SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 March 10, 2000: 62,744,776 shares
-------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 31, 2000 (Unaudited) and
October 31, 1999
Condensed Statements of Operations (Unaudited) for the three months
ended January 31, 2000 and January 31, 1999, and for the period from
November 5, 1982 (Inception) through January 31, 2000
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through January 31, 2000
Condensed Statements of Cash Flows (Unaudited) for the three months
ended January 31, 2000 and January 31, 1999, and for the period from
November 5, 1982 (Inception) through January 31, 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 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
---------------------
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS
-------------------------
Unaudited
January 31, October 31,
ASSETS 2000 1999
------ ---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$2,047,925 and $1,531,254, respectively) $2,124,390 $1,587,830
Marketable securities, at cost - 488,038
Inventory 4,356,490 4,538,608
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $862,000) 1,088,662 929,099
----------- ---------
Total current assets 7,569,542 7,543,575
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,693,279 and $1,627,012, respectively) 468,469 531,155
OTHER ASSETS 26,668 26,814
DEFERRED TAX BENEFITS (net of valuation allowance of
$33,652,000 and $33,026,000, respectively) - -
----------- -----------
$8,064,679 $8,101,544
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable (including amounts due to Joint Venture of
approximately $862,000) $1,674,359 $1,546,494
Accrued liabilities 300,660 270,273
---------- ---------
Total current liabilities 1,975,019 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 61,292,076 and 60,057,376 shares, respectively 612,921 600,574
Additional paid-in capital 56,971,318 55,844,128
Accumulated (deficit) during development stage (51,494,579) (50,159,925)
------------ ------------
6,089,660 6,284,777
------------ ------------
$8,064,679 $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 three months For the period from
ended January 31, November 5, 1982
------------------------------------------------ (inception) through
2000 1999 January 31, 2000
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
SALES $276,792 $ - $323,669
COST OF SALES 207,065 - 244,369
--------------------- ---------------------- --------------------
Gross profit 69,727 - 79,300
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, (including
research and development expenses of approximately
$641,000, $728,000 and $32,115,000, respectively) 1,422,369 1,415,282 55,297,220
--------------------- ---------------------- --------------------
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN JOINT VENTURE - 68,628 1,225,000
--------------------- ---------------------- ---------------------
INTEREST INCOME 17,988 52,827 4,948,341
--------------------- ---------------------- ---------------------
NET (LOSS) $(1,334,654) $(1,431,083) $(51,494,579)
===================== ====================== =====================
NET (LOSS) PER SHARE OF COMMON STOCK: Basic and Diluted $(0.02) $(0.02) $(1.08)
===================== ====================== =====================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and
Diluted 60,327,102 57,920,672 47,552,308
===================== ====================== =====================
</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 STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 2000 (UNAUDITED)
-------------------------------------------------------------------------------------
Additional Accumulated
Common Stock Paid-in (Deficit) During
Shares Par Value Capital Development 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>
5
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JANUARY 31, 2000 (UNAUDITED)
-------------------------------------------------------------------------------------
Continued
---------
Additional Accumulated
Common Stock Paid-in (Deficit) During
Shares Par Value Capital Development 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 January 2000 under stock option plans,
net of registration costs 2,586,100 25,861 5,093,872 -
Sale of common stock, at market, to a related party and other
unrelated parties in April and September, 1999 and January
2000 1,720,000 17,200 1,803,380 -
Stock options granted to consultants - - 357,100 -
Accumulated (deficit) during development stage - - - (51,494,579)
-------------- ------------ ---------------- ----------------
BALANCE, January 31, 2000 61,292,076 $612,921 $56,971,318 $(51,494,579)
============== ============ ================ ================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the three
months ended For the period from
January 31, November 5, 1982
---------------------------------------------- (inception) through
2000 1999 January 31, 2000
-------------------- -------------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(1,161,035) $(1,417,535) $(56,922,889)
Cash received from customers 151,945 - 198,822
Interest received 27,506 49,883 4,948,341
-------------------- -------------------- -------------------
Net cash (used in) operating activities (981,584) (1,367,652) (51,775,726)
-------------------- -------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (3,581) (8,302) (2,027,023)
Disbursements to acquire certificates of deposit and
marketable securities - (489,444) (13,534,037)
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 484,457 (497,746) (3,252,023)
-------------------- -------------------- -------------------
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 687,607 838,650 37,748,820
Proceeds from sales of common stock in private
placements, net of listing fees 346,080 - 1,820,580
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 1,033,687 838,650 57,152,139
-------------------- -------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 536,560 (1,026,748) 2,124,390
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,587,830 5,406,017 -
-------------------- -------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,124,390 $4,379,269 $2,124,390
==================== ==================== ===================
Continued
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
---------
For the three
months ended For the period from
January 31, November 5, 1982
-------------------------------------------- (inception) through
2000 1999 January 31, 2000
------------------- ------------------- ------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) $(1,334,654) $(1,431,083) $(51,494,579)
Loss from Joint Venture - 68,628 1,139,828
Stock option compensation to consultants 105,850 61,650 357,100
Depreciation and amortization 66,267 72,054 1,708,937
Impairment of investment in Joint Venture - - 85,172
Impairment of amounts due from Joint
Venture - - 1,407,461
Decrease (increase) in inventory 182,118 (272,295) (4,356,490)
(Increase) decrease in prepaid expenses and
other current assets (159,563) 125,036 (1,088,662)
Decrease (increase) in long term amount due from Joint
Venture - 111,983 (1,407,461)
Decrease (increase) in other assets 146 (5,494) (26,668)
Increase (decrease) in accounts payable and accrued
liabilities 158,252 (98,131) 1,899,636
------------------- ------------------- ------------------------
Net cash (used in) operating activities $(981,584) $(1,367,652) $(51,775,726)
=================== =================== ========================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
8
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
JANUARY 31, 2000 (UNAUDITED)
----------------------------
(1) Nature of business and other disclosures:
----------------------------------------
Organization
------------
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 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 a private label digital cryptographic chip 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 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 January 31, 2000 and
October 31, 1999, which is shown net in the accompanying financial statements.
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
9
<PAGE>
Company has 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 three month periods ended January
31, 2000 and 1999 and for the period from November 5, 1982 (inception) through
January 31, 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 January
31, 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.
(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.
10
<PAGE>
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 the three month periods ended January 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Condensed Statements of Operations
----------------------------------
(Unaudited)
----------- For the three months ended
------------------------------------------
January 31, January 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Net Sales $ - $ -
Operating (Loss) (48,380) (104,471)
Other Income (Expense) (19,148) (20,308)
----------------- ------------------
Net (Loss) $ (67,528) $ (124,779)
================= ==================
</TABLE>
The cumulative net (loss) incurred by Shanghai CopyTele since its inception on
April 10, 1995 is $(2,139,942).
(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
(the "1993 Plan"). The 1987 Plan has been terminated other than with respect to
outstanding stock options thereunder.
11
<PAGE>
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 three months ended January 31, 2000 and January 31, 1999 was $105,850 and
$61,650, respectively, and is 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.
As of January 31, 2000, all of the aforementioned warrants to purchase shares of
common stock issued and outstanding were exercisable. At January 31, 1999, there
were no outstanding warrants.
12
<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 which could potentially be used by manufacturers
of toners and pigments. 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.
We are producing and have commenced a marketing program for the USS-900 and the
SCS-700. The USS-900 uses the Harris Corporation digital cryptographic chip -
the Citadel(TM)CCX - which is capable of providing high-grade information
encryption. Harris is supplying the chip under a three year agreement at a
negotiated price based in part on sales of the USS-900. We have produced a
limited number of the USS-900s with the assistance of a U.S. based
sub-contractor. Shanghai CopyTele produces 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.
13
<PAGE>
Results of Operations
---------------------
We sell our USS-900, SCS-700 and Magic Printer 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 three month period ended January 31, 2000 were approximately
$277,000. No sales were recognized for the comparable period in fiscal 1999.
Cost of sales and gross profit were approximately $207,000 and $70,000,
respectively, for the three month period ended January 31, 2000 with no
comparable amounts in the fiscal 1999 period. Selling, general and
administrative expenses, excluding the loss from Shanghai CopyTele, for the
three months ended January 31, 2000, and 1999 and for the period from November
5, 1982 (inception) through January 31, 2000 were approximately $1,422,000,
$1,415,000 and $55,297,000, respectively. These amounts include research,
development and tooling costs of approximately $641,000, $728,000 and
$32,115,000, respectively, as well as normal operating expenses.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, increased by approximately $7,000, from approximately $1,415,000 in
the fiscal 1999 period to approximately $1,422,000 in the fiscal 2000 period.
Expenditures for research and development for video and color flat panel
displays, compensation costs, engineering supplies and travel related expenses
decreased in the fiscal 2000 period as compared to the fiscal 1999 period. These
decreases were offset by increases in professional fees, marketing costs, and
stock based compensation to consultants.
Employee compensation and related costs decreased in the fiscal 2000 period as
compared to the fiscal 1999 period principally as a result of certain cost
reductions. These reductions were offset by the hiring of three additional sales
and marketing employees whose cost were incurred in the fiscal 2000 period but
not the fiscal 1999 period. Payroll taxes and pension costs also decreased as a
result of the decreased compensation costs. Other employee benefit programs
increased as a result of rate increases in the fiscal 2000 period. Engineering
supplies decreased in the fiscal 2000 period as compared to the comparable
fiscal 1999 period primarily as a result of reduced purchases of components used
to develop the USS-900 in the fiscal 1999 period. Engineering service costs
decreased in the fiscal 2000 period as compared to the comparable fiscal 1999
period 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
comparable periods principally as a result of lower costs incurred in connection
with the development of our video and color displays.
Marketing costs increased in the fiscal 2000 period as compared to the
comparable fiscal 1999 period as a result of the launch of the USS-900 and the
SCS-700. However, travel and entertainment costs decreased slightly.
Professional fees were higher in the fiscal 2000 period as compared to the
comparable fiscal 1999 period as a result of higher fees incurred for patent
related services and legal and accounting services. Rents also increased as a
result
14
<PAGE>
of the leasing of additional storage space. Insurance expense increased in the
fiscal 2000 period as a result of higher levels of coverage and the addition of
one policy. Our non-cash charge to earnings for stock based compensation to
consultants was higher in the fiscal 2000 period as compared to the comparable
fiscal 1999 period.
Shanghai CopyTele's loss for the three months ended January 31, 2000 and 1999
and for the period from April 10, 1995 (Shanghai CopyTele's inception) through
January 31, 2000 were approximately $68,000, $125,000 and $2,140,000,
respectively. The decrease in the loss for the fiscal 2000 period from the
fiscal 1999 period of approximately $57,000 was primarily the result of cost
reductions and limited production activity with respect to producing panel
assemblies and Magicom(R) 2000 for the SCS-700 program. 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. 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. Additional investments in
Shanghai CopyTele are directly expensed to the statements of operations.
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.
The decrease in interest income of $35,000 from approximately $53,000 during the
fiscal 1999 period as compared to approximately $18,000 during the fiscal 2000
period resulted primarily from a decrease in average funds available for
investment and a slight decrease in interest rates. Funds available for
investment during the fiscal 2000 and 1999 periods, on a monthly weighted
average basis, were approximately $1,640,000 and $4,641,000, respectively. The
investment instruments selected by us are principally money market accounts and
treasury investments.
Year 2000 Issue
---------------
We are not aware of any Year 2000 problems affecting us. The cost for us to
address this issue was immaterial. Our contingency plan remains available to us
should we need to implement any part. We will continue to monitor our systems
and relationships for any potential Year 2000 problems that we have not yet
uncovered.
15
<PAGE>
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 Stock Option Plan, adopted by the Board of Directors on
April 1, 1987, and our 1993 Stock Option Plan, adopted by the Board of Directors
on April 28, 1993, and amended on May 3, 1995 and May 10, 1996.
For the three month periods ended January 31, 2000 and 1999, we received
proceeds aggregating approximately $688,000 and $839,000, respectively, from the
exercise of stock options to purchase shares of our common stock. During the
three month period ended January 31, 2000, we also received proceeds of
approximately $354,000 from sales of our common stock in a private placement.
During the period from February 1, 2000 through March 13, 2000, we received
proceeds aggregating approximately $2,338,000 from the exercise of stock options
pursuant to the 1993 Stock Option Plan and approximately $304,000 from the sales
of our common stock in private placements. Working capital decreased by
approximately $132,000 from approximately $5,727,000 at October 31, 1999 to
approximately $5,595,000 at January 31, 2000 as a result of the loss incurred
for the period offset by the proceeds received during the same period.
Our operations used approximately $982,000 in cash during the three month period
ended January 31, 2000. As of January 31, 2000, our working capital included
approximately $2,124,000 of cash and approximately $1,113,000 (net of
approximately $862,000 due to Shanghai CopyTele) of accounts payable and accrued
liabilities. 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 February 1, 2000 to March 13, 2000,
will be sufficient to continue operations through the first 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 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.
16
<PAGE>
We are seeking to improve our liquidity through the sale of products. In an
effort to generate sales, we have commenced marketing the USS-900 directly and
to U.S. office equipment 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 device and the modified Magicom(R) 2000 SCS-700
system, sufficient sales will be generated 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 January 31, 2000 were
approximately $6,090,000. We anticipate that we may require additional funds to
maintain the NASD net tangible assets requirement. 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
$1,085,000 has been borrowed to date. Short-term loans aggregating the
$1,085,000 are from a Chinese bank, secured by the building and a land-use
contract with the Land Administration Bureau of Shanghai County, and from one of
the Chinese parties. 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 we will not have to further reduce the selling
prices of our inventory below its current carrying value to accomplish our
business strategies.
As of January 31, 2000, we owed Shanghai CopyTele approximately $862,000 which
when paid could be used by Shanghai CopyTele to repay us. Sales of units by
Shanghai CopyTele to us may result in an increase in our inventory before the
units are then sold by us in the ordinary course of our business.
17
<PAGE>
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 $32
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 February 1, 2000 to March 13, 2000, will
be sufficient to continue operations through the first 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. 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 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.
18
<PAGE>
PART II OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No current report on Form 8-K was filed for the Company during
the first quarter of its fiscal year ended January 31, 2000.
19
<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.
By: DENIS A. KRUSOS
-----------------------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
March 15, 2000 Officer)
By: FRANK J. DISANTO
-----------------------------------------
Frank J. DiSanto
March 15, 2000 President and Director
By: GERALD J. BENTIVEGNA
-----------------------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
March 15, 2000 and Accounting Officer)
20
<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>
<CIK> 0000715446
<NAME> CopyTele, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-1-1999
<PERIOD-END> JAN-31-2000
<CASH> 2,124,390
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,356,490
<CURRENT-ASSETS> 7,569,542
<PP&E> 2,161,748
<DEPRECIATION> (1,693,279)
<TOTAL-ASSETS> 8,064,679
<CURRENT-LIABILITIES> 1,975,019
<BONDS> 0
0
0
<COMMON> 612,921
<OTHER-SE> 5,476,739
<TOTAL-LIABILITY-AND-EQUITY> 8,064,679
<SALES> 276,792
<TOTAL-REVENUES> 276,792
<CGS> 207,065
<TOTAL-COSTS> 1,422,369
<OTHER-EXPENSES> (17,988)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,334,654)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,334,654)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,334,654)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
