================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended October 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required) For the transition period from
------------- to --------------
Commission file number: 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
900 Walt Whitman Road
Huntington Station, NY 11746
(516) 549-5900
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number,Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------ -----------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of January 22, 1999,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($1.91): $95,593,898.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
On January 22, 1999, the registrant had outstanding 58,111,176 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
================================================================================
<PAGE>
This amendment is to file exhibit 99.1 - Financial Statements of
Shanghai CopyTele Electronics Co., Ltd.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a)(1)(2) Financial Statement Schedules
See accompanying "Index to Financial Statements".
(a)(3) Executive Compensation Plans and Arrangements
Stock Option Plan (1987) (filed as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended April 30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit
10.69 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to
the Company's Proxy Statement dated June 10, 1993).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed
as Exhibit 4(d) to the Company's Form S-8 dated September
6, 1995).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended April 30, 1996).
(b) Reports on Form 8-K
No current report on Form 8-K was filed for the Company
during the fourth quarter of its fiscal year ended
October 31, 1998.
(c) Exhibits
(a) 3.1 Certificate of Incorporation, as
amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-laws.
(c) 10.1 Stock Option Plan, adopted on April
1, 1987 and approved by shareholders
on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan,
adopted on March 12, 1990 and
approved by shareholders on
May 24, 1990.
<PAGE>
(e) 10.3 CopyTele, Inc. 1993 Stock Option
Plan, adopted on April 28, 1993
and approved by shareholders on
July 14, 1993.
(f) 10.4 Joint Venture Contract, dated as
of March 28, 1995, by and between
Shanghai Electronic Components
Corp.and CopyTele, Inc.
(f) 10.5 Technology License Agreement,
dated as of March 28, 1995, by
and between Shanghai CopyTele
Electronics Co., Ltd. and CopyTele,
Inc.
(g) 10.6 Amendment No. 1 to the CopyTele,
Inc. 1993 Stock Option Plan,
adopted on May 3, 1995 and approved
by shareholders on July 19, 1995.
(h) 10.7 Assignment Agreement, dated as of
July 10, 1995, by and among
Shanghai Electronic Components
Corp., Shanghai International Trade
and Investment Developing Corp.
and CopyTele, Inc.
(i) 10.8 Amendment No. 2 to the CopyTele,
Inc. 1993 Stock Option Plan,
adopted on May 10, 1996 and approved
by shareholders on July 24, 1996.
(j) 10.9 Contract Granting Land-Use
Rights, dated October 11, 1995,
between the Land Administration
Bureau Songjiang County and Shanghai
CopyTele Electronics Co., Ltd.
21 List of Significant Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
(k) 99.1 Financial Statements of Shanghai
CopyTele Electronics Co., Ltd.
(a) Incorporated by reference to Form 10-Q for the
fiscal quarter ended July 31, 1992 and to Form 10-Q
for the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective
Amendment No.1 to Form S-8 (Registration No.33-49402)
dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1987.
<PAGE>
(d) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1990.
(e) Incorporated by reference to Proxy Statement dated
June 10, 1993.
(f) Incorporated by reference to Form 8-K dated March 28,
1995.
(g) Incorporated by reference to Form S-8
(Registration No. 33-62381) dated September 6, 1995.
(h) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1995.
(i) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.
(j) Incorporated by reference to Form 10-Q for the fiscal
quarter ended January 31, 1997.
(k) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1998.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COPYTELE, INC.
By:/s/ Denis A. Krusos
-------------------------
Denis A. Krusos
Chairman of the Board and
March 30, 1999 Chief Executive Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Ref. Number Description
- ---- ------- ------------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-Laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on
March 12, 1990 and approved by shareholders on
May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on July
14, 1993.
(f) 10.4 Joint Venture Contract, dated as of March 28,
1995, by and between Shanghai Electronic
Components Corp. and CopyTele, Inc.
(f) 10.5 Technology License Agreement, dated as of March
28, 1995, by and between Shanghai CopyTele
Electronics Co., Ltd. and CopyTele, Inc.
(g) 10.6 Amendment No. 1 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 3, 1995 and
approved by shareholders on July 19, 1995.
(h) 10.7 Assignment Agreement, dated as of July 10, 1995,
by and among Shanghai Electronic Components
Corp., Shanghai International Trade and Investment
Developing Corp. and CopyTele, Inc.
(i) 10.8 Amendment No. 2 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 10, 1996 and
approved by shareholders on July 24, 1996.
(j) 10.9 Contract Granting Land-Use Rights, dated
October 11, 1995, between the Land Administration
Bureau Songjiang County and Shanghai CopyTele
Electronics Co., Ltd.
21 List of Significant Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
(k) 99.1 Financial Statements of Shanghai CopyTele
Electronics Co., Ltd.
<PAGE>
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 1992 and the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1990.
(e) Incorporated by reference to Proxy Statement dated June 10, 1993.
(f) Incorporated by reference to Form 8-K dated March 28, 1995.
(g) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(h) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1995.
(i) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
(j) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1997.
(k) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1998.
<PAGE>
SHANGHAI COPYTELE ELECTRONICS CO., LTD. Exhibit 99.1
---------------------------------------
(Registered in the People's Republic of China)
----------------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1998
----------------
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1998 and 1997 F-2
Statements of Results of Operations for each of the three years ended October 31, 1998 F-3
Statements of Cash Flows for each of the three years ended October 31, 1998 F-4 - F-5
Statements of Owners' Equity for each of the three years ended October 31, 1998 F-6
Notes to Financial Statements F-7 - F-13
</TABLE>
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Shanghai CopyTele Electronics Co., Ltd.:
We have audited the accompanying balance sheets of Shanghai CopyTele Electronics
Co., Ltd. (established in the People's Republic of China) as of October 31, 1998
and 1997, and the related statements of operations, cash flows and owners'
equity for each of the three years ended October 31, 1998. These financial
statements are the responsibility of the management of Shanghai CopyTele
Electronics Co., Ltd. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Without qualification to the above opinion, we bring the readers attention to
the matters set out at Notes 1, 3 and 8 to the financial statements. The Company
continues to have negative current working capital and is incurring losses from
its operations. The Company is taking action to improve its liquidity and
believes that it has sufficient resources to continue in operation.
Nevertheless, the Company remains heavily dependent upon its principal customer
and major shareholder, CopyTele, Inc., for future sales and profitability.
Inventories have been stated at cost in the financial statements, on the
assumption that gross margins on sales to CopyTele, Inc. will improve.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shanghai CopyTele Electronics
Co., Ltd. as of October 31, 1998 and 1997, and the results of its operations,
cash flows and the changes in its owners' equity for each of the three years
ended October 31, 1998 in conformity with generally accepted accounting
principles in the United States of America.
Shanghai J.W. Associated
CERTIFIED PUBLIC ACCOUNTANTS
Shanghai, PRC
December 18, 1998
F-1
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
BALANCE SHEETS
--------------
(Amounts expressed in United States Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
October 31, October 31,
Note 1998 1997
--------- --------------- --------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash on hand and at banks 51,760 135,890
Due from CopyTele, Inc. 8 661,592 -
Inventories 3 3,568,202 4,830,461
Other current assets 68,581 31,988
--------------- --------------
Total Current assets 4,350,135 4,998,339
PROPERTY, PLANT AND EQUIPMENT, net 4 1,812,310 1,897,832
LAND USE RIGHT, net 5 293,273 299,337
--------------- --------------
TOTAL ASSETS 6,455,718 7,195,508
=============== ==============
LIABILITIES AND OWNERS'EQUITY
CURRENT LIABILITIES:
Short-term bank loans 6 999,316 500,012
Accounts payable 221,459 504,269
Due to CopyTele, Inc. 8 3,916,628 4,303,652
Other current liabilities 116,593 -
--------------- --------------
Total current liabilities 5,253,996 5,307,933
--------------- --------------
OWNERS' EQUITY
Paid-in capital 1 3,500,000 3,500,000
Accumulated deficit (2,298,278) (1,612,425)
--------------- --------------
Total Owners' Equity 1,201,722 1,887,575
--------------- --------------
TOTAL LIABILITIES AND OWNERS' EQUITY 6,455,718 7,195,508
=============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF OPERATIONS
------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
For the years ended October 31,
-------------------------------------------------------
Note 1998 1997 1996
--------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
SALES 8 - - -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (631,101) (594,375) (771,984)
------------------ ----------------- ----------------
Operating loss (631,101) (594,375) (771,984)
OTHER OPERATING INCOME (EXPENSES)
Interest (expenses) income, net (56,117) (19,870) 13,892
Foreign exchange gain (loss), net 169 5,002 (2,144)
Other, net 1,196 (559) -
------------------ ----------------- ----------------
Loss before taxation (685,853) (609,802) (760,236)
TAXATION 7 - - -
------------------ ----------------- ----------------
NET LOSS (685,853) (609,802) (760,236)
ACCUMULATED DEFICITS, beginning of year (1,612,425) (1,002,623) (242,387)
------------------ ----------------- ----------------
ACCUMULATED DEFICITS, end of year (2,298,278) (1,612,425) (1,002,623)
================== ================= ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
For the years ended October 31,
---------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from sales of goods 1,111,118 455,375 -
Interest received 2,124 6,468 13,892
Interest paid (58,241) (26,338) -
Payment to suppliers, employees and others (1,553,313) (809,641) (618,378)
------------------ ----------------- ------------------
Net cash used in operating activities (498,312) (374,136) (604,486)
------------------ ----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of property, plant and
equipment and other assets (85,122) (991,839) (1,074,501)
------------------ ----------------- ------------------
Net cash used in investing activities (85,122) (991,839) (1,074,501)
------------------ ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from the joint venture
partners (Note (a)) - - 1,960,000
Proceeds of short-term bank loans 499,304 500,012 -
------------------ ----------------- ------------------
Net cash provided by financing activities 1,960,000
------------------ ----------------- ------------------
Net DEcrease in cash and cash equivalents (84,130) (865,963) 281,013
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 135,890 1,001,853 720,840
------------------ ----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 51,760 135,890 1,001,853
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF CASH FLOWS (continued)
------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
For the years ended October 31,
---------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
RECONCILIATIONS OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
NET LOSS (685,853) (609,802) (760,236)
Depreciation and amortization 176,708 106,143 510,650
Interest income (2,124) (6,468) (13,892)
Interest expenses 58,241 26,338 -
Decrease (increase) in inventories 1,262,259 (4,830,407) (54)
(Increase) decrease in due from CopyTele, Inc. and
other current assets (698,185) 212,127 (400,079)
(Decrease) increase in accounts payable, due to
CopyTele, Inc. and other current liabilities (553,241) 4,747,803 45,233
Interest received 2,124 6,468 13,892
Interest paid (58,241) (26,338) -
------------------ ----------------- ------------------
Net cash used in operating activities (498,312) (374,136) (604,486)
================== ================= ==================
</TABLE>
Supplemental Cash Flow Information:
(a) Non-cash Financing Activities:
Capital contribution from CopyTele, Inc. included USD700,000 in the form of
technical know-how, of which USD210,000 was contributed during the year ended
October 31, 1995 and USD490,000 was contributed during the year ended October
31, 1996.
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF OWNERS' EQUITY
----------------------------
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
---------------------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Paid-in capital deficits Total
----------------- ------------------ -----------------
<S> <C> <C> <C>
BALANCE, November 1, 1995 1,050,000 (242,387) 807,613
Capital contribution 2,450,000 - 2,450,000
Net loss for the year - (760,236) (760,236)
----------------- ------------------ -----------------
BALANCE, October 31, 1996 3,500,000 (1,002,623) 2,497,377
Net loss for the year - (609,802) (609,802)
----------------- ------------------ -----------------
BALANCE, October 31, 1997 3,500,000 (1,612,425) 1,887,575
Net loss for the year - (685,853) (685,853)
----------------- ------------------ -----------------
BALANCE, October 31, 1998 3,500,000 (2,298,278) 1,201,722
================= ================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Amounts expressed in United States Dollars ("USD") unless otherwise stated)
----------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
--------------------------------------
Shanghai CopyTele Electronics Co., Ltd. (the "Company") is an equity joint
venture registered in the People's Republic of China ("PRC") on May 18, 1995
with an operating period of twenty years. The Company's scope of business
consists of the manufacture and sale of multifunctional telecommunication
products. The Company commenced its commercial production in February 1997.
The registered capital of the Company is USD 3.5 million. As of October 31,
1998, the joint venture partners and their respective capital contributions to
the Company are as follows:
<TABLE>
<CAPTION>
Joint Venture Country of Percentage of Capital
Partner Incorporation Ownership Contributed
------------- --------------- --------------- --------------
<S> <C> <C> <C>
USD
United States of
CopyTele, Inc. America 55% 1,925,000
Shanghai Electronic
Components Corporation PRC 35% 1,225,000
Shanghai International
Trade and Investment
Developing Corp. PRC 10% 350,000
--------- ---------------
Total 100% 3,500,000
========== ===============
</TABLE>
Shanghai Electronic Components Corporation has assigned a 30% interest to
Shanghai Instrumentation and Electronics Holding Group Company and a 5% interest
to Shanghai International Trade and Investment Developing Corp.
As of October 31, 1998, the Company had net current liabilities of approximately
USD904,000, and was incurring losses from its operations. The current working
capital includes approximately USD4,350,000 (inclusive of approximately
USD3,568,000 of inventories) of current assets and approximately USD5,254,000
(inclusive of approximately USD3,916,000 due to CopyTele, Inc.) of current
liabilities. The Company believes that these resources will be sufficient to
continue its operations, as presently conducted, after giving effect to
anticipated reductions in the Company's requirements for component purchases and
reductions in administrative and support personnel, if necessary.
The Company is seeking to improve its liquidity through the sale of products,
deferment of repayment of amounts due to CopyTele, Inc. and additional borrowing
of bank loans, although there can be no assurance that any of these plans can be
implemented at terms that will be favorable to the Company.
F-7
<PAGE>
2. PRINCIPAL ACCOUNTING POLICIES
-----------------------------
The financial statements were prepared in accordance with generally accepted
accounting principles in United States of America ("US GAAP"). This basis of
accounting differs from that used in the statutory accounts prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustment made to conform the statutory accounts of the Company
to US GAAP were:
Charge the expenses and exchange loss incurred during the pre-operating
period, which were capitalized as non-current assets in its statutory
accounts, to the statements of operations.
Write off the technical know-how contributed by CopyTele, Inc. as
paid-in capital, which was capitalized as intangible assets in its
statutory accounts, to the statements of operations.
The accompanying financial statements of the Company were prepared in conformity
with US GAAP as if those standards had been consistently applied throughout the
years. The following accounting policies were adopted in the preparation of
these financial statements:
(a) Inventories
Inventories are stated at the lower of cost, calculated using the
weighted-average method, and net realizable value.
(b) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the property, plant and equipment, after taking into account an
estimated residual value of 10% of cost. The estimated useful lives are as
follows:
Buildings 18 years
Machinery and equipment 10 years
Motor vehicles 5 years
Office equipment 5 years
Construction-in-progress represents buildings under construction and is stated
at cost.
F-8
<PAGE>
(c) Land Use Right
Land use right is stated at cost less accumulated amortization. Amortization of
land use right is provided using the straight-line method over 50 years
(d) Foreign Currency Translations and Balances
The Company maintains its books and accounting records in Renminbi ("RMB"),
which is not a freely convertible currency. Transactions in foreign currencies
are translated into RMB at the exchange rates prevailing at the date of
transactions. Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are translated into RMB at the exchange rates
prevailing at that date. Exchange differences are included in the determination
of income.
The management determines USD is the functional currency. The accounts of the
Company are translated into USD as if the Company's books of record had been
initially recorded in USD. To accomplish that result, all non-monetary accounts
are translated at historical exchange rates between USD and RMB.
(e) Sales Recognition
Sales represent the invoiced value of goods, net of discounts, returns and
surtaxes. Sales are recognized upon passing of title to customers.
(f) Taxation
The Company provides for Enterprise Income Tax ("EIT") on the basis of its
statutory profit for financial reporting purposes, adjusted for income and
expense items which are not assessable or deductible for EIT purposes.
Other taxes are provided in accordance with the prevailing PRC tax regulations.
Deferred taxation is provided under the liability method whereby deferred
taxation is recognized for temporary differences using enacted tax rates in
effect in the years in which the differences are expected to reverse. Temporary
differences are the differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
(g) Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
F-9
<PAGE>
3. INVENTORIES
------------
1998 1997
- ----------------------------------------------------------------------------
Raw materials 2,718,262 4,297,043
Work-in-progress 681,982 430,649
Finished goods 167,958 102,769
--------------- ---------------
3,568,202 4,830,461
=============== ===============
As discussed in Note 8, the Company relies very heavily on CopyTele, Inc. for
its purchase of the Company's products. Therefore, the ultimate realizability of
the Company's inventories is dependent on future sale of products to CopyTele,
Inc.. During its fiscal year ended October 31, 1998, the Company incurred a
gross loss of approximately USD189,000 for its sales to CopyTele, Inc..
Management has recorded the Company's inventories as of October 31, 1998 at cost
and a provision to state inventories at their net realizable value has not been
made on the basis that sales prices are expected to improve. To date, shipments
of the Company's products have been limited. Accordingly, there can be no
assurance that the Company will not be required to reduce the selling price of
its products below their current carrying value to accomplish certain business
strategies, which would require a reduction of such carrying value.
4. PROPERTY, PLANT AND EQUIPMENT
------------------------------
1998 1997
- ------------------------------------------------------------------------------
Buildings 908,101 858,326
Machinery and equipment 951,153 918,794
Motor vehicles 52,971 52,934
Office equipment 184,764 169,560
Construction-in-progress - 12,253
--------------- ---------------
2,096,989 2,011,867
Less: Accumulated depreciation (284,679) (114,035)
--------------- ---------------
Net 1,812,310 1,897,832
======== ========
F-10
<PAGE>
5. LAND USE RIGHT
---------------
1998 1997
- -------------------------------------------------------------------------------
Cost 309,473 309,473
Accumulated amortization (16,200) (10,136)
-------------- --------------
Net 293,273 299,337
======== ========
All land in the PRC is owned by the state or is subject to collective ownership
and neither individuals nor legal entities may own land. The Company acquired
the right to use the land on which its factory is located for USD 309,473.
6. SHORT-TERM BANK LOANS
----------------------
Short-term bank loans bore interest rates ranging from 7.69% to 8.64% per annum
in 1998 and at 6.09% per annum in 1997.
As of October 31, 1998 and 1997, all of the short-term bank loans were secured
by the Company's buildings and land use right.
7. TAXATION
---------
(a) Value-Added Tax ("VAT")
The Company is subject to VAT, which is charged on top of the selling price at a
general rate of 17%. An input credit is available whereby VAT previously paid on
purchases of semi-finished products or raw materials etc. can be used to offset
the VAT on sales to determine the net VAT payable.
As the Company was established after January 1, 1994, its exports are
"zero-rated" for VAT purpose. Accordingly, subject to the changes described
below, the Company charges no VAT on its exports and is entitled to claim a
refund for the input tax incurred in respect of these exports.
F-11
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Pursuant to subsequent tax authority circulars, with effect from July 1, 1995,
the Company may no longer recover fully the input tax of its exports. An amount
equivalent to "17% minus the applicable refund rate" times the FOB value of the
exports will be noncreditable and nonrefundable. As the Company has a "bonded"
arrangement with the customs authority and enjoys duty-exemption on its imported
materials to be used for producing its exports, the amount of noncreditable and
nonrefundable input tax will be "17% minus the applicable refund rate" times
"the FOB value of the exports minus the (composite assessable) value of the
duty-exempt imported materials matching the exports". This noncreditable and
nonrefundable input tax shall be absorbed by the Company as part of the costs of
exports. The applicable refund rate is currently 11%.
(b) Enterprise Income Tax ("EIT")
In accordance with the "Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises", the Company is entitled to full exemption
from EIT for the first two years and a 50% reduction for the next three years,
commencing from the first profitable year after offsetting all tax losses
carried forward from the previous years (at most five years).
The tax effects of temporary differences between financial and taxable income
that give rise to deferred tax assets are principally related to the following:
1998 1997
- -----------------------------------------------------------------------------
Net operating loss carryforward 500,218 306,260
Income tax basis in excess of
financial basis of
- Pre-operating expenses 69,971 85,121
- Technical know-how 190,902 214,042
--------- ---------
Total gross deferred tax assets 761,091 605,423
Less valuation allowance (761,091) (605,423)
--------- ---------
Net deferred tax assets - -
========= ==========
The valuation allowance refers to the portion of the deferred tax assets that
are not currently realizable. The realization of these benefits depends upon the
Company's income in future years.
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8. RELATED PARTY TRANSACTIONS
--------------------------
The Company relies very heavily on CopyTele, Inc. for its purchase of the
Company's products, its supplies to the Company of raw materials and components
required for production. For the years ended October 31, 1998 and 1997, sales to
CopyTele, Inc. accounted for 100 per cent of the Company's net sales. The
Company purchases most of the required raw materials and imported components
through CopyTele, Inc. For the years ended October 31, 1998 and 1997, purchases
of materials and components through CopyTele, Inc. amounted to approximately USD
168,000 and USD 4,480,000 respectively.
The amounts due from/to CopyTele, Inc. arose mainly from the above transactions,
are interest-free and have no fixed repayment terms.
9. COMMITMENTS
------------
As of October 31, 1998, the Company had no material rental, capital or other
purchase commitments.
10. EMPLOYEES' PENSION PLAN
------------------------
The Company contributes annually to a government-sponsored pension scheme, an
amount equivalent to 25.5% of the total basic salary of its employees. This
government sponsored pension scheme will be responsible for payment of the
pension liabilities relating to the retirees of the Company. Pension cost, which
approximated USD 37,000, USD 18,000 and USD 5,000 for the years ended October
31, 1998, 1997 and 1996 respectively, has been accrued and funded on a current
basis.
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