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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 0-11254
COPYTELE, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2622630
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
900 Walt Whitman Road
Melville, NY 11747
(631) 549-5900
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of January 21, 2000,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($1.13): $61,406,422.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
On January 21, 2000, the registrant had outstanding 60,927,376 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
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Item 1. Business
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Forward-Looking Statements
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Information included in this Annual Report on Form 10-K 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 this Annual
Report on Form 10-K under the heading "General Risks and Uncertainties" below.
Except as required by law, we undertake no obligation to update forward-looking
statements made in this Annual Report on Form 10-K or otherwise.
Overview
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CopyTele, Inc. is a development stage enterprise. Our principal activities
include the development, production and marketing of multi-functional encryption
products, under the Cryptele(TM) brand name, which provide high-grade
information security for domestic and international users over virtually any
communications media. The first encryption products we have produced under this
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 encryption digital
cryptographic chip-- the Citadel(TM) CCX - to provide high-grade information
encryption. The SCS-700 combines the USS-900 with a modified version of the
Magicom(R) 2000, our first developed product, to provide a secure telephone
based multi-functional telecommunications system incorporating our E-Paper(TM)
flat panel display technology.
We are also continuing our research and development activities for additional
encryption products and other flat panel displays in addition to our patented,
compact, ultra-high resolution, charged particle, E-Paper(TM) flat panel display
technology. The additional flat panel display technologies include simplified
E-Paper(TM) and thin film designs suitable for low-cost plastic displays using
printing techniques and field emission displays. We are also continuing our
efforts to develop coated particles derived from our E-Paper(TM) flat panel
display technology. If developed, these coated particles could potentially be
used by manufacturers of toners and pigments.
We initially formed Shanghai CopyTele Electronics Co., Ltd., our 55% owned joint
venture in Shanghai, China, in 1995 to produce and market Magicom(R) 2000 and to
supply it to us for sale outside of China. Shanghai CopyTele currently supplies
a portion of the electronic components, sub-assemblies and accessories for use
in the USS-900 and also produces the modified Magicom(R) 2000 units used in the
SCS-700.
We were incorporated on November 5, 1982 under the laws of the State of
Delaware. Our principal executive offices are located at 900 Walt Whitman Road,
Melville, New York 11747 and our telephone number is 631-549-5900.
General Risks and Uncertainties
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We have had limited sales to dealers, distributors and other customers to
support our operations since our inception. We have expended approximately $31
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. See Notes 1 and 2 to our
Financial Statements.
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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 November 1, 1999 to January 27, 2000,
will be sufficient until at least the end of fiscal 2000. 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:
o our ability to successfully market the USS-900 and SCS-700;
o our continuing ability to purchase the Citadel(TM)CCX encryption chip from
Harris for use in the USS-900;
o 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;
o long-term product performance and the capability of our dealers and
distributors to adequately service our products;
o our ability to maintain an acceptable pricing level to end-users for our
products;
o the ability of suppliers to meet our requirements and schedule;
o our ability to obtain adequate supplies of substrates for the SCS-700;
o our ability to successfully develop our new products under development,
particularly our new encryption products;
o rapidly changing consumer preferences; and
o 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.
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Products
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Encryption Products
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The USS-900 and the SCS-700 are our first encryption products in the market
place under the Cryptele(TM) brand name. The following is a brief description of
each product.
USS-900
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The USS-900 is a hardware based peripheral digital encryption system which
incorporates the Harris digital cryptographic chip - the Citadel(TM) CCX - to
provide high-grade information encryption. We developed and are currently
producing the USS-900 in cooperation with Harris under a three-year agreement
entered into in July 1999. Under the terms of this agreement, we are responsible
for the production, development, manufacturing and marketing of the USS-900, and
Harris has agreed to sell us the Citadel(TM) CXX encryption chip at a negotiated
price, based in part on sales of the USS-900. Harris also has agreed that all
USS-900 units may be marked or labeled with the designation "Secured by Harris".
In addition, the agreement provides that, for the term of the agreement, neither
Harris nor CopyTele will participate with any other entity in the design,
development or manufacture of a product functionally equivalent to the USS-900
unless agreed upon by both parties.
The encryption technology of the USS-900 encodes information through a complex
mathematical formula called an algorithm. The algorithm requires a secret "key"
to both encrypt and decrypt information. Only the secret key used to encrypt the
information can be used to decrypt the information. The product automatically
generates new secret keys electronically with each call. The USS-900 easily
interfaces with telephones, fax machines or computers to encrypt information
communicated over ordinary telephone lines or via the internet. A USS-900 is
required at both the sending and receiving end when communicating encrypted
information over any communications media.
The USS-900 is a compact device that is 6" deep x 4.38" wide x 1.38" high and
weighs approximately 9 ounces. The three major components of the unit are the
Citadel(TM) CXX encryption chip, a digital signal processor and modems enclosed
in a plastic case. The unit is portable, has low power consumption and has UL,
FCC and export approvals. The most significant features of this product include
the following:
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o Secure E-mail Attachments - encrypts any computer file to be utilized as an
e-mail attachment which can be sent over the Internet or an ordinary
telephone line.
o Secure Voice Communication - interfaces with any analog telephone allowing
easy encryption of voice communication.
o Secure Fax Communication - interfaces with any fax machine attended or
unattended, ensuring cryptographic communication of information.
o Secure Point-to-Point File Transfers - interfaces with a computer ensuring
cryptographic communication of information between computers.
o File Storage - interfaces with any computer, with the utilization of a
provided CD ROM, to encrypt and decrypt computer files with the use of a
single USS-900. The encrypted files can be stored on the computer, on
networks or on the Internet.
o Secure Simultaneous Voice and Data Communication (SVD) - interfaces with a
telephone and computer to allow secure simultaneous voice communication and
point-to-point file transfer over ordinary telephone lines.
o Secure Voice Teleconferencing - interfaces with multiple telephone lines to
provide multi-persons encrypted communications over ordinary telephone
lines.
o Secure Multi-Capability - interfaces with telephones, fax machines and
computers to perform secure and encrypted voice, fax and point-to-point
data communication all on the same phone call.
o Tonal and Pulse Dialing - interfaces with telephones and fax machines that
have either tonal or pulse dialing systems to provide voice or fax
communications.
SCS-700
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The SCS-700 is a system that contains a modified version of the Magicom(R) 2000
and the USS-900. The Magicom(R) 2000 now contains additional hardware and
software that enable it to interface with the USS-900 and, as a result, operate
as a secure communication system known as the SCS-700. The modified Magicom(R)
2000 unit incorporates our E-Paper(TM) flat panel display technology (see
"E-PaperTM Flat Panel Display") making the SCS-700 a multi-functional screen
based secured communication system that can provide various functions, including
the following:
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o communicate by e-mail over the Internet;
o provide all functions over a single telephone line, including
simultaneous voice and electronic handwriting and editing of
documents;
o input and retrieve documents to and from a computer's storage;
o edit and transmit received documents;
o send and receive full page paperless faxes;
o rapidly scan documents, pictures and drawings into a computer;
o send and receive handwritten information; and
o encrypted communications.
The SCS-700 is compatible with and can send information to fax machines and
computers. In addition, it can interface with any printer, including our Magic
Printer, to print received information. The SCS-700, with the USS-900 as a
component, is able to provide high-grade information security for all SCS-700
functions, including the ability to secure voice, fax, data and simultaneous
voice and handwriting communications.
The high resolution of our E-Paper(TM) flat panel display has enabled us to
produce a compact, lightweight product (approximately 8 pounds when used in
conjunction with the USS-900 unit) capable of displaying a full page of
information, which is considerably smaller than conventional lower resolution
displays would allow. The product size is suitable for office and home use.
Magic Printer
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We developed, in conjunction with a Japanese supplier, a small portable printer
called Magic Printer. Our sales of Magic Printer to date have been minimal. As
of October 31, 1999, we had approximately 2,200 printers in inventory which are
being marketed as an optional accessory for the SCS-700 where desk space is at a
premium or for use with personal, notebook, or laptop computers. We will
determine in the future whether to continue with the Japanese supplier or seek
other sources.
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New Products Under Development
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Encryption Products
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We are in the process of developing three new high-speed hardware based
encryption devices that can be inserted into personal computers or cellular
phones. One device is a PCMIA-Card (Personal Computer Memory Card International
Association) for the mobile laptop market. The other is a PCI-Card (Peripheral
Component Interconnect) for the desktop market. Each of these devices would
bring very high-speed and high grade secure hardware encryption to their
intended products. As for the third device, we have commenced the design process
for an attachment for cellular phones that would encrypt voice and data
information. We have completed the hardware design of the PCMIA-Card and
PCI-Card products and are now developing the software. If we can successfully
develop all three of these products, they could be used to encrypt all types of
computer data including files stored on computer networks and cellular voice and
data. These products also could be used in a wide range of applications
including business, personal and financial security.
Coated Particles
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During 1999, using the coated particles technology that we developed for the
fluid contained in the E-Paper(TM) flat panel display, we continued our efforts
to develop coated particles that could be used in pigments and toners for
printers and copiers. These particles would have a very narrow range of size as
compared to those currently available in printers and copiers. We believe this
enhancement would result in better resolution, less color degradation with time,
and more consistent response to an applied electric field than is presently
available in commercial products. In addition, we anticipate that the coated
particles fabrication process will be simplified and will not require mechanical
procedures of grinding and extensive sieving. We are investigating the
possibility of licensing this technology or forming joint arrangements with
companies that produce pigments and toners.
Flat Panel Display Technology
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During 1999, we continued to produce our E-Paper(TM) flat panel display and to
pursue our efforts to develop new technologies for color and video flat panel
displays.
E-Paper(TM) Flat Panel Display
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The E-Paper(TM) flat panel display incorporated in the SCS-700 posesses a
combination of features that are not presently available in other display
screens. These features include:
o ultra-high resolution;
o compatibility with fax terminals -- 200 lines per inch in the horizontal and
vertical directions with up to a full page of information with
real-time display;
o a minimal amount of inactive space between pixels or picture elements
allowing the image to appear smoother;
o image retention without refreshing which has eliminated the need for
image repetition with resulting flicker and operator fatigue;
o approximately 180 degree viewing angle;
o low power consumption for writing; and
o image retention with minimal power consumption.
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Our 7.8 inch diagonal flat panel is one of the principal features of the SCS-700
product. This flat panel has 1,280 lines by 896 lines with a resolution of 200
lines per inch in both directions containing approxmately 1,150,000 pixels, and
has an image area of approximately 6.4 x 4.5 inches.
Included as an integral part of our E-Paper(TM) flat panel display is a plastic
tip pen and touch writing screen. Due to the ultra-high resolution of the
display, any language may be clearly written with the use of the plastic tip
pen. The E-Paper(TM) flat panel display also incorporates an integrated front
illumination system. This system provides viewing of the flat panel from
nighttime to sunlight ambient light conditions. By incorporating these
capabilities, our E-Paper(TM) flat panel display provides clear and comfortable
viewing, from any angle, of pictures, text in any language, and graphics.
We have in inventory a sufficient quantity of flat panel glass substrates and
displays to meet our current marketing requirements. We are in the process of
developing a simplified and, hopefully, lower cost version of this display which
would incorporate a simpler and unique display structure. If successfully
developed, we could use this lower cost display in future simplified versions of
the SCS-700. We have produced feasibility models of this simpler display. This
display would have the capability of independently controlling pixels to create
images. The technology could possibly be suitable for production using printing
processes and plastic instead of the glass substrates we currently use in the
display. We cannot give you any assurance, however, that we will be able to
develop a commercially marketable display of this type. If we cannot, we will
have to find another supplier of flat panel glass substrates once our current
supply is exhausted, or incorporate the FED technology into an updated version
of the SCS-700. We cannot give you any assurance, however, that we will be able
to obtain an adequate supply of these substrates or successfully incorporate the
FED technology.
Color and Video Flat Panels
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Thin Film Video Color Display (Field Emission Display)
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During 1999, we continued our relationship with Volga Svet, Limited, a Russian
display company, for the development of an ultra-high resolution thin film color
and video emissive flat panel display called "FED" (field emission display). We
have been working with Volga during the past year towards developing the
engineering prototype models of the FED. Approximately 600 FED display
substrates were produced by Volga in connection with the prototype development
effort. We visited the Volga research facilities to evaluate and assist Volga
with the design and performance of the display. Prototype models displaying
multi-color phosphors and matrix configurations were produced to demonstrate the
feasibility of this technology. We are continuing to work with Volga in the
areas of reliability and reproducibility of the display. This includes
performing life and uniformity tests of the display. We expect to continue the
development effort during the first quarter of the year 2000 to optimize the
operating performance required for manufacturing purposes. If we are able to
successfully develop the FED it would utilize a new film-edge, low voltage and a
single substrate technology to generate an ultra-high resolution of 230 lines
per inch in both the vertical and horizontal direction, or a resolution of more
than 50,000 pixels per square inch. This display, which would be only
approximately one-third of an inch thick, would provide a full color and video
display with almost hemispherical viewing angle, and would be suitable for
television, computer and telecommunications devices. We believe that because of
its simplified design, if we can successfully develop the display we would be
able to produce it using standard semi-conductor fabrication production
equipment which, in turn, could potentially result in lower costs to end-users.
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Solid State and Optical Display
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During 1999, we continued our efforts to develop solid state and optical video
and color capability pursuant to development arrangements with a network of U.S.
companies and U.S. universities, including The Center for Advanced Thin Film
Technology at the State University of New York at Albany. In connection with
these efforts, we produced a variety of arrays of static Mems (micro
electromechanical systems) pixels to be used in our display. We also developed a
thin film modulator in conjunction with the arrays of static Mems pixels
necessary to create high resolution images. The optical modulator viewing
surface contains a compound of vanadium which changes its contrast at extremely
high speeds when it is electronically energized. As a result, field sequential
operation, that is, scanning one primary color at a time, is possible thereby
providing higher definition video and color displays on a single silicon
substrate. The present pixel array, on a four inch silicon wafer, is 216 lines
per inch in both the horizontal and vertical directions, or more than 46,000
pixels per square inch. We plan to continue our development efforts to optimize
the fabrication process of the Mems pixel technology in order to select the most
reliable pixel and display sizes for the panel. In addition, we have been
developing a simplified version of the technology that could be used to display
information on signage. We may be able to use this simplified version for
printing on plastic substrates. As a result, this display could operate over
wide temperature ranges which would make it suitable for both indoor and outdoor
applications. We recently demonstrated the feasibility of constructing such a
display on a plastic substrate, and we are continuing our development efforts to
further refine this technology.
Joint Venture
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We formed Shanghai CopyTele on April 10, 1995 pursuant to a Joint Venture
Agreement dated March 28, 1995 between CopyTele and Shanghai Electronic
Components Corp. Shanghai CopyTele is a limited liability company in Shanghai,
China having a duration of 20 years. See Note 3 to our Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
Shanghai CopyTele produces the modified Magicom(R) 2000 used in the SCS-700 and
supplies us with certain components for the USS-900. Shanghai CopyTele is
subject to the rules and regulations of China's legal and economic system as
well as its political and economic environment. Although China currently is
encouraging a favorable business environment with foreign businesses operating
in China, we cannot give you any assurance that rules or regulations will not be
put into effect in the future that could diminish or eliminate our ability to
produce our product in China or successfully participate in the operations of
Shanghai CopyTele.
Production
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We initially produced a limited number of USS-900 units which we used for test
marketing purposes in the United States and at trade shows. Thereafter, several
U.S. based sub-contractors produced additional USS-900 units, some of which we
have used to obtain a larger test marketing evaluation and to satisfy initial
purchase orders. After we produced the first 400 units, we started using a U.S.
based electronic production contractor to produce the USS-900. Shanghai CopyTele
supplied portions of the required electronic components, sub-assemblies and
accessories for all these units. As of January 21, 2000, we have produced
approximately 900 units with approximately 1,000 units in process.
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The USS-900 consists of a printed circuit board populated with electrical
components and connectors enclosed in a plastic case. The unit contains three
main components: the Citadel(TM) CCX encryption chip, a digital signal
processor, and modems. The contractor sources all of the components of the unit,
with the exception of the Citadel(TM) CCX encryption chip supplied by Harris.
Thus far, Shanghai CopyTele has supplied the contractor with a portion of the
electronic components, sub-assemblies and accessories for the unit. The
contractor will now begin sourcing these components as well. Given normal lead
times, we anticipate a readily available supply of all components for the
USS-900.
The contractor produces and tests the complete circuit board for the USS-900. We
are continuing to perform final assembly and functionality testing of all units
prior to shipment to our distributors and customers. We are currently
negotiating with the contractor to have it completely assemble and test the
units and ship them directly to our distributors and customers. We cannot give
you any assurance, however, that we will reach a mutually acceptable arrangement
with this contractor.
The SCS-700 contains a modified version of the Magicom(R) 2000. The modified
unit has additional hardware and software that enables it to interface with the
USS-900 and thereby operate as a secure communication system known as the
SCS-700. Shanghai CopyTele produces the modified Magicom(R) 2000 for the SCS-700
system. We then combine the modified Magicom(R) 2000 with the USS-900 to produce
the SCS-700. Shanghai CopyTele is also producing additional E-Paper(TM) flat
panel displays for use in the production of SCS-700s and for spare parts
purposes.
During 1999, Shanghai CopyTele produced or modified approximately 600 Magicom(R)
2000 units, for use in SCS-700s. In addition, we modified a portion of our
inventory of Magicom(R) 2000 units so that as of December 31, 1999, we had a
sufficient quantity of modified Magicom(R) 2000 units in inventory to meet
current demand.
Marketing
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USS-900 and SCS-700
-------------------
Based on input we received regarding our Magicom(R) 2000 unit, during 1999 we
revised our marketing strategy to concentrate on developing a universal
multi-functional peripheral encryption unit (USS-900) and modifying the
Magicom(R) 2000 to interface with the USS-900 and thereby become a
multi-functional encryption system (SCS-700). As a result, we are now focusing
our marketing efforts on selling our products to selected distributors and
dealers who have marketing capabilities in the encryption field. Our sales and
marketing office, which consists of a marketing team of 10 sales personnel and
independent sales representatives, is implementing this marketing strategy. As a
result of our efforts, as of January 21, 2000, two large office equipment
suppliers and fifteen distributors and dealers specializing in the encryption
field have begun marketing the USS-900. We are marketing the SCS-700 directly,
and through several of our dealers, mainly to U.S. and foreign government
agencies. We do not have long-term agreements with any of our suppliers,
distributors and dealers, other than Harris. Most of our suppliers, distributors
and dealers, however, have purchased limited quantities of units under purchase
orders mainly for the purpose of evaluating the product and selling it to their
customers. The marketing of our products began after the completion of the test
marketing phase and the products were launched in late September 1999 at the
American Society of Industrial Security trade show.
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We provide marketing, service training and technical support to all of our
distributors and dealers. During 1999, we, along with our distributors and
dealers, demonstrated our encryption products in approximately 13 trade shows.
In addition, we demonstrated our products directly to customers of our
distributors and dealers to initially measure the products' performance and
marketability, and to solicit customers and additional dealers and distributors
to further expand our marketing capability.
As part of our effort to launch the USS-900, during 1999 we also retained
Fitzgerald Communications, Inc. of Orlando, Florida as our advertising and media
agency. Fitzgerald Communications deals with high-technology accounts engaged in
business-to-business and business-to-government commerce. Fitzgerald
Communications:
o has produced the advertising literature for the Cryptele(TM)brand name;
o is preparing advertising to be placed during the next year in appropriate
trade publications; and
o is preparing a campaign to promote us as an encryption product supplier in the
trade and financial markets.
Fitzgerald Communications also will provide us with support for trade shows
scheduled for the year 2000.
Competition
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The USS-900 and SCS-700 are subject to intense competition that exists in the
encryption and telecommunications industries. Although successful product and
systems development is not necessarily dependent on substantial financial
resources, most of our competitors are larger and possess financial resources
significantly greater than ours.
There are several other companies that sell hardware and/or software encryption
products. We believe, however, that the features included in our USS-900 and the
size of the unit distinguish it from the products being sold by these companies.
We believe that the modified Magicom(R) 2000 used in the SCS-700 is a unique
product in that it incorporates features of many different products on the
market, such as computers, telephones and fax machines. Other products currently
available on the market do not combine all the features found in the Magicom(R)
2000 with a high resolution flat panel display. We believe that it is the
E-PaperTM flat panel display, with its high resolution and associated features,
together with the encryption capability provided by the USS-900 that will
distinguish the SCS-700 from other comparable products in the marketplace.
We cannot give you any assurances that products or systems comparable or
superior to the USS-900 or the SCS-700 will not be developed which would render
the USS-900, the SCS-700 or other products developed by us in the future
difficult to market or otherwise obsolete.
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Patents
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We have received approximately 204 patents, including those from the United
States and certain foreign patent offices, expiring at various dates between
2005 and 2017. At the present time, additional patent applications are pending
with the United States and certain foreign patent offices. These patents are
related to the design, structure and method of construction of the E-PaperTM
flat panel display, methods of operating the display, particle generation,
applications using the E-PaperTM flat panel display, and for our solid state and
thin film video and flat panel display.
We have also filed or are planning to file patent applications for our solid
state and optical and thin film video color flat panel display technologies,
currently under development, for our coated particles, for our USS-900
technology and for our simplified E-PaperTM Flat Panel Display.
We have licensed a number of our patents covering the E-PaperTM flat panel
display (but excluding our manufacturing technology) to Shanghai CopyTele on an
exclusive basis in China.
We cannot assure you that patents will be issued for any of our pending
applications. In addition, we cannot assure you that any patents held or
obtained will protect us against competitors either with or without litigation.
We are not aware that either the USS-900 or the SCS-700 are infringing upon the
patents of others. We cannot assure you, however, that other products developed
by us, if any, will not infringe upon the patents of others, or that we, along
with Shanghai CopyTele, will not have to obtain licenses under the patents of
others, although we are not aware of any at this time.
We believe that the foregoing patents are significant to our future operations.
Research and Development Expenses
- ---------------------------------
Research and development expenses, which have comprised a significant portion of
our selling, general and administrative expenses since our inception, were
approximately $3,163,000, $3,926,000, $3,642,000, and $31,474,000 for the fiscal
years ended October 31, 1999, 1998 and 1997 and for the period from November 5,
1982 (inception) through October 31, 1999, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below
and our Financial Statements.
11
<PAGE>
Employees and Consultants
- -------------------------
We had thirty-five full-time employees and fourteen consultants as of December
31, 1999. Twenty six of these individuals, including our Chairman of the Board
and our President, are engaged in research and development. Their backgrounds
include expertise in physics, chemistry, optics and electronics. Ten individuals
are engaged in marketing and the remaining individuals are engaged in
administrative and financial functions for us. None of our employees are
represented by a labor organization or union.
As of December 31, 1999, Shanghai CopyTele had approximately 16 employees, of
which 7 were engaged in production and 9 were engaged in administrative and
other functions.
Item 2. Properties.
------------
We lease approximately 11,200 square feet of office and laboratory research
facilities at 900 Walt Whitman Road, Melville, New York (our principal offices)
from an unrelated party pursuant to a lease which expires November 30, 2001. Our
base rent is approximately $201,000 per annum with a 3% annual increase and an
escalation clause for increases in certain operating costs. We have the right to
cancel a portion of the lease as of November 30, 2000. This lease does not
contain provisions for its renewal and management will continue to evaluate the
future adequacy of this facility. We anticipate securing a lease renewal for
this facility at the end of the lease term if we determine to remain in the
facility. See Note 5 to our Financial Statements.
In February 1996, we entered into a five year lease with an unrelated party for
approximately 2,300 square feet of office space in Valhalla, New York. The
lease, which expires on June 30, 2001 and is non-renewable, currently provides
for a base rent of $55,775 per annum.
In October 1996, we entered into a lease with an unrelated party for
approximately 2,000 square feet of office and laboratory space near our
principal offices. In May 1997 this lease was modified to add an additional
optical facility of approximately 5,000 square feet of space and to extend the
lease to June 30, 2000. The modified lease currently provides for a base rent of
approximately $50,000 per annum and an escalation clause for increases in
certain operating costs.
12
<PAGE>
Shanghai CopyTele owns and operates from a 30,000 square foot, one-story office,
warehouse and production facility in the Shanghai Songjiang Industrial Zone, on
land acquired pursuant to a 50 year land-use contract dated October 11, 1995,
with the Land Administration Bureau of Shanghai County. Shanghai CopyTele has
obtained short-term loans from a Chinese bank aggregating approximately U.S.
$1,000,000 which are secured by the land-use contract and building. See Note 3
to our Financial Statements.
We believe that the facilities described above are adequate for our current
requirements.
Item 3. Legal Proceedings.
-------------------
We are not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted by us to a vote of our shareholders during the fourth
quarter of our fiscal year ended October 31, 1999.
Executive Officers of the Company
- ---------------------------------
Our only executive officers are Denis A. Krusos, Frank J. DiSanto, Frank W.
Trischetta and Gerald J. Bentivegna. The information required to be furnished
with respect to these executive officers is set forth in Item 10 Part III of
this Annual Report on Form 10-K and is incorporated herein by reference.
13
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Equity and
----------------------------------------------
Related Stockholder Matters.
----------------------------
Our common stock has been traded on the Nasdaq Stock Market National Market (the
"Nasdaq National Market"), the automated quotation system of the National
Association of Securities Dealers, Inc. ("NASD") under the symbol "COPY", since
October 6, 1983, the date public trading of our common stock commenced. The high
and low sales prices as reported by the Nasdaq National Market for each
quarterly fiscal period during our fiscal years ended October 31, 1998 and 1999
have been as follows:
- --------------------------------------------------------------------------------
Fiscal Period High Low
- --------------------------------------------------------------------------------
1st quarter 1998 $4.75 $2.38
2nd quarter 1998 4.63 1.78
3rd quarter 1998 4.13 1.13
4th quarter 1998 2.13 0.63
- --------------------------------------------------------------------------------
1st quarter 1999 2.31 1.00
2nd quarter 1999 1.88 1.03
3rd quarter 1999 3.31 1.38
4th quarter 1999 1.53 0.69
- --------------------------------------------------------------------------------
As of January 21, 2000 the approximate number of record holders of our common
stock was 1,250.
No cash dividends have been paid on our common stock since our inception. We
have no present intention to pay any cash dividends in the foreseeable future.
14
<PAGE>
Item 6. Selected Financial Data.
-------------------------
The following data has been derived from our Financial Statements and should be
read in conjunction with those statements, and the notes related thereto, which
are included in this report.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
from November 5, 1982
(inception) through
As of and for the year ended October 31, October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $46,877 $ - $ - $ - $ - $46,877
- ------------------------------------------------------------------------------------------------------------------------------------
Selling General and
Administrative Expenses 8,284,717 7,231,557 6,378,368 6,017,580 3,332,312 53,874,851
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from Shanghai CopyTele 345,947 377,219 335,391 148,630 17,813 1,225,000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income 156,075 472,822 913,184 722,800 356,226 4,930,353
- ------------------------------------------------------------------------------------------------------------------------------------
Net (Loss) (8,465,016) (7,135,954) (5,800,575) (5,443,410) (2,993,899) (50,159,925)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share of Common
Stock (a) ($.14) ($.12) ($.10) ($.10) ($.06) ($1.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 8,101,544 13,334,972 19,988,207 24,710,420 9,695,398
- ------------------------------------------------------------------------------------------------------------------------------------
Long Term Obligations $ - $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 6,284,777 11,860,913 18,779,142 22,750,273 9,436,708
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share
of Common Stock $ - $ - $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------
</TABLE>
(a) Adjusted for three-for-one stock split declared in October 1985,
five-for-four stock split declared in August 1987, two-for-one stock
split declared in February 1991 and two-for-one stock split declared in
May 1996.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
--------------------------------------------------
Condition and Results of Operations.
------------------------------------
Forward-Looking Statements
- --------------------------
Information included in this Annual Report on Form 10-K may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 this Annual
Report on Form 10-K under the heading "General Risks and Uncertainties".
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 (See "Business -- Products"). 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. See "Business - Flat Panel
Display Technology - Color and Video Flat Panels" and "Business - New Products
Under Development". 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. See "Business - General
Risks and Uncertainties".
We are producing and have commenced a marketing program for the USS-900 and the
SCS-700. The USS-900 uses Harris' 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 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. During fiscal 1999, Shanghai
CopyTele also supplied us with a portion of the electronic components,
sub-assemblies and accessories for the USS-900. See "Business - Production".
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, please refer to our Financial Statements and the notes
thereto.
16
<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, and during fiscal 1999 we recognized revenue on our fiscal 1999
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.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, for the fiscal years ended October 31, 1999, 1998 and 1997 and for the
period from November 5, 1982 (inception) through October 31, 1999 were
approximately $8,285,000, $7,232,000, $6,378,000 and $53,875,000, respectively.
These amounts include research, development and tooling costs of approximately
$3,163,000, $3,926,000, $3,642,000 and $31,474,000, respectively, as well as
normal operating expenses.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, increased by approximately $1,053,000, to approximately $8,285,000 in
fiscal 1999 from approximately $7,232,000 in fiscal 1998. The increase resulted
primarily from a reserve for the amount due from Shanghai CopyTele, charges to
earnings to bring the valuation of inventory in line with current estimates, for
obsolete, spare and scrap parts and other expenses. The increases were offset
somewhat by decreases in expenditures for engineering supplies, certain
marketing costs, professional fees, and research and development for video and
color flat panel displays.
Employee compensation and related costs increased in fiscal 1999 over fiscal
1998 principally as a result of the hiring of three additional sales and
marketing employees and one additional paid engineering employee. Payroll taxes
and pension costs also increased as a result of the additional compensation
costs. An increase in employee stock option exercises during fiscal 1999 also
caused increased payroll taxes over fiscal 1998. Other employee benefit programs
increased commensurate with the additional employees as well as some rate
increases in fiscal 1999. Rents also increased as a result of the leasing of
additional storage space. Insurance expense increased in fiscal 1999 as a result
of higher level coverage needed and the addition of one policy. A charge to
earnings was recorded in fiscal 1999 in order to bring the valuation of
inventory in line with current estimates and for obsolete, spare and scrap
parts. Due to the uncertainty of realizing the amounts due from Shanghai
CopyTele, we reserved all amounts in excess of the amount we owe Shanghai
CopyTele. We also incurred a charge to earnings for interest relating to certain
prior year tax payments paid in the current year.
17
<PAGE>
Engineering supplies decreased in fiscal 1999 as compared to fiscal 1998
primarily as a result of reduced purchases of components used to develop
engineering changes to modify the Magicom(R) 2000 in fiscal 1998. Engineering
service costs increased in fiscal 1999 as compared to fiscal 1998 as a result of
the USS-900 development effort. Marketing costs for the Magicom(R) 2000
decreased in fiscal 1999 as compared to fiscal 1998 as a result of the
elimination of non-recurring costs associated with marketing start-up costs and
reduced travel and entertainment and marketing service costs. However, product
promotion and trade show expenses increased in fiscal 1999. Professional fees
were also lower in fiscal 1999 as compared to fiscal 1998 as a result of lower
fees incurred for patent related services while legal fees increased in the
current year. Research and development costs for flat panel displays decreased
in the aggregate during the comparable years principally as a result of lower
costs incurred in connection with the development of our video and color
displays. Our non-cash charge to earnings for stock based compensation to
consultants mandated by SFAS No. 123 was lower in fiscal 1999 as compared to
fiscal 1998.
Our portion of Shanghai CopyTele's loss for the fiscal years ended October 31,
1999, 1998 and 1997 and for the period from April 10, 1995 (Shanghai CopyTele's
inception) through October 31, 1999 were approximately $261,000, $377,000,
$335,000 and $1,140,000, respectively. The decrease in the loss for fiscal 1999
year from the fiscal 1998 year of approximately $116,000 was primarily the
result of cost reductions, production efficiencies and limited production
activity with respect to modifying Magicom(R) 2000 for the SCS-700 program. We
also recognized a permanent impairment charge on our investment in Shanghai
CopyTele due to the uncertainty of Shanghai CopyTele generating sufficient
future undiscounted cash flows to cover the carrying amount of our investment.
Any additional investments in Shanghai CopyTele will be directly expensed to the
statements of operations.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, increased by approximately $854,000, to approximately $7,232,000
during fiscal 1998 from approximately $6,378,000 in fiscal 1997. This increase
resulted primarily from increases in expenditures for research and development,
employee compensation and related costs, stock based compensation to
consultants, and to a lesser extent communication costs, rent, travel and
professional fees.
Research and development costs increased principally as a result of costs
incurred in connection with the development of our flat panel displays programs.
Employee compensation and related costs increased in fiscal 1998 over fiscal
1997 as a result of a full year's cost of the hiring of additional marketing and
engineering personnel during the fiscal 1997 year which had only a partial
year's costs. To a lesser extent some employee benefit programs incurred a
slight increase in rates in fiscal 1998.
In fiscal 1998, we recorded a non-cash charge to earnings for stock based
compensation to consultants mandated by SFAS No. 123 with an offset to
Additional Paid-In Capital. There was no such charge in fiscal 1997.
Communication and travel costs increased, although to a lesser extent than other
expenses that increased, as a result of increased activity associated with our
distributor and dealer program. Rent increased as a result of leasing additional
space in fiscal 1998 and the effect of a full year's rent in fiscal 1998 versus
a partial year's rent in fiscal 1997 for other leases. Professional fees were
also slightly higher in fiscal 1998 as a result of additional accounting fees
associated with Shanghai CopyTele and the proposed transaction with Shanghai
Instrumentation and Electronics Holding Group Company ("SIEC").
18
<PAGE>
Engineering supplies remained approximately the same in fiscal 1998 as compared
to fiscal 1997 primarily as a result of reduced purchases of panels, chip
drivers and Magicom(R) 2000s used for testing and evaluation purposes offset by
the cost to implement engineering changes to Magicom(R) 2000 and the related
cost to eliminate obsolete components as a result of these changes. A charge to
earnings was recorded in order to bring inventory valuation in line with current
estimates and to reflect a lower selling price to dealers and distributors. Some
marketing costs decreased in fiscal 1998 as a result of non-recurring costs
associated with the start-up costs in the prior year.
Our portion of Shanghai CopyTele's loss increased in fiscal 1998 over fiscal
1997 by approximately $42,000 as a result of manufacturing costs being absorbed
over a limited quantity of product produced, cost incurred in connection with
the implementation of a quality management program, and initial marketing costs.
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. See "Executive Compensation" and Note 8 to our Financial Statements for
a more complete discussion regarding salary and related pension benefit waivers.
The decrease in interest income of $317,000 from approximately $473,000 during
fiscal 1998 as compared to approximately $156,000 during fiscal 1999 resulted
primarily from a decrease in average funds available for investment and a
decrease in interest rates. The decrease in interest income during fiscal 1998
as compared to fiscal 1997 of approximately $440,000 resulted from a decrease in
average funds available for investment aided slightly by a small increase in
interest rates. Funds available for investment during 1999, 1998 and 1997, on a
monthly weighted average basis, were approximately $3,511,000, $8,557,000 and
$17,394,000, respectively. The investment instruments selected by us are
principally money market accounts and treasury investments.
19
<PAGE>
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.
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 fiscal years ended October 31, 1999, 1998 and 1997, we received proceeds
aggregating approximately $1,353,000, $28,000, and $1,754,000, respectively,
from the exercise of stock options and warrants to purchase shares of our common
stock and the exercise of warrants by members of the immediate families of our
Chairman of the Board and our President. During the fiscal year ended October
31, 1999, we received proceeds of $1,500,000 from sales of our common stock in
private placements. During the period from November 1, 1999 through January 27,
2000, we received proceeds aggregating approximately $895,000 from the exercise
of stock options pursuant to the 1993 Plan and private placements. Working
capital decreased by approximately $1,833,000 from approximately $7,560,000 at
October 31, 1998 to approximately $5,727,000 at October 31, 1999 as a result of
the loss incurred for the year and the purchase of property and equipment offset
by the proceeds received during the same period.
Our operations used approximately $6,100,000 in cash during fiscal 1999. As of
October 31, 1999, our working capital included approximately $2,076,000 of cash
and marketable securities and approximately $955,000 (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 November 1, 1999 to January 27, 2000,
will be sufficient to continue operations until at least the end of fiscal 2000.
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.
20
<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 October 31, 1999 were
approximately $6,300,000. 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.
The NASD also requires that we maintain a minimum bid price of $1.00 for
continued listing. If at any time the bid price for our common stock falls below
$1.00 per share for a period of thirty consecutive business days, the NASD has
the right to delist our stock if within ninety days thereafter the bid price for
the stock is not at least $1.00 per share for a minimum of ten consecutive
business days. If our stock were delisted, the delisting could have an adverse
affect on the price of our common stock and could adversely affect the liquidity
of the shares held by our stockholders. See "Market for the Registrant's Common
Equity and Related Stockholder Matters".
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
$1,080,000 has been borrowed to date. Short-term loans aggregating the
$1,080,000 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.
21
<PAGE>
We paid $130,600 in cash to Shanghai CopyTele in 1999 of the total amount we owe
to them, which enabled Shanghai CopyTele to continue the production of a limited
number of modified Magicom(R) 2000 units for the SCS-700 system and panel
assemblies. Additionally, we have reacquired from Shanghai CopyTele a portion of
our Magicom(R) 2000 inventory of parts for the purpose of minimizing Chinese
import duty and value added taxes. The amounts due from Shanghai CopyTele were
reduced by the value of the inventory reacquired. We intend to make the parts
inventory available to Shanghai CopyTele in the future based on Shanghai
CopyTele's production requirements.
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
cannot assure you that we will not have to further reduce the selling prices of
our inventory below its current carrying value to accomplish our business
strategies.
The amounts due from Shanghai CopyTele are primarily costs related to the
purchase by Shanghai CopyTele of components for use in Magicom(R) 2000 units.
Due to the uncertainty of realizing the amounts due from Shanghai CopyTele, we
have reserved all amounts in excess of the amount we owe Shanghai CopyTele. As
of October 31, 1999, 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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See accompanying "Index to Financial Statements".
Item 9. Disagreements on Accounting and Financial Disclosure.
----------------------------------------------------
Not applicable.
22
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
<TABLE>
<CAPTION>
The following table sets forth certain information with respect to all of our
directors and executive officers:
- ------------------------------------------------------------------------------------------------------------------------------------
Position with the Company Director and/or
Name and Principal Occupation Age Executive Officer Since
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denis A. Krusos Director, Chairman of the Board and Chief 72 1982
Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 75 1982
- ------------------------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna Director, Vice President - Finance and Chief 50 1994
Financial Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta Senior Vice President - Marketing and Sales 59 1996
- ------------------------------------------------------------------------------------------------------------------------------------
George P. Larounis Director 71 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Lewis H. Titterton Director 54 1999
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Mr. Krusos has served as one of our Directors and as our Chairman of the Board
and Chief Executive Officer since November 1982. He holds an M.S.E.E. degree
from Newark College of Engineering, a B.E.E. degree from City College of New
York and a Juris Doctor from St. John's University and is a member of the New
York bar.
Mr. DiSanto has served as one of our Directors and as our President since
November 1982. He holds a B.E.E. degree from Polytechnic Institute of Brooklyn
and an M.E.E. degree from New York University.
Mr. Bentivegna has served as our Vice President - Finance and Chief Financial
Officer since September 1994 and as one of our Directors since in July 1995.
Prior to joining us, Mr. Bentivegna was employed at Marino Industries Corp. for
approximately 10 years, where he served as Controller, Treasurer and Chief
Financial Officer. He holds a M.B.A. degree from Long Island University and a
B.B.A. from Dowling College.
Mr. Trischetta has served as our Senior Vice President - Marketing and Sales
since February 1996. Prior to joining us, Mr. Trischetta was employed by
Panasonic Corporation for approximately 15 years where he served as General
Manager Marketing and Sales for Panasonic Office Automation Products. Prior to
that, Mr. Trischetta was employed by 3-M Company for approximately 17 years
where he advanced to a senior sales and marketing executive position. He holds a
B.B.A. from the University of Miami.
Mr. Larounis has served as one of our Directors since September 1997 prior to
which he served as a consultant to us. Mr. Larounis held numerous positions as a
senior international executive of Bendix International and Allied Signal. He has
also served on the Board of Directors of numerous affiliates of Allied Signal in
Europe, Asia and Australia. He holds a B.E.E. degree from the University of
Michigan and a J.D. degree from New York University.
Mr. Titterton has served as one of our Directors since July 1999. Mr. Titterton
is currently Chief Executive Officer of NYMED, Inc. His background is in high
technology with an emphasis on health care and he has been with NYMED, Inc.
since 1989. Mr. Titterton founded MedE America, Inc. in 1986 and was Chief
Executive Officer of Management and Planning Services, Inc from 1978 to 1986. He
holds a M.B.A. from the State University of New York at Albany, and a B.A.
degree from Cornell University.
24
<PAGE>
Item 11. Executive Compensation.
------------------------
Messrs. Denis A. Krusos, Chairman of the Board, Chief Executive Officer and
Director, Frank J. DiSanto, President and Director, Frank W. Trischetta, Senior
Vice President - Marketing and Sales, and Gerald J. Bentivegna, Vice President -
Finance, Chief Financial Officer and Director, are our executive officers. While
there are no formal agreements, Denis A. Krusos and Frank J. DiSanto waived any
and all rights to receive salary and related pension benefits for an
undetermined period of time commencing November 1, 1985. As a result, Mr. Krusos
received no salary or bonus during the last three fiscal years. Except for Mr.
Trischetta, no other executive officer received an annual salary and bonus in
excess of $100,000 during the fiscal year ended October 31, 1999. The following
is compensation information regarding Mr. Krusos and Mr. Trischetta for the
fiscal years ended October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal
Year
Name and Ended Annual Long-Term
Principal Position ----- Compensation Compensation Awards
------------ Securities Underlying
Options (#)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/99 - 50,000
Chairman of the Board, 10/31/98 - 600,000
Chief Executive Officer and Director 10/31/97 - 575,000
- ----------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 10/31/99 $153,289 25,000
Senior Vice President - 10/31/98 $153,008 60,000
Marketing and Sales 10/31/97 $152,500 30,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
The following is information regarding stock options granted to Mr. Krusos and
Mr. Trischetta pursuant to the 1993 Stock Option Plan during the fiscal year
ended October 31, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock Price
Appreciation for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Options Granted to Exercise
Name Granted (#) (1) Employees in Price Expiration
Fiscal Year ($/Share) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Denis A. Krusos 50,000 2.07% $1.313 (2) 4/8/09 $41,287 $ 104,629
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 25,000 1.03% $1.313 (3) 4/8/09 $20,643 $ 52,315
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options are exercisable in whole or in part commencing one
year following the date of grant unless otherwise accelerated.
The options are not issued in tandem with stock appreciation
or similar rights and are not transferable other than by will
or the laws of descent and distribution. The options terminate
upon termination of employment, except that in the case of
death, disability or termination for reasons other than cause,
options may be exercised for certain periods of time
thereafter as set forth in the 1993 Stock Option Plan.
(2) The exercise price of these options was equal to the fair
market value of the underlying common stock on the date of
grant. These options are nonqualified options.
(3) The exercise price of these options was equal to the fair
market value of the underlying common stock on the date of
grant. These options are intended to qualify as incentive
stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
26
<PAGE>
The following is information regarding stock option exercises during fiscal 1999
by Mr. Krusos and Mr. Trischetta and the values of their options as of October
31, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
========================================================================================================================
Number of Securities Underlying Value of Unexercised
Name Shares Acquired Value Realized Unexercised Options at Fiscal Year In-the-Money Options at Fiscal
on Exercise (#) ($) End (#) Year End ($)
--------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
========================================================================================================================
Denis A. Krusos - - 2,920,180 50,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Frank W. - - 453,000 25,000 - -
Trischetta
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
There is no present arrangement for cash compensation of directors for services
in that capacity. Under the 1993 Stock Option Plan, each non-employee director
elected to the Board of Directors is entitled to receive nonqualified stock
options to purchase 20,000 shares of common stock upon his initial election to
the Board of Directors and nonqualified stock options to purchase 40,000 shares
each subsequent year that such director is elected to the Board of Directors.
27
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners
------------------------------------------------
and Management.
---------------
The following table sets forth certain information with respect to our common
stock beneficially owned as of January 21, 2000 by (a) each person who is known
by us to be the beneficial owner of more than 5% of our outstanding common
stock, (b) each of our directors or executive officers and (c) all directors and
executive officers as a group:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership(1)(2) Percent of Class
<S> <C> <C>
===================================================================================================================
Denis A. Krusos 7,096,940 11.13%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto 3,675,710(3) 5.78%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna 306,000 .50%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 578,000 .94%
900 Walt Whitman Road
Melville, NY 11747
- -------------------------------------------------------------------------------------------------------------------
George P. Larounis 282,500 .46%
15-17 A. Tsoha St.
11521 Athens, Greece
- -------------------------------------------------------------------------------------------------------------------
Lewis H. Titterton 1,539,600(4) 2.51%
6 Autumn Lane
Saratoga Springs, NY 12866
- -------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group 13,478,750(3)(4) 19.80%
(6 persons)
- -------------------------------------------------------------------------------------------------------------------
- --------------------
</TABLE>
28
<PAGE>
(1) A beneficial owner of a security includes any person who directly or
indirectly has or shares voting power and/or investment power with respect to
such security or has the right to obtain such voting power and/or investment
power within sixty (60) days. Except as otherwise noted, each designated
beneficial owner in this report has sole voting power and investment power with
respect to the shares of our common stock beneficially owned by such person.
(2) Includes 2,845,180 shares, 2,675,180 shares, 304,000 shares, 528,000 shares,
282,500 shares, 0 shares and 6,634,860 shares as to which Denis A. Krusos, Frank
J. DiSanto, Gerald J. Bentivegna, Frank W. Trischetta, George P. Larounis, Lewis
H. Titterton and all directors, and executive officers as a group, respectively,
have the right to acquire within 60 days upon exercise of options granted
pursuant to the 1993 Plan.
(3) Includes 613,215 shares held by the Frank J. DiSanto Revocable Living Trust.
Mr. DiSanto is the trustee and has sole voting and investment power over the
trust. Includes 250,000 shares which are pledged to a bank under a commercial
loan.
(4) Includes 500,000 shares which Lewis H. Titterton has the right to acquire
upon the exercise of warrants.
Item 13. Certain Relationships and Related Transactions.
------------------------------------------------
On April 30, 1999, Lewis H. Titterton, who became a director in July 1999,
purchased 300,000 shares of our common stock at a purchase price of $1.50 per
share (the market price on the date of the agreement), or an aggregate purchase
price of $450,000, pursuant to a Stock Subscription Agreement, dated as of April
27, 1999, between CopyTele and Mr. Titterton. Pursuant to the Stock Subscription
Agreement, Mr. Titterton also was issued a Warrant to purchase 300,000 shares of
our common stock at a purchase price of $1.50 per share. The Warrant expires on
April 30, 2001.
On September 8, 1999, Lewis H. Titterton purchased 200,000 shares of our common
stock at a purchase price of $1.00 per share (the market price on the date of
the agreement), or an aggregate purchase price of $200,000, pursuant to a Stock
Subscription Agreement, dated as of August 30, 1999, between CopyTele and Mr.
Titterton. Pursuant to the Stock Subscription Agreement, Mr. Titterton also was
issued a Warrant to purchase 200,000 shares of our common stock at a purchase
price of $1.00 per share. The Warrant expires on September 8, 2001.
29
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a)(1)(2) Financial Statement Schedules
See accompanying "Index to Financial Statements".
(a)(3) Executive Compensation Plans and Arrangements
Stock Option Plan (1987) (filed as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit 10.69
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
Company's Proxy Statement dated June 10, 1993).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 4(d) to the Company's Form S-8 dated September 6,
1995).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1996).
30
<PAGE>
(b) Reports on Form 8-K
--------------------
No current report on Form 8-K was filed for the Company during the fourth
quarter of its fiscal year ended October 31, 1999.
(c) Exhibits
---------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and approved by
shareholders on May 27, 1987.
(d) 10.2 Amendment to 1987 Stock Option Plan, adopted on March 12, 1990 and
approved by shareholders on May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted on April 28, 1993 and
approved by shareholders on July 14, 1993.
(f) 10.4 Joint Venture Contract, dated as of March 28, 1995, by and between
Shanghai Electronic Components Corp. and CopyTele, Inc.
(f) 10.5 Technology License Agreement, dated as of March 28, 1995, by and
between Shanghai CopyTele Electronics Co., Ltd. and CopyTele, Inc.
(g) 10.6 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option Plan, adopted
on May 3, 1995 and approved by shareholders on July 19, 1995.
(h) 10.7 Assignment Agreement, dated as of July 10, 1995, by and among Shanghai
Electronic Components Corp., Shanghai International Trade and
Investment Developing Corp. and CopyTele, Inc.
(i) 10.8 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option Plan, adopted
on May 10, 1996 and approved by shareholders on July 24, 1996.
(j) 10.9 Contract Granting Land-Use Rights, dated October 11, 1995, between the
Land Administration Bureau Songjiang County and Shanghai CopyTele
Electronics Co., Ltd.
(k)10.10 Agreement dated March 3, 1999 between Harris Corporation and CopyTele,
Inc.
31
<PAGE>
(l) 10.11 Stock Subscription Agreement Dated April 27, 1999, including form of
Warrant, between CopyTele, Inc. and Lewis H. Titterton
(m) 10.12 Agreement dated July 28,1999, between CopyTele, Inc. and Harris
Corporation, RF Communications
(n) 10.13 Stock Subscription Agreement Dated August 30, 1999, including form of
Warrant, between CopyTele, Inc. and Lewis H. Titterton
(n) 21 List of Significant Subsidiaries.
(n) 23.1 Consent of Arthur Andersen LLP.
(n) 27 Financial Data Schedule.
(n) 99.1 Financial Statements of Shanghai CopyTele Electronics Co., Ltd.
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended July 31,
1992 and to Form 10-Q for the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-8
(Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended October
31,1990.
(e) Incorporated by reference to Proxy Statement dated June 10, 1993.
(f) Incorporated by reference to Form 8-K dated March 28, 1995.
(g) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(h) Incorporated by reference to Form 10-K for the fiscal year ended October
31, 1995.
(i) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1996.
(j) Incorporated by reference to Form 10-Q for the fiscal quarter ended January
31, 1997.
(k) Incorporated by reference to Form 10-Q for the fiscal quarter ended January
31, 1999.
(l) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1999.
(m) Incorporated by reference to Form 8-K dated July 28, 1999
(n) Filed herewith.
32
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COPYTELE, INC.
By:/s/ Denis A. Krusos
------------------
Denis A. Krusos
Chairman of the Board and
January 28, 2000 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Denis A. Krusos
-------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
January 28, 2000 Officer)
/s/ Frank J. DiSanto
--------------------
Frank J. DiSanto
January 28, 2000 President and Director
/s/ Gerald J. Bentivegna
------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
January 28, 2000 and Accounting Officer)
/s/ Lewis H. Titterton
----------------------
Lewis H. Titterton
January 28, 2000 Director
/s/ George P. Larounis
----------------------
George P. Larounis
January 28, 2000 Director
33
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
-------
Ref. Number Description
- ---- ------- ------------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
3.3 Amendment to By-Laws.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987 and
approved by shareholders on May 27, 1987.
(d) 10.2 Amendment to Stock Option Plan, adopted on
March 12, 1990 and approved by shareholders on
May 24, 1990.
(e) 10.3 CopyTele, Inc. 1993 Stock Option Plan, adopted
on April 28, 1993 and approved by shareholders on
July 14, 1993.
(f) 10.4 Joint Venture Contract, dated as of March 28,
1995, by and between Shanghai Electronic
Components Corp. and CopyTele, Inc.
(f) 10.5 Technology License Agreement, dated as of March
28, 1995, by and between Shanghai CopyTele
Electronics Co., Ltd. and CopyTele, Inc.
(g) 10.6 Amendment No. 1 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 3, 1995 and approved
by shareholders on July 19, 1995.
(h) 10.7 Assignment Agreement, dated as of July 10, 1995,
by and among Shanghai Electronic Components
Corp., Shanghai International Trade and
Investment Developing Corp. and CopyTele, Inc.
34
<PAGE>
(i) 10.8 Amendment No. 2 to the CopyTele, Inc. 1993 Stock
Option Plan, adopted on May 10, 1996 and approved
by shareholders on July 24, 1996.
(j) 10.9 Contract Granting Land-Use Rights, dated
October 11, 1995, between the Land
Administration Bureau Songjiang County and Shanghai
CopyTele Electronics Co., Ltd.
(k) 10.10 Agreement dated March 3, 1999 between Harris
Corporation and CopyTele, Inc.
(l) 10.11 Stock Subscription Agreement Dated April 27, 1999
including form of Warrant, between CopyTele, Inc.
and Lewis H. Titterton.
(m) 10.12 Agreement dated July 28,1999, between CopyTele,
Inc. and Harris Corporation, RF Communications
(n) 10.13 Stock Subscription Agreement Dated August 30, 1999
including form of Warrant, between CopyTele, Inc.
and Lewis H. Titterton.
(n) 21 List of Significant Subsidiaries.
(n) 23.1 Consent of Arthur Andersen LLP.
(n) 27 Financial Data Schedule.
(n) 99.1 Financial Statements of Shanghai CopyTele
Electronics Co., Ltd.
35
<PAGE>
(a) Incorporated by reference to Form 10-Q for the fiscal quarter ended
July 31, 1992 and the fiscal quarter ended July 31, 1997.
(b) Incorporated by reference to Post-Effective Amendment No. 1 to
Form S-8 (Registration No. 33-49402) dated December 8, 1993.
(c) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1987.
(d) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1990.
(e) Incorporated by reference to Proxy Statement dated June 10, 1993.
(f) Incorporated by reference to Form 8-K dated March 28, 1995.
(g) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(h) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1995.
(i) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
(j) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1997.
(k) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1999.
(l) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1999.
(m) Incorporated by reference to Form 8-K dated July 28, 1999
(n) Filed herewith.
36
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1999
----------------
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1999 and 1998 F-2
Statements of Operations for each of the three fiscal years in the period ended
October 31, 1999 and for the period from inception (November 5, 1982) to
October 31, 1999 F-3
Statements of Shareholders' Equity for the period from inception (November 5,
1982) to October 31, 1983 and for each of the sixteen fiscal years in the
period ended
October 31, 1999 F-4 - F-8
Statements of Cash Flows for each of the three fiscal years in the period ended
October 31, 1999 and for the period from inception (November 5, 1982) to
October 31, 1999 F-9
Notes to Financial Statements F-10 - F-20
Report of Independent Public Accountants on Schedule F-21
</TABLE>
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To CopyTele, Inc.:
We have audited the accompanying balance sheets of CopyTele, Inc. (a Delaware
corporation in the development stage - Note 1) as of October 31, 1999 and 1998,
and the related statements of operations and cash flows for the each of the
three fiscal years in the period ended October 31, 1999 and for the period from
inception (November 5, 1982) to October 31, 1999, and the statements of
shareholder's equity for the period from inception (November 5, 1982) to October
31, 1983 and for each of the sixteen fiscal years in the period ended October
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CopyTele, Inc. as of October
31, 1999 and 1998, and the results of their operations and its cash flows for
each of the three fiscal years in the period ended October 31, 1999 and for the
period from inception to October 31, 1999 in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
Melville, New York
January 27, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
BALANCE SHEETS
--------------
October 31, October 31,
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of $1,531,254 and
$5,363,522, respectively) $ 1,587,830 $ 5,406,017
Marketable securities 488,038 -
Inventory 4,538,608 2,719,215
Prepaid expenses and other current assets (including amounts due from Joint Venture of
approximately $862,000 and $825,000, respectively) 929,099 908,639
-------------- --------------
Total current assets 7,543,575 9,033,871
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,627,012 and $1,351,778, respectively) 531,155 766,106
INVESTMENT IN JOINT VENTURE (Notes 1 and 3) - 345,947
AMOUNTS DUE FROM JOINT VENTURE, net (Note 1) - 3,091,628
OTHER ASSETS 26,814 97,420
DEFERRED TAX BENEFITS (net of valuation allowance of $33,026,000 and $30,910,000,
respectively) - -
-------------- --------------
$ 8,101,544 $ 13,334,972
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (including amounts due to Joint Venture of approximately $862,000 and
$662,000, respectively) $ 1,546,494 $ 1,392,321
Accrued liabilities 270,273 81,738
-------------- --------------
Total current liabilities 1,816,767 1,474,059
COMMITMENTS AND CONTINGENCIES (Note 5)
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; issued and
outstanding 60,057,376 and 57,871,176 shares, respectively 600,574 578,712
Additional paid-in capital 55,844,128 52,977,110
Deficit accumulated during the development stage (50,159,925) (41,694,909)
-------------- ---------------
6,284,777 11,860,913
-------------- --------------
$ 8,101,544 $ 13,334,972
============== ==============
The accompanying notes are an integral part of these balance sheets.
</TABLE>
F-2
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the Period
from Inception
For the Fiscal Year Ended October 31, (November 5, 1982)
------------------- ------------------ ------------------ to
1999 1998 1997 October 31, 1999
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
SALES $ 46,877 $ - $ - $ 46,877
COST OF SALES 37,304 - - 37,304
--------------- --------------- --------------- -------------------
Gross profit 9,573 - - 9,573
--------------- --------------- --------------- -------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately
$3,163,000, $3,926,000, $3,642,000
and $31,474,000, respectively) 8,284,717 7,231,557 6,378,368 53,874,851
--------------- --------------- --------------- -------------------
LOSS FROM AND IMPAIRMENT OF INVESTMENT
IN JOINT VENTURE (Notes 1 and 3) 345,947 377,219 335,391 1,225,000
--------------- --------------- --------------- -------------------
INTEREST INCOME 156,075 472,822 913,184 4,930,353
--------------- --------------- --------------- -------------------
NET (LOSS) $ (8,465,016) $ (7,135,954) $ (5,800,575) $ ( 50,159,925)
=============== =============== =============== ==================
NET (LOSS) PER SHARE OF COMMON STOCK:
Basic and Diluted $ (.14) $ (.12) $ (.10) $ (1.06)
=============== ============== ============== ==================
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 58,792,745 57,865,834 57,667,787 47,362,777
=============== =============== =============== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
--------------------------------------------------------------------
AND FOR EACH OF THE SIXTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------------
Accumulated
Deficit
Common Stock Additional During the
--------------- --------------- 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 - - (350,376) -
Net (loss) for the period - - - (976,919)
------------ ----------- ------------ --------------
BALANCE, October 31, 1983 2,800,000 28,000 6,385,384 (976,919)
Additional costs incurred in conjunction with public offering - - (11,654) -
Net (loss) for the period - - - (1,542,384)
------------ ----------- ------------ ---------------
BALANCE, October 31, 1984 2,800,000 28,000 6,373,730 (2,519,303)
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 - - 362,365 -
Three-for-one stock split (A) 5,714,400 57,144 (57,144) -
Net (loss) for the period - - - (1,745,389)
------------ ----------- ------------ --------------
BALANCE, October 31, 1985 8,571,600 85,716 7,309,796 (4,264,692)
Common stock issued, at $4 per share, upon exercise of 2,800
warrants in December 1985 8,400 84 33,516 -
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company - - (62,146) -
Net (loss) for the period - - - (1,806,696)
------------ ----------- ------------ --------------
BALANCE, October 31, 1986 8,580,000 85,800 7,281,166 (6,071,388)
</TABLE>
Continued
F-4
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
--------------------------------------------------------------------
AND FOR EACH OF THE SIXTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------------
Continued
---------
Accumulated
Deficit
Common Stock Additional During the
-------------- --------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
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 -
Additional costs incurred by the Company in conjunction with
sales of common stock by individuals from January 29, 1985
to October 4, 1985 under agreements with the Company - - (1,474) -
Five-for-four stock split (A) 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 on September 10, 1987 and to officers on
October 29, 1987 64,740 647 309,601 -
Net (loss) for the period - - - (1,401,736)
----------- ----------- ----------- -------------
BALANCE, October 31, 1987 10,873,825 108,738 8,428,057 (7,473,124)
Sale of common stock, at market, to members of officers'
immediate families from November 24, 1987 to June 29,
1988 and additional contributions by officers in January
1988 and March 1988 related to adjustments to sales price
of common stock on October 29, 1987 260,210 2,602 2,250,594 -
Net (loss) for the period - - - (1,317,305)
----------- ----------- ----------- -------------
BALANCE, October 31, 1988 11,134,035 111,340 10,678,651 (8,790,429)
Sale of common stock, at market, to an officer on February 26,
1989 and to members of officers' immediate families from
February 26, 1989 (amended on March 10, 1989) to
September 27, 1989 142,725 1,427 2,093,851 -
Sale of common stock, at market, to senior level personnel
on February 26, 1989 29,850 299 499,689 -
Sale of common stock, at market, to unrelated party on
February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Net (loss) for the period - - - (1,101,515)
----------- ----------- ----------- -------------
BALANCE, October 31, 1989 11,342,430 113,424 13,871,818 (9,891,944)
Sale of common stock, at market, to members of officers'
immediate families from November 14, 1989 to October 15,
1990 117,825 1,179 1,140,725 -
Net (loss) for the period - - - (1,111,413)
----------- ----------- ----------- -------------
BALANCE, October 31, 1990 11,460,255 114,603 15,012,543 (11,003,357)
Continued
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
--------------------------------------------------------------------
AND FOR EACH OF THE SIXTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------------
Continued
---------
Accumulated
Deficit
Common Stock Additional During the
--------------- --------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
Sale of common stock, at market, to members of officers'
immediate families on December 4, 1990 42,540 425 329,260 -
Two-for-one stock split (A) 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members of officers'
immediate families from April 26, 1991 to September 16, 1991 102,543 1,025 1,033,981 -
Net (loss) for the period - - - (1,299,992)
------------ ------------ ------------ ------------
BALANCE, October 31, 1991 23,108,133 231,081 16,260,756 (12,303,349)
Sale of common stock, at market, to members of officers'
immediate families from December 16, 1991 to October
27, 1992 158,910 1,589 1,754,330 -
Costs incurred in conjunction with registration of stock
option plan - - (33,251) -
Net (loss) for the period - - - (1,827,356)
------------ ------------ ------------ ------------
BALANCE, October 31, 1992 23,267,043 232,670 17,981,835 (14,130,705)
Common stock issued upon exercise of stock options from
December 16, 1992 to October 22, 1993 under stock option
Plan 1,032,940 10,330 5,914,480 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in September 1993 239,000 2,390 996,774 -
Net (loss) for the period - - - (2,762,849)
------------ ------------ ------------ ------------
BALANCE, October 31, 1993 24,538,983 245,390 24,893,089 (16,893,554)
Costs incurred in connection with registration of stock
option plan - - (50,324) -
Common stock issued upon exercise of stock options from
December 22, 1993 to June 14, 1994 under stock option plan 233,200 2,332 1,273,411 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in July 1994 65,220 652 371,754 -
Net (loss) for the period - - - (3,427,517)
------------ ------------ ------------ ------------
BALANCE, October 31, 1994 24,837,403 248,374 26,487,930 (20,321,071)
Continued
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
--------------------------------------------------------------------
AND FOR EACH OF THE SIXTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------------
Continued
---------
Accumulated
Deficit
Common Stock Additional During the
--------------- -------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
Costs incurred in connection with registration of stock
option plan - - (29,759) -
Common stock issued upon exercise of stock options from
February 17, 1995 to October 30, 1995 under stock option plans 980,400 9,804 5,278,824 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in February, July and
September 1995 137,300 1,373 755,132 -
Net (loss) for the period - - - (2,993,899)
------------ ------------ ------------ --------------
BALANCE, October 31, 1995 25,955,103 259,551 32,492,127 (23,314,970)
Common stock issued upon exercise of stock options from
November 2, 1995 to June 12, 1996 under stock option plans 2,288,800 22,888 15,843,842 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in January and March, 1996 138,280 1,383 527,802 -
Two-for-one stock split (A) 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of stock options from
July 8, 1996 to October 30, 1996 under stock option plans 532,500 5,325 1,795,395 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in July and October, 1996 107,790 1,078 559,262 -
Net (loss) for the period - - - (5,443,410)
------------ ------------ ------------ --------------
BALANCE, October 31, 1996 57,404,656 574,047 50,934,606 (28,758,380)
Costs incurred in conjunction with registration of stock option
plan - - (11,705) -
Common stock issued upon exercise of stock options from
November 25, 1996 to October 6, 1997 under stock option plans 342,700 3,427 1,258,829 -
Common stock issued upon exercise of warrants by members
of officers' immediate families in March 1997 98,820 988 502,905 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Net (loss) for the period - - - (5,800,575)
------------ ------------ ------------ --------------
BALANCE, October 31, 1997 57,861,176 578,612 52,759,485 (34,558,955)
Continued
</TABLE>
F-7
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1982) TO OCTOBER 31, 1983
--------------------------------------------------------------------
AND FOR EACH OF THE SIXTEEN FISCAL YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------------
Continued
---------
<TABLE>
<CAPTION>
Accumulated
Deficit
Common Stock Additional During the
--------------- --------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
<S> <C> <C> <C> <C>
Stock option compensation to consultants - - 189,600 -
Common stock issued upon exercise of stock options in May 1998 10,000 100 28,025 -
Net (loss) for the period - - - (7,135,954)
------------ ------------ ------------ --------------
BALANCE, October 31, 1998 57,871,176 578,712 52,977,110 (41,694,909)
Stock option compensation to consultants - - 61,650 -
Common stock issued upon exercise of stock options between
January 15, 1999 and August 3, 1999 886,200 8,862 1,343,868 -
Common stock issued in private placements on April 30, 1999 and
September 8, 1999, net of expenses 1,300,000 13,000 1,461,500 -
Net (loss) for the period - - - (8,465,016)
------------ ------------ ------------ --------------
BALANCE, October 31, 1999 60,057,376 $ 600,574 $ 55,844,128 $ (50,159,925)
============ ============ ============ ==============
</TABLE>
(A) Reflects cumulative effect on all share data prior to splits described in
Note 4.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Period
For the Fiscal from Inception
Year Ended October 31, (November 5,1982)
--------------- --------------- -------------- to
1999 1998 1997 October 31, 1999
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $ (6,314,512) $ (8,249,844) $ (11,089,765) $ (55,761,854)
Cash received from customers 46,877 - - 46,877
Interest received 150,539 513,633 917,696 4,920,835
------------ ------------ ------------- ---------------
Net cash (used in) operating activities (6,117,096) (7,736,211) (10,172,069) (50,794,142)
------------ ------------ ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (40,283) (185,876) (448,288) (2,023,442)
Disbursements to acquire certificates of deposit and
marketable securities (488,038) - (970,808) (13,534,037)
Proceeds from maturities of investments - 970,808 - 13,045,999
Investment made in Joint Venture - - - (1,225,000)
------------ ------------ ------------- ---------------
Net cash (used in) provided by investing activities (528,321) 784,932 (1,419,096) (3,736,480)
------------ ------------ ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants, net
of underwriting discounts of $690,000 related to initial
public offering in October 1983 - - - 17,647,369
Proceeds from exercise of stock options and warrants,
net of registration disbursements 1,352,730 28,125 1,754,444 37,061,213
Proceeds from sale of common stock in private placements 1,474,500 - - 1,474,500
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 2,827,230 28,125 1,754,444 56,118,452
------------ ------------ ------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(3,818,187) (6,923,154) (9,836,721) 1,587,830
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,406,017 12,329,171 22,165,892 -
------------ ------------ ------------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,587,830 $ 5,406,017 $ 12,329,171 $ 1,587,830
============ ============ ============= =============
RECONCILIATION OF NET (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net (loss) $ (8,465,016) $ (7,135,954) $ (5,800,575) $ (50,159,925)
Stock option compensation to consultants 61,650 189,600 - 251,250
Loss from Joint Venture 260,775 377,219 335,391 1,139,828
Depreciation and amortization 275,234 288,829 257,315 1,642,670
Impairment of investment in Joint Venture 85,172 - - 85,172
Impairment of amount due from Joint Venture 1,407,461 - - 1,407,461
Amortization of discount on marketable securities - 26,365 (26,365) -
Increase in inventory (1,819,393) (2,587,717) (131,498) (4,538,608)
(Increase) decrease in prepaid expenses and other current assets (20,460) 3,831,751 (4,312,667) (929,099)
Decrease (increase) in long-term amount due from joint venture 1,684,167 (3,091,628) - (1,407,461)
(Increase) decrease in other assets 70,606 21,746 108,476 (26,814)
Increase (decrease) in accounts payable and accrued liabilities 342,708 343,578 (602,146) 1,741,384
------------ ------------ ------------- ---------------
Net cash (used in) operating activities $ (6,117,096) $ (7,736,211) $ (10,172,069) $ (50,794,142)
============= ============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1999
----------------
(1) Nature of business and funding:
-------------------------------
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 "SCE"), the
Company's 55% owned joint venture in Shanghai, China, was established in 1995 to
produce and market Magicom (R) 2000 for the Company.
Funding and Management's Plans
------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily through the proceeds from sales of its common stock in its
initial public offering, in private placements, upon exercise of warrants issued
in connection with the private placements and public offering, and upon the
exercise of stock options. The Company is hopeful that with both the development
of its new products and its increased marketing efforts, it will procure enough
sales throughout fiscal 2000 to emerge from the development stage. However,
there can be no assurance that the Company will be able to do so.
The Company's operations used approximately $6,117,000 in cash during fiscal
1999. As of October 31, 1999, working capital included approximately $2,076,000
of cash and marketable securities and approximately $955,000 (net of
approximately $862,000 due to SCE) of accounts payable and accrued liabilities.
The Company believes that these resources and other sources of cash flows will
be sufficient to enable it to continue in operation until at least the end of
fiscal 2000, after giving effect to certain reductions in operating expenses, as
necessary. As of January 27, 2000, the Company had approximately $2,000,000 in
cash and marketable securities. This balance reflects, in part, the proceeds
from both the exercise of stock options and private placement stock sales, and
non-refundable sales of products.
The Company is seeking to improve its liquidity through increased sales of its
products. The Company may also seek to improve its liquidity through sales of
its common stock. There can be no assurance that any of these plans will
materialize at terms that will be favorable to the Company.
The Company has had limited sales to dealers, distributors and end-users since
its inception, and during fiscal 1999 has recognized revenue of approximately
$47,000 on fiscal 1999 sales. Despite the foregoing, there can be no assurance
that the Company will generate significant revenues in the future (through sales
or otherwise), that the Company will have sufficient revenues to generate a
profit, or that other products will not be produced by other companies that will
render the products of the Company obsolete.
The National Association of Securities Dealers, Inc. ("NASD") requires that the
Company maintain a minimum of $4,000,000 of net tangible assets to maintain its
Nasdaq National Market listing, and a minimum bid price of at least $1.00 per
share in order to maintain its Nasdaq listing. The Company anticipates that it
will seek additional sources of funding, when necessary, to satisfy such
requirements or for other purposes. There can be no assurance that such funding,
if required, will be obtained. The Company's estimated funding capacity
indicated above assumes, although there is no assurance, that the waiver of
salary and pension benefits by the Chairman of the Board, the President and
certain senior level personnel, will continue (Note 8).
F-10
<PAGE>
Realizability of Assets
-----------------------
During the fiscal year ended October 31, 1999, the Company increased its
inventory to approximately $4,539,000 to prepare for the distribution of its
products. 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.
Inaddition, the Company's advances to SCE have funded the purchase of inventory
components to manufacture the Magicom(R) 2000. Due to the uncertainty of
realizing the amounts due from SCE, the Company has reserved for approximately
$1,407,000 of this amount, which is shown net in the accompanying financial
statements.
Inaccordance 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 has recognized a permanent impairment charge in the amount of
$85,172 on its previously recorded investment in Joint Venture, due to the
uncertainty of SCE generating enough future undiscounted cash flows to cover the
carrying amount of the investment.
Product Development
-------------------
The Company has received 204 patents, including those from the United States and
certain foreign patent offices, expiring at various dates between 2005 and 2017.
At the present time, additional patent applications are pending with the United
States and certain foreign patent offices. The foregoing patents are related to
the design, structure and methods of construction of the E-PaperTM Flat Panel
Display, methods of operating the E-PaperTM Flat Panel Display, particle
generation, applications using the E-PaperTM Flat Panel Display, and new
applications for its encryption products. The Company also has filed or is
planning to file patent applications for its solid state, optical and thin film
video color flat panel display technologies currently under development, for its
coated particles, its USS-900 technology and for its simplified E-Paper(TM) Flat
Panel Display. There can be no assurance that patents will be obtained for any
of the pending applications; however, the Company has been advised by its patent
counsel that in their opinion the subject matter of the pending applications
contains patentable material. In addition, there can be no assurance that any
patents held or obtained will protect the Company against competitors either
with or without litigation. The Company is not aware that any of its products
are infringing upon the patents of others. There can be no assurance, however,
that other products developed by the Company, if any, will not infringe upon the
patents of others, or that the Company and SCE will not have to obtain licenses
under the patents of others. The Company believes that the foregoing patents are
significant to the future operations of the Company.
During 1995, the Company signed a joint venture contract (the "Joint Venture
Contract") to form a joint venture in Shanghai, China with a 20-year duration.
With this agreement, SCE was formed with the Company owning a 55% share in
capital, profits and losses. The remaining 45% is owned by two Chinese
companies. Reference is made to Note 3 for a further discussion regarding SCE.
Pursuant to a certain Technology License Agreement entered into on the same date
as the Joint Venture Contract, the Company has licensed its flat panel
application technology to SCE for exclusive use in China. The Company is solely
authorized to market Joint Venture products outside of China. Additional
capitalization, if necessary, may be financed through a combination of third
party borrowings and equity investments contributed by the Company and its Joint
Venture partners in proportion to their respective equity interests and on terms
to be agreed upon.
The success and profitability of the Company's products will depend upon many
factors, many of which are beyond its 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, 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.
F-11
<PAGE>
(2) Summary of significant accounting policies:
-------------------------------------------
Revenue recognition-
--------------------
The Company recognizes revenue upon final customer acceptance of its delivered
product. At the present time, the Company defines final customer acceptance
based upon the non-refundable payment of its product sales.
Cash equivalents-
-----------------
Cash equivalents consist of investments that are readily convertible into cash
and have original maturities of three months or less.
Marketable securities-
----------------------
The Company accounts for investments in marketable securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under SFAS No. 115, the Company is required to classify each
investment in marketable securities in one of three categories: trading,
available-for-sale, or held-to-maturity. The Company's investments at October
31, 1999, were classified as held-to-maturity as the Company has the ability and
intent to hold these securities until they mature. As such, in accordance with
SFAS No. 115, these investments are presented in the accompanying balance sheet
at cost as of October 31, 1999. Accrued interest income related to these
investments are included in earnings for the year ended October 31, 1999. As of
October 31, 1998, the Company held no marketable securities.
Inventories-
------------
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market, which represents the Company's best estimate of market value.
Property and equipment-
-----------------------
Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets, primarily five years.
Research and development costs-
-------------------------------
Research and development costs incurred by the Company are included in selling,
general and administrative expenses in the year incurred.
F-12
<PAGE>
Income taxes-
-------------
The Company recognizes deferred tax assets and liabilities for the estimated
future tax effects of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Net (loss) per share of common stock-
-------------------------------------
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
In accordance with SFAS 128, basic net (loss) per common share ("Basic EPS") is
computed by dividing net (loss) by the weighted average number of common shares
outstanding. Diluted net (loss) per common share ("Diluted EPS") is computed by
dividing net (loss) by the weighted-average number of common shares and dilutive
common share equivalents and convertible securities then outstanding. SFAS No.
128 requires the presentation of both Basic EPS and Diluted EPS on the face of
the statements of operations. Diluted EPS for all years presented is the same as
Basic EPS, as the inclusion of the impact of common stock equivalents then
outstanding would be anti-dilutive.
Recent accounting pronouncements-
---------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999 (subsequently amended by SFAS No. 137, to be effective for
all fiscal years beginning after June 15, 2000) and will not require retroactive
restatement of prior period financial statements. This statement requires the
recognition of all derivative instruments as either assets or liabilities in the
balance sheet, measured at fair value. Derivative instruments will be recognized
as gains or losses in the period of change. If certain conditions are met where
the derivative instrument has been designated as a fair value hedge, the hedge
items may also be marked to market through earnings, thus creating an offset. If
the derivative is designed and qualifies as a cash flow hedge, the changes in
fair value of the derivative instrument may be recorded in comprehensive income.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its financial position or results of operations as the Company does
not presently make use of derivative instruments.
Use of estimates-
-----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications-
------------------
Certain prior year amounts have been reclassified to conform with the current
year presentation.
F-13
<PAGE>
(3) Investment in Joint Venture:
----------------------------
Due to the uncertainty of realizability of its investment, the Company has
recognized in fiscal 1999 a permanent impairment charge of approximately $85,000
against the carrying value of this investment. Any additional investments in SCE
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 SCE, and
technology that has been valued for purposes of the Joint Venture at $700,000.
SCE does not reflect the $700,000 in technology as an asset or equity investment
in the condensed financial statements presented below. The other parties to the
Joint Venture have contributed cash aggregating $1,575,000.
<TABLE>
<CAPTION>
Condensed financial information for SCE as of October 31, 1999 and 1998 and for
the three years ended October 31, 1999, is as follows:
Condensed Balance Sheets 1999 1998
------------------------ ---- ----
<S> <C> <C>
Cash $ 17,793 $ 51,760
Due from CopyTele, Inc. 861,611 661,592
Inventories 1,574,315 3,568,202
Other current assets 5,812 68,581
Land occupancy rights, net of amortization; fixed assets, net of
depreciation, and other non-current assets 1,928,121 2,105,583
------------- -------------
Total Assets $ 4,387,652 $ 6,455,718
============= =============
Short-term loans $ 1,080,268 $ 999,316
Accounts payable and accrued liabilities 310,726 338,052
Due to CopyTele, Inc. 2,269,072 3,916,628
Capital 727,586 1,201,722
------------- -------------
Total Liabilities and Capital $ 4,387,652 $ 6,455,718
============= =============
Condensed Statements of Operations 1999 1998 1997
---------------------------------- ---- ---- ----
Net Sales $ - $ - $ -
Operating (Loss) (399,781) (629,578) (599,299)
Other (Expense) (74,355) (56,275) (10,503)
-------------- ------------- -------------
Net (Loss) $ (474,136) $ (685,853) $ (609,802)
============== ============= =============
</TABLE>
The short-term loans from a Chinese bank bear interest at floating rates of
approximately 5.86% to 7.13% per annum at October 31, 1999. These loans will
mature in February 2000 and April 2000 and are secured by a land-use contract
and building owned by SCE. An additional short-term loan of approximately
$120,000 was obtained in November 1998, bearing a floating interest rate of
approximately 5.86% and maturing in May 2000, of which approximately $80,000
remains outstanding as of October 31, 1999.
The cumulative net loss incurred by SCE since its inception (April 10, 1995) is
$(2,072,414).
F-14
<PAGE>
(4) Shareholders' Equity:
---------------------
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.
As of October 31, 1999, all of the warrants to purchase shares of common stock
issued and outstanding were exercisable. At October 31, 1998, there were no
outstanding warrants.
Stock splits-
-------------
On October 4, 1985, the Company declared a three-for-one stock split, effected
in the form of a 200% stock dividend, payable on November 8, 1985 to
shareholders of record as of October 15, 1985.
On August 13, 1987, the Company declared a five-for-four stock split, effected
in the form of a 25% stock dividend, payable on September 15, 1987 to
shareholders of record as of August 31, 1987.
On February 12, 1991, the Company declared a two-for-one stock split, effected
in the form of a 100% stock dividend, payable on March 18, 1991 to shareholders
of record as of February 25, 1991.
On May 24, 1996 the Company declared a two-for-one stock split, effected in the
form of a 100% stock dividend, payable on June 17, 1996 to shareholders of
record as of June 4, 1996.
The weighted average number of shares outstanding and net loss per share amounts
in the accompanying financial statements have been restated to reflect these
stock splits.
Preferred stock-
----------------
On May 29, 1986, the Company's shareholders authorized 500,000 shares of
preferred stock with a par value of $100 per share. The shares of preferred
stock may be issued in series at the direction of the Board of Directors, and
the relative rights, preferences and limitations of such shares will all be
determined by the Board of Directors.
Stock option plans-
-------------------
The Company has two stock option plans: the 1987 Stock Option Plan (the "1987
Plan"), adopted by the Board of Directors on April 1, 1987, and the CopyTele,
Inc. 1993 Stock Option Plan (the "1993 Plan"), adopted by the Board of Directors
on April 28, 1993.
F-15
<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 ("APB")Opinion No. 25, "Accounting for
Stock Issued to Employees." 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 have been made at the fair market value of the
Company's stock on the date of grant.
Had compensation cost for these plans been determined at fair value, consistent
with SFAS No. 123, the Company's net loss and net loss per share would have
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Year Ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Basic and Diluted
Net (Loss): As Reported $ (8,465,016) $ (7,135,954) $ (5,800,575)
Pro Forma $ (10,560,690) $ (11,041,940) $ (15,706,850)
Basic and Diluted
Net (Loss) Per Share: As Reported $(.14) $(.12) $(.10)
Pro Forma $(.18) $(.19) $(.27)
</TABLE>
Options granted to non-employee consultants are accounted for using the
fair-value method required by SFAS No. 123. Compensation expense for consultants
recognized in the years ended October 31, 1999 and 1998 was $61,650 and
$189,600, respectively, was measured at the vesting date upon the Company's
determination of performance commitment achievement and is included in selling,
general and administrative expenses on the accompanying statements of
operations. No such costs were incurred in the year ended October 31, 1997.
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used for grants for the years ended October 31, 1999 and 1998,
respectively: risk free interest rates of 5.50%; expected dividend yields of 0%;
expected lives of 3.53 and 3.23 years; and expected stock price volatility of
78% and 69%. The weighted-average fair value of options granted under SFAS No.
123 for the years ended October 31, 1999 and 1998 was $1.46 and $1.47,
respectively.
In May 1987, the Company's shareholders approved the 1987 Plan which, after
giving consideration to the five-for-four and the two two-for-one stock splits,
as well as an amendment approved by shareholders in May 1990 to increase the
number of shares issuable under the 1987 Plan, provided for the granting of
stock options to purchase 9,000,000 shares of common stock of the Company. The
1987 Plan provided for the granting of incentive stock options to key employees,
and nonqualified stock options to key employees, consultants and directors of
the Company. The option prices were determined by the Board of Directors, but
with respect to incentive stock options, the option price could not be less than
the fair market value at the date of grant. The stock options are exercisable
over a period not to exceed 10 years, also as determined by the Board of
Directors. In July 1992, the Company registered the shares of common stock
covered by the 1987 Plan. Upon approval of the 1993 Plan by the Company's
shareholders in July 1993, the 1987 Plan was terminated with respect to the
grant of future options.
F-16
<PAGE>
Information regarding the 1987 Plan for the three years ended October 31, 1999
is as follows:
<TABLE>
<CAPTION>
Current Weighted
Average Exercise
Shares Price Per Share
<S> <C> <C>
Shares Under Option at October 31, 1996 754,360 $4.75
Exercised (68,200) $2.93
--------------
Shares Under Option at October 31, 1997 686,160 $4.93
Expired (37,600) $2.47
--------------
Shares Under Option and Exercisable at October 31, 1998 648,560 $5.08
Expired (67,760) $5.00
--------------
Shares Under Option and Exercisable at October 31, 1999 580,800 $5.09
==============
</TABLE>
The following table summarizes information about stock options outstanding under
the 1987 Plan as of October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------
Number Weighted Average Weighted Number Weighted
Outstanding remaining Average Exercisable Average
Exercise Prices at 10/31/99 Contractual Life Exercise Price at 10/31/99 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.09 120,000 0.04 3.09 120,000 3.09
$4.25 6,800 1.79 4.25 6,800 4.25
$5.63 454,000 4.32 5.63 454,000 5.63
</TABLE>
The exercise price with respect to all of the options granted under the 1987
Plan since its inception, was at least equal to the fair market value of the
underlying common stock at the date of grant. As of October 31, 1999, all of the
options to purchase shares of common stock granted and outstanding under the
1987 Plan were exercisable.
On July 14, 1993, the Company's shareholders approved the 1993 Plan, which had
been adopted by the Company's Board of Directors on April 28, 1993. The 1993
Plan was amended as of May 3, 1995 and May 10, 1996 to, among other things,
increase the number of shares of the Company's common stock available for
issuance thereunder from 6,000,000 to 20,000,000, after giving consideration to
the two-for-one stock split in 1996. Incentive stock options and stock
appreciation rights may be granted to key employees, and nonqualified stock
options and stock appreciation rights may be granted to key employees and
consultants of the Company. As amended, nonqualified stock options to purchase
40,000 shares of common stock will be granted annually to each re-elected
non-employee director of the Company and 20,000 shares to each newly elected
non-employee director. The 1993 Plan is administered by the Stock Option
Committee, which determines the option price, term and provisions of each
option; however, the purchase price of shares issuable upon the exercise of
incentive stock options will not be less than the fair market value of such
shares and incentive stock options will not be exercisable for more than 10
years.
F-17
<PAGE>
Information regarding the 1993 Plan for the three years ended October 31, 1999
is as follows:
<TABLE>
<CAPTION>
Current Weighted
Average Exercise
Shares Price Per Share
<S> <C> <C>
Shares Under Option at October 31, 1996 9,174,860 $5.32
Granted 2,905,500 $4.73
Exercised (274,500) $3.87
Canceled (265,500) $5.87
------------
Shares Under Option at October 31, 1997 11,540,360 $5.19
----------
Granted 2,758,000 $2.82
Canceled (400,000) $5.02
Expired (184,000) $6.16
Exercised (10,000) $2.81
------------
Shares Under Option at October 31, 1998 13,704,360 $4.71
----------
Granted 2,421,000 $1.46
Canceled (1,938,000) $5.34
Expired (50,000) $5.37
Exercised (886,200) $1.53
------------
Shares Under Option at October 31, 1999 13,251,160 $4.22
----------
Options Exercisable at October 31, 1999 12,424,160 $4.44
==========
</TABLE>
The following table summarizes information about stock options outstanding under
the 1993 Plan as of October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- ---------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding remaining Average Exercisable Average
Exercise Prices at 10/31/99 Contractual Life Exercise Price at 10/31/99 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.31 to $3.38 5,203,800 6.98 $2.49 4,376,800 $2.70
$3.63 to $5.75 5,631,360 6.14 $4.75 5,631,360 $4.75
$6.38 to $6.88 2,416,000 4.36 $6.78 2,416,000 $6.78
</TABLE>
The exercise price with respect to all of the options granted under the 1993
Plan since its inception, was at least equal to the fair market value of the
underlying common stock at the grant date. As of October 31, 1999, 783,000
options were available for future grants under the 1993 Plan.
In December 1998, the Company cancelled and reissued 1,566,500 options to
purchase the Company's common stock pursuant to the 1993 Plan, at the then
current fair market value.
During the period from November 1, 1999 through January 27, 2000, there were
cancellations of 750,200 options under the 1993 Plan. The Company also granted
an additional 1,490,000 options to purchase the Company's common stock pursuant
to the 1993 Plan during the period from November 1, 1999 through January 27,
2000.
From November 1, 1999 through January 27, 2000, options to purchase 640,000
shares of the Company's common stock were exercised for an aggregate amount of
approximatly $540,000.
F-18
<PAGE>
(5) Commitments and contingencies:
------------------------------
Leases-
-------
The Company leases space at its principal location for office and laboratory
research facilities. The current lease is for approximately 11,200 square feet
and expires on November 30, 2001. The lease contains base rentals of
approximately $201,000 per annum with a 3% annual increase and an escalation
clause for increases in certain operating costs. The Company has the right to
cancel a portion of the lease as of November 30, 2000. This lease does not
contain provisions for its renewal.
In February 1996, the Company entered into a five-year lease for approximately
2,300 square feet of office space. The lease expires on June 30, 2001 and is
non-renewable. The base rent for the remaining term is approximately $56,000 per
annum.
In October 1996, the Company entered into a lease for approximately 2,000 square
feet of office and laboratory space near its principle offices. In May 1997,
this lease was modified to add an additional facility of approximately 5,000
square feet of rental space and to extend the lease to June 30, 2000. The
modified lease provided for escalating base rents of approximately $46,000,
$48,000 and $50,000, respectively, for each year beginning July 1, 1997, and an
escalation clause for increases in certain operating costs.
Rent expense for the years ended October 31, 1999, 1998, 1997 and for the period
from inception (November 5, 1982) to October 31, 1999, was approximately
$313,000, $287,000, $269,000 and $2,424,000, respectively.
(6) Employee pension plan:
----------------------
The Company adopted a noncontributory defined contribution pension plan,
effective November 1, 1983, covering all of its present employees.
Contributions, which are made to a trust, are based upon specified percentages
of compensation, as defined in the plan. Pension cost, which was approximately
$137,000, $123,000 and $102,000 and $805,000 for the fiscal years ended October
31, 1999, 1998, 1997 and for the period from the inception of the plan to
October 31, 1999, respectively, has been accrued and funded on a current basis.
(7) Income taxes:
-------------
At October 31, 1999, the Company had tax net operating loss and tax credit
carryforwards of approximately $72,210,000 and $1,635,000, respectively,
available, within statutory limits (expiring at various dates between 2000 and
2019), to offset any future regular Federal corporate taxable income and taxes
payable. The principle differences between the net loss for financial statement
purposes and the tax net operating loss attributable to the year ended October
31, 1999, were nondeductible expenses for tax purposes of joint venture
receivable reserves and impairment. If the tax benefits relating to deductions
of option holders' income are ultimately realized, those benefits will be
credited directly to additional paid-in capital. Certain changes in stock
ownership can result in a limitation on the amount of net operating loss and tax
credit carryovers that can be utilized each year.
The Company had tax net operating loss and tax credit carryforwards of
approximately $63,706,000 and $124,000, respectively, at October 31, 1999,
available, within statutory limits, to offset future New York State corporate
taxable income and taxes payable, if any, under certain computations of such
taxes. The tax net operating loss carryforwards expire at various dates between
2000 and 2014 and the tax credit carryforwards expire between 2000 and 2009.
Deferred tax benefits at October 31, 1999 and 1998, which are fully offset by
valuation allowances, primarily represent the estimated future tax effects of
Federal and State net operating loss and tax credit carryforwards aggregating
approximately $33,026,000 and $30,910,000, respectively.
During the period from inception (November 5, 1982) to October 31, 1999, the
Company incurred no Federal and no material State income taxes.
F-19
<PAGE>
(8) Selling, general and administrative expenses:
---------------------------------------------
While there is no formal agreement, the Company's Chairman of the Board and its
President waived any and all rights to receive salary and related pension
benefits for an undetermined period of time beginning November 1985. The
aggregate annual expenses for these individuals at the time of such waivers were
approximately $325,000.
Four other individuals, including an officer and three senior level personnel
then employed at the Company, waived salary and related pension benefits from
January 1987 through December 1990. While there are no formal agreements,
commencing January 1991, these individuals waived such rights for an
undetermined period of time and did not receive salary or related pension
benefits through December 1992. The Company's Chairman of the Board, its
President, and the three senior level personnel, continued to waive such rights
beginning 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 aggregate annual expenses for these five individuals, then
employed at the Company, at the time of their respective initial waivers were
approximately $440,000. The Company does not anticipate the retroactive
reinstatement of any of the salary or related pension benefit waivers indicated
above. F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To CopyTele, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of CopyTele, Inc. included in this filing and have issued
our report thereon dated January 27, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of valuation and qualifying accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/S/ ARTHUR ANDERSEN LLP
Melville, New York
January 27, 2000
F-21
<PAGE>
SCHEDULE II
- -----------
COPYTELE, INC
-------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
(rounded to the nearest thousand)
---------------------------------
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
-------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
- ------------------------------------------------------------------------------------------------------------------
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions end of period
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1999
----
Reserve on amounts due
from Joint Venture $ - $1,407,000 $ - $ 1,407,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998
----
Reserve on amounts due
from Joint Venture $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1997
----
Reserve on amounts due
from Joint Venture $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
F-22
<PAGE>
Exhibit 10.13
-------------
THE SECURITIES REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT, OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT IS AVAILABLE.
COPYTELE, INC.
--------------
STOCK SUBSCRIPTION AGREEMENT
----------------------------
This Stock Subscription Agreement (this "Agreement"), dated as of August 30,
1999, is entered into by and between CopyTele, Inc., a Delaware corporation (the
"Company"), and Lewis H. Titterton (the "Subscriber").
The Company has offered for sale, and the Subscriber has agreed to purchase,
200,000 shares (the "Shares") of common stock, par value $.01 per share (the
"Common Stock"), of the Company and a Warrant (the "Warrant") to purchase
200,000 shares of Common Stock (the "Warrant Shares"). In connection therewith,
the Company and the Subscriber hereby agree as follows:
1. Purchase and Sale of Shares.
----------------------------
Upon the basis of the representations and warranties, and subject to the terms
and conditions, set forth herein, the Company agrees to issue and sell the
Shares and the Warrant to the Subscriber on the Closing Date (as hereinafter
defined) at a purchase price of $1.00 per share of Common Stock, or an aggregate
purchase price of $200,000 (the "Subscription Price"), and the Subscriber agrees
to purchase the Shares and the Warrant from the Company on the Closing Date at
the Subscription Price.
2. Closing.
--------
The closing of the purchase and sale of the Shares shall take place at 10:00
a.m., New York City time, on September 8, 1999, at the offices of the Company at
900 Walt Whitman Road, Huntington, New York 11746, or on such other date or at
such other time or place as the Company and the Subscriber may agree upon in
writing (such time and date of the closing being referred to herein as the
"Closing Date"). Upon payment of the Subscription Price in full in the form of
cash or certified or bank check payable to the order of the Company, the Company
will deliver to the Subscriber as promptly as practicable (but in no event later
than fifteen (15) days following the date of payment in full of the Subscription
Price) (i) a certificate or certificates representing the Shares, registered in
the name of the Subscriber, and (ii) a Warrant granting the Subscriber the right
to purchase the Warrant Shares at the purchase price per share of $1.00,
expiring two (2) years following the Closing Date, in the form attached hereto
as Exhibit A, the terms and conditions of which are agreed to by the Subscriber.
1
<PAGE>
3. Representations and Warranties of the Company.
-------------------------------------------------
The Company represents and warrants
that:
(a) no consent, approval, authorization or order of any court, governmental
agency or body or arbitrator having jurisdiction over the Company or any of the
Company's affiliates is required for the execution of this Agreement or the
performance of the Company's obligations hereunder, including, without
limitation, the sale of the Shares to the Subscriber;
(b) neither the sale of the Shares and the Warrant nor the performance of the
Company's other obligations pursuant to this Agreement will violate, conflict
with, result in a breach of, or constitute a default (or an event that, with the
giving of notice or the lapse of time or both, would constitute a default) under
(i) the certificate of incorporation or bylaws of the Company, (ii) any decree,
judgment, order or determination of any court, governmental agency or body, or
arbitrator having jurisdiction over the Company or any of the Company's
properties or assets, (iii) any law, treaty, rule or regulation applicable to
the Company (other than the federal securities laws, representations and
warranties with respect to which are made by the Company solely in paragraphs
(f) through (j) of this Section 3) or (iv) the terms of any bond, debenture,
note or other evidence of indebtedness, or any agreement, stock option or other
similar plan, indenture, lease, mortgage, deed or trust or other instrument to
which the Company is a party or otherwise bound or to which any property of the
Company is subject;
(c) the Company has or, prior to the Closing, will have taken all corporate
action required to authorize the execution and delivery of this Agreement and
the performance of its obligations hereunder;
(d) the Company has duly authorized the Shares and the Warrant Shares and, when
issued and delivered in accordance with the terms of the Company's certificate
of incorporation and delivered to and paid for by the Subscriber in accordance
with the terms hereof and the Warrant, respectively, the Shares and the Warrant
Shares will be duly and validly issued, fully paid and non-assessable, and the
issuance of the Shares and the Warrant Shares will not be subject to any
preemptive or similar rights;
(e) the Shares and the Warrant Shares will be free and clear of any security
interest, lien, claim or other encumbrance;
(f) the sale of the Shares and the Warrants by the Company are not part of a
plan or scheme to evade the registration requirements of the Securities Act of
1933, as amended (the "Act");
2
<PAGE>
(g) neither the Company nor any person acting on behalf of the Company has
offered or sold any of the Shares or the Warrant by any form of general
solicitation or general advertising;
(h) the Company has offered the Shares and the Warrant for sale only to
"accredited investors," as such term is defined in Rule 501(a) under the Act,
who by reason of their business and financial experience have such knowledge,
sophistication and experience in business and financial matters as to be capable
of evaluating the merits and risks of the investment in the Shares, the Warrant
and the Warrant Shares;
(i) the Company's Annual Report on Form 10-K (the "Form 10-K") for the fiscal
year ended October 31, 1998 fairly and accurately presents the Company's
business as of the date thereof and its financial condition and results of
operation through October 31, 1998, and the Form 10-K does not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(j) the financial statements of the Company included in the Form 10-K, including
the schedules and notes thereto, comply in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended, and have been
prepared, and fairly present the financial condition and results of operations
and cash flows of the Company and its subsidiaries at the respective dates and
for the respective periods indicated, in accordance with generally accepted
accounting principles consistently applied throughout such periods; and
(k) except as set forth in the Form 10-K, since October 31, 1998 (i) the Company
has not incurred any material liabilities, direct or contingent, and (ii) there
has been no material adverse change in the properties, business, results of
operations, condition (financial or other), affairs or prospects of the Company
and its subsidiaries, taken as a whole.
The Company has not made any representations or warranties to the Subscriber,
and the Subscriber has not relied upon any representations or warranties of the
Company, except as expressly set forth in this Section 3.
3
<PAGE>
4. Representations and Warranties of the Subscriber.
------------------------------------------------------
The Subscriber represents and
warrants that:
(a) the purchase of the Shares and the Warrant by the Subscriber is not part of
a plan or scheme to evade the registration requirements of the Act;
(b) the Subscriber is an "accredited investor," as such term is defined in Rule
501(a) under the Act, who by reason of its business and financial experience has
such knowledge, sophistication and experience in business and financial matters
as to be capable of evaluating the merits and risks of the investment in the
Shares, the Warrant and the Warrant Shares and, having had access to or having
been furnished with all such information as it has considered necessary
(including, without limitation, the Form 10-K), has concluded that it is able to
bear those risks;
(c) the Subscriber understands that (i) the Shares, the Warrant and the Warrant
Shares have not been registered under the Act and may not be offered or sold
unless registered under the Act or an exemption from the registration
requirements of the Act is available, (ii) if any transfer of the Shares, the
Warrant or the Warrant Shares is to be made in reliance on an exemption under
the Act, the Company may require an opinion of counsel satisfactory to it that
such transfer may be made pursuant to such exemption and (iii) so long as deemed
appropriate by the Company, the Shares, the Warrant and the Warrant Shares may
bear a legend to the effect of clauses (i) and (ii) of this paragraph;
(d) in making any subsequent offering or sale of the Shares, the Subscriber will
be acting only for itself and not as part of a sale or planned distribution in
violation of the Act;
(e) the Shares and Warrant were not offered to the Subscriber by any form of
general solicitation or general advertising;
(f) the Subscriber understands that no federal or state or other governmental
agency has passed upon or made any recommendation or endorsement with respect to
the Shares, the Warrant or the Warrant Shares;
(g) the Subscriber is purchasing the Shares and the Warrant, and will acquire
the Warrant Shares, for its own account and not with a view to, or for sale in
connection with, any distribution;
(h) during the period of five (5) business days immediately prior to the
execution of this Agreement by the Subscriber, Subscriber did not, and from such
date and through the expiration of the 90th day following the date hereof will
not, directly or indirectly, execute or effect or cause to be executed or
effected any short sale, option, or equity swap transaction in or with respect
to the Common Stock or any other derivative security transaction the purpose or
effect of which is to hedge or transfer to a third party all or any part of the
risk of loss associated with the ownership of the Shares, the Warrant or the
Warrant Shares by the Subscriber; and
4
<PAGE>
(i) no consent, approval, authorization or order of any court, governmental
agency or body or arbitrator having jurisdiction over the Subscriber or any of
the Subscriber's affiliates is required for the execution of this Agreement or
the performance of the Subscriber's obligations hereunder, including, without
limitation, the purchase of the Shares and the Warrant by the Subscriber.
5. Conditions to Closing.
----------------------
The obligations of each party hereunder shall be subject to (a) the accuracy of
the representations and warranties of the other party hereto as of the date
hereof and as of the Closing Date, as if such representations and warranties had
been made on and as of such date, (b) the performance by the other party of its
obligations hereunder and (c) the condition that Les Appel, counsel to the
Subscriber, shall have delivered on or prior to the Closing Date an opinion to
the effect that the sale of the Shares and the Warrant pursuant to, and in the
manner contemplated by, this Agreement does not require registration under the
Act, which opinion shall be acceptable to the Company's transfer agent for the
Shares. The Company and the Subscriber hereby acknowledge that Les Appel,
counsel to the Subscriber, will rely on the accuracy and truth of the
representations and warranties of the Company and the Subscriber in Section 3
and Section 4, respectively, and hereby, consent to such reliance by such
counsel.
6. Indemnification.
----------------
(a) The Company agrees to indemnify and hold harmless the Subscriber, each
person, if any, who controls the Subscriber within the meaning of Section 15 of
the Act and each officer, director, employee and agent of the Subscriber and of
any such controlling person against any and all losses, liabilities, claims,
damages or expenses whatsoever, as incurred, arising out of or resulting from
any breach or alleged breach or other violation or alleged violation of any
representation, warranty, covenant or undertaking by the Company contained in
this Agreement, and the Company will reimburse the Subscriber for its reasonable
legal and other expenses (including the cost of any investigation and
preparation, and including the reasonable fees and expenses of counsel) incurred
in connection therewith.
(b) The Subscriber agrees to indemnify and hold harmless the Company, each
person, if any, who controls the Company within the meaning of Section 15 of the
Act and each officer, director, employee and agent of the Company and of any
such controlling person against any and all losses, liabilities, claims, damages
or expenses whatsoever, as incurred, arising out of or resulting from any breach
or alleged breach or other violation or alleged violation of any representation,
warranty, covenant or undertaking by the Subscriber contained in this Agreement,
and the Subscriber will reimburse the Company for its reasonable legal and other
expenses (including the cost of any investigation and preparation, and including
the reasonable fees and expenses of counsel) incurred in connection therewith.
5
<PAGE>
7. Survival of Representations and Warranties.
--------------------------------------------
The respective agreements, representations, warranties, indemnities and other
statements made by or on behalf of each party hereto pursuant to this Agreement
shall remain in full force and effect, regardless of any investigation made by
or on behalf of any party, and shall survive delivery of any payment for the
Shares and the Warrant.
8. Miscellaneous.
--------------
(a) This Agreement may be executed in one or more counterparts, and such
counterparts shall constitute but one and the same agreement.
(b) This Agreement shall inure to the benefit of and be binding upon the parties
hereto, their respective successors and, with respect to the indemnification
provisions hereof, each person entitled to indemnification hereunder, and no
other person shall have any right or obligation hereunder. This Agreement shall
not be assignable by any party hereto without the prior written consent of the
other party hereto. Any assignment contrary to the terms hereof shall be null
and void and of no force or effect.
(c) This Agreement represents the entire understanding and agreement between the
parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by written
instrument making specific reference to this Agreement signed by the party
against whom enforcement of any such amendment, supplement, modification or
waiver is sought.
9. Time of the Essence.
--------------------
Time shall be of the essence in this Agreement.
10. Governing Law.
---------------
This Agreement shall be governed by the internal laws of the State of New York.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Subscription
Agreement to be executed and delivered as of the date first written above.
COPYTELE, INC.
By: Denis A. Krusos
---------------------
Name: Denis A. Krusos
Title: Chairman of the Board and
Chief Executive Officer
SUBSCRIBER:
Lewis H. Titterton
-------------------------
Name: Lewis H. Titterton
7
<PAGE>
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR
ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant to Purchase Expiration: September 8, 2001
------------------
200,000 Shares
---------------
-----------------------------
COPYTELE, INC.
COMMON STOCK PURCHASE WARRANT
-----------------------------
This certifies that, for good and valuable consideration, CopyTele, Inc., a
Delaware corporation (including any successor thereto with respect to the
obligations hereunder, by merger, consolidation or otherwise, the "Company"),
grants to Lewis Titterton or permitted assigns (the "Warrantholder"), the right
to subscribe for and purchase, in whole or in part, from time to time from the
Company 200,000 duly authorized, validly issued, fully paid and nonassessable
shares (the "Warrant Shares") of the Company's Common Stock, par value $.01 per
share (the "Common Stock"), at the purchase price per share of $ 1.00 (the
"Exercise Price") at any time prior to 5:00 p.m., New York time on the
Expiration Date, all subject to the terms, conditions and adjustments herein set
forth. The terms that are capitalized herein shall have the meanings specified
in Section 10 hereof, unless the context shall otherwise require.
1. Duration and Exercise of Warrant; Limitation on Exercise; Payment of Taxes.
--------------------------------------------------------------------------
1.1. Duration and Exercise of Warrant.
------------------------------------
Subject to the terms and conditions set forth herein, this Warrant may be
exercised, in whole or in part, by the Warrantholder by:
(a) the surrender of this Warrant to the Company, with a duly executed Exercise
Form specifying the number of Warrant Shares to be purchased, during normal
business hours on any Business Day prior to the Expiration Date; and
(b) the delivery of payment to the Company of the Exercise Price for the number
of Warrant Shares specified in the Exercise Form in the form of cash or
certified or bank check payable to the order of the Company.
The Company agrees that such Warrant Shares shall be deemed to be issued to the
Warrantholder as the record holder of such Warrant Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for the Warrant Shares as aforesaid. Notwithstanding the foregoing,
no such surrender shall be effective to constitute the person entitled to
receive such shares as the record holder thereof while the transfer books of the
Company for the Common Stock are closed for any purpose (but not for any period
in excess of five days); but any such surrender of this Warrant for exercise
during any period while such books are so closed shall become effective for
exercise immediately upon the reopening of such books, as if the exercise had
been made on the date this Warrant was surrendered and for the number of shares
of Common Stock and at the Exercise Price in effect at the date of such
surrender. This Warrant and all rights and options hereunder shall expire on the
Expiration Date, and shall be wholly null and void to the extent this Warrant is
not exercised before it expires.
8
<PAGE>
1.2. Warrant Shares Certificate.
---------------------------
A stock certificate or certificates for the Warrant Shares specified in the
Exercise Form shall be delivered to the Warrantholder within 10 Business Days
after receipt of the Exercise Form by the Company and payment of the purchase
price. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the stock certificate or certificates, deliver
to the Warrantholder a new Warrant evidencing the rights to purchase the
remaining Warrant Shares, which new Warrant shall in all other respects be
identical with this Warrant.
1.3. Payment of Taxes.
----------------
The issuance of certificates for Warrant Shares shall be made without charge to
the Warrantholder for any stock transfer or other issuance tax in respect
thereto; provided, however, that the Warrantholder shall be required to pay any
and all taxes that may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Warrantholder as reflected upon the books of the Company.
2. Restrictions on Transfer; Restrictive Legends.
---------------------------------------------
2.1. Limitation on Transfer.
-------------------------
No Warrantholder shall, directly or indirectly, sell, give, assign, hypothecate,
pledge, encumber, grant a security interest in or otherwise dispose of (whether
by operation of law or otherwise) (each a "transfer") this Warrant or any right,
title or interest herein or hereto, except in accordance with the provisions of
this Warrant. Any attempt to transfer this Warrant or any rights hereunder in
violation of the preceding sentence shall be null and void ab initio and the
Company shall not register any such transfer.
2.2. Transfer Procedures.
-------------------
If any Warrantholder wishes to transfer this Warrant to a transferee (a
"Transferee") under this Section 2, such Warrantholder shall give notice to the
Company of its intention to make any transfer permitted under this Section 2 not
less than five (5) days prior to effecting such transfer, which notice shall
state the name and address of each Transferee to whom such transfer is proposed.
This Warrant may, in accordance with the terms hereof, be transferred in whole
or in part. If this Warrant is assigned in whole, the assignee shall receive a
new Warrant (registered in the name of such assignee or its nominee) which new
Warrant shall cover the number of shares assigned. If this Warrant is assigned
in part, the assignor and assignee shall each receive a new Warrant (which, in
the case of the assignee, shall be registered in the name of the assignee or its
nominee), each of which new Warrant shall cover the number of shares not so
assigned and in respect of which no such exercise has been made in the case of
the assignor and the number of shares so assigned, in the case of the assignee.
9
<PAGE>
2.3. Transfers in Compliance with Law; Substitution of Transferee.
-----------------------------------------------------------------
Notwithstanding any other provision of this Warrant, no transfer may be made
pursuant to this Section 2 unless (a) the Transferee has agreed in writing to be
bound by the terms and conditions hereto, (b) the transfer complies in all
respects with the applicable provisions of this Warrant, and (c) the transfer
complies in all respects with applicable federal and state securities laws,
including, without limitation, the Securities Act of 1933, as amended. If
requested by the Company in its reasonable judgment, an opinion of counsel to
such transferring Warrantholder shall be supplied to the Company at such
transferring Warrantholder's expense, to the effect that such transfer complies
with the applicable federal and state securities laws; provided, however, that
no such opinion shall be required if the Transferee is a successor trust to the
Warrantholder which has the same beneficiaries. Any attempt to transfer this
Warrant or rights hereunder in violation of this Warrant shall be null and void
ab initio and the Company shall not register such transfer.
3. Legends.
-------
Each Warrant (and each Warrant issued in substitution for any Warrant pursuant
hereto) shall be stamped or otherwise imprinted with a legend in substantially
the following form:
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR
ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Each stock certificate for Warrant Shares issued upon the exercise of any
Warrant and each stock certificate issued upon the direct or indirect transfer
of any such Warrant Shares shall be stamped or otherwise imprinted with a legend
in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
10
<PAGE>
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or a stock certificate for Warrant Shares, in each case without
a legend, if either (i) such Warrant or such Warrant Shares, as the case may be,
have been registered for resale under the Securities Act or (ii) the
Warrantholder has delivered to the Company an opinion of counsel (reasonably
satisfactory to the Company) which opinion shall be addressed to the Company and
be reasonably satisfactory in form and substance to the Company's counsel, to
the affect that such registration is not required with respect to such Warrant
or such Warrant Shares, as the case may be.
4. Reservation of Shares, Etc.
--------------------------
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of this Warrant will,
upon issuance, be duly and validly issued, fully paid and nonassessable, not
subject to any preemptive rights, and free from all taxes, liens, security
interests, charges, and other encumbrances with respect to the issuance thereof,
other than taxes in respect of any transfer occurring contemporaneously with
such issue.
(b) During the period within which this Warrant may be exercised, the Company
will at all times have authorized and reserved, and keep available free from
preemptive rights, a sufficient number of shares of Common Stock to provide for
the exercise of the rights represented by this Warrant.
5. Loss or Destruction of Warrant.
------------------------------
Subject to the terms and conditions hereof, upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, of
such bond or indemnification as the Company may reasonably require and, in the
case of such mutilation, upon surrender and cancellation of this Warrant, the
Company will execute and deliver a new Warrant of like tenor. If the original
holder of this Warrant or any subsequent Institutional Holder with a minimum net
worth of at least $25,000,000 is the owner of this Warrant at the time it shall
be lost, stolen or destroyed, then the affidavit of an authorized officer of
such owner, setting forth the fact of such loss, theft or destruction and of its
ownership of this Warrant at the time of such loss, theft or destruction shall
be accepted as satisfactory evidence thereof and no further bond shall be
required as a condition to the execution and delivery of a new Warrant other
than the written agreement of such owner to indemnify the Company.
11
<PAGE>
6. Ownership of Warrant.
--------------------
The Company may deem and treat the person in whose name this warrant is
registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer. Notwithstanding the
foregoing, the Warrants represented hereby, if properly assigned in compliance
with this Agreement, may be exercised by an assignee for the purchase of Warrant
Shares without having a new Warrant issued.
7. Certain Adjustment.
------------------
7.1. The number of Warrant Shares purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment as follows:
(a) Stock Dividends; Stock Splits. If at any time after the date of the issuance
of this Warrant (i) the Company shall pay a stock dividend or make any other
distribution payable in shares of Common Stock or (ii) the number of shares of
Common Stock shall have been increased by a subdivision or split-up of shares of
Common Stock, then, on the date of the payment of such dividend or immediately
after the effective date of subdivision or split up, as the case may be, the
number of shares to be delivered upon exercise of this Warrant will be increased
so that the Warrantholder will be entitled to receive the number of shares of
Common Stock that such Warrantholder would have owned immediately following such
action had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph (f).
(b) Combination of Stock. If the number of shares of Common stock outstanding at
any time after the date of the issuance of this Warrant shall have been
decreased by a combination of the outstanding shares of Common Stock, then,
immediately after the effective date of such combination, the number of shares
of Common Stock to be delivered upon exercise of this Warrant will be decreased
so that the Warrantholder thereafter will be entitled to receive the number of
shares of Common Stock that such Warrantholder would have owned immediately
following such action had this Warrant been exercised immediately prior thereto,
and the Exercise Price will be adjusted as provided below in paragraph (f).
12
<PAGE>
(c) Reorganization, etc. If any capital reorganization of the Company, or any
reclassification of the Common Stock, or any consolidation or share exchange of
the Company with or merger of the Company with or into any other person or any
sale, lease or other transfer of all or substantially all of the assets of the
Company to any other person, shall be effected in such a way that the holders of
Common Stock shall be entitled to receive stock, other securities or assets
(whether such stock, other securities or assets are issued or distributed by the
Company or another person) with respect to or in exchange for Common Stock,
then, upon exercise of this Warrant the Warrantholder shall have the right to
receive the kind and amount of stock other securities or assets receivable upon
such reorganization, reclassification, consolidation, merger or sale, lease or
other transfer by a holder of the number of shares of Common Stock that such
Warrantholder would have been entitled to receive upon exercise of this Warrant
had this Warrant been exercised immediately before such reorganization,
reclassification, consolidation, merger or sale, lease or other transfer,
subject to adjustments that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Section 7.1.
(d) Fractional Shares. No fractional shares of Common Stock or scrip shall be
issued to any Warrantholder in connection with the exercise of this Warrant.
Instead of any fractional shares of Common Stock that would otherwise be
issuable to such Warrantholder, the Company will pay to such Warrantholder a
cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the then current Fair Market Value per share of
Common Stock.
(e) Carryover Notwithstanding any other provision of this Section 7.1, no
adjustment shall be made to the number of shares of Common Stock to be delivered
to the Warrantholder (or to the Exercise Price) if such adjustment represents
less than 1% of the number of shares to be so delivered, but any lesser
adjustment shall be carried forward and shall he made at the time and together
with the next subsequent adjustment that together with any adjustments so
carried forward shall amount to 1% or more of the number of shares to be so
delivered. However, upon the exercise of this Warrant, the Company shall make
all necessary adjustments not theretofore made to the number of shares of Common
Stock to be delivered to the Warrantholder (or to the Exercise Price) up to and
including the date upon which this Warrant is exercised.
(f) Exercise Price Adjustment. Whenever the number of Warrant Shares purchasable
upon the exercise of the Warrant is adjusted as provided pursuant to this
Section 7.1, the Exercise Price payable upon the exercise of this Warrant shall
be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of Warrant
Shares purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
purchasable immediately thereafter; provided, however, that the Exercise Price
for each Warrant Share shall in no event be less than the par value of such
Warrant Share.
13
<PAGE>
7.2. No Adjustment for Dividends.
-----------------------------
Except as provided in Section 7.1, no adjustment in respect of any dividends
shall be made during the term of this Warrant or upon the exercise of this
Warrant. Notwithstanding any other provision hereof, no adjustments shall be
made on Warrant Shares issuable on the exercise of this Warrant for any cash
dividends paid or payable to holders of record of Common Stock prior to the date
as of which the Warrantholder shall be deemed to be the record holder of such
Warrant Shares.
7.3. Notice of Adjustment.
---------------------
Whenever the number of Warrant Shares or the Exercise Price of such Warrant
Shares is adjusted, as herein provided, or the rights of the Warrantholder shall
change by reason of other events specified herein, the Company shall promptly
mail by first class, postage prepaid, to the Warrantholder, notice of such
adjustment or adjustments and a certificate of the Chief Financial Officer of
the Company setting forth the number of Warrant Shares and the Exercise Price of
such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
such adjustment was made.
8. Amendments.
----------
Any provision of this Warrant may be amended and the observance thereof waived
only with the written consent of the Company and the Warrantholder.
9. Notices of Corporate Action.
---------------------------
So long as this Warrant has not been exercised in full, in the event of:
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right,
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any consolidation or
merger involving the Company and any other party or any transfer of all or
substantially all the assets of the Company to any other party, or
14
<PAGE>
(c) any voluntary or involuntary dissolution, liquidation or winding-up of the
Company, the Company will mail to the Warrantholder a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right and the amount and character of any such
dividend, distribution or right and (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
delivered at least 10 days prior to the date therein specified, in the case of
any date referred to in the foregoing subdivisions (i) and (ii).
10. Definitions.
-----------
As used herein, unless the context otherwise requires, the following terms have
the following respective meanings:
"Business Day" means any day other than a Saturday, Sunday or a day on which
national banks are authorized by law to close in the State of New York.
"Common Stock" has the meaning specified on the cover of this Warrant.
"Company" has the meaning specified on the cover of this Warrant
"Exercise Form" means an Exercise Form in the form annexed hereto as Exhibit A.
"Exercise Price" has the meaning specified on the cover of this Warrant.
"Expiration Date" means September 8, 2001 ; provided, however, that if such date
shall not be a Business Day, then on the next following day that is a Business
Day.
"Institutional Holder" means any bank, trust company, savings and loan
association or other financial institution, any pension plan, any pension trust,
any investment company, any insurance company, any broker or dealer, or any
similar financial institution or entity, regardless of legal form.
"Person" means any natural person, corporation, limited liability company,
trust, joint venture, association, company, partnership, governmental authority
or other entity.
15
<PAGE>
"Securities Act" has the meaning specified on the cover of this Warrant, or any
similar Federal statute, and the rules and regulations of the Securities and
Exchange Commission thereunder, all as the same shall be in effect at the time.
Reference to a particular section of the Securities Act, shall include a
reference to the comparable section, if any, of any such similar Federal
statute.
"Transfer" has the meaning specified in Section 2.1
"Transferee" has the meaning specified in Section 2.2.
"Warrantholder" has the meaning specified on the cover of this Warrant.
"Warrant Shares" has the meaning specified on the cover of this Warrant.
11. Miscellaneous.
-------------
11.1. Entire Agreement.
-----------------
This Warrant constitutes the entire agreement between the Company and the
Warrantholder with respect to the Warrants.
11.2. Binding Effect; Benefits.
-------------------------
This Warrant shall inure to the benefit of and shall be binding upon the Company
and the Warrantholder and their respective successors and assigns. Nothing in
this Warrant, expressed or implied, is intended to or shall confer on any person
other than the Company and the Warrantholder, or their respective successors or
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Warrant.
11.3. Section and Other Headings.
---------------------------
The section and other headings contained in this Warrant are for reference
purposes only and shall not be deemed to be a part of this Warrant or to affect
the meaning or interpretation of this Warrant.
16
<PAGE>
11.4. Notices.
--------
All notices and other communications required or permitted hereunder shall be in
writing and shall be delivered personally, telecopied or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telecopied or sent by certified, registered
or express mail, as follows:
(a) if to the Company, addressed to:
CopyTele, Inc.
900 Walt Whitman Road
Huntington, New York 11746
Attn:Chief Financial Officer
(b) if to Warrantholder, addressed to:
Lewis H. Titterton
6 Autumn Lane
Saratoga Springs, NY 12866
Any party may by notice given in accordance with this Section 11.4 designate
another address or person for receipt of notices hereunder.
11.5. Severability.
-------------
Any term or provision of this Warrant which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the terms and provisions of this Warrant or affecting the validity or
enforceability of any of the terms or provisions of this Warrant in any other
jurisdiction.
17
<PAGE>
11.6. Governing Law.
--------------
This Warrant shall be deemed to be a contract made under the laws of the State
of New York and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to such agreements made and to
be performed entirely within such State.
11.7. No Rights or Liabilities as Stockholder.
------------------------------------------
Nothing contained in this Warrant shall be determined as conferring upon the
Warrantholder any rights as a stockholder of the Company or as imposing any
liabilities on the Warrantholder to purchase any securities whether such
liabilities are asserted by the Company or by creditors or stockholders of the
Company or otherwise.
11.8. Copy of Warrant.
---------------
A copy of this Warrant shall be filed among the records of the Company.
11.9. Exercise of Remedies.
---------------------
In the event that the Company shall fail to observe any provision contained in
this Warrant, the holder hereof and/or any holder of the Common Stock issued
hereunder, as the case may be, may enforce its rights hereunder by suit in
equity, by action at law, or by any other appropriate proceedings in aid of the
exercise of any power granted in this Warrant and, without limiting the
foregoing, said holder shall be entitled to the entry of a decree for specific
performance and to such other and further relief as such court may decree.
18
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer.
COPYTELE, INC.
By: Denis A. Krusos
Name: Denis A. Krusos
Title: Chairman of the Board &
Chief Executive Officer
Dated: September 8, 1999
19
Exhibit A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant, to purchase _________ of the Warrant Shares and herewith tenders
payment for such Warrant Shares to the order of CopyTele, Inc. in the amount of
$________ in accordance with the terms of this Warrant. The undersigned requests
(a) that a certificate for such Warrant Shares be registered in the name of the
undersigned (b), if such shares shall not include all of the shares issuable as
provided in such Warrant, that a new Warrant of like tenor and date for the
balance of the shares issuable thereunder be issued to the undersigned and (c)
that such certificates and Warrant, if any, be delivered to the undersigned's
address below.
The undersigned represents that it is acquiring such Warrant Shares for its own
account for investment and not with a view to or for sale in connection with any
distribution thereof.
Dated:
Signature
(Print Name)
(Street Address)
(City) (State) (Zip Code)
Signed in the presence of:
20
EXHIBIT 21
List of Significant Subsidiaries
--------------------------------
Shanghai CopyTele Electronics Co., Ltd. Shanghai, China
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report dated January 27, 2000, included in this Form 10-K, into CopyTele, Inc.'s
previously filed Registration Statement on Form S-8, as amended, (File No.
33-49402), Registration Statement on Form S-8 (File No. 33-72716), Registration
Statement on Form S-8 (File No. 33-62381) and Registration Statement on Form S-8
(File No. 333-16933).
ARTHUR ANDERSEN LLP
Melville, New York
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
financial statements contained in the body of the accompanying Form10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CIK> 0000715446
<NAME> CopyTele, Inc.
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1.0000
<CASH> 1,587,830
<SECURITIES> 488,038
<RECEIVABLES> 2,269,072
<ALLOWANCES> 1,407,461
<INVENTORY> 4,538,608
<CURRENT-ASSETS> 7,543,575
<PP&E> 2,158,167
<DEPRECIATION> 1,627,012
<TOTAL-ASSETS> 8,101,544
<CURRENT-LIABILITIES> 1,816,767
<BONDS> 0
0
0
<COMMON> 600,574
<OTHER-SE> 5,684,203
<TOTAL-LIABILITY-AND-EQUITY> 8,101,544
<SALES> 46,877
<TOTAL-REVENUES> 46,877
<CGS> 37,304
<TOTAL-COSTS> 8,630,664
<OTHER-EXPENSES> (156,075)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,465,016)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,465,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,465,016)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
Exhibit 99.1
- ------------
SHANGHAI COPYTELE ELECTRONICS CO., LTD.
---------------------------------------
(Registered in the People's Republic of China)
----------------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1999
----------------
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1999 and 1998 F-2
Statements of Operations for each of the three years ended
October 31, 1999 F-3
Statements of Cash Flows for each of the three years
ended October 31, 1999 F-4 - F-5
Statements of Owners' Equity for each of the three years ended
October 31, 1999 F-6
Notes to Financial Statements F-7 - F-14
</TABLE>
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Investors of
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
We have audited the accompanying balance sheets of Shanghai CopyTele Electronics
Co., Ltd. (established in the People's Republic of China) as of October 31, 1999
and 1998, and the related statements of operations, cash flows and owners'
equity for each of the three years ended October 31, 1999. These financial
statements are the responsibility of the management of Shanghai CopyTele
Electronics Co., Ltd. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shanghai CopyTele Electronics
Co., Ltd. as of October 31, 1999 and 1998, and the results of its operations,
cash flows and the changes in its owners' equity for each of the three years
ended October 31, 1999, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that Shanghai
CopyTele Electronics Co., Ltd. (the "Company") will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company continues to
have negative working capital and is incurring losses from its operations that
raises substantial doubt about its ability to continue as a going concern. The
Company is taking action to improve its liquidity and believes that it has
sufficient resources to continue in operation. Nevertheless, as discussed in
Notes 3 and 8 to the financial statements, the Company remains heavily dependent
upon its principal customer and major shareholder, CopyTele, Inc., for future
sales and profitability. Inventories have been stated at cost in the financial
statements, on the assumption that gross margins on sales to CopyTele, Inc. will
improve. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Shanghai, PRC
November 24, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
BALANCE SHEETS
--------------
AS OF OCTOBER 31, 1999 AND 1998
-------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
Note October 31, 1999 October 31, 1998
---------- ------------------- -------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash on hand and at banks 17,793 51,760
Due from CopyTele, Inc. 8 861,611 661,592
Inventories 3 1,574,315 3,568,202
Other current assets 5,812 68,581
------------------- -------------------
Total current assets 2,459,531 4,350,135
PROPERTY, PLANT AND EQUIPMENT, net 4 1,641,066 1,812,310
LAND USE RIGHT, net 5 287,055 293,273
------------------- -------------------
TOTAL ASSETS 4,387,652 6,455,718
=================== ===================
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term loans 6 1,080,268 999,316
Accounts payable 206,680 221,459
Due to CopyTele, Inc. 8 2,269,072 3,916,628
Other current liabilities 104,046 116,593
------------------- -------------------
Total current liabilities 3,660,066 5,253,996
------------------- -------------------
OWNERS' EQUITY
Paid-in capital 1 3,500,000 3,500,000
Accumulated deficit (2,772,414) (2,298,278)
------------------- -------------------
Total Owners' Equity 727,586 1,201,722
------------------- -------------------
TOTAL LIABILITIES AND OWNERS' EQUITY 4,387,652 6,455,718
=================== ===================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
---------------------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
For the years ended October 31,
-----------------------------------------------------
Note 1999 1998 1997
-------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
SALES, net 8 - - -
---------------- --------------- -----------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (399,782) (631,101) (594,375)
---------------- --------------- ----------------
Operating loss (399,782) (631,101) (594,375)
OTHER OPERATING INCOME (EXPENSES)
Interest expenses, net (76,115) (56,117) (19,870)
Foreign exchange (loss) gain, net 551 169 5,002
Others, net 1,210 1,196 (559)
---------------- --------------- ----------------
Loss before taxation (474,136) (685,853) (609,802)
TAXATION 7 - - -
---------------- --------------- ----------------
NET LOSS (474,136) (685,853) (609,802)
ACCUMULATED DEFICIT, beginning of year (2,298,278) (1,612,425) (1,002,623)
---------------- --------------- ----------------
ACCUMULATED DEFICIT, end of year (2,772,414) (2,298,278) (1,612,425)
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
---------------------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
For the years ended October 31,
-----------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales of goods 460,113 1,111,118 455,375
Interest received 1,405 2,124 6,468
Interest paid (77,520) (58,241) (26,338)
Payment to suppliers, employees and others (498,917) (1,553,313) (809,641)
---------------- --------------- ----------------
Net cash used in operating activities (114,919) (498,312) (374,136)
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of property, plant and
equipment - (85,122) (991,839)
---------------- --------------- ----------------
Net cash used in investing activities - (85,122) (991,839)
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of short-term loans 80,952 499,304 500,012
---------------- --------------- ----------------
Net cash provided by financing activities 80,952 499,304 500,012
---------------- --------------- ----------------
Net Decrease in cash and cash equivalents (33,967) (84,130) (865,963)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51,760 135,890 1,001,853
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 17,793 51,760 135,890
================ =============== ================
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF CASH FLOWS (Continued)
------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
---------------------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
For the years ended October 31,
-----------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
RECONCILIATIONS OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
NET LOSS (474,136) (685,853) (609,802)
Depreciation and amortization 177,462 176,708 106,143
Interest income (1,405) (2,124) (6,468)
Interest expenses 77,520 58,241 26,338
Decrease (increase) in inventories 1,993,887 1,262,259 (4,830,407)
(Increase) decrease in due from CopyTele, Inc. and
other current assets (137,250) (698,185) 212,127
(Decrease) increase in accounts payable, due to
CopyTele, Inc. and other current liabilities (1,674,882) (553,241) 4,747,803
Interest received 1,405 2,124 6,468
Interest paid (77,520) (58,241) (26,338)
---------------- --------------- ----------------
Net cash used in operating activities (114,919) (498,312) (374,136)
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
STATEMENTS OF OWNERS' EQUITY
----------------------------
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
---------------------------------------------------
(Amounts expressed in United States Dollars)
--------------------------------------------
Accumulated
Paid-in capital deficit Total
---------------- --------------- ----------------
<S> <C> <C> <C>
BALANCE, October 31, 1996 3,500,000 (1,002,623) 2,497,377
Net loss for the year - (609,802) (609,802)
---------------- --------------- ----------------
BALANCE, October 31, 1997 3,500,000 (1,612,425) 1,887,575
Net loss for the year - (685,853) (685,853)
---------------- --------------- ----------------
BALANCE, October 31, 1998 3,500,000 (2,298,278) 1,201,722
Net loss for the year - (474,136) (474,136)
---------------- --------------- ----------------
BALANCE, October 31, 1999 3,500,000 (2,772,414) 727,586
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Shanghai CopyTele Electronics Co., Ltd.
---------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Amounts expressed in United States Dollars ("USD") unless otherwise stated)
----------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
--------------------------------------
Shanghai CopyTele Electronics Co., Ltd. (the "Company") is an equity joint
venture registered in the People's Republic of China ("PRC") on May 18, 1995
with an operating period of twenty years. The Company's scope of business
consists of the manufacture and sale of multifunctional telecommunications
products. The Company commenced its commercial production in February 1997.
The registered capital of the Company is USD 3.5 million. As of October 31,
1999, the joint venture partners and their respective capital contributions to
the Company are as follows:
<TABLE>
<CAPTION>
Country of Percentage of Capital
-
Joint Venture Partner Incorporation Ownership Contributed
----------------------------------------- ------------------- ---------------- -----------------
<S> <C> <C> <C>
USD
CopyTele, Inc. United States of 55% 1,925,000
America
Shanghai Electronic Components PRC 35% 1,225,000
Corporation
Shanghai International Trade and PRC 10% 350,000
Investment Developing Corp.
---------------- -----------------
Total 100% 3,500,000
================ =================
</TABLE>
Shanghai Electronic Components Corporation has assigned a 30% interest to
Shanghai Instrumentation and Electronics Holding Group Company and a 5% interest
to Shanghai International Trade and Investment Developing Corp.
As of October 31, 1999, the Company had net current liabilities of approximately
USD 1,201,000, and was incurring losses from its operations. The current working
capital includes approximately USD 2,459,000 (inclusive of approximately USD
1,574,000 of inventories) of current assets and approximately USD 3,660,000
(inclusive of approximately USD 2,269,000 due to CopyTele, Inc.) of current
liabilities. The Company believes that these resources will be sufficient to
continue its operations, as presently conducted, after giving effect to
anticipated reductions in the Company's requirements for component purchases and
reductions in administrative and support personnel, if necessary.
F-8
<PAGE>
The Company is seeking to improve its liquidity through the sale of products,
deferral of repayment of amounts due to CopyTele, Inc., and additional borrowing
of bank loans, although there can be no assurance that any of these plans can be
implemented at terms that will be favorable to the Company.
2. PRINCIPAL ACCOUNTING POLICIES
-----------------------------
The financial statements were prepared in accordance with generally accepted
accounting principles in United States of America ("US GAAP"). This basis of
accounting differs from that used in the statutory accounts prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of the Company
to US GAAP were:
o Charge the expenses and exchange loss incurred during the
pre-operating period, which were capitalized as non-current assets in
its statutory accounts, to the statements of operations.
o Write off the technical know-how contributed by CopyTele, Inc. as
paid-in capital, which was capitalized as intangible assets in its
statutory accounts, to the statements of operations.
The financial statements of the Company were prepared in conformity with US GAAP
as if those standards had been consistently applied throughout the years. The
following accounting policies were adopted in the preparation of these financial
statements:
(a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand and time
deposits with banks and liquid investments with on original maturity
of three months or less.
(b) Inventories
Inventories are stated at the lower of cost, calculated using the
weighted-average method, and net realizable value.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the property, plant and equipment,
after taking into account an estimated residual value of 10% of cost.
The estimated useful lives are as follows:
F-9
<PAGE>
Buildings 18 years
Machinery and equipment 10 years
Motor vehicles 5 years
Office equipment 5 years
(d) Land Use Right
Land use right is stated at cost less accumulated amortization.
Amortization of land use right is provided using the straight-line
method over 50 years
(e) Foreign Currency Translations and Balances
The Company maintains its books and accounting records in Renminbi
("RMB"), which is not a freely convertible currency. Transactions in
foreign currencies are translated into RMB at the exchange rates
prevailing at the date of transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet
date are translated into RMB at the exchange rates prevailing at that
date. Exchange differences are included in the determination of
income.
The management determines that USD is the Company's functional
currency. The accounts of the Company are translated into USD as if
the Company's books and records had been initially recorded in USD.
To accomplish that result, all non-monetary accounts are translated
at historical exchange rates between USD and RMB.
(f) Sales Recognition
Sales represent the invoiced value of goods, net of discounts,
returns and surtaxes. Sales are recognized upon passing of title to
customers.
(g) Taxation
The Company provides for Enterprise Income Tax ("EIT") on the basis
of its statutory profit for financial reporting purposes, adjusted
for income and expense items which are not assessable or deductible
for EIT purposes.
Other taxes are provided in accordance with the prevailing PRC tax regulations.
Deferred taxation is provided under the liability method whereby deferred
taxation is recognized for temporary differences using enacted tax rates in
effect in the years in which the differences are expected to reverse. Temporary
differences are the differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
F-10
<PAGE>
(h) Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. INVENTORIES
-----------
1999 1998
-------------------- --------------------
Raw materials 1,366,773 2,718,262
Work-in-process 173,187 681,982
Finished goods 34,355 167,958
-------------------- --------------------
1,574,315 3,568,202
==================== ====================
As discussed in Note 8, the Company relies very heavily on CopyTele, Inc. for
its purchase of the Company's products. Therefore, the ultimate realizability of
the Company's inventories is dependent on future sale of products to CopyTele,
Inc.. During its fiscal years ended October 31, 1999, 1998 and 1997, the Company
incurred a gross loss of approximately USD 192,000, USD 189,000 and USD 225,000
respectively for its sales to CopyTele, Inc. Management has recorded the
Company's inventories as of October 31, 1999 at cost and a provision to state
inventories at their net realizable value has not been made on the basis that
sales prices are expected to improve. To date, shipments of the Company's
products have been limited. Accordingly, there can be no assurance that the
Company will not be required to reduce the selling price of its products below
their current carrying value to accomplish certain business strategies, which
would require a reduction of such carrying value.
4. PROPERTY, PLANT AND EQUIPMENT
------------------------------
1999 1998
-------------------- --------------------
Buildings 908,101 908,101
Machinery and equipment 951,153 951,153
Motor vehicles 52,971 52,971
Office equipment 184,764 184,764
-------------------- --------------------
2,096,989 2,096,989
Less: Accumulated depreciation (455,923) (284,679)
-------------------- --------------------
Net 1,641,066 1,812,310
==================== ====================
F-11
<PAGE>
As of October 31, 1999 and 1998, the Company's buildings with net book value of
approximately USD 772,000 and USD 815,000 respectively were used as mortgage of
short-term bank loans (Note 6).
5. LAND USE RIGHT
---------------
1999 1998
-------------------- --------------------
Cost 309,473 309,473
Accumulated amortization (22,418) (16,200)
-------------------- --------------------
Net 287,055 293,273
==================== ====================
All land in the PRC is owned by the state or is subject to collective ownership
and neither individuals nor legal entities may own land. The Company acquired
the right to use the land on which its factory is located for USD 309,473.
<TABLE>
<CAPTION>
6. SHORT-TERM LOANS
-----------------
1999 1998
----------------------------------- -----------------------------------
Interest rate Interest rate
per annum Amount per annum Amount
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bank loans 5.86%-7.13% 999,328 7.69%-8.64% 999,316
Loan from a joint
venture partner 5.86% 80,940 -
----------------- ----------------
1,080,268 999,316
================= ================
</TABLE>
As of October 31, 1999 and 1998, bank loans were secured by the Company's
buildings (Note 4).
Based on the borrowing rates currently available to the Company, the carrying
amount of its short-term loans approximated its fair value.
7. TAXATION
---------
(a) Value-Added Tax ("VAT")
The Company is subject to VAT, which is charged on top of the selling price at a
general rate of 17%. An input credit is available whereby VAT previously paid on
purchases of semi-finished products or raw materials etc. can be used to offset
the VAT on sales to determine the net VAT payable.
As the Company was established after January 1, 1994, its exports are
"zero-rated" for VAT purpose. Accordingly, subject to the changes described
below, the Company charges no VAT on its exports and is entitled to claim a
refund for the input tax incurred in respect of these exports.
F-12
<PAGE>
Pursuant to subsequent tax authority circulars, with effect from July 1, 1995,
the Company may no longer recover fully the input tax of its exports. An amount
equivalent to "17% minus the applicable refund rate" times the FOB value of the
exports will be noncreditable and nonrefundable. As the Company has a "bonded"
arrangement with the customs authority and enjoys duty-exemption on its imported
materials to be used for producing its exports, the amount of noncreditable and
nonrefundable input tax will be "17% minus the applicable refund rate" times
"the FOB value of the exports minus the (composite assessable) value of the
duty-exempt imported materials matching the exports". This noncreditable and
nonrefundable input tax shall be absorbed by the Company as part of the costs of
exports. The applicable refund rate is currently 17% (1998: 11%).
(b) Enterprise Income Tax ("EIT")
In accordance with the "Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises", the Company is entitled to full exemption
from EIT for the first three years and a 50% reduction for the next three years,
commencing from the first profitable year after offsetting all tax losses
carried forward from the previous years (at most five years).
The tax effects of temporary differences between financial and taxable income
that give rise to deferred tax assets are principally related to the following:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
Net operating loss carryforward 702,835 500,218
Income tax basis in excess of financial basis of
- Pre-operating expenses 48,572 69,971
- Technical know-how 168,213 190,902
-------------------- --------------------
Total gross deferred tax assets 919,620 761,091
Less valuation allowance (919,620) (761,091)
-------------------- --------------------
Net deferred tax assets - -
==================== ====================
The valuation allowance refers to the portion of the deferred tax
assets that are not currently realizable. The realization of these
benefits depends upon the Company's income in future years.
</TABLE>
F-13
<PAGE>
8. RELATED PARTY TRANSACTIONS
---------------------------
The Company relies very heavily on CopyTele, Inc. for its purchase of the
Company's products, its supplies to the Company of raw materials and components
required for production. For the years ended October 31, 1999, 1998 and 1997,
sales to CopyTele, Inc. accounted for 100 per cent of the Company's net sales.
The Company purchases most of the required raw materials and imported components
through CopyTele, Inc. For the years ended October 31, 1999, 1998 and 1997,
purchase of materials and components through CopyTele, Inc. amounted to
approximately Nil, USD 168,000 and USD 4,480,000 respectively. Purchase returns
to CopyTele, Inc. during the year ended October 31, 1999 amounted to USD
1,467,000 (1998 and 1997: Nil)
The amounts due from/to CopyTele, Inc. arose mainly from the above transactions,
are interest-free and have no fixed repayment terms.
9. COMMITMENTS
------------
As of October 31, 1999, the Company had no material rental, capital or other
purchase commitments.
10. EMPLOYEES' PENSION PLAN
------------------------
The Company contributes annually to a government-sponsored pension scheme an
amount equivalent to 25.5% of the total basic salary of its employees. This
government-sponsored pension scheme will be responsible for payment of the
pension liabilities relating to the retirees of the Company. Pension cost, which
approximated USD 17,000, USD 37,000 and USD 18,000 for the years ended October
31, 1999, 1998 and 1997 respectively, has been accrued and funded on a current
basis.
F-14
