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, 2000
--------------
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
Melville, NY 11747
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 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 7, 2000: 63,084,526 shares
-------------------
1
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of April 30, 2000 (Unaudited) and October
31, 1999
Condensed Statements of Operations (Unaudited) for the six months
ended April 30, 2000 and 1999, and for the period from November 5,
1982 (Inception) through April 30, 2000
Condensed Statements of Operations (Unaudited) for the three months
ended April 30, 2000 and 1999
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through April 30, 2000
Condensed Statements of Cash Flows (Unaudited) for the six months
ended April 30, 2000 and 1999, and for the period from November 5,
1982 (Inception) through April 30, 2000
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 2. Changes in Securities and Use of Proceeds
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 2000 1999
------ --------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$3,456,336 and $1,531,254, respectively) $3,588,909 $1,587,830
Marketable securities, at cost 96,873 488,038
Inventory 4,360,349 4,538,608
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $862,000) 1,264,098 929,099
--------- -------
Total current assets 9,310,229 7,543,575
PROPERTY AND EQUIPMENT, net 403,400 531,155
OTHER ASSETS 26,231 26,814
DEFERRED TAX BENEFITS (net of valuation allowance of
$34,739,000 and $33,026,000, respectively) - -
---------- -----------
$9,739,860 $8,101,544
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable (including amounts due to Joint Venture of
approximately $862,000) $1,949,302 $1,546,494
Accrued liabilities 126,071 270,273
--------- ---------
Total current liabilities 2,075,373 1,816,767
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; outstanding 62,941,276 and 60,057,376 shares, respectively 629,413 600,574
Additional paid-in capital 59,776,048 55,844,128
Accumulated (deficit) during development stage (52,740,974) (50,159,925)
----------- -----------
7,664,487 6,284,777
----------- -----------
$9,739,860 $8,101,544
=========== ===========
</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 six months For the period from
ended April 30, November 5, 1982
------------------------------------------------ (Inception) through
2000 1999 April 30, 2000
--------------------- ---------------------- --------------------
<S> <C> <C> <C>
SALES $698,392 $ - $745,269
COST OF SALES 391,579 - 428,883
-------------------- ---------------------- --------------------
Gross profit 306,813 - 316,386
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
research and development expenses of approximately
$1,330,000, $1,479,000 and
$32,804,000, respectively) 2,875,800 3,012,135 56,750,651
-------------------- ---------------------- ---------------------
LOSS FROM AND IMPAIRMENT OF
INVESTMENT IN JOINT VENTURE 64,040 113,095 1,289,040
-------------------- ---------------------- ---------------------
INTEREST INCOME 51,978 96,775 4,982,331
-------------------- ---------------------- ---------------------
NET LOSS $(2,581,049) $(3,028,455) $(52,740,974)
==================== ====================== =====================
NET LOSS PER SHARE OF COMMON STOCK: Basic and Diluted $(0.04) $(0.05) $(1.10)
==================== ====================== =====================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and
Diluted 61,433,918 58,190,083 47,763,991
==================== ====================== =====================
</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,
------------------------------------------------
2000 1999
--------------------- ----------------------
<S> <C> <C>
SALES $421,600 $ -
COST OF SALES 184,514 -
--------------------- ----------------------
Gross profit 237,086 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
research and development expenses of approximately
$689,000 and $751,000, respectively) 1,463,471 1,596,853
--------------------- ----------------------
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN
JOINT VENTURE 54,000 44,467
--------------------- ----------------------
INTEREST INCOME 33,990 43,948
--------------------- ----------------------
NET LOSS $(1,246,395) $(1,597,372)
===================== ======================
NET LOSS PER SHARE OF COMMON STOCK: Basic and Diluted $(0.02) $(0.03)
===================== ======================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic
and Diluted 62,565,329 58,468,576
===================== ======================
</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, 2000 (UNAUDITED)
----------------------------------------------------------------------------------
Accumulated
Additional (Deficit) 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, 2000 (UNAUDITED)
-----------------------------------------------------------------------------------
Continued
---------
Accumulated
Additional (Deficit) 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 purchase of equipment 15,000 150 74,850 -
Common stock issued upon exercise of stock options
from July 1996 to October 1999 under stock option plans,
net of registration costs 1,771,400 17,714 4,414,412 -
Sale of common stock, at market, to a related party and
other unrelated parties in April and September, 1999 1,300,000 13,000 1,461,500 -
Stock options granted to consultants - - 385,700 -
Common stock issued upon exercise of stock options
from November 1999 to April 2000 under stock option plans 2,267,400 22,674 3,003,050 -
Sale of common stock, at market, to unrelated parties in
January and March 2000, net of listing fees 616,500 6,165 794,420 -
Accumulated (deficit) during development stage - - - (52,740,974)
-------------- ------------ ------------- --------------
BALANCE, April 30, 2000 62,941,276 $629,413 $59,776,048 $(52,740,974)
============== ============ ============= ==============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
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
2000 1999 April 30, 2000
-------------------- ----------------- ----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants $(2,583,142) $(2,729,146) $(58,344,996)
Cash received from customers 311,683 - 358,560
Interest received 60,506 87,165 4,981,341
-------------------- -------------------- -------------------
Net cash used in operating activities (2,210,953) (2,641,981) (53,005,095)
-------------------- -------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,442) (24,455) (2,028,884)
Disbursements to acquire certificates of deposit and
marketable securities (96,873) (489,444) (13,630,910)
Proceeds from maturities of investments 488,038 - 13,534,037
Investment made in Joint Venture - - (1,225,000)
-------------------- -------------------- -------------------
Net cash provided by (used in) investing activities 385,723 (513,899) (3,350,757)
-------------------- -------------------- -------------------
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 costs 3,025,724 891,600 40,086,937
Proceeds from sales of common stock in private placements,
net of listing fees 800,585 600,000 2,275,085
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 3,826,309 1,491,600 59,944,761
-------------------- -------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,001,079 (1,664,280) 3,588,909
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,587,830 5,406,017 -
-------------------- -------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,588,909 $3,741,737 $3,588,909
==================== ==================== ===================
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
2000 1999 April 30, 2000
------------------- ------------------- ------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Net loss $(2,581,049) $(3,028,455) $(52,740,974)
Loss from Joint Venture - 113,095 1,139,828
Stock option compensation to consultants 134,450 61,650 385,700
Depreciation and amortization 133,198 139,442 1,775,868
Impairment of investment in Joint Venture - - 85,172
Impairment of amounts due from Joint
Venture - - 1,407,461
Decrease (increase) in inventory 178,259 (104,412) (4,360,349)
(Increase) decrease in prepaid expenses and
other current assets (334,999) 228,509 (1,264,098)
Decrease (increase) in long term amount due
from Joint Venture - 110,858 (1,407,461)
Decrease (increase) in other assets 583 (5,494) (26,231)
Increase (decrease) in accounts payable and
accrued liabilities 258,605 (157,174) 1,999,989
------------------- ------------------- ------------------------
Net cash used in operating activities $(2,210,953) $(2,641,981) $(53,005,095)
=================== =================== ========================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
9
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
APRIL 30, 2000 (UNAUDITED)
--------------------------
(1) Nature of business and other disclosures:
----------------------------------------
Organization
------------
CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982
(Inception), is a development stage enterprise whose principal activities
include the development, production and marketing of multi-functional encryption
and telecommunications products under the Cryptele(TM) brand name. The first
encryption products the Company has produced under the Cryptele(TM) brand name
product line are the USS-900 (Universal Secure System) and the SCS-700 (Secure
Communication System). The USS-900 is a hardware-based peripheral digital
encryption system which incorporates the Harris Corporation digital
cryptographic chip - the Citadel(TM) - and "triple DES" software to provide
high-grade information encryption. The SCS-700 combines the USS-900 with a
modified version of the Magicom(R) 2000, the Company's first developed product,
to provide a secure telephone-based multi-functional telecommunications system
incorporating the Company's E-Paper(TM) flat panel display technology. The
Company is also continuing its research and development activities for
additional encryption products and flat panel display technologies in addition
to its ultra-high resolution charged particle E-Paper(TM) flat panel display.
Shanghai CopyTele Electronics Co., Ltd. (the "Joint Venture" or "Shanghai
CopyTele"), the Company's 55% owned joint venture in Shanghai, China, was
established in 1995 to produce and market the Magicom(R) 2000 for the Company.
Realizability of Assets
-----------------------
Management has recorded the Company's inventory at its current best estimate of
net realizable value, which is based upon the historic and future selling prices
of the Company's Magicom(R) 2000 units as packaged in the SCS-700, and the
USS-900. To date, sales of the Company's product have been limited. Accordingly,
there can be no assurance that the Company will not be required to further
reduce the selling price of its inventory below its current carrying value in
order to accomplish the Company's business strategies.
In addition, the Company's advances to Shanghai CopyTele have funded the
purchase of inventory components to manufacture the Magicom(R) 2000. Due to the
uncertainty of realizing the amounts due from Shanghai CopyTele, the Company has
reserved for approximately $1,407,000 of this amount at April 30, 2000 and
October 31, 1999, which is shown net in the accompanying financial statements.
10
<PAGE>
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company recognized a permanent impairment charge at October 31, 1999 in the
amount of $85,172 on its previously recorded investment in Joint Venture, due to
the uncertainty of Shanghai CopyTele generating enough future undiscounted cash
flows to cover the carrying amount of the investment.
The success and profitability of the Company's products will depend upon many
factors, many of which are beyond the Company's control. These factors include
the capability of the Company to market its products, the Company's continuing
ability to purchase the encryption chip for use in the USS-900, the production
capability of the Company and its suppliers as required, long-term product
performance and the capability of the Company's dealers and distributors to
adequately service the Company's products, the ability of the Company to
maintain an acceptable pricing level to its customers for its products, the
ability of suppliers to meet the Company's requirements and schedule, the
Company's ability to obtain adequate supplies of substrates for the SCS-700, the
Company's ability to successfully develop its new products under development,
rapidly changing consumer preference, and the possible development of
competitive products that could render the Company's products obsolete or
unmarketable.
Basis of Presentation
---------------------
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The information contained herein is for the six and three month periods ended
April 30, 2000 and 1999, and for the period from November 5, 1982 (Inception)
through April 30, 2000. 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
herein.
The results of operations for interim periods may not necessarily reflect the
annual operations of the Company. Reference is made to the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1999, for more extensive disclosures
than contained in these condensed financial statements.
Amounts Due from Joint Venture
------------------------------
The amounts due from the Joint Venture of approximately $862,000 as of April 30,
2000 and October 31, 1999, represents advances for parts inventory, such as the
flat panel assembly components, purchased by the Company on behalf of Shanghai
CopyTele, which are incorporated into the Magicom(R) 2000 product.
11
<PAGE>
(2) Joint Venture:
-------------
Investment in Joint Venture
---------------------------
Due to the uncertainty of realizability of its investment, the Company
recognized a permanent impairment charge in fiscal 1999 against the carrying
value of this investment. The Company is not legally liable for the obligations
of the Joint Venture beyond its initial cash capital contribution of $1,225,000.
Therefore, the Company has discontinued recording its share of any of the Joint
Venture's losses since October 31, 1999. Should the Joint Venture subsequently
report income, the Company will begin accruing income only after the cumulative
income exceeds the unrecorded losses and original investment. Any additional
investments in Shanghai CopyTele by the Company will be directly expensed to the
statement of operations.
The Company controls four of seven votes of the Joint Venture's board of
directors. However, decisions involving the Joint Venture require either a
unanimous or two-thirds vote of the Joint Venture's board of directors. Since
the Company has significant influence over the Joint Venture's operations but
does not have control, the Company has historically reflected its investment in
the Joint Venture under the equity method of accounting.
The Company has contributed an aggregate of $1,225,000 in cash to Shanghai
CopyTele, and technology that has been valued for purposes of the Joint Venture
at $700,000. Shanghai CopyTele does not reflect the $700,000 in technology as an
asset or equity investment in their financial statements. The other parties to
the Joint Venture have contributed cash aggregating $1,575,000.
Condensed Statements of Operations for Shanghai CopyTele for the six month
periods ended April 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Condensed Statements of Operations
(Unaudited)
For the six months ended April 30,
-----------------------------------------------------
2000 1999
---------------------- ----------------------
<S> <C> <C>
Net Sales $ - $ -
Operating Loss (80,799) (166,684)
Other Expense, net (39,735) (38,943)
---------------------- ----------------------
Net Loss $(120,534) $(205,627)
====================== ======================
</TABLE>
The cumulative net loss incurred by Shanghai CopyTele since its inception on
April 10, 1995 is $2,192,948.
12
<PAGE>
(3) Shareholders' Equity:
--------------------
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, and amended on May 3, 1995 and May 10, 1996 (the "1993 Plan"). The 1987
Plan has been terminated other than with respect to outstanding stock options
thereunder.
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.
Options granted to non-employee consultants are accounted for using the
fair-value method required by SFAS No. 123. Compensation expense recognized in
the six month periods ended April 30, 2000 and 1999 were $134,450 and $61,650,
respectively, and in the three month periods ended April 30, 2000 and 1999 were
$28,600 and $0, respectively, and are included in general and administrative
expenses for the periods.
Sales of common stock and issuance of warrants:
-----------------------------------------------
On April 30, 1999, the Company sold 400,000 shares of its common stock in two
private placements at a price of $1.50 per share, or an aggregate of $600,000,
of which 300,000 shares were sold to an individual who became a director of the
Company in July 1999. In conjunction with the sales of common stock, the Company
issued warrants to purchase 400,000 shares of common stock at an exercise price
of $1.50 per share, which expire on April 30, 2001.
On September 8, 1999, the Company sold 900,000 shares of common stock in six
private placements at a price of $1.00 per share, or an aggregate of $900,000,
of which 200,000 shares were sold to a director of the Company. In conjunction
with the sales of common stock, the Company issued warrants to purchase 900,000
shares of common stock at an exercise price of $1.00 per share, which expire on
September 8, 2001.
On January 5, 2000, the Company sold 420,000 shares of common stock in a private
placement at a price of $0.844 per share, or an aggregate of $354,480. In
conjunction with the sales of common stock, the Company issued warrants to
purchase 420,000 shares of common stock at an exercise price of $0.844 per
share, which expire on January 5, 2002.
13
<PAGE>
In March 2000, the Company sold 196,500 shares of its common stock in three
private placements at a price of $2.313 per share, or an aggregate of $454,505.
In conjunction with the sales of common stock, the Company issued warrants to
purchase 196,500 shares of common stock at an exercise price of $2.313 per
share, which expire in March 2002.
As of April 30, 2000, all of the aforementioned warrants to purchase shares of
common stock issued and outstanding were exercisable. At April 30, 1999, there
were no outstanding warrants.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
--------------------------
Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes", "expects", "intends",
"plans", "anticipates", "likely", "will", and similar expressions to identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties and other factors, some of which are beyond our control,
that could cause actual results to differ materially from those forecast or
anticipated in the forward-looking statements. These risks, uncertainties and
factors include, but are not limited to, those factors set forth in "General
Risks and Uncertainties" below 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, 1999.
General
-------
We have been a development stage company since our inception on November 5,
1982. Our principal activities include the development, production and marketing
of USS-900, a hardware-based peripheral digital encryption device, and the
SCS-700, which combines the USS-900 with a modified Magicom(R) 2000 to provide a
secure telephone-based multi-functional telecommunications product incorporating
our E-Paper(TM) flat panel display technology. We are also continuing our
research and development activities for additional encryption products, and
other ultra-high resolution flat panel displays, including video and color
displays and coated particles. We cannot assure you, however, that our efforts
in these areas will be successful. We also cannot assure you that we will
generate significant revenues in the future, that we will have sufficient
revenues to generate profit or that other products will not be produced by other
companies that will render our products obsolete or unmarketable.
The USS-900 uses the Harris Corporation digital cryptographic chip - the
Citadel(TM) CCX - and "triple DES" software which are capable of providing
high-grade information encryption. Harris is supplying the chip under a three
year agreement at a negotiated price. Triple DES is an algorithm available in
the public domain which has been incorporated into our software. Triple DES is
used by many U.S. government agencies. We are producing the USS-900 with the
assistance of a U.S.-based sub-contractor. Shanghai CopyTele has produced the
modified Magicom(R) 2000 for the SCS-700 system. Shanghai CopyTele also supplied
us with a portion of the electronic components, sub-assemblies and accessories
for the USS-900.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, please refer to our Financial Statements and the notes
thereto.
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Results of Operations
---------------------
We sell our USS-900 and SCS-700 products to end-users directly and through a
distributor/dealer network. We have had limited sales to our dealers,
distributors and other customers to support our operations since our inception.
We are currently recognizing revenue on our non-refundable sales. We are
hopeful, although there is no assurance, that with an increased marketing effort
for our existing products and our new products under development, we will
procure sufficient sales during fiscal 2000 to emerge from the development
stage.
Sales for the six and three month periods ended April 30, 2000 were
approximately $698,000 and $422,000, respectively. No sales were recognized for
the comparable periods in fiscal 1999. Cost of sales and gross profit were
approximately $392,000 and $307,000, respectively for the six months ended April
30, 2000, and $185,000 and $237,000, respectively, for the three months ended
April 30, 2000, with no amounts in the comparable six and three month fiscal
1999 periods. Selling, general and administrative expenses, excluding the loss
from Shanghai CopyTele, for the six month periods ended April 30, 2000 and 1999,
and for the period from November 5, 1982 (Inception) through April 30, 2000 were
approximately $2,876,000, $3,012,000 and $56,751,000, respectively. These
amounts include research, development and tooling costs of approximately
$1,330,000, $1,479,000, and $32,804,000, respectively, as well as normal
operating expenses. Selling, general and administrative expenses, excluding the
loss from Shanghai CopyTele, for the three month periods ended April 30, 2000
and 1999 were approximately $1,463,000 and $1,597,000, respectively. These
amounts include research, development and tooling costs of approximately
$689,000 and $751,000, respectively, as well as normal operating expenses.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, decreased in the six month fiscal 2000 period by approximately
$136,000, from approximately $3,012,000 in the fiscal 1999 period to
approximately $2,876,000 in the fiscal 2000 period. Selling, general and
administrative expenses, excluding the loss from Shanghai CopyTele, decreased in
the three month fiscal 2000 period by approximately $134,000, from approximately
$1,597,000 in the fiscal 1999 period to approximately $1,463,000 in the fiscal
2000 period. The decreases in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods were principally the result of decreases in
compensation costs, engineering supplies and expenditures for research and
development for video and color flat panel displays in the fiscal 2000 periods
as compared to the fiscal 1999 periods. These decreases were offset by increases
in professional fees, marketing costs, and stock based compensation to
consultants and a charge to earnings to bring the valuation of inventory in line
with current estimates.
Employee compensation and related costs decreased in the aggregate during the
fiscal 2000 periods as compared to the fiscal 1999 periods principally as a
result of certain cost reductions offset in part by an increase in payroll taxes
associated with employee stock option exercises. Decreases in pension costs were
commensurate with the decreased compensation costs while other employee benefit
programs expenses remained approximately the same with reductions in personnel
offset by rate increases. Engineering supplies decreased in the fiscal 2000
periods as compared to the comparable fiscal 1999
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periods primarily as a result of a reduction of component purchases to develop
the USS-900 during the fiscal 1999 periods. Engineering service costs also
decreased in the fiscal 2000 periods as compared to the comparable fiscal 1999
periods as a result of completing the development of the USS-900. Research and
development costs for flat panel displays decreased in the aggregate during the
fiscal 2000 periods as compared to the comparable fiscal 1999 periods
principally as a result of lower costs incurred in connection with the
development of our video and color displays. A charge to earnings of $250,000
was recorded in the fiscal quarter ending April 30, 2000 in order to bring the
valuation of inventory in line with current estimates and for obsolete and spare
parts.
Marketing costs increased in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods as a result of increased advertising, trade show
attendance and other promotions for the USS-900 and the SCS-700. However, travel
and entertainment costs decreased in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods due to less international travel. Professional
fees were higher in the fiscal 2000 periods as compared to the comparable fiscal
1999 periods as a result of higher fees incurred for patent-related services and
accounting services. Rents also increased during the fiscal 2000 periods as
compared to the comparable fiscal 1999 periods as a result of the leasing of
additional storage space. Insurance expense increased in the fiscal 2000 periods
as a result of higher levels of coverage and the addition of one policy.
Additional advances to Shanghai CopyTele were expensed in the fiscal 2000
periods. The non-cash charge to earnings for stock based compensation to
consultants was higher in the fiscal 2000 periods as compared to the comparable
fiscal 1999 periods.
Shanghai CopyTele's losses for the six month periods ended April 30, 2000 and
1999, and for the period from April 10, 1995 (Shanghai CopyTele's Inception)
through April 30, 2000, were approximately $121,000, $206,000, and $2,193,000,
respectively. The decrease in the loss for the six month fiscal 2000 period from
the fiscal 1999 period of approximately $85,000 was primarily the result of
further cost reductions and limited production activity with respect to
producing panel assemblies and Magicom(R) 2000 for the SCS-700 product. Shanghai
CopyTele is currently seeking products to produce in its facility. A permanent
impairment charge was recognized on our investment in Shanghai CopyTele in the
fiscal year ended October 31, 1999 due to the uncertainty of Shanghai CopyTele
generating sufficient future undiscounted cash flows to cover the carrying
amount of our investment.
While there is no formal agreement, our Chairman of the Board and our 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 by us, 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. Our Chairman of the Board, our President
and the three senior level personnel continued to waive such rights commencing
in January 1993 for an undetermined period of time. From February 1993 to
September 1998 one additional employee also waived such salary and benefit
rights.
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Interest income decreased approximately $45,000 from approximately $97,000
during the six month fiscal 1999 period as compared to approximately $52,000
during the six month fiscal 2000 period. Interest income also decreased $10,000
from approximately $44,000 during the three month fiscal 1999 period as compared
to approximately $34,000 during the three month fiscal 2000 period. The decrease
in the six and three month comparable periods resulted primarily from a decrease
in average funds available for investment which was offset by a slight increase
in interest rates. Funds available for investment, on a monthly weighted average
basis, during the six month fiscal 2000 and 1999 periods were approximately
$2,543,000 and $4,400,000, respectively, and $3,450,000 and $4,152,000,
respectively, during the three month fiscal 2000 and 1999 periods. The
investment instruments selected by us are principally money market accounts and
treasury investments.
Liquidity and Capital Resources
-------------------------------
Since our inception, we have met our liquidity and capital expenditure needs
primarily from the proceeds of sales of our common stock in our initial public
offering, in private placements, upon exercise of warrants issued in connection
with the private placements and public offering and upon the exercise of stock
options pursuant to our 1987 Plan and our 1993 Plan.
During the six month period ended April 30, 2000, we received proceeds
aggregating approximately $312,000 in payments from our customers for products
sold. For the six month periods ended April 30, 2000 and 1999, we received
proceeds aggregating approximately $3,026,000 and $891,600, respectively, from
the exercise of stock options to purchase shares of our common stock. During the
six month periods ended April 30, 2000 and 1999, we also received proceeds of
approximately $809,000, and $600,000 from sales of our common stock in private
placements. During the period from May 1, 2000 through June 7, 2000, we received
proceeds aggregating approximately $356,000 in payments from our customers for
products sold, and approximately $200,000 from the exercise of warrants. Working
capital increased by approximately $1,508,000 from approximately $5,727,000 at
October 31, 1999 to approximately $7,235,000 at April 30, 2000 as a result of
the proceeds received during the period offset by the loss incurred for the
period.
As of April 30, 2000, our working capital included approximately $3,686,000 of
cash and marketable securities, and approximately $1,213,000 (net of
approximately $862,000 due to Shanghai CopyTele) of accounts payable and accrued
liabilities. Our operations used approximately $2,211,000 in cash during the six
month period ended April 30, 2000. Based on reductions in operating expenses
that have been made and additional reductions that may be implemented, if
necessary, we believe that our cash resources, including cash received from May
1, 2000 to June 7, 2000, will be sufficient to continue operations into the
third quarter of fiscal 2001. We anticipate that, thereafter, we will continue
to require additional funds to continue our marketing, and research and
development activities if cash generated from operations is insufficient to
satisfy our liquidity requirements. However, our projections of future cash
needs and cash flows may differ from actual results. If current cash and cash
that may be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit. The sale of additional equity securities or convertible debt could
result in additional
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dilution to our stockholders. We can give you no assurance that we will be able
to generate adequate funds from operations, that funds will be available to us
from debt or equity financings, or that if available, we will be able to obtain
such funds on favorable terms and conditions. We currently have no definitive
arrangements with respect to additional financing.
Our 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.
We are seeking to improve our liquidity through an increased level of sales of
our products. In an effort to generate sales, we have commenced marketing the
USS-900 in both the U.S. and international markets directly and through a
network of large office equipment suppliers, security product organizations,
distributors and dealers. We also have commenced marketing the SCS-700 system
utilizing the Magicom(R) 2000, as modified to function as a secure communication
system, to government agencies and units of the armed forces. We are hopeful,
although we can give you no assurance, that by marketing the USS-900 encryption
product and the modified Magicom(R) 2000 SCS-700 system, sales will continue to
increase to improve our liquidity.
The NASD requires that we maintain a minimum of $4 million of net tangible
assets to maintain our Nasdaq National Market listing. If our stock were
delisted, the delisting could potentially have an adverse affect on the price of
our common stock and could adversely affect the liquidity of the shares held by
our stockholders. Our net tangible assets as of April 30, 2000 were
approximately $7,664,000. We anticipate that we may require additional funds to
maintain the NASD net tangible assets requirement if funds generated from
operations are insufficient. We can give you no assurance that we will be able
to generate adequate funds from operations, that funds will be available to us
from equity financings, or that if available, we will be able to obtain such
funds on favorable terms and conditions. We currently have no definitive
arrangements with respect to additional equity financings.
Shanghai CopyTele 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 of funding which may be borrowed from banks, of which
approximately $990,000 has been borrowed to date. These short-term loans are
from a Chinese bank, secured by the building and a land-use contract with the
Land Administration Bureau of Shanghai County. We have contributed $1,225,000 in
cash, and technology valued for the purposes of Shanghai CopyTele at $700,000,
and the Chinese parties contributed $1,575,000 in cash to Shanghai CopyTele.
Shanghai CopyTele may require additional capitalization depending upon the
nature and extent of its business activities. We can give you no assurance that
adequate funds will be available to Shanghai CopyTele, including any future
capital contributions, if any, beyond its initial capital contributions or that,
if available, Shanghai CopyTele will be able to obtain such funds on favorable
terms and conditions.
We have recorded our inventory at management's current best estimate of its net
realizable value, which is based upon the historic and future selling price of
our products. To date, sales of our products have been limited. Accordingly, we
can give you no assurance that
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we will not have to further reduce the selling prices of our inventory below its
current carrying value to accomplish our business strategies.
General Risks and Uncertainties
-------------------------------
We have had limited sales to dealers, distributors and other customers to
support our operations since our inception. We have expended approximately $33
million for research and development since our inception. We have had net losses
and negative cash flow from operations in each year of our business since
inception and we may continue to incur substantial losses and experience
substantial negative cash flows from operations.
Based on reductions in operating expenses that have been made and additional
reductions that may be implemented, if necessary, we believe that our cash
resources, including cash received from May 1, 2000 to June 7, 2000, will be
sufficient to continue operations into the third quarter of fiscal 2001. We
anticipate that, thereafter, we may continue to require additional funds to
continue our marketing, research and development activities, if cash generated
from operations is insufficient to satisfy our liquidity requirements. We may
seek to sell debt or equity securities or to obtain a line of credit, if needed.
In addition, we may need to raise additional equity financing to satisfy an NASD
requirement that we have a minimum of $4 million of net tangible assets to
maintain our Nasdaq National Market listing if funds generated from operations
are insufficient. The NASD also requires that we maintain a minimum bid price of
at least $1.00 per share in order to continue our listing. If our stock were
delisted, the delisting could potentially have an adverse affect on the market
price of our common stock and the liquidity of our shares. We cannot give you
any assurance that additional financing, if needed, will be available to us or
that, if available, we will be able to obtain additional financing on favorable
terms and conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Our encryption products are only in their initial stages of production and
marketing. The success and profitability of these products will depend upon many
factors, many of which are beyond our control, including: our ability to
successfully market the USS-900 and SCS-700; our continuing ability to purchase
the Citadel(TM) CCX encryption chip from Harris for use in the USS-900; our
production capabilities and those of our suppliers as required for the
production of the USS-900, and the modified Magicom(R) 2000 for the SCS-700;
long-term product performance and the capability of our dealers and distributors
to adequately service our products; our ability to maintain an acceptable
pricing level to end-users for our products; the ability of suppliers to meet
our requirements and schedule; our ability to obtain adequate supplies of
substrates for the SCS-700; our ability to successfully develop our new products
under development, particularly our new encryption products; rapidly changing
consumer preferences; and the possible development of competitive products that
could render our products obsolete or unmarketable. Consequently, we cannot give
you any assurance that we will generate sufficient revenues to support our
operations in the future or that we will have sufficient revenues to generate
profits.
Our Chief Executive Officer, Denis A. Krusos, and our President, Frank J.
DiSanto, founded CopyTele in 1982 and are engaged in the management and
operations of our business and that of Shanghai CopyTele, including all aspects
of the development, production and
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marketing of our products and our flat panel display technology. Messrs. Krusos
and DiSanto, and our other senior executives, are important to our future
business and financial arrangements and the loss of the services of any such
persons may have a material adverse effect on our business prospects.
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PART II OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Recent Sales of Unregistered Securities
---------------------------------------
In March 2000, the Company issued and sold 196,500 shares of Common Stock in
private placements to three accredited investors for a purchase price of $2.313
per share, or an aggregate of $454,505. In conjunction with the sales of Common
Stock, the Company issued Warrants to purchase 196,500 shares of Common Stock at
an exercise price of $2.313 per share, which expire in March 2002. The shares of
Common Stock and Warrants were offered and sold in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended,
relative to sales by an issuer not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No current report on Form 8-K was filed for the Company during the second
quarter of its fiscal year ended April 30, 2000.
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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.
By: DENIS A. KRUSOS
------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
June 13, 2000 Officer)
By: FRANK J. DISANTO
-------------------------
Frank J. DiSanto
June 13, 2000 President and Director
By: GERALD J. BENTIVEGNA
-------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
June 13, 2000 and Accounting Officer)
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