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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8696
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2664428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1960 Bronson Road
P.O. Box 340
Fairfield Connecticut 06430
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (203) 255-6044
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
Common Stock ($.01 par value) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securi-
ties 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 .
Exhibit Index on sequentially numbered page 47.
Page 1 of 62 sequentially numbered pages.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
As of October 23, 1998, 5,978,103 shares of the registrant's
common stock were outstanding. The aggregate market value of the
voting stock (disregarding preferred stock, for which there is no
public market) held by nonaffiliates of the registrant, based on the
mean between the high and the low price of the registrant's common
stock on the American Stock Exchange on such date, was approximately
$24,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
Registrant's definitive proxy Part III
statement for its January, 1999
annual meeting of stockholders
PART I
Item 1. Business
Introduction
Competitive Technologies, Inc. (the registrant or CTT), is a
Delaware corporation incorporated in 1971 to succeed an Illinois
business corporation incorporated in 1968. CTT provides technology
management services to corporations, federal agencies and laborato-
ries, and universities. CTT's goal is to maximize its clients'
returns on research, development and patent investments by selling,
licensing or otherwise transferring their innovations to others.
Effective January 31, 1996, a wholly owned subsidiary of CTT
acquired the remaining 80% of University Science, Engineering and
Technology, Inc. (USET). The total purchase price was $1,835,000 of
which approximately $301,000 remains to be paid on January 31, 1999.
This transaction is more fully described in Note 2 to Consolidated
Financial Statements. Effective January 31, 1996, CTT began to
account for USET as a consolidated subsidiary. Accordingly, CTT
included USET's results of operations in its consolidated results of
operations from January 31, 1996. Prior to January 31, 1996, CTT's
subsidiary owned 20% of USET, accounted for the investment in USET on
the equity method and recorded 20% of USET's net income.
In February, 1995, CTT sold a significant portion of its
investment in NovaNET Learning, Inc. (formerly University Communica-
tions, Inc.)(NLI) to Barden Companies, Inc. CTT received approximate-
ly $3 million in cash and reduced its ownership in NLI from 55.1% to
14.5%. CTT carries its remaining investment in NLI on the cost
method.
The registrant's subsidiaries include Competitive Technologies
of PA, Inc. (CTT-PA), USET and Competitive Technologies of Ohio, Inc.
(CTT-OH).
On October 1, 1998, the registrant and its subsidiaries employed
approximately 14 people full-time. Substantially all employees are
salaried and none is represented by a labor union.
Technology Management Services
The registrant and its subsidiaries provide technology transfer
and related services for inventions and other innovations made or
owned by their clients. For an invention or group of inventions, CTT
may evaluate technical feasibility, assess potential patentability,
assess commercial potential, apply for and prosecute patents, enforce
issued patents, sell or license the invention to others, manage
related license agreements, and distribute license royalties to their
respective owners. In certain instances, CTT has initiated litigation
to enforce its royalty rights.
CTT's agreements with its clients specify the particular services
CTT provides and how the clients compensate CTT for those services.
Most clients agree to share with CTT specific percentages of amounts
earned from sale or license of their technologies. Some clients agree
to pay a fixed retainer, a fee for specific services or specified
annual fees for CTT's services. In addition, some clients agree to
share expenses of the technology transfer process.
As early in the technology transfer process as possible, CTT
assesses each invention's patentability and marketability. This
permits CTT to focus efforts and resources on inventions with higher
potential for successful commercialization.
CTT and its subsidiaries provide technology transfer services
to universities, other research institutions, government agencies, and
domestic and foreign corporations. CTT's employees, consultants, and
subcontractors perform the contracted services from their respective
offices.
Since January 31, 1996, CTT has managed USET as a wholly owned
subsidiary. From August 20, 1990 until January 31, 1996, a wholly
owned subsidiary of CTT owned 20% of USET and CTT managed USET's
operations and its portfolio of technologies, patents and licenses.
The USET portfolio comprises primarily technologies from CTT's
university clients before June 28, 1988.
From June 28, 1988, through August 20, 1990, USET was a
subsidiary of Macmillan, Inc., successor to the interest of Maxwell
Communication Corporation (Maxwell). On June 28, 1988, CTT sold its
technology management operations to Maxwell and retained a 70%, 50%
or 10% interest in the revenues and certain patent expenses related
to the portfolio after distribution of the respective university's
share.
CTT and USET have shared royalty revenues and patent expenses
related to this portfolio from June 28, 1988, through July 31, 1998.
Under the August 20, 1990 USET purchase agreement, the purchase price
included an up-front payment of $1,000,000 plus payments contingent
upon USET's earned royalties (as specifically set forth in that
agreement) which totaled $989,000. In addition, installment payment
amounts under the January 31, 1996, acquisition agreement were based
on USET's retained royalties.
The registrant and Lehigh University own 80% and 20%, respective-
ly, of the stock of CTT-PA. Lehigh University owns 74,302 unregis-
tered shares of the registrant's common stock. CTT-PA manages Lehigh
University's technology portfolio. The registrant recently announced
plans to close its office in Bethlehem, Pennsylvania (see Note 14 to
Consolidated Financial Statements) and to assume CTT-PA's obligations
under the agreement with Lehigh University.
Retained royalty revenues for the registrant and its subsidiaries
in the last five years were derived from the following portfolios (in
thousands):
1998 1997 1996 1995 1994
The USET portfolio:
Registrant's
share $1,148 $ 943 $ 972 $ 752 $ 671
USET's share 1,107 835 611 -- --
The CTT-PA
portfolio 46 57 37 44 47
Others 100 100 -- -- --
$2,401 $1,935 $1,620 $ 796 $ 718
The only two technologies that produced retained royalties equal
to or exceeding 10% of consolidated revenue for the registrant and its
subsidiaries during 1998, 1997 or 1996 were gallium arsenide semicon-
ductors and Vitamin B12 assay.
Inventions employing gallium arsenide to improve semiconductor
operating characteristics were developed at the University of
Illinois. U.S. patents have issued from March, 1983 to May, 1989 and
expire from May, 2001 to September, 2006. These inventions are
licensed to Mitsubishi Electric Corporation, NEC Corporation, Polaroid
Corporation, Spectra Diode Laboratories, Inc. and Toshiba Corporation.
These inventions are in current use according to information received
from licensees and other sources. Retained royalties received from
the gallium arsenide semiconductor inventions were approximately
$232,000 (10%), $282,000 (15%) and $289,000 (18%) of total retained
royalties in 1998, 1997 and 1996, respectively.
The improved assay procedure for diagnosing Vitamin B12 deficien-
cies was developed at the University of Colorado. U.S. patents have
issued from February, 1980 to May, 1984 and expire between February,
1997 and May, 2001. Certain of these licensed patents expired in
April, 1998. These expiring licenses contributed approximately
$380,000 (16%) of total retained royalties in fiscal 1998. These
assay procedures are licensed to Abbott Laboratories, Bayer Corpora-
tion, Bio-Rad Laboratories, Inc., Boehringer Mannheim, Chiron Diagnos-
tics Corporation, Dade International, Inc., Diagnostic Products
Corporation, ICN Biomedicals, ICN East, Inc. and Beckman Instruments,
Inc. On the basis of information received from licensees and other
sources, these assay procedures are in current use. Retained
royalties received from the Vitamin B12 assay were approximately
$664,000 (28%), $581,000 (30%) and $562,000 (35%) of total retained
royalties in 1998, 1997 and 1996, respectively.
In fiscal 1998, the registrant pursued an aggressive program to
license an assay used to determine whether an individual has an
elevated level of homocysteine and a corresponding deficiency of
folate or Vitamin B12. Recent studies indicate that high levels of
homocysteine are a primary risk factor for coronary artery disease and
a risk factor for strokes and general artery damage. The registrant's
patent which covers this homocysteine assay expires in 2007. During
fiscal 1998, the registrant signed four additional homocysteine
licenses and earned $191,000 of royalties from all homocysteine
licenses. This is an increase of 125% over fiscal 1997. The
registrant is continuing its licensing program for this assay in
fiscal 1999. The registrant cannot predict the timing or amounts of
retained royalties which may be earned or the timing or costs which
may be incurred in licensing this assay.
On January 24, 1995, the registrant was awarded an approximately
$800,000 cost reimbursement contract by the Department of the Air
Force to develop strategic planning and operating tools for agile
enterprises. Work on the contract began in February, 1995, and was
completed in November, 1996. Through July 31, 1997, the registrant
had earned and recognized approximately $833,000 of revenue on this
contract ($79,000 and $254,000 in fiscal 1997 and 1996, respectively)
of which approximately $479,000 was paid or payable to subcontractors.
Revenues retained by the registrant under this contract contributed
to recovering some of its personnel and overhead costs.
The registrant's foreign operations are limited to royalties
received from foreign licensees (see Note 4 to Consolidated Financial
Statements).
Investments in Development-Stage Companies
The registrant generally does not finance research and develop-
ment of technologies. However, in certain instances, the registrant
has been involved in forming companies to exploit specific technolo-
gies it believed were beyond the pure research and development stage.
In 1994 the registrant formed Knowledge Solutions, Inc. ("KSI")
to develop products using a multimedia training process model from
Lehigh University. At July 31, 1998, the registrant owned 33.7% of
KSI's outstanding common stock and had recorded a total of $241,000
as its equity in KSI's losses. The registrant expects KSI to be
dissolved in fiscal 1999.
In 1994 the registrant established a majority-owned subsidiary,
VVI, to develop and exploit a video compression technology developed
at Lehigh University. Research and development expenditures (included
in costs of technology management services in the Consolidated
Financial Statements) of approximately $78,000, $195,000 and $64,000
were incurred by VVI in 1998, 1997 and 1996, respectively. Since its
inception VVI has obtained $348,000 in equity funding, $75,000 in
grant funding and $99,000 from a Small Business Innovation Research
contract. VVI is obligated to repay up to three times total grant
funds received (see Note 12 to Consolidated Financial Statements).
At July 31, 1998, the registrant owned 54.5% of VVI's outstanding
common stock. VVI's principal minority shareholders are or were
employees of VVI or CTT-PA. Unless VVI obtains additional financing,
it will not be able to continue development of its video compression
technology. During fiscal 1998 VVI improved its video compression
software product for inclusion in MPEG-4, an international standard
expected to be adopted for consumer applications such as video
teleconferencing, video databases and wireless video access. In
addition, CTT continues to seek alternate possibilities for commer-
cialization of this technology.
In 1995 the registrant invested in Equine Biodiagnostics, Inc.
("EBI"), a company organized to provide diagnostic laboratory services
for the equine industry. EBI's initial product had already been
tested and was marketed in EBI's first month of operations. The
registrant has recorded equity in EBI's net income of $174,000 from
inception through July 31, 1998. At July 31, 1998, the registrant
owned 37.5% of EBI's outstanding stock. The registrant sold its
investment in EBI during the first quarter of fiscal 1999 for $198,850
in cash. No gain or loss was recognized on the sale.
In June, 1986, the registrant formed NovaNET Learning, Inc. to
commercialize NovaNET, an interactive education and communication
network developed at the University of Illinois. NLI's revenues have
grown to $12,050,000 for the fiscal year ended July 31, 1998. In
February, 1995, the registrant sold the majority of its shares of NLI
common stock to Barden Companies, Inc. and recorded a $2,534,505 gain
on the sale. After the sale the registrant owned approximately 14.5% of
NLI's outstanding common stock.
Special Factors
Losses During Past Fiscal Years. On a consolidated basis the
registrant incurred net losses of $1,235,000, $1,571,000 and $588,000
in 1998, 1997 and 1996, respectively. The registrant's operating
activities used $430,000, $897,000 and $1,228,000 in 1998, 1997 and
1996, respectively. The registrant's investing and financing
activities provided $1,151,000 and $1,452,000 in 1997 and 1996,
respectively, and used $168,000 in 1998.
Reliance on and Lack of Control of Licensees. To the extent that
the registrant and its subsidiaries share in royalties received from
licensees, the revenues from such licensees are dependent upon the
efforts and expenditures of such licensees. Retained royalties were
92%, 78% and 71% of the registrant's consolidated total revenues in
1998, 1997 and 1996, respectively. The registrant has no control over
the efforts and expenditures of such licensees. In addition,
development of new products by licensees involves high risk since many
new technologies do not become commercially profitable products
despite the application of extensive development efforts by such
licensees. Licensees are not required to advise the registrant of
problems which may be encountered in the attempt to develop commercial
products and such information is usually treated as confidential by
such licensees. It may be assumed that licensees will encounter
problems frequently. Only if licensees succeed in resolving those
problems will the licenses generate royalty income in which the
registrant can share.
Need for Government Approvals. Commercial exploitation of some
licensed patents may require approval of governmental regulatory
agencies; there is no assurance that such approvals will be granted.
The principal government agency involved is the United States Food and
Drug Administration ("FDA"). FDA's approval process is rigorous, time
consuming and costly. Unless and until a licensee obtains approval
of a product requiring such approval, sales of the product will not
be made and the registrant will receive no royalty income based on
sales of the product.
Dependence on Patents. Revenues from patent licenses are subject
to the risk that issued patents may be declared invalid, that patents
may not issue on patent applications, or that new or alternative
technologies may render licensed patents uncommercial. In addition,
upon expiration of all patents underlying a patent license, royalties
to the registrant from such license will cease, and there can be no
assurance that the registrant will be able to replace such royalties
with royalty revenues from other licenses.
Risks Pertaining to Contracts with Federal Agencies and Laborato-
ries. To the extent that the registrant and its subsidiaries earn
revenues under contracts and subcontracts from agencies or laborato-
ries of the Federal government, their revenues under such service
contracts are dependent upon continued funding of the related
activities by the Federal government. Revenues under service
contracts or subcontracts from agencies or laboratories of the Federal
government were 1%, 8% and 15% of the registrant's consolidated total
revenues in 1998, 1997 and 1996, respectively. The registrant has no
control over funding decisions of the Federal government, contract
decisions of the Federal agencies and laboratories or subcontract
decisions of other government contractors. To the extent that
government service contracts must be renewed, there can be no
assurance that they will be renewed. The registrant is not currently
renewing or proposing any new Federal government service contracts.
Risks Pertaining to Evaluating and Securing Funding for New
Business and Product Development. The registrant continues to seek
business opportunities which are synergistic with its expertise in
technology management or businesses which have the potential to
generate excess cash flow which can be used by the registrant to build
its business. There can be no assurance that the registrant will
succeed in acquiring or developing such businesses or products or that
they will be profitable. In instances where the registrant invests
its own funds, whether directly, through a subsidiary or a joint
venture or otherwise, in researching, developing, manufacturing or
marketing new products, the registrant incurs the same risks as
licensees with respect to new product development. New products may
need further funding after initial funds are exhausted and if such
funding cannot be obtained, such new products may have to be abandoned
resulting in loss of monies previously invested. There is consider-
able risk that any new product may be rendered obsolete or otherwise
not suitable for commercialization by new or alternative technologies.
Dependence on Key Personnel. The registrant believes that the
growth of its business is dependent upon the knowledge and abilities
of a small number of employees and that the loss of such persons could
have an adverse effect on future activities of the registrant. The
principal key employee is Mr. Frank R. McPike, Jr. Mr. McPike was
appointed interim chief executive officer in August, 1998 and has
served as the registrant's chief financial officer for 15 years.
Competition. Competition in the technology management services
business is vigorous. Several organizations, some of which are well
established and have greater financial resources than the registrant,
provide technology management services.
Discontinued Operations
Computer-based Education Services Segment
On February 15, 1995, Barden Companies, Inc. ("Barden") exercised
its option to purchase from the registrant additional shares of
NovaNET Learning, Inc. common stock. Barden paid $3,227,372 ($1.375
per share) in cash for 2,347,180 shares held by the registrant. In
connection with Barden's purchase, the registrant offered to purchase
from all NLI shareholders other than Barden a number of their shares
of NLI common stock to allow all NLI shareholders to participate in
the sale to Barden on a pro rata basis. Pursuant to this offer, the
registrant purchased 151,096 tendered shares for a total of $207,757
($1.375 per share) in cash. The registrant's net gain on these
transactions was $2,534,505 which was recorded in fiscal 1995. Upon
completion of these and other transactions, Barden owned 52.1% and the
registrant owned 14.5% of the outstanding common stock of NLI.
Effective February 15, 1995, the registrant began to account for
its $159,375 investment in NLI on the cost method. Consolidated
financial statements for the registrant and its subsidiaries for all
prior periods present NLI's net assets and the registrant's equity in
NLI's net results of operations as a discontinued operation.
NLI previously comprised the computer-based education services
segment in the registrant's consolidated financial statements but is
now presented as a discontinued operation. The registrant's equity
in NLI's net income from operations for the six and one-half months
to February 15, 1995 was $99,000. At various times since NLI's
initial funding in June, 1986, the registrant had invested an
aggregate of $1,997,000 in NLI equity.
NLI's revenues were $2,764,000, for the six and one-half months
ended February 15, 1995 (date of sale). NLI markets its interactive
courseware throughout the United States principally to schools and
colleges, drop-out prevention programs, correctional and other
institutions aimed at improving teenage and adult literacy.
Item 2. Properties
Since November, 1996, the registrant and USET have occupied
approximately 9,000 square feet in an office building in Fairfield,
Connecticut under a lease which expires December 31, 2001. The
registrant has an option to renew the lease through December 31, 2006.
A subsidiary of the registrant occupies an office in Bethlehem,
Pennsylvania under an agreement with Lehigh University. The
registrant recently announced that it is closing this office.
The registrant believes its remaining facilities are adequate for
its current and near-term operations.
Item 3. Legal Proceedings
On November 4, 1991, a suit was filed in the Superior Court of
the Judicial District of Fairfield, Connecticut, at Bridgeport by
Bruce Arbeiter, Jeffrey A. Bigelow, Jeffrey W. Leiderman, Optical
Associates Limited Partnership ("OALP") and Optical Associates
Management Corp. ("OAMC") purportedly on behalf of all the limited
partners of OALP, as plaintiffs, against Genetic Technology Manage-
ment, Inc. ("GTM"), University Optical Products Co. ("UOP"), the
registrant, Jay Warren Blaker, L.W. Miles, A. Sidney Alpert, Frank R.
McPike, Jr., Michael Behar, Bruce E. Langton, Arthur M. Lieberman and
Harry Van Benschoten, as defendants. The complaint alleges, among
other things, that in January, 1989, the defendants, GTM, UOP and the
registrant, sold substantially all of the assets of OALP to Unilens
Corp. USA ("Unilens") and disbursed only 4% of the sales price to
OALP, all in violation of certain agreements, representations and
legal obligations; that OALP is entitled to the full proceeds of the
sale to Unilens; and that by vote of limited partners holding in
excess of 80% of the capital interests of OALP, the limited partners
have removed GTM as the general partner of OALP and replaced GTM with
OAMC. The complaint claims, among other things, money damages (in
an amount not specified in the claim for relief); treble and punitive
damages (with no amounts specified); attorneys fees; an accounting;
temporary and permanent injunctive relief; and judgment holding that
OAMC was legally substituted for GTM as the general partner of OALP.
Management of the registrant believes, based upon all of the facts
available to management, that the claims asserted in the suit are
without merit, and the registrant intends to defend the suit
vigorously. Hearings in the case have commenced before an attorney
referee; however, due to scheduling conflicts, further hearings have
been adjourned and are expected to occur later in calendar 1998 or
1999.
On July 7, 1997, in a case previously filed in the United States
District Court for the District of Colorado by University of Colorado
Foundation, Inc., The University of Colorado, The Board of Regents of
the University of Colorado, Robert H. Allen and Paul A. Seligman,
plaintiffs, against American Cyanamid Company, defendant, judgment was
entered in favor of plaintiffs and against defendant in the amount of
approximately $44.4 million. The case involved an idea by professors
at the University of Colorado that improved Materna, a prenatal
vitamin compound sold by defendant. The District Court concluded that
defendant fraudulently obtained a patent on the improvement without
disclosing the patent application to plaintiffs and without naming the
professors as the inventors and that the defendant was unjustly
enriched. While the registrant was not and is not a party to this
case, the registrant had a contract with the University of Colorado
to license University of Colorado inventions to third parties, and the
registrant is entitled to a share of the judgment. If the judgment
is affirmed in full upon appeal, the registrant's share will be
approximately $5.5 million. The registrant is advised that the case
is currently pending on appeal in the Federal Circuit Court of
Appeals. Oral arguments are scheduled for December, 1998. There can
be no assurance that plaintiffs will prevail on appeal, nor can
registrant predict the amount of the judgment, if any, that may
ultimately be entered following the appeal.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4A. Executive Officers of the Registrant
Principal Occupation and Position
Name Age and Office with Registrant
Frank R. McPike, Jr. 49 Interim Chief Executive Officer since
August, 1998; Secretary since August,
1989; Treasurer since July, 1988; Vice
President, Finance, since December,
1983; Director from July, 1988 through
March, 1998.
When this report was prepared, Mr. McPike was the registrant's
sole executive officer. The registrant's former President and Chief
Executive Officer resigned his employment with the registrant to
pursue other opportunities.
The terms of all officers of the registrant are until the first
meeting of the newly elected Board of Directors following the
forthcoming annual meeting of stockholders of the registrant and until
their respective successors shall have been duly elected and shall
have qualified, subject to employment agreements. Mr. McPike has an
employment contract with the registrant; this contract will be
described in the registrant's definitive proxy statement. There is
no family relationship between any director or executive officer of
the registrant.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) The registrant's common stock is listed on the American
Stock Exchange. The following table sets forth the high and low sales
prices as reported by the American Stock Exchange for the periods
indicated.
Fiscal Year Ended July 31, 1998 High Low
First Quarter.................... 11 3/4 7 7/8
Second Quarter................... 9 1/4 7 5/8
Third Quarter.................... 11 3/8 7 1/2
Fourth Quarter................... 10 3/8 8
Fiscal Year Ended July 31, 1997 High Low
First Quarter.................... 12 1/4 9 1/4
Second Quarter................... 12 1/2 9 1/8
Third Quarter.................... 11 1/2 8 3/8
Fourth Quarter................... 11 3/4 8 1/2
No cash dividends were declared on the registrant's common stock
during the last two fiscal years.
At October 21, 1998 there were approximately 905 holders of
record of the registrant's common stock.
(b) As of May 1, 1998, the registrant issued to Desmond Towey
& Associates non-transferrable warrants to purchase 3,000 shares of
the registrant's common stock at $9.00 (the mean between the high and
low prices on the American Stock Exchange on November 1, 1997). The
warrants were issued in partial consideration for public relations
services to be provided between May 1, 1998 and July 31, 1998. The
warrants become exercisable in November, 1998, and expire three years
from issuance. There were no underwriters involved in the transac-
tion. The warrants and the common stock underlying the warrants were
exempt from registration under Section 4(2) of the Securities Act of
1933. The warrants contained, and the shares issuable upon exercise
will contain, restrictive legends.
COMPETITIVE TECHNOLOGIES, INC.
Selected Financial Data (1)
Years ended July 31
Item 6. Selected Financial Data
1998 1997 1996 (3) 1995(4) 1994(4)
Retained royalties $ 2,400,534 $ 1,935,041 $ 1,619,909 $ 796,243 $ 717,514
Revenues under service
contracts and grants 211,300 541,176 660,287 906,952 245,264
Total revenues $ 2,611,834 $ 2,476,217 $ 2,280,196 $ 1,703,195 $ 962,778
Loss from continuing
operations (2) $(1,235,489) $(1,571,045) $ (588,101) $ (641,249) $ (828,996)
Income (loss) from operations
of discontinued operation -- -- -- 99,468 (10,786)
Net gain on disposal of
discontinued operations -- -- -- 2,534,505 221,852
Net income (loss) $(1,235,489) $(1,571,045) $ (588,101) $ 1,992,724 $ (617,930)
Net income (loss) per share
(basic and diluted):
Continuing operations $ (0.21) $ (0.27) $ (0.10) $ (0.11) $ (0.15)
Operations of discontinued
operation -- -- -- 0.02 --
Net gain (loss) on disposal
of discontinued operations -- -- -- 0.43 0.04
Net income (loss) $ (0.21) $ (0.27) $ (0.10) $ 0.34 $ (0.11)
Weighted average number of
common shares outstanding 5,969,434 5,914,868 5,853,814 5,814,826 5,761,610
At year end:
Cash, cash equivalents
and short-term investments $ 2,634,618 $ 3,465,005 $ 4,381,630 $ 4,957,143 $ 1,939,525
Total assets $ 6,301,864 $ 7,203,480 $ 8,368,140 $ 6,768,942 $ 4,766,745
Long-term obligations $ -- $ 260,265 $ 652,367 $ -- $ --
Shareholders' interest $ 4,172,413 $ 5,014,746 $ 6,287,952 $ 6,289,524 $ 4,149,775
(1) Should be read in conjunction with Consolidated Financial Statements
and Notes thereto.
(2) Includes net income (losses) related to equity method affiliates of
approximately $58,000, $34,000, ($104,000) and $20,000 in 1997, 1996,
1995 and 1994, respectively.
(3) Includes results of USET's operations on a consolidated basis for the
six months from January 1, 1996 through July 31, 1996 (see Note 2 to
Consolidated Financial Statements).
(4) Gains on disposal of discontinued operations are on disposal of NovaNET
Learning, Inc. in 1995 and University Optical Products Co. in 1994.
(5) No cash dividends were declared or paid in any year presented.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
Cash and cash equivalents of $216,826 at July 31, 1998, are
$597,613 lower than cash and cash equivalents of $814,439 at July 31,
1997. Operating activities used $429,829, investing activities
provided $183,473 and financing activities used $351,257 in the year
ended July 31, 1998.
In addition to cash and cash equivalents, Competitive Technolo-
gies, Inc. ("CTT") and its majority-owned subsidiaries ("the Company")
held $2,417,792 in short-term investments at July 31, 1998. These
investments are available to fund the Company's future operating,
investing and financing activities.
In August, 1998, CTT's Board of Directors approved restructuring
the Company's operations to reduce future operating expenses. The
restructuring included closing its office in Bethlehem, Pennsylvania,
reducing the Company's staff by four full-time employees, and
reassigning their operating functions among the Company's remaining
staff. The Company will recognize costs related to this action, which
are expected to be approximately $70,000, in the first quarter of
fiscal 1999.
In October, 1997, CTT's management decided to reduce operating
expenses by closing its office in Cleveland, Ohio. In connection with
this action, CTT recorded general and administration expenses of
approximately $75,000. Since then, CTT personnel in other Company
offices perform operating functions previously performed in Cleveland.
In addition, CTT contracted with an entity controlled by certain
former Cleveland-based employees to provide certain sales and
marketing services during the six months from February 1, 1998,
through July 31, 1998, for approximately $140,000 plus a commission
on such sales or licenses of certain technologies as may be procured
solely through the efforts of the contractor. The contractor procured
no such sales or licenses during the period ended July 31, 1998.
The Company's net loss of $1,235,489 for the year ended July 31,
1998 included the following noncash items: depreciation and
amortization of approximately $234,000, amortization of discount on
purchase obligation of approximately $38,000, accrued expenses of
approximately $538,000, and minority interest of approximately
$23,000.
In general, changes in various operating accounts result from
changes in the timing and amounts of cash flows before and after the
end of the period. The most substantial changes in operating accounts
were the $156,000 increase in royalties receivable and the $144,000
increase in royalties payable.
The Company purchased approximately $24,000 of equipment and
furnishings in the year ended July 31, 1998, to improve client
service capabilities.
The Company received $1,500,000 from sales of available-for-sale
securities and invested approximately $1,278,000 in other short-term
investments.
In fiscal 1998, CTT received $199,310 from stock options and
warrants exercised to purchase common stock.
On January 31, 1998, the Company paid approximately $551,000 of
the University Science, Engineering and Technology, Inc. ("USET")
purchase obligation. This installment was 60% of USET's gross
retained earned revenues for the preceding calendar year as provided
in the purchase agreement. The Company expects to pay the remaining
$301,000 of the USET purchase obligation (including interest) on
January 31, 1999.
During the first quarter of fiscal 1999, CTT sold its investment
in Equine Biodiagnostics, Inc. for $198,850 in cash. No gain or loss
was recognized on the sale.
In October, 1998, the Board of Directors authorized the repur-
chase of up to 250,000 shares of the Company's common stock. The
Company plans to repurchase shares on the open market or in privately
negotiated transactions at times and in amounts determined by
management based on its evaluation of market and economic conditions.
The Company has agreed to pay certain persons specified percent-
ages of Renova royalties received until certain total payments have
been made. At July 31, 1998, the remaining amount of such contingent
obligations was $79,458.
The Company's former President and Chief Executive Officer, whose
employment contract runs through July 31, 1999, resigned his
employment with the Company to pursue other opportunities. In
connection with his resignation, the Company accrued contract
settlement costs of $300,000 in the fourth quarter of fiscal 1998.
The Company carries liability insurance, directors' and officers'
liability insurance and casualty insurance for owned or leased
tangible assets. It does not carry key person life insurance. There
are no legal restrictions on payments of dividends by CTT.
At July 31, 1998, the Company had no outstanding commitments for
capital expenditures other than the obligations incurred in connection
with the purchase of USET.
The Company continues to pursue additional technology management
opportunities. If and when these opportunities are consummated, the
Company may commit capital resources to them.
The Company does not believe that inflation had a significant
impact on its operations during 1998 or 1997 or that it will have a
significant impact on operations during the next twelve-month
operating period.
The Company has examined the Year 2000 computer issue. This
issue concerns computer hardware and software systems' ability to
recognize and process dates after December 31, 1999, properly and
accurately. The Company has reviewed its computer hardware and
software and is or will be modifying that which is not currently Year
2000 compliant. Management believes that the greatest risk to the
Company would be if its licensees were to be unable to make their
licensed products Year 2000 compliant or to report their respective
royalties. Accordingly, the Company has requested that its licensees
confirm that the Year 2000 computer issue will not prevent them from
producing or reporting royalties after December 31, 1999. It has also
requested confirmation from its banks and other vendors that their
computer systems are or will be Year 2000 compliant. The Company does
not expect its costs to address these Year 2000 issues to have a
material impact on its business, operations or financial condition.
Vector Vision, Inc. ("VVI"), CTT's 54.5% owned subsidiary,
continues to seek additional financing to support its continuing
development. Without additional outside financing, VVI's development
activities will continue to proceed at a minimum level. The Company,
the inventor and others supported VVI's development activities during
fiscal 1998. During that time VVI improved its video compression
software product for inclusion in MPEG-4, an international standard
expected to be adopted for consumer applications such as video
teleconferencing, video databases and wireless video access.
In connection with the case which involved an idea by professors
at the University of Colorado that improved a prenatal vitamin
compound sold by American Cyanamid Company, the Company is entitled
to a share of the judgment. If the judgment is affirmed in full upon
appeal, which is currently pending, the Company expects its share to
be approximately $5,500,000. There can be no assurance that the
plaintiffs will prevail on appeal, nor can the Company predict the
amount of the judgment, if any, that may ultimately be entered
following the appeal. The Company has recorded no potential judgment
proceeds in its financial statements to date. (See Item 3. Legal
Proceedings.)
With $2,634,618 in cash, cash equivalents and short-term invest-
ments at July 31, 1998, the Company anticipates that currently
available funds will be sufficient to finance cash needs for at least the
next two years for its current operating activities as well as for
potential additional technology management opportunities. This
anticipation is based upon the Company's current expectations.
However, expansion of the Company's services is subject to many
factors outside the Company's control and to presently unanticipated
opportunities that may arise in the future. Accordingly, there can
be no assurance that the Company's current expectations regarding the
sufficiency of currently available funds will prove to be accurate.
Results of Operations - 1998 vs. 1997
Consolidated revenues for the year ended July 31, 1998, were
$135,617 (5%) higher than for the year ended July 31, 1997. Retained
royalties accounted for 92% and 78% of total revenues in fiscal 1998
and 1997, respectively.
Retained royalties in fiscal 1998 were $465,493 (24%) higher than in
fiscal 1997. This increase includes revenues (license fees, amounts for past
infringements, and earned royalties) from new licenses and sublicens-
es, an option fee, a final royalty settlement on an expired patent and
higher earned royalties on several licensed technologies. These
increases were partially offset by a licensee's report correcting
previously reported royalties.
The Company's retained royalties from its Vitamin B12 assay were
approximately $664,000 (28%) and $581,000 (30%) of total retained
royalties in 1998 and 1997, respectively. Certain of these licensed
patents expired in April, 1998. These expiring licenses contributed
approximately $380,000 (16%) of total retained royalties in fiscal
1998. The remaining Vitamin B12 assay licenses are expected to expire
in May, 2001. The Company's retained royalties from the gallium
arsenide semiconductor inventions were approximately $232,000 (10%)
and $282,000 (15%) of total retained royalties in 1998 and 1997,
respectively. No other technologies produced retained royalties equal
to or greater than 10% of consolidated revenue in 1998. See Note 4
to Consolidated Financial Statements.
Fiscal 1998 revenues under service contracts and grants were $329,876
(61%) lower than in fiscal 1997. In fiscal 1998, the Company earned service
contract revenues from a state government contract and several other
smaller corporate, government and university contracts. In fiscal
1997, the Company earned service contract revenues under several large
nonrecurring international and domestic corporate, government and
university service contracts. There were no grant revenues in fiscal
1998 or 1997.
Total operating expenses for fiscal 1998 were $268,371 (6%) lower
than for fiscal 1997. In fiscal 1998, the Company reduced total
personnel costs, consultants' fees and expenses, related operating
expenses, and VVI's research and development expenses. Costs related
to the acquisition of Competitive Technologies of PA, Inc. were fully
amortized in September, 1997. These reductions were partially offset
by higher rent expense, directors' fees and expenses, shareholders'
expenses and legal expenses and by the $300,000 estimated costs of
settling the Company's employment contract with its former President
and Chief Executive Officer.
Costs of technology management services were $640,306 (23%) lower
in fiscal 1998 than in fiscal 1997 as more fully discussed below.
Costs related to retained royalties were approximately $75,000
(9%) higher in 1998 than in 1997. This reflects higher personnel
costs (including benefits and overheads) associated with patenting and
licensing services, higher costs for subcontractors retained for sales
and marketing certain corporate technologies, and higher patent
litigation expenses. It also reflects lower foreign and domestic
patent costs, lower amortization expenses and higher recoveries of
foreign patent costs against university royalties. These costs
include domestic and foreign patent prosecution, maintenance and
litigation expenses.
Fiscal 1998 costs related to service contracts (including direct charges
for subcontractors' services and personnel costs associated with service
contracts) were approximately $688,000 (65%) lower than for fiscal
1997. This reduction corresponds to the reduction in revenues under
service contracts.
Fiscal 1998 costs associated with new client development (principally
personnel costs, including benefits and overheads) decreased approx-
imately $27,000 (3%) from fiscal 1997.
General and administration expenses were approximately $72,000
(5%) higher in fiscal 1998. This includes costs associated with
closing the Company's office in Cleveland, Ohio, and consolidating
that office's functions into operations in other Company offices. In
addition, the Company incurred higher legal expenses, directors' fees
and shareholders' expenses in connection with reconstituting its Board
of Directors and related matters.
In fiscal 1998, the Company accrued contract settlement expenses
of $300,000 for the estimated costs of settling the remainder of its
former President and Chief Executive Officer's employment contract.
The net effect of the $135,617 increase in operating revenues and
the $268,371 reduction in operating expenses was to reduce the
Company's operating loss by $403,988 (23%) compared with fiscal 1997.
Interest income increased $27,838 (20%) despite lower average
invested balances. Weighted average interest rates were approximately
1.2% higher in fiscal 1998. Interest expense of $37,688 and $93,371
in fiscal 1998 and 1997, respectively, relates to the debt incurred
in connection with the acquisition of USET.
In fiscal 1998, net income related to equity method affiliates
comprised CTT's equity in the net income of Equine Biodiagnostics,
Inc. ("EBI") ($22,000) substantially offset by CTT's equity in net
losses of other ventures. In fiscal 1997, net income related to
equity method affiliates was principally CTT's equity in the net
income of EBI ($70,000) partially offset by CTT's equity in other net
losses.
Other income for fiscal 1998 includes approximately $18,000 gain
realized from available-for-sale securities. Other income for fiscal
1997 included $77,000 gain from short-term investments.
Other expenses for fiscal 1998 were legal expenses incurred in
connection with a suit brought against CTT, some of its subsidiaries
and former directors as more fully detailed in Note 12 to Consolidated
Financial Statements. Further hearings in this case have been
adjourned and are expected to occur later in calendar 1998 or 1999.
CTT is unable to estimate the related legal expenses which may be
incurred in fiscal 1999. Unilens Corp. USA ("Unilens") made no
payments in either fiscal year. Since CTT carries this receivable at
zero value, any collections will be recorded in the period collected.
Through July 31, 1998, the Company had received aggregate cash
proceeds of approximately $1,011,000 from the January, 1989, sale of
University Optical Products Co.'s assets to Unilens. As cash proceeds
were received, CTT paid a 4% cash commission to Optical Associates,
L. P., its joint venture partner.
Minority interest in the losses of subsidiaries in 1998 of
$22,721 and in 1997 of $81,721 was VVI's minority shareholders'
additional interest in its losses. The minority interest in VVI's
losses is limited to the minority's interest in VVI's outstanding
common stock. Unless VVI obtains additional external equity financ-
ing, no further losses may be charged to VVI's minority interest.
The Company has substantial net operating loss carryforwards for
Federal income tax purposes. These may not be used to reduce future
taxable income of USET. However, so long as the Company's other
operations generate current taxable losses equal to USET's current
taxable income, Federal income tax liabilities can be minimized.
The Company does not expect adoption of Statements of Financial
Accounting Standards No. 130, 131, or 133 to have a material effect
on its financial statements (see Note 1 to Consolidated Financial
Statements).
Results of Operations - 1997 vs. 1996
Through January 31, 1996, the Company accounted for its invest-
ment in USET on the equity method and recorded 20% of its net income.
The Company has consolidated USET's results of operations for all
periods since February 1, 1996.
Consolidated revenues for the year ended July 31, 1997, were
$196,021 (9%) higher than for the year ended July 31, 1996.
Retained royalties were $315,132 (19%) higher than in fiscal
1996. Up-front license fees for a plasma display energy recovery
technology of approximately $97,000 for fiscal 1996 were non-recurring
and this decrease was partially offset by a new license fee and
increased royalties on several technologies for fiscal 1997. There
were also modest increases in royalties from sales of Renova and
Ethyol. Consolidating USET increased retained royalties for fiscal
1997 by $223,952 (14%) as compared with fiscal 1996.
The Company's retained royalties from its Vitamin B12 assay were
approximately $581,000 (30%) and $562,000 (35%) of total retained
royalties in 1997 and 1996, respectively. The Company's retained
royalties from the gallium arsenide semiconductor inventions were
approximately $282,000 (15%) and $289,000 (18%) of total retained
royalties in 1997 and 1996, respectively. No other technologies
produced retained royalties equal to or greater than 10% of consoli-
dated revenue in 1997 or 1996.
Revenues under service contracts and grants were $541,176 in
fiscal 1997, $119,111 (18%) lower than in fiscal 1996. Revenues from
intercorporate service contracts were $249,800 in fiscal 1997,
approximately $75,000 higher than in fiscal 1996. Revenues from
service contracts for various government clients of $225,000 in fiscal
1997 were $197,000 lower than in fiscal 1996. VVI completed its SBIR
contract in October, 1996, and CTT completed its contract with the
Department of the Air Force in November, 1996. Revenues from this
contract for fiscal 1997 were $175,000 lower than for fiscal 1996.
There were no grant revenues in fiscal 1997 compared with $7,784 in
support of VVI's development activities in fiscal 1996.
Costs of technology management services were approximately
$881,000 (48%) higher in fiscal 1997 than in fiscal 1996 as more fully
discussed below.
Costs related to retained royalties were $168,000 higher in 1997
than in 1996. This increase included $139,000 in amortization of the
cost of intangible assets acquired in connection with the purchase of
USET. It also reflected increased costs for personnel and consultants
retained to assist in evaluating and marketing corporate technologies,
domestic patent costs on a new university technology and lower
recoveries of foreign patent costs against university royalties.
Costs related to service contracts and grants (including direct
charges for subcontractors' services and personnel costs associated
with service contracts) increased $328,000 compared with fiscal 1996.
This included increased costs in connection with VVI's SBIR contract
and efforts to develop its video compression technology ($161,000),
and increased personnel (including benefits and overheads) and direct
costs associated with corporate and collaborative service contracts.
Costs associated with new client development (principally
personnel costs, including benefits and overheads) increased approx-
imately $385,000 over fiscal 1996. The Company's strategic decision
to expand its focus to include providing technology management
services to corporations required hiring experienced employees to
identify and develop new opportunities into client relationships.
General and administration expenses were approximately $249,000
(19%) higher in fiscal 1997. This increase included operating
expenses supporting the Company's and USET's ongoing operations. In
addition, the Company signed a new five-year office lease beginning
in November, 1996, (and incurred relocation expenses in November,
1996) which increased other operating expenses in fiscal 1997.
The net effect of these increases in operating revenues and
expenses was to increase the Company's operating loss by $934,131
(110%) compared with fiscal 1996.
Interest income decreased $66,072 (32%) because of lower average
invested balances and lower average interest rates in fiscal 1997.
Interest expense of $93,371 and $57,413 in fiscal 1997 and 1996,
respectively, related primarily to the debt incurred in connection
with the acquisition of USET.
In fiscal 1997, net income related to equity method affiliates
was principally CTT's equity in the net income of EBI ($70,000)
partially offset by CTT's equity in net losses of other ventures. In
fiscal 1996, net income related to equity method affiliates included
the Company's 20% equity in the net income of USET ($30,000) for the
six months ended January 31, 1996, its equity in the net loss of
Knowledge Solutions, Inc. ($70,000) and its equity in the net income
of EBI ($76,000).
In January, 1996, CTT received $96,907 in cash for the sale of
its remaining interest in Plasmaco, Inc. Since CTT's investment in
Plasmaco, Inc. was carried at no value, the $96,907 was included in
income for the second quarter of fiscal 1996.
Other income for fiscal 1997 included approximately $77,000 gain
from short-term investments. Other expenses for fiscal 1997 include
legal expenses incurred in connection with a suit brought against CTT
and some of its subsidiaries and former directors as more fully
detailed in Note 12 to Consolidated Financial Statements.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking state-
ments. These statements are not guarantees of future performance and
should be evaluated in the context of the risks and uncertainties
inherent in the Company's business, including those set forth under
Special Factors in Item 1 of this Annual Report on Form 10-K for the
year ended July 31, 1998. Actual results may differ materially from
these forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Accountants 22
Consolidated Balance Sheets 23-24
Consolidated Statements of Operations 25
Consolidated Statements of Changes
in Shareholders' Interest 26
Consolidated Statements of Cash Flows 27-28
Notes to Consolidated Financial Statements 29-44
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019-6013
Telephone (212) 259 1000
Facsimile (212) 259 1301
REPORT OF INDEPENDENT ACCOUNTANTS
October 2, 1998
To the Board of Directors and Shareholders
Of Competitive Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in share-
holders' interest and of cash flows present fairly, in all material
respects, the financial position of Competitive Technologies, Inc. and
Subsidiaries at July 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended July 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsi-
bility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
ASSETS
1998 1997
Current assets:
Cash and cash equivalents $ 216,826 $ 814,439
Short-term investments, at market 2,417,792 2,650,566
Receivables, including $20,143 and $19,241
receivable from related parties in
1998 and 1997, respectively 1,491,937 1,404,035
Prepaid expenses and other current assets 139,780 115,537
Total current assets 4,266,335 4,984,577
Property and equipment, net 171,214 228,297
Investments 408,288 394,451
Intangible assets acquired, principally
licenses and patented technologies, net
of accumulated amortization of $349,134 and
$210,462 in 1998 and 1997, respectively 1,444,014 1,582,686
Other assets 12,013 13,469
TOTAL ASSETS $6,301,864 $ 7,203,480
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
(Continued)
1998 1997
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable, including $2,043 and
$4,258 payable to related parties
in 1998 and 1997, respectively $ 37,323 $ 87,644
Accrued liabilities 1,794,742 1,290,825
Current portion of purchase obligation 297,386 550,000
Total current liabilities 2,129,451 1,928,469
Noncurrent portion of purchase obligation,
net of unamortized discount of $41,925
in 1997 -- 260,265
Commitments and contingencies
Shareholders' interest:
5% preferred stock, $25 par value;
35,920 shares authorized; 2,427
issued and outstanding 60,675 60,675
Common stock, $.01 par value; shares
authorized: 20,000,000 in 1998 and
7,964,080 in 1997; issued: 6,003,193
in 1998 and 5,951,829 in 1997;
outstanding: 5,993,003 in 1998 and
5,936,483 in 1997 60,032 59,518
Capital in excess of par value 25,637,881 25,218,106
Treasury stock (common), at cost;
10,190 shares in 1998 and 15,346
shares in 1997 (95,968) (98,511)
Net unrealized holding gains (losses)
on available-for-sale securities (21,874) 7,802
Accumulated deficit (21,468,333) (20,232,844)
Total shareholders' interest 4,172,413 5,014,746
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 6,301,864 $ 7,203,480
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended July 31, 1998, 1997 and 1996
1998 1997 1996
Revenues:
Retained royalties $ 2,400,534 $ 1,935,041 $ 1,619,909
Revenues under service contracts
and grants, including $101,281,
$142,216 and $156,766 from
related parties in
1998, 1997 and 1996,
respectively 211,300 541,176 660,287
2,611,834 2,476,217 2,280,196
Costs of technology management
services, of which $36,612 and
$8,759 were paid to related
parties in 1997 and 1996,
respectively 2,087,234 2,727,540 1,846,268
General and administration expenses,
of which $6,504, $40,882 and
$89,618 were paid to related
parties in 1998, 1997 and 1996,
respectively 1,606,503 1,534,568 1,285,688
Contract settlement expense 300,000 -- --
3,993,737 4,262,108 3,131,956
Operating loss (1,381,903) (1,785,891) (851,760)
Interest income 170,051 142,213 208,285
Interest expense (37,688) (93,371) (57,413)
Income (loss) related to
equity method affiliates, net 182 58,325 33,808
Other income (expense), net (8,852) 25,958 78,979
Loss before minority interest (1,258,210) (1,652,766) (588,101)
Minority interest in losses of
subsidiaries 22,721 81,721 --
Net loss $(1,235,489) $(1,571,045) $ (588,101)
Net loss per share:
Basic and diluted $ (0.21) $ (0.27) $ (0.10)
Weighted average number of common
shares outstanding:
Basic and diluted 5,969,434 5,914,868 5,853,814
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Interest
For the years ended July 31, 1998, 1997 and 1996
Net
unrealized
holding
Preferred Stock gains (losses)
Shares Common Stock Capital in Treasury Stock on available-
issued and Shares excess of Shares for-sale Accumulated
outstanding Amount issued Amount par value held Amount securities Deficit
Balance - July 31, 1995 2,427 $60,675 5,835,365 $58,353 $24,410,143 (25,000) $(174,713) $ 8,764 $(18,073,698)
Exercise of common stock
warrants . . . . . . . 5,000 50 28,700
Stock issued under
Directors' Stock
Participation Plan . . 4,776 48 39,952
Stock issued under
Employees' Common Stock
Retirement Plan. . . . 8,688 87 88,965
Exercise of common stock
options. . . . . . . . 72,000 720 426,166
Net change in unrealized
holding gains
on available-for-sale
securities. . . . . . 1,841
Net loss. . . . . . . . (588,101)
Balance - July 31, 1996 2,427 60,675 5,925,829 59,258 24,993,926 (25,000) (174,713) 10,605 (18,661,799)
Exercise of common
stock options . . . . 14,000 140 92,642
Exercise of common
stock warrants. . . . 6,000 60 38,190
Stock issued under 1996
Directors' Stock
Participation Plan. . 6,000 60 59,940
Stock issued under
Employees' Common
Stock Retirement
Plan. . . . . . . . 29,998 9,654 76,202
Grant of warrants to
consultants . . . . . 3,410
Net change in unrealized
holding gains (losses)
on available-for-sale
securities. . . . . . (2,803)
Net loss. . . . . . . . (1,571,045)
Balance - July 31, 1997 2,427 60,675 5,951,829 59,518 25,218,106 (15,346) (98,511) 7,802 (20,232,844)
Exercise of common stock
options. . . . . . . 33,358 333 243,684 (6,438) (73,033)
Exercise of common stock
warrants . . . . . . 6,000 61 28,265
Stock issued under 1996
Directors' Stock
Participation Plan . 12,006 120 101,130
Stock issued under
Employees' Common
Stock Retirement
Plan . . . . . . . 24,423 11,594 75,576
Grant of warrants to
consultants. . . . . 22,273
Net change in unrealized
holding gains (losses)
on available-for-sale
securities . . . . . (29,676)
Net loss. . . . . . . (1,235,489)
Balance - July 31, 1998 2,427 $60,675 6,003,193 $60,032 $25,637,881 (10,190) $ (95,968) $ (21,874) $(21,468,333)
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 1998, 1997 and 1996
1998 1997 1996
Cash flow from operating
activities:
Net loss $(1,235,489) $(1,571,045) $ (588,101)
Noncash items included in net loss:
Depreciation and
amortization 233,657 383,622 273,127
Equity method affiliates (182) (58,325) (33,808)
Minority interest (22,721) (81,721) --
Directors' stock and
stock retirement plan
accruals 175,004 183,700 123,232
Contract settlement accrual 300,000 -- --
Amortization of discount
on purchase obligation 37,688 91,338 57,258
Other noncash items 67,078 (17,707) 21,657
Other (11,994) 19 (100,517)
Net changes in various
operating accounts:
Receivables (87,902) (316,005) (724,088)
Prepaid expenses and other
current assets (24,243) 15,289 (132,708)
Accounts payable and
accrued liabilities 139,275 474,123 (123,795)
Net cash flow used in
operating activities (429,829) (896,712) (1,227,743)
Cash flow from investing
activities:
Purchases of property and
equipment, net (24,433) (160,002) (54,016)
Proceeds from sales of:
Available-for-sale securities 1,500,000 4,550,000 3,694,767
Other short-term investments -- 1,188,784 --
Directors' escrow account -- 325,000 --
Purchases of short-term
investments (1,278,420) (4,494,300) (2,831,180)
Net cash acquired in connection
with investment in subsidiary -- 105,171
Investments in affiliates and
subsidiaries, net (13,674) 58,437 81,907
Net cash flow from
investing activities 183,473 1,467,919 996,649
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 1998, 1997 and 1996
(Continued)
1998 1997 1996
Cash flow from financing activities:
Proceeds from exercise of
stock options and warrants 199,310 131,032 455,636
Proceeds from minority's in-
vestment in subsidiary's
common stock -- 35,000 --
Repayment of purchase
obligation (550,567) (483,440) --
Net cash flow from financing
activities (351,257) (317,408) 455,636
Net (decrease) increase in cash
and cash equivalents (597,613) 253,799 224,542
Cash and cash equivalents,
beginning of year 814,439 560,640 336,098
Cash and cash equivalents, end
of year $ 216,826 $ 814,439 $ 560,640
Supplemental cash flow information:
Schedule of significant noncash
investing and financing
activities:
Debt incurred for investment
in subsidiary $ -- $ -- $ 1,145,109
$ -- $ -- $ 1,145,109
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Competitive Technologies, Inc. ("CTT") and its majority-owned
subsidiaries ("the Company"). CTT's majority-owned subsidiaries are
Competitive Technologies of PA, Inc. ("CTT-PA"), Competitive
Technologies of Ohio, Inc. ("CTT-OH"), University Optical Products Co.
("UOP"), Genetic Technology Management, Inc. ("GTM"), UPAT Services,
Inc. ("USI") and Vector Vision, Inc. ("VVI") (see Note 2). Intercom-
pany accounts and transactions have been eliminated in consolidation.
As more fully discussed in Note 2, the Company purchased the
remaining interests in University Science, Engineering and Technology,
Inc. ("USET") on January 31, 1996. Accordingly, USET has been a
wholly owned subsidiary and USET's results of operations have been
consolidated since January 31, 1996. Through January 31, 1996, the
Company accounted for its investment in USET on the equity method and
recorded 20% of its net income.
Business
The Company provides technology management services to its
clients which include corporations, federal agencies and laboratories
and universities in North America, Europe and the Far East. These
services include technical evaluations, patent and market assessments,
patent application and prosecution, patent enforcement, licensing,
license management and royalty distribution.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications
Certain accounts have been reclassified to conform with the
presentation in financial statements for fiscal 1998.
Revenues and Expenses
Royalty income, net of amounts due others, is included in income
in the period in which it is earned. Such retained royalties are
earned through servicing agreements with various technology sources
under which the Company retains an agreed percentage of income derived
from license or sale of technologies. Royalties receivable are
recorded based on royalty reports actually received and therefore no
allowance for bad debts is required.
Revenues under service contracts are recognized for technology
management, licensing and other services in the period the contractual
service is provided and the related revenue is earned.
Grant revenues, which are nonrefundable except under certain
conditions (see Note 12), are recognized in the period grant funds are
received.
Expenditures made in connection with evaluating the marketability
of inventions, patenting inventions, licensing patented inventions and
enforcing patents are charged to operations as incurred.
Cash Equivalents
Cash equivalents include only highly liquid investments purchased
with an original maturity of three months or less.
The Company's bank and investment accounts are maintained with
three financial institutions. The Company's policy is to monitor the
financial strength of these institutions on an ongoing basis.
Property and Equipment
The costs of depreciable assets are charged to operations on a
straight-line basis over their estimated useful lives (3 to 5 years
for equipment) or the terms of the related lease for leasehold
improvements. The cost and related accumulated depreciation of
property and equipment are removed from the accounts upon retirement
or other disposition; any resulting gain or loss is reflected in
earnings.
Intangible Assets Acquired
Intangible assets acquired in connection with the acquisition of
USET comprise principally licenses and patented technologies and were
recorded at their estimated fair value on January 31, 1996, which is
being amortized on a straight-line basis over their estimated
remaining lives (approximately 13 years from the date acquired).
Subsidiaries' Issuances of Shares
The Company recognizes in earnings gains or losses reflecting
increases in the value of its equity in subsidiaries' net worth re-
sulting from subsidiaries' issuances of shares to minority sharehold-
ers.
Income Taxes
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each balance
sheet date based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Provision for income taxes is the tax payable for the year
and the change during the year in deferred tax assets and liabilities.
Investment tax credits are accounted for using the flow-through
method.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," effective for its fiscal quarter ended
January 31, 1998. Statement No. 128 replaced primary and fully
diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share is computed based on the weighted-average
number of common shares outstanding without giving any effect to
potentially dilutive securities. Diluted earnings per share is
computed giving effect to all potentially dilutive securities that
were outstanding during the period. All earnings per share amounts
for all periods presented have been conformed to the Statement No. 128
requirements.
At July 31, 1998, 1997 and 1996, respectively, options and
warrants to purchase 506,542, 494,900 and 560,900 shares of common
stock were outstanding but were not included in the computation of
earnings per share because they were anti-dilutive.
Stock-Based Compensation
The Company adopted Financial Accounting Standards Statement No.
123, "Accounting for Stock-Based Compensation" effective August 1,
1996. The Company elected to continue accounting for employee stock-
based compensation under Accounting Principles Board Opinion No. 25
and disclose the pro forma effects that fair value accounting would
have on net income and earnings per share. In addition, the Company
adopted fair value accounting for stock options or other equity
instruments issued to nonemployee providers of goods and services.
The effect of adoption was not material to the Company's financial
statements.
Impairment of Long-lived Assets
The Company reviews long-lived and intangible assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If the sum
of expected future undiscounted cash flows is less than the carrying
amount of the asset, an impairment loss is recognized based on the
fair value of the asset.
Future Impact of Adopting Recently Issued Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting comprehensive income and its components in
financial statements. Comprehensive income includes all changes in
shareholders' interest that result from recognized transactions and
other economic events of the period other than transactions of
shareholders in their capacities as shareholders. The Company will
adopt this Statement on August 1, 1998. The Company does not expect
adoption to have a material effect on its financial statements.
In June, 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for public business
enterprises to report information about operating segments. The
Company will adopt this Statement on August 1, 1998. The Company does
not expect adoption to have a material effect on its financial
statements.
In June, 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Company will adopt this Statement on August 1, 1999.
The Company does not expect adoption to have a material effect on its
financial statements.
2. ACQUISITION OF USET
On January 31, 1996, USI purchased the limited partnership
interests of Texas Research and Technology Foundation and United
Services Automobile Association in USET Acquisition Partners, L.P.
("UAP"). The total purchase price was $1,835,000 (excluding expenses
related to the acquisition). Installment payments totalling
$1,034,007 were made on January 31, 1997 and 1998. The remaining
balance of $300,993 (including interest) is scheduled for payment on
January 31, 1999. At July 31, 1998 and 1997, the carrying amount of
the purchase obligation approximated fair value.
After the purchase, USI owned 100% of all partnership interests
in UAP and as a result, UAP was dissolved. UAP's principal asset was
its investment in 100% of the equity of USET Holding Co. USET Holding
Co.'s only asset was its investment in 100% of the equity of USET.
In addition to cash of approximately $605,000 and computer equipment,
USET's assets comprised principally licenses and patented technolo-
gies. USI accounted for the acquisition under the purchase method and
recorded the estimated present value of the purchase obligation of
$1,145,109 using a 10% discount rate.
The following unaudited pro forma summary information presents
the consolidated results of operations of the Company as if this
acquisition had occurred on August 1, 1994 (in thousands, except per
share amounts). The unaudited pro forma amounts are based on
assumptions and estimates the Company believes are reasonable;
however, such amounts do not necessarily represent results which would
have occurred if the acquisition had taken place on the basis assumed,
nor are they indicative of the results of future combined operations.
For the year
ended
July 31, 1996
Total revenues $2,701
Operating loss (662)
Loss from continuing
operations (483)
Loss share loss from
continuing operations $(0.08)
3. INVESTMENTS IN AFFILIATES
CTT accounted for its 33.7% investment in Knowledge Solutions,
Inc. ("KSI") on the equity method at July 31, 1998 and 1997. KSI
stock is not publicly traded and there is no quoted market price for
its stock.
At July 31, 1998 and 1997, CTT owned 37.5% of the outstanding
common stock of Equine Biodiagnostics, Inc. ("EBI") and accounted for
its investment in EBI on the equity method. EBI stock is not publicly
traded and there is no quoted market price for its stock. During the
first quarter of fiscal 1999, CTT sold its investment in EBI for
$198,850 in cash. No gain or loss was recognized on the sale.
At July 31, 1998 and 1997, the Company's investments in equity
method affiliates exceeded its share of their underlying net assets
by approximately $44,000 and $38,000, respectively.
Since February 15, 1995, CTT has accounted for its $159,375
investment in NovaNET Learning, Inc. ("NLI") under the cost method.
NLI stock is not publicly traded and there is no quoted market price
for its stock.
In January, 1996, CTT received $96,907 in cash for the sale of
its remaining interest in Plasmaco, Inc. Since 1993 CTT carried its
investment in Plasmaco, Inc. at no value and therefore the $96,907
gain was included in other income for fiscal 1996.
CTT's 13.3% voting interest in Innovation Partners International,
k.k. ("IPI") is accounted for under the cost method. IPI stock is not
publicly traded and there is no quoted market price for its stock.
Summary Information
Summarized information from the unaudited financial statements
of the Company's equity method affiliates follows (in thousands):
At and for the year ended July 31, 1997
KSI EBI OTHERS Total
Current assets $ 22 $ 485 $ 33 $ 540
Noncurrent assets 14 53 15 82
Current liabilities 150 59 -- 209
Noncurrent liabilities -- 27 -- 27
Shareholders' equity
(deficit) (114) 452 48 386
Gross revenues 36 791 11 838
Gross profit (loss) (5) 715 7 717
Net income (loss) (59) 191 (23) 109
Equity in net income (loss) -- 70 (12) 58
Company's investments in
equity method affiliates -- 176 19 195
At and for the year ended July 31, 1996
UAP KSI EBI OTHERS Total
(1)
Current assets $ -- $ 34 $ 307 $ 26 $ 367
Noncurrent assets -- 19 58 4 81
Current liabilities -- 123 64 3 190
Noncurrent liabilities -- -- 40 -- 40
Shareholders' equity
(deficit) -- (70) 261 27 218
Gross revenues 421 75 658 -- 1,154
Gross profit 382 54 608 -- 1,044
Net income (loss) 150 (188) 196 (3) 155
Equity in net income (loss) 30 (70) 76 (2) 34
Company's investments in -- -- 107 14 121
equity method affiliates
(1) Effective January 31, 1996 the Company began to account for UAP
as a consolidated subsidiary. Results reported in this note for 1996
are for the six months ended January 31, 1996 only (see Note 2).
4. REVENUES
All of the Company's royalty revenues derive from its patent
rights to various technologies. Although patents may be declared
invalid, may not issue on patent applications, or new or alternative
technologies may render licensed patents uncommercial, the Company is
not aware of any such circumstances specific to its portfolio of
licensed technologies. In addition, licensees may not develop
products incorporating the Company's patented technologies or they may
be unsuccessful in obtaining governmental approvals required to sell
such products. In such cases, except for minimum fees provided in
certain license agreements, royalty revenues generally would not
accrue to the Company.
Approximately $664,000 (28%) of retained royalties (25% of total
revenues) in 1998 is from several licenses of the Vitamin B12 assay.
Certain of these licensed patents expired in April, 1998. These
expiring licenses contributed approximately $380,000 (16%) of total
retained royalties in fiscal 1998. The remaining Vitamin B12 assay
licenses are expected to expire in May, 2001.
Retained royalties for 1998, 1997 and 1996, include $192,433,
$225,233 and $268,542, respectively, from foreign licensees.
5. RECEIVABLES
Receivables as of July 31, 1998 and 1997 comprise:
1998 1997
Royalties 1,444,014 $1,288,363
Other 47,923 115,672
$1,491,937 $1,404,035
6. SHORT-TERM INVESTMENTS
As of July 31, 1998 and 1997, the components of the Company's
available-for-sale securities were as follows (in thousands):
Gross Gross
Unrealized Unrealized
Aggregate Holding Holding Maturity
Security Type Fair Value Gains Losses Cost Basis Grouping
July 31, 1998:
Equity
Securities $ 33 $ -- $22 $ 55 N/A
July 31, 1997:
U.S. Treasury Within 1
bills $1,489 $ 8 $-- $1,481 year
As of July 31, 1998 and 1997 the Company also had invested
$2,384,460 and $1,045,093, respectively, in Eurodollar (U.S. dollar
denominated deposits in a bank located outside the United States) and
rated money market funds.
For the years ended July 31, 1998, 1997 and 1996, respectively,
proceeds from the sale of available-for-sale securities were
$1,500,000, $4,550,000 and $3,694,767 which resulted in gross realized
gains of $18,482, $76,863 and $61,691. Cost is based on specific
identification in computing realized gains.
7. PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1998 and 1997 comprise:
1998 1997
Equipment and furnishings $ 281,265 $ 311,807
Leasehold improvements 55,196 54,632
336,461 366,439
Accumulated depreciation
and amortization (165,247) (138,142)
$ 171,214 $ 228,297
Depreciation expense was $81,516, $76,065 and $69,253 in 1998,
1997 and 1996 respectively.
8. ACCRUED LIABILITIES
Accrued liabilities at July 31, 1998 and 1997 were:
1998 1997
Accrued compensation $ 117,005 $ 159,519
Accrued contract settlement 300,000 --
Royalties payable 982,111 837,718
Deferred revenues 99,160 68,022
Other 296,466 225,566
$1,794,742 $1,290,825
9. INCOME TAXES
The Company has not provided for Federal or State income taxes
since it has net operating losses. The Company incurs and pays only
minimum State taxes.
Components of the Company's net deferred tax assets as of July
31, 1998 and 1997 are as follows (in thousands):
1998 1997
Net operating loss carryforwards $ 5,738 $ 5,468
Net capital loss carryforwards 860 893
Installment receivable from
sale of discontinued operation 1,410 1,343
Other, net 228 757
Net deferred tax assets 8,236 8,461
Valuation allowance (8,236) (8,461)
Net deferred tax asset $ -- $ --
At July 31, 1998, the Company had Federal net operating loss
carryforwards of approximately $16,876,000 which expire from 1999
($257,000 in 1999) through 2013. The Company also has investment tax
credit carryforwards of approximately $65,000 which expire from 1999
($48,000 in 1999) through 2001. At July 31, 1998, the Company had
Connecticut net operating loss carryforwards of approximately $553,000
which expire from 1999 ($256,000 in 1999) through 2002 and Pennsylva-
nia net operating loss carryforwards of approximately $803,000 which
expire from 1999 ($264,000 in 1999) through 2001.
10. SHAREHOLDERS' INTEREST
Preferred Stock
Dividends on preferred stock are noncumulative and preferred
stock is redeemable at par value at the option of CTT.
Stock-based Compensation Plans
At July 31, 1998, CTT had four stock-based compensation plans
which are described below. The Company applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its
Employee Stock Option Plan. The compensation cost that has been
charged against income for each of its 1996 Directors' Stock
Participation Plan, Directors' Stock Participation Plan, Common Stock
Warrants and Employees' Common Stock Retirement Plan is reported
below. Had compensation cost for CTT's Employee Stock Option Plan
been determined based on the fair value at the grant dates for options
awarded under that plan consistent with the fair value provisions of
Financial Accounting Standards Board Statement No. 123, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1998 1997 1996
Net loss As reported $ (1,235,489) $(1,571,045) $ (588,101)
Pro forma $ (1,305,996) $(1,759,008) $ (820,153)
Basic and diluted
earnings As reported $ (0.21) $ (0.27) $ (0.10)
per share Pro forma $ (0.22) $ (0.30) $ (0.14)
Employee Stock Option Plans
CTT has a stock option plan which expires December 31, 2000.
Under this plan both incentive stock options and nonqualified stock
options may be granted to key employees. Incentive stock options are
granted at an exercise price equal to the fair market value of the
optioned stock on the grant date and terminate ten years after the
grant date if not terminated earlier. Nonqualified stock options may
be granted at an exercise price from 85% to 100% of the fair market
value of the optioned stock on the grant date. Options granted before
July 31, 1997 generally became exercisable six months after the grant
date and terminate ten years after the grant date if not terminated
earlier. Options granted since July 31, 1997, vest 25%, 25% and 50%
after one, two and three years, respectively. For nonqualified stock
options, the difference between the exercise price and the fair market
value of the optioned stock on the grant date, if any, is charged to
expense over the term of the option. Stock appreciation rights may
be granted either at the time an option is granted or any time
thereafter. There are no stock appreciation rights outstanding.
The following information relates to the stock option plan which
expires December 31, 2000:
July 31, July 31,
1998 1997
Common shares reserved for
issuance on exercise of options 559,388 592,746
Shares available for future
option grants 81,346 131,846
On March 31, 1998, shareholders approved the 1997 Employees'
Stock Option Plan. Options granted under this plan may be either
incentive stock options or nonstatutory options at an option price of
not less than 100% of the fair market value of the stock at grant
date. The maximum term of any option under the 1997 option plan is
ten years from the date of grant and no options may be granted after
September 30, 2007. No options were granted under this plan during
fiscal 1998. All 275,000 common shares reserved for future issuance
under this 1997 plan are available for future option grants at July
31, 1998.
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively:
1998 1997 1996
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 42.1% 43.4% 42.0%
Risk-free interest rates 6.0% 6.1% 6.0%
Expected lives 4 years 5 years 5 years
A summary of the status of CTT's Employee Stock Option Plans as
of July 31, 1998, 1997 and 1996, and changes during the years then
ended is presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options out-
standing at
beginning of
year 460,900 $ 9.10 429,900 $ 9.08 465,900 $ 8.78
Granted 134,500 $10.88 66,500 $ 9.63 86,000 $ 9.25
Forfeited (39,000) $11.094 (2,500) $ 9.63 --
Exercised (33,358) $ 7.32 (14,000) $ 6.63 (72,000) $ 6.01
Expired or
terminated (45,000) $10.92 (19,000) $12.42 (50,000) $10.96
Options out-
standing at
end of year 478,042 $9.39 460,900 $ 9.10 429,900 $ 9.08
Options
exercisable
at year-end 382,542 $9.04 460,900 $ 9.10 420,900 $ 9.03
Weighted-average
fair value of
options granted
during the year $3.05 $2.94 $2.70
The following table summarizes information about stock options
outstanding at July 31, 1998:
Number Weighted- Number
Range Outstanding Average Weighted- Exercisable Weighted-
of at Remaining Average at Average
Exercise July 31, Contractual Exercise July 31, Exercise
Prices 1998 Life Price 1998 Price
$6.50-$9.875 262,042 6.77 years $ 8.08 249,042 $ 8.03
$10.31-$11.875 216,000 5.98 years $10.98 133,500 $10.91
Directors' Stock Participation Plan
Under the terms of the 1996 Directors' Stock Participation Plan
which was approved by shareholders on December 20, 1996 and expires
January 2, 2006, on the first business day of January each year, CTT
shall issue to each outside director who has been elected by
shareholders and served at least one year as a director the lesser of
2,500 shares of CTT's common stock or shares of CTT's common stock
equal to $15,000 on the date such shares are issued. Should an
eligible director terminate as a director before January 2, CTT shall
issue such director a number of shares equal to the proportion of the
year served by that director.
Under the terms of the Directors' Stock Participation Plan which
expired in January, 1996, outside directors who served a full annual
term were eligible to receive shares of common stock of CTT. The
number of shares issuable each year to any director was the lesser of
2,000 shares or an aggregate fair market value on the date of issuance
of $10,000.
In 1998, 1997 and 1996, eligible directors were issued 12,006,
6,000 and 4,776, shares of common stock, respectively, the fair value
of which has been charged to expense.
Common Stock Warrants
From time to time CTT compensates certain of its consultants in
part by granting them warrants to purchase shares of its common stock.
Such warrants generally become exercisable six months after issuance.
In 1998 and 1997, the fair value of warrants to purchase 11,500 and
15,000 shares, respectively, of CTT's common stock was charged to
expense.
A summary of the status of CTT's common stock warrants as of July
31, 1998, 1997 and 1996, and changes during the years then ended is
presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Warrants out-
standing at
beginning of
year 34,000 $ 8.34 131,000 $ 7.95 171,000 $ 7.61
Granted 11,500 $ 9.46 15,000 $10.38 20,000 $ 6.23
Exercised (6,000) $ 5.44 (6,000) $ 6.38 (5,000) $ 5.75
Expired or
terminated (11,000) $ 6.74 (106,000) $ 8.26 (55,000) $ 6.45
Warrants out-
standing at
end of year 28,500 $10.01 34,000 $ 8.34 131,000 $ 7.95
Warrants exercisable
at year-end 25,500 $10.13 28,000 $ 7.87 131,000 $ 7.95
Weighted-average
fair value of
warrants granted
during the year $2.71 $2.27 $1.82
The following table summarizes information about common stock warrants
outstanding at July 31, 1998:
Number Weighted- Number
Range Outstanding Average Weighted- Exercisable Weighted-
of at Remaining Average at Average
Exercise July 31, Contractual Exercise July 31, Exercise
Prices 1998 Life Price 1998 Price
$9.00-$11.094 28,500 2.13 years $10.01 25,500 $10.13
Warrant Aggregate
Price per Exercise Expiration
Issued No. Shares Share Price Date
April 1996 2,000 $10.500 $ 21,000 April 1999
September 1996 3,000 $ 9.875 $ 29,625 September 2001
November 1996 6,000 $10.500 $ 63,000 October 1999
May 1997 6,000 $10.500 $ 63,000 October 1999
August 1997 2,500 $11.094 $ 27,735 August 2002
November 1997 6,000 $ 9.000 $ 54,000 October 2000
May 1998 3,000 $ 9.000 $ 27,000 April 2000
28,500 $ 285,360
Employees' Stock Retirement Plan
Effective August 1, 1990, CTT adopted an Employees' Common Stock
Retirement Plan. Under the terms of this Plan, a committee of outside
directors annually recommends for full Board approval a contribution
of shares of CTT's common stock to the Plan. For the fiscal years
ended July 31, 1998, 1997 and 1996 the board authorized contributions
of 11,594, 9,654 and 8,688 shares valued at approximately $100,000
$106,200 and $89,000, respectively, based upon year-end closing
prices. These amounts have been charged to expense in 1998, 1997 and
1996, respectively.
11. 401(k) PLAN
Effective January 1, 1997, the Company established a 401(k) defined
contribution plan for all employees meeting certain service require-
ments. This plan allows employees to contribute up to 15% of their
annual compensation. The Company may also make discretionary matching
contributions. During the years ended July 31, 1998 and 1997 no
matching contributions were made by the Company.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
In November, 1996, CTT relocated its principal executive office
to Fairfield, Connecticut under a lease which expires December 31,
2001. CTT has the option to extend the lease for an additional five
years.
At July 31, 1998, future minimum rental payments required under
operating leases with initial or remaining noncancelable lease terms
in excess of one year are as follows:
Years ending July 31:
1999 $ 204,877
2000 216,486
2001 204,931
2002 84,375
Total minimum payments
required $ 710,669
Total rental expense for all operating leases was:
1998 1997 1996
Minimum rentals $ 219,265 $ 148,603 $ 365,940
Less: Sublease rentals $ (25,323) (27,449) (295,944)
$ 193,942 $ 121,154 $ 69,996
The lessor of CTT's office space during fiscal 1997 (through
November, 1996) and 1996 was a partnership comprising four former
officers of CTT.
Contract Settlement Obligation
The Company's former President and Chief Executive Officer, whose
employment contract runs through July 31, 1999, resigned his
employment with the Company to pursue other opportunities. In
connection with his resignation, the Company accrued contract
settlement costs of $300,000 in the fourth quarter of fiscal 1998.
Other Obligations
The Company also has employment contracts with two of its
officers from January, 1997 through January, 2000 with aggregate
minimum compensation $262,000 per year.
CTT-PA and VVI have contingent obligations to repay up to
$209,067 and $224,127, respectively, (three times total grant funds
received) in consideration of grant funding received in 1994 and 1995.
CTT-PA is obligated to pay at the rate of 7.5% of its revenues, if
any, from transferring rights to inventions supported by the grant
funds. VVI is obligated to pay at rates of 1.5% of its net sales of
supported products or 15% of its revenues from licensing supported
products, if any. These obligations will be recognized when any such
revenues are recognized.
Litigation
On July 7, 1997, in a case previously filed in the United States
District Court for the District of Colorado by University of Colorado
Foundation, Inc., The University of Colorado, The Board of Regents of
the University of Colorado, Robert H. Allen and Paul A. Seligman,
plaintiffs, against American Cyanamid Company, defendant, judgment was
entered in favor of plaintiffs and against defendant in the amount of
approximately $44.4 million. The case involved an idea by professors
at the University of Colorado that improved Materna, a prenatal
vitamin compound sold by defendant. The District Court concluded that
defendant fraudulently obtained a patent on the improvement without
disclosing the patent application to plaintiffs and without naming the
professors as the inventors and that the defendant was unjustly
enriched. While the Company was not and is not a party to this case,
the Company had a contract with the University of Colorado to license
University of Colorado inventions to third parties, and the Company
is entitled to a share of the judgment. If the judgment is affirmed
in full upon appeal, the Company's share will be approximately $5.5
million. The Company is advised that the case is currently pending
on appeal in the Federal Circuit Court of Appeals. Oral arguments are
scheduled for December, 1998. There can be no assurance that
plaintiffs will prevail on appeal, nor can Company predict the amount
of the judgment, if any, that may ultimately be entered following the
appeal.
In 1989 UOP, a majority-owned subsidiary of CTT which had
developed a computer-based system to manufacture specialty contact
lenses, intraocular lenses and other precision optical products, sold
substantially all its assets to Unilens Corp. USA.
The proceeds of the sale included an installment obligation for
$5,500,000 payable at a minimum of $250,000 per year beginning in
January 1992. Due to the uncertainty of the timing and amount of
future cash flows, income on the installment obligation is recorded
net of related expenses as the payments are received. Cash received
in excess of the fair value assigned to the original obligation is
recorded as other income from continuing operations. As cash proceeds
are received, CTT records a 4% commission expense payable to its joint
venture partner, Optical Associates, Limited Partnership ("OALP").
CTT recognized other expenses from continuing operations of
$29,334, $50,905 and $79,619 in 1998, 1997 and 1996, respectively, for
legal expenses related to the suit described in the following
paragraph.
In November, 1991, a suit was filed in Connecticut against CTT,
its wholly-owned subsidiary, GTM, its majority-owned subsidiary, UOP,
and several former directors on behalf of the 59 limited partners of
OALP. The complaint alleges, among other things, that the January
1989 sale of UOP's assets to Unilens violated the partnership
agreement and that OALP is entitled to the full proceeds of the sale
to Unilens. The complaint claims, among other things, money damages
and treble and punitive damages in an unspecified amount and
attorneys' fees. The Company believes that the asserted claims are
without merit and intends to defend vigorously the action instituted
by plaintiffs. Hearings in the case have commenced before an attorney
referee; however, due to scheduling conflicts, further hearings have
been adjourned and are expected to occur later in calendar 1998 or
1999. Through July 31, 1998, the Company had received aggregate cash
proceeds of approximately $1,011,000 from the January 1989 sale of
UOP's assets to Unilens.
13. RELATED PARTY TRANSACTIONS
CTT managed USET for UAP through January 31, 1996. During fiscal
1996 (through January 31, 1996), CTT charged USET $30,161 for
management, legal and administrative services.
CTT incurred charges in connection with patent and trademark
litigation from a law firm in which a director of CTT until December,
1995, is a partner. Such charges amounted to approximately $8,000 in
1996. That firm agreed that payment of approximately $67,000 of fees
incurred during 1992 in connection with Renova litigation would be
contingent upon CTT's receipt of proceeds from settlement of the
related litigation. CTT agreed to pay the director's firm one-half
of such receipts, if any, to a limit of three times the contingent
fees incurred or approximately $202,000. The litigation was settled
in June, 1992. Through July 31, 1998, CTT had paid cumulative
contingent fees of $122,320 of which $45,494, $30,417 and $8,078 were
charged to operations in 1998, 1997 and 1996, respectively.
During 1997 and 1996 CTT incurred charges of approximately
$41,000 and $90,000, respectively, for consulting services provided
by its former chief executive officer who was also a director.
CTT-PA earned approximately $101,000, $142,000 and $138,000 in
1998, 1997 and 1996, respectively, from contracts with Lehigh
University, which owns 20% of the outstanding common stock of CTT-PA.
14. SUBSEQUENT EVENTS
In August, 1998, CTT's Board of Directors approved a plan to
reduce future operating expenses. This restructuring plan entails
closing the CTT-PA office in Bethlehem, Pennsylvania, reducing the
Company's staff by four full-time employees, and reassigning their
operating functions among the Company's remaining staff. The Company
will recognize costs related to this action, which are expected to be
approximately $70,000, in the first quarter of fiscal 1999.
In October, 1998, the Board of Directors authorized the
repurchase of up to 250,000 shares of the Company's common stock. The
Company plans to repurchase shares on the open market or in privately
negotiated transactions at times and in amounts determined by
management based on its evaluation of market and economic conditions.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Pursuant to General Instruction G(3), the information called for
by Part III (Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security
Ownership of Certain Beneficial Owners and Management), and Item 13
(Certain Relationships and Related Transactions)) is incorporated by
reference, to the extent required, from the registrant's definitive
proxy statement for its January, 1999 annual meeting of stockholders
to be filed with the Commission pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this Form
10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) List of financial statements and schedules. Page
Competitive Technologies, Inc. and Subsidiaries:
Consolidated Balance Sheets as of July 31, 1998
and 1997. 23-24
Consolidated Statements of Operations for the
years ended July 31, 1998, 1997 and 1996. 25
Consolidated Statements of Changes in
Shareholders' Interest for the years ended
July 31, 1998, 1997 and 1996. 26
Consolidated Statements of Cash Flows for the
years ended July 31, 1998, 1997 and 1996. 27-28
Notes to Consolidated Financial Statements. 29-44
All financial statement schedules have been omitted because the
information is not present or is not present in sufficient amounts to
require submission of the schedule or because the information required
is included in the financial statements or the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter.
(c) List of exhibits: See Exhibit Index immediately preceding
exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPETITIVE TECHNOLOGIES, INC.
(Registrant)
By S/ Frank R. McPike, Jr.
Frank R. McPike, Jr.
Vice President, Finance and CFO
Date: October 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
S/ Frank R. McPike Jr. Interim Chief )
Frank R. McPike, Jr. Executive Officer, )
Vice President, )
Finance, Treasurer and )
Secretary (Principal )
Financial and )
Accounting Officer) )
)
GEORGE C. J. BIGAR* Director )
George C. J. Bigar )
)
MICHAEL G. BOLTON* Director ) October 28, 1998
Michael G. Bolton )
)
JOHN M. SABIN* Director )
John M. Sabin )
)
SAMUEL M. FODALE* Director )
Samuel M. Fodale )
)
)
)
)
* By S/ Frank R. McPike, Jr. )
Frank R. McPike, Jr., Attorney-in-Fact )
EXHIBIT INDEX
Exhibit
No. Description Page
3.1 Unofficial restated certificate of incorpora-
tion of the registrant as amended to date filed
as Exhibit 4.1 to registrant's Registration
Statement on Form S-8, File Number 333-49095
and hereby incorporated by reference.
3.2 By-laws of the registrant as amended to date
filed as Exhibit 3.1 to registrant's Form 10-Q
for the quarter ended October 31, 1997 and
hereby incorporated by reference.
10.1* Registrant's Restated Key Employees' Stock
Option Plan, filed as Exhibit 4.3 to regis-
trant's Registration Statement on Form S-8,
File No. 33-87756 and hereby incorporated by
reference.
10.2* Incentive Compensation Plan of the registrant,
filed as Exhibit 10.2 to the registrant's Form
10-K for the year ended July 31, 1997 and
hereby incorporated by reference.
10.3* Registrant's Restated Directors' Stock Partici-
pation Plan filed as Exhibit 10.3 to regis-
trant's Form 10-Q for the quarter ended January
31, 1995 and hereby incorporated by reference.
10.4* Registrant's 1996 Directors' Stock Participa-
tion Plan filed as Exhibit 4.3 to registrant's
Form S-8 No. 333-18759 and hereby incorporated
by reference.
10.5 Limited Partnership Agreement of Optical Asso-
ciates, Limited Partnership dated November 3,
1983 filed as Exhibit 19.02 to registrant's
Form 10-Q for the quarter ended January 31,
1984 and hereby incorporated by reference.
10.6 Joint Venture Agreement dated April 30, 1984
between Optical Associates, Limited Partnership
and University Optical Products Co., filed as
Exhibit 19.02 to registrant's Form 10-Q for the
quarter ended April 30, 1984 and hereby incor-
porated by reference; moratorium agreement
dated July 20, 1987 between University Optical
Products Co. and Optical Associates, Limited
Partnership filed as Exhibit 10.14 to regis-
trant's Form 10-K for the fiscal year ended
July 31, 1987 and hereby incorporated by refer-
ence.
10.7 Asset Purchase Agreement among University
Optical Products Co., Unilens Corp. USA, Uni-
lens Optical Corp. and the registrant dated
January 23, 1989 filed as Exhibit 19.1 to
registrant's Form 10-Q for six months ended
January 31, 1989 and hereby incorporated by
reference.
10.8* Registrant's 1997 Employees' Stock Option Plan
filed as Exhibit 4.3 to registrant's Registra-
tion Statement on Form S-8, File Number 333-
49095 and hereby incorporated by reference.
10.9 Asset Purchase Agreement between Unilens Corp.
U.S.A. and University Optical Products Co.
dated November 30, 1989 filed as Exhibit 19.1
to registrant's Form 10-Q for the three months
ended October 31, 1989 and hereby incorporated
by reference.
10.10* Employment agreement between registrant and
George M. Stadler dated August 1, 1995 filed as
Exhibit 10.19 to registrant's Form 10-K for the
year ended July 31, 1995 and hereby incorporat-
ed by reference.
10.11* Voluntary Release and Exit Agreement between
registrant and George M. Stadler signed October
15, 1998.
10.12* Employment Agreement between registrant and
Frank R. McPike, Jr. dated January 7, 1997
filed as Exhibit 10.1 to registrant's Form 10-Q
for the quarter ended January 31, 1997 and
hereby incorporated by reference.
10.13 Settlement and Forbearance Agreement dated July
15, 1993 among registrant, Unilens Corp. USA
and Unilens Vision Inc. filed as Exhibit 10.47
to registrant's Form 10-K for the year ended
July 31, 1993 and hereby incorporated by refer-
ence.
10.14 Stock Purchase Agreement dated July 15, 1993
among registrant, Unilens Corp. USA and Unilens
Vision Inc. filed as Exhibit 10.48 to regi-
strant's Form 10-K for the year ended July 31,
1993 and hereby incorporated by reference.
10.15 Amendment and Modification Agreement dated
September 27, 1993 among registrant, Unilens
Corp. USA and Unilens Vision Inc. filed as
Exhibit 10.49 to registrant's Form 10-K and
hereby incorporated by reference.
10.16 Agreement for Purchase and Sale of Partnership
Interests in USET Acquisition Partners, L.P.
effective January 31, 1996 by and between UPAT
Services, Inc., Texas Research and Technology
Foundation and United Services Automobile
Association filed as Exhibit 2.1 to regi-
strant's Form 8-K dated January 31, 1996 and
hereby incorporated by reference.
10.17 Promissory Note of UPAT Services, Inc. dated
January 31, 1996 in the principal amount of
$983,684.21 payable to United Services Automo-
bile Association ("USAA") filed as Exhibit 2.2
to registrant's Form 8-K dated January 31, 1996
and hereby incorporated by reference.
10.18 Promissory Note of UPAT Services, Inc. dated
January 31, 1996 in the principal amount of
$351,315.79 payable to Texas Research and
Technology Foundation filed as Exhibit 2.3 to
registrant's Form 8-K dated January 31, 1996
and hereby incorporated by reference.
10.19 Security Agreement of UPAT Services, Inc. dated
January 31, 1996 to USAA and Texas Research and
Technology Foundation as collateral for the
related Promissory notes dated January 31, 1996
filed as Exhibit 2.4 to registrant's Form 8-K
dated January 31, 1996 and hereby incorporated
by reference.
10.20 USET Acquisition Partners, L.P. Assignment of
Partnership Interests to UPAT Services, Inc. by
Texas Research and Technology Foundation filed
as Exhibit 2.5 to registrant's Form 8-K dated
January 31, 1996 and hereby incorporated by
reference.
10.21 USET Acquisition Partners, L.P. Assignment of
Partnership Interests to UPAT Services, Inc. by
USAA filed as Exhibit 2.6 to registrant's Form
8-K dated January 31, 1996 and hereby incorpo-
rated by reference.
10.22 Lease agreement between registrant and The
Bronson Road Group made August 28, 1996 filed
as Exhibit 10.34 to registrant's Form 10-K for
the year ended July 31, 1996 and hereby incor-
porated by reference.
11.1 Schedule of computation of earnings per share
for the three years ended July 31, 1998.
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of attorney.
27.1 Financial Data Schedule - EDGAR only.
* Management Contract or Compensatory Plan