SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
-------------
Commission file number 0-11254
-------
COPYTELE, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
900 Walt Whitman Road
Melville, NY 11747
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(631) 549-5900
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, par value
$.01 per share, outstanding as of September 11, 2000: 63,084,526 shares
-----------------
1
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 2000 (Unaudited) and October
31, 1999
Condensed Statements of Operations (Unaudited)for the nine months
ended July 31, 2000 and 1999, and for the period from November 5, 1982
(Inception) through July 31, 2000
Condensed Statements of Operations (Unaudited) for the three months
ended July 31, 2000 and 1999
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through July 31, 2000
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended July 31, 2000 and 1999, and for the period from November 5, 1982
(Inception) through July 31, 2000
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
Part I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
---------------------
<TABLE>
<CAPTION>
COPYTELE,INC.
-------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS
------------------------
Unaudited
July 31, October 31,
ASSETS 2000 1999
------ --------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$2,596,735 and $1,531,254, respectively) $2,620,721 $1,587,830
Marketable securities, at cost 96,873 488,038
Accounts receivable (net of allowance for doubtful accounts) 477,773 23,115
Inventory 4,868,280 4,538,608
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $862,000) 888,346 905,984
--------- ---------
Total current assets 8,951,993 7,543,575
PROPERTY AND EQUIPMENT, net 325,073 531,155
OTHER ASSETS 25,091 26,814
DEFERRED TAX BENEFITS (net of valuation allowance of
$35,100,000 and $33,026,000, respectively) - -
---------- -----------
$9,302,157 $8,101,544
========== ===========
LIABILITIES AND SHAREHOLDERS'EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable (including amounts due to Joint Venture of
approximately $862,000) $2,166,853 $1,546,494
Accrued liabilities 168,437 270,273
--------- ---------
Total current liabilities 2,335,290 1,816,767
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; authorized 500,000 shares;
no shares outstanding - -
Common stock, par value $.01 per share; authorized 240,000,000
shares; outstanding 63,084,526 and 60,057,376 shares, respectively 630,845 600,574
Additional paid-in capital 60,050,852 55,844,128
Accumulated (deficit) during development stage (53,714,830) (50,159,925)
----------- -----------
6,966,867 6,284,777
----------- -----------
$9,302,157 $8,101,544
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the nine months For the period from
ended July 31, November 5, 1982
------------------------------------------------ (Inception) through
2000 1999 July 31, 2000
--------------------- ---------------------- --------------------
<S> <C> <C> <C>
SALES $1,190,588 $ - $1,237,465
COST OF SALES 616,977 - 654,281
-------------------- ---------------------- --------------------
Gross profit 573,611 - 583,184
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
research and development expenses of approximately
$1,975,000, $2,203,000 and
$33,449,000, respectively) 4,140,806 4,909,332 58,015,657
-------------------- ---------------------- ---------------------
LOSS FROM AND IMPAIRMENT OF
INVESTMENT IN JOINT VENTURE 82,040 142,506 1,307,040
-------------------- ---------------------- ---------------------
INTEREST INCOME 94,330 133,127 5,024,683
-------------------- ---------------------- ---------------------
NET LOSS $(3,554,905) $(4,918,711) $(53,714,830)
==================== ====================== =====================
NET LOSS PER SHARE OF COMMON STOCK: Basic and Diluted $(0.06) $(0.08) $(1.12)
==================== ====================== =====================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and
Diluted 61,984,822 58,491,880 47,981,532
==================== ====================== =====================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months
ended July 31,
------------------------------------------------
2000 1999
--------------------- ----------------------
<S> <C> <C>
SALES $492,196 $ -
COST OF SALES 225,398 -
--------------------- ----------------------
Gross profit 266,798 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
research and development expenses of approximately
$645,000 and $724,000, respectively) 1,265,006 1,897,197
--------------------- ----------------------
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN
JOINT VENTURE 18,000 29,411
--------------------- ----------------------
INTEREST INCOME 42,352 36,352
--------------------- ----------------------
NET LOSS $(973,856) $(1,890,256)
===================== ======================
NET LOSS PER SHARE OF COMMON STOCK: Basic and Diluted $(0.02) $(0.03)
===================== ======================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic
and Diluted 63,074,654 59,085,633
===================== ======================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 2000 (UNAUDITED)
-----------------------------------------------------------------------------------
Accumulated
Additional (Deficit) During
Common Stock Paid-in Development
Shares Par Value Capital Stage
-------------------------------- ------------ ----------------
<S> <C> <C> <C> <C>
BALANCE, November 5, 1982 (Inception) - $ - $ - $ -
Sale of common stock, at par, to incorporators on November
8, 1982 1,470,000 14,700 - -
Sale of common stock, at $.10 per share, primarily to
officers and employees from November 9, 1982 to November
30, 1982 390,000 3,900 35,100 -
Sale of common stock, at $2 per share, in private offering
from January 24, 1983 to March 28, 1983 250,000 2,500 497,500 -
Sale of common stock, at $10 per share, in public offering on
October 6, 1983, net of underwriting discounts of $1 per
share 690,000 6,900 6,203,100 -
Sale of 60,000 warrants to representative of underwriters, at
$.001 each, in conjunction with public offering - - 60 -
Costs incurred in conjunction with private and public
offerings - - (362,030) -
Common stock issued, at $12 per share, upon exercise of
57,200 warrants from February 5, 1985 to October 16, 1985,
net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by individuals from
January 29, 1985 to October 4, 1985 under agreements with
the Company, net of costs incurred by the Company - - 298,745 -
Restatement as of October 31, 1985 for three-for-one stock
split 5,714,400 57,144 (57,144) -
Common stock issued, at $4 per share, upon exercise of 2,800
warrants in December 1985 8,400 84 33,516 -
Sale of common stock, at market, to officers on January 9,
1987 and April 22, 1987 and to members of their immediate
families on July 28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for five-for-four stock
split 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction with five-for-four
stock split - - (1,345) -
Sale of common stock, at market, to members of officers'
immediate families from September 10,1987 to December 4,
1990 and to officers on October 29, 1987 and February 26,
1989 628,040 6,280 6,124,031 -
Sale of common stock, at market, to senior level
personnel on February 26, 1989 29,850 299 499,689 -
Continued
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH JULY 31, 2000 (UNAUDITED)
-----------------------------------------------------------------------------------
Continued
---------
Accumulated
Additional (Deficit) During
Common Stock Paid-in Development
Shares Par Value Capital Stage
--------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sale of common stock, at market, to unrelated party on
February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991 for
two-for-one stock split 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members of officers'
immediate families from April 26, 1991 to October 27,
1992 261,453 2,615 2,788,311 -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates from September 1993 through March 1996 579,800 5,798 2,651,462 -
Common stock issued upon exercise of stock options
from December 16, 1992 to June 12, 1996 4,535,340 45,353 28,197,223 -
Restatement as of June 17, 1996 for two-for-one stock
split 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates in July and October, 1996, and March 1997 206,610 2,066 1,062,167 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Common stock issued upon exercise of stock options
from July 1996 to October 1999 under stock option plans,
net of registration costs 1,771,400 17,714 4,414,412 -
Sale of common stock, at market, to a related party and
other unrelated parties in April and September, 1999 1,300,000 13,000 1,461,500 -
Stock options granted to consultants - - 461,900 -
Common stock issued upon exercise of stock options
from November 1999 to April 2000 under stock option plans 2,267,400 22,674 3,003,050 -
Sale of common stock, at market, to unrelated parties in
January and March, net of listing fees 616,500 6,165 794,420 -
Common stock issued upon exercise of warrants in May 2000 143,250 1,432 198,604
Accumulated (deficit) during development stage - - - (53,714,830)
-------------- ------------ ------------- --------------
BALANCE, July 31, 2000 63,084,526 $630,845 $60,050,852 $(53,714,830)
============== ============ ============= ==============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the nine
months ended For the period from
July 31, November 5, 1982
------------------------------------------ (Inception) through
2000 1999 July 31, 2000
-------------------- ----------------- ----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants $(4,179,428) $(4,533,039) $(59,941,282)
Cash received from customers 716,331 - 763,208
Interest received 102,299 132,343 5,023,134
-------------------- -------------------- -------------------
Net cash used in operating activities (3,360,798) (4,400,696) (54,154,940)
-------------------- -------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (23,821) (41,767) (2,047,263)
Disbursements to acquire certificates of deposit and
marketable securities (96,873) (488,038) (13,630,910)
Proceeds from maturities of investments 488,038 - 13,534,037
Investment made in Joint Venture - (71,500) (1,225,000)
-------------------- -------------------- -------------------
Net cash provided by (used in) investing activities 367,344 (601,305) (3,369,136)
-------------------- -------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants, net of
underwriting discounts of $690,000 related to initial
public offering in October 1983 - - 17,647,369
Proceeds from exercise of stock options and warrants, net
of registration costs 3,225,760 1,345,230 40,286,973
Proceeds from sales of common stock in private placements,
net of listing fees 800,585 600,000 2,275,085
Proceeds from sales of common stock by individuals
under agreements with the Company, net of disbursements
made by the Company - - 298,745
Disbursements made in conjunction with sales of stock - - (362,030)
Fractional share payments in conjunction with stock split - - (1,345)
-------------------- -------------------- -------------------
Net cash provided by financing activities 4,026,345 1,945,230 60,144,797
-------------------- -------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,032,891 (3,056,771) 2,620,721
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,587,830 5,406,017 -
-------------------- -------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,620,721 $2,349,246 $2,620,721
==================== ==================== ===================
Continued
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
---------
For the nine
months ended For the period from
July 31, November 5, 1982
-------------------------------------------- (Inception) through
2000 1999 July 31, 2000
------------------- ------------------- ------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Net loss $(3,554,905) $(4,918,711) $(53,714,830)
Loss from Joint Venture - 142,506 1,139,828
Stock option compensation to consultants 210,650 61,650 461,900
Depreciation and amortization 199,903 207,353 1,842,573
Loss from disposition of assets 30,000 - 30,000
Impairment of investment in Joint Venture - - 85,172
Impairment of amounts due from Joint
Venture - - 1,407,461
(Increase) in accounts receivable (454,658) - (477,773)
(Increase) in inventory (329,672) (898,790) (4,868,280)
Decrease (increase) in prepaid expenses and
other current assets 17,638 159,173 (888,346)
Decrease (increase) in long term amount due
from Joint Venture - 731,991 (1,407,461)
Decrease (increase) in other assets 1,723 (5,494) (25,091)
Increase in accounts payable and
accrued liabilities 518,523 119,626 2,259,907
------------------- ------------------- ------------------------
Net cash used in operating activities $(3,360,798) $(4,400,696) $(54,154,940)
=================== =================== ========================
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
9
<PAGE>
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
July 31, 2000 (UNAUDITED)
-------------------------
(1) Nature of business and other disclosures:
-----------------------------------------
Organization
------------
CopyTele, Inc. (the "Company"), which was incorporated on November 5, 1982
(Inception), is a development stage enterprise whose principal activities
include the development, production and marketing of multi-functional encryption
and telecommunications products under the Cryptele (TM) brand name. The first
encryption products the Company has produced under the Cryptele (TM) brand name
product line are the USS-900 (Universal Secure System) and the SCS-700 (Secure
Communication System). The Company has recently introduced its DSS-1000 hardware
encryption system for digital applications. The USS-900 and the DSS-1000 are
hardware-based peripheral digital encryption systems which are available with
either the Harris Corporation digital cryptographic chip the Citadel (TM)CCX -
or "triple DES" software to provide high-grade information encryption. The
SCS-700 combines the USS-900 with a modified version of the Magicom (R) 2000,
the Company,s first developed product, to provide a secure telephone-based
multi-functional telecommunications system incorporating the Company's E-Paper
(TM) flat panel display technology. The Company is also continuing its research
and development activities for additional encryption products and flat panel
display technologies in addition to its ultra-high resolution charged particle
E-Paper (TM) flat panel display.
Shanghai CopyTele Electronics Co., Ltd. (the "Joint Venture" or "Shanghai
CopyTele"), the Company's 55% owned joint venture in Shanghai, China, was
established in 1995 to produce and market the Magicom (R) 2000 for the Company.
Realizability of Assets
-----------------------
Management has recorded the Company's inventory at its current best estimate of
net realizable value, which is based upon the historic and future selling prices
of the Company's Magicom (R) 2000 units as packaged in the SCS-700, and the
USS-900. To date, sales of the Company's product have been limited. Accordingly,
there can be no assurance that the Company will not be required to further
reduce the selling price of its inventory below its current carrying value in
order to accomplish the Company's business strategies (Note 4).
In addition, the Company's advances to Shanghai CopyTele have funded the
purchase of inventory components to manufacture the Magicom (R) 2000. Due to the
uncertainty of realizing the amounts due from Shanghai CopyTele, the Company has
reserved for approximately $1,407,000 of this amount at July 31, 2000 and
October 31, 1999, which is shown net in the accompanying financial statements.
10
<PAGE>
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company recognized a permanent impairment charge at October 31, 1999 in the
amount of $85,172 on its previously recorded investment in Joint Venture, due to
the uncertainty of Shanghai CopyTele generating enough future undiscounted cash
flows to cover the carrying amount of the investment.
The success and profitability of the Company's products will depend upon many
factors, many of which are beyond the Company's control. These factors include
the capability of the Company to market its products, the Company's continuing
ability to purchase the encryption chip for use in its encryption products, the
production capability of the Company and its suppliers as required, long-term
product performance and the capability of the Company's dealers and distributors
to adequately service the Company's products, the ability of the Company to
maintain an acceptable pricing level to its customers for its products, the
ability of suppliers to meet the Company's requirements and schedule, the
Company's ability to successfully develop its new products under development,
rapidly changing consumer preference, and the possible development of
competitive products that could render the Company's products obsolete or
unmarketable.
Basis of Presentation
---------------------
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The information contained herein is for the nine and three month periods ended
July 31, 2000 and 1999, and for the period from November 5, 1982 (Inception)
through July 31, 2000. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation of the results of operations for such periods) have been included
herein.
The results of operations for interim periods may not necessarily reflect the
annual operations of the Company. Reference is made to the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1999, for more extensive disclosures
than contained in these condensed financial statements.
Revenue Recognition
--------------------
The Company recognizes revenue based upon shipment of non-refundable product
sales.
Amounts Due from Joint Venture
------------------------------
The amounts due from the Joint Venture of approximately $862,000 as of July 31,
2000 and October 31, 1999, represents advances for parts inventory, such as the
flat panel assembly components, purchased by the Company on behalf of Shanghai
CopyTele, which are incorporated into the Magicom (R) 2000 product.
11
<PAGE>
(2) Joint Venture:
-------------
Investment in Joint Venture
---------------------------
Due to the uncertainty of realizability of its investment, the Company
recognized a permanent impairment charge in fiscal 1999 against the carrying
value of this investment. The Company is not legally liable for the obligations
of the Joint Venture beyond its initial cash capital contribution of $1,225,000.
Therefore, the Company has discontinued recording its share of any of the Joint
Venture's losses since October 31, 1999. Should the Joint Venture subsequently
report income, the Company will begin accruing income only after the cumulative
income exceeds the unrecorded losses and original investment. Any additional
investments in Shanghai CopyTele by the Company will be directly expensed to the
statement of operations.
The Company controls four of seven votes of the Joint Venture's board of
directors. However, decisions involving the Joint Venture require either a
unanimous or two-thirds vote of the Joint Venture's board of directors. Since
the Company has significant influence over the Joint Venture's operations but
does not have control, the Company has historically reflected its investment in
the Joint Venture under the equity method of accounting.
The Company has contributed an aggregate of $1,225,000 in cash to Shanghai
CopyTele, and technology that has been valued for purposes of the Joint Venture
at $700,000. Shanghai CopyTele does not reflect the $700,000 in technology as an
asset or equity investment in their financial statements. The other parties to
the Joint Venture have contributed cash aggregating $1,575,000.
Condensed Statements of Operations for Shanghai CopyTele for the nine month
periods ended July 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION> Condensed Statements of Operations
(Unaudited)
For the nine months ended July 31,
--------------------------------------
2000 1999
----------------- --------------
<S> <C> <C>
Net Sales $ - $ -
Operating Loss (142,514) (201,203)
Other Expense, net (59,735) (57,897)
----------------- --------------
Net Loss $(202,249) $(259,100)
================= ==============
</TABLE>
The cumulative net loss incurred by Shanghai CopyTele since its inception on
April 10, 1995 is $2,274,663.
Two short term loans from a Chinese bank totaling approximately $990,000 matured
on July 20, 2000. The bank has agreed to extend these loans until November 2000.
The loans are secured by a land-use contract and building owned by Shanghai
CopyTele.
12
<PAGE>
(3) Shareholders' Equity:
---------------------
Stock option plans:
--------------------
The Company has three stock option plans, the 1987 Stock Option Plan, adopted by
the Board of Directors on April 1, 1987 (the "1987 Plan"), the CopyTele, Inc.
1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993, and
amended on May 3, 1995 and May 10, 1996 (the "1993 Plan") and the CopyTele, Inc.
2000 Share Incentive Plan adopted by the Board of Directors on May 8, 2000. The
1987 Plan and the 1993 Plan have been terminated other than with respect to
outstanding stock options thereunder. All the plans were approved by the
Company's stockholders.
SFAS No. 123, "Accounting for Stock Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. In accordance with APB Opinion No. 25, no compensation
cost has been recognized by the Company, as all option grants to employees have
been made at the fair market value of the Company's stock on the date of grant.
Options granted to non-employee consultants are accounted for using the
fair-value method required by SFAS No. 123. Compensation expense recognized in
the nine month periods ended July 31, 2000 and 1999 were $210,650 and $61,650,
respectively, and in the three month periods ended July 31, 2000 and 1999 were
$76,200 and $0, respectively, and are included in general and administrative
expenses for the periods.
Sales of common stock and issuance of warrants:
-----------------------------------------------
On April 30, 1999, the Company sold 400,000 shares of its common stock in two
private placements at a price of $1.50 per share, or an aggregate of $600,000,
of which 300,000 shares were sold to an individual who became a director of the
Company in July 1999. In conjunction with the sales of common stock, the Company
issued warrants to purchase 400,000 shares of common stock at an exercise price
of $1.50 per share, which expire on April 30, 2001.
On September 8, 1999, the Company sold 900,000 shares of common stock in six
private placements at a price of $1.00 per share, or an aggregate of $900,000,
of which 200,000 shares were sold to a director of the Company. In conjunction
with the sales of common stock, the Company issued warrants to purchase 900,000
shares of common stock at an exercise price of $1.00 per share, which expire on
September 8, 2001.
On January 5, 2000, the Company sold 420,000 shares of common stock in a private
placement at a price of $0.844 per share, or an aggregate of $354,480. In
conjunction with the sale of common stock, the Company issued warrants to
purchase 420,000 shares of common stock at an exercise price of $0.844 per
share, which expire on January 5, 2002.
13
<PAGE>
In March 2000, the Company sold 196,500 shares of its common stock in three
private placements at a price of $2.313 per share, or an aggregate of $454,505.
In conjunction with the sales of common stock, the Company issued warrants to
purchase 196,500 shares of common stock at an exercise price of $2.313 per
share, which expire in March 2002.
In May 2000, 143,250 warrants were exercised for an aggregate purchase price of
$200,037.
As of July 31, 2000, 1,773,250 warrants to purchase shares of common stock
issued and outstanding were exercisable. At July 31, 1999, there were 400,000
outstanding warrants.
(4) Subsequent Event:
-----------------
In August 2000, the Company entered into a barter transaction whereby $3,000,000
of certain inventory was sold in exchange for an equal value of trade credits.
In accordance with Accounting Principles Board Opinion No. 29, "Accounting for
Nonmonetary Transactions", the Company recognized no gain or loss on the
transaction as it is management's opinion that this exchange was effected at
fair market value. These trade credits, which will be recorded as an asset on
the Balance Sheet, may be used to reduce the cost of advertising as well as
other products and services.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-----------------------------------------------------
Condition and Results of Operations
------------------------------------
Forward-Looking Statements
---------------------------
Information included in this Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future
events and results. We generally use the words "believes", "expects", "intends",
"plans", "anticipates", "likely", "will", and similar expressions to identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties and other factors, some of which are beyond our control,
that could cause actual results to differ materially from those forecast or
anticipated in the forward-looking statements. These risks, uncertainties and
factors include, but are not limited to, those factors set forth in "General
Risks and Uncertainties" below and Note 1 to the Company's Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999.
General
-------
We have been a development stage company since our inception on November 5,
1982. Our principal activities include the development, production and marketing
of the 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. The Company has
recently introduced its DSS-1000 hardware-based peripheral encryption system for
digital applications. We are also continuing our research and development
activities for additional encryption products, and other ultra-high resolution
flat panel displays, including video and color displays and coated particles. We
cannot assure you, however, that our efforts in these areas will be successful.
We also cannot assure you that we will generate significant revenues in the
future, that we will have sufficient revenues to generate profit or that other
products will not be produced by other companies that will render our products
obsolete or unmarketable.
The USS-900 and the DSS-1000 are hardware-based peripheral digital encryption
systems which are available with either the high grade strength of the Harris
Corporation digital cryptographic chip the Citadel(TM) CCX - or "triple DES"
software to provide high-grade information encryption. Harris is supplying the
chip at a negotiated price under a three year agreement entered into in 1999.
Triple DES is an algorithm available in the public domain which has been
incorporated into our software. Triple DES is used by many U.S. government
agencies. We are producing the USS-900 with the assistance of a U.S.-based
sub-contractor. Shanghai CopyTele has produced the modified Magicom(R) 2000 for
the SCS-700 system. Shanghai CopyTele also supplied us with a portion of the
electronic components, sub-assemblies and accessories for the USS-900.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, please refer to our Financial Statements and the notes
thereto.
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<PAGE>
Results of Operations
----------------------
We sell our USS-900 and SCS-700 products to end-users directly and through a
distributor/dealer network. We have had limited sales to our dealers,
distributors and other customers to support our operations since our inception.
We are hopeful, although there is no assurance, that with an increased marketing
effort for our existing products and our new products under development, we will
procure sufficient sales during fiscal 2000 to emerge from the development
stage.
Sales for the nine and three month periods ended July 31, 2000 were
approximately $1,191,000 and $492,000, respectively. No sales were recognized
for the comparable periods in fiscal 1999. Cost of sales and gross profit were
approximately $617,000 and $574,000, respectively for the nine months ended July
31, 2000, and $225,000 and $267,000, respectively, for the three months ended
July 31, 2000, with no amounts in the comparable nine and three month fiscal
1999 periods. Sales increased in the three month period ended July 31, 2000
primarily as a result of the addition of new distributors.
Selling, general and administrative expenses, excluding the loss from Shanghai
CopyTele, decreased in the nine month fiscal 2000 period by approximately
$768,000, from approximately $4,909,000 in the fiscal 1999 period to
approximately $4,141,000 in the fiscal 2000 period. Included in the selling,
general and administrative expenses are research, development and tooling costs.
The research and development costs decreased in the nine month fiscal 2000
period by approximately $228,000, from approximately $2,203,000 in the fiscal
1999 period to approximately $1,975,000 in the fiscal 2000 period.
There was also a decrease of approximately $632,000 in selling, general and
administrative expenses, excluding the loss from Shanghai CopyTele, from the
three month fiscal 1999 period of $1,897,000, to approximately $1,265,000 in the
fiscal 2000 period. Included in these expenses are research, development and
tooling costs. The research and development costs also decreased in the three
month fiscal 2000 period by approximately $79,000, from approximately $724,000
in the fiscal 1999 period to approximately $645,000 in the fiscal 2000 period.
The decreases in the fiscal 2000 periods as compared to the comparable fiscal
1999 periods were principally the result of decreases in compensation costs,
engineering supplies, travel, and expenditures for research and development for
video and color flat panel displays. These decreases were offset by increases in
professional fees, marketing costs, stock based compensation to consultants,
rent and a charge to earnings to bring the valuation of inventory in line with
current estimates.
Employee compensation and related costs decreased in the aggregate during the
fiscal 2000 periods as compared to the fiscal 1999 periods principally as a
result of certain cost reductions offset in part by an increase in payroll taxes
associated with employee stock option exercises. Decreases in pension costs were
commensurate with the decreased compensation costs. Other employee benefit
programs expenses remained approximately the same with reductions in personnel
offset by rate increases. Engineering supplies decreased in the fiscal 2000
periods as compared to the comparable fiscal 1999 periods
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primarily as a result of a reduction of component purchases to develop the
USS-900 and the video and color flat panel displays. Engineering service costs
also decreased in the fiscal 2000 periods as compared to the comparable fiscal
1999 periods as a result of completing the development of the USS-900 and
reductions in services for Shanghai CopyTele. Research and development costs for
flat panel displays decreased in the aggregate during the fiscal 2000 periods as
compared to the comparable fiscal 1999 periods principally as a result of lower
costs incurred in connection with the development of our video and color
displays. Charges to earnings of approximately $333,000 were recorded during the
nine month fiscal period as compared to $675,000 in the comparable fiscal 1999
period in order to bring the valuation of inventory in line with current
estimates and for obsolete and spare parts.
Marketing costs increased in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods as a result of increased advertising, trade show
attendance and other promotions for the USS-900 and the SCS-700. However, travel
and entertainment costs decreased in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods due primarily to less international travel.
Professional fees were higher in the fiscal 2000 periods as compared to the
comparable fiscal 1999 periods as a result of higher fees incurred for legal,
accounting and patent-related services. Rents also increased during the fiscal
2000 periods as compared to the comparable fiscal 1999 periods as a result of
the leasing of additional storage space. Insurance expense increased in the
fiscal 2000 periods as a result of higher levels of coverage and the addition of
one policy. Additional advances to Shanghai CopyTele were expensed in the fiscal
2000 periods. The non-cash charge to earnings for stock based compensation to
consultants was higher in the fiscal 2000 periods as compared to the comparable
fiscal 1999 periods.
Shanghai CopyTele's losses for the nine month periods ended July 31, 2000 and
1999, and for the period from April 10, 1995 (Shanghai CopyTele's Inception)
through July 31, 2000, were approximately $202,000, $259,000, and $2,275,000,
respectively. The decrease in the loss for the nine month fiscal 2000 period
from the fiscal 1999 period of approximately $57,000 was primarily the result of
further cost reductions and limited production activity with respect to panel
assemblies and Magicom(R) 2000 for the SCS-700 product. Shanghai CopyTele is
currently idle but is seeking products to produce in its facility, or to lease
or sell the facility to a third party. A permanent impairment charge was
recognized on our investment in Shanghai CopyTele in the fiscal year ended
October 31, 1999 due to the uncertainty of Shanghai CopyTele generating
sufficient future undiscounted cash flows to cover the carrying amount of our
investment.
While there is no formal agreement, our Chairman of the Board and our President
have waived salary and related pension benefits for an undetermined period of
time commencing November 1985. Four other individuals, including an officer and
three senior level personnel, then employed by us, waived salary and related
pension benefits from January 1987 through December 1990. While there are no
formal agreements, commencing January 1991 these individuals waived such rights
for an undetermined period of time and they did not receive salary or related
pension benefits through December 1992. Our Chairman of the Board, our President
and the three senior level personnel continued to waive such rights commencing
in January 1993 for an undetermined period of time. From February 1993 to
September 1998 one additional employee also waived such salary and benefit
rights.
17
<PAGE>
Interest income decreased approximately $39,000 from approximately $133,000
during the nine month fiscal 1999 period as compared to approximately $94,000
during the nine month fiscal 2000 period. Interest income increased
approximately $6,000 from approximately $36,000 during the three month fiscal
1999 period as compared to approximately $42,000 during the three month fiscal
2000 period. The decrease in the nine month comparable periods resulted
primarily from a decrease in average funds available for investment which was
offset by a slight increase in interest rates. The increase in the three month
comparable periods resulted primarily from an increase in average funds
available for investment aided by a slight increase in interest rates. Funds
available for investment, on a monthly weighted average basis, during the nine
month fiscal 2000 and 1999 periods were approximately $2,677,000 and $3,995,000,
respectively, and $2,943,000 and $3,194,000, respectively, during the three
month fiscal 2000 and 1999 periods. The investment instruments selected by us
are principally money market accounts and treasury investments.
Liquidity and Capital Resources
-------------------------------
Since our inception, we have met our liquidity and capital expenditure needs
primarily from the proceeds of sales of our common stock in our initial public
offering, in private placements, upon exercise of warrants issued in connection
with the private placements and public offering and upon the exercise of stock
options pursuant to our 1987 Plan and our 1993 Plan.
During the nine month period ended July 31, 2000, we received proceeds
aggregating approximately $716,000 in payments from our customers for products
sold. For the nine month periods ended July 31, 2000 and 1999, we also received
proceeds aggregating approximately $3,226,000 and $1,345,000, respectively, from
the exercise of stock options and warrants to purchase shares of our common
stock. During the nine month periods ended July 31, 2000 and 1999, we also
received proceeds of approximately $809,000 and $600,000, respectively from
sales of our common stock in private placements. Working capital increased by
approximately $890,000 from approximately $5,727,000 at October 31, 1999 to
approximately $6,617,000 at July 31, 2000 primarily as a result of the proceeds
received in the fiscal 2000 period offset by the loss incurred.
As of July 31, 2000, our working capital included approximately $2,718,000 of
cash and marketable securities, and approximately $1,473,000 (net of
approximately $862,000 due to Shanghai CopyTele) of accounts payable and accrued
liabilities. Our operations used approximately $3,361,000 in cash during the
nine month period ended July 31, 2000. Based on reductions in operating expenses
that have been made and additional reductions that may be implemented, if
necessary, we believe that our cash resources and cash generated from operations
will be sufficient to continue operations through the third quarter of fiscal
2001. We anticipate that, thereafter, we will continue to require additional
funds to continue our marketing, and research and development activities if cash
generated from operations is insufficient to satisfy our liquidity requirements.
However, our projections of future cash needs and cash flows may differ from
actual results. If current cash and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we may seek to sell debt
or equity securities or to obtain a line of credit. The sale of additional
equity securities or convertible
18
<PAGE>
debt could result in additional dilution to our stockholders. We can give you no
assurance that we will be able to generate adequate funds from operations, that
funds will be available to us from debt or equity financings, or that if
available, we will be able to obtain such funds on favorable terms and
conditions. We currently have no definitive arrangements with respect to
additional financing.
Our estimated funding capacity indicated above assumes, although there is no
assurance, that the waiver of salary and pension benefits by the Chairman of the
Board, the President and senior level personnel will continue.
We are seeking to improve our liquidity through an increased level of sales of
our products. In an effort to generate sales, we are marketing the USS-900 and
the DSS-1000 in both the U.S. and international markets directly and through a
network of large office equipment suppliers, security product organizations,
distributors and dealers. We are also increasing our advertising program to
include television spots in the fall of 2000. We are hopeful, although we can
give you no assurance, that by marketing our encryption products and increasing
our advertising, sales will continue to increase to improve our liquidity.
The NASD requires that we maintain a minimum of $4 million of net tangible
assets to maintain our Nasdaq National Market listing. If our stock were
delisted, the delisting could potentially have an adverse affect on the price of
our common stock and could adversely affect the liquidity of the shares held by
our stockholders. Our net tangible assets as of July 31, 2000 were approximately
$6,963,000. We anticipate that we may require additional funds to maintain the
NASD net tangible assets requirement if funds generated from operations are
insufficient. We can give you no assurance that we will be able to generate
adequate funds from operations, that funds will be available to us from equity
financings, or that if available, we will be able to obtain such funds on
favorable terms and conditions. We currently have no definitive arrangements
with respect to additional equity financings.
Shanghai CopyTele required an initial aggregate capital investment of $3,500,000
from the parties to the joint venture. The Joint Venture Agreement contemplates
an additional $3,500,000 of funding which may be borrowed from banks, of which
approximately $990,000 has been borrowed to date. These short-term loans, which
mature in November 2000, are from a Chinese bank, secured by the building and a
land-use contract with the Land Administration Bureau of Shanghai County. We
have contributed $1,225,000 in cash, and technology valued for the purposes of
Shanghai CopyTele at $700,000, and the Chinese parties contributed $1,575,000 in
cash to Shanghai CopyTele. Shanghai CopyTele may require additional
capitalization depending upon the nature and extent of its business activities.
We can give you no assurance that adequate funds will be available to Shanghai
CopyTele, including any future capital contributions, if any, beyond its initial
capital contributions or that, if available, Shanghai CopyTele will be able to
obtain such funds on favorable terms and conditions.
We have recorded our inventory at management's current best estimate of its net
realizable value, which is based upon the historic and future selling price of
our products. To date, sales of our products have been limited. Accordingly, we
can give you no assurance that we will not have to further reduce the selling
prices of our inventory below its current carrying value to accomplish our
business strategies (Note 4).
19
<PAGE>
General Risks and Uncertainties
-------------------------------
We have had limited sales to dealers, distributors and other customers to
support our operations since our inception. We have expended approximately $33
million for research and development since our inception. We have had net losses
and negative cash flow from operations in each year of our business since
inception and we may continue to incur substantial losses and experience
substantial negative cash flows from operations.
Based on reductions in operating expenses that have been made and additional
reductions that may be implemented, if necessary, we believe that our cash
resources and cash generated from operations will be sufficient to continue
operations through the third quarter of fiscal 2001. We anticipate that,
thereafter, we may continue to require additional funds to continue our
marketing, research and development activities, if cash generated from
operations is insufficient to satisfy our liquidity requirements. We may seek to
sell debt or equity securities or to obtain a line of credit, if needed. In
addition, we may need to raise additional equity financing to satisfy an NASD
requirement that we have a minimum of $4 million of net tangible assets to
maintain our Nasdaq National Market listing if funds generated from operations
are insufficient. The NASD also requires that we maintain a minimum bid price of
at least $1.00 per share in order to continue our listing. If our stock were
delisted, the delisting could potentially have an adverse affect on the market
price of our common stock and the liquidity of our shares. We cannot give you
any assurance that additional financing, if needed, will be available to us or
that, if available, we will be able to obtain additional financing on favorable
terms and conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Our encryption products are only in their initial stages of production and
marketing. The success and profitability of these products will depend upon many
factors, many of which are beyond our control, including: our ability to
successfully market the USS-900 and the DSS-1000; our continuing ability to
purchase the Citadel(TM) CCX encryption chip from Harris for use in the USS-900,
the DSS-1000 and other encryption products; our production capabilities and
those of our suppliers as required for the production of the USS-900 and the
DSS-1000, and our other encryption products; long-term product performance and
the capability of our dealers and distributors to adequately service our
products; our ability to maintain an acceptable pricing level to end-users for
our products; the ability of suppliers to meet our requirements and schedule;
our ability to successfully develop our new products under development,
particularly our new encryption products; rapidly changing consumer preferences;
and the possible development of competitive products that could render our
products obsolete or unmarketable. Consequently, we cannot give you any
assurance that we will generate sufficient revenues to support our operations in
the future or that we will have sufficient revenues to generate profits.
Our Chief Executive Officer, Denis A. Krusos, and our President, Frank J.
DiSanto, founded CopyTele in 1982 and are engaged in the management and
operations of our business and that of Shanghai CopyTele, including all aspects
of the development, production and marketing of our products and our flat panel
display technology. Messrs. Krusos and DiSanto, and our other senior executives,
20
<PAGE>
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.
PART II OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Recent Sales of Unregistered Securities
---------------------------------------
In May 2000, the Company issued 143,250 shares of Common Stock in connection
with the exercise of warrants to two accredited investors for purchase prices
averaging approximately $1.40 per share, or an aggregate of $200,037. The
exercise prices represented the fair market value of the common stock on the
date the related Stock Subscription Agreements were entered into. The shares of
Common Stock were issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, relative to sales by an
issuer not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on July 25, 2000, six
directors were elected and the CopyTele, Inc. 2000 Share Incentive Plan was
approved. In addition, the selection of Arthur Andersen LLP, independent public
accountants, to audit the financial statements of the Company for the fiscal
year ending October 31, 2000 was ratified. The following is a tabulation of the
voting with respect to the foregoing matters:
(a) Election of Directors -
Nominee For Withheld
Denis A. Krusos 55,482,281 1,977,534
Frank J. DiSanto 55,733,047 1,726,768
Gerald J. Bentivegna 55,082,553 1,377,262
George P. Larounis 55,957,595 1,502,220
Lewis H. Titterton 56,108,815 1,351,000
Anthony Bowers 55,977,595 1,482,220
(b) Approval of the CopyTele, Inc. 2000 Share Incentive Plan:
For Against Abstain Broker Non-Votes
17,204,896 5,398,530 299,677 34,557,193
(c) Ratification of selection of Arthur Andersen LLP as independent
auditors for the fiscal year ending October 31, 2000:
For Against Abstain
56,994,185 366,434 99,196
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
10 - CopyTele, Inc. 2000 Share Incentive Plan, filed as Annex A to
the Registrant's Proxy Statement dated June 12, 2000
(incorporated by reference).
27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No current report on Form 8-K was filed for the Company during the
third quarter of its fiscal year ended July 31, 2000.
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CopyTele, Inc.
By: DENIS A. KRUSOS
------------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
September 14, 2000 Officer)
By: FRANK J. DISANTO
-------------------------
Frank J. DiSanto
September 14, 2000 President and Director
By: GERALD J. BENTIVEGNA
-------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
September 14, 2000 and Accounting Officer)
23
