The NY Observer story:
Meet Magicom 2000! A High-Tech Gadget That No One's Seen
by Christopher Byron
A fabulous new computer product looks just about ready to hit the market. For $2,000, more or less, you can be the proud owner of a "Magicom 2000" desktop telephone-scanner-computer interface-voice mail-fax machine-handwriting transmitter and just about anything else you can think of, all rolled into one handy, breadbox-size package that will sit right at your elbow, right there on the desk. Best of all, you'll be able to buy this wonderful, labor-saving device from a home-grown American company based on Long Island.
Unfortunately, there's just one problem: If you want to get yourself a Magicom 2000 now, you'll have to go to Russia, Asia, Brazil or someplace like that. That's because the company making the Magicom 2000 doesn't plan to be marketing it here in the global capital of business technology-i.e., the United States-just yet.
Why not? Because, as explained by the company, it makes more sense to beta-test the thing out there in Russia, North Africa, China and other such places first-to get the bugs and kinks worked out, you understand. After all, who should be better equipped to evaluate the merits of a cutting-edge business productivity tool than all those laptop-toting Azerbaijani business tycoons wandering around Russia, looking for ways to wring the most out of every minute in the new age of global capitalism?
That, at any rate, is the explanation regarding the perplexing introduction of the Magicom 2000 from the head of marketing for the company in question-Copytele Inc. of Huntington Station, L.I. Said the senior vice president of marketing, Frank Trischetta, "We'll be launching in the U.S. very soon. It's a product for architects, doctors, motion picture executives, police departments-everybody!"
So here's this week's question for devotees of how the game of conjuring something out of nothing is actually played on Wall Street: Does the name of the aforementioned company, Copytele Inc., perchance ring a bell?
If not, maybe the following headline from a yellowing 13-year-old Fortune magazine clip will help: "The Mystifying Business Behind a Magical Stock." The story goes on to detail the unusual history of what was then a barely year-old high-tech development company whose stock had surged on claims of a breakthrough new product destined to "reshape the copier business." Dubbed the CT-100, the soon-to-be-introduced gizmo would allow ordinary copiers to function as computer printers. There was just one problem. According to the article, the company had no products or revenues, nor even a working prototype of what it was trying to develop. All it had were lots of name-dropping press releases and a clique of True Believer investors ready to chase the stock to Mars.
Thirteen years later, not a whole lot has changed. Gone is the fanatical following of Copytele bulls on Wall Street. From a split-adjusted high of nearly $60 per share back in the 1980's, the stock has sunk almost out of view and now trades on the Nasdaq electronic stock market at barely $3.25 per share. Gone as well are the claims for the CT-100 that was allegedly destined to upend the computer and copier industries. It seems that the product just never worked out.
But with that exception, it seems that life at the office at Copytele remains pretty much what it always has been-lots of hype about that big, new drop-dead product that lies just around the corner, but only the skimpiest of details to prove it. This time around, the claims center on the Magicom 2000, which the company says will simultaneously maintain two-way transmission of voice and image data over a single, ordinary phone line.
Yet is that technologically possible? A check with AT&T Corporation produced a skeptical response. "If you're talking about an ISDN line, then, yes, it's not hard at all," said an official. "But if you're talking about using an ordinary telephone line, then the fact is, there just isn't enough bandwidth on the line to support it. AT&T had a product in the market a couple of years ago called the Videofone, but the images were very jerky and we gave it up. No one wanted it."
A check with sources at the Xerox Corporation and the Hewlett-Packard Company brought blank stares: No one had ever heard of Copytele or its soon-to-shake-the-world Magicom 2000. "I can tell you this," said one Hewlett-Packard source. "We watch patent filings in the industry very carefully, and if there was anything to what is being claimed, we'd know about it."
We'll just pass over the question of whether Russia, China and other such technologically challenged countries are suitable beta test sites for ISDN-dependent telecommunications equipment, and move on to the equally perplexing matter of Copytele's finances, the accounting for which seems to force the outer limits of the credible.
We begin with the fact that in its 15 years of existence, Copytele has not reported one thin dime of revenues from any source, ever. Run your eyes across the company's operating statements, and year after year, you see nothing on the revenue line but zero after zero, perhaps the longest stretch of its kind on record: a full decade and a half in which a publicly traded Nasdaq company has reported absolutely no revenues whatsoever. Meanwhile, selling, general and administrative expenses have gone from $2 million in 1992 to $6 million in 1996.
In the company's latest quarterly report to shareholders, there is the mystifying statement that, because it is a development-stage company and because the Magicom 2000 is its first product, Copytele has, for the time being, decided to "defer" the reporting of sales revenue. What that seems to mean is that the company is taking in no sales revenue at all, in Russia or anywhere else, and is simply shipping machines on consignment to those beta-test-site guinea pigs out there in the third world.
So, where's the company getting the money to run the business day to day? Copytele does, after all, have about 60 employees, and there's also the monthly nut on its rental digs in Huntington Station.
The money is sure not coming from investments. Since 1982, when accounting at Copytele began, the company has taken in a total of barely $4 million in interest income on its cash balances, or about $275,000 per year. That interest income seems to come mainly from cash deposits. But during the same time, Copytele has been shelling out maybe $2.5 million-or roughly nine times its interest income-in annual cost outlays.
How does the gap get closed? Mainly, it would seem, by a clever stock-selling ploy that benefits insiders more than anyone else. As explained by Michael Murphy of the Half Moon Bay, Calif.-based Overpriced Stock Service newsletter, instead of simply arranging for stock offerings by the company, Copytele's insiders, led by chairman and chief executive officer Denis Krusos, have periodically been selling large blocks of their own stock on the open market, raising cash, then using only a portion of it to purchase treasury shares from the company itself.
So, the business they're really in is the selling of Copytele stock. They have actually sold $52 million worth of stock over the past 14 years. Out of that, they've blown $36 million and now sit with a fat little cushion of $16 million in cash, no doubt to take care of the directors in their old age, four out of five of whom are over 69 years old. If they had some brains in their heads, they'd buy a bread-and-butter company with the cash and some borrowings, and live off it very nicely for the rest of their lives. Come to think of it, maybe they're not so dumb after all. They've been living very nicely off a company that doesn't have any borrowings at all; the whole fandango is being supported by witless outside shareholders.
This arrangement keeps the company liquid with cash while putting millions into the pockets of Denis and his gang, but in the process, outside investors have gotten shellacked: Copytele's share price has plunged even as the number of shares has soared, from 690,000 publicly traded shares in the 1983 initial public offering to maybe 58 million shares now.
That share volume now gives Copytele, at its current price of around $3.25 per share, a market capitalization of nearly $190 million-this for a company that has racked up 15 years of losses that now total $33 million, and whose net worth seems to consist almost exclusively of the periodic cash infusions that come from the stock sales.
How long can this go on? Probably for as long as investors gullible enough to keep buying Copytele's shares can still be rounded up on Wall Street-which means for a very long time indeed. To that end, the company has now begun cranking up its promotion machine all over again, and the press releases have begun pouring forth anew. Copytele has even signed up the Burson-Marsteller public relations firm to promote the stock.
Explained the P.R. agency's account rep on the case, Nicholas Platt, "I'm just here to provide stock price quotes and that sort of thing." For actual financial details about the company, Mr. Platt said to contact Mr. Krusos. Yet after hearing the questions that seemed to need asking, Mr. Krusos decided not to be interviewed. Big surprise. |
