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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, 1997
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
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(State or Other Jurisdiction of Incorporation or Organization)
11-2622630
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(I.R.S. Employer Identification No.)
900 Walt Whitman Road
Huntington Station, NY 11746
(516) 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, 1998,
computed by reference to the closing sale price of the registrant's Common Stock
on the NASDAQ National Market System on such date ($3.25): $158,437,617.
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, 1998, the registrant had outstanding 57,861,176 shares of Common
Stock, par value $.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
Item 1. Business
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General
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CopyTele, Inc. (the "Company" or "CopyTele"), is a development stage enterprise
whose principal activities include the development, production and marketing of
a telephone based multi-functional telecommunications product incorporating the
Company's patented compact, ultra-high resolution, charged particle, E-Paper(TM)
flat panel display technology (the "E-Paper(TM) Flat Panel Display"), and the
operations of Shanghai CopyTele Electronics Co., Ltd. ("SCE"), the Company's 55%
owned joint venture in Shanghai, China. The Company also is continuing its
research and development activities for ultra-high resolution video and color
flat panel displays.
SCE was formed to produce and market multi-functional telecommunications
products in China, utilizing the Company's E-Paper(TM)Flat Panel Display and
associated proprietary hardware and software technology and to supply such
products to CopyTele for sale outside of China. The telecommunications product
developed by the Company is MAGICOM(R) 2000, a telephone based multi-functional
product that can simultaneously provide voice, electronic handwriting and
editing of documents over a single public telephone line. SCE is producing
MAGICOM(R) 2000 for its distribution channels in China and CopyTele's
distribution network in various regions of the world including the United
States.
The Company also has developed, in conjunction with a Japanese company (the
"Japanese Supplier"), a small portable printer called MAGIC PRINTER. The printer
is being produced for the Company by the Japanese Supplier and is being marketed
by the Company through its distributor and dealer network, including in China,
for use with MAGICOM(R) 2000 or in conjunction with personal or laptop
computers.
To date, the Company has had no revenues to support its operations. Although the
Company generated limited sales to certain of its distributors, revenue and
related gross profit recognition on these initial sales was deferred in fiscal
1997 until the Company determines its products have been accepted by the
end-users (See Notes 1 and 2 to the Company's Financial Statements). The Company
has expended approximately $24.4 million for research and development since its
inception in 1982. MAGICOM(R) 2000 and MAGIC PRINTER are only in their initial
stages of production and marketing. The success and profitability of these
products will depend upon many factors, including those normally associated with
any new product. See "MAGICOM(R) 2000 - General Risk and Uncertainties" below.
Consequently, there is no assurance that the Company will generate sufficient
revenues to support its operations in the future, will have sufficient revenues
to generate profits or that other products will not be produced by other
companies that will render the products of the Company and of SCE obsolete or
unmarketable.
The Company's Chief Executive Officer, Denis A. Krusos, its President, Frank J.
DiSanto, and other senior executives are engaged in the management and
operations of the Company and SCE, including all aspects of the development,
production and marketing of the Company's products and flat panel display
technology, and are important to the future business and financial arrangements
of the Company and SCE.
1
The Company was incorporated on November 5, 1982, under the laws of the State of
Delaware. Its principal executive offices are located at 900 Walt Whitman Road,
Huntington Station, New York 11746 and its telephone number is 516-549-5900.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
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Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: production capability by SCE and the Japanese Supplier of MAGICOM(R)
2000 and MAGIC PRINTER, respectively; long-term product performance and the
capability of the Company, SCE, its distributors and its dealers to adequately
service the Company's products; the ability of distributors and its dealers to
market their contracted quantities of the Company's products in their respective
territories; the ability of the Company and SCE to obtain all required foreign
government approvals; the volatility of foreign currency exchange rates;
political and economic stability in targeted marketing territories; and the
possible development of competitive products that could render the Company's
products obsolete or unmarketable.
MAGICOM(R) 2000
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General
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MAGICOM(R) 2000 incorporates CopyTele's E-Paper(TM)Flat Panel Display. This
product offers many features, including simultaneous voice and electronic
handwriting and editing of documents over a single public telephone line;
digital voice mail system; full duplex digital speakerphone; sending and
receiving fax (full page transmission and paperless reception); electronic
handwriting; e-mail communication; data transmission; storage and computer
interface; a scanner, as well as personal copying capabilities with the use of
MAGIC PRINTER; and the ability to transmit alphanumeric messages to a pager
using a touch sensitive keyboard screen, all in a compact easy-to-use desktop
unit. In addition to using a single public telephone line, MAGICOM(R) 2000 is
also capable of performing simultaneous voice and electronic handwriting using
two public telephone lines or one public telephone line and a cellular phone
link. MAGICOM(R) 2000 also has other telecommunications capabilities, such as
speed dialing, pause, re-dial, flash, electronic directory, date and time and is
capable of incorporating on a continuing basis, future functions that may be
developed from the Company's proprietary software development. The Company is
continuing to develop proprietary software to provide interfacing with on-line
services and the Internet.
2
The E-Paper(TM) Flat Panel Display, incorporated in MAGICOM(R) 2000 brings an
advanced standard of readability to visually displayed electronic information,
since its display image forms in a manner closely resembling the way a printed
image forms on a page. Business documents, letters, diagrams, written messages
or notes, magazine articles, pictures and other forms of information that can be
received electronically can be read and viewed with the ease approaching that of
a printed page. Users can view, in a single image, an entire page of
information. The displayed images can be viewed from any angle under all
lighting conditions. Once an image is viewed on this display, it can be retained
with minimal display power. This provides additional user-friendliness since no
refreshing is necessary to view an image. Conventional displays, such as cathode
ray tubes ("CRTs") and liquid crystal displays ("LCDs"), require refresh (quick
repetition of an image) which is one reason why people find reading a printed
page on paper easier and more natural. The E-Paper(TM) Flat Panel Display, in
combination with a high quality writing screen and plastic tip pen, allows
electronic writing with the ease approaching that of writing on paper. The
display-writing screen combination can be used to create and transmit
information and edit received documents. The Company has described these display
features as "electronic paper". In addition, the high resolution of its
E-Paper(TM) Flat Panel Display has enabled CopyTele to produce a compact,
lightweight product capable of displaying a full page of information,
considerably smaller than conventional lower resolution displays would allow.
The product size is suitable for office and home use.
1997 Developments
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During 1997, the Company developed and incorporated into MAGICOM(R) 2000 a
number of enhanced features in response to marketing requirements from its
distribution network involving system applications of MAGICOM(R) 2000. The
Company also incorporated technology into MAGICOM(R) 2000 in order to meet UL
and FCC requirements in the United States and national telecom agency
requirements for certain of those foreign countries in which distributors are
marketing the Company's product. See "Marketing" below. Among the enhanced
features incorporated in MAGICOM(R) 2000 during 1997 are the following:
Use of a single public phone line and a 33.6K BPS internal modem to
provide simultaneous voice, handwriting and editing of documents over
a wide range of quality of public lines that exist in developed and
developing countries.
Use of software capability to provide for variations in telephone
network interfaces as required by various national telecom agencies.
Selection by a user of the number of rings before MAGICOM(R) 2000
answers a voice call during the "day" mode. During the "night" mode,
MAGICOM(R) 2000 answers in one ring.
Elimination of audible ringing on all fax calls.
Use of software to communicate with fax machines having special
standards in various developing countries.
New coated particles in the E-Paper(TM) Flat Panel Display which have
increased the display's contrast, brightness, and longevity.
3
In addition, the Company continually endeavors to improve and make more
efficient the production process used by SCE to produce MAGICOM(R) 2000.
Specifically, the Company has simplified the process of assembling the
E-Paper(TM) Flat Panel Display by modifying the software used to connect the
C-MOS driver chips on its display and by improving its flat panel structure for
better contrast. The Company also has produced a second generation power supply
and control logic which is expected to reduce production cost. In addition, the
Company has expanded SCE's production capacity for the fluid insertion in its
E-Paper(TM) Flat Panel Display and has developed a process to make larger
quantities of coated particles used in the display's fluid.
MAGIC PRINTER
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The Company has developed, in conjunction with the Japanese Supplier, a small
portable printer called MAGIC PRINTER. The Company's MAGIC PRINTER, which is
produced by the Japanese Supplier in accordance with the Company's
specifications, is small in size and lightweight, and is being marketed as an
optional accessory for the MAGICOM(R) 2000 where desk space is at a premium or
for use with personal or laptop computers. The following are the printer's main
features:
Approximately 1 inch high by 2 inches deep and 10 inches wide.
Weight approximately 1 pound including a battery.
High quality images.
Printer speed of two pages per minute.
Operation via AC adapter, that automatically switches between 115 and
230 volts, or an optional battery.
Parallel interface for quick downloading of bit-mapped images.
Can be driven directly from most Windows software applications with
the supplied Windows(R) 95 or Windows(R) 3.1 drivers.
Variable paper sizes: U.S. letter, U.S. legal or A4.
Requires paper to be fed one piece at a time.
The Japanese Supplier currently is producing a sufficient quantity of printers
to meet the Company's anticipated short-term needs. The long-term availability
of the printer's supply, however, will be subject to future negotiations.
Therefore, there can be no assurance that the Company and the Japanese Supplier
will be able to arrive at a mutually acceptable agreement with respect to the
production of MAGIC PRINTER in the future. If the Company is unable to reach
such agreement, there can be no assurance that the Company will be able to
obtain a printer similar to MAGIC PRINTER from another manufacturer.
4
Joint Venture
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SCE was formed on April 10, 1995 pursuant to a Joint Venture Agreement dated
March 28, 1995 ("the Joint Venture Agreement") between CopyTele and Shanghai
Electronic Components Corp. ("SECC"). With this Joint Venture Agreement, SCE was
formed as a limited liability company in Shanghai, China having a duration of 20
years. The Company has been advised that SECC is wholly-owned by the government
of China.
SCE required an initial aggregate capital investment of $3.5 million from the
parties to the joint venture. The Joint Venture Agreement contemplates an
additional $3.5 million investment which may be borrowed from third parties of
which $500,000 has been borrowed to date. CopyTele, which owns a 55% interest in
SCE, has contributed $1,225,000 in cash, and technology (valued for purposes of
the Joint Venture Agreement at $700,000 and representing 20% of the registered
capital) which has been licensed to SCE pursuant to a Technology License
Agreement, dated as of March 28, 1995, between SCE and the Company (the
"Technology License Agreement"). In accordance with Chinese regulations, the
maximum percentage of technology which can be contributed as registered capital
is 20%. SECC and Shanghai International Trade and Investment Developing Corp.
("SIT") have contributed an aggregate of $1,575,000 in cash to SCE. SIT, a state
owned investment and trade development company operating under the leadership of
the Shanghai Foreign Economic Relations and Trade Commission in Shanghai, China,
acquired a 10% economic interest in SCE from SECC in 1996. Recently, SCE
approved an additional assignment by SECC of a 30% interest in the joint venture
to Shanghai Instrumentation and Electronics Holding Group Company ("SIEC") of
Shanghai China, SECC's parent company, and SECC's remaining 5% interest to SIT,
bringing SIT's total interest to 15%. As a result, SECC would no longer have a
direct economic interest in SCE. The assignments are awaiting final Chinese
government approval which CopyTele has been informed should be forthcoming
shortly. The Board of Directors of SCE is comprised of seven directors. In
accordance with the Joint Venture Agreement, CopyTele has appointed four
directors, the Vice-Chairman and the General Manager, and SECC and SIT jointly
have appointed three directors, the Chairman and the Vice-General Manager. The
Company accounts for its investment in SCE under the equity method of
accounting. See Notes 2 and 3 to the Company's Financial Statements.
The parties have agreed in principle to increase the investment in SCE to a
maximum of $25 million depending on the nature and extent of SCE's business. It
is contemplated that additional financing for SCE will be obtained from a
combination of third party borrowings and equity investments contributed by the
Company and the other parties to SCE in proportion to their respective equity
interests and on terms to be agreed upon. The Company may require additional
financing in order to participate in SCE following its initial capital
contributions and to continue its research and development activities. There can
be no assurance, however, that adequate financing will be available to the
Company or SCE, or that, if available, it will be available on favorable terms
and conditions.
5
CopyTele has licensed only its flat panel application technology to SCE for
exclusive use in China. SCE does not have the right to produce the thin film
coated glass for the Company's flat panel which is being supplied to SCE by the
Company. As a result of licensing the technology, CopyTele will receive
royalties for the duration of the Technology License Agreement on all net sales
by SCE, including sales to CopyTele for resale outside of China. The Company
received royalties on SCE's initial sales of MAGICOM(R) 2000 to CopyTele during
1997 in the form of a lower selling price. These units were used primarily for
marketing purposes by the Company. Pursuant to the Joint Venture Agreement,
CopyTele is solely authorized to market and sell SCE's products outside of China
while SCE is responsible for marketing and sales within China.
In December 1996, SCE completed construction of a new 30,000 square foot
facility in the Shanghai Songjiang Industrial Zone (see "Properties" below), and
commenced production of MAGICOM(R) 2000 in this facility during the first
calendar quarter of 1997 after relocating production from a previously occupied
leased facility ( see "Production" below). The capital contributions made to SCE
were sufficient to enable SCE to cover the costs of building the new facility,
which totaled approximately U.S. $1 million in the aggregate. SCE has obtained
two short-term loans from a Chinese bank aggregating U.S. $500,000 for the
purpose of purchasing production materials and supplies. These loans are secured
by a land-use contract with the Land Administration Bureau of Shanghai County
(see "Properties" below and Note 3 to the Company's Financial Statements) and
equipment. Funding for the purchase of additional equipment, if required, and
working capital requirements are expected to be financed through additional
third party borrowings, but there can be no assurance that, if available, SCE
will be able to obtain such financing on favorable terms and conditions.
Production
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SCE utilizes multi-purpose production and assembly line equipment to produce
MAGICOM(R) 2000. The production process primarily involves a series of
multi-stations where employees progressively assemble and test the product prior
to shipment. As of December 31, 1997, approximately sixty of SCE's seventy-two
employees were involved in the assembly and production of MAGICOM(R) 2000.
However, the number of employees is subject to change depending upon SCE's
ongoing production requirements. MAGICOM(R) 2000's main sub-assemblies include
printed circuit boards containing the power supply, the control logic and the
telephone interface, which circuit boards are being automatically populated with
electronic components by sub-contractors. The other assemblies include a
document scanner, keypad, and function controls. The E-Paper(TM) Flat Panel
Display assembly area contains multiple stations of equipment which
automatically insert and bond the 128 output chips located on the flat panel and
assemble the illumination system and the touch screen on the flat panel. The
Company is providing SCE with the 128 output chips, the flat panel fluid, and
the flat panel substrates which are being produced by Hoya Corporation ("Hoya"),
a major Japanese high technology manufacturer of glass products. See "Flat Panel
Display Technology -- General" below. The Company is also receiving sample
quantities of assembled flat panel substrates from Hoya to monitor their
performance. SCE is filling the E-Paper(TM) Flat Panel Displays with fluid
containing the coated yellow particles in a new 5,000 square foot
environmentally controlled "clean room" area, mounting and electrically
connecting the 128 output chips to
6
the E-Paper(TM) Flat Panel Displays, and integrating the illumination system and
touch screen to complete the E-Paper(TM) Flat Panel Display assembly. The
Company has provided multiple testing systems to SCE to check the operation of
MAGICOM(R) 2000 units prior to shipment. The Company is also receiving sample
quantities of SCE produced MAGICOM(R) 2000 units to continuously monitor the
quality of the production process.
MAGICOM(R) 2000 contains various electronic components. The commodity-type
components, such as resistors, capacitors and multi-purpose chips are available
and are being purchased from various vendors world-wide. Special purpose
components, such as the fax and data chip set, the 33.6K BPS modem, the 128
output drive chips and the E-Paper(TM) Flat Panel Display's coated glass plates,
are being purchased from single vendors which represent the major suppliers of
these components throughout the telecommunications, consumer electronics and
other industries. The Company does not presently anticipate that it will
experience any difficulty in obtaining the required components for MAGICOM(R)
2000 at acceptable prices.
Production of MAGICOM(R) 2000 is being performed in SCE's 30,000 square foot
facility in the Shanghai Songjiang Industrial Zone. This facility has warehouse
space, administrative offices, and the capability to house multiple equipment
stations to assemble the product. SCE believes it currently has adequate
management, technical and production personnel to operate the facility and
intends to increase personnel as needed. See "Employees and Consultants". The
Songjiang Industrial Zone is approximately 20 miles from downtown Shanghai, 30
miles from a deep harbor and 13 miles from an international airport. A
transportation system of connecting expressways, railroads and waterways provide
efficient routes to import raw materials and to export SCE's products to
world-wide markets.
During 1997, the Company developed and incorporated into MAGICOM(R) 2000 a
number of enhanced features in response to marketing requirements from its
distribution network. See "1997 Developments" above. The major enhancement to
MAGICOM(R) 2000 involved adding the capability to provide simultaneous voice,
electronic handwriting, and editing of documents or drawings over a single
public telephone line. Previously this feature was accomplished only by using
two public telephone lines. The addition of this feature required a major
engineering effort by the Company which resulted in the addition of a 33.6K BPS
modem module with its associated proprietary software and hardware inside the
product. The Company determined to limit SCE's production efforts until the
changes could be incorporated into the finished product.
7
The Company completed the implementation of the product changes by the end of
1997, including designing a second generation of sub-assemblies to simplify the
production process and reduce its cost. Upon such completion, SCE increased
production to appoximately 300 assembled MAGICOM(R) 2000 units in December. As a
result of adding new capabilities to the product, however, SCE was limited to
producing approximately seven hundred assembled MAGICOM(R) 2000 units during
1997. Production is expected to increase to meet anticipated product demand in
1998, but the Company is unable to predict actual production levels. The Company
currently maintains a small inventory of units in the United States to support
the marketing operations of its international distributors and U.S. dealers and
continues to develop additional software features.
During the period of limited production of assembled units, SCE continued to
produce sub-assemblies that required only minimal changes. The production of
E-Paper(TM) Flat Panel Display sub-assemblies, for example, continued throughout
1997 since the feature enhancements requested by the Company's distributors did
not involve the flat panel assembly. During 1997, more than two thousand
E-Paper(TM) Flat Panel Display assemblies were produced, many of which were used
for performance testing, including bonding efficiency, reliability, illumination
levels, electronic handwriting quality, packaging for shipment and for use in
fully assembled units. As a result of these continued production efforts, SCE
was able to maintain a supply of E-Paper(TM) Flat Panel Displays that will be
readily available for use in the production of MAGICOM(R) 2000.
Marketing
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Pursuant to the Joint Venture Agreement, the Company is solely authorized to
purchase MAGICOM(R) 2000 from SCE for marketing and sale outside China. In this
regard, the Company has established a Sales and Marketing Office and has hired a
marketing team, including independent sales representatives, to implement its
marketing strategy. As of December 31, 1997, the Company employed six sales
personnel and had retained five independent representatives in several
countries, including the United States. To date, the Company also has entered
into agreements with twelve foreign distributors and two dealers in the United
States to sell and service MAGICOM(R) 2000 and MAGIC PRINTER and one foreign
distributor in China to sell and service MAGIC PRINTER.
The Company's overall marketing strategy is to penetrate world-wide markets in
progressive stages, beginning with those markets which the Company believes to
have lower entry barriers. The Company's strategy with respect to MAGIC PRINTER
specifically is to market the printer as both an optional accessory to
MAGICOM(R) 2000 and as a portable printer to be used with personal or laptop
computers. As a result of its marketing efforts, the Company has entered into
distribution and dealer agreements to sell and service MAGICOM(R) 2000 and MAGIC
PRINTER in Russia, its former Republics, North Africa, Egypt, Philippines,
Indonesia, Malaysia, Thailand, Hong Kong, Brazil and South Korea and to sell and
service MAGIC PRINTER in China. See "MAGICOM 2000 (R) - General Risks and
Uncertainties" below for certain risks associated with these products. Depending
upon the growth of SCE's production capabilities and the marketing requirements
of MAGICOM(R) 2000 and MAGIC PRINTER, the Company plans to add additional
distributors in existing markets as well as new regions of the world to increase
marketing potential. In this regard, the Company currently is pursuing further
representation in Europe, the Middle East and Latin America. The Company also
has selected dealers in various parts of the United States, including the New
York and Washington D.C. Metropolitan Areas to sell and service MAGICOM(R) 2000
and MAGIC PRINTER under renewable one-year agreements. If these efforts are
successful, the Company plans to add additional dealers to service other regions
of the country.
8
The Company's foreign distribution and dealer agreements are each for terms of
three years or less. In light of the recent adverse economic conditions in
certain regions, particularly Southeast Asia, however, it is anticipated that
either the term of the agreements with distributors in those countries will be
extended over a longer period or the quantities contracted for sale
renegotiated. The agreements provide for periodic purchase orders in increasing
quantities accompanied by irrevocable bank letters of credit, acceptable to the
Company, furnished by the distributors.
The independent sales representatives are responsible for soliciting
distributors and referring them to the Company. The independent sales
representatives will receive a commission for the Company's sales to such
distributors.
The Company's distributors and independent sales representatives currently are
in the process of marketing MAGICOM(R) 2000 and MAGIC PRINTER to telephone
companies, government agencies and industrial, professional and service
entities. In an effort to support its distributors and independent
representatives and to facilitate the opening of new markets, the Company has
developed brochures, videos, exhibition booths for trade shows, sales handbooks
and other sales and marketing tools. The Company and representatives of SCE also
have participated in trade exhibitions and seminars, including displaying the
equipment in exhibitions in China, Tunisia, Egypt, Russia, Germany and the Latin
American Comdex Show in Miami, Florida. Furthermore, the Company has provided
service training and technical support to specific system applications
identified by its distributors.
The Company is continuously working with its distributors to obtain
certification of MAGICOM(R) 2000 by the national telecom agencies for those
foreign countries in which distributors are marketing the product. Such approval
is generally required before the MAGICOM(R) 2000 unit can be sold in a specific
country. The MAGIC PRINTER, however, does not require national telecom agency
approvals. The required certifications for MAGICOM(R) 2000 have been obtained in
North Africa, Russia and China. The Company's distributors are continuing to
pursue certification in Egypt, Brazil, Indonesia, Malaysia, Philippines,
Thailand and Hong Kong despite the recent economic conditions that may adversely
affect the marketability of MAGICOM(R) 2000 and MAGIC PRINTER in certain of
those countries. The certification process will be an ongoing effort as more
distributors are selected in different countries. The Company also has obtained
UL and FCC approvals in the United States and CSA approval in Canada.
During 1997, the Company and its distributors demonstrated MAGICOM(R) 2000 units
in various business and governmental organizations to measure their performance
and marketability. As a result of this evaluation, a number of feature
enhancements were requested by the Company's distributors and it was necessary
to limit production efforts until the changes were implemented by the end of
1997. See "1997 Developments" and "Production" above. Units that previously had
been acquired by distributors were updated by the Company, and the distributors
were then able to proceed with their marketing efforts in accordance with the
terms of their agreements with the Company. As a result of adding new
capabilities to the product, however, the Company supplied or sold to its
distributors only a limited quantity of assembled MAGICOM(R) 2000 units for
marketing purposes during 1997.
9
The Company's distributors and dealers are in various stages of marketing
MAGICOM(R) 2000 and MAGIC PRINTER, ranging from performing test marketing, to
obtaining national telecom agency approvals, to soliciting orders. The Company
has supplied or sold a limited quantity of units to its distributors for
marketing purposes and continuously monitors their progress in an effort to
evaluate their ability to market the products in their respective territories.
It is the policy of the Company to take remedial action, including adding
additional distributors, in any territory where it believes that a distributor
will not achieve the marketing potential of the products.
SCE is solely responsible for marketing MAGICOM(R) 2000 in China. SCE has
featured MAGICOM(R) 2000 at several trade shows in China and has launched a
marketing program pursuant to which SCE has selected appropriate local sales
channels for the product and has initiated discussions with local distributors.
To date, SCE has entered into a one year renewable distribution agreement
requiring periodic purchase orders with a distributor to sell and service
MAGICOM(R) 2000 in China and is currently in discussions with other
distributors.
General Risks and Uncertainties
-------------------------------
MAGICOM(R) 2000 and MAGIC PRINTER are only in their initial stages of production
and marketing. The success and profitability of these products will depend upon
many factors, including those normally associated with any new product. These
factors include the capability of SCE and the Japanese Supplier to produce
sufficient quantities of MAGICOM(R) 2000 and MAGIC PRINTER, respectively; the
ability of the Company and SCE to maintain an acceptable pricing level to
end-users for the Company's products; the ability of suppliers to meet the
Company's requirements and schedule; the long-term product performance and the
capability of the Company, SCE and its distributors and dealers to adequately
service the Company's products; the ability of distributors and dealers to
market their contracted quantities of the Company's products in their respective
territories; the ability of SCE to obtain additional financing on favorable
terms and conditions; the quality of available phone lines; rapidly changing
consumer preferences; and the possible development of competitive products that
could render the Company's products obsolete or unmarketable. In addition, since
the Company's products are sold internationally, the Company is subject to the
risks associated with doing business in foreign markets. These risks include the
potential difficulties for the Company and SCE to obtain required foreign
government approvals; the volatility of foreign currency exchange rates and
political and economic instability in targeted marketing territories; and
increased foreign government restrictions, including additional duties, taxes
and quotas. The occurrence of any combination of these events could have the
effect of diminishing product sales and potential profitability in affected
countries.
MAGICOM(R) 2000 is produced through SCE, a joint venture in China which is
subject to the rules and regulations of China's legal and economic system as
well as its political and economic environment. Although China is currently
encouraging a favorable business environment with foreign businesses operating
in China, there can be no assurance that rules or regulations will not be put
into effect in the future that could diminish or eliminate the ability of the
Company to produce its product in China or successfully participate in the
operations of SCE.
10
Flat Panel Display Technology
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E-Paper(TM) Flat Panel Display
------------------------------
In 1997, the Company continued to enhance the characteristics of its E-Paper(TM)
Flat Panel Display and also to pursue its efforts to develop two new
technologies for color and video flat panel displays (see "Color and Video Flat
Panel" below). The enhancements relating to the E-Paper(TM) Flat Panel Display
included developing and producing the Company's proprietary coated yellow
particles to increase the MAGICOM(R) 2000 display's contrast, brightness and
longevity. Also, software modifications were made to simplify the production
process utilized to connect the driver chips to the flat panel structure. The
E-Paper(TM) Flat Panel Display possesses a combination of features that are not
presently available in other display screens, such as ultra-high resolution,
compatibility with facsimile terminals (200 lines per inch in the horizontal and
vertical directions with up to a full page of information with real-time
display), a minimal amount of inactive space between pixels or picture elements
(allowing the image to appear smoother), image retention without refreshing
(eliminating the need for image repetition with resulting flicker and operator
fatigue), approximately 180 degree viewing angle, low power consumption for
writing and image retention with minimal power consumption. The Company has
developed flat panels with viewing areas whose diagonals are 7.8, 7.2 and 5.7
inches, and containing approximately 1,150,000, 800,000 and 630,000 pixels,
respectively. The Company's 7.8 inch diagonal flat panel is one of the principal
features of the MAGICOM(R) 2000 product. This flat panel has 1,280 lines by 896
lines with a resolution of 200 lines per inch in both directions, and has an
image area of approximately 6.4 x 4.5 inches.
The Company is continuing to purchase flat panel substrates from Hoya. The flat
panel substrates are produced and assembled by Hoya using the Company's
technology and design specifications and are then incorporated into MAGICOM(R)
2000 units produced at SCE. The flat panel substrates incorporate the Company's
latest designs. In conjunction with Hoya, the Company has improved production
technology by reducing the number of steps necessary to construct the flat panel
substrates, thereby allowing multiple flat panel substrates to be produced from
a single primary glass substrate, while improving its structure to enhance its
image brightness and contrast. The overall size of the flat panel substrate has
been reduced while maintaining the same image area, thereby allowing a larger
number of flat panel substrates to be produced from a single glass substrate and
reducing the size and potentially the cost of the flat panel substrate.
The Company's E-Paper(TM)Flat Panel Display design utilizes a new chip which has
128 outputs, as compared to the prior chip which had 64 outputs. The new chip is
approximately the same size, has higher speed to accommodate faster panel
operation, and is capable of using minimal power when viewing an image. The new
chip is being purchased by the Company and is being supplied to SCE for
incorporation into production units.
11
The flat panel also utilizes fluids which were developed by the Company and
which are suitable for production processing. See "Fluid" below. The fluid
contains coated yellow particles suspended in a dark dye. Thus, the flat panel
contains a yellow background with black writing or vice versa. The Company has
expanded its equipment and "clean room" facilities in the United States and has
thereby increased the Company's capability of producing larger quantities of the
specially coated yellow particles and fluid. The Company is supplying the fluid
with the coated yellow particles to SCE for insertion into the E-Paper(TM) Flat
Panel Displays.
Included as an integral part of the Company's 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. An integrated front illumination system (see "Illumination" below) is also
incorporated into the E-Paper(TM) Flat Panel Display. This system provides
viewing of the flat panel from nighttime to sunlight ambient light conditions.
By incorporating these capabilities, the Company's E-Paper(TM) Flat Panel
Display provides clear and comfortable viewing, from any angle, of pictures,
text in any language, and graphics.
Illumination
------------
The Company has developed a front light illumination system for the E-Paper(TM)
Flat Panel Display used in MAGICOM(R) 2000. This allows viewing of images under
nighttime to sunlight conditions. The front illumination system has been
integrated with the flat panel assembly. The light is generated by cold cathode
fluorescent lamps. The design of these lamps was developed in conjunction with
another company in accordance with the Company's specifications. The Company
determined experimentally the dimensions, slit angle and phosphor color of the
fluorescent lamp. The development also included the design of the optical
system, its optical quality, mechanical mounting techniques and the generation
of standards for quality control of the system's brightness, contrast and
uniformity.
The Company is continuing to pursue the development of new techniques designed
to further improve light output efficiency and to lower the production cost of
the illumination system. These development activities involve advanced optics
and designs, such as light shaping diffusers, edge illuminated holograms,
pixellated illumination, and optical thin film coatings. These development
activities complement the Company's front illumination system using conventional
optical light coupling and, if successful, could lead to lower cost, higher
efficiency, and improved uniformity.
Fluid
-----
For fluid production being supplied to SCE, an environmentally controlled
chamber has been installed at the Company's facilities. Using the chamber,
environmental parameters have been set to optimize desirable fluid properties.
Additional equipment is being used to allow large batches of specially coated
yellow particles and fluid to be produced. Equipment is also being used to
characterize sample batches and to assure fluid consistency. Results of these
tests have led to improved processing methods and increased fluid quality
control. Quantities of fluid necessary for the production of assembled
MAGICOM(R) 2000 units are being supplied to SCE by the Company.
12
Fluid development work, particularly the processing of coated yellow particles
in the suspension, has been expanded through the addition of equipment and the
expansion of the Company's facilities. A number of coatings are applied in the
production process to the Company's pigment particles to increase contrast and
to enhance stability and longevity.
The Company believes that the E-Paper(TM) Flat Panel Display is environmentally
comparable to a liquid crystal display and the Company presently is not aware of
any environmental hazards associated with the small quantity of fluid medium
inside the display.
Color and Video Flat Panel
- --------------------------
Solid State and Optical Display
-------------------------------
During 1997, the Company concentrated a significant portion of its efforts on
the continuing development of digital video and color capability for its overall
flat panel display technology. The Company believes that, if successful, the
technology under development, which involves the Company's proprietary design
for solid state and optical technology, will be most suitable to obtain
ultra-high resolution in color at video speeds, with minimal power, high
contrast and long life. The Company's goal is to achieve color implementation
without the use of the traditional color filters which are currently used in
LCDs.
The Company's design for this color and video flat panel display utilizes a
display structure which is wafer thin (less than 1/30 of an inch) and which
would have the control logic, drivers and display structure all produced on this
thin substrate. The display could plug-in to products that the Company may
develop in the future or products developed by other companies. The flat panel
fabrication utilizes CMOS and MEMS (optical electromechanical systems) wafer
processing. MEMS technology is the process by which precise optomechanical parts
can be made by micromachining - a batch-fabrication technology similar to the
process for making very large integrated (VLSI) circuits. For this display, MEMS
technology is being used to make the static ultra-high resolution pixel array.
This flat panel display design uses a series of thin films to form a display
matrix with the final film. The Company's goal is to develop a final film which
would provide the ability to reflect the proper light from each pixel to form an
image. The solid state and optical flat panel display under development is
initially being designed to include the following features:
Ultra-high resolution of 240 by 240 lines per inch.
Video frame rate capability which is faster than 30 frames per second
(normal TV rate).
Color achieved with control of the final thin film.
13
16 levels of gray scale.
Thin film display with CMOS pixel drives, two dimensional pixel areas
and control logic on a single wafer.
Initial screen having an array of 640 x 480 pixels with larger sizes
planned in future.
Production fabrication requires standard 2 micron semiconductor
wafer fabrication facilities which includes thin film, CMOS and
MEMS wafer processing.
In an effort to achieve its design goals for the fabrication of a solid state
and optical flat panel display, during 1997 the Company further expanded its
technical staff with leading scientists in this field, leased a new optical
facility, acquired new equipment, and entered into development arrangements with
a network of U.S. companies and U.S. universities (the "U.S. organizations")
which, in the Company's opinion, have the technical know-how and the facilities
necessary to fabricate the display. These U.S. organizations are utilizing the
Company's design and coating know-how to develop the specified requirements for
the display. The Company will either own or have the right to license all the
know-how, if any, that is developed pursuant to these arrangements.
In order to determine the feasibility of the solid state and optical flat panel
display, the Company and the U.S. organizations focused on the design and
performance requirements needed to produce prototypes. This effort included
consideration of display power, structural stress reduction techniques for
fabricating pixels, CMOS-MEMS compatible overall process flow and lithography
pixel design. Each of these areas was tested, including the use of both
numerical and analytical simulation. The design includes an unconventional chip
architecture to minimize the number of drivers. The design also uses a method to
obtain 16 levels of gray scale, a MEMS pixel design which relieves mechanical
stress, and use of a CMOS and MEMS process that is compatible with the
capabilities of the U.S. organizations. After having determined that the design
and performance requirements for the display are feasible, the Company is now
proceeding with the U.S. organizations in an effort to implement the design plan
to fabricate the solid state and optical flat panel display. If the project
proceeds as planned, prototype models could be available within the next two
years.
In addition to the solid state and optical flat panel display, during 1997 the
Company also began developing software and hardware which, using a PC operating
evaluation control system, would plug into the display to generate television,
fax, and computer images on the display. The Company, in conjunction with a
Russian company, has developed and is testing a prototype for the evaluation
control system and is adding additional capabilities to meet the display
requirements. The program to develop the evaluation control system is currently
being funded by the Company which will own all the know-how, if any, generated
by this program.
14
Thin Film Video Color Display
-----------------------------
During 1997, the Company also entered into a Joint Cooperation Agreement (the
"Joint Cooperation Agreement") with a Russian display company to co-develop an
ultra-high resolution thin film color and video emissive flat panel display.
This flat panel display would complement the Company's other passive display
technologies in that it would use emission of light to create images. The
Company is funding the project, while the Russian company is contributing its
proprietary thin film technology. All know-how developed pursuant to the Joint
Cooperation Agreement, if any, would initially become the joint property of the
Company and the Russian company. It is the present intent of the parties to form
a joint venture in Russia for the manufacture of the display if and when a
limited quantity of prototypes has been developed and tested demonstrating the
feasibility of the display. It is contemplated that sixty percent (60%) of the
venture would be owned by the Company and forty percent (40%) would be owned by
the Russian company, and that each company would grant to the joint venture an
exclusive license with respect to all know-how developed and a royalty-free,
nonexclusive license with respect to the preexisting know-how contributed by the
Russian company. In the event that the parties are unable after a specified time
to reach agreement upon the terms of a joint venture, all know-how developed
pursuant to the Joint Cooperation Agreement would become the property of the
Company and the Company would have a royalty-free, nonexclusive, worldwide
license with respect to the preexisting know-how contributed by the Russian
company.
The Company believes that this thin film technology, if successfully developed,
could create an ultra-high resolution color video emissive display with a
simplified production process as compared to other similar emissive technologies
being used by other companies. The thin film video color flat panel display
under development is initially being designed to include the following features:
Resolution 240 vertical by 150 horizontal lines per inch.
T.V. video frame rate.
640 x 480 RGB.
Contrast ratio approximately 100:1.
Brightness 100 cd/m2 .
Viewing angle approximately 160 degrees.
Power consumption less than 2 watts.
Capable of incorporating 640 x 480 building blocks to make larger size
displays.
If the program proceeds as planned, prototype models could be available within
the next two years.
15
The Company believes that if ultra-high resolution video and color capabilities
for solid state and/or thin film video color flat panel displays can be fully
developed, the technologies could be of universal use, involving passive
(requires external lighting to view an image) or emissive (self-emits light to
view an image) technology, in such products as computers, digital television,
high definition television, video conferencing, multi-media devices, personal
telecommunication devices and network computers (NC), and for accessing on-line
information services and the Internet. The Company has filed or is planning to
file patent applications for these technologies. There can be no assurance,
however, that the Company will be able to develop solid state and/or thin film
video color flat panel displays having the features described above or that such
displays will be acceptable for use in products of third parties or commercially
acceptable for use in products that may be developed by the Company in the
future.
Other Developments
- ------------------
The Company announced on December 18, 1997 that it is engaged in preliminary
discussions with SIEC. The present intention of the companies as set forth in a
non-binding letter of intent is to mutually cooperate to develop, produce, and
market high technology products, under mutually acceptable terms, using
CopyTele's overall flat panel and associated technology. The parties also intend
to cooperate to mutually market certain of SIEC's products, to be enhanced by
CopyTele's technology, outside of China. In order to share in their respective
efforts, the companies are attempting to devise and agree upon a means to share
an interest in each other's company. It is presently contemplated that CopyTele
would issue common stock in an amount representing slightly less than 20% of its
currently outstanding shares in exchange for an interest in SIEC's holdings.
CopyTele believes that the proposed arrangement with SIEC would represent a
unique relationship in China between a large Chinese government-owned holding
company and a foreign company. The companies are in discussions concerning the
details of this possible arrangement, although it is expected to take a number
of months before the parties could enter into a final, binding agreement. There
can be no assurance that the parties will be able to arrive at mutually
acceptable agreements or obtain the requisite governmental approvals. Among the
issues to be finalized are those concerning the valuation of CopyTele's shares,
the form, structure and valuation of the interest in SIEC's holdings that would
be exchanged for CopyTele's shares, the nature and structure of the venture, the
specific products to be developed for sale and the likely timetable for
implementing the venture.
SIEC has advised CopyTele that it is a large Chinese government-owned company
whose holdings include investments in wholly owned enterprises, listed companies
on the Shanghai Stock Exchange, and foreign joint ventures. Through these
enterprises, there are a total of approximately 293 enterprises including 150
foreign joint ventures, 12 research and design institutes and 5 training centers
in which SIEC has a direct investment or an investment through its subsidiaries.
SIEC and its subsidiaries manage these enterprises which currently have
approximately 80,000 employees, occupy space of approximately 22 million square
feet and produce approximately 5,900 products, including electronics
instruments, household electric apparatus, electronic components and devices,
telecommunications products, computers, semiconductor discrete devices,
integrated circuits, thick film circuits, and analytic, automation and optic
instruments.
16
As previously disclosed, the Company entered into a letter of intent in 1996 for
the formation of a second joint venture with SECC. In light of the Company's
current discussions with SIEC, however, the Company has determined that it is
unlikely that it will pursue this second joint venture if a definitive agreement
is ultimately reached with SIEC.
Competition
- -----------
The telecommunications industry has a substantial number of competitors which
are significantly larger and possess financial resources significantly greater
than those of the Company or SCE. Certain competitive products contain displays
which primarily include LCDs. These products, however, have fewer features than
the Company's product and the displays have significantly less resolution and
information content capability than the Company's E-Paper(TM) Flat Panel
Display. The Company's E-Paper(TM) Flat Panel Display is being utilized for the
first time in the marketplace in MAGICOM(R) 2000. The Company believes that
telecommunications products incorporating the Company's E-Paper(TM) Flat Panel
Display could have many commercial applications and could combine many
characteristics which the Company believes would be desirable to potential
customers.
MAGICOM(R) 2000, the only telecommunications product developed by the Company,
is a unique product that incorporates certain features of many different
products on the market, such as computers, telephones and fax machines. The
product allows the user to talk and write on the machine at the same time as
well as exchange information, faxes and messages with other MAGICOM(R) 2000
units, terminals, computers, fax machines and pagers. Other products currently
available on the market do not combine all these features together with a high
resolution flat panel display. It is the E-PAPER(TM) Flat Panel Display, with
its associated features, that the Company believes principally will distinguish
MAGICOM(R) 2000 from other comparable products that may be developed by other
manufacturers in the future. However, there is no assurance that comparable or
superior products or systems to MAGICOM(R) 2000 will not be developed which
would render MAGICOM(R) 2000 or other products of the Company and SCE difficult
to market or otherwise obsolete.
If the Company is successful in its efforts to develop its advanced flat panel
displays for color and video, the panels would be of a higher resolution than
competing products that currently exist in the marketplace. However, there can
be no assurance that other competitive products will not be produced in the
future by other companies which will offer similar or enhanced resolution or
other features.
17
Patents
- -------
The Company has received approximately 146 patents, including those from the
United States and certain foreign patent offices, expiring at various dates
between 2005 and 2015. 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-Paper(TM) Flat Panel Display, methods of operating the E-Paper(TM) Flat Panel
Display, particle generation, applications using the E-Paper(TM) Flat Panel
Display, and new applications for SCE's planned products. The Company also has
filed or is planning to file patent applications for its solid state and optical
and thin film video color flat panel display technologies currently under
development. The Company has been advised by its patent counsel that in their
opinion the subject matter of the pending applications contains patentable
material.
The Company has licensed a number of its patents covering the E-Paper(TM) Flat
Panel Display (but excluding its manufacturing technology) to SCE on an
exclusive basis in China.
There is no assurance that patents will be obtained for any of the pending
applications. In addition, there is 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 MAGICOM(R) 2000 is infringing upon the
patents of others. There is 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.
Research and Development Expenses
- ---------------------------------
Research and development expenses, which have comprised a significant portion of
the Company's selling, general and administrative expenses since its inception,
were approximately $3,642,000, $3,858,000, $2,353,000, and $24,385,000 for the
fiscal years ended October 31, 1997, 1996 and 1995 and for the period from
November 5, 1982 (inception) through October 31, 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and the Company's Financial Statements.
Employees and Consultants
- -------------------------
The Company had thirty-six full-time employees and fourteen consultants as of
December 31, 1997. Twenty four of these individuals, including the Company's
Chairman of the Board and its President, are engaged in research and
development. Their backgrounds include expertise in physics, chemistry, optics
and electronics. Thirteen individuals are engaged in marketing and the remaining
individuals are engaged in administrative and financial functions for the
Company. None of the Company's employees are represented by a labor organization
or union.
As of December 31, 1997, SCE had approximately seventy two (72) employees, of
which sixty (60) were engaged in production and twelve (12) were engaged in
administrative and other functions.
18
Item 2. Properties.
-----------
The Company leases approximately 10,000 square feet of office and laboratory
research facilities at 900 Walt Whitman Road, Huntington Station, New York (its
principal offices) from an unrelated party pursuant to a lease which expires
November 30, 1998, for a base rent of approximately $166,000 per annum, as well
as escalation clauses for increases in certain operating costs, for a total cost
aggregating approximately $173,000 per annum. The Company has the right to
cancel a portion of the lease as of February 28, 1998. This lease does not
contain provisions for its renewal and management will continue to evaluate the
future adequacy of this facility. The Company anticipates securing a lease
renewal for this facility at the end of the lease term if it determines to
remain in the facility. See Note 8 to the Company's Financial Statements.
In February 1996, the Company 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, has a base rent
of $51,175 per annum in years one and two and $55,775 per annum for the
remainder of the lease. In October 1996, the Company entered into a lease with
an unrelated party for approximately 2,000 square feet of office and laboratory
space near its 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 provides for escalating
base rents of approximately $46,000, $48,000 and $50,000 respectively, for each
year beginning July 1, 1997.
SCE operates from a 30,000 square foot, one-story office, warehouse and
production facility owned by SCE 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. SCE has obtained two
short-term loans from a Chinese bank aggregating U.S.$500,000 which are secured
by the land-use contract and equipment. See Note 3 to the Company's Financial
Statements.
Management believes that the facilities described above are adequate for the
Company's and SCE's current requirements. It is anticipated that additional
space may be needed in the future depending upon the nature and extent of the
Company's and SCE's activities.
Item 3. Legal Proceedings.
------------------
The Company is not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
During the fourth quarter of the Company's fiscal year ended October 31, 1997,
no matters were submitted by the Company to a vote of its shareholders.
Executive Officers of the Company
- ---------------------------------
The only executive officers of the Company 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, and
incorporated by reference from, Item 10 Part III of this Annual Report on Form
10-K.
19
PART II
-------
Item 5. Market for the Registrant's Common Equity and
---------------------------------------------
Related Stockholder Matters.
----------------------------
The common stock of the Company has been traded on the National Association of
Securities Dealers, Inc. Automated Quotation National Market System ("NASDAQ -
NMS"), 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 the Company's common stock commenced. The high and low sales
prices as reported by NASDAQ for each quarterly fiscal period, adjusted for the
two-for-one stock split declared in May 1996, during the Company's fiscal years
ended October 31, 1996 and 1997 have been as follows:
================================================================================
Fiscal Period High Low
================================================================================
1st quarter 1996 $5.56 $4.06
2nd quarter 1996 6.06 4.63
3rd quarter 1996 9.88 5.25
4th quarter 1996 7.63 5.25
- --------------------------------------------------------------------------------
1st quarter 1997 7.38 3.75
2nd quarter 1997 7.25 4.25
3rd quarter 1997 5.88 4.50
4th quarter 1997 5.25 3.63
- --------------------------------------------------------------------------------
As of January 21, 1998 the approximate number of record holders of common stock
of the Company was 1,200.
No cash dividends have been paid on the common stock of the Company since its
inception and the Company has no present intention to pay any cash dividends in
the foreseeable future.
In fiscal 1997, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto each
exercised warrants to purchase 32,940 shares of common stock, at an exercise
price of $5.10 per share of the Company's common stock. The exercise price
represented the fair market value of such stock on the date of issuance of these
warrants, subsequently adjusted for the two-for-one stock splits declared by the
Company in February 1991 and May 1996 and the anti-dilution provisions of the
warrants. Peri D. Krusos and Denis Z. Krusos are the daughter and son,
respectively, of Denis A. Krusos and Daniel A. DiSanto is the son of Frank J.
DiSanto. The exemption from registration relied upon for the sale of the common
stock was Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to the terms and conditions of a certain Equipment Purchase Agreement,
on July 1, 1997 (the "Issue Date"), the Company issued 15,000 shares (the
"Shares") of its common stock to Master Print Holography, Inc. (the "Seller") in
exchange for certain labratory equipment valued at $75,000. The Equipment
Agreement provides that if as of one year from the Issue Date (the "Market Value
Date") the Market Value (as defined below) of the Shares on the National
Association of Securities Dealers, Inc. Automated Quotation National Market
System (NASDAQ - NMS) is less than $75,000, the Company will pay to the Seller
the difference in cash as of the Market Value Date. For purposes hereof, Market
Value of the Shares as of the Market Value Date will be the closing quotation at
which the Company's common stock is traded on NASDAQ - NMS on such date. The
exemption from registration relied upon for the issuance of the common stock was
Section 4(2) of the Securities Act of 1933, as amended.
20
Item 6. Selected Financial Data.
------------------------
The following data has been derived from the Financial Statements of the Company
and should be read in conjunction with those statements, and the notes related
thereto, which are included in this report.
------------------------------------------------------------------------
For the period
As of and for the year ended October 31, from November 5, 1982
(inception) through
October 31, 1997
========================================================================
1997 1996 1995 1994 1993
========================================================================================================================
Sales $ - $ - $ - $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
Selling General and
Administrative Expenses, and 6,713,759 6,166,210 3,350,125 3,651,334 2,925,627 38,860,411
Loss from SCE
- -------------------------------------------------------------------------------------------------------------------------
Interest Income 913,184 722,800 356,226 223,817 162,778 4,301,456
- ------------------------------------------------------------------------------------------------------------------------
Net (Loss) (5,800,575) (5,443,410) (2,993,899) (3,427,517) (2,762,849) (34,558,955)
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Per Share
of Common Stock (a) ($0.10) ($0.10) ($0.06) ($0.07) ($0.06) ($0.75)
- -------------------------------------------------------------------------------------------------------------------------
Total Assets 19,988,207 24,710,420 9,695,398 6,614,332 8,686,241
- -------------------------------------------------------------------------------------------------------------------------
Long Term Obligations $ - $ - $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 18,779,142 22,750,273 9,436,708 6,415,233 8,244,925
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share $ - $ - $ - $ - $ - $ -
of Common Stock
- -------------------------------------------------------------------------------------------------------------------------
--------------------
(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.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The Company, which is a development stage enterprise, was incorporated on
November 5, 1982 and has had no revenues, other than limited sales the
recognition of which has been deferred (see Notes 1 and 2 to the Company's
Financial Statements), to support its operations since its inception. The
Company's principal activities include the development, production and marketing
of a telephone based multi-functional telecommunications product incorporating
the Company's ultra-high resolution E-Paper(TM) Flat Panel Display technology
and the operations of SCE, the Company's 55% owned joint venture in Shanghai,
China which is accounted for under the equity method of accounting. The Company
is marketing a small portable printer called MAGIC PRINTER and is also
continuing its research and development activities for ultra-high resolution
video and color flat panel displays. See "Business - MAGICOM(R) 2000 - 1997
Developments", "Business - Flat Panel Display Technology - Color and Video Flat
Panel" and Notes 2 and 3 to the Company's Financial Statements.
21
There can be no assurance, however, that the Company's efforts in these areas
will be successful. There is also no assurance that the Company will generate
significant revenues in the future, will have sufficient revenues to generate
profit or that other products will not be produced by other companies that will
render the products of the Company or SCE obsolete or unmarketable. See
"Business - MAGICOM(R) 2000 - General Risks and Uncertainties".
Recently, the Company announced that it is engaged in preliminary discussions
with SIEC. The present intentions of the companies as set forth in a non-binding
letter of intent is to mutually cooperate to develop, produce and market high
technology products, under mutually acceptable terms, using the Company's
overall flat panel and associated technology. The parties also intend to
cooperate to mutually market certain of SIEC's products, to be enhanced by the
Company's technology, outside of China. In order to share in their respective
efforts, the companies are attempting to devise and agree upon a means to share
an interest in each other's company. It is presently contemplated that the
Company would issue common stock in an amount representing less than 20% of its
currently outstanding shares in exchange for an interest in SIEC's holdings. See
"Business - Other Developments". As previously disclosed, the Company entered
into a letter of intent in 1996 for the formation of a second joint venture with
SECC. In light of the Company's current discussions with SIEC, however, the
Company has determined that it is unlikely that it will pursue this second joint
venture if a definitive agreement is ultimately reached with SIEC.
The Company plans to sell its products to end-users through a distributor/dealer
network. All of the critical elements of the earnings process will be complete
when a distributor/dealer sells these products to end-users. As a result,
initial revenue and related gross profit on the sale of these products will be
recognized by the Company upon acceptance by the end-users.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, reference is made to the Company's Financial Statements
and the notes thereto.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. See "Business" and Note 1 to the Company's
Financial Statement contained herein for discussions regarding uncertainties
that may significantly affect the results of operations, future liquidity and
capital resources.
Results of Operations
- ---------------------
Selling, general and administrative expenses, including the loss from SCE, for
the fiscal years ended October 31, 1997, 1996 and 1995 and for the period from
November 5, 1982 (inception) through October 31, 1997 were approximately
$6,714,000, $6,166,000, $3,350,000 and $38,860,000, respectively. These amounts
include research, development and tooling costs of approximately $3,642,000,
$3,858,000, $2,353,000 and $24,385,000, respectively, as well as normal
operating expenses.
22
Selling, general and administrative expenses, including the loss from SCE,
increased approximately $548,000 during fiscal 1997 as compared to fiscal 1996
resulting primarily from increases in expenditures for salaries, loss from joint
venture operations, costs associated with marketing and to a lesser extent,
communication costs and rents. Salaries increased in 1997 primarily as a result
of the Company incurring a full year of salaries for marketing personnel
compared with partial year salaries in 1996, when the Company commenced its
marketing efforts, and the hiring of additional engineering personnel. The
Company's portion of SCE's loss increased over the prior year from $335,000 in
fiscal 1997 compared to $149,000 in fiscal 1996 as a result of manufacturing
costs being absorbed over a limited quantity of product produced. Marketing
related costs including travel increased in the current year as the Company
marketed its products in various regions throughout the world. Depreciation
expenses increased as the equipment purchased during the 1996 year depreciated
for a full year in 1997. Telecommunication costs and rents increased to a lesser
extent over the prior year as compared to other cost increases. Engineering
supplies decreased primarily as a result of reduced purchases of panels and chip
drivers which are used for testing and evaluation purposes. The decrease was
partially offset by the purchase of MAGICOM(R) 2000 units from SCE for similar
purposes. Employee benefit related costs decreased as a result of the decrease
in the exercise of stock options, which consequently reduced payroll taxes. The
decrease in workers' compensation costs was offset by an increase in pension and
other group insurance coverage as a result of the addition of new personnel.
Professional fees decreased in the aggregate during the 1997 fiscal year as
patent related costs decreased significantly and offset by a lesser increase in
all other professional fees.
Selling, general and administrative expenses, including the loss from SCE,
increased $2,816,000 during fiscal 1996 as compared to fiscal 1995 resulting
primarily from increases in expenditures for engineering supplies and services
necessitated by the Company's development program and related activities at the
time. Professional fees increased during the fiscal 1996 period, especially
patent application preparation and filing fees. Other increases in professional
fees, including accounting and shareholder services, were offset by a decline in
other legal fees which were not patent related. Initial marketing costs were
incurred during the fiscal 1996 period as a result of the opening and staffing
of a marketing office, retention of public relations and advertising firms and
the production of advertising and promotional materials. Other expense
categories also increased in 1996, including compensation and related costs,
rent and travel expenditures, as a result of adding personnel in marketing and
engineering, the rental of additional space and facilities, and travel
associated with marketing and supporting the joint venture in China. The
Company's portion of SCE's loss in fiscal 1996 of approximately $149,000 as
compared to the loss in fiscal 1995 of approximately $18,000 was as a result of
SCE expensing start up costs prior to production.
23
While there is no formal agreement, the Company's Chairman of the Board and its
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 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 they 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 commencing in January 1993 for an undetermined period of time.
Since February 1993, one additional employee is also currently waiving such
salary and benefit rights for an undetermined period of time. See "Executive
Compensation" and Note 11 to the Company's Financial Statements for a more
complete discussion regarding salary and related pension benefit waivers.
The increase in interest income during fiscal 1997 as compared to 1996 of
$190,384 resulted primarily from an increase in average funds available for
investment aided slightly by an increase in interest rates. The increase in
interest income during fiscal 1996 as compared to fiscal 1995 of $366,574
resulted from a significant increase in average funds available for investment,
offset slightly be a decrease in interest rates. Funds available for investment
during 1997, 1996 and 1995, on a monthly weighted average basis, were
approximately $17,394,000, $16,011,000 and $7,175,000, respectively. The
investment instruments selected by the Company are principally money market
accounts and commercial paper.
During October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock Based
Compensation. This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
plans. However, SFAS No. 123 also permits the Company to continue to measure
compensation costs under preexisting accounting pronouncements. If the fair
market value based method of accounting is not adopted, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share. The Company has
chosen to disclose pro forma net income and earnings per share in the notes to
financial statements and continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. This statement was first disclosed by the Company in the first
quarter of fiscal 1997. The Company has adopted all other recently issued
accounting standards which have an impact on its financial statements.
The Company does not anticipate any material costs, problems or uncertainties
associated with the Year 2000 computer issue at this time but will continue to
monitor the issue as the Year 2000 approaches.
See "Business" and Note 1 to the Company's Financial Statements for discussions
regarding uncertainties that may significantly affect results of future
operations.
24
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has met its liquidity and capital expenditure
needs primarily from the proceeds of 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 pursuant to the Company's Stock Option Plan, adopted by the
Board of Directors on April 1, 1987 (the "1987 Plan") and the CopyTele, Inc.
1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993 and
amended on May 3, 1995 and May 10, 1996 (the "1993 Plan").
For the fiscal years ended October 31, 1997, 1996 and 1995, the Company received
proceeds aggregating approximately $1,754,000, $18,757,000 and $6,015,000,
respectively, from the exercise of stock options and warrants to purchase shares
of its common stock pursuant to the 1987 Plan, the 1993 Plan and the exercise of
warrants by members of the immediate families of its Chairman of the Board and
its President. See "Certain Relationships and Related Transactions" below and
the Company's Financial Statements for a more complete discussion regarding
sales of common stock. Working capital decreased by approximately $3,600,000
from approximately $20,600,000 at October 31, 1996 to approximately $17,000,000
at October 31, 1997 as a result of the loss incurred for the year and the
purchase of property and equipment.
SCE 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 investment which may be borrowed from banks of which
$500,000 has been borrowed to date. The Company has contributed $1,225,000 in
cash, and technology valued for the purposes of SCE at $700,000, and SECC and
SIT have contributed $1,575,000 in cash to SCE. See Notes 1, 2 and 3 to the
Company's Financial Statements. SCE may require additional capitalization of up
to a total of $25 million, depending upon the nature and extent of its business
activities. The Company currently has no plans with respect to additional
financing. There can be no assurance that adequate funds will be available to
the Company or SCE, including any future capital contribution, if any, beyond
the Company's initial capital contributions of $1,225,000 to SCE, or that, if
available, the Company and SCE will be able to obtain such funds on favorable
terms and conditions.
The Company believes that without taking into consideration potential revenues
from sales of MAGICOM(R) 2000 it will have sufficient funds into the first
quarter of fiscal 2000 to maintain its present level of development efforts.
This includes, among other things, the collection of the amounts due from SCE,
but excludes cash expenditures that may be required with the potential
transaction with SIEC. The amounts due from SCE are primarily costs related to
the purchase of components for SCE's use in MAGICOM(R) 2000 units. It is
expected that SCE will pay the Company during the current year through the sales
of units and financing from banks.
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 senior level personnel will continue. The
Company anticipates that it may require additional funds in order to participate
in SCE following its initial capital contributions and to continue its research
and development activities.
See "Business" and Note 1 to the Company's Financial Statements for discussions
regarding uncertainties that may significantly affect future liquidity and
capital resources.
25
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
See accompanying "Index to Financial Statements".
Item 9. Disagreements on Accounting and Financial Disclosure.
-----------------------------------------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The following table sets forth certain information with respect to all of the
directors and executive officers of the Company:
==========================================================================================================================
Director and/or
Position with the Company and Principal Executive Officer
Name Occupation Age Since
==========================================================================================================================
Denis A. Krusos Director, Chairman of the Board and Chief 70 1982
Executive Officer
- ---------------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto Director and President 73 1982
- ---------------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna Director, Vice President - Finance and Chief 48 1994
Financial Officer
- ---------------------------------------------------------------------------------------------------------------------------
John R. Shonnard Director 82 1988
- ---------------------------------------------------------------------------------------------------------------------------
George P. Larounis Director 69 1997
- ---------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta Senior Vice President - Marketing and 57 1996
Sales
- ---------------------------------------------------------------------------------------------------------------------------
26
Mr. Krusos has been a Director, Chairman of the Board and Chief Executive
Officer of the Company 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 been a Director and President of the Company 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 been Vice President - Finance and Chief Financial Officer
since September 1994 and was elected a Director in July 1995. Prior to joining
the Company, 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. Shonnard has been a Director of the Company since January 1988. He had been
a research consultant to the Company from August 1983 until his retirement in
May 1988. Mr. Shonnard was engaged in development engineering in the
communications field for over fifty years and has held numerous patents in the
communications field.
Mr. Larounis has been a Director of the Company since September 1997 prior to
which he served as a consultant to the Company. 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. Trischetta has been Senior Vice President - Marketing and Sales since
February 1996. Prior to joining the Company, 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.
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 the executive officers of the
Company. 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 a salary or bonus in
excess of $100,000 during the fiscal year ended October 31, 1997. The following
is compensation information regarding Mr. Krusos and Mr. Trischetta for the
fiscal years ended October 31, 1997, 1996 and 1995:
27
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation Awards
Fiscal -------------- -------------------
Name and Year
Principal Position Ended
------------------ -----
Securities Underlying
Options (#)
- ----------------------------------------------------------------------------------------------------------------------------
Denis A. Krusos, 10/31/97 - 575,000
Chairman of the Board, 10/31/96 - 575,000
Chief Executive Officer and Director 10/31/95 - 900,000
- ----------------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 10/31/97 $152,500 30,000
Senior Vice President - 10/31/96 $117,600 155,000
Marketing and Sales
- ----------------------------------------------------------------------------------------------------------------------------
The following is information regarding stock options granted to Mr. Krusos and
Mr. Trischetta pursuant to the 1993 Plan during the fiscal year ended October
31, 1997:
- ----------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
===========================================================================================================================
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock Price
Appreciation for Option Term
===========================================================================================================================
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Granted Employees in Price Expiration
Name (#) (1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
===========================================================================================================================
Denis A. 325,000 11.19% $4.500 (2) 12/16/06 $ 919,758 $ 2,330,848
Krusos
- ----------------------------------------------------------------------------------------------------------------------------
250,000 8.60% $4.375 (2) 4/20/07 $687,853 $ 1,743,156
------------------------------------------------------------------------------------------------------------
Frank W. 30,000 1.03% $4.500 (2) 12/16/06 $ 84,901 $ 215,155
Trischetta
- ----------------------------------------------------------------------------------------------------------------------------
- -------------------
28
(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 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.
The following is information regarding stock option exercises during fiscal 1997
by Mr. Krusos and Mr. Trischetta and the values of their options as of October
31, 1997:
- -----------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/VALUES
=======================================================================================================================
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Options Money Options at Fiscal Year
at Fiscal Year End (#) End ($) (2)
Shares Acquired Value Realized
Name on Exercise (#) ($) (1)
----------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
Denis A. Krusos - - 2,347,180 - $175,000 -
- ------------------------------------------------------------------------------------------------------------------------
Frank W. - - 363,000 30,000 $283,375 $7,500
Trischetta
- ------------------------------------------------------------------------------------------------------------------------
(1) Such value is determined by applying the net difference between the
selling price of the stock sold on day of exercise and the exercise
price for the options to the number of options exercised.
(2) Such value was determined by applying the net difference between the
last sales price of the Company's common stock on October 31, 1997 and
the exercise price for the options to the number of unexercised
in-the-money options held. The exercise price of these options was at
least equal to the fair market value of the underlying common stock as
defined in the 1993 Plan.
There is no present arrangement for cash compensation of directors for services
in that capacity. Under the 1993 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.
29
Item 12. Security Ownership of Certain Beneficial Owner
----------------------------------------------
and Management.
--------------
The following table sets forth certain information with respect to the Company's
common stock beneficially owned as of January 21, 1998 by (a) each person who is
known by the management of the Company to be the beneficial owner of more than
5% of the Company's outstanding common stock, (b) each director or executive
officer of the Company and (c) all directors and executive officers as a group:
- -------------------------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)(2) Percent of
Class
- -------------------------------------------------------------------------------------------------------------------
Denis A. Krusos 6,930,940 11.51%
900 Walt Whitman Road
Huntington Station, NY 11746
- -------------------------------------------------------------------------------------------------------------------
Frank J. DiSanto 6,572,960(3) 10.95%
900 Walt Whitman Road
Huntington Station, NY 11746
- -------------------------------------------------------------------------------------------------------------------
Gerald J. Bentivegna 211,000 .36%
900 Walt Whitman Road
Huntington Station, NY 11746
- -------------------------------------------------------------------------------------------------------------------
George P. Larounis 242,500 .42%
15-17 A. Tsoha St.
11521 Athens, Greece
- -------------------------------------------------------------------------------------------------------------------
John R. Shonnard 287,200(4) .50%
12521 Rios Road
San Diego, CA 92128
- -------------------------------------------------------------------------------------------------------------------
Frank W. Trischetta 393,000 .67%
900 Walt Whitman Road
Huntington Station, NY 11746
- -------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group 14,637,600(3)(4) 23.09%
(6 persons)
- -------------------------------------------------------------------------------------------------------------------
- --------------------
(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 the Company's
common stock beneficially owned by such person.
30
(2) Includes 2,347,180 shares, 2,177,180 shares, 209,000 shares, 242,500
shares, 157,600 shares, 393,000 shares and 5,526,460 shares as to
which Denis A. Krusos, Frank J. DiSanto, Gerald J. Bentivegna, George
P. Larounis, John R. Shonnard, Frank W. Trischetta 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 1987 Plan and/or the 1993 Plan.
(3) Includes 2,000,000 shares held by the Frank J. DiSanto Revocable
Living Trust. Mr. DiSanto is the trustee and has sole voting and
investment power of the trust.
(4) Includes 129,600 shares of the Company's common stock, all of which are
held in a revocable trust by the Wells Fargo Bank (successor of the
First Interstate Bank), as trustee of such trust. Mr. Shonnard and his
wife, Janet L. Shonnard, are the beneficiaries of such trust and, under
certain circumstances, may exercise the voting power and investment
power of the trust jointly.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
In fiscal 1997, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto each
exercised warrants to purchase 32,940 shares of common stock, at an exercise
price of $5.10 per share of the Company's common stock. The exercise price
represented the fair market value of such stock on the date of issuance of these
warrants, subsequently adjusted for the two-for-one stock splits declared by the
Company in February 1991 and May 1996 and the anti-dilution provisions of the
warrants. The warrants were issued in fiscal 1992 in conjunction with sales of
common stock by the Company to the foregoing individuals. Peri D. Krusos and
Denis Z. Krusos are the daughter and son, respectively, of Denis A. Krusos and
Daniel A. DiSanto is the son of Frank J. DiSanto.
As of January 21, 1998, after adjustments for the two-for-one stock split
declared in May 1996, Peri D. Krusos, Denis Z. Krusos and Daniel A. DiSanto each
held warrants to purchase 32,000 shares of common stock, all of which are
exercisable.
31
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and
--------------------------------------------
Reports on Form 8-K.
--------------------
(a)(1)(2) Financial Statement Schedules
-----------------------------
See accompanying "Index to Financial Statements".
(a)(3) Executive Compensation Plans and Arrangements
---------------------------------------------
Stock Option Plan (1987) (filed as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 30, 1987).
Amendment to Stock Option Plan (1987) (filed as Exhibit 10.69
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990).
CopyTele, Inc. 1993 Stock Option Plan (filed as Annex A to the
Company's Proxy Statement dated June 10, 1993).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 4(d) to the Company's Form S-8 dated September 6,
1995).
Amendment to CopyTele, Inc. 1993 Stock Option Plan (filed as
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1996).
(b) Reports on Form 8-K
-------------------
No current report on Form 8-K was filed for the Company during
the fourth quarter of its fiscal year ended October 31, 1997.
(c) Exhibits
--------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
(c) 10.1 Stock Option Plan, adopted on April 1, 1987
and approved byshareholders 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.
32
(e) 10.3 Stock Purchase Warrant, dated October 27,
1992, between the Registrant and Denis Z.
Krusos.
(e) 10.4 Stock Purchase Warrant, dated October 27,
1992, between the Registrant and Daniel A.
DiSanto.
(e) 10.5 Stock Purchase Warrant, dated October 27,
1992, between the Registrant and Peri D.
Krusos.
(f) 10.6 CopyTele, Inc. 1993 Stock Option Plan,
adopted on April 28, 1993 and approved by
shareholders on July 14, 1993.
(g) 10.7 Joint Venture Contract, dated as of March
28,1995, by and between Shanghai Electronic
Components Corp. and CopyTele, Inc.
(g) 10.8 Technology License Agreement, dated as of
March 28, 1995, by and between Shanghai
CopyTele Electronics Co., Ltd. and CopyTele,
Inc.
(h) 10.9 Amendment No. 1 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 3, 1995
and approved by shareholders on July 19,
1995.
(i) 10.10 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.
(j) 10.11 Amendment No. 2 to the CopyTele, Inc. 1993
Stock Option Plan, adopted on May 10, 1996
and approved by shareholders on July 24,
1996.
(k) 10.12 Contract Granting Land-Use Rights, dated
October 11, 1995, between the Land
Administration Bureau Songjiang County and
Shanghai CopyTele Electronics Co., Ltd.
21 List of Significant Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
-----------
33
(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 Form 10-K for the fiscal
year ended October 31, 1992.
(f) Incorporated by reference to Proxy Statement dated
June 10, 1993.
(g) Incorporated by reference to Form 8-K dated March 28,
1995.
(h) Incorporated by reference to Form S-8 (Registration
No. 33-62381) dated September 6,1995.
(i) Incorporated by reference to Form 10-K for the fiscal
year ended October 31, 1995.
(j) Incorporated by reference to Form 10-Q for the fiscal
quarter ended April 30, 1996.
(k) Incorporated by reference to Form 10-Q for the fiscal
quarter ended January 31, 1997.
34
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, 1998 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.
By:/s/ Denis A. Krusos
--------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal Executive
January 28, 1998 Officer)
By:/s/ Frank J. DiSanto
----------------------
Frank J. DiSanto
January 28, 1998 President and Director
By:/s/ Gerald J. Bentivegna
-------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
January 28, 1998 and Accounting Officer)
By:/s/ John R. Shonnard
---------------------
John R. Shonnard
January 28, 1998 Director
By:/s/ George P. Larounis
-----------------------
George P. Larounis
January 28, 1998 Director
35
EXHIBIT INDEX
Exhibit
Ref. Number Description
- ---- --------- --------------
(a) 3.1 Certificate of Incorporation, as amended.
(b) 3.2 By-laws, as amended and restated.
(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 Stock Purchase Warrant, dated October 27, 1992,
between the Registrant and Denis Z. Krusos.
(e) 10.4 Stock Purchase Warrant, dated October 27, 1992,
between the Registrant and Daniel A. DiSanto.
(e) 10.5 Stock Purchase Warrant, dated October 27, 1992,
between the Registrant and Peri D. Krusos.
(f) 10.6 CopyTele, Inc. 1993 Stock Option Plan, adopted on
April 28, 1993 and approved by shareholders on July 14,
1993.
(g) 10.7 Joint Venture Contract, dated as of March 28, 1995, by
and between Shanghai Electronic Components Corp. and
CopyTele, Inc.
(g) 10.8 Technology License Agreement, dated as of March 28,
1995, by and between Shanghai CopyTele Electronics Co.,
Ltd. and CopyTele, Inc.
(h) 10.9 Amendment No. 1 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 3, 1995 and approved by
shareholders on July 19, 1995.
(i) 10.10 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.
(j) 10.11 Amendment No. 2 to the CopyTele, Inc. 1993 Stock Option
Plan, adopted on May 10, 1996 and approved by
shareholders on July 24, 1996.
36
(k) 10.12 Contract Granting Land-Use Rights, dated October 11,
1995, between the Land Administration Bureau Songjiang
County and Shanghai CopyTele Electronics Co., Ltd.
21 Lists of Significant Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
(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 Form 10-K for the fiscal year ended
October 31, 1992.
(f) Incorporated by reference to Proxy Statement dated June 10, 1993.
(g) Incorporated by reference to Form 8-K dated March 28, 1995.
(h) Incorporated by reference to Form S-8 (Registration No. 33-62381) dated
September 6, 1995.
(i) Incorporated by reference to Form 10-K for the fiscal year ended
October 31, 1995.
(j) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 1996.
(k) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1997.
37
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1997
----------------
Page
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1997 and 1996 F-2
Statements of Operations for the three years ended October 31, 1997 and for the period
from November 5, 1982 (inception) through October 31, 1997 F-3
Statements of Shareholders' Equity for the period from November 5, 1982 (inception)
through October 31, 1983 and for the fourteen years ended October 31, 1997 F-4 - F-7
Statements of Cash Flows for the three years ended October 31, 1997 and for the
period from November 5, 1982 (inception) through October 31, 1997 F-8
Notes to Financial Statements F-9 - F-20
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
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, 1997 and 1996,
and the related statements of operations and cash flows for each of the three
years in the period ended October 31, 1997 and for the period from November 5,
1982 (inception) to October 31, 1997 and the statements of shareholders' equity
for the period from November 5, 1982 (inception) through October 31, 1983 and
for each of the fourteen years in the period ended October 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 1997 and for the period from
November 5, 1982 (inception) to October 31, 1997, and the changes in its
shareholders' equity for the period from November 5, 1982 (inception) through
October 31, 1983 and for each of the fourteen years in the period ended October
31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 21, 1998
F-1
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
BALANCE SHEETS
--------------
October 31, October 31,
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$11,977,526 and $21,921,133, respectively) $ 12,329,171 $ 22,165,892
Marketable securities, at amortized cost (Note 2) 997,173 -
Accrued interest receivable 18,429 49,306
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $4,304,000 and $241,000, respectively) 4,853,459 378,417
------------ ------------
18,198,232 22,593,615
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,062,949 and $816,651, respectively) 947,643 830,606
INVESTMENT IN JOINT VENTURE (Notes 1, 2 and 3) 723,166 1,058,557
OTHER ASSETS 119,166 227,642
DEFERRED TAX BENEFITS (net of valuation allowance of $28,295,000
and $25,308,000, respectively) - -
-------------- --------------
$ 19,988,207 $ 24,710,420
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,209,065 $ 1,960,147
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 4, 5, 6 and 7):
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 57,861,176 and 57,404,656 shares, respectively 578,612 574,047
Additional paid-in capital 52,759,485 50,934,606
Accumulated (deficit) during development stage (34,558,955) (28,758,380)
--------------- ---------------
18,779,142 22,750,273
--------------- ---------------
$ 19,988,207 $ 24,710,420
============== ==============
The accompanying notes are an integral part of these balance sheets.
F-2
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
For the Period From
For the Years Ended October 31, November 5, 1982
------------------------------------------------------- (inception) through
1997 1996 1995 October 31, 1997
---- ---- ---- ----------------
SALES $ - $ - $ - $ -
------------- ------------- --------------- --------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(including research and development
expenses of approximately
$3,642,000, $3,858,000, $2,353,000 and
$24,385,000, respectively) 6,378,368 6,017,580 3,332,312 38,358,577
-------------- --------------- --------------- -------------
LOSS FROM JOINT VENTURE (Notes 1, 2 and 3) 335,391 148,630 17,813 501,834
-------------- --------------- --------------- -------------
INTEREST INCOME 913,184 722,800 356,226 4,301,456
-------------- --------------- --------------- -------------
NET (LOSS) $ (5,800,575) $ (5,443,410) $ (2,993,899) $ (34,558,955)
=============== ================ ================ ================
NET (LOSS) PER SHARE OF COMMON STOCK $ (.10) $ (.10) $ (.06) $ (.75)
============== ============== ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 57,667,787 54,771,891 50,514,568 45,899,506
============== =============== ============== ================
The accompanying notes are an integral part of these statements.
F-3
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
------------------------------------------------
THROUGH OCTOBER 31, 1983 AND
----------------------------
FOR THE FOURTEEN YEARS ENDED OCTOBER 31, 1997
---------------------------------------------
Accumulated
(Deficit)
Common Stock Additional During
----------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
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)
Continued
F-4
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
------------------------------------------------
THROUGH OCTOBER 31, 1983 AND
----------------------------
FOR THE FOURTEEN YEARS ENDED OCTOBER 31, 1997
---------------------------------------------
Continued
---------
Accumulated
(Deficit)
Common Stock Additional During
------------------------------ Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
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
F-5
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
------------------------------------------------
THROUGH OCTOBER 31, 1983 AND
----------------------------
FOR THE FOURTEEN YEARS ENDED OCTOBER 31, 1997
---------------------------------------------
Continued
---------
Accumulated
(Deficit)
Common Stock Additional During
------------------------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
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
F-6
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION)
------------------------------------------------
THROUGH OCTOBER 31, 1983 AND
----------------------------
FOR THE FOURTEEN YEARS ENDED OCTOBER 31, 1997
---------------------------------------------
Continued
---------
Accumulated
(Deficit)
Common Stock Additional During
--------------- --------------- Paid-in Development
Shares Par Value Capital Stage
------ --------- ------- -----
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)
============ ============ ============ ==============
(A) Reflects cumulative effect on all share data prior to splits described in Note 5.
The accompanying notes are an integral part of these statements.
F-7
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Period from
For the Years Ended October 31, November 5, 1982
--------------- ------------------------------- (inception) through
1997 1996 1995 October 31, 1997
---- ---- ---- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and consultants $(11,089,765) $ (4,888,843) $ (3,274,894) $ (41,197,498)
Interest received 917,696 709,700 337,061 4,256,663
--------------- ------------ ------------ ---------------
Net cash (used in) operating activities (10,172,069) (4,179,143) (2,937,833) (36,940,835)
-------------- ------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (448,288) (418,733) (90,549) (1,797,283)
Disbursements to acquire certificates of deposit and
marketable securities (970,808) - - (13,045,999)
Proceeds from maturities of investments - - - 12,075,191
Investment made in Joint Venture - (857,500) (367,500) (1,225,000)
------------ ------------ ------------ ---------------
Net cash (used in) investing activities (1,419,096) (1,276,233) (458,049) (3,993,091)
------------ ------------ ------------ ---------------
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 1,754,444 18,756,975 6,015,374 35,680,358
Proceeds from sales of common stock by individuals under
agreements with the Company, net of disbursements made
by the Company - - - 298,745
Disbursements made in conjunction with sales of stock - - - (362,030)
Fractional share payments in conjunction with stock split - - - (1,345)
------------ ------------ ------------ ---------------
Net cash provided by financing activities 1,754,444 18,756,975 6,015,374 53,263,097
------------ ------------ ------------ ---------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (9,836,721) 13,301,599 2,619,492 12,329,171
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 22,165,892 8,864,293 6,244,801 -
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,329,171 $ 22,165,892 $ 8,864,293 $ 12,329,171
============ ============ ============ ===============
RECONCILIATION OF NET (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net (loss) $ (5,800,575) $ (5,443,410) $ (2,993,899) $ (34,558,955)
Loss from Joint Venture 335,391 148,630 17,813 501,834
Depreciation and amortization 257,315 126,231 62,518 1,078,607
Amortization of discount on marketable securities (26,365) - -
Decrease (increase) in accrued interest receivable 30,877 (13,100) (19,165) (18,429)
(Increase) in prepaid expenses and other
current assets (4,475,042) (325,966) (6,457) (4,853,459)
Decrease (increase) in other assets 108,476 (70,082) (58,842) (119,166)
(Decrease) increase in accounts payable and accrued
liabilities related to operating activities (602,146) 1,398,554 60,199 1,055,098
------------ ------------ ------------ ---------------
Net cash (used in) operating activities $(10,172,069) $ (4,179,143) $ (2,937,833) $ (36,940,835)
============ ============ ============ ===============
The accompanying notes are an integral part of these statements.
F-8
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1997
----------------
(1) Nature of business and funding:
-------------------------------
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 a telephone based multi-functional
telecommunications product incorporating the Company's ultra-high resolution
E-Paper(TM) flat panel display technology and the operations of Shanghai
CopyTele Electronics Co., Ltd. (the "Joint Venture" or "SCE"), the Company's 55%
owned joint venture in Shanghai, China with Shanghai Electronic Components Corp.
("SECC") and Shanghai International Trade and Developing Corp. ("SIT"). The
Company also is continuing its research and development activities for
ultra-high resolution video and color flat panel displays. Recently, SECC has
agreed to assign its 35% interest in SCE to Shanghai Instrumentation and
Electronics Holding Group Company ("SIEC") and SIT. After the assignments, SIEC
will own 30%, SIT will own 15% and CopyTele's ownership will remain at 55% of
SCE. The assignment has been approved by the Company as well as the board of
directors of SCE; however, final approval is pending with the Chinese
government.
Since its inception, the Company has had no revenues. The Company has generated
limited sales to certain distributors as further discussed in Note 2. Revenue
and gross profit recognition on these initial sales have been deferred. There is
no assurance that the Company will generate significant revenues in the future,
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
and SCE obsolete. The Chairman of the Board, the President and other senior
executives are engaged in the management and operations of the Company and SCE,
including all aspects of the development, production and marketing of the
Company's products and flat panel technology, and are important to the future
business and financial arrangements of the Company and SCE.
The Company has received approximately one hundred forty-six patents from the
United States Patent and Trademark Office and certain foreign patent offices,
expiring at various dates between 2005 and 2015, related to the design,
structure and methods of construction of the flat panel, methods of operating
the flat panel, particle generation, applications using the flat panel and new
applications for SCE's planned products. At the present time, additional patent
applications are pending with the United States and certain foreign patent
offices. There is no assurance that patents will be obtained for any of the
pending applications. In addition, there is 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 MAGICOM(R)2000 is infringing upon the
patents of others. There is also no assurance that, if the Company or SCE
successfully develops other products, such products will not infringe upon the
patents of others, or that the Company and SCE will not have to obtain licenses
under patents of others. The Company believes that the aforementioned patents
are significant to the future operations of the Company. The Company has also
filed or is planning to file patent applications for its solid state and and
thin film video color flat panel display technologies currently under
development.
F-9
During 1995, the Company signed a joint venture contract (the "Joint Venture
Contract") with SECC 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 the two
Chinese companies. SIEC will own 30% of SCE and SIT will own 15% as a result of
an assignment agreed to by the Company, SECC and SIT. Reference is made to Note
3 for a further discussion regarding SCE. Pursuant to a 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. The parties to SCE have agreed in principle to increase the
investment to a maximum of $25 million, depending upon the nature and extent of
business activities. It is contemplated that this capitalization, if necessary,
will be financed through a combination of third party borrowings and equity
investments contributed by the Company, SIEC and SIT in proportion to their
respective equity interests and on terms to be agreed upon. The Company may
require additional financing in order to participate in the Joint Venture
following its initial capital contributions. No assurance can be given that the
Company will be able to raise its share of future capitalization, if necessary,
or that adequate financing will be available on terms and conditions favorable
to the Company.
The Company has produced a telephone based multi-functional telecommunications
product incorporating the Company's flat panel display, called E-Paper(TM), and
associated proprietary hardware and software technology, called MAGICOM(R)2000.
The product offers many features, including simultaneous voice and electronic
handwriting and editing of documents over a single public telephone line,
digital voice mail system, full duplex digital speakerphone, sending and
receiving fax (full page transmission and paperless reception), electronic
handwriting, e-mail communication, data transmission, storage and computer
interface, a scanner, as well as personal copying capabilities with the use of a
printer developed by the Company, called Magic Printer, and the ability to
transmit to a pager using a touch sensitive keyboard screen, all in a compact
desktop unit. The inventory levels at SCE at October 31, 1997 have increased
significantly over 1996 levels in order to prepare for the production
requirements necessary to fulfill anticipated orders in fiscal 1998. The Company
believes that the inventory on hand, consisting primarily of component parts, at
SCE at October 31, 1997 is realizable and will be used in fiscal 1998
production. The success and profitability of the Company's product will depend
upon many factors, including those normally associated with any new product.
These factors include the capability of SCE to produce sufficient quantities of
MAGICOM(R)2000, the ability of the Company and SCE to maintain an acceptable
pricing level to end-users for the product, long-term product performance and
the capability of the Company, SCE and its distributors to adequately service
the product, the ability of distributors to market their contracted quantities
of the product in their respective territories, political and economic stability
in targeted marketing territories, and the possible development of competitive
products that could render the Company's product obsolete or unmarketable.
The Company has also developed, in conjunction with a Japanese company, a small
portable printer called MAGIC PRINTER. The printer is being produced for the
Company by the Japanese company and is being marketed by the Company through its
distributor and dealer network, including China, for use with MAGICOM(R)2000 or
in conjunction with personal or laptop computers.
F-10
The Company believes that without taking into consideration anticipated revenues
from sales of MAGICOM(R)2000 and Magic Printer, it will have sufficient funds
into the first quarter of fiscal 2000 to maintain its present level of
development efforts. The National Association of Securities Dealers, Inc.
requires that the Company maintain a minimum of $4,000,000 of net tangible
assets to maintain its National Association of Securities Dealers, Inc.
Automated Quotation National Market System listing. The Company anticipates that
it will seek additional sources of funding, when necessary, to satisfy such
requirements or for other purposes. There is 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 senior level
personnel will continue. See Note 11 for a more complete discussion regarding
such waivers.
(2) Summary of significant accounting policies:
-------------------------------------------
Revenue recognition-
--------------------
The Company plans to sell its products through a distributor/dealer network. All
of the critical elements of the earnings process will be complete when a
distributor/dealer sells these products to end-users. As a result, initial
revenue and related gross profit on the sales of these products will be
recognized by the Company upon acceptance by the end-users.
Cash equivalents-
-----------------
The Company classifies highly liquid investments with original maturities of
three months or less at their date of purchase as cash equivalents. These cash
equivalents are recorded at cost, which approximates fair market value at
October 31, 1997 and 1996, respectively.
Marketable securities-
----------------------
Marketable securities at October 31, 1997, consist of an investment in
commercial paper. The Company accounts for investments in marketable securities
in accordance with Statement of Financial Accounting Standards ("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 investment at October 31, 1997, has been
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,
the investment is presented in the Balance Sheet at its amortized cost as of
October 31, 1997, and the discount amortization has been included in earnings
for the year ended October 31, 1997. This investment in commercial paper will
mature within one year.
Property and equipment-
-----------------------
Property and equipment, consisting primarily of engineering equipment, is stated
at cost. Depreciation is calculated on a straight-line basis primarily over five
years.
F-11
Investment in Joint Venture-
----------------------------
The Company controls four of seven votes of the Joint Venture's board of
directors. However, decisions involving the Joint Venture require either an
unanimous or two-thirds vote of the Joint Venture board of directors. Since the
Company has significant influence over the Joint Venture operations but does not
have control, the Company has reflected its investment in the Joint Venture
under the equity method of accounting.
Research, development and tooling costs-
----------------------------------------
Research, development and tooling costs incurred by the Company are included in
selling, general and administrative expenses in the year incurred.
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-
-------------------------------------
Net(loss) per share of common stock has been computed based on the weighted
average number of shares outstanding during the periods. Such amounts and shares
have been restated for stock splits declared since inception, as more fully
described in Note 5. There are no common stock equivalents that have a dilutive
effect.
Recently issued accounting standards-
-------------------------------------
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on the weighted average shares outstanding and excludes any
potential dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock and is similar to the currently
required fully diluted EPS. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all prior periods presented. The Company
does not expect the impact of the adoption of this pronouncement to be material
to previously reported EPS amounts.
The Company has adopted all other recently issued accounting standards which are
applicable, none of which were material to the financial position or results of
operations of the Company's financial statements.
F-12
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 amounts reported in the financial statements and related notes to
financial statements. Actual results could differ from those estimates.
Reclassifications-
------------------
Certain prior year amounts have been reclassified to conform with the current
year presentation.
(3) Investment in Joint Venture:
----------------------------
The Company has contributed to SCE $1,225,000 in cash, 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 have contributed cash
aggregating $1,575,000. The Company has reflected its investment in SCE under
the equity method of accounting (See Note 2) and will recognize losses in SCE to
the extent of its cash investment.
Condensed financial information for SCE at October 31, 1997 and 1996 and for the
three years ended October 31, 1997, is as follows:
Condensed Balance Sheets 1997 1996
------------------------ ---- ----
Cash $ 135,890 $ 726,640
Inventories 4,830,461 240,823
Other current assets 31,988 25,586
Land occupancy rights, net of amortization, fixed assets,
net of depreciation and other non-current assets 2,197,169 1,792,538
------------- -------------
Total Assets $ 7,195,508 $ 2,785,587
============= =============
Short term loans $ 500,012 $ -
Accounts payable and accrued liabilities 504,269 47,387
Due to CopyTele, Inc. 4,303,652 240,823
Capital 1,887,575 2,497,377
------------- -------------
Total Liabilities and Capital $ 7,195,508 $ 2,785,587
============= =============
Condensed Statements of Operations 1997 1996 1995
---------------------------------- ---- ---- ----
Net Sales $ - $ - $ -
Operating (Loss) (599,299) (289,447) (35,234)
Interest Income (Expense) (10,503) 19,211 2,847
-------------- ------------- -------------
Net (Loss) $ (609,802) $ (270,236) $ (32,387)
============== ============== =============
The short term loans from a Chinese bank bear interest at a floating rate which
is currently approximately 7.4% per annum adjustable quarterly. These loans were
extended in December 1997 and will mature in May 1998 through August 1998. These
loans are secured by a land-use contract and equipment owned by SCE.
Included in accounts payable and accrued liabilities at October 31, 1997, is
approximately $372,000 of advances paid by CopyTele, Inc. towards the purchase
of products from SCE.
F-13
The cumulative net (loss) incurred by SCE since its inception on April 10, 1995
is $(912,425).
See Note 2 regarding the Company's revenue recognition policy.
Second Joint Venture-
---------------------
The Company entered into a letter of intent in 1996 for the formation of a
second joint venture with SECC. In light of the Company's current discussions
with SIEC regarding a possible venture for the production and marketing of high
technology products, the Company has determined that it is unlikely that it will
pursue this second joint venture if a definative agreement is ultimatly reached
with SIEC.
(4) Issuance of warrants:
---------------------
The Company in conjunction with sales of its common stock issued warrants to
members of the immediate families of its Chairman of the Board and its
President. In addition, the Company also issued warrants to an unrelated party
(which expired in May, 1994) who purchased shares of the Company's common stock
and to its former Vice President - Finance. Information regarding these warrants
for the three years ended October 31, 1997, after adjustments for anti-dilutive
provisions and applicable stock splits, is as follows:
Current Weighted
Average Exercise
Shares Price per Share
------ ----------------
Shares covered by warrants at October 31, 1994 1,338,666 $ 3.58
Warrants exercised (274,600) $ 2.76
Warrants expired (211,400) $ 2.91
----------
Shares covered by warrants at October 31, 1995 852,666 $ 3.90
Warrants exercised (384,350) $ 2.83
Warrants expired (53,200) $ 1.88
-----------
Shares covered by warrants at October 31, 1996 415,116 $ 5.11
Warrants exercised (98,820) $ 5.10
Warrants expired (220,296) $ 5.09
----------
Shares covered by warrants at October 31, 1997 96,000 $ 5.10
===========
The exercise price of all of the aforementioned warrants represented the fair
market value of the underlying common stock on the day preceding issuance of
such warrants. These warrants are exercisable for five years commencing ninety
days from the date of issuance. As of October 31, 1997, all of the warrants to
purchase shares of common stock issued and outstanding were exercisable.
F-14
(5) 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 the stock
splits.
(6) 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. The Board of Directors currently has no definitive plan
or agreements for issuance of any of the preferred stock.
(7) Stock option plans:
-------------------
The Company has two stock option plans, the 1987 Stock Option Plan, adopted by
the Board of Directors on April 1, 1987 (the "1987 Plan"), and the CopyTele,
Inc. 1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993
(the "1993 Plan").
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 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 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 consistent with SFAS No.
123, the Company's net loss and net loss per share would have increased to the
following pro forma amounts:
For the Year Ended For the Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Net Loss: As Reported $(5,800,575) $(5,443,410)
Pro Forma $(15,706,850) $(12,755,762)
Net Loss
Per Share: As Reported $(0.10) $(0.10)
Pro Forma $(0.27) $(0.23)
F-15
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants for the years ended October 31, 1997 and 1996,
respectively: risk free interest rates of 5.50% and 5.67%; expected dividend
yields of 0%; expected lives of 2.86 years; and expected stock price volatility
of 73% and 66%. The weighted average fair value of options granted under SFAS
No. 123 for the years ended October 31, 1997 and 1996 are $2.34 and $2.43,
respectively.
In May 1987 the Company's shareholders approved a stock option plan (the "1987
Plan") which, after giving consideration to the five-for-four and two
two-for-one stock splits described in Note 5 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 options to key
employees, consultants and directors of the Company. The option price was
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 the
approval of the CopyTele, Inc. 1993 Stock Option Plan (the "1993 Plan") by the
Company's shareholders in July 1993, the 1987 Plan was terminated with respect
to the grant of future options.
Information regarding the 1987 Plan for the three years ended October 31, 1997
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ---------------
Shares Under Option at October 31, 1994 3,375,720 $3.48
Exercised (1,262,000) $2.67
Canceled (345,600) $3.78
------------
Shares Under Option at October 31, 1995 1,768,120 $3.99
Exercised (1,013,760) $3.46
-----------
Shares Under Option at October 31, 1996 754,360 $4.75
Exercised (68,200) $2.93
------------
Shares Under Option and Exercisable at October 31, 1997 686,160 $4.93
============ =====
The following table summarizes information about stock options outstanding at
October 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ----------------------------------
Number Weighted Average Number
Range of Outstanding remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 10/31/97 Contractual Life Exercise Price at 10/31/97 Exercise Price
--------------- ----------- ---------------- ---------------- ------------ ----------------
$2.47 to $3.09 157,600 1.73 $2.94 157,600 $2.94
$4.19 to $5.63 508,560 4.92 $5.47 508,560 $5.47
$6.94 20,000 4.21 $6.94 20,000 $6.94
F-16
The exercise price with respect to all of the options granted under the 1987
Plan from its inception was at least equal to the fair market value of the
underlying common stock on the date of grant. As of October 31, 1997, 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 pursuant to grants thereunder from 6 million shares to 20 million
shares after giving consideration to the two-for-one stock split in 1996. The
1993 Plan provides for the granting of stock options to purchase shares of
common stock of the Company or stock appreciation rights up to the aggregate of
20 million shares. Incentive options and rights may be granted to key employees
and nonqualified options and rights may be granted to key employees and
consultants of the Company. As amended, nonqualified options to purchase 40,000
shares of common stock will be granted annually to each re-elected nonemployee
director of the Company and 20,000 shares to each newly elected nonemployee
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.
Information regarding the 1993 Plan for the three years ended October 31, 1997
is as follows:
Current Weighted
Average Exercise
Shares Price Per Share
------ ----------------
Shares Under Option at October 31, 1994 4,462,000 $5.68
Granted 5,250,000 $3.30
Exercised (698,800) $2.74
Canceled (120,000) $4.28
------------
Shares Under Option at October 31, 1995 8,893,200 $4.52
Granted 4,578,000 $5.17
Exercised (4,096,340) $3.46
Canceled (200,000) $4.78
------------
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
============ =====
Options Exercisable at October 31, 1997 9,497,360 $5.30
============ =====
F-17
The following table summarizes information about stock options outstanding at
October 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------------------
Number Weighted Average Number
Range of Outstanding remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 10/31/97 Contractual Life Exercise Price at 10/31/97 Exercise Price
--------------- ----------- ----------------- ---------------- ------------- ----------------
$2.81 to $3.94 1,334,000 7.36 $3.27 1,334,000 $3.27
$4.38 to $6.38 8,086,360 8.22 $5.06 6,043,360 $5.18
$6.88 to $8.50 2,120,000 5.70 $6.93 2,120,000 $6.93
The exercise price with respect to all of the options granted under the 1993
Plan from its inception was at least equal to the fair market value of the
underlying common stock on the grant date. At October 31, 1997, 3,390,000
options were available for future grants under the 1993 Plan.
In November 1997, the Company granted 1,360,000 options to purchase the
Company's common stock pursuant to the 1993 Plan.
(8) Commitments and contingencies:
------------------------------
Leases-
-------
The Company leases space at its principal location for office and laboratory
research facilities from an unrelated party. The current lease is for
approximately 10,000 square feet and expires on November 30, 1998. The lease now
contains base rentals of approximately $166,000 per annum, as well as escalation
clauses for increases in certain operating costs, for a total cost aggregating
approximately $173,000 per annum.
In February 1996, the Company entered into a five-year lease with an unrelated
party for approximately 2,300 square feet of office space. The lease expires on
June 30, 2001 and is non-renewable. It has a base rent of approximately $51,000
per annum for the first two years and approximately $56,000 per annum
thereafter. In October 1996, the Company entered into a third lease with another
unrelated party 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
extend the lease to June 30, 2000. The modified lease provides for escalating
base rents of approximately $46,000, $48,000 and $50,000, respectively, for each
year beginning July 1, 1997.
Rent expense for the years ended October 31, 1997, 1996, 1995 and for the period
from November 5, 1982 (inception) through October 31, 1997 was approximately
$269,000, $215,000, $130,000 and $1,824,000, respectively.
Key-man life insurance-
-----------------------
The Company maintains key-man life insurance, aggregating $1,500,000 insuring
the lives of its Chairman of the Board and its President. The Company is the
beneficiary under these policies. Annual expenses relating to the maintenance of
this insurance aggregated approximately $34,000.
F-18
(9) Employees' 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 approximated
$102,000, $70,000, $50,000 and $545,000 for the years ended October 31, 1997,
1996 and 1995 and for the period from the inception of the plan through October
31, 1997, respectively, has been accrued and funded on a current basis.
(10) Income taxes:
-------------
At October 31, 1997, the Company had tax net operating loss and tax credit
carryforwards of approximately $61,077,000 and $1,499,000 respectively,
available, within statutory limits (expiring at various dates between 1998 and
2012), to offset 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, 1997 were deductions for tax purposes of option holders' income related to
stock option exercises aggregating approximately $900,000. If the tax benefits
are ultimately realized relating to deductions of option holders' income, 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 $56,278,000 and $114,000 respectively, at October 31, 1997,
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
1998 and 2012 and the tax credit carryforwards expire between 1999 and 2007.
Deferred tax benefits at October 31, 1997 and 1996, 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 $28,295,000 and $25,308,000, respectively.
During the period from November 5, 1982 (inception) through October 31, 1997,
the Company incurred no Federal and no material State income taxes.
(11) Selling, general and administrative expenses:
----------------------------------------------
While there is no formal agreement, the Company's Chairman of the Board and its
President have waived any and all rights to receive salary and related pension
benefits for an undetermined period of time commencing November 1985. The
aggregate annual expenses for these individuals at the time of such waivers were
approximately $325,000.
F-19
Four other individuals, including an officer and senior level personnel, then
employed at the Company, waived any and all rights to receive salary and related
pension benefits for the period 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. The three senior level
personnel continued to waive such rights commencing in January 1993 for an
undetermined period of time. Since February 1993, one additional employee is
also currently waiving such salary and benefit rights for an undetermined period
of time. The aggregate annual expense for these five individuals, then employed
at the Company, at the time of their respective initial waivers was
approximately $440,000. The Company does not contemplate the retroactive
reinstatement of any of the salary or related pension benefit waivers indicated
above.
F-20