SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
Commission file number 0-11254
COPYTELE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2622630
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
900 Walt Whitman Road
Huntington Station, NY 11746
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 549-5900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, par value
$.01 per share, outstanding as of June 7, 1999: 59,115,376 shares
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Balance Sheets (Unaudited) as of April 30, 1999 and October
31, 1998
Condensed Statements of Operations (Unaudited) for the six months ended
April 30, 1999 and April 30, 1998, and for the period from November 5,
1982 (Inception) through April 30, 1999
Condensed Statements of Operations (Unaudited) for the three months
ended April 30, 1999 and April 30, 1998
Condensed Statement of Shareholders' Equity (Unaudited) for the period
from November 5, 1982 (Inception) through April 30, 1999
Condensed Statements of Cash Flows (Unaudited) for the six months ended
April 30, 1999 and April 30, 1998, and for the period from November 5,
1982 (Inception) through April 30, 1999
Condensed Statements of Cash Flows (Unaudited) for the three months
ended April 30, 1999 and April 30, 1998
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
---------------------
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------
April 30, October 31,
ASSETS 1999 1998
------ ---- ----
CURRENT ASSETS:
Cash (including cash equivalents and interest bearing accounts of
$3,669,984 and $5,363,522, respectively) $ 3,741,737 $ 5,406,017
Marketable securities, at cost 489,444 -
Accrued interest receivable 13,593 3,983
Inventory 2,823,627 2,719,215
Prepaid expenses and other current assets (including amounts due from
Joint Venture of approximately $619,000 and $825,000, respectively) 666,537 904,656
------------ ------------
Total current assets 7,734,938 9,033,871
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $1,491,220 and $1,351,778, respectively) 664,639 766,106
INVESTMENT IN JOINT VENTURE (Note 2) 232,852 345,947
AMOUNTS DUE FROM JOINT VENTURE 2,980,770 3,091,628
OTHER ASSETS 102,914 97,420
DEFERRED TAX BENEFITS (net of valuation allowance of
$31,906,000 and $30,910,000, respectively) - -
------------ ------------
$11,716,113 $ 13,334,972
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable (including amounts due to Joint Venture of
approximately $619,000 and $662,000, respectively) $ 1,246,581 $1,392,321
Accrued liabilities 83,824 81,738
------------ ------------
Total current liabilities 1,330,405 1,474,059
SHAREHOLDERS' EQUITY:
Preferred stock, par value $100 per share; authorized 500,000 shares;
no shares outstanding - -
Common stock, par value $.01 per share; authorized 240,000,000
shares; outstanding 58,865,576 and 57,871,176 shares, respectively 588,656 578,712
Additional paid-in capital 54,520,416 52,977,110
Accumulated (deficit) during development stage (44,723,364) (41,694,909)
------------ ------------
10,385,708 11,860,913
------------ ------------
$11,716,113 $13,334,972
============ ============
The accompanying notes to condensed financial statements are an integral part
of these balance sheets.
3
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the six months For the period from
Ended April 30, November 5, 1982
------------------------------------------- (inception) through
1999 1998 April 30, 1999
--------------------- --------------------- ---------------------
SALES $ - $ - $ -
--------------------- ----------------------- ---------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,(including
research and development expenses of approximately
$1,479,000, $2,106,000 and $29,790,000,
respectively) 3,012,135 3,833,273 48,602,269
--------------------- ----------------------- ---------------------
LOSS FROM JOINT VENTURE 113,095 207,381 992,148
--------------------- ----------------------- ---------------------
INTEREST INCOME 96,775 288,767 4,871,053
--------------------- ----------------------- ---------------------
NET (LOSS) ($3,028,455) ($3,751,887) ($44,723,364)
====================== ======================= =====================
NET (LOSS) PER SHARE OF COMMON
STOCK: Basic and Diluted ($0.05) ($0.06) ($0.95)
====================== ======================= =====================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 58,190,083 57,861,176 46,995,119
====================== ======================= =====================
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------
For the three months
ended April 30,
------------------------------------------------
1999 1998
---------------------- -----------------------
SALES $ - $ -
---------------------- -----------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, (including
research and development expenses of approximately
$751,000 and $1,006,000, respectively) 1,596,853 1,874,876
---------------------- -----------------------
LOSS FROM JOINT VENTURE 44,467 70,802
---------------------- -----------------------
INTEREST INCOME 43,948 130,617
---------------------- -----------------------
NET (LOSS) ($1,597,372) ($1,815,061)
====================== =======================
NET (LOSS) PER SHARE OF COMMON
STOCK: Basic and Diluted ($0.03) ($0.03)
====================== =======================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING: Basic and Diluted 58,468,576 57,861,176
====================== =======================
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH APRIL 30, 1999 (UNAUDITED)
-----------------------------------------------------------------------------------
Additional Accumulated
Common Stock Paid-in (Deficit) During
Shares Par Value Capital Development 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 - - (362,030) -
Common stock issued, at $12 per share, upon exercise of
57,200 warrants from February 5, 1985 to October 16, 1985,
net of registration costs 57,200 572 630,845 -
Proceeds from sales of common stock by individuals from
January 29, 1985 to October 4, 1985 under agreements with
the Company, net of costs incurred by the Company - - 298,745 -
Restatement as of October 31, 1985 for three-for-one stock
split 5,714,400 57,144 (57,144) -
Common stock issued, at $4 per share, upon exercise of 2,800
warrants in December 1985 8,400 84 33,516 -
Sale of common stock, at market, to officers on January 9,
1987 and April 22, 1987 and to members of their immediate
families on July 28, 1987 67,350 674 861,726 -
Restatement as of July 31, 1987 for five-for-four stock split 2,161,735 21,617 (21,617) -
Fractional share payments in conjunction with five-for-four
stock split - - (1,345) -
Sale of common stock, at market, to members of officers'
immediate families from September 10,1987 to December 4, 1990
and to officers on October 29, 1987 and February 26, 1989 628,040 6,280 6,124,031 -
Sale of common stock, at market, to senior level
personnel on February 26, 1989 29,850 299 499,689 -
Continued
6
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------
FOR THE PERIOD FROM NOVEMBER 5, 1982 (INCEPTION) THROUGH APRIL 30, 1999 (UNAUDITED)
-----------------------------------------------------------------------------------
Continued
---------
Additional Accumulated
Common Stock Paid-in (Deficit) During
Shares Par Value Capital Development Stage
-------------------------------- -------------- -----------------
Sale of common stock, at market, to unrelated party on
February 26, 1989 amended on March 10, 1989 35,820 358 599,627 -
Restatement as of January 31, 1991 for
two-for-one stock split 11,502,795 115,028 (115,028) -
Sale of common stock, at market, to members of officers'
immediate families from April 26, 1991 to October 27, 1992 261,453 2,615 2,788,311 -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates from September 1993 through March 1996 579,800 5,798 2,651,462 -
Common stock issued upon exercise of stock options
from December 16, 1992 to June 12, 1996 4,535,340 45,353 28,197,223 -
Restatement as of June 17, 1996 for two-for-one stock split 28,382,183 283,822 (283,822) -
Common stock issued upon exercise of warrants by
members of officers' immediate families on various
dates in July and October, 1996, and March 1997 206,610 2,066 1,062,167 -
Common stock issued upon purchase of equipment 15,000 150 74,850 -
Common stock issued upon exercise of stock options from
July 1996 to April 1999 under stock option plans, net
of registration costs 1,479,600 14,796 3,956,200 -
Sale of common stock, at market, to a related party and
an unrelated party on April 30, 1999 400,000 4,000 596,000 -
Stock options granted to consultants - - 251,250 -
Accumulated (deficit) during development stage - - - ( 44,723,364)
--------------- --------------- ---------------- -------------
BALANCE, April 30, 1999 58,865,576 $588,656 $54,520,416 ($44,723,364)
=============== =============== ================ =============
The accompanying notes to condensed financial statements are an integral part of
this statement.
7
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the six
months ended For the period from
April 30, November 5, 1982
-------------------------------------- (inception) through
1999 1998 April 30, 1999
----------------- -------------------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($2,729,146) ($4,391,355) ($52,176,488)
Interest received 87,165 319,647 4,857,461
----------------- -------------------- -------------------------
Net cash (used in) operating activities (2,641,981) (4,071,708) (47,319,027)
----------------- -------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (24,455) (298,473) (2,007,614)
Disbursements to acquire certificates of deposit and
marketable securities (489,444) (972,469) (13,535,443)
Proceeds from maturities of investments - 970,808 13,045,999
Investment made in Joint Venture - - (1,225,000)
----------------- -------------------- -------------------------
Net cash (used in) investing activities (513,899) (300,134) (3,722,058)
----------------- -------------------- -------------------------
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 600,000 - 18,247,369
Proceeds from exercise of stock options and warrants,
net of registration disbursements 891,600 - 36,600,083
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 1,491,600 - 54,782,822
----------------- -------------------- -------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,664,280) (4,371,842) 3,741,737
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,406,017 12,329,171 -
----------------- -------------------- -------------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $3,741,737 $7,957,329 $3,741,737
================= ==================== =========================
Continued
8
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
Continued
For the six
months ended For the period from
April 30, November 5, 1982
--------------------------------------- (inception) through
1999 1998 April 30, 1999
------------------- ------------------- -------------------------
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ($3,028,455) ($3,751,887) ($44,723,364)
Stock option compensation to consultants 61,650 179,700 251,250
Loss from Joint Venture 113,095 207,381 992,148
Depreciation and amortization 139,442 146,935 1,506,878
Amortization of discount on marketable
securities - 23,273 -
(Increase) decrease in accrued interest
receivable (9,610) 7,607 (13,593)
(Increase) in inventory (104,412) (607,623) (2,823,627)
Decrease (increase) in prepaid expenses and
other current assets 238,119 (422,112) (666,537)
Decrease (increase) in long term amount due from Joint
Venture 110,858 - (2,980,770)
(Increase) decrease in other assets (5,494) 14,289 (102,914)
(Decrease) increase in accounts payable
and accrued liabilities (157,174) 130,729 1,241,502
------------------- ------------------- ---------------------
Net cash (used in) operating activities ($2,641,981) ($4,071,708) ($47,319,027)
=================== =================== =====================
The accompanying notes to condensed financial statements are an integral part of
these statements.
9
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------
For the three months
ended April 30,
--------------------------------
1999 1998
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments to suppliers, employees and
consultants ($1,311,611) ($2,342,105)
Interest received 37,282 129,540
---------------- ---------------
Net cash (used in) operating activities (1,274,329) (2,212,565)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and
equipment (16,153) (44,093)
Disbursements to acquire certificates of deposit and marketable
securities - (972,469)
---------------- ---------------
Net cash (used in) investing activities (16,153) (1,016,562)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants 600,000 -
Proceeds from exercise of stock options and
warrants, net of registration disbursements 52,950 -
---------------- ---------------
Net cash provided by financing activities 652,950 -
---------------- ---------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (637,532) (3,229,127)
---------------- ---------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,379,269 11,186,456
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,741,737 $7,957,329
================= ===============
RECONCILIATION OF NET (LOSS) TO NET CASH (USED IN)
OPERATING ACTIVITIES:
Net (loss) ($1,597,372) ($1,815,061)
Loss from Joint Venture 44,467 70,802
Depreciation and amortization 67,388 76,117
(Increase) decrease in accrued interest receivable (6,666) 2,015
Decrease (increase) in inventory 167,883 (161,298)
Amortization of discount on marketable securities - (3,092)
Decrease (increase) in prepaid expenses and other
current assets 110,139 (212,011)
(Increase) in long term amount due from Joint Venture (1,125) -
Decrease in other assets - 320
(Decrease) in accounts payable and accrued liabilities (59,043) (170,357)
----------------- ---------------
Net cash (used in) operating activities ($1,274,329) ($2,212,565)
================= ===============
The accompanying notes to condensed financial statements are an integral part of
these statements.
10
COPYTELE, INC.
--------------
(Development Stage Enterprise)
------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
APRIL 30, 1999 (UNAUDITED)
--------------------------
(1) Nature of business and other disclosures:
------------------------------------------
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 MAGICOM(R) 2000, a telephone based multi-functional
telecommunications product incorporating the Company's E-Paper(TM) Flat Panel
Display technology; the development of USS-900, a hardware based peripheral
digital encryption device, and e-way, a peripheral product which is being
designed to provide simultaneous voice and handwriting, Internet e-mail, and
Caller ID; and the operations of Shanghai CopyTele Electronics Co., Ltd. (the
"Joint Venture" or "SCE"), the Company's 55% owned joint venture in Shanghai,
China. The Company is also continuing its research and development activities
for additional ultra-high resolution flat panel displays, including video and
color displays, and coated particles which could potentially be used by
manufacturers of toners and pigments.
The Company is producing its telephone based multi-functional telecommunications
product, called MAGICOM(R) 2000, incorporating the Company's flat panel display,
called E-Paper(TM), and associated proprietary hardware and software technology
and marketing the product through its United States and international
distributor/dealer network. The Company has also developed, in conjunction with
a Japanese company, a small portable printer called MAGIC PRINTER. The printer
is presently being produced for the Company by the Japanese company 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.
The Company is proceeding with the development of a hardware based peripheral
digital encryption system called the USS-900, with technical assistance from
Harris Corporation ("Harris"). This device utilizes the digital cryptographic
chip - the Citadel(TM) (a trademark of Harris) - which is capable of providing
high-grade information encryption. The USS-900 has received UL and FCC approval
and is currently being tested by the Company for functionality and compatibility
which is expected to be concluded in June 1999. A limited number of
pre-production USS-900 devices have been produced by the Company at its facility
in New York. The pre-production USS-900 units are being utilized by the Company
for demonstration purposes in the United States. To develop the USS-900, the
Company utilized its experience derived from the development of its MAGICOM(R)
2000 and e-way products. e-way is being developed as a screen based peripheral
device to a computer, telephone or fax machine which can be used as a display
for handwriting and keyboard typing. The Company has completed the design of
e-way and intends to produce a limited initial quantity for test marketing.
The Company plans to sell its products, including the USS-900 and e-way if they
are successfully produced and test marketed, to end-users through a
distributor/dealer network. All of the critical elements of the earnings process
for a product will be complete when a distributor/dealer sells the product to
end-users. The Company has had no sales since its inception other than sales of
a limited quantity of the MAGICOM(R) 2000 and MAGIC PRINTER products to certain
distributors. Revenue will not be recorded on sales until the Company determines
that the product(s) have been accepted by the end-users. 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. See "Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995" contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations for discussions regarding
uncertainties that may significantly affect the results of operations, future
liquidity and capital resources.
11
Basis of Presentation
---------------------
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The information contained herein is for the six and three month periods ended
April 30, 1999 and 1998 and for the period from November 5, 1982 (inception)
through April 30, 1999. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments considered necessary for a fair
presentation of the results of operations for such periods) have been included
herein. The results of operations for interim periods may not necessarily
reflect the annual operations of the Company. Reference is made to the October
31, 1998 audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998,
for more extensive disclosures than contained in these condensed financial
statements.
Effective October 31, 1998, the Company adopted SFAS No. 128, "Earnings Per
Share". In accordance with SFAS 128, basic net (loss) per common share ("Basic
EPS") is computed by dividing net (loss) by the weighted average number of
common shares outstanding. Diluted net (loss) per common share ("Diluted EPS")
is computed by dividing net (loss) by the weighted average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the statements of operations. The impact of the
adoption of this statement was not material to previously reported EPS amounts.
Diluted EPS for all years presented is the same as Basic EPS, as the inclusion
of the impact of common stock equivalents then outstanding would be
anti-dilutive.
Realizability of Assets
-----------------------
During fiscal 1998 and the six months ended April 30, 1999, the Company
increased its inventory to approximately $2,825,000 to prepare for the
distribution of its MAGICOM(R) 2000 and MAGIC PRINTER products. Management has
recorded the Company's MAGICOM(R) 2000 inventory at its current net realizable
value, which is based upon the current anticipated selling price of the product,
and provides for no further reductions of the selling price. To date, shipments
of the Company's product have been limited. Accordingly, there can be no
assurance that the Company will not be required to further reduce the selling
price of the MAGICOM(R) 2000 below its current carrying value to accomplish
certain business strategies, which would require a further reduction of such
carrying value.
In addition, amounts due from SCE totaled approximately $3,600,000 as of April
30, 1999. The advances to SCE have primarily funded the purchase of inventory
components to manufacture the Company's MAGICOM(R) 2000. The ultimate
realizability of amounts due from SCE are dependent, in part, on future sales of
the Company's products. The Company's proportionate share of future losses in
the Joint Venture will continue to reduce the carrying value of the investment
in the Joint Venture until such amount is exhausted. If, after the Company fully
writes off its investment, it makes any additional investments, such additional
investments will be charged directly to the statement of operations.
The Company is continuing to evaluate the realizability of these assets on an
ongoing basis and will make such adjustments, as necessary, to reflect estimated
net realizable values based on current facts and circumstances.
Amounts Due from Joint Venture
------------------------------
The amounts due from the Joint Venture of approximately $3,600,000 and
$3,917,000, respectively, on the accompanying Condensed Balance Sheets represent
parts inventory, such as the flat panel assembly components, purchased by the
Company on behalf of SCE which are incorporated into the MAGICOM(R) 2000
product.
12
(2) Joint Venture:
---------------
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 and will recognize losses in SCE to the extent
of its cash investment. If future losses result in the write-off of the original
cash investment, and the Company makes additional investments, such investments
will be charged directly to the statement of operations.
Condensed Financial Information
-------------------------------
Condensed Balance Sheets for SCE at April 30, 1999 and October 31, 1998 and
Condensed Statements of Operations for the six month periods ended April 30,
1999 and 1998 are as follows:
Condensed Balance Sheets
-------------------------
(Unaudited)
-----------
April 30, October 31,
1999 1998
----------------- ------------------
Cash $ 68,823 $ 51,760
Accounts receivable from CopyTele, Inc. 619,050 661,592
Inventories 3,313,119 3,568,202
Other current assets 15,444 68,581
Land occupancy rights, net of amortization; fixed assets,
net of depreciation and other non-current assets 2,016,584 2,105,583
----------------- ------------------
Total Assets $6,033,020 $6,455,718
================= ==================
Short term loans $1,120,126 $ 999,316
Accounts payable and accrued liabilities 316,979 338,052
Due to CopyTele, Inc. 3,599,820 3,916,628
Capital 996,095 1,201,722
================= ==================
Total Liabilities and Capital $6,033,020 $ 6,455,718
================= ==================
Condensed Statements of Operations
----------------------------------
(Unaudited)
----------- For the six months ended
------------------------------------------
April 30, April 30,
1999 1998
----------------- ------------------
Net Sales $ - $ -
Operating (Loss) (166,684) (361,296)
Other Income (Expense) (38,943) (15,760)
================= ==================
Net (Loss) $(205,627) $(377,056)
================= ==================
13
The short term loans bear interest at floating rates of approximately 5.86% to
7.13% per annum at April 30, 1999. These loans will mature in May and November
of 1999, and February 2000 and are secured by a land-use contract and building
owned by SCE.
The cumulative net (loss) incurred by SCE since its inception on April 10, 1995
is $(1,803,905).
Any valuation reserves related to the Company's inventory will result in a
similar charge to the statement of operations of SCE, as the operations and
certain assets of both entities are inter-dependent. Such a charge would result
in a decrease to the Company's investment in SCE.
(3) Shareholders' Equity:
---------------------
Stock option plans:
-------------------
The Company has two stock option plans, the 1987 Stock Option Plan, adopted by
the Board of Directors on April 1, 1987 (the "1987 Plan"), and the CopyTele,
Inc. 1993 Stock Option Plan, adopted by the Board of Directors on April 28, 1993
(the "1993 Plan").
SFAS No. 123, "Accounting for Stock Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. In accordance with APB Opinion No. 25, no compensation
cost has been recognized by the Company, as all option grants to employees have
been made at the fair market value of the Company's stock on the date of grant.
Options granted to non-employee consultants are accounted for using the
fair-value method required by SFAS No. 123. Compensation expense recognized in
the six months ended April 30, 1999 and April 30, 1998 was $61,650 and $179,700,
respectively, and is included in general and administrative expenses for the
periods.
Sales of common stock and issuance of warrants:
-----------------------------------------------
On April 30 1999, the Company sold 400,000 shares of its common stock in two
private placements for $1.50 per share, or an aggregate of $600,000, of which
300,000 shares were sold to a nominee for election to the Company's Board of
Directors at the 1999 Annual Meeting of Stockholders. In conjunction with the
sales of common stock, the Company issued warrants to purchase 400,000 shares of
common stock at an exercise price of $1.50 per share which expire on April 30,
2001.
14
Item 2. Management's Discussion and Analysis of Financial
--------------------------------------------------
Condition and Results of Operations.
------------------------------------
Safe Harbor Statement Under the Private Securities Litigation Reform Act
------------------------------------------------------------------------
of 1995.
--------
Certain statements in this Quarterly Report on Form 10-Q 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; the ability of a second supplier to
produce and supply a lower cost printer; 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 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; the ability
of the Company to reduce the cost of MAGICOM(R) 2000 and the related printer;
political and economic stability in China and Russia in which research,
development or production activities are taking place on behalf of the Company;
the ability of the Company to commercially develop and establish a market for
its new products under development including the USS-900 and e-way; the possible
development of competitive products that could render the Company's products
obsolete or unmarketable; and the ability of the Company to obtain additional
financing. See "Business" and Note 1 to the Company's Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998 for discussions regarding uncertainties that may significantly
affect the results of operations, future liquidity and capital resources.
General
-------
The Company, which is a development stage enterprise, was incorporated on
November 5, 1982. The Company's principal activities include the development,
production and marketing of MAGICOM(R) 2000, a telephone based multi-functional
telecommunications product incorporating the Company's E-Paper(TM) Flat Panel
Display technology; the development of USS-900, a hardware based peripheral
digital encryption device, and e-way, a peripheral product which is being
designed to provide simultaneous voice and handwriting, Internet e-mail, and
Caller ID; and the operations of Shanghai CopyTele Electronics Co., Ltd. (the
"Joint Venture" or "SCE"), the Company's 55% owned joint venture in Shanghai,
China which is accounted for under the equity method of accounting. The Company
is also continuing its research and development activities for additional
ultra-high resolution flat panel displays, including video and color displays,
and coated particles which could potentially be used by manufacturers of toners
and pigments. 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.
The Company has proceeded with the development of a hardware based peripheral
digital encryption system called the USS-900, with technical assistance from
Harris Corporation ("Harris"). This device utilizes the digital cryptographic
chip - the Citadel(TM) (a trademark of Harris) - which is capable of providing
high-grade information encryption. The USS-900 has received UL and FCC approval
and is currently being tested by the Company for functionality and compatibility
which is expected to be concluded in June 1999. A limited number of
pre-production USS-900 devices have been produced by the Company at its facility
in New York. The pre-production USS-900 units are being utilized by the Company
for demonstration purposes in the United States. To develop the USS-900, the
Company utilized its experience derived from the development of its MAGICOM(R)
2000 and e-way products. e-way is being developed as a screen based peripheral
device to a computer, telephone or fax machine which can be used as a display
for handwriting and keyboard typing. The Company has completed the design of
e-way and intends to produce a limited initial quantity for test marketing.
In reviewing Management's Discussion and Analysis of Financial Condition and
Results of Operations, reference is made to the Company's Condensed Financial
Statements and the notes thereto.
15
Results of Operations
---------------------
The Company plans to sell its products, including the USS-900 and e-way if they
are successfully produced and test marketed, to end-users through a
distributor/dealer network. All of the critical elements of the earnings process
for a product will be complete when a distributor/dealer sells the product to
end users. The Company has had no sales since its inception other than sales of
a limited quantity of the MAGICOM(R) 2000 and MAGIC PRINTER products to its
distributors. Revenue will not be recorded on these sales, which were not
material, until the Company determines that the product(s) have been accepted by
the end-users.
Selling, general and administrative expenses, excluding the loss from SCE, for
the six month periods ended April 30, 1999 and 1998 decreased by approximately
$821,000, to approximately $3,012,000 in the fiscal 1999 period from
approximately $3,833,000 in the fiscal 1998 period. These amounts include
research, development and tooling costs of approximately $1,479,000 and
$2,106,000 for the fiscal 1999 and 1998 periods, respectively, as well as normal
operating expenses. Selling, general and administrative expenses, excluding the
loss from SCE, for the three month periods ended April 30, 1999 and 1998
decreased by approximately $278,000, to approximately $1,597,000 in the fiscal
1999 period from approximately $1,875,000 in the fiscal 1998 period. Also
included in these amounts are research, development and tooling costs of
approximately $751,000 and $1,006,000 for the fiscal 1999 and 1998 periods,
respectively, as well as normal operating expenses. From November 5, 1982
(inception) through April 30, 1999 selling, general and administrative expenses,
excluding the loss from SCE, were approximately $48,602,000 including
approximately $29,790,000 for research, development and tooling costs, as well
as normal operating expenses.
The decreases in selling, general and administrative expenses, excluding the
loss from SCE, of approximately $821,000 and $278,000 during the six and three
month periods, respectively, in the fiscal 1999 periods as compared to the same
periods in fiscal 1998 resulted primarily from decreases in expenditures for
engineering supplies, marketing costs, professional fees, and research and
development for video and color flat panel displays.
Engineering supplies decreased in the fiscal 1999 periods as compared to the
fiscal 1998 periods primarily as a result of reduced purchases of components
used to develop engineering changes to MAGICOM(R) 2000. This decrease was offset
somewhat by the cost to eliminate used components as a result of these changes.
Engineering service costs increased in the fiscal 1999 periods as compared to
the fiscal 1998 periods as a result of the USS-900 development effort. Marketing
costs for the MAGICOM(R) 2000 decreased in the fiscal 1999 periods as compared
to the fiscal 1998 periods as a result of the elimination of non-recurring costs
associated with marketing start-up costs and reduced travel and entertainment
costs. Professional fees were also lower in the fiscal 1999 periods as compared
to the fiscal 1998 periods as a result of lower fees incurred for legal,
accounting and patent related services. Research and development costs for flat
panel displays decreased in the aggregate during the six month comparable
periods principally as a result of lower costs incurred in connection with the
development of the Company's solid state and optical video and color display.
This decrease was offset somewhat by higher costs in the field emission (FED),
vacuum fluorescent (VFD) and liquid crystal (LCD) flat panel displays programs
under development. There was a slight increase in the three month fiscal 1999
period as compared to the fiscal 1998 period. These costs vary over time
depending on the phase of development of each product or technology. The
Company's non-cash charge to earnings for stock based compensation to
consultants mandated by SFAS No. 123 was lower in the fiscal 1999 periods as
compared to the fiscal 1998 periods.
16
Employee compensation and related costs increased in the fiscal 1999 periods
over the fiscal 1998 periods as a result of the hiring of three additional sales
and marketing personnel, one additional paid engineering employee and higher
payroll taxes associated with stock option exercises. Some employee benefit
programs incurred rate increases for the fiscal 1999 periods. Rents also
increased slightly as a result of annual escalations in certain leases. A charge
to earnings was recorded in order to bring the valuation of inventory in line
with current estimates.
The Company's portion of SCE's loss for the six month periods ended April 30,
1999 and 1998 decreased by approximately $94,000 to approximately $113,000 in
the fiscal 1999 period from approximately $207,000 in the fiscal 1998 period.
The Company's portion of SCE's loss for the three month periods ended April 30,
1999 and 1998 also decreased by approximately $27,000 to approximately $44,000
in the fiscal 1999 period as compared to the prior year's period of
approximately $71,000. The decrease in the losses was primarily the result of
cost reductions, production efficiencies and limited production activity with
respect to the MAGICOM(R) 2000. From November 5, 1982 (inception) through April
30, 1999 the Company's portion of SCE's losses were approximately $992,000. The
Company's proportionate share of future losses in SCE will continue to reduce
the carrying value of the Company's investment in SCE until such amount is
exhausted. If, after the Company fully writes off its investment, it makes any
additional investments, such additional investments will be charged directly to
the statement of operations.
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.
From February 1993 to September 1998 one additional employee also waived such
salary and benefit rights.
Interest income during the six month periods ended April 30, 1999 and 1998
decreased by approximately $192,000 from approximately $289,000 during the
fiscal 1998 period as compared to $97,000 during the fiscal 1999 period. There
was also a decrease of approximately $87,000 in the three month comparable
periods ended April 30, 1999 and 1998. The decreases resulted primarily from a
decrease in average funds available for investment and lower interest rates.
Funds available for investment during the six and three month periods ended
April 30, 1999 and 1998, on a monthly weighted average basis, were approximately
$4,400,000, $10,425,000, $4,152,000 and $9,475,000, respectively. The
investments selected by the Company are principally treasury bills, money market
accounts and commercial paper.
17
Year 2000 Issue
---------------
The Year 2000 issue relates to computer systems programmed to use two digits
rather than four digits to define the applicable year. Computer systems and
other programmable devices utilizing date/time-sensitive software and hardware
may recognize a date using "00" as the year 1900 rather than Year 2000 which
could result in the computer or device shutting down, performing incorrect
computations or performing inconsistently.
The Company is continuing the process of determining its risks regarding the
Year 2000 issue. Once the assessment is complete, the Company will formulate and
begin to implement a plan to correct or establish contingencies for any Year
2000 problems it uncovers. However, the Company cannot guarantee that its
remediation efforts will prevent the occurrence of all Year 2000 problems.
The Company utilizes brand name personal computers and predominately
off-the-shelf software to perform its daily functions. An initial assessment of
the hardware indicates that the hardware is already Year 2000 compliant, and
non-compliant system operating software will be compliant with the installation
of readily available updates. The Company's financial software has already been
upgraded to be Year 2000 compliant. The Company's MAGICOM(R) 2000 product is
Year 2000 compliant. SCE has performed their initial assessment and will
implement a plan to correct deficiencies which do not appear to be material.
The Company has several material third party relationships primarily with
financial institutions, utilities, and telecommunications companies. The Company
is planning to take reasonable steps to verify the Year 2000 readiness of these
companies. The Company is in the process of contacting its key customers,
suppliers and vendors regarding their state of readiness.
The initial cost to begin the assessment process and the cost expended to update
some items has not been material to date. The Company believes that its total
cost to test and correct any Year 2000 deficiencies will be in line with its
annually budgeted expense for computerization and is estimating the cost not to
exceed $20,000.
Failure by the Company to resolve a material Year 2000 issue could result in the
interruption or failure of certain business activities or operations, and could
materially adversely affect the financial condition, results of operation and
cash flow of the Company. If an interruption or failure does occur, the extent
of the Company's exposure would depend primarily upon the time it takes to
remedy the problem. Based on the Company's current knowledge of its systems,
operations and third party relationships, the Company does not anticipate that
the Year 2000 issue will have a material adverse impact on the Company.
The Company contemplates formulating a Year 2000 contingency plan in the event
of possible interruptions in business operations. This plan is currently
expected to be completed by the middle of calendar year 1999. There can be no
assurance, however, that the Company will be able to develop or implement a
successful contingency plan addressing the Year 2000 issue or that such a plan
will be economically feasible.
18
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 1987 Plan and the 1993 Plan.
During the six month period ended April 30, 1999, the Company received proceeds
aggregating approximately $891,600 from the exercise of stock options under the
1993 Plan to purchase shares of its common stock and $600,000 from sales of its
common stock in private placements. During the period from May 1, 1999 through
June 7, 1999 the Company received additional proceeds aggregating approximately
$390,000 from the exercise of stock options pursuant to the 1993 Plan. Working
capital decreased by approximately $1,160,000 from approximately $7,560,000 at
October 31, 1998 to approximately $6,400,000 at April 30, 1999 as a result of
the loss incurred for the six month period ended April 30, 1999 offset by the
proceeds received in the same period.
The Company's operations used approximately $2,640,000 in cash during the six
month period ended April 30, 1999. The current working capital includes
approximately $4,230,000 of cash and marketable securities, and approximately
$711,000 (net of approximately $619,000 due to SCE) of accounts payable and
accrued liabilities. The Company believes that these net cash resources will be
sufficient to continue its operations, as presently being conducted, into the
second quarter of fiscal 2000 after giving effect to anticipated reductions in
SCE's requirements for components purchases, which amounted to $1,275,000 during
fiscal 1998, and reductions in administrative and support personnel, if
necessary.
Management has recorded the Company's inventory at its current net realizable
value, which is based upon the current anticipated selling price of the
Company's MAGICOM(R) 2000 units, and provides for no further reductions of the
selling price of the product. To date, shipments of the Company's product have
been limited. Accordingly, there can be no assurance that the Company will not
be required to further reduce the selling price of the MAGICOM(R) 2000 below its
current carrying value to accomplish certain business strategies which would
require a further reduction of such carrying value. In addition, amounts due
from SCE totaled approximately $3,600,000 as of April 30, 1999. The advances to
SCE have primarily funded the purchase of inventory components to manufacture
the Company's MAGICOM(R) 2000. The ultimate realizability of amounts due from
SCE are also dependent, in part, on future sales of the Company's products. The
Company will continue to evaluate the realizability of these assets on an
ongoing basis and will make such adjustments, as necessary, to reflect estimated
net realizable values based on current facts and circumstances.
The Company is seeking to improve its liquidity through the sale of products,
the collection of amounts due from SCE, and through possible sales of its common
stock, each as more fully described below.
In an effort to stimulate sales, the Company has reduced the selling price of
MAGICOM(R) 2000 and MAGIC PRINTER and is attempting to lower the cost of
producing these products so that further price reductions may be made. The
Company is hopeful, although there is no assurance, that with the price
reductions and the addition of the USS-900 encryption device, if it can be
successfully produced and marketed, sales of MAGICOM(R) 2000 will increase.
The amounts due from SCE are primarily costs related to the purchase by SCE of
components for use in MAGICOM(R) 2000 units. It is expected, although there can
be no assurance, that SCE will pay the Company during the current and succeeding
year through the sales of units and financing from banks. SCE repaid the Company
approximately $226,000 in the six months ended April 30, 1999. As of April 30,
1999, the Company owed SCE approximately $619,000 which when paid would be used
by SCE to repay the Company. Sales of units by SCE to the Company may result in
an increase in the Company's inventory before the units are then sold by the
Company in the ordinary course of its business.
19
The Company may also attempt to raise additional funds, if necessary, through
private sales of its common stock at offering prices at or near the then market
price of the Company's stock. The market price of the Company's stock at the
time of the sales would affect the amount of dilution that would result to
stockholders from such sales. There can be no assurance, however, that the
Company will be able to consummate any future private sales of its common stock.
The NASD requires that the Company maintain a minimum of $4 million of net
tangible assets to maintain its NASDAQ-NMS listing. If the Company's stock were
delisted, the delisting could potentially have an adverse affect on the price of
the Company's common stock and could adversely affect the liquidity of the
shares held by the Company's stockholders. The Company anticipates that it will
seek additional sources of funding, when necessary, in order to satisfy the NASD
requirements.
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 to continue its
research and development activities, maintain the NASD funding requirement and
participate in SCE beyond its initial capital contribution. There can be no
assurance that adequate funds will be available to the Company or that, if
available, the Company will be able to obtain such funds on favorable terms and
conditions. The Company currently has no definitive arrangements with respect to
additional financing.
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 of funding which may be borrowed from banks, of which
$1,120,000 has been borrowed to date. Short-term loans aggregating the
$1,120,000 are from a Chinese bank, secured by a land-use contract with the Land
Administration Bureau of Shanghai County and the building, and from one of the
Chinese parties. The Company has contributed $1,225,000 in cash, and technology
valued for the purposes of SCE at $700,000, and the Chinese parties contributed
$1,575,000 in cash to SCE. SCE may require additional capitalization depending
upon the nature and extent of its business activities. There can be no assurance
that adequate funds will be available to SCE, including any future capital
contributions, if any, beyond its initial capital contributions or that, if
available, SCE will be able to obtain such funds on favorable terms and
conditions.
20
PART II OTHER INFORMATION
- -------------------------
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
Recent Sales of Unregistered Securities
- ---------------------------------------
On April 30, 1999 the Company issued and sold 400,000 shares of Common Stock for
a purchase price of $1.50 per share, or an aggregate of $600,000. The shares
were sold to two individuals, one of whom was Lewis H. Titterton, a nominee for
election as a director of the Company at the 1999 Annual Meeting of
Stockholders, who purchased 300,000 shares. In conjunction with the sales of
Common Stock, the Company issued Warrants to purchase 400,000 shares of Common
Stock at an exercise price of $1.50 per share which expire on April 30, 2001, of
which a Warrant for 300,000 shares was issued to Mr. Titterton. The shares of
Common Stock and Warrants were offered and sold in reliance upon the the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended, relative to sales by an issuer not involving a public offering.
A copy of the Stock Subscription Agreement, dated April 27, 1999, between the
Company and Mr. Titterton, including the form of Warrant issued to Mr.
Titterton, is filed as an Exhibit to this Report.
Item 6. Exhibits and Reports on Form 8-K.
----------------------------------
(a) Exhibits
--------
10.11 - Stock Subscription Agreement dated April 27, 1999
including form of Warrant, between CopyTele, Inc.
and Lewis H. Titterton, a nominee for election
as Director at the 1999 Annual Meeting of
Stockholders.
27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed for the
Company during the quarter ended April 30, 1999.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CopyTele, Inc.
By:/s/ DENIS A. KRUSOS
----------------------
Denis A. Krusos
Chairman of the Board,
Chief Executive Officer
and Director (Principal
June 14, 1999 Executive Officer)
By:/s/ FRANK J. DISANTO
-----------------------
Frank J. DiSanto
June 14, 1999 President and Director
By:/s/ GERALD J. BENTIVEGNA
---------------------------
Gerald J. Bentivegna
Vice President - Finance,
Chief Financial Officer and
Director (Principal Financial
June 14, 1999 and Accounting Officer)
22
Exhibit Index
-------------
Exhibit
Number Description
- ------- ------------
10.11 Stock Subscription Agreement dated April 27, 1999 including
form of Warrant, between CopyTele, Inc. and Lewis H.
Titterton, a nominee for election as Director at the 1999
Annual Meeting of Stockholders
EXHIBIT 10.11
- -------------
THE SECURITIES REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT, OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT IS AVAILABLE.
COPYTELE, INC.
STOCK SUBSCRIPTION AGREEMENT
This Stock Subscription Agreement (this "Agreement"), dated as of April
27, 1999, is entered into by and between CopyTele, Inc., a Delaware corporation
(the "Company"), and Lewis H. Titterton (the "Subscriber").
The Company has offered for sale, and the Subscriber has agreed to
purchase, 300,000 shares (the "Shares") of common stock, par value $.01 per
share (the "Common Stock"), of the Company and a Warrant (the "Warrant") to
purchase 300,000 shares of Common Stock (the "Warrant Shares"). In connection
therewith, the Company and the Subscriber hereby agree as follows:
1. Purchase and Sale of Shares. Upon the basis of the
representations and warranties, and subject to the terms and conditions, set
forth herein, the Company agrees to issue and sell the Shares and the Warrant to
the Subscriber on the Closing Date (as hereinafter defined) at a purchase price
of $1.50 per share of Common Stock, or an aggregate purchase price of $450,000
(the "Subscription Price"), and the Subscriber agrees to purchase the Shares and
the Warrant from the Company on the Closing Date at the Subscription Price.
2. Closing. The closing of the purchase and sale of the Shares
shall take place at 10:00 a.m., New York City time, on April 30, 1999, at the
offices of the Company at 900 Walt Whitman Road, Huntington, New York 11746, or
on such other date or at such other time or place as the Company and the
Subscriber may agree upon in writing (such time and date of the closing being
referred to herein as the "Closing Date"). Upon payment of the Subscription
Price in full in the form of cash or certified or bank check payable to the
order of the Company, the Company will deliver to the Subscriber as promptly as
practicable (but in no event later than fifteen (15) days following the date of
payment in full of the Subscription Price) (i) a certificate or certificates
representing the Shares, registered in the name of the Subscriber, and (ii) a
Warrant granting the Subscriber the right to purchase the Warrant Shares at the
purchase price per share of $1.50, expiring two (2) years following the Closing
Date, in the form attached hereto as Exhibit A, the terms and conditions of
which are agreed to by the Subscriber.
3. Representations and Warranties of the Company. The Company
represents and warrants that:
(a) no consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction
over the Company or any of the Company's affiliates is required for the
execution of this Agreement or the performance of the Company's
obligations hereunder, including, without limitation, the sale of the
Shares to the Subscriber;
(b) neither the sale of the Shares and the Warrant nor
the performance of the Company's other obligations pursuant to this
Agreement will violate, conflict with, result in a breach of, or
constitute a default (or an event that, with the giving of notice or
the lapse of time or both, would constitute a default) under (i) the
certificate of incorporation or bylaws of the Company, (ii) any decree,
judgment, order or determination of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or any of the
Company's properties or assets, (iii) any law, treaty, rule or
regulation applicable to the Company (other than the federal securities
laws, representations and warranties with respect to which are made by
the Company solely in paragraphs (f) through (j) of this Section 3) or
(iv) the terms of any bond, debenture, note or other evidence of
indebtedness, or any agreement, stock option or other similar plan,
indenture, lease, mortgage, deed or trust or other instrument to which
the Company is a party or otherwise bound or to which any property of
the Company is subject;
(c) the Company has or, prior to the Closing, will have
taken all corporate action required to authorize the execution and
delivery of this Agreement and the performance of its obligations
hereunder;
(d) the Company has duly authorized the Shares and the
Warrant Shares and, when issued and delivered in accordance with the
terms of the Company's certificate of incorporation and delivered to
and paid for by the Subscriber in accordance with the terms hereof and
the Warrant, respectively, the Shares and the Warrant Shares will be
duly and validly issued, fully paid and non-assessable, and the
issuance of the Shares and the Warrant Shares will not be subject to
any preemptive or similar rights;
(e) the Shares and the Warrant Shares will be free and
clear of any security interest, lien, claim or other encumbrance;
(f) the sale of the Shares and the Warrants by the
Company are not part of a plan or scheme to evade the registration
requirements of the Securities Act of 1933, as amended (the "Act");
(g) neither the Company nor any person acting on behalf
of the Company has offered or sold any of the Shares or the Warrant by
any form of general solicitation or general advertising;
(h) the Company has offered the Shares and the Warrant
for sale only to "accredited investors," as such term is defined in
Rule 501(a) under the Act, who by reason of their business and
financial experience have such knowledge, sophistication and experience
in business and financial matters as to be capable of evaluating the
merits and risks of the investment in the Shares, the Warrant and the
Warrant Shares;
(i) the Company's Annual Report on Form 10-K (the "Form
10-K") for the fiscal year ended October 31, 1998 fairly and accurately
presents the Company's business as of the date thereof and its
financial condition and results of operation through October 31, 1998,
and the Form 10-K does not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(j) the financial statements of the Company included in
the Form 10-K, including the schedules and notes thereto, comply in all
material respects with the requirements of the Securities Exchange Act
of 1934, as amended, and have been prepared, and fairly present the
financial condition and results of operations and cash flows of the
Company and its subsidiaries at the respective dates and for the
respective periods indicated, in accordance with generally accepted
accounting principles consistently applied throughout such periods; and
2
(k) except as set forth in the Form 10-K, since October
31, 1998 (i) the Company has not incurred any material liabilities,
direct or contingent, and (ii) there has been no material adverse
change in the properties, business, results of operations, condition
(financial or other), affairs or prospects of the Company and its
subsidiaries, taken as a whole.
The Company has not made any representations or warranties to
the Subscriber, and the Subscriber has not relied upon any representations or
warranties of the Company, except as expressly set forth in this Section 3.
4. Representations and Warranties of the Subscriber. The
Subscriber represents and warrants that:
(a) the purchase of the Shares and the Warrant by the
Subscriber is not part of a plan or scheme to evade the registration
requirements of the Act;
(b) the Subscriber is an "accredited investor," as such
term is defined in Rule 501(a) under the Act, who by reason of its
business and financial experience has such knowledge, sophistication
and experience in business and financial matters as to be capable of
evaluating the merits and risks of the investment in the Shares, the
Warrant and the Warrant Shares and, having had access to or having been
furnished with all such information as it has considered necessary
(including, without limitation, the Form 10-K), has concluded that it
is able to bear those risks;
(c) the Subscriber understands that (i) the Shares, the
Warrant and the Warrant Shares have not been registered under the Act
and may not be offered or sold unless registered under the Act or an
exemption from the registration requirements of the Act is available,
(ii) if any transfer of the Shares, the Warrant or the Warrant Shares
is to be made in reliance on an exemption under the Act, the Company
may require an opinion of counsel satisfactory to it that such transfer
may be made pursuant to such exemption and (iii) so long as deemed
appropriate by the Company, the Shares, the Warrant and the Warrant
Shares may bear a legend to the effect of clauses (i) and (ii) of this
paragraph;
(d) in making any subsequent offering or sale of the
Shares, the Subscriber will be acting only for itself and not as part
of a sale or planned distribution in violation of the Act;
(e) the Shares and Warrant were not offered to the
Subscriber by any form of general solicitation or general
advertising;
(f) the Subscriber understands that no federal or state
or other governmental agency has passed upon or made any recommendation
or endorsement with respect to the Shares, the Warrant or the Warrant
Shares;
(g) the Subscriber is purchasing the Shares and the
Warrant, and will acquire the Warrant Shares, for its own account and
not with a view to, or for sale in connection with, any distribution;
3
(h) during the period of five (5) business days
immediately prior to the execution of this Agreement by the Subscriber,
Subscriber did not, and from such date and through the expiration of
the 90th day following the date hereof will not, directly or
indirectly, execute or effect or cause to be executed or effected any
short sale, option, or equity swap transaction in or with respect to
the Common Stock or any other derivative security transaction the
purpose or effect of which is to hedge or transfer to a third party all
or any part of the risk of loss associated with the ownership of the
Shares, the Warrant or the Warrant Shares by the Subscriber; and
(i) no consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction
over the Subscriber or any of the Subscriber's affiliates is required
for the execution of this Agreement or the performance of the
Subscriber's obligations hereunder, including, without limitation, the
purchase of the Shares and the Warrant by the Subscriber.
5. Conditions to Closing. The obligations of each party hereunder
shall be subject to (a) the accuracy of the representations and warranties of
the other party hereto as of the date hereof and as of the Closing Date, as if
such representations and warranties had been made on and as of such date, (b)
the performance by the other party of its obligations hereunder and (c) the
condition that Les Appel, counsel to the Subscriber, shall have delivered on or
prior to the Closing Date an opinion to the effect that the sale of the Shares
and the Warrant pursuant to, and in the manner contemplated by, this Agreement
does not require registration under the Act, which opinion shall be acceptable
to the Company's transfer agent for the Shares. The Company and the Subscriber
hereby acknowledge that Les Appel, counsel to the Subscriber, will rely on the
accuracy and truth of the representations and warranties of the Company and the
Subscriber in Section 3 and Section 4, respectively, and hereby, consent to such
reliance by such counsel.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Subscriber, each person, if any, who controls the Subscriber within the
meaning of Section 15 of the Act and each officer, director, employee
and agent of the Subscriber and of any such controlling person against
any and all losses, liabilities, claims, damages or expenses
whatsoever, as incurred, arising out of or resulting from any breach or
alleged breach or other violation or alleged violation of any
representation, warranty, covenant or undertaking by the Company
contained in this Agreement, and the Company will reimburse the
Subscriber for its reasonable legal and other expenses (including the
cost of any investigation and preparation, and including the reasonable
fees and expenses of counsel) incurred in connection therewith.
(b) The Subscriber agrees to indemnify and hold harmless
the Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Act and each officer, director, employee
and agent of the Company and of any such controlling person against any
and all losses, liabilities, claims, damages or expenses whatsoever, as
incurred, arising out of or resulting from any breach or alleged breach
or other violation or alleged violation of any representation,
warranty, covenant or undertaking by the Subscriber contained in this
Agreement, and the Subscriber will reimburse the Company for its
reasonable legal and other expenses (including the cost of any
investigation and preparation, and including the reasonable fees and
expenses of counsel) incurred in connection therewith.
7. Survival of Representations and Warranties. The respective
agreements, representations, warranties, indemnities and other statements made
by or on behalf of each party hereto pursuant to this Agreement shall remain in
full force and effect, regardless of any investigation made by or on behalf of
any party, and shall survive delivery of any payment for the Shares and the
Warrant.
4
8. Miscellaneous.
(a) This Agreement may be executed in one or more
counterparts, and such counterparts shall constitute but one and the
same agreement.
(b) This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective successors and, with
respect to the indemnification provisions hereof, each person entitled
to indemnification hereunder, and no other person shall have any right
or obligation hereunder. This Agreement shall not be assignable by any
party hereto without the prior written consent of the other party
hereto. Any assignment contrary to the terms hereof shall be null and
void and of no force or effect.
(c) This Agreement represents the entire understanding
and agreement between the parties hereto with respect to the subject
matter hereof and can be amended, supplemented or changed, and any
provision hereof can be waived, only by written instrument making
specific reference to this Agreement signed by the party against whom
enforcement of any such amendment, supplement, modification or waiver
is sought.
9. Time of the Essence. Time shall be of the essence in this
Agreement.
10.Governing Law. This Agreement shall be governed by the
internal laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Stock
Subscription Agreement to be executed and delivered as of the date first written
above.
COPYTELE, INC.
By: Denis A. Krusos
--------------------------------------
Name: Denis A. Krusos
Title: Chairman of the Board and
Chief Executive Officer
SUBSCRIBER:
Lewis H. Titterton
--------------------------------------
Name: Lewis H. Titterton
5
Exhibit A
- ---------
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS
AVAILABLE.
Warrant to Purchase Expiration: April 30, 2001
--------------
300,000 Shares
- -------
COPYTELE, INC.
--------------
COMMON STOCK PURCHASE WARRANT
-----------------------------
This certifies that, for good and valuable consideration,
CopyTele, Inc., a Delaware corporation (including any successor thereto with
respect to the obligations hereunder, by merger, consolidation or otherwise, the
"Company"), grants to Lewis H. Titterton or permitted assigns (the
"Warrantholder"), the right to subscribe for and purchase, in whole or in part,
from time to time from the Company 300,000 duly authorized, validly issued,
fully paid and nonassessable shares (the "Warrant Shares") of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), at the purchase
price per share of $1.50 (the "Exercise Price") at any time prior to 5:00 p.m.,
New York time on the Expiration Date, all subject to the terms, conditions and
adjustments herein set forth. The terms that are capitalized herein shall have
the meanings specified in Section 10 hereof, unless the context shall otherwise
require.
1. Duration and Exercise of Warrant; Limitation on Exercise; Payment of Taxes.
---------------------------------------------------------------------------
1.1. Duration and Exercise of Warrant. Subject to the terms and
------------------------------------
conditions set forth herein, this Warrant may be exercised, in whole or in part,
by the Warrantholder by:
(a) the surrender of this Warrant to the Company, with a
duly executed Exercise Form specifying the number of Warrant Shares to be
purchased, during normal business hours on any Business Day prior to the
Expiration Date; and
(b) the delivery of payment to the Company of the
Exercise Price for the number of Warrant Shares specified in the Exercise
Form in the form of cash or certified or bank check payable to the order of
the Company.
The Company agrees that such Warrant Shares shall be deemed to
be issued to the Warrantholder as the record holder of such Warrant Shares as of
the close of business on the date on which this Warrant shall have been
surrendered and payment made for the Warrant Shares as aforesaid.
Notwithstanding the foregoing, no such surrender shall be effective to
constitute the person entitled to receive such shares as the record holder
thereof while the transfer books of the Company for the Common Stock are closed
for any purpose (but not for any period in excess of five days); but any such
surrender of this Warrant for exercise during any period while such books are so
closed shall become effective for exercise immediately upon the reopening of
such books, as if the exercise had been made on the date this Warrant was
surrendered and for the number of shares of Common Stock and at the Exercise
Price in effect at the date of such surrender. This Warrant and all rights and
options hereunder shall expire on the Expiration Date, and shall be wholly null
and void to the extent this Warrant is not exercised before it expires.
1.2. Warrant Shares Certificate. A stock certificate or
-------------------------------
certificates for the Warrant Shares specified in the Exercise Form shall be
delivered to the Warrantholder within 10 Business Days after receipt of the
Exercise Form by the Company and payment of the purchase price. If this Warrant
shall have been exercised only in part, the Company shall, at the time of
delivery of the stock certificate or certificates, deliver to the Warrantholder
a new Warrant evidencing the rights to purchase the remaining Warrant Shares,
which new Warrant shall in all other respects be identical with this Warrant.
1.3. Payment of Taxes. The issuance of certificates for Warrant
-----------------
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereto; provided, however, that the
--------- --------
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. Restrictions on Transfer; Restrictive Legends.
----------------------------------------------
2.1. Limitation on Transfer. No Warrantholder shall, directly or
-----------------------
indirectly, sell, give, assign, hypothecate, pledge, encumber, grant a security
interest in or otherwise dispose of (whether by operation of law or otherwise)
(each a "transfer") this Warrant or any right, title or interest herein or
hereto, except in accordance with the provisions of this Warrant. Any attempt to
transfer this Warrant or any rights hereunder in violation of the preceding
sentence shall be null and void ab initio and the Company shall not register any
---------
such transfer.
2
2.2. Transfer Procedures. If any Warrantholder wishes to transfer
---------------------
this Warrant to a transferee (a "Transferee") under this Section 2, such
Warrantholder shall give notice to the Company of its intention to make any
transfer permitted under this Section 2 not less than five (5) days prior to
effecting such transfer, which notice shall state the name and address of each
Transferee to whom such transfer is proposed. This Warrant may, in accordance
with the terms hereof, be transferred in whole or in part. If this Warrant is
assigned in whole, the assignee shall receive a new Warrant (registered in the
name of such assignee or its nominee) which new Warrant shall cover the number
of shares assigned. If this Warrant is assigned in part, the assignor and
assignee shall each receive a new Warrant (which, in the case of the assignee,
shall be registered in the name of the assignee or its nominee), each of which
new Warrant shall cover the number of shares not so assigned and in respect of
which no such exercise has been made in the case of the assignor and the number
of shares so assigned, in the case of the assignee.
2.3. Transfers in Compliance with Law; Substitution of Transferee.
--------------------------------------------------------------
Notwithstanding any other provision of this Warrant, no transfer may be made
pursuant to this Section 2 unless (a) the Transferee has agreed in writing to be
bound by the terms and conditions hereto, (b) the transfer complies in all
respects with the applicable provisions of this Warrant, and (c) the transfer
complies in all respects with applicable federal and state securities laws,
including, without limitation, the Securities Act of 1933, as amended. If
requested by the Company in its reasonable judgment, an opinion of counsel to
such transferring Warrantholder shall be supplied to the Company at such
transferring Warrantholder's expense, to the effect that such transfer complies
with the applicable federal and state securities laws; provided, however, that
no such opinion shall be required if the Transferee is a successor trust to the
Warrantholder which has the same beneficiaries. Any attempt to transfer this
Warrant or rights hereunder in violation of this Warrant shall be null and void
ab initio and the Company shall not register such transfer.
- ---------
3. Legends.
--------
Each Warrant (and each Warrant issued in substitution for any Warrant
pursuant hereto) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
3
Each stock certificate for Warrant Shares issued upon the exercise of
any Warrant and each stock certificate issued upon the direct or indirect
transfer of any such Warrant Shares shall be stamped or otherwise imprinted with
a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH
LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS
AVAILABLE.
Notwithstanding the foregoing, the Warrantholder may require the
Company to issue a Warrant or a stock certificate for Warrant Shares, in each
case without a legend, if either (i) such Warrant or such Warrant Shares, as the
case may be, have been registered for resale under the Securities Act or (ii)
the Warrantholder has delivered to the Company an opinion of counsel (reasonably
satisfactory to the Company) which opinion shall be addressed to the Company and
be reasonably satisfactory in form and substance to the Company's counsel, to
the affect that such registration is not required with respect to such Warrant
or such Warrant Shares, as the case may be.
4. Reservation of Shares, Etc.
---------------------------
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise
of this Warrant will, upon issuance, be duly and validly issued, fully paid
and nonassessable, not subject to any preemptive rights, and free from all
taxes, liens, security interests, charges, and other encumbrances with respect
to the issuance thereof, other than taxes in respect of any transfer occurring
contemporaneously with such issue.
(b) During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved, and keep
available free from preemptive rights, a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant.
4
5. Loss or Destruction of Warrant.
-------------------------------
Subject to the terms and conditions hereof, upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of such bond or indemnification as the Company may reasonably
require and, in the case of such mutilation, upon surrender and cancellation of
this Warrant, the Company will execute and deliver a new Warrant of like tenor.
If the original holder of this Warrant or any subsequent Institutional Holder
with a minimum net worth of at least $25,000,000 is the owner of this Warrant at
the time it shall be lost, stolen or destroyed, then the affidavit of an
authorized officer of such owner, setting forth the fact of such loss, theft or
destruction and of its ownership of this Warrant at the time of such loss, theft
or destruction shall be accepted as satisfactory evidence thereof and no further
bond shall be required as a condition to the execution and delivery of a new
Warrant other than the written agreement of such owner to indemnify the Company.
6. Ownership of Warrant.
---------------------
The Company may deem and treat the person in whose name this
warrant is registered as the holder and owner hereof (notwithstanding any
notations of ownership or writing hereon made by anyone other than the Company)
for all purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer. Notwithstanding the
foregoing, the Warrants represented hereby, if properly assigned in compliance
with this Agreement, may be exercised by an assignee for the purchase of Warrant
Shares without having a new Warrant issued.
7. Certain Adjustment.
-------------------
7.1. The number of Warrant Shares purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment as follows:
(a) Stock Dividends; Stock Splits. If at any time after
---------------------------------
the date of the issuance of this Warrant (i) theCompany shall pay a stock
dividend or make any other distribution payable inshares of Common Stock or
(ii) the number of shares of Common Stock shall have been increased by a
subdivision or split-up of shares of Common Stock, then, on the date of
the payment of such dividend or immediately after the effective date of
subdivision or split up, as the case maybe, the number of shares to be delivered
upon exercise of this Warrant will beincreased so that the Warrantholder
will be entitled to receive the number ofshares of Common Stock that such
Warrantholder would have owned immediatelyfollowing such action had this
Warrant been exercised immediately prior thereto,and the Exercise Price will be
adjusted as provided below in paragraph (f).
(b) Combination of Stock. If the number of shares of Common
----------------------
stock outstanding at any time after the date of the issuance of this Warrant
shall have been decreased by a combination of the outstanding shares of Common
Stock, then, immediately after the effective date of such combination,the number
of shares of Common Stock to be delivered uponexercise of this Warrant will be
decreased so that the Warrantholder thereafter will be entitledto receive the
number of shares of Common Stock that such Warrantholder wouldhave owned
immediately following such action had this Warrant been exercised immediately
prior thereto, and the Exercise Price will be adjusted as provided below in
paragraph (f).
5
(c) Reorganization, etc. If any capital reorganization
---------------------
of the Company, or any reclassification of the Common Stock,or any consolidation
or share exchange of the Company with or merger of the Company with or into any
other person or any sale, lease or other transfer of all or substantially all
of the assets of the Company to any other person, shall be effected in such a
way that the holders of Common Stock shall be entitled to receive stock, other
securities or assets (whether such stock, other securities or assets are issued
or distributed by the Company or another person) with respect to or in exchange
for Common Stock, then, upon exercise of this Warrant the Warrantholder shall
have the right to receive the kind and amount of stock other securities or
assets receivable upon such reorganization, reclassification, consolidation,
merger or sale, lease or other transfer by a holder of the number of shares of
Common Stock that such Warrantholder would have been entitled to receive upon
exercise of this Warrant had this Warrant been exercised immediately before
such reorganization, reclassification, consolidation, merger or sale, lease
or other transfer, subject to adjustments that shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Section 7.1.
(d) Fractional Shares. No fractional shares of Common
-------------------
Stock or scrip shall be issued to any Warrantholder in connection with the
exercise of this Warrant. Instead of any fractional shares of Common Stock that
would otherwise be issuable to such Warrantholder, the Company will pay to
such Warrantholder a cash adjustment in respect of such fractional interest
in an amount equal to that fractional interest of the then current Fair Market
Value per share of Common Stock.
(e) Carryover Notwithstanding any other provision of
---------
this Section 7.1, no adjustment shall be made to the number of shares of Common
Stock to be delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than 1% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall he made at the
time and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to 1% or more of the number of
shares to be so delivered. However, upon the exercise of this Warrant, the
Company shall make all necessary adjustments not theretofore made to the number
of shares of Common Stock to be delivered to the Warrantholder (or to the
Exercise Price) up to and including the date upon which this Warrant is
exercised.
(f) Exercise Price Adjustment. Whenever the number of
----------------------------
Warrant Shares purchasable upon the exercise of the Warrant is adjusted as
provided pursuant to this Section 7.1, the Exercise Price payable upon the
exercise of this Warrant shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of Warrant Shares purchasable upon the exercise of the Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares purchasable immediately thereafter; provided,
however, that the Exercise Price for each Warrant Share shall in no event be
less than the par value of such Warrant Share.
6
7.2. No Adjustment for Dividends. Except as provided in Section
-------------------------------
7.1, no adjustment in respect of any dividends shall be made during the term of
this Warrant or upon the exercise of this Warrant. Notwithstanding any other
provision hereof, no adjustments shall be made on Warrant Shares issuable on the
exercise of this Warrant for any cash dividends paid or payable to holders of
record of Common Stock prior to the date as of which the Warrantholder shall be
deemed to be the record holder of such Warrant Shares.
7.3. Notice of Adjustment. Whenever the number of Warrant Shares or
---------------------
the Exercise Price of such Warrant Shares is adjusted, as herein provided, or
the rights of the Warrantholder shall change by reason of other events specified
herein, the Company shall promptly mail by first class, postage prepaid, to the
Warrantholder, notice of such adjustment or adjustments and a certificate of the
Chief Financial Officer of the Company setting forth the number of Warrant
Shares and the Exercise Price of such Warrant Shares after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made.
8. Amendments. Any provision of this Warrant may be amended and the
-----------
observance thereof waived only with the written consent of the Company and the
Warrantholder.
9. Notices of Corporate Action. So long as this Warrant has not been
----------------------------
exercised in full, in the event of:
(a) any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other distribution,
or any right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other
right,
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger involving the Company and any other party or any
transfer of all or substantially all theassets of the Company to any other
party, or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
the Company will mail to the Warrantholder a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right and the amount and character of any such
dividend, distribution or right and (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
delivered at least 10 days prior to the date therein specified, in the case of
any date referred to in the foregoing subdivisions (i) and (ii).
7
10. Definitions.
------------
As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
"Business Day" means any day other than a Saturday, Sunday or
--------------
a day on which national banks are authorized by law to close in the State of New
York.
"Common Stock" has the meaning specified on the cover of this
--------------
Warrant.
"Company" has the meaning specified on the cover of this
---------
Warrant.
"Exercise Form" means an Exercise Form in the form annexed
----------------
hereto as Exhibit A.
"Exercise Price" has the meaning specified on the cover of
----------------
this Warrant.
"Expiration Date" means April 30, 2001; provided, however,
------------------ -------------------------------------
that if such date shall not be a Business Day, then on the next following day
that is a Business Day.
"Institutional Holder" means any bank, trust company, savings
----------------------
and loan association or other financial institution, any pension plan, any
pension trust, any investment company, any insurance company, any broker or
dealer, or any similar financial institution or entity, regardless of legal
form.
"Person" means any natural person, corporation, limited
--------
liability company, trust, joint venture, association, company, partnership,
governmental authority or other entity.
"Securities Act" has the meaning specified on the cover of
-----------------
this Warrant, or any similar Federal statute, and the rules and regulations of
the Securities and Exchange Commission thereunder, all as the same shall be in
effect at the time. Reference to a particular section of the Securities Act,
shall include a reference to the comparable section, if any, of any such similar
Federal statute.
8
"Transfer" has the meaning specified in Section 2.1
----------
"Transferee" has the meaning specified in Section 2.2.
------------
"Warrantholder" has the meaning specified on the cover of this
---------------
Warrant.
"Warrant Shares" has the meaning specified on the cover of
----------------
this Warrant.
11. Miscellaneous.
--------------
11.1. Entire Agreement. This Warrant constitutes the entire
-----------------
agreement between the Company and the Warrantholder with respect to the
Warrants.
11.2. Binding Effect; Benefits. This Warrant shall inure to the
---------------------------
benefit of and shall be binding upon the Company and the Warrantholder and their
respective successors and assigns. Nothing in this Warrant, expressed or
implied, is intended to or shall confer on any person other than the Company and
the Warrantholder, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Warrant.
11.3. Section and Other Headings. The section and other headings
----------------------------
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
11.4. Notices. All notices and other communications required or
--------
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally, telecopied
or sent by certified, registered or express mail, as follows:
(a) if to the Company, addressed to:
CopyTele, Inc.
900 Walt Whitman Road
Huntington, New York 11746
Attn: Chief Financial Officer
(b) if to Warrantholder, addressed to:
Lewis H. Titterton
6 Autumn Lane
Saratoga Springs, NY 12866
Any party may by notice given in accordance with this Section 11.4 designate
another address or person for receipt of notices hereunder.
9
11.5. Severability. Any term or provision of this Warrant which is
-------------
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
11.6. Governing Law. This Warrant shall be deemed to be a contract
---------------
made under the laws of the State of New York and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to such agreements made and to be performed entirely within such State.
11.7. No Rights or Liabilities as Stockholder. Nothing contained in
----------------------------------------
this Warrant shall be determined as conferring upon the Warrantholder any rights
as a stockholder of the Company or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are asserted
by the Company or by creditors or stockholders of the Company or otherwise.
11.8. Copy of Warrant. A copy of this Warrant shall be filed among
----------------
the records of the Company.
11.9. Exercise of Remedies. In the event that the Company shall fail
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to observe any provision contained in this Warrant, the holder hereof and/or any
holder of the Common Stock issued hereunder, as the case may be, may enforce its
rights hereunder by suit in equity, by action at law, or by any other
appropriate proceedings in aid of the exercise of any power granted in this
Warrant and, without limiting the foregoing, said holder shall be entitled to
the entry of a decree for specific performance and to such other and further
relief as such court may decree.
* * *
10
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
COPYTELE, INC.
By: Denis A. Krusos
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Name: Denis A. Krusos
Title: Chairman of the Board &
Chief Executive Officer
Dated: April 30, 1999
11
EXHIBIT A
EXERCISE FORM
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(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant, to purchase _________ of the Warrant Shares
and herewith tenders payment for such Warrant Shares to the order of CopyTele,
Inc. in the amount of $________ in accordance with the terms of this Warrant.
The undersigned requests (a) that a certificate for such Warrant Shares be
registered in the name of the undersigned (b), if such shares shall not include
all of the shares issuable as provided in such Warrant, that a new Warrant of
like tenor and date for the balance of the shares issuable thereunder be issued
to the undersigned and (c) that such certificates and Warrant, if any, be
delivered to the undersigned's address below.
The undersigned represents that it is acquiring such Warrant
Shares for its own account for investment and not with a view to or for sale in
connection with any distribution thereof.
Dated:
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Signature
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(Print Name)
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(Street Address)
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(City) (State) (Zip Code)
Signed in the presence of:
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