Significant Unaffiliated Stockholder Delivers Letter to CopyTele, Inc. Board of Directors

NEW YORK, May 13 /PRNewswire-FirstCall/ -- John D. Reynolds, a significant unaffiliated stockholder of CopyTele, Inc. (OTC Bulletin Board: COPY), announced today that he has sent a letter dated May 13, 2010 to CopyTele's Board of Directors.  

The full text of the letter follows:

Dear Members of the Board of Directors:

I currently own 2,000,000 shares of Common Stock of CopyTele, Inc. ("CopyTele" or the "Company").  As a significant stockholder of CopyTele, I am extremely dissatisfied with the current direction of the Company.  After discussions with other large stockholders, it appears many of the Company's stockholders also share my views.  Over the past several months, I have made numerous attempts to privately reach out to the Board of Directors ("you" or the "Board") to discuss my concerns regarding CopyTele's dismal financial performance and its unwillingness and failure to communicate with its stockholders.  Since you have been wholly unresponsive, you have left me with little choice but to send this letter publicly in the hope that the Board will promptly implement meaningful steps to enhance stockholder value, including the immediate appointment of three independent representatives to the Board.  

For years, the Company's stockholders have suffered from an entrenched Board that lacks independence, accountability and proper oversight, all of which are necessary functions of proper corporate governance.  It is time for a change in the Company's Board and management team.  "New blood" is needed now to reinvigorate CopyTele, especially when you consider the following:

• None of the Company's three directors are "independent" under the rules applicable to the Nasdaq Stock Market;
• Denis A. Krusos, 82, has served as Chairman of the Board and Chief Executive Officer since November 1982;
• Henry P. Herms, 64, has served as Chief Financial Officer and Vice President -- Finance since November 2000 and as a member of the Board since August 2001;
• George P. Larounis, 81, an old friend of Mr. Krusos, has served as a member of the Board since September 1997, prior to which he served as a consultant to the Company;
• The Company does not have a standing audit, nominating or compensation committee; and
• Management is left with the ability to determine its own compensation.

The Company's 2009 proxy statement provides that director candidates for the Company's Board "should be free from conflicts that would impair their ability to discharge the fiduciary duties owed as a director to CopyTele and its stockholders" and that the Company "will consider directors' independence from our management and stockholders."  Yet, not one of you is truly independent.  

Your disregard for stockholder concerns is indicative of what I believe to be an underlying problem at CopyTele; a Board that is unwilling and unable, on account of its composition, lack of independence and conflicts of interest, to hold management accountable and act in the best interests of its stockholders, the true owners of the Company.  This is reflected in the following:

• The Board's consistent pattern of  significantly diluting stockholders' equity through third-party stock transactions and generous equity awards to itself, including stock options for 9,665,000 underlying shares of common stock the Board has awarded itself under the Company's 2000 Share Incentive Plan and 2003 Share Incentive Plan;
• The Board's failure to adhere to even the most basic tenets of proper corporate governance;
• The Board's failure to communicate effectively with its stockholders and the investment community;
• The Board's failure to maintain "key person" life insurance on Mr. Krusos; and
• The Board's failure to publicly communicate a succession plan for key management positions.

I have lost faith in Mr. Krusos' ability to perform and deliver value as the Company's Chairman and CEO.  In 25+ years as Chairman and CEO, Mr. Krusos has never shown a clear path to profitability or a plan for achieving it.  Over the past three fiscal years, management has delivered increasing net losses and declining stock prices.  In fact, the Company has had net losses and negative cash flows from operations in each year since its inception, and has consistently underperformed both the Nasdaq Stock Market U.S. Index and the Nasdaq Electronic Components Stock Index over the past five years.  The Company's stock was trading at $2.06 ten years ago.  It recently closed as low as $ 0.29.  Yet, the Board has approved and continues to approve massively excessive stock awards to themselves and management which fly in the face of these poor results.  Despite this negative stock and operational performance, Mr. Krusos received $ 1.25 million of total compensation in fiscal year 2008.  

In the 2009 proxy statement, the Company states that, given its size, (i) a policy with regard to the consideration of director candidates recommended by stockholders is not necessary and (ii) separate committees of the Board are not necessary.  Along those same lines, ask yourselves whether Mr. Krusos' excessive compensation is necessary.

The Board's actions over the past several years show a complete disregard for the Company's stockholders and is indicative of actions taken by an entrenched board more concerned with the individual directors own well being rather than that of the stockholders at whose discretion they serve.  Management and the Board have approved dilutive stock transactions and issued themselves shares of common stock that rob the corporation of potential profits and further dilute the value of the shares of the stockholders who have invested significant capital to acquire them.  Consider the following:

• Of the 11,065,455 shares reported to be beneficially owned by Messrs. Krusos, Herms and Larounis in the Company's 2009 proxy statement, an astounding 9,665,000 of such shares, or 87%, were underlying stock options granted under the Company's 2000 Share Incentive Plan and 2003 Share Incentive Plan;
• In connection with the Technology License Agreement with Videocon Industries Limited, an Indian company ("Videocon"), the Company entered into a share subscription agreement with Mars Overseas, an affiliate of Videocon, pursuant to which Mars Overseas acquired 20,000,000 unregistered shares of the Company's common stock, or approximately 13.7% of the Company's outstanding shares.  While the Company is supposed to receive a license fee of $11 million from Videocon, the Company recently reported that it has only received aggregate license fee payments of $2.9 million to date;
• In August 2009, the Company entered into an Engagement Agreement with ZQX Advisors, LLC ("ZQX") to assist the Company in seeking business opportunities and licenses for its electrophoretic display technology (E-Paper®).  Pursuant to the Engagement Agreement, the Company gave ZQX 800,000 unregistered shares of common stock and warrants to purchase an additional 500,000 unregistered shares of common stock in exchange for a 19.5% ownership interest in ZQX.  Without adequate information regarding the ZQX transaction, I can only be left to assume this is yet another questionable and dilutive transaction; and
• In September 2009, the Company entered into an agreement with Volga Svet Ltd. pursuant to which the Company gave Volga Svet 150,000 unregistered shares of common stock in exchange for a 19.9% ownership interest in Volga Svet.  Yet more dilution of stockholders' equity.

Despite the ongoing massive and dilutive share issuances, results from these transactions have been minimal to non-existent.  What's more is CopyTele has failed to adequately communicate with the investment community and information to stockholders about these transactions has been sparse and barely there.  

In connection with the Technology License Agreement with Videocon, pursuant to which the Company issued 20,000,000 shares and is supposedly to receive a license fee of $11 million from Videocon, payable in installments over a 27-month period, the Company recently reported that it has only received aggregate license fee payments of $2.9 million to date.  You have provided no information with the regard to the $8.1 million the Company is owed by August 2010.  The Company is also to supposedly receive an agreed upon royalty from Videocon based on display sales by Videocon under the Technology License Agreement.  Yet stockholders have no way of being able to quantify the value of the royalty payments from Videocon since you conveniently failed to publicly file Exhibit E to the Technology License Agreement filed with the Company's Form 10-Q for the fiscal quarter ended July 31, 2008.  I believe this omission is in violation of securities laws.  I urge you to make such Exhibit E publicly available without delay.  

You also disclose in the Company's Form 10-K that the Company has been working with an Asian company for more than six years to produce and market products utilizing the Company's licensed technology.  At no point, has the Company provided any details regarding this Asian company and the nature of the working relationship.  You have also provided stockholders with very little, if any, information about ZQX, who the Company entered into a material agreement with back in August 2009.  I demand you immediately provide stockholders with adequate information about this Asian company and ZQX so we can better understand and assess the Company's business relationships and dealings.  

Years of disappointing performance and inadequate communications have destroyed the Company's credibility.  Stockholder value will not be achieved without transparent communications detailing the reasons for any earnings shortfalls, providing specific evidence regarding how problems will be solved, and providing clear, accurate and concise guidance on future results.  Your lack of a response to my request for a constructive dialogue only underscores how much improvement is needed in this regard. Snubbing a significant stockholder is not a way to promote open dialogue with your investor base; it is rather the behavior of a company or a board with something to hide.

Through these blunders of execution, coupled with poor communication with your investors, the Board and management have put CopyTele in a very precarious position.  As a significant stockholder of the Company, my primary interest is to encourage management and the Board to take immediate steps to enhance stockholder value.  It seems clear that this Board needs truly independent directors to bolster the Company and promote an atmosphere of accountability and oversight.  Since my concerns have fallen on deaf ears thus far, I urge the Board to immediately commence a dialogue with me in furtherance of the appointment of three independent stockholder representatives to the Board.  

Lest I remind you that as members of the Board each of you has fiduciary obligations to take actions that are in the best interests of the Company's stockholders.  Let us not forget who owns the Company and for whom the Board of Directors works.  We will not hesitate to hold you personally liable for any failure to fully and faithfully discharge such obligations.  We reserve the right to take any and all actions that we deem appropriate if discussions are not immediately commenced and thereafter three independent stockholder representatives are not appointed to the Board.  To that end, I have retained the services of Olshan Grundman Frome Rosenzweig & Wolosky LLP, though I hope no further action will be necessary.

Sincerely,

John D. Reynolds

CONTACT: JOHN D. REYNOLDS / [email protected]

SOURCE John D. Reynolds