 and $11,977,526, respectively) $7,957,329 $12,329,171
Marketable securities, at amortized cost 975,561 997,173
Accrued interest receivable 10,822 18,429
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $4,935,000 and $4,304,000, respectively) 5,883,194 4,853,459
----------- ------------
14,826,906 18,198,232
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,209,884 and $1,062,949, respectively) 873,902 947,643
INVESTMENT IN JOINT VENTURE (Note 2) 515,785 723,166
OTHER ASSETS 104,877 119,166
DEFERRED TAX BENEFITS (net of valuation allowance of $29,759,000
and $28,295,000, respectively) - -
------------- -------------
$16,321,470 $19,988,207
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,114,515 $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 (38,310,842) (34,558,955)
-------------- ---------------
15,206,955 18,779,142
-------------- ---------------
$16,321,470 $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 six months November 5,1982
ended April 30, (inception)
------------------------------------------------- through
1998 1997 April 30, 1998
------------ ------------ -------------------
<S> <C> <C> <C>
SALES $ - $ - $ -
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, (including research and
development expenses of approximately
$2,106,000, $2,021,000 and
$26,491,000, respectively) 3,833,273 3,337,796 42,191,850
-------------- -------------- ----------------
LOSS FROM JOINT VENTURE 207,381 157,913 709,215
-------------- -------------- ----------------
INTEREST INCOME 288,767 514,284 4,590,223
-------------- -------------- ----------------
NET (LOSS) ($3,751,887) ($2,981,425) ($38,310,842)
============== ============== ================
NET (LOSS) PER SHARE OF COMMON STOCK ($0.06) ($0.05) ($0.83)
============== ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 57,861,176 57,535,605 46,282,567
============== ============== ================
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months
ended April 30,
----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
SALES $ - $ -
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, (including research and
development expenses of approximately
$1,006,000 and $1,123,000, respectively) 1,874,876 1,775,292
--------------- --------------
LOSS FROM JOINT VENTURE 70,802 88,896
--------------- --------------
INTEREST INCOME 130,617 253,208
--------------- --------------
NET (LOSS) ($1,815,061) ($1,610,980)
=============== ==============
NET (LOSS) PER SHARE OF COMMON STOCK ($0.03) ($0.03)
=============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 57,861,176 57,651,900
=============== ==============
</TABLE>
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, 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>
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, 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 - - - ($38,310,842)
-------------- ------------ --------------- ---------------
BALANCE, April 30, 1998 57,861,176 $578,612 $52,939,185 ($38,310,842)
============== ============ ================ ===============
</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 six
months ended For the period from
April 30, November 5, 1982
---------------------------------------------- (inception) through
1998 1997 April 30, 1998
-------------------- ------------------- -----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($4,391,355) ($5,279,263) ($45,588,853)
Interest received 319,647 554,807 4,576,310
-------------------- ------------------- -----------------------
Net cash (used in) operating activities (4,071,708) (4,724,456) (41,012,543)
-------------------- ------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (298,473) (364,190) (2,095,756)
Disbursements to acquire certificates of deposit
and marketable securities (972,469) - (14,018,468)
Proceeds from maturities of investments 970,808 - 13,045,999
Investment made in Joint Venture - - (1,225,000)
-------------------- ------------------- -----------------------
Net cash (used in) investing activities (300,134) (364,190) (4,293,225)
-------------------- ------------------- -----------------------
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 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 - 1,398,444 53,263,097
-------------------- ------------------- -----------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,371,842) (3,690,202) 7,957,329
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 12,329,171 22,165,892 -
-------------------- ------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $7,957,329 $18,475,690 $7,957,329
==================== =================== =======================
Continued
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
---------
For the six
months ended For the period from
April 30, November 5, 1982
-------------------------------------------- (inception) through
1998 1997 April 30, 1998
------------------- ------------------- ---------------------
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ($3,751,887) ($2,981,425) ($38,310,842)
Stock options granted to consultants 179,700 - 179,700
Pro-rata share of Joint Venture Company
losses 207,381 157,913 709,215
Depreciation and amortization 146,935 123,329 1,225,542
Decrease (Increase) in accrued interest
receivable 7,607 40,523 (10,822)
Amortization of discount on
marketable securities 23,273 - (3,092)
(Increase) in prepaid expenses and other
current assets (1,029,735) (1,764,536) (5,883,194)
Decrease (Increase) in other assets 14,289 77,686 (104,877)
Increase (Decrease) in accounts payable
and accrued liabilities related to operating
activities 130,729 (377,946) 1,185,827
------------------- ------------------- ---------------------
Net cash (used in) operating activities ($4,071,708) ($4,724,456) ($41,012,543)
=================== =================== =====================
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these statements.
9
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the three months
ended April 30,
------------------------------------------------------------
1998 1997
------------------------- ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($2,342,105) ($2,354,082)
Interest received 129,540 253,866
------------------------- ------------------------
Net cash (used in) operating activities (2,212,565) (2,100,216)
------------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (44,093) (138,537)
Disbursements to acquire certificates of
deposit and marketable securities (972,469) -
------------------------- ------------------------
Net cash (used in) investing activities (1,016,562) (138,537)
------------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and
warrants, net of registration disbursements - 1,168,149
------------------------- ------------------------
Net cash provided by financing activities - 1,168,149
------------------------- ------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,229,127) (1,070,604)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,186,456 19,546,294
------------------------- ------------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $7,957,329 $18,475,690
========================= ========================
RECONCILIATION OF NET (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net (loss) ($1,815,061) ($1,610,980)
Pro-rata share of Joint Venture Company losses 70,802 88,896
Depreciation and amortization 76,117 60,025
Decrease in accrued interest receivable 2,015 658
Amortization of discount on marketable
securities (3,092) -
(Increase) in prepaid expenses and other current
assets (373,309) (658,171)
Decrease in other assets 320 22,463
(Decrease) in accounts payable and accrued
liabilities related to operating activities (170,357) (3,107)
========================= ========================
Net cash (used in) operating activities ($2,212,565) ($2,100,216)
========================= ========================
</TABLE>
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, 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
Instrumentation and Electronics Holding Group Company ("SIEC") and Shanghai
International Trade and Developing Corp. ("SIT"). As a result of an assignment
by Shanghai Electronic Components Corp., SIEC has acquired a 30% interest in SCE
and SIT's interest increased to 15%. The Company also is continuing its research
and development activities for ultra-high resolution video and color solid state
optical (reflective) and thin film (emissive) flat panel displays.
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. See Safe
Harbor Statement Under the Private Securities Litigation Reform Act of 1995
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussions regarding uncertainties that may
significantly affect the results of operations, future liquidity and capital
resources.
The information contained herein for the six and three month periods ended April
30, 1998 and 1997 and for the period from November 5, 1982 (inception) through
April 30, 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-dilutive 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 $4,935,000 and
$4,304,000, respectively, on the accompanying Condensed Balance Sheets represent
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.
11
<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 Balance Sheets for SCE at April 30, 1998 and October 31, 1997 and
Condensed Statements of Operations for the six month periods ended April 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets April 30, October 31,
------------------------- 1998 1997
(Unaudited) ----------------- -------------------
<S> <C> <C>
Cash $ 370,789 $ 135,890
Inventories 4,876,368 4,830,461
Other current assets 156,970 31,988
Land occupancy rights, net of amortization; fixed assets,
net of depreciation and other non-current assets 2,192,505 2,197,169
----------------- -------------------
Total Assets $ 7,596,632 $ 7,195,508
================= ===================
Short term loans $ 999,321 $ 500,012
Accounts payable and accrued liabilities 151,816 504,269
Due to CopyTele, Inc. 4,934,976 4,303,652
Capital 1,510,519 1,887,575
================= ===================
Total Liabilities and Capital $ 7,596,632 $ 7,195,508
================= ===================
For the six months ended
-------------------------------------------
Condensed Statements of Operations April 30, April 30,
---------------------------------- 1998 1997
(Unaudited) ----------------- -------------------
Net Sales $ - $ -
Operating (Loss) (361,296) (287,502)
Other Income (Expense) (15,760) 387
================= ===================
Net (Loss) ($377,056) ($287,115)
================= ===================
</TABLE>
The short-term loans from a Chinese bank bear interest at floating rates, which
are currently, approximately 7.69% and 8.64% per annum adjustable quarterly.
These loans were extended in February and April 1998 and will mature February
1999 and April 1999, respectively. These loans are secured by a land-use
contract and building owned by SCE.
Included in accounts payable and accrued liabilities at October 31, 1997, is
$372,000 of advances paid by the Company towards the purchase of products from
SCE. No such advances were outstanding at April 30, 1998.
The cumulative net loss incurred by SCE since its inception on April 10, 1995 is
$1,289,481.
12
<PAGE>
(3) Stock option plans:
-------------------
The Company has two stock option plans, the 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 options granted 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 Six Months For the Six Months
Ended April 30, 1998 Ended April 30, 1997
-------------------------------- -------------------------------
<S> <C> <C>
Net Loss: As Reported ($3,751,887) ($2,981,425)
Pro Forma ($5,771,165) ($9,432,417)
Net Loss
Per Share: As Reported ($0.06) ($0.05)
Pro Forma ($0.10) ($0.16)
</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 six months ended April 30, 1998 was approximately $180,000,
and is included in general and administrative expenses for the period with an
offset to Additional Paid-In Capital. No such costs were incurred in the six
month period ended April 30, 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 six months ended April 30, 1998 and 1997,
respectively: risk free interest rates of 5.50% and 5.61%; expected dividend
yields of 0%; expected lives of 2.86 and 2.56 years; and expected stock price
volatility of 68% and 69%. The weighted average fair value of options granted
under SFAS No. 123 for the six months ended April 30, 1998 and 1997 are $1.62
and $ 2.29, respectively.
13
<PAGE>
During the period from November 1, 1997 to April 30, 1998, there were no stock
options exercised, granted or canceled under the 1987 Plan. At April 30, 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 April 30, 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 (370,000) $5.12
------------------
Shares Under Option at April 30, 1998 12,530,360 $5.00
==================
Options Exercisable at April 30, 1998 10,795,360 $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 April 30, 1998, 2,400,000 options
were available for future grants under the 1993 Plan.
From May 1, 1998 through June 5, 1998, the Company received proceeds aggregating
approximately $28,125 relating to the exercise of options to purchase 10,000
shares of Common Stock pursuant to the 1993 Plan.
As of June 5, 1998, 12,080,360 of the options to purchase shares of Common Stock
granted and outstanding under the 1993 Plan were exercisable.
(4) Warrants to purchase common stock:
----------------------------------
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 April 30, 1998, these warrants
expired; therefore at April 30, 1998, there were no shares covered by warrants.
14
<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. 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 solid state optical (reflective) and thin film (emissive) 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 including issues such as the type of products that would be
considered for development, the method of development, technology licensing
requirements where applicable, possible locations for the production of products
and certain aspects of an international co-marketing 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.
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. Such factors include, among others, the
following: production capability by SCE and the Japanese company of MAGICOM(R)
2000 and MAGIC PRINTER, respectively; long-term product performance and the
capability of the Company, SCE, its distributors and its dealers to adequately
service the Company's products; the ability of distributors and dealers to
market their contracted quantities of the Company's products in their respective
territories; the ability of the Company and SCE to obtain all required foreign
governmental approvals; the volatility of foreign currency exchange rates;
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. See "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.
15
<PAGE>
Results of Operations
- ---------------------
Selling, general and administrative expenses, including the loss from SCE for
the six month periods ended April 30, 1998 and 1997 increased approximately
$545,000 to approximately $4,041,000 in the fiscal 1998 period from
approximately $3,496,000 in the fiscal 1997 period. Included in these amounts
are research, development and tooling costs, as well as normal operating
expenses, of approximately $2,106,000 and $2,021,000 for the fiscal 1998 and
1997 periods, respectively. Selling, general and administrative expenses,
including the loss from SCE for the three month periods ended April 30, 1998 and
1997 increased approximately $82,000 to approximately $1,946,000 in the fiscal
1998 period from approximately $1,864,000 in the fiscal 1997 period. Included in
these amounts are research, development and tooling costs, as well as normal
operating expenses, of approximately $1,006,000 and $1,123,000 for the fiscal
1998 and 1997 periods, respectively. From November 5, 1982 (inception) through
April 30, 1998, selling, general and administrative expenses, including the loss
from SCE were approximately $42,901,000 including approximately $26,491,000 for
research, development and tooling costs, as well as normal operating expenses.
The increases resulted primarily from increases in expenses for salaries, losses
from joint venture operations, costs associated with stock based compensation to
consultants, professional fees, engineering costs, travel costs and to a lesser
extent, communication costs and rents. Salaries increased in the fiscal 1998
periods over the comparable fiscal 1997 periods as a result of hiring additional
marketing and engineering personnel. Marketing related costs, including travel,
increased in the current periods as higher travel related costs were incurred in
connection with meeting with prospective dealers and distributors. Engineering
supplies decreased primarily as a result of reduced purchases of panels and chip
drivers used for testing and evaluation purposes, and the reduced purchases of
MAGICOM(R) 2000 units from SCE for similar purposes. The decrease was offset
somewhat by the cost to implement engineering changes to MAGICOM(R) 2000 and the
related cost to eliminate obsolete components as a result of these changes.
Research and development costs increased as a result of costs incurred in
connection with development of the Company's solid state optical (reflective)
and thin film (emissive) flat panel display programs.
Professional fees increased in the aggregate during the fiscal 1998 periods over
the comparable fiscal 1997 periods as a result of higher legal and accounting
expenses associated with the Joint Venture and the Company's potential agreement
with SIEC. Telecommunication costs and rents increased to a lesser extent over
the prior year's periods as compared to other cost increases. 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. A non-cash expense
of approximately $180,000 was charged to earnings during the six month fiscal
1998 period for stock based compensation to consultants with an offset to
Additional Paid-In Capital.
The Company's portion of SCE's loss increased during the six month period ended
April 30, 1998 by approximately $49,000 to approximately $207,000 from
approximately $158,000 in the fiscal 1997 period. The increase was the result of
manufacturing costs being absorbed over a limited quantity of product produced,
costs incurred in connection with the implementation of a quality management
program and initial marketing costs. The loss decreased during the three month
period ended April 30, 1998 by approximately $18,000 to approximately $71,000
from approximately $89,000 in the fiscal 1997 period.
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 $226,000 and $123,000 during
the six and three months ended April 30, 1998 as compared to the same periods in
1997 resulted primarily from a decrease in average funds available for
investment offset slightly by an increase in interest rates. Funds available for
investment during the six month periods ended April 30, 1998 and 1997, on a
monthly weighted average basis, were approximately $10,427,000 and $19,650,000,
respectively. For the three month periods ended April 30, 1998 and 1997, funds
available for investment, on a monthly weighted average basis, were
approximately $9,477,000 and 19,090,000, respectively. The investment
instruments selected by the Company are principally money market accounts and
commercial paper.
16
<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.
From May 1, 1998 to June 5, 1998, the Company received proceeds aggregating
approximately $28,000 relating to the exercise of options to purchase 10,000
shares of Common Stock under the 1993 Plan.
Working capital decreased by approximately $3,278,000 from approximately
$16,990,000 at October 31, 1997 to approximately $13,712,000 at April 30, 1998
primarily as a result of the loss incurred for the period.
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 $1,000,000 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 the other parties 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 contributions, 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.
17
<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 April 30, 1998.
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 Executive
June 15, 1998 Officer)
FRANK J. DISANTO
----------------
Frank J. DiSanto
June 15 , 1998 President and Director
GERALD J. BENTIVEGNA
--------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
June 15 , 1998 and Accounting Officer)
19
<PAGE>
<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>
<S> <C>
<MULTIPLIER> 1
<CIK> 0000715446
<NAME> CopyTele, Inc.
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1998
<CASH> 7,957,329
<SECURITIES> 0
<RECEIVABLES> 5,110,784
<ALLOWANCES> 0
<INVENTORY> 739,121
<CURRENT-ASSETS> 14,826,906
<PP&E> 2,083,786
<DEPRECIATION> 1,209,884
<TOTAL-ASSETS> 16,321,470
<CURRENT-LIABILITIES> 1,114,515
<BONDS> 0
0
0
<COMMON> 578,612
<OTHER-SE> 14,628,343
<TOTAL-LIABILITY-AND-EQUITY> 16,321,470
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,040,654
<OTHER-EXPENSES> (288,767)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,751,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,751,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,751,887)
<EPS-PRIMARY> ($0.06)
<EPS-DILUTED> 0
</TABLE>
