UNITED STATES
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, 2004
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1960 Bronson Road
FAIRFIELD, CONNECTICUT 06824
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 255-6044
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ]Yes [x]No
The aggregate market value of the common equity held by non-affiliates
of the registrant as of January 31, 2004 (the last business day of the
registrant's most recently completed second fiscal quarter) was approximately
$35,800,000.
The number of shares of the registrant's common stock outstanding as of
October 1, 2004, was 6,409,696 shares.
Document of Which Portions
are Incorporated by Reference Location in This Form 10-K
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Registrant's definitive proxy statement Part III - Items 10, 11, 12, 13 and 14
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COMPETITIVE TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I
Forward-Looking Statements ................................................. 4
Item 1. Business .......................................................... 4
Item 2. Properties ........................................................ 8
Item 3. Legal Proceedings ................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ............... 12
Item 4A Executive Officers of the Registrant .............................. 12
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities ..... 13
Item 6. Selected Financial Data ........................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk ........ 33
Item 8. Financial Statements and Supplementary Data ....................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................. 62
Item 9A. Controls and Procedures ........................................... 62
Item 9B. Other Information ................................................. 62
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 62
Item 11. Executive Compensation ........................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 63
Item 13. Certain Relationships and Related Transactions ................... 63
Item 14. Principal Accounting Fees and Services ........................... 63
PART IV
Item 15. Exhibits, Financial Statement Schedules .......................... 63
Signatures ................................................................ 64
Exhibit Index ............................................................. 65
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PART I
FORWARD-LOOKING STATEMENTS
Please refer to "Forward-Looking Statements" in Item 7 for a
description of the nature of certain terms and statements used herein.
ITEM 1. BUSINESS
OVERVIEW: TECHNOLOGY COMMERCIALIZATION SERVICES
Competitive Technologies, Inc. ("CTT"), is a Delaware corporation
incorporated in 1971 to succeed an Illinois business corporation incorporated in
1968. CTT and its subsidiaries (collectively, the "registrant," "we," "our," or
"us"), provide technology transfer, selling and licensing services focused on
the technology needs of its customers to match those requirements with
commercially viable technology solutions, bridging the gap between market demand
and raw innovation. We do this in two ways. We develop, and have developed over
the years, relationships with the technology and research arms of universities,
independent research institutions and companies, as well as inventors and patent
or other intellectual property holders (who then become our "Clients") to obtain
rights or a license to their invention, patent or intellectual property rights
(collectively, the "Technology"), and we then find markets either to sell the
Technology or to further develop it, through a license or sublicense. We also
develop relationships with those who have a need or use for Technologies
(usually companies, and they become our customers, usually through a license or
sublicense), and match their needs with one of our Technologies ("reverse
marketing"). Since we focus on both Technologies needed and available, and the
Technologies' end markets, we believe that we provide a valuable service in
matching needs to Technology solutions. Using our services provides benefits to
both the Technology provider and the user of the Technology; the Technology
provider can focus solely on research and innovation, rather than on selling and
marketing, and the Technology user can focus on selling, development and
marketing, rather than on research and development. We also work to enforce our
Clients' and our patent rights with respect to our Technologies. Our goal is to
maximize the value of the Technology for the benefit of our Clients, customers
and shareholders.
When we acquire a Technology, we may acquire exclusive or non-exclusive
rights, worldwide rights or rights limited to a specific geographic area. When
we license or sublicense rights to our customers, we may grant exclusive or
non-exclusive rights, worldwide or geographically limited rights and/or we may
limit rights to a defined field of use. Technologies may be early stage, that
require further development and/or testing and approval before they can be
commercialized; mid stage, that require some further refinement; or late stage,
that are ready to market immediately. We seek a balanced portfolio with
Technologies in each stage of the life cycle.
We identify and commercialize (or find companies that will do it for
us) innovative Technologies in life, digital, nano and physical sciences
developed by universities, companies, independent research institutions and
individual inventors. Life sciences include medical testing, diagnostics,
pharmaceuticals, biotechnologies, medical devices and other medical or
biological applications. Digital sciences include communications,
semiconductors, Internet related, e-commerce and consumer electronics
applications. Nano sciences deal with the manipulation of microscopic particles
into useful arrangements, and smart or novel materials (a nano particle is one
thousand times smaller than the width of a human hair). Physical sciences
include chemical, display, and environmental applications.
We estimate that over the years we have licensed nearly 500
technologies to and from corporations, and can count as our Clients several
major universities.
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TECHNOLOGY ACQUISITION AND PORTFOLIO
Currently we are working to expand the number of universities that we
have relationships with, and are developing programs specifically designed to
establish us as the premier technology commercialization company.
In addition to contacts with universities, independent research
institutions and inventors, we learn of Technologies available when inventors or
intellectual property holders hear of our services by word-of-mouth and come to
us for assistance. An internal committee established for the purpose of
evaluating leads and accepting or rejecting Technologies continuously evaluates
all potential Technologies. Factors in the evaluation process include, but are
not limited to, strength and ability to protect the intellectual property, life
stage, further development time, if any, of the Technology, marketability,
market size and potential profitability of the Technology, and whether we have
relationships with potential users of the Technology.
Generally, early stage Technologies have limited current revenue
potential but may have high long-term revenue potential, while mid stage and
late stage Technologies may produce more current revenues but may have more
limited long-term revenue potential. Of Technologies that we evaluate and accept
into our portfolio, several will produce little or no revenues, several will
produce steady and/or modest revenues for a period of time, and a few will
produce significant annual revenues for several years, extending generally
through the life of the patent. In addition, when we accept a Technology, we try
to obtain the rights to improvements and/or refinements that may extend the
patentable (useful) life of the Technology and the potential revenues generated.
Since we may not know a Technology's revenue potential right away and it often
takes a few years before we earn significant revenues from a Technology, we
review our portfolio regularly, adding and removing Technologies to find a
balance between Technologies that produce current revenues and those that
produce long-term revenues.
MARKETING TECHNOLOGIES
We commercialize our Technologies through many methods, from contacts
in research and development, marketing and executive levels at major
corporations, to attendance at seminars and trade shows. We also perform market
research to determine the most likely users of Technologies, and we may contact
current customers to determine if they have an interest in or another use for a
new Technology.
TECHNOLOGY PROTECTION AND LITIGATION
An important part of our business is patenting and protecting our
Technologies, both domestically and internationally. We sometimes assist in or
prepare initial patent applications, and prosecute and maintain patents.
Unfortunately, patent enforcement also is a part of our business due to patent
infringement, both willful and unintentional. In addition, companies will
attempt to find "work-arounds" to avoid paying us and our Clients royalties for
the use of our Technologies, and at times these "work-arounds" may be
successful. We vigorously and aggressively defend our Technologies on our
Clients' and our behalf, and pursue patent infringement cases through
litigation, if necessary. Such actions and cases, even if settled out of court,
may take several years to complete, and the expenses of these matters may be
borne by our Clients, by us or shared. Patent law provides for the potential of
treble damages in the event of a willful infringement, but such awards are
provided solely at the discretion of the court.
REVENUE GENERATION
We earn recurring revenues principally from Technology license and
royalty fees. In most cases, we obtain or license the rights to a Technology
from a Client, and then license or sublicense our rights to our customers.
Generally, the agreements we enter into with our Clients and customers are for
the duration of the Technology life, which usually is determined by applicable
patent law. Our customers pay us royalties based on their usage of the
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Technology, and we share the fees with our Clients. When we receive periodic
reports of sales of licensed products and royalties earned from our customers,
we record revenues for our portion and record our obligation to our Clients for
their portion. The revenues we record are solely our share of the gross
revenues, net of our Clients' shares, which usually are fixed percentages. For
early stage Technologies that may not be ready for commercial development
without further research, we may receive milestone payments based on research
progress or subsequent sublicense or joint venture proceeds. We receive future
royalty payments based on our customers' sales of the Technology, and, under
certain of our sublicense or license arrangements, we receive an upfront fee.
In certain cases, we may waive the first year royalty fee in consideration for
the upfront fee. Often we apply the upfront fee or initial royalty fees to
reimburse our Client and/or our patent prosecution and/or maintenance costs
incurred. In these cases, we record the payments as a reduction of expense, not
as revenue. If the reimbursement belongs to our Client, we record no revenue or
expense. As a result, a new Technology may not generate significant revenues in
its early years.
We stipulate the terms of our licensing arrangements in separate
written agreements with our Clients and with our customers. Generally, we enter
into single element arrangements with our customers, under which we have no
significant obligations after executing the agreements. In certain limited
instances, we may enter into multiple element arrangements under which we may
have continuing service obligations. Unlike single element arrangements, the
revenue recognition for which is described above, we defer all revenue from
multiple element arrangements until we have delivered all the required elements.
We determine delivery of elements based on the verifiable objective evidence
available. We also may have milestone billing arrangements. We evaluate
milestone billing arrangements on a case-by-case basis, and record revenues
under the milestone payment method, whereby we recognize nonrefundable, upfront
fees ratably over the entire arrangement and milestone payments as we achieve
the specified milestone. Currently, we do not have any multiple element or
milestone billing arrangements, though we have had such arrangements in the past
and could have such arrangements in the future.
Currently, we have a concentration of retained royalties derived from
three Technologies. We are aggressively marketing current and seeking new
Technologies both to mitigate this concentration of revenues and provide us with
a more steady future revenue stream. The Technologies that produced revenues
equal to or exceeding 15% of our total retained royalties revenue for 2004, 2003
or 2002 were:
2004 2003 2002
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Homocysteine assay $651,000 $584,000 *
Ethyol(TM) $500,000 $647,000 $ 391,000
Gallium arsenide $334,000 $508,000 $1,012,000
As a percentage of total retained royalties for the same periods, these
Technologies represented:
2004 2003 2002
----- ---- ----
Homocysteine assay 31% 22% *
Ethyol 24% 24% 15%
Gallium arsenide 16% 19% 39%
* Amount was less than 15% of retained royalty revenues in this year.
The homocysteine assay (life sciences) is a diagnostic blood test used
to determine homocysteine levels and a corresponding deficiency of folate or
vitamin B12. Studies suggest that high levels of homocysteine are a primary risk
factor for cardiovascular, vascular and Alzheimer's diseases, and rheumatoid
arthritis. The number of physicians prescribing and using the results of the
homocysteine assay has increased dramatically and it is becoming a regular part
of medical exams. Our U.S. patent that covers this homocysteine assay expires in
July 2007. In fiscal 2004, as described in Item 3., "Legal Proceedings," the
courts affirmed our patent rights relating to homocysteine assays in the
Laboratory Corporation of America Holdings case. After these rulings, we filed
suit against Abbott Laboratories and Bayer Corporation (we settled with Bayer)
for patent infringement, and we are pursuing other laboratories performing
homocysteine assays to enforce our rights to receive royalties on each past and
current assay performed. We believe that revenues from homocysteine will
continue to grow, possibly at a substantial rate, but we cannot predict the rate
of growth or if or when we will succeed in closing additional license agreements
and enforcing our patent rights, or how the growth in volume will affect assay
pricing.
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Ethyol (life sciences) is an agent that reduces certain side effects of
chemotherapy, and is licensed by Southern Research Institute ("SRI"),
exclusively to MedImmune, Inc. (formerly U.S. BioScience, Inc.). Pursuant to an
agreement between SRI and us, SRI pays us up to a maximum of $500,000 in any
calendar year from Ethyol license income it receives. Since calendar 2002 we
have received the maximum revenue each year.
Inventions using gallium arsenide (digital sciences) to improve
semiconductor operating characteristics were developed at the University of
Illinois. U.S. patents issued from March 1983 to May 1989, and expire from May
2001 through September 2006. We have licensed the Technology to Mitsubishi
Electric Corporation, NEC Corporation, Semiconductor Company, Matsushita
Electric Industrial Co., Ltd., SDL, Inc., Hitachi Ltd., Tottori Sanyo Electric
Co., Ltd. and Toshiba Corporation. Approximately $87,000, $156,000, and
$417,000, respectively, of retained royalties in fiscal 2004, 2003 and 2002,
were from one U.S. licensee's sales of licensed product; the remaining $247,000,
$351,000 and $595,000, respectively, were from several foreign licenses.
We also earn revenues from royalty settlements and awards. These
settlements and awards generally are non-recurring, and are the result of
successful patent enforcement actions, and may include interest. In fiscal 2004,
we earned $4.7 million, including interest, from the final resolution of the
Materna(TM) case.
Other Technologies in our life sciences portfolio (many of which are
subject to testing, clinical trials and approvals) include: a nanoparticle bone
cement biomaterial, which has a broad range of potential applications, including
dental, spinal and other bone related applications; a therapeutic drug to treat
male and female sexual dysfunction; a sunless tanning agent that may prevent
skin cancer from unprotected exposure to the sun; a potential anti-cancer
compound that may inhibit tumor growth with low toxicity to normal cells; and
Therapik(TM), a device that alleviates the effect of insect bites and stings.
Our digital sciences portfolio includes: a non-destructive silicon
carbide wafer testing process that allows for quality testing without destroying
the wafer (computer "chips", or integrated circuits, are built on silicon
carbide wafers); an early stage video and audio signal processing technology
that is used in streaming video products for personal computers and wireless
devices, including mobile phones, licensed in the MPEG 4 visual patent
portfolio; an encryption technology that operates at high speeds with low memory
requirements to secure applications used on the internet, telecommunications,
smart cards and e-commerce; and EZSpeech(TM), an interactive software platform
designed to help individuals master English when it is not their native
language.
Our physical sciences portfolio includes: clean, renewable fuel
technologies, including patented alternative fuel formulations and a method to
convert municipal waste to fuel grade ethanol and certain marketable chemicals;
a method for accelerating steel cutting that has a variety of uses; and a
specialty cleaning and lubricating chemical formulation that improves the
efficiency and safety of glass and plastic bottle and can conveyor systems.
Page 7
RETAINED ROYALTIES FROM FOREIGN SOURCES
We are developing new relationships with Asian companies, especially
Korean companies, seeking technology solutions. Retained royalties received from
foreign licensees totaled $519,622, $657,194, and $878,894, respectively,
for 2004, 2003 and 2002. Of the foreign sourced royalties received, $397,000,
$486,000 and $730,000, respectively, in 2004, 2003, and 2002 were from Japanese
licenses.
INVESTMENTS
From time to time in the past, in addition to providing other forms of
assistance, we have funded certain development-stage companies to exploit
specific Technologies.
EMPLOYEES
As of October 15, 2004, we employed 17 people (full-time equivalents).
We also employ independent consultants who provide us with business development
services under contracts with us. In addition to the diverse technical,
intellectual property, legal, financial, marketing and business expertise of our
professional team, from time to time we rely on advice from outside technical
and professional specialists to satisfy our Clients' and customers' unique
technology needs.
CODE OF ETHICS
Our Board of Directors adopted our Corporate Standards of Conduct, as
amended, for all directors, officers and employees in January 1999. A copy of it
was filed as Exhibit 14.1 to our 2003 Annual Report on Form 10-K.
AVAILABLE INFORMATION
We make available without charge copies of our Annual Report, Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, any amendments to those reports and any other of our reports filed with or
furnished to the Securities and Exchange Commission ("SEC") on or through our
website, HTTP://WWW.COMPETITIVETECH.NET, as soon as reasonably practicable after
they are filed. You may request a paper copy of materials we file with the SEC
by calling us at (203) 255-6044.
You also may read and copy materials we file with the SEC on the SEC's
website at HTTP://WWW.SEC.GOV, or at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling (800) 732-0330.
ITEM 2. PROPERTIES
Our executive office is approximately 9,000 square feet of leased space
in an office building in Fairfield, Connecticut. The office lease expires
December 31, 2006, and provides for annual base rent of $225,000, which includes
taxes, climate control, power and maintenance. We have an option to renew the
lease through December 31, 2011. We believe that our facilities are adequate for
our current and near-term operations.
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ITEM 3. LEGAL PROCEEDINGS
BAYER CORPORATION
On August 17, 2004, we filed a complaint alleging infringement of our
patent covering homocysteine assays against Bayer Corporation, et al, ("Bayer"),
in the United States District Court for the District of Colorado, seeking
monetary damages, punitive damages, attorneys fees, court costs and other
remuneration at the option of the court. Bayer responded to our complaint on
September 27, 2004, denying the allegations. On October 21, 2004 the parties
settled the case. Pursuant to the settlement, we granted Bayer a license, and
Bayer will pay us a fee and royalties on sales of Bayer homocysteine assays
beginning July 1, 2004. The fee is non-refundable and is not creditable against
future royalties.
FEDERAL INSURANCE COMPANY
On February 3, 2004, we filed a civil action against Federal Insurance
Company ("Federal"), in the U.S. District Court for the District of Connecticut
(the "CTT Complaint"), to enforce our claim that expenses incurred by CTT, Mr.
Frank R. McPike, Jr., our former Chief Executive Officer, and certain other
directors and officers relating to an SEC investigation, including any
subsequent action thereon, should be reimbursed by Federal since the expenses
fell within the coverage provisions of our insurance policy. Effective October
13, 2004, Federal agreed to pay us $167,500 in settlement of the CTT Complaint,
and Federal acknowledged that our deductible under the policy was deemed
satisfied for purposes of a civil suit filed against us by the SEC (see below).
In return, we agreed to withdraw the CTT Complaint with prejudice and release
Federal from any and all claims made in the CTT Complaint.
On September 15, 2004, the Chubb Group of Insurance Companies, on
behalf of Federal, notified us that they agreed to accept coverage as to losses,
including defense costs, incurred by CTT and Mr. McPike as a result of the SEC's
civil suit (described below), according to the terms of the policy.
SECURITIES AND EXCHANGE COMMISSION
On August 11, 2004, the SEC filed a civil suit naming Competitive
Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer),
and six individual brokers in the United States District Court for the District
of Connecticut, alleging that from at least July 1998 to June 2001, the
defendents were involved in a scheme to manipulate the price of our stock. The
case relates to our 1998 stock repurchase program under which we repurchased
shares of our common stock from time to time during the period from October 28,
1998 to March 22, 2001. CTT was named as a defendant in the suit due to the
alleged conduct of Mr. McPike, whose conduct in connection with the stock
repurchase program was imputed to CTT as a matter of law. Relating to CTT, the
SEC in the suit seeks a permanent injunction prohibiting us from further
violations of the Securities Exchange Act of 1934 and a civil penalty pursuant
to Section 21(d)(3) of the Securities Exchange Act of 1934 (this section
provides for maximum penalties of $550,000 for a corporate entity and $110,000
per individual). On September 24, 2004, we responded to this civil suit, and
filed a motion to dismiss the suit. On October 15, 2004, the SEC filed a motion
opposing our motion to dismiss the suit. Further action in this case is pending.
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LABORATORY CORPORATION OF AMERICA HOLDINGS D/B/A LABCORP
On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit
("CAFC") denied the petition of Laboratory Corporation of America Holdings d/b/a
LabCorp ("LabCorp") for a rehearing or a rehearing en banc (rehearing by the
full CAFC) of a June 8, 2004 decision affirming a November 2002 decision in
favor of Metabolite Laboratories, Inc. ("MLI") and us, (collectively, the
"Plaintiffs"). As a result of the August 5, 2004 decision, on August 16, 2004
the Plaintiffs received approximately $6.7 million. Our share of the $6.7
million payment was $921,000 (recorded in fiscal 2005). The payment did not
include attorneys fees or court costs previously awarded to the Plaintiffs but
still under appeal with the court. In addition, we have claimed additional
attorneys fees and court costs for the appeals. This request is pending.
LabCorp's options are either to accept the court's decision or to
appeal the decision to the U.S. Supreme Court. If LabCorp chooses to appeal the
decision to the U.S. Supreme Court, they have 90 days from the August 5, 2004
decision to file their appeal (or until November 3, 2004, unless extended). If
LabCorp appeals to the U.S. Supreme Court, and if the original judgment is
subsequently reversed, then LabCorp may attempt to recover amounts paid to the
Plaintiffs, including royalties paid to us as part of a January 2003 stipulated
court order (the "Stipulated Order"). (Pursuant to the Stipulated Order, the
court had stayed execution of the monetary judgment and a permanent injunction
that prevented LabCorp from performing homocysteine assays, and LabCorp agreed
to pay us a percentage of their homocysteine assay sales during their appeals.)
LabCorp's ability to recover any amounts paid to the Plaintiffs would depend on
the extent and reason for the reversal. From January 2003 through July 31, 2004,
LabCorp paid us an aggregate of $1,342,040 under the Stipulated Order, including
both our retained amounts and amounts paid or payable to our clients. We believe
that the probability that LabCorp will recover any amount is remote.
The funds we received on August 16, 2004 were released from a bond
previously posted by LabCorp as part of the appeals process in this homocysteine
assay patent infringement case originally filed by the Plaintiffs against
LabCorp on May 4, 1999, in the United States District Court for the District of
Colorado. The Plaintiffs alleged, in part, breach of contract, patent
infringement and that LabCorp owed the Plaintiffs royalties for homocysteine
assays performed beginning in the summer of 1998 using methods falling within
the claims of a patent we own. (We licensed the patent on a non-exclusive basis
to MLI and MLI sublicensed it to LabCorp.) Plaintiffs sought unspecified
monetary and exemplary damages, for LabCorp to cure past breaches, to provide an
accounting of wrongfully withheld royalties, and to refrain from infringing the
patent. Plaintiffs also sought reimbursement of their attorneys fees. LabCorp
filed an answer and counterclaims alleging non-infringement, patent invalidity
and patent misuse.
In November 2001 a jury confirmed the validity of our patent rights,
found that LabCorp willfully infringed our patent and breached their sublicense
contract, and awarded damages to the Plaintiffs. In December 2001, the court
entered judgment affirming the jury's verdict. In an amended judgment issued in
November 2002, the court awarded the Plaintiffs approximately $1,019,000 in
damages, $1,019,000 in enhanced (punitive) damages, $560,000 in attorneys fees,
and $132,000 in prejudgment interest, and issued a permanent injunction barring
LabCorp from performing future homocysteine assays.
ABBOTT LABORATORIES, INC.
On June 8, 2004, we filed a complaint alleging patent infringement of
our patent covering homocysteine assays against Abbott Laboratories, Inc.,
("Abbott"), in the United States District Court for the District of Colorado,
seeking monetary damages, punitive damages, attorneys fees, court costs and
other remuneration at the option of the court. Abbott was served in August and
responded to the suit on October 12, 2004, denying the allegations. Further
action in this case is pending.
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MATERNA(TM)
On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant)
petition for a writ of certiorari (petition requesting the court to review an
appeal) in the Materna litigation, upholding the original judgment of the lower
court in favor of the plaintiffs. The petition was Wyeth's final avenue of
appeal in the case, and the denial finalized this case. On the same day, a bond
previously posted by the defendant was released to all parties, and the judgment
and award were satisfied. We retained an aggregate of $5.3 million from this
case in fiscal 2004 and 2003.
The 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, previously filed the lawsuit against the
defendant, American Cyanamid Company (now a subsidiary of Wyeth), in the United
States District Court for the District of Colorado. The case involved a claim of
patent infringement relating to a reformulation of Materna, a prenatal vitamin
compound sold by the defendant. While we were not a direct party to the case, we
did have a contract with the University of Colorado to license University of
Colorado inventions to third parties. As a result of our contract, we were
entitled to share 18.2% of any damages awarded to the University of Colorado
after deducting their expenses relating to the suit.
On July 7, 2000, the District Court concluded that Robert H. Allen and
Paul A. Seligman were the sole inventors of the Materna reformulation and that
the defendant was liable on the plaintiffs' claims for fraud and unjust
enrichment. On August 13, 2002, the District Court judge awarded the plaintiffs
damages of approximately $54 million, plus interest from January 1, 2002. Wyeth
appealed the judgment to the CAFC, but the CAFC affirmed the judgment and denied
Wyeth's subsequent request for a rehearing.
FUJITSU
In December 2000, (coincident with filing a complaint with the United
States International Trade Commission ("ITC") that was withdrawn in August 2001)
the University of Illinois and CTT filed a complaint against Fujitsu Limited,
Fujitsu General Limited, Fujitsu General America, Fujitsu Microelectronics, Inc.
and Fujitsu Hitachi Plasma Display Ltd. (Fujitsu et al.) in the United States
District Court for the Central District of Illinois seeking damages for past
infringements and an injunction against future sales of plasma display panels
that infringe two U.S. patents held by our client, the University of Illinois.
The two patents cover energy recovery in flat plasma display panels. In July
2001, we reactivated this complaint to pursue legal remedies (damages for past
infringing sales and possibly damages for willfulness) that are not available at
the ITC. In May 2002, the District Court granted defendants' motion to transfer
this case to the Northern District of California.
Effective July 23, 2002, the University of Illinois agreed to take the
lead in this litigation and assume the cost of new lead counsel. Before this
agreement, we bore the entire cost of lead counsel in this litigation. In
December 2002, we were dismissed as co-plaintiff from this litigation, but we
retain our economic interest in any potential favorable outcome.
In September 2001, Fujitsu et al. filed counterclaims against us and
Plasmaco, Inc. (our licensee) in the United States District Court for the
District of Delaware (which subsequently was dismissed and reinstituted in the
Northern District of California). The counterclaims alleged, among other things,
that we had misappropriated confidential information and trade secrets supplied
by Fujitsu during the course of the ITC action. It also alleged that, with
Plasmaco's assistance, we abused the ITC process to obtain information to which
we otherwise would not have been entitled and which we would use in the action
against Fujitsu in the United States District Court for the Northern District of
California.
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On July 31, 2003, the judge in this case issued his Markman decision,
in which he ruled on the scope and interpretation of terms in the underlying
patent claims. The Court then stayed all issues in both cases, except issues
relating to summary judgment. Both parties moved for summary judgment. In April
2004, the issues relating to summary judgment were heard, and on July 1, 2004,
summary judgment was granted in favor of the defendant, Fujitsu. On September
20, 2004, the judge entered a stipulated order staying certain issues, including
the counterclaims, pending resolution of the University's appeal of the summary
judgment, including the Markman decision.
We are unable to estimate the legal expenses or the loss we may incur
or the possible damages we may recover in these suits, if any, and we have not
recorded any potential judgment proceeds in our financial statements to date. We
record expenses in connection with these suits as they are incurred.
OTHER
By letter dated October 7, 2003, the U.S. Department of Labor notified
us that certain former employees had filed complaints alleging discriminatory
employment practices in violation of Section 806 of the Corporate and Criminal
Fraud Accountability Act of 2002, 18 U.S.C. 1514A, also known as the
Sarbanes-Oxley Act. The complainants requested that the Occupational Safety and
Health Administration ("OSHA") investigate and, if appropriate, prosecute such
violations and requested OSHA assistance in obtaining fair and reasonable
reimbursement and compensation for damages. We believe that these claims are
without merit, and we have responded aggressively to the complaints. We cannot
estimate the final outcome of these complaints or the related legal or other
expenses that we may incur.
We believe that we carry adequate liability insurance, directors and
officers insurance, casualty insurance (for owned or leased tangible assets),
and other insurance as needed to cover us against potential and actual claims
and lawsuits that occur in the ordinary course of our business. However, an
unfavorable resolution of any or all matters, and/or our incurrence of
significant legal fees and other costs to defend or prosecute any of these
actions and proceedings may, depending on the amount and timing, have a material
adverse effect on our consolidated financial position, results of operations or
cash flows in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal 2004.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers, their ages and background
information are as follows:
JOHN B. NANO, 60, was elected a director and has served as our
President and Chief Executive Officer since June 2002. Mr. Nano also served as
our Chief Financial Officer from August 2003 to May 2004. Prior to joining us,
Mr. Nano served as Principal reporting to the Chairman of Stonehenge Networks
Holdings, N.V. (a global virtual private network provider) with respect to
certain operating, strategic planning and finance functions from 2000 to 2001.
Prior to that Mr. Nano served as Executive Vice President and Chief Financial
Officer of ConAgra Trade Group, Inc. (a subsidiary of ConAgra, Inc., an
international food company) from 1998 to 1999. From 1993 to 1998, he served as
Executive Vice President, Chief Financial Officer and President of the Internet
Startup Division of Sunkyong America (a subsidiary of Sunkyong Group, a Korean
conglomerate).
DR. DONALD J. FREED, 62, has served as our Executive Vice President and
Chief Technology Officer since January 1, 2004. From April 2003 to December
2003, he was a consultant to us. From November 1998 through March 2003, he
served as Vice President, Business Development, and prior thereto, as Vice
President of Marketing of Nanophase Technologies Corporation, a publicly held
nanomaterials company. Dr. Freed was responsible for the successful start-up of
advanced materials initiatives in three Fortune 50 companies, and has extensive
experience in licensing and technology transfer on a global basis throughout
Europe and Asia.
Page 12
MICHAEL D. DAVIDSON, 45, has served as our Vice President and Chief
Financial Officer since May 3, 2004. From 1998 through 2004, he was with First
Aviation Services Inc., (a provider of parts and services to the aerospace
industry) in various capacities, including financial consultant, Controller, and
as Vice President, Chief Financial Officer and Corporate Secretary.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) MARKET INFORMATION. Our common stock is listed on the American
Stock Exchange. The following table sets forth the quarterly high and low sales
prices of our common stock as reported by the American Stock Exchange for the
periods indicated.
FISCAL YEAR ENDED Fiscal Year Ended
JULY 31, 2004 July 31, 2003
- ------------------------------------------------------ ----------------------------------------------------
HIGH LOW HIGH LOW
FIRST QUARTER $2.10 $1.53 First Quarter $3.84 $1.82
SECOND QUARTER $6.36 $1.97 Second Quarter $3.50 $1.80
THIRD QUARTER $6.50 $3.70 Third Quarter $2.40 $1.76
FOURTH QUARTER $5.25 $3.00 Fourth Quarter $2.12 $1.49
(b) HOLDERS. At October 1, 2004 there were approximately 700
holders of record of our common stock.
(c) DIVIDENDS. No cash dividends were declared on our common stock
during the last two fiscal years.
(d) SALES AND ISSUANCES OF UNREGISTERED SECURITIES. The following table
lists sales and issuances of CTT common stock to Fusion Capital pursuant to the
$5 million equity financing arrangement with them, as described in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We issued all of these securities without registration in reliance
upon an exemption under Section 4(2) of the Securities Act because we made the
offers and sales in private placements.
Number of
shares sold Total cash
Date and issued received
- -------------- ------------- -----------
May 10, 2004 1,027 $ 3,860
June 8, 2004 17,021 50,001
June 30, 2004 10,323 45,600
July 14, 2004 10,331 46,767
July 21, 2004 2,060 8,500
July 22, 2004 2,060 8,400
July 23, 2004 2,572 10,100
July 26, 2004 2,571 10,075
July 27, 2004 4,389 16,699
-------- --------
52,354 $200,002
======== ========
Page 13
COMPETITIVE TECHNOLOGIES, INC.
ITEM 6. SELECTED FINANCIAL DATA (1) (5)
Selected Financial Data
For the years ended July 31, 2004, 2003 and 2002
Year ended July 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ----------- ----------- ------------ -----------
Statement of Operations Summary:
Total revenues (2) (3) $8,021,654 $ 3,319,556 $ 2,595,931 $ 3,641,284 $ 4,112,867
========== =========== =========== ============ ===========
Net income (loss) (2) (4) $2,954,529 $(1,935,301) $(4,016,428) $ (2,500,749) $ 1,300,937
========== =========== =========== ============ ===========
Net income (loss) per share:
Basic $ 0.47 $ (0.31) $ (0.65) $ (0.41) $ 0.21
========== =========== =========== ============ ===========
Assuming dilution $ 0.46 $ (0.31) $ (0.65) $ (0.41) $ 0.21
========== =========== =========== ============ ===========
Weighted average number of common shares
outstanding:
Basic 6,247,588 6,182,657 6,148,022 6,135,486 6,079,211
Assuming dilution 6,456,860 6,182,657 6,148,022 6,135,486 6,187,407
Year-end Balance Sheet Summary: At July 31,
----------------------------------------------------------------------
Cash and cash equivalents $4,309,680 $ 1,504,295 $ 2,887,295 $ 5,017,877 $ 6,716,429
Total assets 6,680,807 2,952,501 6,399,783 10,640,873 12,093,965
Total long-term obligations -- -- -- -- --
Total shareholders' interest 4,938,518 1,169,427 2,992,643 6,967,746 9,928,112
(1) This summary should be read in conjunction with our Consolidated Financial
Statements and Notes thereto.
(2) 2004 includes $4,694,000 from the Materna award and $1,203,000 from the
Unilens settlement and stock sale. 2003 includes $600,000 from the Materna
award, and 2000 includes $736,375 for exchanging future potential royalties
for common stock.
(3) Total revenues exclude $99,719, $400,054 and $526,899, respectively, for
2002, 2001 and 2000, of interest and other income not classified as
revenues in those years.
(4) 2003 includes $341,000 of corporate legal expenses directly related to the
SEC investigation, $482,000 impairment charges on intangible assets,
$944,000 impairment loss on investments, and a reversal (income) of
$1,583,000 of 2002 patent enforcement expenses. 2002 includes $2,132,000 of
patent enforcement legal expenses and $810,000 of impairment loss on
investments, and 2001 includes $2,474,000 of patent enforcement legal
expenses and $600,000 of impairment loss on investments and loans.
(5) No cash dividends were declared or paid in any year presented.
Page 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements about our future expectations, including development and
regulatory plans, and all other statements in this Annual Report on Form 10-K
other than historical facts, are "forward-looking statements" within the meaning
of applicable Federal Securities Laws, and are not guarantees of future
performance. When used in this Form 10-K, the words "anticipate," "believe,"
"intend," "plan," "expect," "estimate," "approximate," and similar expressions,
as they relate to us or our business or management, are intended to identify
such forward-looking statements. These statements involve risks and
uncertainties related to market acceptance of and competition for our licensed
technologies, and other risks and uncertainties inherent in our business,
including those set forth under the caption "Risk Factors" at the end of Item 7
of this Annual Report on Form 10-K for the year ended July 31, 2004, and other
factors that may be described in our other filings with the Securities and
Exchange Commission, and are subject to change at any time. Our actual results
could differ materially from these forward-looking statements. We undertake no
obligation to update publicly any forward-looking statement.
OVERVIEW
We are a full service technology transfer and licensing provider
focused on the technology needs of our customers and transforming those
requirements into commercially viable solutions. We develop relationships with
universities, companies, inventors and patent or intellectual property holders
to obtain the rights or a license to their technologies, and they become our
"Clients," for whom we find markets for the technology. We also develop
relationships with those who have a need or use for technologies, and they
become our customers, usually through a license or sublicense. We identify and
commercialize innovative technologies in life, digital, nano, and physical
sciences developed by universities, companies and inventors. Our goal is to
maximize the value of intellectual assets for the benefit of our Clients,
customers and shareholders.
We earn revenues primarily from licensing our Clients' and our
intellectual property rights, principally patents and inventions (collectively,
the "Technology"), to our customers (licensees). Our customers pay us royalties
based on their usage of the Technology, and we share the fees with our Clients.
Currently, we have a concentration of revenues derived from three technologies.
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform to the current year's presentation. In addition, we
have revised our Consolidated Statements of Operations to a single step
presentation for all years presented. Under this presentation, all income is
presented in revenues and all expense is presented in expenses and deducted from
revenues. We revised our definition of cash equivalents to include all highly
liquid investments, and this definition now includes accounts previously
classified as short-term investments.
Because we have rounded all amounts in this Item 7 to the nearest
thousand dollars, certain amounts may not total precisely. In addition, all
periods discussed in this Item 7 relate to our fiscal year ending July 31
(first, second, third and fourth quarters ending October 31, January 31, April
30 and July 31, respectively).
Page 15
RESULTS OF OPERATIONS - 2004 VS. 2003
SUMMARY OF RESULTS
Net income for 2004 was $2,955,000, or $0.46 per diluted share,
compared to a net loss for 2003 of $1,935,000, or $0.31 per diluted share, an
improvement of $ 4,890,000, or $0.77 per diluted share.
REVENUES
Total revenues for 2004 were $8,022,000, compared to $3,320,000 for
2003, an increase of $4,702,000, or 142%.
RETAINED ROYALTIES for 2004 were $2,111,000, which was $582,000, or 22%
lower than the $2,693,000 reported in 2003. The following table compares
revenues from technologies with retained royalties greater than $100,000 in 2004
or 2003.
Increase % Increase
2004 2003 (Decrease) (Decrease)
---------- ---------- ---------- ----------
Homocysteine assay $ 651,000 $ 584,000 $ 67,000 12%
Ethyol(TM) 500,000 647,000 (147,000) (23%)
Gallium arsenide 334,000 508,000 (174,000) (34%)
Plasma display 150,000 135,000 15,000 11%
Electrochromic display 17,000 157,000 (140,000) (89%)
Vitamin B12 assay -- 115,000 (115,000) (100%)
All other technologies 459,000 547,000 (88,000) (16%)
---------- ---------- ---------- ----------
TOTAL RETAINED ROYALTIES $2,111,000 $2,693,000 $ (582,000) (22%)
========== ========== ========== ==========
The number of physicians prescribing and using the results of the
homocysteine assay has increased dramatically, and it is becoming a more
frequently prescribed test. Our U.S. patent that covers this homocysteine assay,
the validity of which has been confirmed by a court decision, expires in July
2007. We believe that revenues from this Technology will continue to grow,
possibly at a substantial rate, but we cannot predict if or when we will succeed
in closing additional license agreements and enforcing our patent rights, or how
the growth in volume will affect assay pricing. We have filed suit against
Abbott Laboratories and Bayer Corporation (we settled with Bayer) for
infringement of our homocysteine assay patent and are pursuing other
laboratories and diagnostic supply companies performing or manufacturing
homocysteine assays to protect our rights to receive royalties on each assay
performed. We cannot estimate the impact of our actions with respect to
enforcing our homocysteine assay patent at this time. We expect Ethyol retained
royalties to continue at their 2004 level for several years. The decreases in
retained royalties from gallium arsenide, electrochromic display and the vitamin
B12 assay were the result of expired or terminated licenses.
Approximately 71% of our retained royalties for 2004 was from three
technologies: 31% from homocysteine assays, 24% from Ethyol, and 16% from
gallium arsenide patents. We are seeking new technologies to mitigate this
concentration of revenues, to replace revenues from expiring licenses and to
provide future revenues.
Page 16
ROYALTY SETTLEMENTS AND AWARDS comprised approximately 54% and 17%,
respectively, of our total revenues for 2004 and 2003, and were derived from the
Materna(TM) litigation. We recorded these revenues in the following captions and
periods:
MATERNA LITIGATION INCOME SUMMARY
---------------------------------------------------------------------------------------------
ROYALTY
SETTLEMENTS INTEREST TOTAL
PERIOD REPORTED AND AWARDS INCOME, NET REVENUES
---------------------------------- ---------------- --------------- ----------------
First Quarter 2004 $ 836,000 $ 64,000 $ 900,000
Second Quarter 2004 232,000 18,000 250,000
Third Quarter 2004 3,271,000 273,000 3,544,000
---------------- --------------- ----------------
TOTAL 2004 $ 4,339,000 $ 355,000 $ 4,694,000
================ =============== ================
Fourth Quarter 2003 $ 561,000 $ 39,000 $ 600,000
---------------- --------------- ----------------
Total 2003 $ 561,000 $ 39,000 $ 600,000
================ =============== ================
Cumulative Total $ 4,900,000 $ 394,000 $ 5,294,000
================ =============== ================
To generate cash, in the first and second quarters of 2004 and the
fourth quarter of 2003, we sold $1,125,000, $312,500 and $1,290,000,
respectively, of our Materna award without recourse for $900,000, $250,000 and
$600,000 in cash. Had we not done this, our portion of the final award would
have been $6,297,000, including interest awarded.
SETTLEMENT WITH UNILENS, NET for 2004 was $1,203,000, relating to our
settlement with Unilens Corp. USA ("Unilens") in October 2003. Unilens agreed to
pay us a gross amount of $1,250,000 in quarterly installments of at least
$100,000 to settle an old receivable due us that we had written off in prior
years. Through June 30, 2004 we recorded $349,000 of income, representing our
portion of the cash collected from Unilens under the settlement. At July 31,
2004 we reviewed Unilens' financial condition and determined that the remaining
balance of the receivable was collectible. As a result, we recorded income of
$697,000, which represented the net present value of our portion of the
remaining receivable balance. We will accrue interest income on the receivable
from Unilens as we receive installment payments from Unilens. In prior years we
had received shares of Unilens stock in partial payment against the old
receivable. We sold the remaining shares in the fourth quarter, generating net
proceeds of $157,000, which we also recorded as income since the shares had no
book value.
INTEREST INCOME, NET for 2004 was $369,000, compared to $65,000 in
2003. In addition to the interest income related to the Materna award discussed
above, we earned net interest income of $14,000 and $27,000, respectively, on
our invested cash and cash equivalents in 2004 and 2003. Although our average
invested balance increased significantly in April 2004 with our receipt of the
Materna litigation award, our weighted average per annum interest rate was 0.6%
for 2004, lower than the 1.2% rate in 2003.
Page 17
EXPENSES
--------
Increase % Increase
2004 2003 (Decrease) (Decrease)
-------------- --------------- --------------- -------------
Personnel and other direct
expenses relating to revenues $ 3,367,000 $ 3,418,000 $ (51,000) (1%)
General and administrative expenses 1,553,000 2,050,000 (497,000) (24%)
Patent enforcement expenses, net
of reimbursements 107,000 426,000 (319,000) (75%)
Impairment losses on investments 40,000 944,000 (904,000) (96%)
Reversal of accounts payable
exchanged for contingent
note payable -- (1,583,000) 1,583,000 100%
-------------- --------------- --------------- -------------
TOTAL EXPENSES $ 5,067,000 $ 5,255,000 $ (188,000) (4%)
============== =============== =============== =============
PERSONNEL AND OTHER DIRECT EXPENSES RELATING TO REVENUES decreased due
to a combination of several factors (only the more significant factors are
discussed herein). Our personnel expenses for 2004 were $381,000 higher than for
2003. This increase includes higher bonus expense, a severance payment of
$112,500 paid to our former chief financial officer, and recruiting expenses for
new employees in 2004. In 2004 we also incurred increased expenses related to
entering a patent in the MPEG-4 licensing portfolio. Offsetting these increases,
in 2004 our impairment charges on intangible assets acquired were $52,000,
compared to $482,000 for 2003, a reduction of $430,000. With the lower carrying
value for our intangible assets acquired, our amortization expenses for 2004
were $120,000 lower than for 2003, and we expect our amortization expense to be
approximately $14,000 in 2005 and 2006.
GENERAL AND ADMINISTRATIVE EXPENSES decreased in 2004 principally due
to a decrease in our legal fees incurred in connection with the Securities and
Exchange Commission ("SEC") investigation and civil suit, which were $268,000
lower for 2004 than for 2003, when the SEC investigation was much more active.
We also reduced costs for our annual report, financial advisory and audit
services. We expect to incur higher expenses in future years to implement the
requirements of the Sarbanes-Oxley Act of 2002.
PATENT ENFORCEMENT EXPENSES, NET OF REIMBURSEMENTS, reflect our level
of activity and vary depending on the stage of the litigation. Our overall
activity in the current year was less than in the prior year. Both years
included enforcement in the LabCorp and Fujitsu litigations. In addition to
these two cases, we expect to incur enforcement expenses in 2005 to enforce our
homocysteine assay patents with other infringers.
IMPAIRMENT LOSSES ON INVESTMENTS decreased in 2004. In 2004 we reviewed
the fair value of our investment in Innovation Partners International, Inc.
("IPI"), a Japanese company, and determined that it was impaired. While we
continue to hold 13.3% of IPI's outstanding voting shares, IPI continues to
struggle for revenues and profitability. Therefore we recognized an impairment
loss of $40,000 and reduced our carrying value for this investment to zero. In
2003 we recorded an impairment charge of $944,000 to reduce our carrying value
for our investment in NTRU Cryptosystems, Inc. ("NTRU") to zero.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
We did not record an income tax provision in 2004 since we incurred a
substantial net operating loss for income tax purposes. This was due principally
to the Unilens receivable that had no basis for book purposes but was fully
valued for income tax purposes. As a result, the settlement with Unilens in
October 2003 generated a significant loss on an income tax basis, compared to
income of $1,045,000 on a book basis. In 2003 we did not record any income tax
benefit since we incurred a net loss and could not conclude that the utilization
of the income tax benefit in the future was more likely than not. We have
substantial federal and state operating and capital loss carryforwards to use
against future regular taxable income. In the fourth quarter of 2004 we revised
our estimated federal alternative minimum tax liability and reversed the $40,000
provision that we had provided in the third quarter of 2004.
Page 18
RESULTS OF OPERATIONS - 2003 VS. 2002
SUMMARY OF RESULTS
Our net loss for 2003 was $1,935,000, or $0.31 per share, compared with
a net loss of $4,016,000, or $0.65 per share for 2002, an improvement of
$2,081,000, or $0.34 per share.
REVENUES
Total revenues for 2003 were $3,320,000, compared to $2,596,000 for
2002, an increase of $724,000, or 28%.
RETAINED ROYALTIES for 2003 were $2,693,000, which was $122,000, or 5%
higher than the $2,571,000 reported in 2002. The following table compares
revenues from technologies with retained royalties greater than $100,000 in
2003.
Increase % Increase
2003 2002 (Decrease) (Decrease)
---------- ----------- ----------- ----------
Homocysteine assay $ 584,000 $ 171,000 $ 413,000 242%
Ethyol(TM) 647,000 391,000 256,000 65%
Gallium arsenide 508,000 1,012,000 (504,000) (50%)
Plasma display 135,000 135,000 -- --
Electrochromic display 157,000 -- 157,000 N/A
Vitamin B12 assay 115,000 264,000 (149,000) (56%)
All other technologies 547,000 598,000 (51,000) (9%)
---------- ---------- --------- ----
Total retained royalties $2,693,000 $2,571,000 $ 122,000 5%
========== ========== ========= ====
The increase in homocysteine assay royalties includes amounts from
LabCorp under a January 2003 stipulated order pursuant to the LabCorp
litigation, and from other new license agreements made in the second quarter of
2003. The increase in retained royalties from Ethyol was due to the licensee's
change in the method of distributing Ethyol, which increased sales. In the
future, we expect to receive and record our maximum limit of $500,000 per
calendar year in each fiscal year. The decrease in gallium arsenide retained
royalties was due to expiring licenses and much lower sales of licensed
products. Our exclusive licensee terminated its license for the electrochromic
display in 2003 and, as a result, we recognized $107,000 of previously deferred
revenue and $50,000 of license termination fees in 2003. The last vitamin B12
patent expired in November 2002, causing the decline in these retained
royalties.
In 2003, 65% of our retained royalties was from three technologies: 24%
from Ethyol, 22% from the homocysteine assay, and 19% from gallium arsenide
semiconductors.
ROYALTY SETTLEMENTS AND AWARDS in 2003 included $561,000 from our
non-recourse sale of a portion of our award in the Materna litigation. See
discussion in "Results of Operations - 2004 vs. 2003" above.
INTEREST INCOME, NET for 2003 was $65,000. In addition to the interest
income related to the Materna award discussed above, we earned net interest
income on our invested cash and cash equivalents of $27,000. For 2003, our
weighted average interest rate was approximately 1.2% per annum.
Page 19
EXPENSES
Increase % Increase
2003 2002 (Decrease) (Decrease)
----------- -------------- ------------- -----------
Personnel and other direct
expenses relating to revenues $ 3,418,000 $ 2,242,000 $ 1,176,000 52%
General and administrative expenses 2,050,000 1,501,000 549,000 37%
Patent enforcement expenses, net
of reimbursements 426,000 2,132,000 (1,706,000) (80%)
Impairment losses on investments 944,000 810,000 134,000 17%
Other expense, net -- (73,000) 73,000 100%
Reversal of accounts payable
exchanged for contingent
note payable (1,583,000) -- (1,583,000) N/A
----------- ----------- ----------- ----
TOTAL EXPENSES $ 5,255,000 $ 6,612,000 $(1,357,000) (21%)
=========== =========== =========== ====
PERSONNEL AND OTHER DIRECT EXPENSES RELATING TO REVENUES for 2003
included increases of $774,000 in personnel expenses for employees and
consultants we engaged to assist us in developing specific revenue opportunities
and strategic alliances and relationships, partially offset by a reduction of
$118,000 in recruiting expenses. In addition, in the fourth quarter of 2003, we
recorded $482,000 of impairment charges related to intangible assets,
principally due to the uncertainty of future revenues from the ribozyme
Technology. In the fourth quarter of 2002, we recorded $156,000 of impairment
charges related to intangible assets.
GENERAL AND ADMINISTRATIVE EXPENSES for 2003 included increased
corporate legal expenses directly related to the SEC investigation ($252,000),
financing related expenses ($192,000) and investor relations ($107,000).
PATENT ENFORCEMENT EXPENSES, NET OF REIMBURSEMENTS, decreased
substantially in 2003 compared to 2002 as a result of our July 23, 2002
agreement with the University of Illinois, our Client, in which the University
agreed to take the lead and assume the cost of new lead counsel in the
litigation against Fujitsu. The level of patent enforcement expenses varies
depending on the stage of the litigation.
OTHER EXPENSE, NET for 2002 principally was interest income of $97,000,
partially offset by a minority interest charge of $27,000.
IMPAIRMENT LOSSES ON INVESTMENTS in 2003 were due to the uncertain
timing and amount of our expected future cash flows from our investment in
NTRU's common stock (3,129,509 shares) after NTRU's recapitalization. In 2002,
in connection with the sale of all our interests related to E. L. Specialists,
Inc. ("ELS"), we recorded an impairment loss of $782,000 on our loans to ELS. We
also recorded an impairment loss of $50,000 to write off all of our investment
in Digital Ink, Inc. ("DII") in 2002 because DII was unable to obtain financing
to continue operations. Our recovery of $22,000 previously advanced to
Micro-ASI, Inc. partially offset these impairment losses on investments in 2002.
We had written off all our advances to Micro-ASI in 2001 because of Micro-ASI's
bankruptcy filing.
REVERSAL OF ACCOUNTS PAYABLE EXCHANGED FOR CONTINGENT NOTE PAYABLE was
the result of an agreement we signed on October 28, 2002, whereby future
payments to our former patent litigation counsel in the Fujitsu matter became
completely contingent on any future receipts from Fujitsu. The contingent
promissory note is payable only from future receipts in any settlement or other
favorable outcome of the litigation against Fujitsu. Accordingly, in the first
quarter of 2003 we reversed $1,583,000 from accounts payable that had been
accrued at July 31, 2002.
Page 20
PROVISION FOR (BENEFIT FROM) INCOME TAXES
We did not record an income tax benefit on our net losses in 2003 or
2002 since we could not conclude that the utilization of any income tax benefit
in the future was more likely than not.
FINANCIAL CONDITION AND LIQUIDITY
Our liquidity requirements arise principally from our working capital
needs, including funds needed to find and obtain new technologies and to protect
and enforce our intellectual property rights, if necessary. We fund our
liquidity requirements with a combination of cash on hand and cash flows from
operations, including legal settlements and awards. In addition, we have the
ability to fund our requirements through sales of common stock under an equity
financing arrangement (see below). At July 31, 2004, we had no outstanding debt
or available credit facility.
Cash and cash equivalents consist of demand deposits and highly liquid,
interest earning investments with maturities when purchased of three months or
less, including overnight bank deposits and money market funds. We carry cash
equivalents at cost, which approximates fair value.
During the year ended July 31, 2004, our financial position improved
considerably, principally because we received approximately $4.7 million from
the final resolution of the Materna litigation, we collected certain amounts due
us from Unilens, pursuant to our settlement with them, and we completed an
equity financing arrangement (all explained below). We also have taken steps to
pursue new revenues, and previously structured certain payment obligations to be
contingent solely upon receipt of future revenues.
On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant)
petition for a writ of certiorari (petition requesting the high court to review
an appeal) in the Materna litigation, upholding the original judgment of the
lower court in favor of the plaintiffs. The petition was Wyeth's final avenue of
appeal in the case, and the denial finalized this case. On the same day, a bond
previously posted by the defendant was released to all parties, and the judgment
and award were satisfied.
Upon the final resolution of the case, we received $3,858,000, which
was our adjusted portion of the court award. From our proceeds we paid one of
our shareholders $312,500, plus a nominal amount for interest, to satisfy a
non-recourse sale and assignment of a portion of our award to the shareholder
for $250,000 in cash. Earlier in the fiscal year, we sold another portion of our
award on a non-recourse basis to an outside party for $900,000 in cash. Both
sales were made in order to raise cash. In total for 2004, we recorded revenue
and interest income of $4,694,000 relating to this litigation.
In 1989 we sold certain assets of one of our subsidiaries to Unilens
for $6 million, including a $5.5 million installment receivable. Due to
uncertainties related to collection of the installment receivable, we previously
wrote off the entire balance of the installment receivable. In July 2003 we
resumed collection efforts with respect to the receivable from Unilens. In
October 2003 we reached an agreement to settle all prior claims and to terminate
all prior agreements between us. Unilens agreed to pay us an aggregate of
$1,250,000, with $100,000 paid to us in October 2003 on execution of the
agreement and the remaining balance payable in quarterly installments on March
31, June 30, September 30 and December 31 at the greater of $100,000 or an
amount equal to 50% of royalties received by Unilens from a certain licensee.
During the year ended July 31, 2004, we collected $349,000, which was net of
certain related expenses and obligations.
Page 21
We previously had received 135,000 shares of Unilens stock as partial
payment against the 1989 receivable from Unilens. Because of very limited
trading in Unilens stock and its extremely low price, we did not assign a cost
basis to the shares when we received them. During the three months ended July
31, 2004, we sold our shares and recorded the net proceeds of $157,000 as
income.
At July 31, 2004, cash and cash equivalents were $4,310,000, compared
to $1,504,000 at July 31, 2003. Cash provided by operating activities in 2004
was $2,329,000, compared to a net use of cash of $1,605,000 in 2003. The cash
provided in the current year principally was the result of receiving a net total
of $4,694,000 from the final resolution of the Materna litigation. Cash provided
by investing activities was $500,000 in 2004, compared to $222,000 in 2003. The
increase was due to collection on the Unilens receivable and proceeds from sales
of Unilens stock. Net cash used in financing activities in 2004 was used to pay
costs related to our equity financing in excess of the amounts we received from
sales of our common stock.
In addition to fluctuations in the amounts of retained royalties
revenues reported, changes in royalties receivable and payable reflect our
normal cycle of royalty collections and payments.
FUNDING AND CAPITAL REQUIREMENTS
On February 25, 2004, we entered into an agreement with Fusion Capital
Fund II, LLC ("Fusion Capital") to sell up to $5 million of our common stock to
Fusion Capital over a 20-month period (the "Stock Sale Agreement"). We have the
right to determine the timing and the amount of stock sold, if any, to Fusion
Capital. We also have the right, in our sole discretion, to extend the term of
the Stock Sale Agreement by six months. At our option and at any time until 20
days after the termination of the Stock Sale Agreement, we may elect to enter
into a second agreement with Fusion Capital for the sale of an additional $5
million of common stock on the same terms and conditions as the Stock Sale
Agreement.
Under the terms of the Stock Sale Agreement, we issued 53,138 shares of
our common stock to Fusion Capital for its initial commitment (the "Initial
Shares"), and agreed to issue 35,425 additional commitment shares to Fusion
Capital on a pro-rata basis as we sell the $5 million of stock (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the Stock
Sale Agreement was contingent upon certain conditions, principally the
Securities and Exchange Commission ("SEC") declaring effective our Registration
Statement filed with the SEC to register 1,248,115 shares of common stock
potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC
declared our registration statement effective.
Subject to our right to suspend sales of our common stock at any time
and to terminate the Stock Sale Agreement at any time, Fusion Capital is
obligated to purchase up to $12,500 of our common stock each trading day (the
"Daily Commitment Amount"). The Daily Commitment Amount may increase upon each
$0.25 increase in our stock price above $4.50 per share up to a maximum of
$22,500 if our stock price reaches or exceeds $5.50 per share. The Daily
Commitment Amount also may decrease if our stock price drops below a "floor"
price. The floor price initially was set at $3.00 per share and we may increase
or decrease it from time to time, except that in no case shall it be less than
$1.00 per share. The sale price per share will be the lower of the lowest sales
price on the sale date or an average of the three lowest closing prices during
the 12 consecutive trading days prior to the sale date.
Fusion Capital may not purchase shares of our common stock under the
Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9%
of our common stock outstanding at the time of purchase by Fusion Capital.
However, Fusion Capital is obligated to pay the Daily Commitment Amount even
though they may not receive additional shares until their beneficial ownership
is less than the 9.9% limitation. Fusion Capital is free to sell its purchased
shares at any time, and this would allow them to avoid the 9.9% limitation;
however, Fusion Capital has agreed not to sell the Commitment Shares until the
earlier of October 25, 2006, (20 months from February 25, 2004) or termination
of the Stock Sale Agreement. In accordance with the American Stock Exchange
rules, we cannot issue more than 1,248,115 shares of our common stock (including
the Commitment Shares) to Fusion Capital under the Stock Sale Agreement without
the prior approval of our shareholders. Until the termination of the Stock Sale
Agreement, we have agreed that we will not, without the prior written consent of
Fusion Capital, contract for any equity financing (including any debt financing
with an equity component), or issue any floating conversion rate or variable
priced equity or floating conversion rate or variable priced equity-like
securities.
Page 22
Through July 31, 2004, we sold 50,938 shares (and issued 1,416
Commitment Shares) of our common stock to Fusion Capital for approximately
$200,000. We plan to use the proceeds for general working capital needs.
In consideration for assisting us in arranging the transaction with
Fusion Capital, we agreed to pay our financial advisor a success fee of $250,000
(the "Success Fee," which was 5% of the total potential equity financing from
Fusion Capital). We made an initial payment to our advisor of $50,000, with the
balance to be paid ratably over 20 months. Through July 31, 2004, we had paid a
total of $90,000 of the Success Fee, with the balance recorded in accrued
expenses and other liabilities. In addition, we granted the advisor five-year
warrants to purchase 57,537 shares of our common stock (approximately 5% of
1,159,552 shares, the estimated maximum number of shares that may be sold to
Fusion Capital, excluding the Commitment Shares), exercisable immediately, at an
exercise price of $4.345 per share (which was 110% of the $3.95 average closing
price of our common stock for the 10-day trading period ended January 21, 2004
that was used to determine the number of Commitment Shares). The warrants
include piggyback registration rights with respect to the shares to be issued
upon exercise of the warrants, meaning that if we file to register any of our
common stock, other than a registration relating to our employee benefit plans
or certain other exceptions, the advisor may request that we include their
shares in the registration, subject to our limiting the amount of shares to be
included upon advice from our managing underwriter.
In addition to the cash Success Fee, we incurred other cash costs
relating to the completion of the Stock Sale Agreement, including professional
fees, listing fees and due diligence costs. We also incurred noncash costs for
the unpaid balance of the Success Fee ($160,000), the estimated fair value of
the Initial Shares ($316,171) and the warrants issued to our financial advisor
($236,465). We have capitalized all of the cash and noncash costs, aggregating
$962,559, as deferred financing costs, and will charge them against capital in
excess of par value on a pro-rata basis as we sell shares to Fusion Capital,
based upon the ratio of the proceeds received compared to our estimate of the
total proceeds to be received over the life of the Stock Sale Agreement. We
currently estimate that we will sell $2 million of common stock to Fusion
Capital pursuant to the Stock Sale Agreement and, accordingly, charged $96,257
for amortization against capital in excess of par value in fiscal 2004. The
remaining balance of the deferred charges will be amortized against capital in
excess of par value as we sell common stock to Fusion Capital in the future.
Since July 31, 2004 through October 13, 2004, we sold 81,582 shares
(and issued 2,126 Commitment Shares) of our common stock to Fusion Capital for
approximately $300,000, and amortized approximately $144,000 of deferred charges
against capital in excess of par value.
The amounts and timing of our future cash requirements will depend on
many factors, including the results of our operations and marketing efforts, the
results and costs of legal proceedings, and our equity financing. To sustain
profitability, we must license technologies with sufficient current and
long-term revenue streams, and we must continually add new licenses. However,
obtaining rights to new technologies, granting rights to licensees, enforcing
intellectual property rights, and collecting royalty revenues are subject to
many factors outside our control or that we cannot currently anticipate.
Although there can be no assurance that we will be successful in our efforts, we
believe that the combination of our cash on hand, the ability to raise funds
from sales of our common stock under the Stock Sale Agreement, and revenues from
executing our strategic plan will be sufficient to meet our current and
anticipated operating cash requirements at least through fiscal 2006.
Page 23
Commitments and Contractual Obligations
At July 31, 2004, our commitments were:
Payments Due by Period
-------------------------------------------------------------------------------------
At July 31, 2004 Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
------------- --------------- --------------- -------------- -------------
Operating lease obligations $ 558,000 $ 238,000 $ 320,000 $ -- $ --
------------- --------------- --------------- -------------- -------------
$ 558,000 $ 238,000 $ 320,000 $ -- $ --
============= =============== =============== ============== =============
Our other commitments are either contingent upon a future event or
terminable on ninety days' notice or less.
CONTINGENCIES
Our directors, officers, employees and agents may claim indemnification
in certain circumstances. We are currently exposed to potential indemnification
claims in connection with the SEC investigation and civil suit, and with
complaints filed by certain former employees alleging discriminatory employment
practices in violation of Section 806 of the Corporate and Criminal Fraud
Accountability Act of 2002 (see Item 3., "Legal Proceedings"). We seek to limit
and reduce our potential financial obligations for indemnification by carrying
directors' and officers' liability insurance (subject to deductibles).
We also carry liability insurance, casualty insurance (for owned or
leased tangible assets), and other insurance as needed to cover us against
potential and actual claims and lawsuits that occur in the ordinary course of
our business.
Currently, we engage two independent consultants who provide us with
business development and evaluation services under contracts that are cancelable
on up to thirty (30) days written notice. These contracts include contingencies
for potential incentive compensation solely as a percentage of new revenues
generated by the consultants' efforts. For the years ended July 31, 2004, 2003
and 2002, we neither accrued nor paid incentive compensation under such
contracts since none was earned. In addition, previously we engaged a third
party to audit royalties reported by certain of our customers. Pursuant to this
agreement, we compensate the third party on a contingency basis solely from any
additional royalties resulting from the royalty audit.
Many of our agreements provide that we apply initial, upfront fees,
license fees and/or royalties we receive against amounts that our Clients or we
have incurred for patent application, prosecution, issuance and maintenance
costs. If we incur such costs, we expense them as we incur them and reduce our
expense if we are reimbursed from fees and/or royalties we receive. If the
reimbursement belongs to our Client, we record no revenue or expense.
As of July 31, 2004, CTT and Vector Vision, Inc. ("VVI") have
contingent obligations to repay up to $199,569 and $224,127, respectively, in
consideration of grant funding received in 1994 and 1995. CTT also is obligated
to pay 7.5% of its revenues, if any, from transferring rights to certain
inventions supported by the grant funds. VVI is obligated to pay 1.5% of its net
sales of supported products or 15% of its revenues from licensing supported
products, if any. We recognize these obligations only if we receive revenues
related to the grant funds.
Page 24
As a result of our financial condition and results at and for the year
ended July 31, 2003, the American Stock Exchange ("AMEX") notified us that we
did not meet their standards for continued listing on the AMEX, since we had
experienced net losses in the prior three years and had less than $4,000,000
shareholders' interest at July 31, 2003. Our financial position and results at
and for the year ended July 31, 2004 comply with AMEX standards for continued
listing, and we will submit our 2004 financial statements to the AMEX listing
qualifications department for their review. We cannot determine when or if the
AMEX will lift their review.
On October 28, 2002, we signed an agreement making any further payments
to our former patent litigation counsel in the Fujitsu litigation completely
contingent on future receipts from Fujitsu. This contingent obligation was
reflected in a promissory note payable to our former patent litigation counsel
for $1,683,349 plus simple interest at the annual rate of 11% from the agreement
date, payable only from future receipts, if any, in a settlement or other
favorable outcome of the litigation against Fujitsu. As of July 31, 2004, the
aggregate amount that we might pay under this note is approximately $2 million,
including interest. We must settle this contingent obligation before we record
any revenue from future proceeds related to this litigation.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires that we make estimates, assumptions and judgments that affect the
reported amounts of assets and liabilities at the date of the financial
statements, the reported amounts of revenues and expenses for the reporting
period, and related disclosures. We base our estimates on the information
available at the time and assumptions we believe are reasonable. By their
nature, estimates, assumptions and judgments are subject to change at any time,
and may depend on factors we cannot control. As a result, if future events
differ from our estimates, assumptions and judgments, we may need to adjust or
revise them.
We believe the following significant estimates, assumptions and
judgments we used in preparing our consolidated financial statements are
critical to understanding our financial condition and operations.
REVENUE RECOGNITION OF UNILENS SETTLEMENT
At the time of our October 2003 settlement with Unilens when we agreed
to settle all prior claims in exchange for $1,250,000 to be paid over time, we
believed that collection of the full amount due us was uncertain, due to
Unilens' financial condition at the time and its prior payment history.
Therefore, initially we recorded income from this settlement as we received cash
from Unilens.
At July 31, 2004, we evaluated Unilens' financial condition and its
history of timely payments under the settlement agreement. Based on Unilens'
overall financial position, its cash on hand, its financial results and positive
cash flows, we concluded that the remaining balance of our receivable from
Unilens was collectible. As a result, we recorded $697,000 in income in the
fourth quarter of 2004 to recognize the net present value of the remaining
receivable. We used a 10% discount rate to estimate the present value of the
payments to be received over time. We believe that this discount rate was
appropriate considering that Unilens is paying interest at a rate of
approximately 7.5% on a note due to another party that has a first security
interest, while we have a subordinate security interest.
As we receive future payments from Unilens, we will record interest
income for the estimated amount of interest imputed. Assuming that Unilens
continues to make timely payments, we estimate our aggregate future interest
income to be $87,000 spread over 2005 and 2006.
Page 25
DEFERRED EQUITY FINANCING COSTS
In connection with our equity financing agreement with Fusion Capital,
we incurred $963,000 of deferred equity financing costs, including $236,000
representing the value of warrants issued to our financial advisor and $316,000
representing the value of shares issued to Fusion Capital to enter into the
financing agreement (the "Commitment Shares").
The warrants were valued using a Black-Scholes valuation model. The
model and the assumptions we used are similar to those we use to estimate the
value of stock options issued to our directors and employees for disclosure
purposes, and we believe that our assumptions were reasonable under the
circumstances. In addition, the amortization of the deferred equity financing
costs may vary, since it is based on our estimate of the total proceeds we
expect to receive from Fusion Capital under the agreement. We will review our
estimate of the expected total proceeds and adjust our amortization of deferred
financing costs prospectively, if necessary. If our assumptions used to value
the warrants or our estimate of the expected total proceeds had been different,
then the impact would have been to increase or decrease our total assets, with a
corresponding increase or decrease to shareholders' interest. There would have
been no impact on our net income. At July 31, 2004, we estimated that the total
proceeds will be $2,000,000.
IMPAIRMENT OF LONG-TERM INVESTMENTS AND INTANGIBLE ASSETS
We review intangible assets and investments in equity securities that
do not have readily determinable fair values for impairment when 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, we recognize an impairment loss measured
by the amount the asset's carrying value exceeds its fair value and re-evaluate
the remaining useful life of the asset. If a quoted market price is available
for the asset or a similar asset, we use it in determining fair value. If not,
we determine fair value as the present value of estimated cash flows based on
reasonable and supportable assumptions.
We apply our impairment policy to our equity investments in privately
held companies. We consider the financial health of each investee (including its
cash position), its business outlook (including product stage and viability to
continue operations), recent funding activities, and business plans (including
historical and forecast financial information). Our equity investments are not
readily transferable and our opportunities to liquidate them are limited and
subject to many factors beyond our control, including circumstances internal to
the investee and broader economic conditions.
We reviewed IPI's 2004 annual report, which indicated that IPI
continues to struggle for revenues and profitability. After considering IPI's
financial condition and business outlook, we concluded that our investment was
impaired, and reduced our carrying value to zero.
We also apply our impairment policy to all acquired intangible assets.
For each Technology, we compare our carrying value with our estimated future
retained royalties. If the sum of the estimated future undiscounted cash flows
from a Technology is less than our carrying value for that Technology, we record
an impairment charge to reduce our carrying value to the estimated fair value of
that Technology. In 2004 we revised our estimate of future revenues principally
from two automotive Technologies. As a result, we reduced their carrying value
to zero and recorded an impairment charge of $52,000. In 2003 we recorded
$482,000 of impairment charges related to intangible assets principally due to
the uncertainty of future revenues from the ribozyme Technology.
Page 26
RELATED PARTY TRANSACTIONS
Our board of directors determined that when a director's services are
outside the normal duties of a director, we compensate the director at the rate
of $1,000 per day, plus expenses (which is the same amount we pay a director for
attending a one-day Board meeting). We classify these amounts as consulting
expenses (included in personnel and other direct expenses relating to revenues).
We incurred charges for consulting services (including expenses and use
taxes) provided by one director of $14,000 and $6,000, respectively, in 2004 and
2003, and provided by two directors of $124,000 in 2002. In 2002, a former
director, George C. J. Bigar provided $117,000 of the consulting services (which
were discontinued in June 2002) related to our investments and potential
investments in development-stage companies.
RISK FACTORS
IN THREE OF THE LAST FIVE FISCAL YEARS, WE HAVE EXPERIENCED SIGNIFICANT NET
LOSSES.
The table below summarizes our consolidated results of operations and
cash flows for the five years ended July 31, 2004:
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428) $(2,500,749) $ 1,300,937
Net cash flow from:
Operating activities $ 2,328,684 $(1,604,910) $(1,666,360) $ (246,834) $ 458,295
Investing activities $ 499,663 $ 221,910 $ (464,222) $ (793,554) $ (583,280)
Financing activities $ (22,962) $ -- $ -- $ (658,164) $ 1,342,928
Net increase (decrease) in cash
and cash equivalents $ 2,805,385 $(1,383,000) $(2,130,582) $(1,698,552) $ 1,217,943
We incurred substantial net losses in the three years ending July 31,
2003, principally from expenses related to patent enforcement litigation, which
we have since reduced significantly. Fiscal 2003 included nonrecurring, noncash
income from a reversal of $1.6 million from accounts payable to our former
patent litigation counsel. Through July 31, 2004, we have incurred $563,000
cumulatively for legal fees and other costs related to an investigation and
subsequent civil suit filed by the SEC (see Item 3., "Legal Proceedings"). Our
insurance carrier has notified us that they will cover losses going forward in
the SEC civil suit, according to the terms of our policy. We still are involved
in on-going litigation and enforcement, and the costs may be significant. During
fiscal 2004, we focused our efforts and resources on increasing revenues to
replace revenues from expiring licenses; however, our efforts and resources have
not yet increased revenues sufficiently. Also, in February 2004, to improve our
financial condition we entered into an equity financing arrangement with Fusion
Capital for up to $5 million of cash through sales of our common stock, at our
option. Approximately $4.8 million pursuant to this financing remained available
at July 31, 2004. Also, we received nonrecurring cash income of $4.7 million and
$0.6 million, respectively, (included in revenue and cash flow from operating
activities) in 2004 and 2003, from the Materna litigation. At July 31, 2004 we
had more than $4.3 million in cash and cash equivalents. However, we cannot
assure you that we will continue to achieve the 2004 level of results or that we
will not experience substantial losses in the future.
To achieve profitability, we must successfully license technologies
with current and long-term revenue streams substantially greater than our
operating expenses. To sustain profitability, we must continually add such
licenses. In addition, we must control our costs, including litigation related
costs. The time required to reach recurring profitability is highly uncertain
and we cannot assure you that we will be able to achieve profitability on a
sustained basis, if at all.
Page 27
In addition, our future royalty revenues, obtaining rights to new
technologies, granting licenses, enforcing intellectual property rights, and
profits or losses are subject to many factors outside our control, or that we
currently cannot anticipate, including technological changes and developments,
economic cycles, and the ability of our licensees to commercialize our
technologies successfully. Consequently, we may not be able to generate
sufficient revenues to be profitable. Although we cannot assure you that we will
be successful in these efforts, we believe that our business plan will sustain
us at least through fiscal 2006.
OUR FORMER CHIEF EXECUTIVE OFFICER AND CTT HAVE BEEN NAMED IN A CIVIL SUIT FILED
BY THE SEC. UNTIL THIS MATTER IS RESOLVED, OUR STOCK PRICE MAY BE ADVERSELY
IMPACTED, OUR OPERATIONS AND EXPENSES MAY BE NEGATIVELY AFFECTED, AND OUR
ABILITY TO OBTAIN ANY DEBT FINANCING MAY BE RESTRICTED.
On August 11, 2004, the SEC filed a civil suit naming Competitive
Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer),
and six individual brokers in the United States District Court for the District
of Connecticut, alleging that from at least July 1998 to June 2001, CTT was
involved in a scheme to manipulate the price of our stock. The case relates to
our 1998 stock repurchase program under which we repurchased shares of our
common stock from time to time during the period from October 28, 1998 to March
22, 2001. CTT was named as a defendant in the suit due to the alleged conduct of
Mr. McPike, whose conduct in connection with the stock repurchase program was
imputed to CTT as a matter of law. Relating to CTT, the SEC in the suit seeks a
permanent injunction prohibiting us from further violations of the Securities
Exchange Act of 1934 and a civil penalty pursuant to Section 21(d)(3) of the
Securities Exchange Act of 1934 (this section provides for maximum penalties of
$550,000 for a corporate entity and $110,000 per individual). On September 24,
2004, we responded to this civil suit, and filed a motion to dismiss the suit.
On October 15, 2004, the SEC filed a motion opposing our motion to dismiss the
suit. Further action in this case is pending.
For further information, see Item 3., "Legal Proceedings."
Until this matter is resolved, our stock price may be adversely
impacted, our operations and expenses may be negatively affected, and our
ability to obtain debt financing may be severely restricted.
OUR BY-LAWS PROVIDE THAT WE WILL INDEMNIFY OUR DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS IN CERTAIN CIRCUMSTANCES. WE CARRY DIRECTORS' AND OFFICERS' LIABILITY
INSURANCE (SUBJECT TO DEDUCTIBLES) TO REDUCE THESE FINANCIAL OBLIGATIONS.
Our directors, officers, employees and agents may claim indemnification
in certain circumstances. We are currently exposed to potential indemnification
claims in connection with the civil suit filed by the SEC and with complaints
filed by certain former employees alleging discriminatory employment practices
in violation of Section 806 of the Corporate and Criminal Fraud Accountability
Act of 2002 (see Item 3., "Legal Proceedings").
We seek to limit and reduce our potential financial obligations for
indemnification by carrying directors' and officers' liability insurance
(subject to deductibles).
WE DERIVED MORE THAN 70% OF OUR RETAINED ROYALTIES IN FISCAL 2004 FROM THREE
TECHNOLOGIES.
We derived approximately $1,485,000, or 71%, of 2004 retained royalties
from three technologies: $651,000, or 31%, from the homocysteine assay,
$500,000, or 24%, from Ethyol, and $334,000, or 16%, from gallium arsenide
patents. In fiscal 2003, we derived approximately 65% of our retained royalties
from the same three technologies.
We expect retained royalties from the homocysteine assay to increase in
future years. Our U.S. patent that covers the homocysteine assay expires in July
2007. Our retained royalties from Ethyol are limited to a maximum of $500,000
per calendar year, and we reached the maximum in calendar 2004, 2003 and 2002.
We expect Ethyol retained royalties to continue at their 2004 level for several
years. Certain of the gallium arsenide patents are expiring and we expect less
retained royalties from gallium arsenide in the future (see below).
Page 28
Such a concentration of revenues makes our operations vulnerable to
changes in any one of them, and such changes could have a significant adverse
impact on our financial position.
CERTAIN OF OUR LICENSED PATENTS HAVE RECENTLY EXPIRED OR WILL EXPIRE IN THE NEAR
FUTURE AND WE MAY NOT BE ABLE TO REPLACE THEIR ROYALTY REVENUES.
In fiscal 2004, we derived retained royalties from licenses on thirty
(30) patented technologies. We expect royalties from sixteen (16) of those
patented technologies to expire in the next five years. Those patented
technologies represented approximately 62% of our retained royalties in fiscal
2004. Fiscal 2004 retained royalty revenues of approximately $141,000, or 7%,
$905,000, or 43%, and $241,000, or 11%, respectively, were from patents expiring
in fiscal 2004, 2007 and 2009. The loss of these royalties may adversely affect
our operating results if we are unable to replace them with revenue from other
licenses or other sources. Since it often takes two or more years for a
technology to produce significant revenues, we must continuously seek new
sources of future revenues.
WE ARE CURRENTLY INVOLVED IN LAWSUITS THAT HAVE HISTORICALLY INVOLVED
SIGNIFICANT LEGAL EXPENSES. IF THE COURTS IN THESE SUITS DECIDE AGAINST US, THIS
COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
For a complete description of these lawsuits, see Item 3.,
"Legal Proceedings."
SALES OF OUR COMMON STOCK TO FUSION CAPITAL WILL CAUSE DILUTION TO CURRENT
STOCKHOLDERS AND FUSION CAPITAL'S RESALE OF THOSE SHARES OF COMMON STOCK COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
In February 2004 we entered into an agreement with Fusion Capital to
sell up to $5 million of our common stock to Fusion Capital over a twenty (20)
month period, subject to certain limitations and extensions. The purchase price
for the common stock to be issued to Fusion Capital pursuant to the common stock
purchase agreement fluctuates based on the price of our common stock. The
purchase price per share is equal to the lesser of: (i) the lowest sale price of
our common stock on the purchase date or (ii) the average of the three (3)
lowest closing sale prices of our common stock during the twelve (12)
consecutive trading days prior to the date of a purchase by Fusion Capital.
Pursuant to a registration statement filed with the SEC, all shares sold to
Fusion Capital are freely tradeable.
Fusion Capital may sell none, some or all of the shares of common stock
purchased from us at any time. We expect that Fusion Capital will resell any
shares that they purchase over a period of up to twenty (20) months from the
date of the agreement, subject to a six (6) month extension or earlier
termination at our discretion. Depending upon market liquidity at the time, a
sale of shares by Fusion Capital at any given time could cause the trading price
of our common stock to decline. The sale of a substantial number of shares of
our common stock, or the anticipation of such sales, could make it more
difficult for us to sell equity or equity-related securities in the future at a
time and at a price at which we might otherwise wish to effect sales.
There are 1,159,552 shares of our common stock registered for sale by
Fusion Capital (excluding 53,138 commitment shares that have been issued Fusion
Capital and the additional commitment shares that are issuable to Fusion Capital
under the agreement). Through July 31, 2004, we sold 50,938 shares to Fusion
Capital. We have the right but not the obligation to sell additional shares to
Fusion Capital under the common stock purchase agreement. The remaining
1,108,614 of these registered shares equaled 17.5% of our outstanding shares of
common stock at July 31, 2004. In addition to the 53,138 shares that were issued
to Fusion Capital as an initial commitment fee, we may issue an additional
35,425 shares to Fusion Capital as we sell shares to Fusion Capital.
Page 29
The sale of shares to Fusion Capital may result in significant dilution
to the ownership interests of other holders of our common stock. The amount of
dilution would be higher if the per share market price of our common stock is
lower at the time we sell shares to Fusion Capital, since a lower market price
would cause more shares of our common stock to be issued to Fusion Capital for
the same proceeds. Subsequent sales of these shares in the open market by Fusion
Capital may also have the effect of lowering our stock price, thereby increasing
the number of shares issuable to them under the common stock purchase agreement
and consequently further diluting our outstanding shares. Although we have the
right to reduce or suspend sales to Fusion Capital at any time, our financial
condition at the time may require us to waive our right to suspend purchases
even if there is a decline in the market price. Furthermore, the dilution caused
by the issuance of shares to Fusion Capital may cause other shareholders to
elect to sell their shares of our common stock, which could cause the trading
price of our common stock to decrease. In addition, prospective investors
anticipating the downward pressure on the price of our common stock due to the
shares available for sale by Fusion Capital could refrain from purchases or
cause sales or short sales in anticipation of a decline of the market price,
which may itself cause the price of our stock to decline.
WE ARE UNDER REVIEW BY THE AMEX FOR DELISTING OUR COMMON STOCK.
As a result of our financial condition and results at and for the year
ended July 31, 2003, the AMEX notified us that we did not meet their standards
for continued listing on the AMEX, since we had experienced net losses in the
prior three years and had less than $4,000,000 in shareholders' interest at July
31, 2003. Our financial condition and results of operations at and for the year
ended July 31, 2004 comply with the AMEX standards for continued listing, and we
will submit our 2004 financial statements to the AMEX listing qualifications
department for their review. We cannot determine when or if the AMEX will lift
their review.
OUR REVENUE GROWTH DEPENDS ON OUR ABILITY TO UNDERSTAND THE TECHNOLOGY
REQUIREMENTS OF OUR CUSTOMERS IN THE CONTEXT OF THEIR MARKETS. IF WE FAIL TO
UNDERSTAND THEIR TECHNOLOGY NEEDS OR MARKETS, WE LIMIT OUR ABILITY TO MEET THOSE
NEEDS AND TO GENERATE REVENUES.
We believe that by focusing on the technology needs of our customers,
we are better positioned to generate revenues by providing them technology
solutions. In this way, the market demands of our customers drive our revenues.
The better we understand their markets and requirements, the better we are able
to identify and obtain effective technology solutions for our customers.
Currently, we rely on our professional staff and contract business development
consultants to understand our customers' technical, commercial, and market
requirements and constraints and to identify and obtain effective technology
solutions for them.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our success depends on the knowledge, efforts and abilities of a small
number of key personnel. John B. Nano is our President and Chief Executive
Officer, Donald J. Freed is our Executive Vice President and Chief Technology
Officer, Michael D. Davidson is our Vice President and Chief Financial Officer,
and Paul A. Levitsky is our Vice President and General Counsel. We rely on our
professional staff and contract business development consultants to identify
intellectual property opportunities and technology solutions, and to negotiate
and close license agreements. Competition for personnel with the necessary
breadth and depth of experience is intense and we cannot assure you that we will
be able to continue to attract and retain qualified personnel. If we were unable
to hire and retain highly qualified professionals and consultants, our revenues,
prospects, financial condition and future activities could be materially
adversely affected.
Page 30
WE DEPEND ON OUR RELATIONSHIPS WITH INVENTORS TO GAIN ACCESS TO NEW TECHNOLOGIES
AND INVENTIONS. IF WE FAIL TO MAINTAIN EXISTING RELATIONSHIPS OR TO DEVELOP NEW
RELATIONSHIPS, WE MAY REDUCE THE NUMBER OF TECHNOLOGIES AND INVENTIONS AVAILABLE
TO GENERATE REVENUES. IN ADDITION, TECHNOLOGY CAN CHANGE RAPIDLY AND INDUSTRY
STANDARDS ARE CONTINUALLY EVOLVING. THIS OFTEN MAKES PRODUCTS OBSOLETE, OR
RESULTS IN SHORT PRODUCT LIFECYCLES. OUR PROFITABILITY ALSO DEPENDS ON OUR
LICENSEES' ABILITY TO ADAPT TO SUCH CHANGES.
We do not invent new technologies or products ourselves. We depend on
relationships with universities, corporations, governmental agencies, research
institutions, inventors, and others to provide us with technology-based
opportunities that we can develop into profitable royalty-bearing licenses. Our
failure to maintain these relationships or to develop new relationships could
adversely affect our business, operating results and financial condition. If we
are unable to forge new relationships or to maintain our current relationships,
we may be unable to identify new technology-based opportunities and
royalty-bearing licenses. We also are dependent on our clients' abilities to
introduce new products and adapt to changes in technology and economic needs.
Further, we cannot be certain that our current or any new relationships
will provide the volume or quality of available new technologies necessary to
sustain our business. In some cases, universities and other sources of new
technologies may compete against us as they seek to develop and commercialize
these technologies themselves, or through entities that they develop, finance
and/or control. In other cases, universities receive financing for basic
research from companies in exchange for the exclusive right to commercialize any
resulting inventions. These and other strategies may reduce the number of
technology sources (potential clients) to whom we can market our services. If we
are unable to secure new sources of technology, it could have a material adverse
effect on our business, operating results and financial condition.
WE RECEIVE MOST OF OUR REVENUES FROM CUSTOMERS OVER WHOM WE HAVE NO CONTROL.
We rely on royalties received from our customers for revenues. The
royalties we receive from our customers depend on their efforts and expenditures
and we have no control over their efforts or expenditures. Additionally, our
customers' development of new products involves great risk since many new
technologies do not become commercially profitable products despite extensive
development efforts. Our license agreements do not require customers to advise
us of problems they may encounter in attempting to develop commercial products
and they usually treat such information as confidential. You should expect our
customers to encounter problems frequently. Our customers' failure to resolve
such problems may result in a material adverse effect on our business, operating
results and financial condition.
OUR CUSTOMERS, AND THEREFORE WE, DEPEND ON RECEIVING GOVERNMENT APPROVALS TO
EXPLOIT CERTAIN LICENSED PRODUCTS COMMERCIALLY.
Commercial exploitation of some licensed patents may require the
approval of governmental regulatory agencies, especially in the life sciences
area, and there is no assurance that those agencies will grant such approvals.
In the United States, the principal governmental agency involved is the U.S.
Food and Drug Administration ("FDA"). The FDA's approval process is rigorous,
time consuming and costly. Unless and until a licensee obtains approval for a
product requiring such approval, the licensee may not sell the product in the
U.S.A., and therefore we will not receive royalty income based on U.S. sales of
the product.
Page 31
IF OUR CLIENTS AND WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING
OUR LICENSES, OR TO ENFORCE OUR PATENTS ADEQUATELY, WE MAY BE UNABLE TO EXPLOIT
SUCH LICENSED PATENTS OR TECHNOLOGIES SUCCESSFULLY.
Our success in earning revenues from licenses is subject to the risk
that issued patents may be declared invalid, that patents may not issue on
patent applications, or that competitors may circumvent or infringe our licensed
patents and thereby render our licensed patents not commercially viable. In
addition, when all patents underlying a license expire, our royalties from that
license cease, and there can be no assurance that we will be able to replace
those royalties with royalty revenues from new or other licenses.
PATENT LITIGATION HAS INCREASED; IT CAN BE EXPENSIVE AND MAY DELAY OR PREVENT
OUR CUSTOMERS' PRODUCTS FROM ENTERING THE MARKET.
Our clients and/or we may pursue patent infringement litigation or
interference proceedings against sellers of products that we believe infringe
our patent rights. Holders of conflicting patents or sellers of competing
products also may challenge our patents in patent infringement litigation or
interference proceedings. For a description of proceedings in which we are
currently involved, see Item 3., "Legal Proceedings."
We cannot assure you that our clients and/or we will be successful in
any such litigation or proceeding, and the results and costs of such litigation
or proceeding may materially adversely affect our business, operating results
and financial condition.
DEVELOPING NEW PRODUCTS, CREATING EFFECTIVE COMMERCIALIZATION STRATEGIES FOR
TECHNOLOGIES, AND ENHANCING THOSE PRODUCTS AND STRATEGIES ARE SUBJECT TO
INHERENT RISKS. THESE RISKS INCLUDE UNANTICIPATED DELAYS, UNRECOVERABLE
EXPENSES, TECHNICAL PROBLEMS OR DIFFICULTIES, AND THE POSSIBILITY THAT
DEVELOPMENT FUNDS WILL BE INSUFFICIENT. THE OCCURRENCE OF ANY ONE OR MORE OF
THESE RISKS COULD MAKE US ABANDON OR SUBSTANTIALLY CHANGE OUR TECHNOLOGY
COMMERCIALIZATION STRATEGY.
Our success depends on, among other factors, our clients developing new
or improved technologies, our customers' products meeting targeted cost and
performance objectives for large-scale production, and our customers' ability to
adapt technologies to satisfy industry standards, satisfy consumer expectations
and needs, and bring their products to market before the market is saturated.
They may encounter unanticipated technical or other problems that result in
increased costs or substantial delays in introducing and marketing new products.
Current and future products may not be reliable or durable under actual
operating conditions or otherwise commercially viable and competitive. New
products may not satisfy price or other performance objectives when introduced
in the marketplace. Any of these events would adversely affect our realization
of royalties from such new products.
STRONG COMPETITION WITHIN OUR INDUSTRY MAY REDUCE OUR CLIENT BASE.
We compete with universities, law firms, venture capital firms and
other technology commercialization firms for technology licensing opportunities.
Many organizations offer some aspect of technology transfer services, and some
are well established and have more financial and human resources than we do.
This market is highly fragmented and participants frequently focus on a specific
technology area.
Page 32
WE HAVE NOT PAID DIVIDENDS AND DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON
STOCK IN THE FORESEEABLE FUTURE.
We have not paid cash dividends on our common stock since 1981, and we
do not expect our Board of Directors to declare or pay cash dividends in the
foreseeable future. The decision to pay dividends is solely at the discretion of
our Board of Directors based upon factors that they deem relevant.
BEING A PUBLIC COMPANY INCREASES OUR ADMINISTRATIVE COSTS.
The Sarbanes-Oxley Act of 2002, as well as new rules subsequently
implemented by the SEC and new listing requirements subsequently adopted by AMEX
in response to Sarbanes-Oxley, have required changes in corporate governance
practices, internal control policies and audit committee practices of public
companies. These new rules, regulations, and requirements may significantly
increase our legal, financial, compliance and administrative costs, and have
made certain other activities more time consuming and costly. These new rules
and regulations also may make it more difficult and more expensive for us to
obtain director and officer liability insurance in the future, and could make it
more difficult for us to attract and retain qualified members for our Board of
Directors, particularly to serve on our audit committee.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DESCRIPTION PAGE
Reports of Independent Registered Public Accounting Firms 34 - 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Changes in Shareholders' Interest 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40 - 61
Page 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Competitive Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Competitive
Technologies, Inc. and Subsidiaries as of July 31, 2004 and 2003 and the related
consolidated statements of operations, changes in shareholders' interest and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Competitive
Technologies, Inc. and Subsidiaries as of July 31, 2004 and 2003, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP
Valhalla, New York
October 5, 2004
Page 34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Competitive Technologies, Inc.
In our opinion, the consolidated statements of operations, shareholders'
interest and cash flow present fairly, in all material respects, the results of
operations and cash flows of Competitive Technologies, Inc. and its Subsidiaries
(the "Company") for the year ended July 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Stamford, Connecticut
October 28, 2002
Page 35
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, July 31,
2004 2003
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,309,680 $ 1,504,295
Receivables 829,996 957,275
Prepaid expenses and other current assets 209,154 275,019
------------ ------------
Total current assets 5,348,830 2,736,589
Deferred equity financing costs, net 866,302 --
Non-current receivable, net 394,133 --
Intangible assets acquired, net 52,150 142,722
Property and equipment, net 19,392 29,834
Investments, net -- 43,356
------------ ------------
$ 6,680,807 $ 2,952,501
============ ============
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable $ 162,913 $ 501,655
Accrued expenses and other liabilities 1,579,376 1,281,419
------------ ------------
Total current liabilities 1,742,289 1,783,074
------------ ------------
Commitments and contingencies -- --
Shareholders' interest:
5% preferred stock, $25 par value, 35,920 60,675 60,675
shares authorized, 2,427 shares
issued and outstanding
Common stock, $.01 par value, 20,000,000 63,492 62,013
shares authorized, 6,349,189 and
6,201,345 shares issued and outstanding, respectively
Capital in excess of par value 27,560,312 26,747,229
Accumulated deficit (22,745,961) (25,700,490)
------------ ------------
Total shareholders' interest 4,938,518 1,169,427
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 6,680,807 $ 2,952,501
============ ============
See accompanying notes
Page 36
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended July 31,
----------------------------------------
2004 2003 2002
----------- ----------- -----------
Revenues
Retained royalties $ 2,110,711 $ 2,692,933 $ 2,570,931
Royalty settlements and awards 4,338,836 561,238 --
Settlement with Unilens, net 1,202,751 -- --
Interest income, net 369,356 65,385 --
Other income -- -- 25,000
----------- ----------- -----------
8,021,654 3,319,556 2,595,931
----------- ----------- -----------
Expenses
Personnel and other direct expenses
relating to revenues 3,367,496 3,417,909 2,241,439
General and administrative expenses 1,552,753 2,050,652 1,501,287
Patent enforcement expenses, net of
reimbursements 107,356 425,790 2,132,090
Impairment losses on investments 39,520 943,951 810,326
Other expense, net -- -- (72,783)
Reversal of accounts payable exchanged
for contingent note payable -- (1,583,445) --
----------- ----------- -----------
5,067,125 5,254,857 6,612,359
----------- ----------- -----------
Income (loss) before income taxes 2,954,529 (1,935,301) (4,016,428)
Provision for (benefit from) income taxes -- -- --
----------- ----------- -----------
Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428)
=========== =========== ===========
Net income (loss) per common share:
Basic $ 0.47 $ (0.31) $ (0.65)
=========== =========== ===========
Assuming dilution $ 0.46 $ (0.31) $ (0.65)
=========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 6,247,588 6,182,657 6,148,022
Assuming dilution 6,456,860 6,182,657 6,148,022
See accompanying notes
Page 37
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Interest
For the years ended July 31, 2004, 2003 and 2002
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Shares Capital
issued and issued and in excess of
outstanding Amount outstanding Amount par value
------------- ----------- ------------- ----------- ----------------
Balance - July 31, 2001 2,427 $ 60,675 6,190,785 $ 61,907 $ 26,975,178
Stock issued under 1996 Directors'
Stock Participation Plan - - - - (81,891)
Net loss - - - - -
------------- ----------- ------------- ----------- ----------------
Balance - July 31, 2002 2,427 60,675 6,190,785 61,907 26,893,287
Stock issued under 1996 Directors'
Stock Participation Plan - - 10,560 106 1,814
Stock issued under 401(k) Plan - - - - (147,872)
Net loss - - - - -
------------- ----------- ------------- ----------- ----------------
Balance - July 31, 2003 2,427 60,675 6,201,345 62,013 26,747,229
Exercise of common stock options - - 12,850 129 26,829
Stock issued under 1996
Directors' Stock Participation Plan - - 12,500 125 31,125
Stock issued under 401(k) Plan - - 17,002 170 99,803
Commitment shares issued in
equity financing - - 53,138 531 315,640
Sales and issuances of stock in
equity financing - - 52,354 524 199,478
Amortization of deferred equity
financing costs - - - - (96,257)
Warrants granted to advisor as
fee for equity financing - - - - 236,465
Net income - - - - -
------------- ----------- ------------- ----------- ----------------
Balance - July 31, 2004 2,427 $ 60,675 6,349,189 $ 63,492 $ 27,560,312
============= =========== ============= =========== ================
See accompanying notes
Treasury Stock
--------------------------- Total
Shares Accumulated Shareholders'
held Amount Deficit Interest
------------ ------------- ----------------- ---------------
Balance - July 31, 2001 (51,434) $ (381,253) $ (19,748,761) $ 6,967,746
Stock issued under 1996 Directors'
Stock Participation Plan 15,000 123,216 - 41,325
Net loss - - (4,016,428) (4,016,428)
------------ ------------- ----------------- ---------------
Balance - July 31, 2002 (36,434) (258,037) (23,765,189) 2,992,643
Stock issued under 1996 Directors'
Stock Participation Plan 4,440 30,181 - 32,101
Stock issued under 401(k) Plan 31,994 227,856 - 79,984
Net loss - - (1,935,301) (1,935,301)
------------ ------------- ----------------- ---------------
Balance - July 31, 2003 - - (25,700,490) 1,169,427
Exercise of common stock options - - - 26,958
Stock issued under 1996
Directors' Stock Participation Plan - - - 31,250
Stock issued under 401(k) Plan - - - 99,973
Commitment shares issued in
equity financing - - - 316,171
Sales and issuances of stock in
equity financing - - - 200,002
Amortization of deferred equity
financing costs - - - (96,257)
Warrants granted to advisor as
fee for equity financing - - - 236,465
Net income - - 2,954,529 2,954,529
------------ ------------- ----------------- ---------------
Balance - July 31, 2004 - $ - $ (22,745,961) $4,938,518
============ ============= ================= ===============
See accompanying notes
Page 38
PART I. FINANCIAL INFORMATION (Continued)
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended July 31,
----------------------------------------
2004 2003 2002
---------- ----------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,954,529 $(1,935,301) $(4,016,428)
Noncash and other expenses (income)
included in net income (loss):
Depreciation and amortization 58,738 187,787 193,775
Stock compensation accrued 131,250 123,350 121,325
Collection on Unilens receivable and sale of
Unilens stock, net (505,905) -- --
Recognition of Unilens receivable (696,846) -- --
Reversal of accounts payable exchanged
for contingent note payable -- (1,583,445) --
Impairment charges 91,498 1,425,887 966,406
Other -- 311 1,312
(Increase) decrease in current assets:
Receivables 484,344 242,208 1,604,391
Prepaid expenses and other current
assets 66,243 (13,821) (191,154)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (255,167) (51,886) (345,987)
and other liabilities
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,328,684 (1,604,910) (1,666,360)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (9,702) (16,467) (30,986)
Purchase of intangible assets -- (50,000) --
Collection on Unilens receivable, net 348,550 -- --
Proceeds from sales of Unilens and other investments 160,815 88,377 --
Advances from (to) E.L. Specialists, Inc. -- 200,000 (306,300)
Investments in cost-method affiliates -- -- (100,000)
Other -- -- (26,936)
----------- ----------- -----------
Net cash provided by (used in) investing activities 499,663 221,910 (464,222)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 26,958 -- --
Proceeds from sales of common stock 200,002 -- --
Deferred equity financing costs paid (249,922) -- --
----------- ----------- -----------
Net cash used in financing activities (22,962) -- --
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,805,385 (1,383,000) (2,130,582)
Cash and cash equivalents at beginning of year 1,504,295 2,887,295 5,017,877
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,309,680 $ 1,504,295 $ 2,887,295
=========== =========== ===========
See accompanying notes
Page 39
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BUSINESS AND BASIS OF PRESENTATION
Competitive Technologies, Inc. ("CTT") and its majority owned
subsidiaries (collectively, "we" or "us") provide patent and technology
licensing and commercialization services throughout the world (with
concentrations in the U.S.A. and Asia) with respect to a broad range of life,
digital, physical, and nano (microscopic particles) science technologies
originally invented by various individuals, corporations and universities. We
are compensated for our services primarily by sharing in the license and royalty
fees generated from our successful licensing of our clients' technologies.
The consolidated financial statements include the accounts of CTT and
its subsidiaries. CTT's principal majority-owned subsidiaries are University
Optical Products Co. ("UOP") and Vector Vision, Inc. ("VVI"). Intercompany
accounts and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires that we make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses and disclosure of contingent assets
and liabilities. Actual results could differ from our estimates, and the
differences could be significant.
REVENUE RECOGNITION
RETAINED ROYALTIES
We earn revenues primarily from patent and technology license and
royalty fees. In most cases, we obtain or license the rights to an invention,
patent or intellectual property (collectively, the "Technology") from a
university, inventor, owner and/or assignee of the Technology (collectively,
"Clients"), and then license or sublicense our rights to our customers, who
either commercialize or further test and develop the Technology. Generally, the
agreements we enter into with our Clients and customers are for the duration of
the Technology life, which usually is determined by applicable patent law. Our
customers pay us royalties based on their usage of the Technology, and we share
the fees with our Clients. When we receive periodic reports of sales of licensed
products and royalties earned from our customers, we record revenues for our
portion and record our obligation to our Clients for their portion. The revenues
we record are solely our share of the gross revenues, net of our Clients'
shares, which usually are fixed percentages. For early stage Technologies that
may not be ready for commercial development without further research, we may
receive milestone payments based on research progress or subsequent sublicense
or joint venture proceeds. We receive future royalty payments based on our
customers' sales of the Technology, and, under certain of our sublicense or
license arrangements, we receive an upfront fee. In certain cases we may waive
the first year royalty fee in consideration for the upfront fee. Often we apply
the upfront fee or initial royalty fees to reimburse our Client's and/or our
patent prosecution and/or maintenance costs incurred. In these cases, we record
the payments as a reduction of expense, not as revenue. If the reimbursement
belongs to our Client, we record no revenue or expense. As a result, a new
Technology may not generate significant revenues in its early years.
Page 40
We stipulate the terms of our licensing arrangements in separate
written agreements with our Clients and with our customers. Generally we enter
into single element arrangements with our customers, under which we have no
significant obligations after executing the agreements. We usually have a right
to audit reported revenues as part of our agreements with our customers.
Retained royalties earned are of the following types:
NONREFUNDABLE, UPFRONT FEES
Unless we pay the upfront fee to our Clients to reimburse them
for patent prosecution and/or maintenance costs, we recognize our share
of nonrefundable, upfront license fees received as revenue upon
execution of a license or sublicense agreement and collection of the
upfront fee from our customers since, upon the occurrence of these two
events, we have an arrangement with our customer, delivery is complete,
collection of the fee has occurred and we have no continuing
obligations.
ROYALTY FEES
Although the royalty rate is fixed in the license agreement,
the amount of royalties earned is contingent upon our customer's
usage of our Technology. Thus, the amount of royalties we earn in each
reporting period is contingent on the outcome of events that are not
within our control, and is not directly tied to services that we
provide. We determine the amount of royalty fee revenue to record when
we can estimate the amount of royalty fees that we have earned for a
period, which occurs when we receive periodic royalty reports from our
customers listing sales of licensed products and royalties earned in
the period. We receive these reports monthly, quarterly, or semi-
annually. Since reports are not received on the same frequency,
revenues will fluctuate from one quarter to another.
In certain limited instances, we may enter into multiple
element arrangements under which we may have continuing service
obligations. Unlike single element arrangements (described above), we
defer all revenue from multiple element arrangements until we have
delivered all the required elements. We determine delivery of elements
based on the verifiable objective evidence available. We also may have
milestone billing arrangements. We evaluate milestone billing
arrangements on a case by case basis, recording revenues under the
milestone payment method, whereby we recognize nonrefundable, upfront
fees ratably over the entire arrangement and milestone payments as we
achieve the specified milestone. Currently, we do not have any multiple
element or milestone billing arrangements, though we have had such
arrangements in the past and could have such arrangements in the
future.
Retained royalties from foreign licensees include $519,622,
$657,194, and $878,894, respectively, for 2004, 2003 and 2002,
including $247,000, $351,000 and $595,000, respectively, from the
gallium arsenide portfolio. Retained royalties from Japanese licenses
were $397,000, $486,000 and $730,000, respectively, in 2004, 2003 and
2002.
ROYALTY SETTLEMENTS AND AWARDS
We earn non-recurring revenues from royalty settlements and awards,
principally from litigation awards that relate to patent infringement actions
filed on behalf of our Clients and/or us. Patent infringement litigation cases
occur generally when a customer or another party either challenges the legal
standing of our Clients' or our Technology rights or simply ignores our rights.
These cases, even if settled out of court, may take several years to complete,
and the expenses may be borne by our Clients, by us, or shared. We share royalty
settlements and awards in accordance with the agreements we have with our
Clients, usually after reimbursing each party for their related legal expenses.
We recognize royalty settlement revenue when our rights to litigation awards
related to our patent and license rights are final and unappealable and we have
assurance of collecting those awards, or when we have collected litigation
awards in cash (from the adverse party or by sale of our rights to another party
without recourse) and we have no obligation or are very unlikely to be obligated
to repay such collected amounts.
Page 41
Litigation awards in patent infringement cases usually include an
amount for interest, as determined by the court, and payable through the date
the judgment is paid. The court awards interest to recognize the fact that we
were entitled to the income at a prior date but did not receive it at the time
it was due. An amount for interest also may be included in settlements with
customers. We record interest as interest income generally when we receive it.
Unless otherwise specified, we record all other revenues as we earn
them.
CONCENTRATION OF REVENUES
Approximately $1,485,000, or 71%, of 2004 retained royalties was
derived from three technologies: $651,000 or 31%, from the homocysteine assay,
$500,000 or 24%, from Ethyol(TM) (an agent that reduces certain side effects of
chemotherapy), and $334,000 or 16%, from gallium arsenide patents (used to
improve semiconductor operating characteristics). In 2003, we derived
approximately 65% of our retained royalties from the same three technologies.
The homocysteine assay is a diagnostic blood test used to determine
homocysteine levels and a corresponding deficiency of folate or vitamin B12.
Studies suggest that high levels of homocysteine are a primary risk factor for
cardiovascular, vascular and Alzheimer's diseases, and rheumatoid arthritis. The
number of physicians prescribing and using the results of the homocysteine assay
has increased dramatically and it is becoming a regular part of medical exams.
Our U.S. patent that covers this assay expires in July 2007. Our retained
royalties from Ethyol are limited to a maximum of $500,000 per calendar year,
and we reached the maximum in calendar 2004, 2003 and 2002. The gallium arsenide
patents began expiring in 2001 and expire through September 2006. As a result,
we expect less retained royalties from gallium arsenide in the future.
Certain of our other patents have expired recently or will soon expire.
Fiscal 2004 retained royalties of approximately $141,000 or 7%, $905,000 or 43%,
and $241,000 or 11%, respectively, were from patents expiring in fiscal 2004,
2007 and 2009. We seek to replace revenues from expiring patents with revenues
from new technologies.
Our royalty revenues derive from our patent rights to various
technologies. Although patents may be declared invalid, may not issue on patent
applications, or may be rendered uncommercial by new or alternative
technologies, we are not currently aware of any such circumstances specific to
our portfolio of licensed technologies. In addition, licensees may not develop
products incorporating our 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, we generally
would not earn any royalty revenues.
EXPENSES
We recognize expenses related to evaluating, patenting and licensing
inventions and enforcing intellectual property rights in the period incurred.
Personnel and other direct expenses relating to revenues include
employee salaries and benefits, marketing and consulting expenses related to
technologies and specific revenue initiatives, domestic and foreign patent legal
filing, prosecution and maintenance expenses, net of reimbursements,
amortization and impairment of intangible assets acquired, and commissions and
other direct costs relating to revenue. Costs of independent contractors who
assist us in licensing specific technologies also are included in personnel and
other direct expenses, as are costs of royalty audits.
Page 42
General and administrative expenses include directors' fees and
expenses, expenses related to being a publicly held company, professional
service expenses (financing, audit and legal, except for patent related legal),
rent and other general business and operating expenses.
Patent enforcement expenses, net of reimbursements, include direct
costs (except personnel related) incurred to enforce our patent rights. In
certain instances we recover reimbursement of amounts previously expensed from
future revenues received. We record our reimbursement as a reduction of expense
in the period in which we recover it.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and highly liquid,
interest earning investments with maturities when purchased of three months or
less, including overnight bank deposits and money market funds. We carry cash
equivalents at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less an allowance for
depreciation. Expenditures for normal maintenance and repair are charged to
expense as incurred. 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 or amortization of property and
equipment are removed from the accounts upon retirement or other disposition,
and any resulting gain or loss is reflected in earnings.
INTANGIBLE ASSETS ACQUIRED
Intangible assets acquired comprise certain licenses and patented
technologies acquired in 1996 and 2003 and are stated at the lower of cost or
estimated fair value. We amortize that value on a straight-line basis over the
estimated remaining lives of the assets.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS ACQUIRED
We review our long-lived and intangible assets acquired for impairment
to determine if the carrying amount of the asset is recoverable. If the sum of
the expected future undiscounted cash flows is less than the carrying amount of
the asset, we record an impairment loss that is measured by the amount that the
carrying value of the asset exceeds its estimated fair value. If a quoted market
price is available for the asset or a similar asset, we use it in determining
the estimated fair value. We also re-evaluate the remaining useful life of the
asset and adjust the useful life accordingly.
DEFERRED EQUITY FINANCING COSTS
We capitalized and deferred the costs we incurred in connection with
our equity financing. We amortize the deferred equity costs to capital in excess
of par value on a pro rata basis based on the ratio of the proceeds received on
the sale compared to our estimate of the total proceeds we expect to receive
over the life of the equity financing. We adjust our amortization prospectively
if we change our estimate of the total proceeds we expect to receive over the
life of the equity financing.
Page 43
INCOME TAXES
We use the liability method to account for income taxes. We recognize
deferred income taxes for the future income tax consequences of differences
between the income tax bases of assets and liabilities and their financial
reporting bases at each balance sheet date. We base the amount of deferred
income taxes recorded on enacted income tax laws and statutory income tax rates
applicable to the periods in which the differences are expected to affect our
taxable income. We establish valuation allowances against deferred income tax
assets to reduce their carrying values to the amount that we estimate we are
more likely than not to realize. The provision for income taxes is the estimated
amount of income tax payable for the year and the change during the year in
deferred tax assets and liabilities.
NET INCOME (LOSS) PER SHARE
We calculate basic earnings per share based on the weighted average
number of common shares outstanding during the period without giving any effect
to potentially dilutive securities. Earnings per share assuming dilution is
calculated giving effect to all potentially dilutive securities outstanding
during the period.
STOCK-BASED COMPENSATION
We have elected to account for stock-based compensation following the
intrinsic value method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, we have not recorded any compensation expense for any period
presented for options granted pursuant to our employee and directors stock
option plans, since the exercise prices of all options granted under those plans
were at least equal to the fair market value of our common stock on the grant
date.
Pursuant to Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," we are required to disclose the fair
value, as defined therein, and the related pro forma compensation expense of
option grants under our stock option plans. The following reconciles our
reported results to the pro forma results if we had used a fair value method to
record compensation expense for stock options granted:
For the years ended July 31,
-------------------------------------------------------
2004 2003 2002
--------------- ------------------- ---------------
Net income (loss), as reported $ 2,954,529 $ (1,935,301) $ (4,016,428)
Deduct: Pro forma compensation expense for
stock options issued using a fair value
method, net of related tax effects
(326,625) (222,855) (135,373)
---------------- ------------------- -------------
Pro forma net income (loss) $ 2,627,904 $ (2,158,156) $ (4,151,801)
================ =================== =============
Basic income (loss) per share:
As reported $ 0.47 $ (0.31) $ (0.65)
================ =================== =============
Pro forma $ 0.42 $ (0.35) $ (0.68)
================ =================== =============
Income (loss) per share, assuming dilution:
As reported $ 0.46 $ (0.31) $ (0.65)
================ =================== =============
Pro forma $ 0.41 $ (0.35) $ (0.68)
================ =================== =============
Page 44
We estimated the fair value of each option on the grant date using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
For the years ended July 31,
--------------------------------------
2004 2003 2002
---------- ---------- ---------
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 82.2% 78.8% 79.1%
Risk-free interest rates 2.5% 3.8% 4.1%
Expected lives 3 years 4 years 3 years
Weighted average fair value per share of
options issued during the year:
At market $ 1.36 $ 0.72 $ 2.89
Above market $ -- $ -- $ 0.27
The pro forma information above may not be representative of pro forma
fair value compensation effects in future years.
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities are excluded from the
Consolidated Statements of Cash Flows. In fiscal year 2004, our noncash
investing activities included the recognition of the Unilens receivable for
$696,846, with credits to income and accrued expenses and other liabilities. Our
noncash financing activities included $712,636, representing the unpaid fee to
our financial advisor and the estimated fair value of our common stock and
warrants issued pursuant to our equity financing, and $131,223 of stock issued
under our stock compensation plans. We charged the estimated value of the stock
and warrants issued pursuant to our equity financing to deferred equity
financing costs, and credited capital in excess of par value.
RECLASSIFICATIONS
Certain amounts in the accompanying consolidated financial statements
have been reclassified to conform to the current year's presentation. In
addition, we have revised our Consolidated Statements of Operations to a single
step presentation for all years presented. Under this presentation, all income
is presented in revenues and all expense is presented in expenses and deducted
from revenues. We revised our definition of cash equivalents to include all
highly liquid investments, and this definition now includes accounts previously
classified as short-term investments.
3. FINAL RESOLUTION OF MATERNA(TM) LITIGATION AND REVENUE RECOGNITION
On April 19, 2004, the U.S. Supreme Court denied Wyeth's (defendant)
petition for a writ of certiorari (petition requesting the high court to review
an appeal) in the Materna litigation, upholding the original judgment of the
lower court in favor of the plaintiffs. The petition was Wyeth's final avenue of
appeal in the case, and the denial finalized this case. On the same day, a bond
previously posted by the defendant was released to all parties, and the judgment
and award were satisfied. The aggregate net revenue we recorded from this case
in 2004 and 2003 was $5.3 million, including interest. Our total share of the
final award, including amounts we sold without recourse, would have been $6.3
million.
Page 45
The 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, previously filed the lawsuit against the
defendant, American Cyanamid Company (now a subsidiary of Wyeth), in the United
States District Court for the District of Colorado. The case involved a claim of
patent infringement relating to a reformulation of Materna, a prenatal vitamin
compound sold by the defendant. While we were not a direct party to the case, we
had a contract with the University of Colorado to license University of Colorado
inventions to third parties. As a result of this contract, we were entitled to
share 18.2% of any damages awarded to the University of Colorado, after
deducting their expenses relating to the suit.
On July 7, 2000, the District Court concluded that Robert H. Allen and
Paul A. Seligman were the sole inventors of the Materna reformulation and that
the defendant was liable on the plaintiffs' claims for fraud and unjust
enrichment. On August 13, 2002, the District Court judge awarded the plaintiffs
damages of approximately $54 million, plus interest from January 1, 2002. Wyeth
appealed the judgment to the U.S. Court of Appeals for the Federal Circuit
("CAFC"), but the CAFC affirmed the judgment and denied Wyeth's subsequent
request for a rehearing.
Upon the final resolution of the case, we received approximately
$3,858,000, which was our remaining portion of the court award. From our
proceeds we paid one of our shareholders $312,500, plus a nominal amount for
interest, to satisfy a non-recourse sale and assignment of a portion of our
award to the shareholder for $250,000 in cash. The sale had occurred earlier in
the fiscal year. We recorded as revenue the net remaining proceeds, $3,543,774
in revenue settlements and awards and interest income, net. In order to raise
cash, in 2004 we previously sold $1,125,000 of our award on a non-recourse basis
to LawFinance Group, Inc. ("LFG") for $900,000 in cash. Revenue recorded in 2004
aggregated $4,693,774, with $4,338,836 recorded in royalty settlements and
awards and the remaining $354,938 recorded as interest income, net.
In fiscal year 2003, we sold $1,290,000 of our award on a non-recourse
basis to LFG for $600,000 in cash and recorded $561,238 as revenue in royalty
settlements and awards and $38,762 in interest income, net.
4. EQUITY FINANCING
On February 25, 2004, we entered into an agreement with Fusion Capital
Fund II, LLC ("Fusion Capital") to sell up to $5 million of our common stock to
Fusion Capital over a 20-month period (the "Stock Sale Agreement"). We have the
right to determine the timing and the amount of stock sold, if any, to Fusion
Capital. We also have the right, in our sole discretion, to extend the term of
the Stock Sale Agreement by six months. At our option and at any time until 20
days after the termination of the Stock Sale Agreement, we may elect to enter
into a second agreement with Fusion Capital for the sale of an additional $5
million of common stock on the same terms and conditions as the Stock Sale
Agreement.
Under the terms of the Stock Sale Agreement, we issued 53,138 shares of
our common stock to Fusion Capital for its initial commitment (the "Initial
Shares"), and agreed to issue 35,425 additional commitment shares to Fusion
Capital on a pro-rata basis as we sell the $5 million of stock (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the Stock
Sale Agreement was contingent upon certain conditions, principally the
Securities and Exchange Commission ("SEC") declaring effective our Registration
Statement filed with the SEC to register 1,248,115 shares of common stock
potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC
declared our registration statement effective.
Page 46
Subject to our right to suspend sales of our common stock at any time
and to terminate the Stock Sale Agreement at any time, Fusion Capital is
obligated to purchase up to $12,500 of our common stock each trading day (the
"Daily Commitment Amount"). The Daily Commitment Amount may increase upon each
$0.25 increase in our stock price above $4.50 per share up to a maximum of
$22,500 if our stock price reaches or exceeds $5.50 per share. The Daily
Commitment Amount also may decrease if our stock price drops below a "floor"
price. The floor price initially was set at $3.00 per share and we may increase
or decrease it from time to time, except that in no case shall it be less than
$1.00 per share. The sale price per share will be the lower of the lowest sales
price on the sale date or an average of the three lowest closing prices during
the 12 consecutive trading days prior to the sale date.
Fusion Capital may not purchase shares of our common stock under the
Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9%
of our common stock outstanding at the time of purchase by Fusion Capital.
However, Fusion Capital is obligated to pay the Daily Commitment Amount even
though they may not receive additional shares until their beneficial ownership
is less than the 9.9% limitation. Fusion Capital is free to sell its purchased
shares at any time, and this would allow them to avoid the 9.9% limitation;
however, Fusion Capital has agreed not to sell the Commitment Shares until the
earlier of October 25, 2006, (20 months from February 25, 2004) or termination
of the Stock Sale Agreement. In accordance with the American Stock Exchange
rules, we cannot issue more than 1,248,115 shares of our common stock (including
the Commitment Shares) to Fusion Capital under the Stock Sale Agreement without
the prior approval of our shareholders. Until the termination of the Stock Sale
Agreement, we have agreed that we will not, without the prior written consent of
Fusion Capital, contract for any equity financing (including any debt financing
with an equity component), or issue any floating conversion rate or variable
priced equity or floating conversion rate or variable priced equity-like
securities.
Through July 31, 2004, we sold 50,938 shares (and issued 1,416
Commitment Shares) of our common stock to Fusion Capital for approximately
$200,000. We plan to use the proceeds for general working capital needs.
In consideration for assisting us in arranging the transaction with
Fusion Capital, we agreed to pay our financial advisor a success fee of $250,000
(the "Success Fee," which was 5% of the total potential equity financing from
Fusion Capital). We made an initial payment to our advisor of $50,000, with the
balance to be paid ratably over 20 months. Through July 31, 2004, we had paid a
total of $90,000 of the Success Fee, with the balance recorded in accrued
expenses and other liabilities. In addition, we granted the advisor five-year
warrants to purchase 57,537 shares of our common stock (approximately 5% of
1,159,552 shares, the estimated maximum number of shares that may be sold to
Fusion Capital, excluding the Commitment Shares), exercisable immediately, at an
exercise price of $4.345 per share (which was 110% of the $3.95 average closing
price of our common stock for the 10-day trading period ended January 21, 2004
that was used to determine the number of Commitment Shares). The warrants
include piggyback registration rights with respect to the shares to be issued
upon exercise of the warrants, meaning that if we file to register any of our
common stock, other than a registration relating to our employee benefit plans
or certain other exceptions, the advisor may request that we include their
shares in the registration, subject to our limiting the amount of shares to be
included upon advice from our managing underwriter.
In addition to the cash Success Fee, we incurred other cash costs
relating to the completion of the Stock Sale Agreement, including professional
fees, listing fees and due diligence costs. We also incurred noncash costs for
the unpaid balance of the Success Fee ($160,000), the estimated fair value of
the Initial Shares ($316,171) and the warrants issued to our financial advisor
($236,465). We have capitalized all of the cash and noncash costs, aggregating
$962,559, as deferred financing costs and will charge them against capital in
excess of par value on a pro-rata basis as we sell shares to Fusion Capital,
based upon the ratio of the proceeds received compared to our estimate of the
total proceeds to be received over the life of the Stock Sale Agreement. We
currently estimate that we will sell $2 million of common stock to Fusion
Capital pursuant to the Stock Sale Agreement and, accordingly, charged $96,257
for amortization against capital in excess of par value in fiscal 2004. The
remaining balance of the deferred charges will be amortized against capital in
excess of par value as we sell common stock to Fusion Capital in the future.
Page 47
Since July 31, 2004 through October 13, 2004, we sold 81,582 shares
(and issued 2,126 Commitment Shares) of our common stock to Fusion Capital for
$300,006, and amortized $144,387 of deferred charges against capital in excess
of par value.
5. SETTLEMENT WITH UNILENS AND STOCK SALE
In 1989 we sold certain assets of UOP to Unilens Corp. USA ("Unilens")
for $6 million, including a $5.5 million installment receivable. Due to
uncertainties related to collection of the installment receivable, we previously
wrote off the entire balance of the installment receivable.
In July 2003 we resumed collection efforts with respect to the
installment receivable from Unilens. In October 2003 we reached an agreement to
settle all prior claims and to terminate all prior agreements between Unilens
and us. Unilens agreed to pay us an aggregate total of $1,250,000, with $100,000
paid to us in October 2003 on execution of the agreement, and the remaining
balance payable in quarterly installments on March 31, June 30, September 30 and
December 31 of the greater of $100,000 or an amount equal to 50% of royalties
received by Unilens from a certain licensee. As collateral for payment of the
settlement, Unilens granted us a subordinate security interest in all Unilens'
real and personal property.
During fiscal 2004, we received gross cash from Unilens of $411,861 and
recorded income, net of certain related expenses and obligations, of $348,550
from this settlement. At July 31, 2004, Unilens owed $838,140 on the receivable.
At July 31, 2004, we evaluated Unilens' financial condition and
determined that our remaining receivable was collectible. As a result, we
recorded an asset of $751,197 (with $357,064 current and $394,133 noncurrent)
representing the net present value of the gross amount of the receivable and
recorded a credit (income) of $696,846, representing our share of the
receivable. We estimated the net present value of the receivable using a 10%
discount factor. The difference between the asset and the income recorded, which
represents amounts due to other parties, was recorded as a liability in accrued
expenses and other liabilities. We will record interest income on the receivable
as we receive installment payments from Unilens.
We previously received 135,000 shares of Unilens stock as partial
payment against the 1989 installment receivable from Unilens. Because of very
limited trading in Unilens stock and its extremely low price, we did not assign
a cost basis to the shares when we received them. During the three months ended
July 31, 2004, we sold our shares and recorded the net proceeds of $157,355 as
income.
Page 48
6. RECEIVABLES
Receivables consist of the following:
JULY 31, July 31,
2004 2003
------------------------ ------------------------
Royalties $ 453,138 $ 905,654
Current portion of Unilens receivable, net 357,064 -
Other 19,794 51,621
------------------------ ------------------------
Receivables $ 829,996 $ 957,275
======================== ========================
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
JULY 31, July 31,
2004 2003
------------------------ ------------------------
Prepaid insurance $ 170,234 $ 184,950
Other prepaid expenses and other current assets 38,920 90,069
------------------------ ------------------------
Prepaid expenses and other current assets $ 209,154 $ 275,019
======================== ========================
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
JULY 31, July 31,
2004 2003
------------------------ ------------------------
Equipment and furnishings $ 179,862 $ 170,160
Leasehold improvements 59,860 59,860
------------------------ ------------------------
239,722 230,020
Accumulated depreciation and amortization (220,330) (200,186)
------------------------ ------------------------
Property and equipment, net $ 19,392 $ 29,834
======================== ========================
Depreciation expense was $20,144, $29,510 and $55,103, respectively, in
2004, 2003 and 2002.
Page 49
9. INVESTMENTS, NET
At July 31, 2004, we owned the following significant investments:
Number of Carrying
shares Type value
---------------- ----------------- -----------------
NTRU Cryptosystems, Inc. ("NTRU") 3,129,509 Common stock $ --
MelanoTan Corporation ("MelanoTan") 378,000 Common stock $ --
In prior years, we acquired a total of 3,129,509 shares of NTRU common
stock (and certain preferred stock that later was redeemed), in exchange for
cash and reducing our future royalty percentage on sales of NTRU's products. We
recorded the estimated fair value of the shares and accounted for our investment
on a cost basis. NTRU is a privately held company and there is no active public
market for its shares. NTRU sells encryption software for security purposes
principally in wireless markets.
In fiscal year 2003, in connection with NTRU's recapitalization, we
reviewed our estimate of the fair value of our NTRU investment and determined
that it was impaired. We recorded a net impairment charge of $943,640 to reduce
its carrying value to zero. We continue to own the shares, and one of our
directors currently participates on NTRU's Board of Directors.
We purchased the shares of MelanoTan stock (approximately 20.9%) for a
nominal amount. In a separate transaction, we licensed to MelanoTan certain
rights relating to a sunless tanning technology that we own. The technology may
prevent or lessen skin cancer caused by unprotected sun exposure. MelanoTan
sublicensed the rights to EpiTan Limited (Australia) ("EpiTan") and received
15,165,415 shares of EpiTan common stock, which is traded on the Australian
Stock Exchange (MelanoTan has no operations of its own). EpiTan is in the
process of testing the technology to determine its effectiveness. In October
2004, MelanoTan announced that it would distribute 6 million of its shares of
EpiTan to its shareholders and that it sold 6 million shares of EpiTan in a
private placement, using the proceeds principally to pay certain income tax
liabilities of MelanoTan. We will retain 500,938 shares from the distribution.
After the sale and distribution, MelanoTan will continue to own 3,165,415 shares
of EpiTan.
Through a series of bridge financing agreements made in 2001 and 2002,
we had loaned and advanced $1,056,300 to E. L. Specialists, Inc. ("ELS"). In
fiscal year 2002, we reviewed ELS' financial position, determined that
collection of the loan was uncertain, and recorded an impairment loss of
$781,924. In early fiscal year 2003, we sold all our interests related to ELS
for $200,000, its remaining carrying value.
In fiscal year 2002, we also recognized an impairment loss of $50,000
on another investment and a recovery of $21,598 on our investment in and
advances to Micro-ASI, Inc. that was written off in 2001. The effect on fiscal
2002 of all these transactions was a net loss of $810,326.
Page 50
10. INTANGIBLE ASSETS ACQUIRED, NET
Intangible assets acquired, net, consist of the following:
July 31, July 31,
2004 2003
-------------------------- ------------------------
Intangible assets acquired, principally licenses and patented
technologies, at cost, net of impairment charges $ 1,152,842 $ 1,204,820
Accumulated amortization (1,100,692) (1,062,098)
-------------------------- ------------------------
Intangible assets acquired, net $ 52,150 $ 142,722
========================== ========================
Certain of our acquired licenses no longer produce revenues and we no
longer expect certain of our acquired patents to generate revenues in the
future. As a result, we recorded impairment charges of $51,978 and $482,247,
respectively, in 2004 and 2003, in personnel and other direct expenses relating
to revenues. We also reviewed and adjusted the amortization period after each
impairment charge to the weighted average life of the remaining technologies,
which was 3.8 years at July 31, 2004.
Amortization expense was $38,594, $158,277 and $138,672 in 2004, 2003
and 2002, respectively. We expect annual amortization expense to be
approximately $14,000 in fiscal years 2005 - 2007, and approximately $11,000 in
fiscal year 2008.
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
July 31, July 31,
2004 2003
------------------------ ------------------------
Royalties payable $ 625,908 $ 854,616
Accrued professional fees 294,100 156,840
Accrued compensation 534,945 217,952
Other 124,423 52,011
------------------------ ------------------------
Accrued expenses and other liabilities $ 1,579,376 $ 1,281,419
======================== ========================
Page 51
12. INCOME TAXES
We did not record an income tax provision in 2004 since we incurred a
substantial net operating loss for income tax purposes. This was due principally
to the Unilens receivable that had no basis for book purposes but was fully
valued for income tax purposes. As a result, the settlement with Unilens in
October 2003 generated a significant loss on an income tax basis and income of
$1,045,395 on a book basis. In 2003 and 2002, respectively, we did not record
any income tax benefit since we incurred losses and could not conclude that
utilization of the income tax benefit was more likely than not to be realized.
Therefore, we provided a full valuation allowance against net deferred tax
assets generated in those years.
Net deferred tax assets consist of the following:
July 31, July 31,
2004 2003
-------------------------- ---------------------------
Net operating loss carryforwards $ 3,865,000 $ 3,512,000
Net capital loss carryforwards 550,000 567,000
Installment receivable from sale of discontinued operation 2,000 341,000
Impairment of investments 368,000 380,000
Other, net 207,000 271,000
-------------------------- ---------------------------
Deferred tax assets 4,992,000 5,071,000
Valuation allowance (4,992,000) (5,071,000)
-------------------------- ---------------------------
Net deferred tax assets $ -- $ --
========================== ===========================
At July 31, 2004, we had aggregate Federal net operating loss
carryforwards of approximately $10,748,000, which expire at various times
through 2024, with the majority of them expiring after 2011. We also have state
net operating loss carryforwards.
Changes in the valuation allowance were as follows:
For the years ended July 31,
--------------------------------------------------------------------
2004 2003 2002
------------------- ------------------ ---------------------
Balance, beginning of year $ 5,071,000 $ 5,842,000 $ 5,613,000
Change in temporary differences (415,000) (1,593,000) 1,281,000
Change in net operating and capital losses 336,000 822,000 (1,052,000)
------------------- ------------------ ---------------------
Balance, end of year $ 4,992,000 $ 5,071,000 $ 5,842,000
=================== ================== =====================
Our ability to derive future tax benefits from the net deferred tax
assets is uncertain and therefore we continue to provide a full valuation
allowance against the assets, reducing the carrying value to zero. We will
reverse the valuation allowance if future financial results are sufficient to
support a carrying value for deferred tax assets.
13. SHAREHOLDERS' INTEREST AND STOCK-BASED COMPENSATION PLANS
PREFERRED STOCK
At our option, we may redeem our preferred stock at its par value at
any time. Dividends on the preferred stock are noncumulative. The preferred
stock is not registered to be publicly traded.
Page 52
EMPLOYEE STOCK OPTION PLANS
Pursuant to our 1997 Employees' Stock Option Plan, as amended (the
"1997 Plan"), we may grant either incentive stock options or nonqualified
options to employees. The options may be granted at option prices not less than
100% of the fair market value of our common stock at the grant date. The
Compensation Committee or the Board of Directors determines vesting provisions
when options are granted. The maximum life of options granted under this plan is
ten years after the grant date. No options may be granted under this plan after
September 30, 2007. The following information relates to the 1997 Plan:
July 31, July 31,
2004 2003
------------------------ ------------------------
Common shares reserved for issuance on exercise of options 972,927 975,777
======================== ========================
Shares available for future option grants 243,452 406,752
======================== ========================
In August 2004, 193,000 options were granted to employees under this
plan, leaving 50,452 options available for future grants.
Prior to the 1997 Plan, we had a stock option plan that expired on
December 31, 2000, after which date no option could be granted under the plan.
Pursuant to this plan both incentive stock options and nonqualified stock
options were granted to key employees. Incentive stock options could be granted
at an exercise price not less than the fair market value of our common stock on
the grant date. Nonqualified stock options could be granted at an exercise price
not less than 85% of the fair market value of the common stock on the grant
date. Options generally vested over a period of up to three years after the
grant date and expire ten years after the grant date if not terminated earlier.
The following information relates to this stock option plan:
July 31, July 31,
2004 2003
------------------------ ------------------------
Common shares reserved for issuance on exercise of options 120,620 140,242
======================== ========================
Shares available for future option grants -- --
======================== ========================
2000 DIRECTORS STOCK OPTION PLAN
We also have a Directors Stock Option Plan approved by shareholders in
2000, under which we grant each non-employee director 10,000 fully vested,
nonqualified common stock options when the director first is elected as a
director and 10,000 more common stock options on the first business day of
January thereafter, as long as the individual is a director. All such stock
options are granted at an option price not less than 100% of the fair market
value of the common stock at the grant date. The maximum life of options granted
under this plan is ten years from the grant date. No options may be granted
after January 1, 2010. The following information relates to the 2000 Directors
Stock Option Plan:
July 31, July 31,
2004 2003
------------------------ ------------------------
Common shares reserved for issuance on exercise of options 384,000 394,000
======================== ========================
Shares available for future option grants 110,000 160,000
======================== ========================
Page 53
SUMMARY OF COMMON STOCK OPTIONS
A summary of the status of all our common stock options as of July 31,
2004, 2003 and 2002, and changes during the years then ended is presented below.
For the years ended July 31,
---------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------------- ------------- ------------- ------------- -------------
Outstanding at beginning
of year 943,267 $ 5.08 940,267 $ 5.44 500,767 $ 7.48
Granted 289,000 2.52 60,000 2.14 452,500 3.35
Forfeited -- -- (9,375) 5.00 -- --
Exercised (12,850) 2.09 -- -- -- --
Expired or terminated (84,622) 6.60 (47,625) 8.42 (13,000) 11.41
------------- -------------- ------------- ------------- ------------- -------------
Outstanding at end of year 1,134,795 $ 4.47 943,267 $ 5.08 940,267 $ 5.44
============= ============== ============= ============= ============= =============
Exercisable at year-end 856,833 $ 4.87 646,092 $ 6.00 485,929 $ 7.22
============= ============== ============= ============= ============= =============
The following table summarizes information about all common stock
options outstanding at July 31, 2004.
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ------------------------------ --------------- --------------- --------------- --------------- ---------------
$1.950 - $ 3.980 616,150 8.56 years $ 2.21 376,900 $ 2.17
$4.220 - $ 6.875 316,145 4.99 years $ 5.90 280,563 $ 5.94
$7.300 - $ 8.375 148,000 5.13 years $ 7.89 144,870 $ 7.89
$9.063 - $11.094 54,500 2.01 years $ 10.05 54,500 $ 10.05
1996 DIRECTORS' STOCK PARTICIPATION PLAN
Pursuant to the terms of our 1996 Directors' Stock Participation Plan,
on the first business day of January of each year, we shall issue to each
outside director who has been elected by a vote of our shareholders and has
served at least one year as a director, the lesser of 2,500 shares of our common
stock or a number of shares of common stock equal to $15,000 on the date such
shares are issued. If an otherwise eligible director terminates as a director
before the first business day of the year, we shall issue such director a number
of shares equal to the proportion of the year served by that director. This plan
expires on January 2, 2006.
Page 54
We issued 12,500, 15,000 and 15,000 shares of common stock to eligible
directors, respectively, in 2004, 2003 and 2002, and charged to expense $31,250,
$23,350, and $41,325, respectively, in 2004, 2003 and 2002, for shares issued
under this plan. The following information relates to the 1996 Directors' Stock
Participation Plan:
July 31, July 31,
2004 2003
------------------------ ------------------------
Common shares reserved for future share issuances 11,079 23,579
======================== ========================
There was no significant impact on the calculation of net income (loss)
per share for the years ended July 31, 2004, 2003 and 2002, as a result of the
issuance of shares to our directors.
EMPLOYEES' COMMON STOCK RETIREMENT PLAN
Effective August 1, 1990, we adopted an Employees' Common Stock
Retirement Plan. Effective January 31, 2003, we merged this plan into our 401(k)
Plan.
14. 401(K) PLAN
We have an employee benefit defined contribution plan qualified under
section 401(k) of the Internal Revenue Code (the "Plan"), for all our employees
who have attained the age of 21 and meet certain service requirements. The Plan
has been in effect since January 1, 1997. Participation in the Plan is
voluntary. Employees may defer compensation up to a specific dollar amount
determined by the Internal Revenue Service for any calendar year ($13,000 plus
an additional $3,000 for participants over age 50 for 2004). We do not make
matching contributions, and employees are not allowed to invest in our stock
under the Plan.
We may make discretionary contributions to the Plan solely on the
authorization of our directors, who may authorize a contribution of a dollar
amount to be allocated to participants according to the provisions of the Plan,
and payable in shares of our common stock valued as of the date the shares are
contributed to the Plan. Our directors authorized and we expensed $100,000,
$100,000 and $80,000, respectively, in 2004, 2003, and 2002, for such
discretionary contributions and we contributed the related shares of our common
stock to the Plan.
Page 55
15. NET INCOME (LOSS) PER SHARE
The following sets forth the denominator used in the calculations of
basic net income (loss) per share and net income (loss) per share assuming
dilution:
For the years ended July 31,
--------------------------------------------------------------------
2004 2003 2002
-------------------- ------------------- ---------------------
Denominator for basic net income (loss) per share,
weighted average shares outstanding 6,247,588 6,182,657 6,148,022
Dilutive effect of warrants and employee and
directors common stock options 209,272 N/A N/A
-------------------- ------------------- ---------------------
Denominator for net income (loss) per share,
assuming dilution 6,456,860 6,182,657 6,148,022
==================== =================== =====================
Options and warrants to purchase 567,398, 943,267 and 940,267 shares of
our common stock at July 31, 2004, 2003 and 2002, respectively, were outstanding
but were not included in the computation of earnings per share because they were
anti-dilutive. Due to our net losses for the years ended July 31, 2003 and 2002,
the denominator used in the calculation of basic net loss per share was the same
as that used for net loss per share, assuming dilution, since the effect of any
options and warrants would have been anti-dilutive.
16. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We have our offices in Fairfield, Connecticut under a lease that
expires December 31, 2006. We have an option to renew this lease for an
additional five years.
At July 31, 2004, future minimum rental payments required under
operating leases with initial or remaining noncancelable lease terms in excess
of one year were:
For the years ending July 31,
2005 $ 237,957
2006 226,505
2007 93,750
---------------
Total minimum payments required $ 558,212
===============
Total rental expense for all operating leases was:
For the years ended July 31,
---------------------------------------------------------------
2004 2003 2002
------------------- ----------------- -------------------
Minimum rentals $ 245,969 $ 233,390 $ 223,613
Less: Sublease rentals (12,400) (9,600) (6,665)
------------------- ----------------- -------------------
Net rent expense $ 233,569 $ 223,790 $ 216,948
=================== ================= ===================
Page 56
Effective August 1, 2004, we entered into a three-year employment
agreement with Mr. John B. Nano, our Chief Executive Officer. Pursuant to the
terms of the agreement, Mr. Nano will receive a minimum annual base compensation
of $350,000, eligibility to participate in bonus and other employee benefit
plans, and the continuation of base compensation and benefits in the event of a
termination of his employment, subject to certain conditions.
CONTINGENCIES - NEW REVENUES
As of July 31, 2004, CTT and VVI have remaining contingent obligations
to repay up to $199,569 and $224,127, respectively, in consideration of grant
funding received in 1994 and 1995. CTT also is obligated to pay at the rate of
7.5% of its revenues, if any, from transferring rights to certain 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. We recognize these obligations only if we receive revenues
related to the grant funds.
Currently, we engage two independent consultants who provide us with
business development and evaluation services under contracts that are cancelable
on up to thirty (30) days written notice. These contracts include contingencies
for potential incentive compensation solely as a percentage of new revenues
generated by the consultants' efforts. For the years ended July 31, 2004, 2003
and 2002, we neither accrued nor paid incentive compensation under such
contracts since none was earned. In addition, previously we engaged a third
party to audit royalties reported by certain of our customers. Pursuant to this
agreement, we will compensate the third party on a contingency basis solely from
any additional royalties resulting from the royalty audit. No payments have been
made under this arrangement.
CONTINGENCIES - LITIGATION
Bayer Corporation
On August 17, 2004, we filed a complaint alleging infringement of our
patent covering homocysteine assays against Bayer Corporation, et al, ("Bayer"),
in the United States District Court for the District of Colorado, seeking
monetary damages, punitive damages, attorneys fees, court costs and other
remuneration at the option of the court. Bayer responded to our complaint on
September 27, 2004, denying the allegations. On October 21, 2004 the parties
settled the case. Pursuant to the settlement, we granted Bayer a license, and
Bayer will pay us a fee and royalties on sales of Bayer homocysteine assays
beginning July 1, 2004. The fee is non-refundable and is not creditable against
future royalties.
FEDERAL INSURANCE COMPANY
On February 3, 2004, we filed a civil action against Federal Insurance
Company ("Federal"), in the U.S. District Court for the District of Connecticut
(the "CTT Complaint"), to enforce our claim that expenses incurred by CTT, Mr.
Frank R. McPike, Jr., our former Chief Executive Officer, and certain other
directors and officers relating to an SEC investigation, including any
subsequent action thereon, should be reimbursed by Federal since the expenses
fell within the coverage provisions of our insurance policy. Effective October
13, 2004, Federal agreed to pay us $167,500 in settlement of the CTT Complaint,
and Federal acknowledged that our deductible under the policy was deemed
satisfied for purposes of a civil suit filed against us by the SEC (see below).
In return, we agreed to withdraw the CTT Complaint with prejudice and release
Federal from any and all claims made in the CTT Complaint.
On September 15, 2004, the Chubb Group of Insurance Companies, on
behalf of Federal, notified us that they agreed to accept coverage as to losses,
including defense costs, incurred by CTT and Mr. McPike as a result of the SEC's
civil suit (described below), according to the terms of the policy.
Page 57
SECURITIES AND EXCHANGE COMMISSION
On August 11, 2004, the SEC filed a civil suit naming Competitive
Technologies, Inc., Frank R. McPike, Jr. (our former Chief Executive Officer),
and six individual brokers in the United States District Court for the District
of Connecticut, alleging that from at least July 1998 to June 2001, the
defendants were involved in a scheme to manipulate the price of our stock. The
case relates to our 1998 stock repurchase program under which we repurchased
shares of our common stock from time to time during the period from October 28,
1998 to March 22, 2001. CTT was named as a defendant in the suit due to the
alleged conduct of Mr. McPike, whose conduct in connection with the stock
repurchase program was imputed to CTT as a matter of law. Relating to CTT, the
SEC in the suit seeks a permanent injunction prohibiting us from further
violations of the Securities Exchange Act of 1934 and a civil penalty pursuant
to Section 21(d)(3) of the Securities Exchange Act of 1934 (this section
provides for maximum penalties of $550,000 for a corporate entity and $110,000
per individual). On September 24, 2004, we responded to this civil suit, and
filed a motion to dismiss the suit. On October 15, 2004, the SEC filed a motion
opposing our motion to dismiss the suit. Further action in this case is pending.
On May 17, 2001, we had received a subpoena from the SEC seeking
certain documents in connection with an SEC private investigation. On June 12,
2003, the SEC sent written "Wells Notices" to us, Mr. McPike (then our Executive
Vice President and Chief Financial Officer), Mr. Samuel M. Fodale (one of our
directors), and Mr. George C. J. Bigar (a former director). The "Wells Notices"
indicated that the staff intended to recommend that the SEC bring a civil action
against us and the individuals in the matter of trading in our stock. Mr. Bigar,
Mr. Fodale, Mr. McPike and CTT each responded to the respective "Wells Notices."
Mr. Fodale and Mr. Bigar were not named in the subsequent civil suit.
Costs incurred related to this matter, including amounts paid and
advanced to Mr. Fodale (described below) were $71,173, $338,482 and $101,790,
respectively, in 2004, 2003, and 2002. We have charged all the costs we have
incurred to date ($562,595, including 2001) to expense as incurred. As described
above under the heading "Federal Insurance Company," we settled our suit against
Federal seeking reimbursement for our costs related to this matter in excess of
our deductible. We will record any amounts we receive from Federal in the period
in which we receive them.
Pursuant to the indemnification provisions of Article IV of our
By-laws, we paid and advanced $101,068 through July 31, 2004, on behalf of Mr.
Fodale for his expenses incurred in connection with the SEC private
investigation. At July 31, 2004, we had not paid or committed to pay an amount
in excess of $60,000 on behalf of any other current or former director for costs
related to this matter.
LABORATORY CORPORATION OF AMERICA HOLDINGS
On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit
("CAFC") denied the petition of Laboratory Corporation of America Holdings d/b/a
LabCorp ("LabCorp") for a rehearing or a rehearing en banc (rehearing by the
full CAFC) of a June 8, 2004 decision affirming a November 2002 decision in
favor of Metabolite Laboratories, Inc. ("MLI") and us, (collectively, the
"Plaintiffs"). As a result of the August 5, 2004 decision, on August 16, 2004
the Plaintiffs received approximately $6.7 million. Our share of the $6.7
million payment was $921,000 (recorded in fiscal 2005). The payment did not
include attorneys fees or court costs previously awarded to the Plaintiffs but
still under appeal with the court. In addition, we claimed additional attorneys
fees and court costs for the appeals. This request is pending.
LabCorp's options are either to accept the court's decision or to
appeal the decision to the U.S. Supreme Court. If LabCorp chooses to appeal the
decision to the U.S. Supreme Court, they have 90 days from the August 5, 2004
decision to file their appeal (or until November 3, 2004, unless extended). If
LabCorp appeals to the U.S. Supreme Court, and if the original judgment is
subsequently reversed, then LabCorp may attempt to recover amounts paid to the
Plaintiffs, including royalties paid to us as part of a January 2003 stipulated
court order (the "Stipulated Order"). (Pursuant to the Stipulated Order, the
court had stayed execution of the monetary judgment and a permanent injunction
that prevented LabCorp from performing homocysteine assays, and LabCorp agreed
to pay us a percentage of their homocysteine assay sales during their appeals.)
LabCorp's ability to recover any amounts paid to the Plaintiffs would depend on
the extent and reason for the reversal. From January 2003 through July 31, 2004,
LabCorp paid us an aggregate of $1,342,040 under the Stipulated Order, including
both our retained amounts and amounts paid or payable to our clients. We believe
that the probability that LabCorp will recover any amount is remote.
Page 58
The funds we received on August 16, 2004 were released from a bond
previously posted by LabCorp as part of the appeals process in this homocysteine
assay patent infringement case originally filed by the Plaintiffs against
LabCorp on May 4, 1999, in the United States District Court for the District of
Colorado. The Plaintiffs alleged, in part, breach of contract, patent
infringement and that LabCorp owed the Plaintiffs royalties for homocysteine
assays performed beginning in the summer of 1998 using methods falling within
the claims of a patent we own. (We licensed the patent on a non-exclusive basis
to MLI and MLI sublicensed it to LabCorp.) Plaintiffs sought unspecified
monetary and exemplary damages, for LabCorp to cure past breaches, to provide an
accounting of wrongfully withheld royalties, and to refrain from infringing the
patent. Plaintiffs also sought reimbursement of their attorneys fees. LabCorp
filed an answer and counterclaims alleging non-infringement, patent invalidity
and patent misuse.
In November 2001 a jury confirmed the validity of our patent rights,
found that LabCorp willfully infringed our patent and breached their sublicense
contract, and awarded damages to the Plaintiffs. In December 2001, the court
entered judgment affirming the jury's verdict. In an amended judgment issued in
November 2002, the court awarded the Plaintiffs approximately $1,019,000 in
damages, $1,019,000 in enhanced (punitive) damages, $560,000 in attorneys fees,
and $132,000 in prejudgment interest, and issued a permanent injunction barring
LabCorp from performing future homocysteine assays.
FUJITSU
In December 2000, (coincident with filing a complaint with the United
States International Trade Commission ("ITC") that was withdrawn in August 2001)
the University of Illinois and CTT filed a complaint against Fujitsu Limited,
Fujitsu General Limited, Fujitsu General America, Fujitsu Microelectronics, Inc.
and Fujitsu Hitachi Plasma Display Ltd. (Fujitsu et al.) in the United States
District Court for the Central District of Illinois seeking damages for past
infringements and an injunction against future sales of plasma display panels
that infringe two U.S. patents held by our client, the University of Illinois.
The two patents cover energy recovery in flat plasma display panels. In July
2001, we reactivated this complaint to pursue legal remedies (damages for past
infringing sales and possibly damages for willfulness) that are not available at
the ITC. In May 2002, the District Court granted defendants' motion to transfer
this case to the Northern District of California.
Effective July 23, 2002, the University of Illinois agreed to take the
lead in this litigation and assume the cost of new lead counsel. Before this
agreement, we bore the entire cost of lead counsel in this litigation. In
December 2002, we were dismissed as co-plaintiff from this litigation, but we
retain our economic interest in any potential favorable outcome.
In September 2001, Fujitsu et al. filed counterclaims against Plasmaco,
Inc. (our licensee) and us in the United States District Court for the District
of Delaware (subsequently dismissed and reinstituted in the Northern District of
California). The counterclaims alleged, among other things, that we had
misappropriated confidential information and trade secrets supplied by Fujitsu
during the course of the ITC action. It also alleged that, with Plasmaco's
assistance, we abused the ITC process to obtain information to which we
otherwise would not have been entitled and which we would use in the action
against Fujitsu in the United States District Court for the Northern District of
California.
Page 59
On July 31, 2003, the judge in this case issued his Markman decision,
in which he ruled on the scope and interpretation of terms in the underlying
patent claims. The Court then stayed all issues in both cases, except issues
relating to summary judgment. Both parties moved for summary judgement. In April
2004, the issues relating to summary judgment were heard, and on July 1, 2004,
summary judgment was granted in favor of the defendant, Fujitsu. On September
20, 2004, the judge entered a stipulated order staying certain issues, including
the counterclaims, pending resolution of the University's appeal of the summary
judgment, including the Markman decision.
On October 28, 2002, we signed an agreement making any further payments
to our former patent litigation counsel in the Fujitsu litigation completely
contingent on future receipts from Fujitsu. This contingent obligation was
reflected in a promissory note payable to our former patent litigation counsel
for $1,683,349 plus simple interest at the annual rate of 11% from the agreement
date, payable only from future receipts, if any, in a settlement or other
favorable outcome of the litigation against Fujitsu. As of July 31, 2004, the
aggregate amount that we might pay under this note is approximately $2 million,
including interest. We must settle this contingent obligation before we record
any revenue from future proceeds related to this litigation.
OTHER
By letter dated October 7, 2003, the U.S. Department of Labor notified
us that certain former employees had filed complaints alleging discriminatory
employment practices in violation of Section 806 of the Corporate and Criminal
Fraud Accountability Act of 2002, 18 U.S.C. 1514A, also known as the
Sarbanes-Oxley Act. The complainants requested that the Occupational Safety and
Health Administration ("OSHA") investigate and, if appropriate, prosecute such
violations and requested OSHA assistance in obtaining fair and reasonable
reimbursement and compensation for damages. We believe that the claims are
without merit, and we have responded aggressively to the complaints. We cannot
estimate the final outcome of these complaints or the related legal or other
expenses that we may incur. To the extent that this matter involves directors
and officers, we are obligated to indemnify them for any costs they incur,
subject to certain limitations.
We also are a party to other legal actions and proceedings, primarily
as a plaintiff (the most significant one being against Abbott Laboratories,
Inc.), for which we cannot predict the final outcomes. Since we are unable to
estimate the legal expenses or the loss we may incur or the possible damages we
may recover in these actions, if any, we have not recorded any potential
judgment proceeds in our financial statements to date. We record expenses in
connection with these actions as they are incurred.
We believe that we carry adequate liability insurance, directors and
officers insurance, casualty insurance (for owned or leased tangible assets),
and other insurance as needed to cover us against potential and actual claims
and lawsuits that occur in the ordinary course of our business. However, an
unfavorable resolution of any or all matters, and/or our incurrence of
significant legal fees and other costs to defend or prosecute any of these
actions and proceedings may, depending on the amount and timing, have a material
adverse effect on our consolidated financial position, results of operations or
cash flows in a particular period.
17. RELATED PARTY TRANSACTIONS
We incurred charges of approximately $14,000, $6,000 and $124,000 in
2004, 2003 and 2002, respectively, for consulting services (including expenses
and use taxes) provided by one director in fiscal 2004 and 2003, and two
directors in fiscal 2002.
Page 60
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ------------- --------------- ---------------
Year ended July 31, 2004 (2) (2) (2) (2)
Total revenues $ 1,363,109 $ 1,037,703 $ 4,155,292 $ 1,465,550
Operating income (loss) (1) 278,619 43,112 2,393,708 (130,266)
Net income (loss) $ 345,293 $ 64,287 $ 2,667,111 $ (122,162)
=============== ============= =============== ===============
Net income (loss) per share:
Basic $ 0.06 $ 0.01 $ 0.43 $ (0.02)
=============== ============= =============== ===============
Assuming dilution $ 0.06 $ 0.01 $ 0.40 $ (0.02)
=============== ============= =============== ===============
Weighted average number of common shares outstanding:
Basic 6,201,345 6,207,631 6,267,314 6,314,494
Assuming dilution 6,201,345 6,398,726 6,617,107 6,314,494
Year ended July 31, 2003 (3) (3) (2) (4)
Total revenues $ 394,595 $ 839,109 $ 663,439 $ 1,422,413
Operating income (loss) (1) 766,070 (1,416,128) (549,713) (800,915)
Net income (loss) $ 778,907 $ (1,410,023) $ (545,729) $ (758,456)
=============== ============= =============== ===============
Net income (loss) per share:
Basic and assuming dilution $ 0.13 $ (0.23) $ (0.09) $ (0.12)
=============== ============= =============== ===============
Weighted average number of common shares outstanding:
Basic 6,154,351 6,174,196 6,201,345 6,201,345
Assuming dilution 6,200,084 6,174,196 6,201,345 6,201,345
(1) Operating income (loss) is defined herein as revenues less expenses,
excluding interest income, net. Interest income on the Materna settlement
is not included in operating income (loss).
(2) Operating income (loss) includes approximately $836,000, $232,000
$3,271,000, and $561,000 respectively, related to the Materna settlement in
the first, second and third quarters of 2004, and fourth quarter of 2003.
All periods reflect interest earned on the Materna settlement as interest,
rather than royalty settlements and awards. Fourth quarter of 2004 includes
income on settlement with Unilens of approximately $697,000.
(3) Operating income (loss) in the first quarter fiscal 2003 includes
$1,583,445 of fiscal 2002 patent enforcement expenses reversed, and the
second quarter of fiscal 2003 includes a $944,000 impairment loss on
investments.
(4) Operating income (loss) includes approximately $482,000 of impairment
charges on intangible assets, $237,000 of legal expenses related to the SEC
investigation and $196,000 of financing costs.
Page 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of July 31, 2004. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported as specified in the Securities and Exchange
Commission's rules and forms. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that these controls were effective
as of July 31, 2004.
(b) CHANGE IN INTERNAL CONTROLS
There were no significant changes in our internal control over
financial reporting during the quarter ended July 31, 2004, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
Pursuant to General Instruction G(3), the information called for by
Part III, except as otherwise indicated, is incorporated by reference, to the
extent required, from the registrant's definitive proxy statement for its annual
meeting of stockholders scheduled to be held on January 14, 2005 (the "Proxy
Statement") 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than information with respect to our executive officers, which is
set forth in Item 4A of Part I of this Form 10-K, the information set forth
under the captions "Election of Directors," "Section 16(A) Beneficial Ownership
Reporting Compliance," and the sub-caption "Audit Committee" under "Board
Meetings and Committees" in the Proxy Statement is incorporated herein by
reference.
The information regarding a code of ethics is incorporated herein by
reference to Item 1 of this Form 10-K under the sub-caption "Code of Ethics."
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Executive Compensation"
and "Director Compensation" in the Proxy Statement is incorporated herein by
reference.
Page 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
The information set forth under the captions "Beneficial Ownership of
Shares" and "Equity Compensation Plan Information" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption "Accounting Fees and
Services" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of financial statements and schedules.
Competitive Technologies, Inc. and Subsidiaries:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of July 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
July 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Interest for the years
ended July 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended
July 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
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) List of exhibits: See Exhibit Index immediately preceding exhibits.
Page 63
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.
(the registrant)
By /S/ JOHN B. NANO
------------------------------------------
John B. Nano
President and Chief Executive
Officer, Director and
Authorized Signer
Date: October 28, 2004
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/ Richard E. Carver Director )
---------------------
Richard E. Carver )
)
/S/ Michael D. Davidson Chief Financial Officer )
-----------------------
Michael D. Davidson )
)
/S/ George W. Dunbar, Jr. Director )
-------------------------
George W. Dunbar, Jr. )
) October 28, 2004
/S/ Samuel M. Fodale Director )
--------------------
Samuel M. Fodale )
/S/ John B. Nano President, Chief Executive Officer and )
----------------
John B. Nano Director )
)
/S/ Charles J. Philippin Director )
------------------------
Charles J. Philippin )
)
/S/ John M. Sabin Director )
-----------------
John M. Sabin )
)
/S/ Jeanne Wendschuh Controller and Principal Accounting )
--------------------
Jeanne Wendschuh Officer )
Page 64
EXHIBIT INDEX
Exhibit
NO. DESCRIPTION
3.1 Unofficial restated certificate of incorporation of the registrant as
amended to date filed (on April 1, 1998) 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 effective July 27, 2004.
10.1* Registrant's Restated Key Employees' Stock Option Plan filed as Exhibit
4.3 to registrant's Registration Statement on Form S-8, File Number
33-87756 and hereby incorporated by reference.
10.2* Registrant's Annual Incentive Compensation Plan filed as Exhibit 10.1
to registrant's Form 10-Q for the quarter ended April 30, 2003 and
hereby incorporated by reference.
10.3* Registrant's 2000 Directors Stock Option Plan as amended January 24,
2003 filed (on January 29, 2003) as Exhibit 4.4 to registrant's
Registration Statement on Form S-8, File Number 333-102798 and hereby
incorporated by reference.
10.4* Registrant's 1996 Directors' Stock Participation Plan filed as Exhibit
4.3 to registrant's Form S-8, File Number 333-18759 and hereby
incorporated by reference.
10.5* Registrant's 1997 Employees' Stock Option Plan as amended January 24,
2003, filed (on January 29, 2003) as Exhibit 4.3 to registrant's
Registration Statement on Form S-8, File Number 333-102798 and hereby
incorporated by reference.
10.6*^ Employment Agreement between registrant and John B. Nano effective as
of August 1, 2004.
10.7* 1997 Employees' Stock Option Agreement between registrant and John B.
Nano dated June 17, 2002 filed as Exhibit 10.19 to registrant's Form
10-K for the year ended July 31, 2002 and hereby incorporated by
reference.
10.8 Settlement Agreement dated October 17, 2003 among registrant, Unilens
Corp. USA and Unilens Vision Inc. filed (on October 22, 2003) as
Exhibit 10.1 to registrant's Form 8-K dated October 17, 2003 and hereby
incorporated by reference.
10.9 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 incorporated by reference.
10.10 First Amendment of Lease Agreement dated August 9, 2001 between
registrant and The Bronson Road Group, LLP filed as Exhibit 10.15 to
registrant's Form 10-K for the year ended July 31, 2001 and hereby
incorporated by reference.
Page 65
10.11 Agreement between registrant and Samuel M. Fodale dated June 13, 2001
filed as Exhibit 10.16 to registrant's Form 10-K for the year ended
July 31, 2001 and hereby incorporated by reference.
10.12 Assignment of Promissory Notes, Technology Servicing Agreement, Note
Purchase Agreement, Security Interest Agreement, and Intercreditor
Agreement between registrant and MRM Acquisitions, LLC effective August
5, 2002 filed as Exhibit 10.1 to registrant's Form 8-K dated July 16,
2002 (on August 6, 2002) and hereby incorporated by reference.
10.13 Agreement closed on May 19, 2003 (made April 30, 2003) between
registrant and LawFinance Group, Inc. filed (on May 28, 2003) as
Exhibit 10.1 to registrant's Form 8-K dated May 19, 2003 and hereby
incorporated by reference.
10.14 Registrant's Contingent Promissory Note dated October 28, 2002 in the
principal amount of $1,683,349 together with its attached Exhibit A
filed as Exhibit 10.20 to registrant's Form 10-K/A for the year ended
July 31, 2002 (filed November 18, 2002) and hereby incorporated by
reference.
10.15 Agreement closed on October 31, 2003 between registrant and LawFinance
Group, Inc. filed (on November 10, 2003) as Exhibit 10.2 to
registrant's Form 8-K dated October 30, 2003 and hereby incorporated by
reference.
10.16 Side Letter Addendum to Agreement closed on October 31, 2003 between
registrant and LawFinance Group, Inc. filed (on November 10, 2003) as
Exhibit 10.1 to registrant's Form 8-K dated October 30, 2003 and hereby
incorporated by reference.
10.17 Agreement between registrant and a shareholder effective November 17,
2003 filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter
ended January 31, 2004 and hereby incorporated by reference.
10.18* Severance Agreement and General Release between registrant and Frank R.
McPike, Jr. effective November 1, 2003 filed as Exhibit 10.2 to
registrant's Form 10-Q for the quarter ended January 31, 2004 and
hereby incorporated by reference.
10.19 Common Stock Purchase Agreement between the registrant and Fusion
Capital Fund II, LLC dated February 25, 2004 filed (on February 27,
2004) as Exhibit 10.1 to registrant's Form 8-K dated February 25, 2004
and hereby incorporated by reference.
10.20 Registration Rights Agreement between the registrant and Fusion Capital
Fund II, LLC dated February 25, 2004 filed (on February 27, 2004) as
Exhibit 10.2 to registrant's Form 8-K dated February 25, 2004 and
hereby incorporated by reference.
10.21 Letter Agreement between the registrant and Brooks, Houghton & Company,
Inc. dated October 7, 2002 filed as Exhibit 10.3 to registrant's Form
10-Q for the quarter ended January 31, 2004 and hereby incorporated by
reference.
Page 66
10.22* Employment Agreement by and between registrant and Donald J. Freed
dated September 27, 2004, filed (on September 29, 2004) as Exhibit 10.1
to registrant's Form 8-K dated September 27, 2004 and hereby
incorporated by reference.
10.23^ Warrant to purchase common stock of registrant granted to Brooks
Houghton & Company, Inc. issued February 25, 2004, and related side
letter agreement dated June 17, 2004.
14.1 Registrant's Corporate Standards of Conduct for all its directors,
officers and employees, as amended, filed as Exhibit 14.1 to
registrant's Form 10-K for the year ended July 31, 2003 and hereby
incorporated by reference.
16.1 Letter to registrant from PricewaterhouseCoopers LLP dated October 6,
2003, regarding change in certifying accountant filed (on October 7,
2003) as Exhibit 16.2 to registrant's Form 8-K/A Amendment No. 3 dated
September 2, 2003 and hereby incorporated by reference.
23.1^ Consent of BDO Seidman, LLP.
23.2^ Consent of PricewaterhouseCoopers LLP.
31.1^ Certification of the Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
15d-14(a)).
31.2^ Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
15d-14(a)).
32.1+ Certification by the Principal Executive Officer of Competitive
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
32.2+ Certification by the Principal Financial Officer of Competitive
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
* Management Contract or Compensatory Plan
^ Filed herewith
+ Furnished herewith
Page 67