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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8696
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2664428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1960 Bronson Road
P.O. Box 340
Fairfield, Connecticut 06430
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (203) 255-6044
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
Common Stock ($.01 par value) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securi-
ties Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
Exhibit Index on sequentially numbered page 55.
Page 1 of 62 sequentially numbered pages.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[x]
As of October 15, 1999, 6,002,502 shares of the registrant's
common stock were outstanding. The aggregate market value of the
voting stock (disregarding preferred stock, for which there is no
public market) held by nonaffiliates of the registrant, based on the
mean between the high and the low price of the registrant's common
stock on the American Stock Exchange on such date, was approximately
$31,733,000.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
None Not Applicable
PART I
Item 1. Business
Introduction
Competitive Technologies, Inc. (the registrant or CTT), is a
Delaware corporation incorporated in 1971 to succeed an Illinois
business corporation incorporated in 1968. CTT provides technology
development and commercialization services with respect to a broad
range of digital and Internet, life sciences and physical sciences
technologies originally invented by various individuals, corporations,
federal agencies and laboratories, and universities. CTT's goal is
to maximize returns on research, development and patent investments
by selling, licensing or otherwise transferring their innovations to
others, or when appropriate, by investing in new entities to
commercialize them.
Effective May 28, 1999, CTT sold its remaining 14.5% interest in
NovaNET Learning, Inc. (NLI) for $2,472,602 in cash in connection with
NLI's acquisition by National Computer Systems, Inc. From February
15, 1995, through May 28, 1999, CTT accounted for its $159,375
investment in NLI under the cost method. In February, 1995, CTT sold
a significant portion of its investment in NLI to Barden Companies,
Inc. As a result of that transaction, CTT received approximately $3
million in cash and reduced its ownership in NLI from 55.1% to 14.5%.
Effective January 31, 1996, CTT acquired 80% of University
Science, Engineering and Technology, Inc. (USET). The total purchase
price was $1,835,000 (excluding expenses related to the acquisition).
CTT paid the final installment of the purchase price on January 31,
1999. In addition to cash of approximately $605,000 and computer
equipment, USET's assets comprised principally licenses and patented
technologies. CTT included USET's results of operations in its
consolidated results of operations from January 31, 1996. Prior to
January 31, 1996, CTT owned 20% of USET and accounted for the
investment in USET on the equity method and recorded 20% of USET's net
income.
The registrant's principal subsidiaries include Competitive
Technologies of PA, Inc. (CTT-PA), USET and Competitive Technologies
of Ohio, Inc. (CTT-OH).
On October 1, 1999, the registrant and its subsidiaries employed
approximately 14 people full-time. Substantially all employees are
salaried and none is represented by a labor union.
Technology Development and Commercialization Services
The registrant and its subsidiaries provide technology develop-
ment and commercialization services for digital and Internet, life
sciences and physical sciences inventions and other innovations made
or owned by individuals, corporations, federal agencies and laborato-
ries, and universities. For an invention or group of inventions, CTT
may evaluate technical feasibility, assess potential patentability,
assess commercial potential, apply for and prosecute patents, enforce
issued patents, sell or license the invention to others, manage
related license agreements, and distribute license royalties to their
respective owners. In certain instances, CTT may initiate litigation
to enforce royalty rights. CTT may also invest in a new entity to
commercialize an invention or group of inventions.
CTT's agreements with its clients specify the particular services
CTT provides and how the clients compensate CTT for those services.
Most clients agree to share with CTT specific percentages of amounts
earned from sale or license of their technologies. Some clients agree
to pay a fixed retainer, a fee for specific services and/or specified
annual fees for CTT's services. In addition, some clients agree to
share expenses of the technology development and commercialization
process.
As early in the technology development and commercialization
process as possible, CTT assesses each invention's patentability and
marketability. This permits CTT to focus efforts and resources on
inventions with higher potential for successful commercialization.
CTT and its subsidiaries provide technology development and
commercialization services to individuals, universities, other
research institutions, government agencies, and domestic and foreign
corporations.
Since January 31, 1996, CTT has managed USET as a wholly owned
subsidiary. From August 20, 1990 until January 31, 1996, CTT owned
20% of USET and managed USET's operations and its portfolio of
technologies, patents and licenses. The USET portfolio comprises
primarily technologies from CTT's university clients before June 28,
1988.
CTT and Lehigh University own 80% and 20%, respectively, of the
stock of CTT-PA. CTT-PA manages Lehigh University's technology
portfolio. CTT closed its office in Bethlehem, Pennsylvania in
September, 1998. Effective July 31, 1999, CTT and Lehigh University
have agreed to dissolve CTT-PA. CTT will retain CTT-PA's assets
(principally its equity in Vector Vision, Inc. (VVI)) and assume CTT-
PA's obligations (primarily to provide technology management services
to Lehigh University) from the dissolution date.
Retained royalty revenues for the registrant and its subsidiaries
in the last five years were derived from the following portfolios (in
thousands):
1999 1998 1997 1996 1995
The USET portfolio:
Registrant's
share $1,769 $1,148 $ 943 $ 972 $ 752
USET's share 977 1,107 835 611 --
The CTT-PA
portfolio 55 46 57 37 44
Others 662 100 100 -- --
$3,463 $2,401 $1,935 $1,620 $ 796
The three technologies that produced retained royalties equal to
or exceeding 10% of consolidated revenue for the registrant and its
subsidiaries during 1999, 1998 or 1997 were encryption, gallium
arsenide semiconductors and Vitamin B12 assay.
The public key encryption and digital authentication technology
was developed by NTRU Cryptosystems, Inc. It can be used to secure
and verify authenticity in wireless and Internet communications and
in electronic commercial transactions. U.S. patents on this
technology have been applied for but none has issued yet. This
technology is non-exclusively licensed to NCT Group, Inc., Sony
Corporation, and TAO Group Limited. Security products based on this
technology have been developed and their marketing and distribution
is beginning, according to information received by the registrant.
Retained royalties earned from this encryption and authentication
technology were $661,500 (19%) of total retained royalties in 1999.
This total amount was from a paid-up, non-exclusive, worldwide, field-
of-use limited license for which all agreed milestones were met during
fiscal 1999 and the licensee paid all agreed milestone payments.
Inventions employing gallium arsenide to improve semiconductor
operating characteristics were developed at the University of
Illinois. U.S. patents have issued from March, 1983 to May, 1989 and
expire from May, 2001 to September, 2006. These inventions are
licensed to Mitsubishi Electric Corporation, NEC Corporation, Polaroid
Corporation, SDL, Inc. and Toshiba Corporation. These inventions are
in current use according to information received from licensees and
other sources. Retained royalties earned from the gallium arsenide
semiconductor inventions were approximately $518,000 (15%), $232,000
(10%) and $282,000 (15%) of total retained royalties in 1999, 1998 and
1997, respectively.
The improved assay procedure for diagnosing Vitamin B12 deficien-
cies was developed at the University of Colorado. U.S. patents have
issued from February, 1980 to May, 1984 and expire between February,
1997 and May, 2001. Certain of these licensed patents expired in
April, 1998 and April, 1999. These expiring licenses contributed
approximately $137,000 (4%) of total retained royalties in fiscal
1999. These assay procedures are licensed to Abbott Laboratories,
Bayer Corporation, Beckman Instruments, Inc., Bio-Rad Laboratories,
Inc., Chiron Diagnostics Corporation, Dade International, Inc.,
Diagnostic Products Corporation, ICN Biomedicals, ICN East, Inc.,
Microgenics, Inc., Roche Diagnostics GmbH and Tosoh Corporation.
These assay procedures are in current use according to information
received from licensees and other sources. Retained royalties earned
from the Vitamin B12 assay were approximately $972,000 (28%), $664,000
(28%) and $581,000 (30%) of total retained royalties in 1999, 1998 and
1997, respectively. Approximately $542,000 of 1999's Vitamin B12
retained royalties was from a licensee's change in its previously
estimated royalties for the period from July, 1993 through July, 1998.
Beginning in fiscal 1998, the registrant has pursued an
aggressive program to license an assay used to determine whether an
individual has an elevated level of homocysteine and a corresponding
deficiency of folate or Vitamin B12. Studies indicate that high
levels of homocysteine are a primary risk factor for coronary artery
disease and a risk factor for strokes and general artery damage. The
registrant's U.S. patent which covers this homocysteine assay expires
in 2007. The registrant had ten homocysteine licenses (including one
sublicense) throughout fiscal 1999, up from three (including one
sublicense) at August 1, 1997. Homocysteine retained royalties in
fiscal 1999 of approximately, $265,000, up from approximately $191,000
in fiscal 1998, were reduced by a sublicensee's withholding royalties
on certain tests. The Company has joined with its licensee in a
lawsuit against the sublicensee. See also Item 3. Legal Proceedings
and Note 13 to Consolidated Financial Statements. The registrant
cannot predict the timing or amounts of retained royalties which may
be earned or the timing or costs which may be incurred in licensing
and enforcing the patents for this assay.
On January 24, 1995, the registrant was awarded an approximately
$800,000 cost reimbursement contract by the Department of the Air
Force to develop strategic planning and operating tools for agile
enterprises. Work on the contract began in February, 1995, and was
completed in November, 1996. The registrant earned approximately
$833,000 of revenue on this contract ($79,000 in fiscal 1997) of which
approximately $479,000 was paid to subcontractors.
The registrant's foreign operations are limited to royalties
received from foreign licensees. See Note 11 to Consolidated
Financial Statements.
Investments in Development-Stage Companies
The registrant generally does not finance research and develop-
ment of technologies. However, in certain instances, the registrant
participates in forming companies to exploit specific technologies it
believes are beyond the pure research and development stage.
In June, 1986, the registrant formed University Communications,
Inc., later renamed NovaNET Learning, Inc., to commercialize NovaNET,
an interactive education and communication network developed at the
University of Illinois. In February, 1995, the registrant sold the
majority of its shares of NLI common stock to Barden Companies, Inc.
and recorded a $2,534,505 gain on the sale. Effective May 28, 1999,
the registrant sold its remaining 14.5% interest in NLI and recorded
a gain of $2,313,227. See Note 2 in Consolidated Financial State-
ments.
In 1995 the registrant invested $25,000 cash in Equine Bio-
diagnostics, Inc. (EBI), a company organized to provide diagnostic
laboratory services for the equine industry. EBI's initial product
had already been tested and was marketed in EBI's first month of
operations. The registrant recorded equity in EBI's net income of
approximately $174,000 from inception through July 31, 1998. The
registrant sold its investment in EBI during the first quarter of
fiscal 1999 for $198,850 in cash. No gain or loss was recognized on
the sale. See Note 2 in Consolidated Financial Statements.
In 1994 the registrant established a majority-owned subsidiary,
VVI, to develop and exploit a video compression technology developed
at Lehigh University. VVI incurred research and development
expenditures (included in costs of technology management services in
the Consolidated Financial Statements) of approximately $78,000 and
$195,000 in 1998 and 1997. Since its inception VVI has obtained
$398,000 in equity funding, $75,000 in grant funding and $99,000 from
a Small Business Innovation Research contract. VVI is obligated to
repay up to three times total grant funds received (see Note 13 to
Consolidated Financial Statements). At July 31, 1999, the registrant
owned 52.4% of VVI's outstanding common stock. At July 31, 1999, VVI
is inactive. VVI expects its video compression software to be
included in a portion of the MPEG-4 standard, an international
standard expected to be adopted for consumer applications such as
video teleconferencing, video databases and wireless video access.
In 1994 the registrant formed Knowledge Solutions, Inc. (KSI) to
develop products using a multimedia training process model from Lehigh
University. Through July 31, 1999, the registrant owned 33.7% of
KSI's outstanding common stock and had recorded a total of $241,000
as its equity in KSI's losses. In July, 1999, KSI's shareholders
authorized its dissolution. The registrant will receive no distribu-
tion from KSI's dissolution.
Special Factors
Losses During Prior Fiscal Years. On a consolidated basis the
registrant earned operating income of $422,000 and net income of
$2,919,000 in fiscal 1999. The registrant's operating activities
provided $626,000 while its investing activities used $295,000 and its
financing activities used $362,000 in fiscal 1999. However, on a
consolidated basis the registrant incurred net losses of $1,235,000
and $1,571,000 in 1998 and 1997, respectively. The registrant's
operating activities used $430,000 and $897,000 in 1998 and 1997,
respectively. The registrant's investing and financing activities
used $168,000 in 1998 and provided $1,151,000 in 1997. There can be
no assurance that the registrant will earn operating income in future
years.
Reliance on and Lack of Control of Licensees. To the extent that
the registrant and its subsidiaries share in royalties received from
licensees, the revenues from such licensees are dependent upon the
efforts and expenditures of such licensees. Retained royalties were
95%, 92% and 78% of the registrant's consolidated total revenues in
1999, 1998 and 1997, respectively. The registrant has no control over
the efforts and expenditures of such licensees. In addition,
development of new products by licensees involves high risk since many
new technologies do not become commercially profitable products
despite extensive development efforts of such licensees. Licensees
are not required to advise the registrant of problems which may be
encountered in the attempt to develop commercial products and such
information is usually treated as confidential by such licensees. It
may be assumed that licensees will encounter problems frequently.
Only if licensees succeed in resolving those problems will the
licenses generate royalty income in which the registrant can share.
Need for Government Approvals. Commercial exploitation of some
licensed patents may require approval of governmental regulatory
agencies; there is no assurance that such approvals will be granted.
The principal government agency involved is the United States Food and
Drug Administration (FDA). FDA's approval process is rigorous, time
consuming and costly. Unless and until a licensee obtains approval
of a product requiring such approval, sales of the product will not
be made and the registrant will receive no royalty income based on
sales of the product.
Dependence on Patents. Revenues from patent licenses are subject
to the risk that issued patents may be declared invalid, that patents
may not issue on patent applications, or that new or alternative
technologies may render licensed patents uncommercial. In addition,
upon expiration of all patents underlying a patent license, royalties
to the registrant from such license will cease, and there can be no
assurance that the registrant will be able to replace such royalties
with royalty revenues from other licenses.
Risks Pertaining to Evaluating and Securing Funding for New
Business and Product Development. The registrant continues to seek
business opportunities which are synergistic with its expertise in
developing and commercializing technology or which have the potential
to generate excess cash flow which could be used by the registrant to
build its business. There can be no assurance that the registrant
will succeed in acquiring or developing such businesses or products
or that they will be profitable. In instances where the registrant
invests its own funds, whether directly, through a subsidiary or a
joint venture or otherwise, in researching, developing, manufacturing
or marketing new products, the registrant incurs the same risks as
licensees with respect to new product development. New products may
need further funding after initial funds are exhausted and if such
funding cannot be obtained, such new products may have to be abandoned
resulting in loss of monies previously invested. There is consider-
able risk that any new product may be rendered obsolete or otherwise
not suitable for commercialization by new or alternative technologies.
Dependence on Key Personnel. The registrant believes that the
growth of its business is dependent upon the knowledge and abilities
of a small number of employees and that the loss of such persons could
have an adverse effect on future activities of the registrant. The
principal key employee is Mr. Frank R. McPike, Jr. Mr. McPike was
appointed President and chief operating officer in October, 1998 and
has served as the registrant's chief financial officer since 1983.
Competition. Competition in the technology management services
business is vigorous. Several organizations, some of which are well
established and have greater financial resources than the registrant,
provide technology management services.
Discontinued Operations
Computer-based Education Services Segment
On February 15, 1995, Barden Companies, Inc. (Barden) purchased
from the registrant additional shares of NovaNET Learning, Inc. common
stock. Barden paid the registrant $3,227,372 ($1.375 per share) in
cash for 2,347,180 shares. In connection with Barden's purchase, the
registrant offered to purchase from all NLI shareholders other than
Barden a number of their shares of NLI common stock to allow all NLI
shareholders to participate in the sale to Barden on a pro rata basis.
Pursuant to this offer, the registrant purchased 151,096 tendered
shares for a total of $207,757 ($1.375 per share) in cash. The
registrant's net gain on these transactions in fiscal 1995 was
$2,534,505. When these and other transactions were completed, Barden
owned 52.1% and the registrant owned 14.5% of the outstanding common
stock of NLI.
From February 15, 1995, through May 28, 1999, the registrant
accounted for its $159,375 investment in NLI under the cost method.
Consolidated financial statements for the registrant and its
subsidiaries for prior periods present NLI as a discontinued
operation. At various times since NLI's initial funding in June,
1986, the registrant invested an aggregate of $1,997,000 in NLI
equity.
Before February 15, 1995, NLI comprised the registrant's
computer-based education services segment. NLI markets its interac-
tive courseware throughout the United States principally to schools
and colleges, drop-out prevention programs, correctional and other
institutions aimed at improving teenage and adult literacy.
Item 2. Properties
Since November, 1996, the registrant has occupied approximately
9,000 square feet in an office building in Fairfield, Connecticut
under a lease which expires December 31, 2001. The registrant has an
option to renew the lease through December 31, 2006. The registrant
believes its facilities are adequate for its current and near-term
operations.
Item 3. Legal Proceedings
On May 4, 1999, Metabolite Laboratories, Inc. (MLI) and the
registrant (collectively plaintiffs) filed a complaint and jury demand
against Laboratory Corporation of America Holdings d/b/a/ LabCorp
(LabCorp) in the United States District Court for the District of
Colorado. The complaint alleges, among other things, that LabCorp
owes plaintiffs royalties for homocysteine assays performed during and
since the summer of 1998 using methods and materials falling within
the claims of a patent owned by the registrant. The registrant
licensed the patent non-exclusively to MLI and MLI sublicensed it to
LabCorp. Plaintiffs claim LabCorp's actions constitute breach of
contract and patent infringement. Their claim seeks an injunction
ordering LabCorp to perform all its obligations under its agreement,
to cure past breaches, to provide an accounting of wrongfully withheld
royalties and to refrain from infringing the patent. Plaintiffs also
seek unspecified money and exemplary damages and attorneys' fees,
among other things. LabCorp has filed an answer and counterclaims
alleging noninfringement, patent invalidity and patent misuse. The
registrant is unable to estimate the related legal expenses it may
incur in this suit and has recorded no revenue for these withheld royalties.
On July 7, 1997, in a case previously filed in the United States
District Court for the District of Colorado by University of Colorado
Foundation, Inc., The University of Colorado, The Board of Regents of
the University of Colorado, Robert H. Allen and Paul A. Seligman,
plaintiffs, against American Cyanamid Company, defendant, judgment was
entered in favor of plaintiffs and against defendant in the amount of
approximately $44.4 million. The case involved an idea by professors
at the University of Colorado that improved Materna, a prenatal
vitamin compound sold by defendant. The District Court concluded that
defendant fraudulently obtained a patent on the improvement without
disclosing the patent application to plaintiffs and without naming the
professors as the inventors and that the defendant was unjustly
enriched. While the registrant was not and is not a party to this
case, the registrant had a contract with the University of Colorado
to license University of Colorado inventions to third parties, and the
registrant is entitled to a share of the judgment. If the judgment
is affirmed in full upon appeal, the registrant expects its share to
be approximately $5.2 million. The registrant has recorded no
potential judgment proceeds in its financial statements to date. The
case is currently pending on appeal in the Federal Circuit Court of
Appeals. Oral arguments were heard on December 7, 1998. There can
be no assurance that plaintiffs will prevail on appeal, nor can
registrant predict the amount of the judgment, if any, that may
ultimately be entered following the appeal.
On November 4, 1991, a suit was filed in the Superior Court of
the Judicial District of Fairfield, Connecticut, at Bridgeport by
Bruce Arbeiter, Jeffrey A. Bigelow, Jeffrey W. Leiderman, Optical
Associates Limited Partnership (OALP) and Optical Associates
Management Corp. (OAMC) purportedly on behalf of all the limited
partners of OALP, as plaintiffs, against Genetic Technology Manage-
ment, Inc. (GTM), University Optical Products Co. (UOP), the
registrant, Jay Warren Blaker, L.W. Miles, A. Sidney Alpert, Frank R.
McPike, Jr., Michael Behar, Bruce E. Langton, Arthur M. Lieberman and
Harry Van Benschoten, as defendants. The complaint alleges, among
other things, that in January, 1989, the defendants, GTM, UOP and the
registrant, sold substantially all of the assets of OALP to Unilens
Corp. USA (Unilens) and disbursed only 4% of the sales price to OALP,
all in violation of certain agreements, representations and legal
obligations; that OALP is entitled to the full proceeds of the sale
to Unilens; and that by vote of limited partners holding in excess of
80% of the capital interests of OALP, the limited partners have
removed GTM as the general partner of OALP and replaced GTM with OAMC.
The complaint claims, among other things, money damages (in an amount
not specified in the claim for relief); treble and punitive damages
(with no amounts specified); attorneys fees; an accounting; temporary
and permanent injunctive relief; and judgment holding that OAMC was
legally substituted for GTM as the general partner of OALP.
Management of the registrant believes, based upon all of the facts
available to management, that the claims asserted in the suit are
without merit, and the registrant intends to defend the suit
vigorously. Hearings in the case have commenced before an attorney
referee; however, due to scheduling conflicts, further hearings have
been adjourned and are expected to occur later in calendar 1999 or
2000.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) The registrant's common stock is listed on the American
Stock Exchange. The following table sets forth the high and low sales
prices as reported by the American Stock Exchange for the periods
indicated.
Fiscal Year Ended July 31, 1999 High Low
First Quarter.................... 8 15/16 2 7/8
Second Quarter................... 8 3/4 3 7/8
Third Quarter.................... 7 1/2 5
Fourth Quarter................... 7 1/2 5 13/16
Fiscal Year Ended July 31, 1998 High Low
First Quarter.................... 11 3/4 7 7/8
Second Quarter................... 9 1/4 7 5/8
Third Quarter.................... 11 3/8 7 1/2
Fourth Quarter................... 10 3/8 8
No cash dividends were declared on the registrant's common stock
during the last two fiscal years.
At October 15, 1999 there were approximately 900 holders of
record of the registrant's common stock.
COMPETITIVE TECHNOLOGIES, INC.
Selected Financial Data (1)
For the years ended July 31
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1999 1998 1997 1996 (4) 1995
<S> <C> <C> <C> <C> <C>
Retained royalties $ 3,463,176 $ 2,400,534 $ 1,935,041 $ 1,619,909 $ 796,243
Revenues under service
contracts and grants 176,148 211,300 541,176 660,287 906,952
Total revenues $ 3,639,324 $ 2,611,834 $ 2,476,217 $ 2,280,196 $ 1,703,195
Income (loss) from continuing
operations (2)(3) $ 2,919,384 $(1,235,489) $(1,571,045) $ (588,101) $ (641,249)
Income (loss) from operations
of discontinued operation (5) -- -- -- -- 99,468
Net gain on disposal of
discontinued operations (6) -- -- -- -- 2,534,505
Net income (loss) $ 2,919,384 $(1,235,489) $(1,571,045) $ (588,101) $ 1,992,724
Net income (loss) per share
(basic and diluted):
Continuing operations $ 0.49 $ (0.21) $ (0.27) $ (0.10) $ (0.11)
Operations of discontinued
operation -- -- -- -- 0.02
Net gain (loss) on disposal of
discontinued operations -- -- -- -- 0.43
Net income (loss) $ 0.49 $ (0.21) $ (0.27) $ (0.10) $ 0.34
Weighted average number of common
shares outstanding (basic) 5,982,112 5,969,434 5,914,868 5,853,814 5,814,826
At year end:
Cash, cash equivalents
and short-term investments $ 5,538,067 $ 2,634,618 $ 3,465,005 $ 4,381,630 $ 4,957,143
Total assets $ 8,959,021 $ 6,301,864 $ 7,203,480 $ 8,368,140 $ 6,768,942
Long-term obligations $ -- $ -- $ 260,265 $ 652,367 $ --
Shareholders' interest $ 7,180,286 $ 4,172,413 $ 5,014,746 $ 6,287,952 $ 6,289,524
</TABLE>
(1) Should be read in conjunction with Consolidated Financial Statements and
Notes thereto.
(2) Includes $2,313,227 gain on sale of investment in NovaNET Learning, Inc.
in 1999.
(3) Includes net income (losses) related to equity method affiliates of
approximately $58,000, $34,000 and ($104,000) in 1997, 1996 and 1995,
respectively. In 1996 and 1995, approximately $30,000 and $47,000,
respectively, of net income related to equity method affiliates related
to USET.
(4) Includes results of USET's operations on a consolidated basis for the six
months from January 31, 1996 through July 31, 1996.
(5) Registrant's equity in net income of NovaNET Learning, Inc. for the six
and one-half months to February 15, 1995.
(6) Disposal of NovaNET Learning, Inc., the registrant's computer-based
education services segment.
(7) No cash dividends were declared or paid in any year presented.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
Cash and cash equivalents of $185,838 at July 31, 1999, were
$30,988 lower than cash and cash equivalents of $216,826 at July
31, 1998. Operating activities provided $626,083, investing
activities used $295,228 and financing activities used $361,843 in
the year ended July 31, 1999.
In addition, Competitive Technologies, Inc. (CTT) and its
majority-owned subsidiaries (the Company) held $5,352,229 in short-
term investments at July 31, 1999. These investments are available
to fund the Company's future operating, investing and financing
activities.
Effective May 28, 1999, CTT sold its 14.5% interest in NovaNET
Learning, Inc. (NLI) for $2,472,602 in cash in connection with
NLI's acquisition by National Computer Systems, Inc. From February
15, 1995, through May 28, 1999, CTT accounted for its $159,375
investment in NLI under the cost method. CTT recognized a gain of
$2,313,227 in its fiscal quarter ended July 31, 1999. Capital loss
carryforwards sheltered the gain from Federal and state income
taxes.
CTT sold its investment in Equine Biodiagnostics, Inc. (EBI)
for $198,850 in cash during the quarter ended October 31, 1998.
This selling price was also CTT's carrying value for this invest-
ment accounted for on the equity method. CTT's original cash
investment in EBI was $25,000. During the time it held this
investment in EBI, CTT recognized $173,850 as its equity in the net
income of EBI.
On May 4, 1999, Metabolite Laboratories, Inc. (MLI) and CTT
(collectively plaintiffs) filed a complaint and jury demand against
Laboratory Corporation of America Holdings d/b/a LabCorp (LabCorp)
in the United States District Court for the District of Colorado.
The complaint alleges, among other things, that LabCorp owes
plaintiffs royalties for homocysteine assays performed during and
since the summer of 1998 using methods and materials falling within
the claims of a patent owned by CTT. CTT licensed the patent non-
exclusively to MLI and MLI sublicensed it to LabCorp. Plaintiffs
claim LabCorp's actions constitute breach of contract and patent
infringement. Their claim seeks an injunction ordering LabCorp to
perform all its obligations under its agreement, to cure past
breaches, to provide an accounting of wrongfully withheld royalties
and to refrain from infringing the patent. Plaintiffs also seek
unspecified money and exemplary damages and attorneys' fees, among
other things. LabCorp has filed an answer and counterclaims
alleging noninfringement, patent invalidity and patent misuse. CTT
is unable to estimate the related legal expenses it may incur in
this suit and has recorded no revenue for these withheld royalties.
In August, 1998, CTT's Board of Directors took steps to reduce
future operating expenses. This restructuring included closing its
office in Bethlehem, Pennsylvania, reducing the Company's staff by
four full-time employees, and reassigning their operating functions
among the Company's remaining staff. The Company recognized
restructuring charges of $70,000 in the quarter ended October 31,
1998, for severance, related legal and other expenses of closing
the office. The Company paid all charges during the quarter ended
October 31, 1998.
The Company's net income of $2,919,384 for the year ended July
31, 1999 included the following noncash items: depreciation and
amortization of approximately $201,000, amortization of discount on
purchase obligation of approximately $4,000, accrued expenses of
approximately $152,000, and minority interest of approximately
$40,000.
In general, changes in various operating accounts result from
changes in the timing and amounts of cash flows before and after
the end of the period. The most substantial changes in operating
accounts were the $206,000 increase in royalties receivable and the
$91,000 increase in royalties payable. During the year ended July
31, 1999, the Company paid salary and benefits continuation pay-
ments and related legal fees of $298,000 to its former president
and chief executive officer. At July 31, 1998, the Company had
accrued $300,000 to settle his employment contract. The Company
will not make further payments to him.
During the year ended July 31, 1999, the Company purchased
approximately $2,928,000 of other short-term investments.
In October, 1998, the Board of Directors authorized CTT to
repurchase up to 250,000 shares of its common stock. The Company
may repurchase shares on the open market or in privately negotiated
transactions at times and in amounts determined by management based
on its evaluation of market and economic conditions. Between
October, 1998, and July 31, 1999, the Company used $109,380 in cash
to repurchase 25,400 shares of its common stock.
In fiscal 1999, CTT received $48,530 from stock options exer-
cised to purchase common stock.
On January 31, 1999, the Company paid the remaining $301,000
of the University Science, Engineering and Technology, Inc. (USET)
purchase obligation (including interest). The Company paid the
entire original purchase obligation of $1,835,000 with USET's cash
at acquisition and USET's share of retained royalties earned during
the three years since January 31, 1996. Since January 31, 1999,
USET's retained royalties are fully available to fund future
operating activities.
The Company is contractually required to pay certain persons
specified percentages of Renova royalties received until certain
total payments have been made. At July 31, 1999, the remaining
amount of such contingent obligations was $35,360.
The Company carries liability insurance, directors' and offic-
ers' liability insurance and casualty insurance for owned or leased
tangible assets. It does not carry key person life insurance.
There are no legal restrictions on payments of dividends by CTT.
At July 31, 1999, the Company had no outstanding commitments
for capital expenditures.
The Company continues to pursue additional technology manage-
ment opportunities. If and when such opportunities are consummat-
ed, the Company may commit capital resources to them.
The Company does not believe that inflation had a significant
impact on its operations during 1999 or 1998 or that it will have a
significant impact on operations during the next twelve-month
operating period.
The Company has addressed the Year 2000 computer issue. This
issue concerns computer hardware and software systems' ability to
recognize and process dates after December 31, 1999, properly and
accurately. The Company has modified, upgraded or replaced previ-
ously noncompliant computer systems. The Company has tested its
significant systems and management is confident that they will
function as required after December 31, 1999. Management believes
that the greatest risk to the Company would be if its licensees
were to be unable to make their licensed products Year 2000 compli-
ant or to report their respective royalties. Accordingly, the
Company requested that its licensees confirm that the Year 2000
computer issue will not prevent them from producing or reporting
royalties after December 31, 1999. Based on licensees' responses
and other information reported by licensees, management does not
expect the Year 2000 issue to have a material effect on royalty
revenues. The Company has also received confirmations from its
banks and other critical vendors that their computer systems are
Year 2000 compliant. Management estimates that it cost approxi-
mately $26,000 to address these Year 2000 issues, including normal-
ly recurring costs to keep its computer systems current. This is a
Year 2000 readiness disclosure entitled to protection as provided
in the Year 2000 Information and Readiness Disclosure Act.
Currently Vector Vision, Inc. (VVI), CTT's 52.4% owned sub-
sidiary, is inactive. The Company, the inventor and others sup-
ported VVI's development activities in the past. VVI expects its
video compression software to be included in a portion of the MPEG-
4 standard, an international standard expected to be adopted for
consumer applications such as video teleconferencing, video data-
bases and wireless video access.
In connection with the case that involved an idea by profes-
sors at the University of Colorado that improved a prenatal vitamin
compound sold by American Cyanamid Company, the Company is entitled
to a share of the judgment. If the judgment is affirmed in full
upon appeal, which is currently pending, the Company expects its
share to be approximately $5,200,000. There can be no assurance
that the plaintiffs will prevail on appeal, nor can the Company
predict the amount of the judgment, if any, that may ultimately be
entered following the appeal. The Company has recorded no poten-
tial judgment proceeds in its financial statements to date. See
Item 3, Legal Proceedings.
At July 31, 1999, the Company had $5,538,067 of cash, cash
equivalents and short-term investments and $577,009 of royalties
receivable net of royalties payable. In addition, it had no debt
and its total shareholders' interest was $7,180,286, which was
approximately $3,008,000 higher than at July 31, 1998.
Based on the Company's current expectations, it anticipates
that currently available funds will be sufficient to finance cash
needs for the foreseeable future for its current operating activi-
ties. However, expansion of the Company's business is subject to
many factors outside the Company's control or that it cannot
currently anticipate, including without limitation business oppor-
tunities that may arise in the future. Accordingly, there can be no
assurance that the Company's current expectations regarding the
sufficiency of currently available funds will prove to be accurate.
Results of Operations - 1999 vs. 1998
The Company's $421,533 operating income and $2,919,384 net
income for the fiscal year ended July 31, 1999, are $1,803,436 and
$4,154,873 higher, respectively, than its operating loss and net
loss for the fiscal year ended July 31, 1998. The Company in-
creased its revenues by $1,027,490 (39%) and reduced its operating
expenses by $775,946 (19%) compared with fiscal 1998. Net income
for fiscal 1999 includes the Company's $2,313,227 gain on the sale
of its investment in NLI in the fourth fiscal quarter.
In fiscal 1999, retained royalties revenues increased substan-
tially while revenues under service contracts decreased compared
with fiscal 1998.
Retained royalties in fiscal 1999 were $3,463,176, which is
$1,062,642 (44%) higher than in fiscal 1998. Approximately
$542,000 of this increase was from a licensee's change in its
previously estimated royalties under Vitamin B12 assay licenses for
the period from July, 1993, through July, 1998. This correction
was partially offset by lower royalty revenues from other Vitamin
B12 assay licensees due to expiration of a U.S. Patent in April,
1998, and certain foreign patents in April, 1999. These expiring
licenses contributed approximately $137,000 (4%) of total retained
royalties in fiscal 1999. The remaining Vitamin B12 assay licenses
are expected to expire in May, 2001. Approximately $972,000 (28%)
of retained royalties in fiscal 1999 were from the Vitamin B12
assay licenses. In fiscal 1998, approximately $664,000 (28%) of
retained royalties were from the Vitamin B12 assay licenses.
Retained royalties in fiscal 1999 also include $661,500 from a
paid-up, non-exclusive, worldwide, field-of-use limited license
granted to an unrelated foreign corporation in November, 1998, on
an encryption technology. All performance milestones agreed in the
license were met during fiscal 1999 and the licensee has paid all
the agreed milestone payments. This license generated 19% of
retained royalties in fiscal 1999.
In fiscal 1999, retained royalties from gallium arsenide
semiconductor inventions, which include laser diode applications,
also increased approximately $286,000 over fiscal 1998. This
increase includes a license issue fee and royalties from a new
license as well as royalties from licensees' increased sales of
licensed products. Retained royalties from gallium arsenide
semiconductor inventions were approximately $518,000 (15%) of
retained royalties in fiscal 1999 ($232,000 (10%) in fiscal 1998).
Retained royalties from homocysteine licenses, including
license issue fees, of approximately $265,000 in fiscal 1999
increased approximately $73,000 (38%) over fiscal 1998. The
Company had ten homocysteine licenses (including one sublicense)
throughout fiscal 1999, up from three (including one sublicense)
at August 1, 1997. Homocysteine retained royalties in fiscal 1999
were reduced by a sublicensee's withholding royalties on certain
tests. The Company has joined with its licensee in a lawsuit
against the sublicensee as detailed above and in Note 13 to Consol-
idated Financial Statements. In addition, retained royalties in
fiscal 1998 benefited from license issue fees on new homocysteine
licenses.
Partially offsetting these increases in retained royalties
were reductions in retained royalties because of (a) a final
royalty settlement on a licensed patent that expired in September,
1997, and (b) a one-time sale of a corporate client's patented
technology in fiscal 1998. Retained royalties also fluctuate due
to changes in the timing of royalties reported by licensees and
changes in licensees' sales of licensed products.
Fiscal 1999 revenues under service contracts and grants were
$35,152 (17%) lower than in fiscal 1998. The Company earned
substantially all of these revenues from contract services to
domestic corporations in fiscal 1999. This includes a one-time fee
for assisting a start-up company to obtain equity financing. The
Company completed two government contracts in fiscal 1998; this
accounts for most of the reduction in service contract revenues
from fiscal 1998.
Total operating expenses for fiscal 1999 were $3,217,791.
This was $775,946 (19%) lower than for fiscal 1998. The Company
reduced personnel and related expenses, consultants' fees, and
VVI's research and development expenses. These reductions were
partially offset by higher shareholders' expenses, including public
and investor relations services. The Company reduced its operating
expenses by closing its Cleveland, Ohio, office in January, 1998,
and its Bethlehem, Pennsylvania, office in September, 1998, and by
reducing its Connecticut office staff.
Costs of technology management services were $72,662 (3%)
lower in fiscal 1999 than in fiscal 1998 as more fully discussed
below.
Costs related to retained royalties were approximately $85,000
(9%) higher in 1999 than in 1998. This reflects higher personnel
costs (including benefits and overheads) associated with patenting
and licensing services partially offset by lower costs for subcon-
tractors on retainer for certain sales and marketing services for
certain corporate technologies. Costs related to retained royal-
ties also include domestic and foreign patent prosecution, mainte-
nance and litigation expenses.
Fiscal 1999 costs related to service contracts (including
direct charges for subcontractors' services and personnel costs
associated with service contracts) were approximately $134,000
(37%) lower than for fiscal 1998. The greatest portion of this
reduction was in personnel costs (including benefits and overheads)
and consultants' costs associated with service contracts.
Costs associated with new client development for fiscal 1999
(principally personnel costs, including benefits and overheads)
were approximately $23,000 (3%) lower than for fiscal 1998. The
Company had fewer employees in fiscal 1999 than it had in fiscal
1998.
General and administration expenses in fiscal 1999 were ap-
proximately $473,000 (29%) lower than in fiscal 1998. The Company
had fewer employees and lower consultants' fees and expenses;
however, these reductions were partially offset by higher share-
holders' expenses (including public and investor relations servic-
es).
Restructuring charges of $70,000 in fiscal 1999 related to the
costs of closing the Company's Bethlehem, Pennsylvania, office and
other staff reductions made in August and September, 1998. Addi-
tionally, charges of $75,000 in fiscal 1998 related to the costs of
closing the Company's office in Cleveland, Ohio. Management took
both of these actions to reduce operating expenses and improve
operating efficiency. In fiscal 1998, the Company accrued contract
settlement expenses of $300,000 for the estimated costs of settling
the remainder of its former president and chief executive officer's
employment contract.
Interest income in fiscal 1999 was higher than for fiscal
1998. The Company's average invested balance was approximately 29%
higher but its weighted average interest rate was approximately
0.8% per annum lower than for fiscal 1998. Interest expense in
fiscal 1999 and 1998 related to the debt incurred in connection
with the acquisition of USET.
Other income for fiscal 1998 includes approximately $18,000
gain realized from available-for-sale securities.
Other expenses for fiscal 1999 and 1998 were legal expenses
incurred in connection with a lawsuit brought against CTT, some of
its subsidiaries and directors. This suit is more fully detailed
in Note 13 to Consolidated Financial Statements. Further hearings
in this case have been adjourned and are expected to occur later in
calendar 1999 or 2000. Management is unable to estimate the
related legal expenses which may be incurred in fiscal 2000.
Unilens Corp. USA (Unilens) made no payments in either fiscal year.
Since the Company carries this receivable at zero value, it will
record any collections in the period collected. Through July 31,
1999, the Company had received aggregate cash proceeds of approxi-
mately $1,011,000 from the January, 1989, sale of University
Optical Products Co.'s assets to Unilens. As cash proceeds were
received, the Company paid a 4% cash commission to Optical Associ-
ates, L. P., its joint venture partner.
Minority interest in the losses of subsidiaries in 1999 and
1998 was VVI's minority shareholders' additional interest in its
losses.
The Company has substantial net operating and capital loss
carryforwards for Federal income tax purposes, a significant
portion of which expire in fiscal 2000.
The Company's adoption of Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," and 131,
"Disclosures about Segments of an Enterprise and Related Informa-
tion," did not have a material effect on its financial statements.
The Company's only item of other comprehensive income is unrealized
holding gains or losses on available-for-sale securities. All the
Company's activities are in one operating segment, technology
management services.
The Company does not expect adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instru-
ments and Hedging Activities," to have a material effect on its
financial statements. See Note 1 to Consolidated Financial State-
ments.
Results of Operations - 1998 vs. 1997
Consolidated revenues for the year ended July 31, 1998, were
$135,617 (5%) higher than for the year ended July 31, 1997. Re-
tained royalties accounted for 92% and 78% of total revenues in
fiscal 1998 and 1997, respectively.
Retained royalties in fiscal 1998 were $465,493 (24%) higher
than in fiscal 1997. This increase included revenues (license
fees, amounts for past infringements, and earned royalties) from
new licenses and sublicenses, an option fee, a final royalty
settlement on an expired patent and higher earned royalties on
several licensed technologies. These increases were partially
offset by a licensee's report reducing previously reported royal-
ties.
The Company's retained royalties from its Vitamin B12 assay
were approximately $664,000 (28%) and $581,000 (30%) of total
retained royalties in 1998 and 1997, respectively. Certain of
these licensed patents expired in April, 1998. These expiring
licenses contributed approximately $380,000 (16%) of total retained
royalties in fiscal 1998. The Company's retained royalties from
the gallium arsenide semiconductor inventions were approximately
$232,000 (10%) and $282,000 (15%) of total retained royalties in
1998 and 1997, respectively. No other technologies produced
retained royalties equal to or greater than 10% of consolidated
revenue in 1998.
Fiscal 1998 revenues under service contracts and grants were
$329,876 (61%) lower than in fiscal 1997. In fiscal 1998, the
Company earned service contract revenues from a state government
contract and several other smaller corporate, government and
university contracts. In fiscal 1997, the Company earned service
contract revenues under several large nonrecurring international
and domestic corporate, government and university service con-
tracts. There were no grant revenues in fiscal 1998 or 1997.
Total operating expenses for fiscal 1998 were $268,371 (6%)
lower than for fiscal 1997. In fiscal 1998, the Company reduced
total personnel costs, consultants' fees and expenses, related
operating expenses, and VVI's research and development expenses.
Costs related to CTT's acquisition of Competitive Technologies of
PA, Inc. were fully amortized in September, 1997. These reductions
were partially offset by higher rent expense, directors' fees and
expenses, shareholders' expenses and legal expenses and by the
$300,000 estimated costs to settle the Company's employment con-
tract with its former president and chief executive officer.
Costs of technology management services were $640,306 (23%)
lower in fiscal 1998 than in fiscal 1997 as more fully discussed
below.
Costs related to retained royalties were approximately $75,000
(9%) higher in 1998 than in 1997. This reflected higher personnel
costs (including benefits and overheads) associated with patenting
and licensing services, higher costs for subcontractors retained
for selling and marketing certain corporate technologies, and
higher patent litigation expenses. It also reflected lower foreign
and domestic patent costs, lower amortization expenses and higher
recoveries of foreign patent costs against university royalties.
Fiscal 1998 costs related to service contracts (including
direct charges for subcontractors' services and personnel costs
associated with service contracts) were approximately $688,000
(65%) lower than for fiscal 1997. This reduction corresponds to
the reduction in revenues under service contracts.
Fiscal 1998 costs associated with new client development
(principally personnel costs, including benefits and overheads)
decreased approximately $27,000 (3%) from fiscal 1997.
General and administration expenses were approximately $72,000
(5%) higher in fiscal 1998. This included costs associated with
closing the Company's office in Cleveland, Ohio, and consolidating
that office's functions into operations in other Company offices.
In addition, the Company incurred higher legal expenses, directors'
fees and shareholders' expenses in connection with reconstituting
its Board of Directors and related matters.
In fiscal 1998, the Company accrued contract settlement ex-
penses of $300,000 for the estimated costs of settling the remain-
der of its former president and chief executive officer's employ-
ment contract.
The net effect of the $135,617 increase in operating revenues
and the $268,371 reduction in operating expenses was to reduce the
Company's operating loss by $403,988 (23%) compared with fiscal
1997.
Interest income increased $27,838 (20%) despite lower average
invested balances. Weighted average interest rates were approxi-
mately 1.2% per annum higher in fiscal 1998. Interest expense of
$37,688 and $93,371 in fiscal 1998 and 1997, respectively, related
to the debt incurred in connection with the acquisition of USET.
In fiscal 1998, net income related to equity method affiliates
comprised CTT's equity in the net income of (EBI) ($22,000) sub-
stantially offset by CTT's equity in net losses of other ventures.
In fiscal 1997, CTT's equity in the net income of EBI ($70,000) was
partially offset by CTT's equity in other net losses.
Other income for fiscal 1998 included approximately $18,000
gain realized from available-for-sale securities. Other income for
fiscal 1997 included $77,000 gain from short-term investments.
Other expenses for fiscal 1998 and 1997 were legal expenses
incurred in connection with a suit brought against CTT, some of its
subsidiaries and former directors as more fully detailed in Note 13
to Consolidated Financial Statements.
Minority interest in the losses of subsidiaries in 1998 and
1997 was VVI's minority shareholders' additional interest in its
losses.
Forward-Looking Statements
Statements about the Company's future expectations, including
development and regulatory plans, and all other statements in this
Annual Report on Form 10-K other than historical facts are "for-
ward-looking statements" within the meaning of applicable Federal
Securities Laws and are not guarantees of future performance.
These statements involve risks and uncertainties related to market
acceptance of and competition for the Company's licensed technolo-
gies and other risks and uncertainties inherent in the Company's
business, including those set forth in Item 1 of this Annual Report
on Form 10-K for the year ended July 31, 1999, and other factors
that may be described in the Company's filings with the Securities
and Exchange Commission, and are subject to change at any time.
The Company's actual results could differ materially from these
forward-looking statements. The Company undertakes no obligation
to update publicly any forward-looking statement.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Accountants 23
Consolidated Balance Sheets 24-25
Consolidated Statements of Operations 26
Consolidated Statements of Changes
in Shareholders' Interest 27
Consolidated Statements of Cash Flows 28-29
Notes to Consolidated Financial Statements 30-44
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019-6013
REPORT OF INDEPENDENT ACCOUNTANTS Telephone (212) 259 1000
Facsimile (212) 259 1301
To the Board of Directors and Shareholders
Of Competitive Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
shareholders' interest and cash flows present fairly, in all
material respects, the financial position of Competitive Technolo-
gies, Inc. and Subsidiaries at July 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the
three years in the period ended July 31, 1999, in conformity with
generally accepted accounting principles. These financial state-
ments are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial state-
ments based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reason-
able assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
September 24, 1999
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1999 and 1998
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 185,838 $ 216,826
Short-term investments, at market 5,352,229 2,417,792
Receivables, including $2,449 and $20,143
receivable from related parties in
1999 and 1998, respectively 1,726,046 1,491,937
Prepaid expenses and other current assets 143,171 139,780
Total current assets 7,407,284 4,266,335
Property and equipment, at cost, net 155,089 171,214
Investments 91,307 408,288
Intangible assets acquired, principally
licenses and patented technologies, net
of accumulated amortization of $487,806
and $349,134 in 1999 and 1998, respectively 1,305,341 1,444,014
Other assets -- 12,013
TOTAL ASSETS $8,959,021 $6,301,864
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1999 and 1998
(Continued)
1999 1998
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable, including $2,043
payable to related parties in 1998 $ 109,986 $ 37,323
Accrued liabilities, including $5,938
payable to related parties in 1999 1,668,749 1,794,742
Current portion of purchase obligation -- 297,386
Total current liabilities 1,778,735 2,129,451
Commitments and contingencies -- --
Shareholders' interest:
5% preferred stock, $25 par value;
35,920 shares authorized; 2,427
issued and outstanding 60,675 60,675
Common stock, $.01 par value; 20,000,000
shares authorized; 6,003,193 shares
issued; shares outstanding: 6,003,112
in 1999 and 5,993,003 in 1998 60,032 60,032
Capital in excess of par value 25,625,072 25,637,881
Treasury stock (common), at cost;
81 shares in 1999 and 10,190 shares
in 1998 (919) (95,968)
Accumulated other comprehensive loss (15,625) (21,874)
Accumulated deficit (18,548,949) (21,468,333)
Total shareholders' interest 7,180,286 4,172,413
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 8,959,021 $ 6,301,864
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended July 31, 1999, 1998 and 1997
1999 1998 1997
Revenues:
Retained royalties $ 3,463,176 $ 2,400,534 $ 1,935,041
Revenues under service contracts
and grants, including $4,947
$101,281 and $142,216 from
related parties in 1999, 1998
and 1997, respectively 176,148 211,300 541,176
3,639,324 2,611,834 2,476,217
Costs of technology management
services, of which $36,612 was
paid to related parties in 1997 2,014,572 2,087,234 2,727,540
General and administration expenses,
of which $4,800, $6,504 and $40,882
were paid to related parties in
1999, 1998 and 1997, respectively 1,133,219 1,606,503 1,534,568
Contract settlement expense -- 300,000 --
Restructuring charges 70,000 -- --
3,217,791 3,993,737 4,262,108
Operating income (loss) 421,533 (1,381,903) (1,785,891)
Gain on sale of investment
in NovaNET Learning, Inc. 2,313,227 -- --
Interest income 190,272 170,051 142,213
Interest expense (3,607) (37,688) (93,371)
Income (loss) related to
equity method affiliates, net (748) 182 58,325
Other income (expense), net (41,337) (8,852) 25,958
Income (loss) before minority
interest 2,879,340 (1,258,210) (1,652,766)
Minority interest in losses of
subsidiaries 40,044 22,721 81,721
Net income (loss) 2,919,384 (1,235,489) (1,571,045)
Other comprehensive income (loss):
Net unrealized holding gains
(losses) on available-for-
sale securities 6,249 (11,194) 74,060
Reclassification adjustment for
realized gains included in
net income (loss) -- (18,482) (76,863)
Comprehensive income (loss) $ 2,925,633 $(1,265,165) $(1,573,848)
Net income (loss) per share:
Basic and diluted $ 0.49 $ (0.21) $ (0.27)
Weighted average number of common
shares outstanding:
Basic 5,982,112 5,969,434 5,914,868
Diluted 6,009,701 5,969,434 5,914,868
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Interest
For the years ended July 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Other
Shares Common Stock Capital in Comprehensive
issued and Shares excess of Treasury Stock Income Accumulated
outstanding Amount issued Amount par value Shares held Amount (Loss) Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1996 2,427 $60,675 5,925,829 $59,258 $24,993,926 (25,000) $(174,713) $ 10,605 $(18,661,799)
Exercise of common
stock options. . . . . 14,000 140 92,642
Exercise of common
stock warrants . . . . 6,000 60 38,190
Stock issued under 1996
Directors' Stock
Participation Plan . . 6,000 60 59,940
Stock issued under
Employees' Common
Stock Retirement Plan. 29,998 9,654 76,202
Grant of warrants to
consultants. . . . . . 3,410
Other comprehensive income:
Net change in unrealized
holding gains (losses)
on available-for-sale
securities . . . . . (2,803)
Net loss . . . . . . . . (1,571,045)
Balance - July 31, 1997 2,427 60,675 5,951,829 59,518 25,218,106 (15,346) (98,511) 7,802 (20,232,844)
Exercise of common
stock options. . . . . 33,358 333 243,684 (6,438) (73,033)
Exercise of common
stock warrants . . . . 6,000 61 28,265
Stock issued under 1996
Directors' Stock
Participation Plan . . 12,006 120 101,130
Stock issued under
Employees' Common
Stock Retirement Plan. 24,423 11,594 75,576
Grant of warrants to
consultants. . . . . . 22,273
Other comprehensive income:
Net change in unrealized
holding gains (losses)
on available-for-sale
securities.. . . . . (29,676)
Net loss . . . . . . . . (1,235,489)
Balance - July 31, 1998 2,427 60,675 6,003,193 60,032 25,637,881 (10,190) (95,968) (21,874) (21,468,333)
Exercise of common
stock options. . . . . (48) 11,500 48,578
Stock issued under 1996
Directors' Stock
Participation Plan . . (22,683) 10,625 74,147
Stock issued under
Employees' Common
Stock Retirement Plan. (1,818) 13,384 81,704
Grant of warrants to
consultants. . . . . . 11,740
Other comprehensive income:
Net change in unrealized
holding gains (losses)
on available-for-sale
securities . . . . . 6,249
Purchase of treasury
stock. . . . . . . . . (25,400) (109,380)
Net income . . . . . . . 2,919,384
Balance - July 31, 1999. 2,427 $60,675 6,003,193 $60,032 $25,625,072 (81) $ (919) $ (15,625) $(18,548,949)
</TABLE>
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 1999, 1998 and 1997
1999 1998 1997
Cash flow from operating
activities:
Net income (loss) $ 2,919,384 $(1,235,489) $(1,571,045)
Noncash items included in
net income (loss):
Depreciation and
amortization 201,277 233,657 383,622
Equity method affiliates 748 (182) (58,325)
Minority interest (40,044) (22,721) (81,721)
Directors' stock and
stock retirement plan
accruals 140,101 175,004 183,700
Contract settlement accrual -- 300,000 --
Amortization of discount
on purchase obligation 3,607 37,688 91,338
Other noncash items 51,784 67,078 (17,707)
Gain on sale of investment in
NovaNET Learning, Inc. (2,313,227) -- --
Other 21 (11,994) 19
Net changes in various
operating accounts:
Receivables (184,109) (87,902) (316,005)
Prepaid expenses and other
current assets (3,391) (24,243) 15,289
Accounts payable and
accrued liabilities (150,068) 139,275 474,123
Net cash flow from
operating activities 626,083 (429,829) (896,712)
Cash flow from investing
activities:
Purchases of property and
equipment, net (46,480) (24,433) (160,002)
Proceeds from sales of:
Available-for-sale securities 1,500,000 4,550,000
Other short-term investments -- 1,188,784
Directors' escrow account -- -- 325,000
Purchases of short-term
investments (2,928,188) (1,278,420) (4,494,300)
Proceeds from sales of
investments in:
NovaNET Learning, Inc. 2,472,602 -- --
Equine Biodiagnostics, Inc. 198,850 -- --
Investments in affiliates and
subsidiaries, net 7,988 (13,674) 58,437
Net cash flow from
investing activities (295,228) 183,473 1,467,919
(continued)
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 1999, 1998 and 1997
(Continued)
1999 1998 1997
Cash flow from financing
activities:
Proceeds from exercise of
stock options and warrants 48,530 199,310 131,032
Proceeds from minority's in-
vestment in subsidiary's
common stock -- -- 35,000
Purchases of treasury stock (109,380) -- --
Repayment of purchase
obligation (300,993) (550,567) (483,440)
Net cash flow from financing
activities (361,843) (351,257) (317,408)
Net (decrease) increase in cash
and cash equivalents (30,988) (597,613) 253,799
Cash and cash equivalents,
beginning of year 216,826 814,439 560,640
Cash and cash equivalents, end
of year $ 185,838 $ 216,826 $ 814,439
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Competitive Technologies, Inc. (CTT) and its majority-owned subsidiar-
ies (the Company). CTT's majority-owned subsidiaries are University
Science, Engineering and Technology, Inc. (USET), Competitive
Technologies of PA, Inc. (CTT-PA), Competitive Technologies of Ohio,
Inc. (CTT-OH), University Optical Products Co. (UOP), Genetic
Technology Management, Inc. (GTM), UPAT Services, Inc. (USI) and
Vector Vision, Inc. (VVI). Intercompany accounts and transactions
have been eliminated in consolidation.
Business
The Company provides technology management services to its
clients which include corporations, federal agencies and laboratories
and universities in North America, Europe and the Far East. These
services include technical evaluations, patent and market assessments,
patent application and prosecution, patent enforcement, licensing,
license management and royalty distribution.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications
Certain accounts have been reclassified to conform with the
presentation in financial statements for fiscal 1999.
Revenues and Expenses
Royalty income, net of amounts due others, is included in income
in the period in which it is earned. Such retained royalties are
earned through servicing agreements with various technology sources
under which the Company retains an agreed percentage of income derived
from license or sale of technologies. Royalties receivable are
recorded based on royalty reports actually received and therefore no
allowance for bad debts is required.
Revenues under service contracts are recognized for technology
management, licensing and other services in the period the contractual
service is provided and the related revenue is earned.
Grant revenues, which are nonrefundable except under certain
conditions (see Note 13), are recognized in the period grant funds are
received.
Expenditures made in connection with evaluating the marketability
of inventions, patenting inventions, licensing patented inventions and
enforcing patents are charged to operations as incurred.
Cash Equivalents
Cash equivalents include only highly liquid investments purchased
with maturity dates of three months or less when purchased.
The Company's bank and investment accounts are maintained with
two financial institutions. The Company's policy is to monitor the
financial strength of these institutions on an ongoing basis.
Property and Equipment
The costs of depreciable assets are charged to operations on a
straight-line basis over their estimated useful lives (3 to 5 years
for equipment) or the terms of the related lease for leasehold
improvements. The cost and related accumulated depreciation of
property and equipment are removed from the accounts upon retirement
or other disposition; any resulting gain or loss is reflected in
earnings.
Intangible Assets Acquired
Intangible assets acquired in connection with the acquisition of
USET comprise principally licenses and patented technologies recorded
at their estimated fair value at acquisition on January 31, 1996.
That value is being amortized on a straight-line basis over their
estimated remaining lives (approximately 13 years from the date
acquired).
Income Taxes
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each balance
sheet date based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Provision for income taxes is the tax payable for the year
and the change during the year in deferred tax assets and liabilities.
Investment tax credits are accounted for using the flow-through
method.
Net Income (Loss) Per Share
Basic earnings per share is computed based on the weighted-
average number of common shares outstanding without giving any effect
to potentially dilutive securities. Diluted earnings per share is
computed giving effect to all potentially dilutive securities that
were outstanding during the period.
Stock-Based Compensation
The Company accounts for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and discloses the pro forma
effects that fair value accounting would have on net income and
earnings per share. The Company charges operations for the fair value
of stock options or other equity instruments issued to nonemployee
providers of goods and services in the period they provide goods or
services.
Impairment of Long-lived Assets
The Company reviews long-lived and intangible assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If the sum
of expected future undiscounted cash flows is less than the carrying
amount of the asset, an impairment loss is recognized based on the
fair value of the asset.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," effective August 1, 1998.
This Statement established standards for reporting comprehensive
income and its components in financial statements. Comprehensive
income includes all changes, net of tax, in shareholders' interest
that result from recognized transactions and other economic events of
the period other than transactions of shareholders in their capacities
as shareholders.
Segment Information
Effective August 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement replaced
the industry segment approach with the management approach for
determining reportable segments. The management approach is that
basis on which management of the Company makes operating decisions and
assesses performance. The Company operates in a single reportable
segment under either approach.
Future Impact of Adopting Recently Issued Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Company will adopt this Statement on August 1, 2000.
The Company does not expect adoption to have a material effect on its
financial statements.
2. INVESTMENTS IN AFFILIATES
CTT accounted for its 33.7% investment in Knowledge Solutions,
Inc. (KSI) on the equity method at July 31, 1999 and 1998. KSI stock
is not publicly traded and there is no quoted market price for its
stock. In July, 1999, KSI's shareholders authorized its dissolution.
At July 31, 1999, CTT's carrying value for this investment was zero.
CTT will receive no distribution from KSI's dissolution.
At July 31, 1998, CTT owned 37.5% of the outstanding common stock
of Equine Biodiagnostics, Inc. (EBI) and accounted for its investment
in EBI on the equity method. EBI stock is not publicly traded and
there is no quoted market price for its stock. During fiscal 1999,
CTT sold its investment in EBI for $198,850 in cash. This selling
price was also CTT's carrying value for this investment. No gain or
loss was recognized on the sale.
Effective May 28, 1999, CTT sold its 14.5% interest in NovaNET
Learning, Inc. (NLI) for $2,472,602 in cash in connection with NLI's
acquisition by National Computer Systems, Inc. From February 15,
1995, through May 28, 1999, CTT accounted for its $159,375 investment
in NLI under the cost method. CTT recognized a gain of $2,313,227
in its fiscal quarter ended July 31, 1999. Capital loss carryforwards
sheltered the gain from Federal and state income taxes.
CTT's 13.3% voting interest in Innovation Partners International,
k.k. (IPI) is accounted for under the cost method. IPI stock is not
publicly traded and there is no quoted market price for its stock.
3. RECEIVABLES
Receivables comprise:
July 31, July 31,
1999 1998
Royalties $1,649,713 $1,444,014
Other 76,333 47,923
$1,726,046 $1,491,937
4. SHORT-TERM INVESTMENTS
The components of the Company's available-for-sale securities
were as follows (in thousands):
Gross Gross
Aggregate Unrealized Unrealized
Security Type Fair Value Holding Gains Holding Losses Cost Basis
At July 31, 1999:
Equity
Securities $ 39 $ -- $ 16 $ 55
At July 31, 1998:
Equity
Securities $ 33 $ -- $ 22 $ 55
At July 31, 1999 and 1998, the Company also had invested
$5,312,648 and $2,384,460, respectively, in money market funds and
Eurodollar funds (U.S. dollar denominated deposits in a bank located
outside the United States).
For the years ended July 31, 1998 and 1997, respectively,
proceeds from the sale of available-for-sale securities were
$1,500,000 and $4,550,000 which resulted in gross realized gains of
$18,482 in 1998 and $76,863 in 1997. The Company computes realized
gains based on specific identification.
Because the Company has capital loss carryforwards, no tax effect
is reported on the Company's unrealized gains on securities reported
in other comprehensive income (loss).
5. PROPERTY AND EQUIPMENT
Property and equipment comprise:
July 31, July 31,
1999 1998
Equipment and furnishings, at cost $ 263,960 $ 281,265
Leasehold improvements, at cost 55,196 55,196
319,156 336,461
Accumulated depreciation
and amortization (164,067) (165,247)
$ 155,089 $ 171,214
Depreciation expense was $62,605, $81,516 and $76,065 in 1999,
1998, and 1997, respectively.
6. ACCRUED LIABILITIES
Accrued liabilities were:
July 31, July 31,
1999 1998
Royalties payable $1,072,704 $ 982,111
Accrued compensation 172,587 117,005
Accrued contract settlement -- 300,000
Deferred revenues 153,741 99,160
Other 269,717 296,466
$1,668,749 $1,794,742
7. INCOME TAXES
The income tax provision for fiscal 1999 has been fully offset
by utilizing operating and capital loss carryforwards. Prior years'
loss carryforwards were previously offset by a valuation allowance.
Components of the Company's net deferred tax assets are (in thou-
sands):
July 31, July 31,
1999 1998
Net operating loss carryforwards $ 5,584 $ 5,738
Net capital loss carryforwards 368 860
Installment receivable from
sale of discontinued operation 1,410 1,410
Other, net (271) 228
Net deferred tax assets 7,091 8,236
Valuation allowance (7,091) (8,236)
Net deferred tax asset $ -- $ --
At July 31, 1999, the Company had Federal net operating loss
carryforwards of approximately $16,423,000 which expire from 2000
($3,556,000 in 2000) through 2013.
8. SHAREHOLDERS' INTEREST
Preferred Stock
Dividends on preferred stock are noncumulative and preferred
stock is redeemable at par value at CTT's option.
Stock-based Compensation Plans
At July 31, 1999, CTT had stock-based compensation plans which
are described below. The Company applies Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its
employee stock option plans. The compensation cost that has been
charged against income for each of its 1996 Directors' Stock
Participation Plan, Directors' Stock Participation Plan, Common Stock
Warrants and Employees' Common Stock Retirement Plan is reported
below.
Had compensation cost for CTT's employee stock option plans been
determined based on the fair value at the grant dates for options
awarded under those plans consistent with the fair value provisions
of Financial Accounting Standards Board Statement No. 123, the
Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below.
For the Year Ended July 31,
1999 1998 1997
Net income (loss) As reported $2,919,384 $ (1,235,489) $(1,571,045)
Pro forma $2,784,168 $ (1,305,996) $(1,759,008)
Basic and diluted
earnings As reported $ 0.49 $ (0.21) $ (0.27)
per share Pro forma $ 0.46 $ (0.22) $ (0.30)
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants:
For the Year Ended July 31,
1999 1998 1997
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 51.0% 42.1% 43.4%
Risk-free interest rates 4.9% 6.0% 6.1%
Expected lives 4 years 4 years 5 years
The pro forma information above may not be representative of pro
forma fair value compensation effects in future years.
Employee Stock Option Plans
CTT has a stock option plan which expires December 31, 2000.
Under this plan both incentive stock options and nonqualified stock
options may be granted to key employees. Incentive stock options may
be granted at an exercise price not less than the fair market value
of the optioned stock on the grant date and terminate ten years after
the grant date if not terminated earlier. Nonqualified stock options
may be granted at an exercise price not less than 85% of the fair
market value of the optioned stock on the grant date. Options granted
before July 31, 1997, generally became exercisable six months after
the grant date and terminate ten years after the grant date if not
terminated earlier. Options granted during fiscal 1998, vest 25%, 25%
and 50% after one, two and three years, respectively. Options granted
since July 31, 1998 vest 50% immediately and 25% and 25% after one and
two years, respectively. For nonqualified stock options, the differ-
ence between the exercise price and the fair market value of the
optioned stock on the grant date, if any, is charged to expense over
the term of the option. Stock appreciation rights may be granted
either at the time an option is granted or any time thereafter. There
are no stock appreciation rights outstanding.
The following information relates to the stock option plan which
expires December 31, 2000:
July 31, July 31,
1999 1998
Common shares reserved for
issuance on exercise of options 547,888 559,388
Shares available for future
option grants 43,346 81,346
On March 31, 1998, shareholders approved the 1997 Employees'
Stock Option Plan. Options granted under this plan may be either
incentive stock options or nonstatutory options at an option price of
not less than 100% of the fair market value of the stock at grant
date. The maximum term of any option under the 1997 option plan is
ten years from the grant date. No options may be granted after
September 30, 2007.
July 31, July 31,
1999 1998
Common shares reserved for
issuance on exercise options 275,000 275,000
Shares available for future
option grants 225,000 275,000
A summary of the status of CTT's Employee Stock Option Plans as
of July 31, 1999, 1998 and 1997, and changes during the years then
ended is presented below:
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options
outstanding,
beginning
of year 478,042 $ 9.39 460,900 $ 9.10 429,900 $ 9.08
Granted 124,000 $ 4.22 134,500 $10.88 66,500 $ 9.63
Forfeited -- $ -- (39,000) $11.09 (2,500) $ 9.63
Exercised (11,500) $ 4.22 (33,358) $ 7.32 (14,000) $ 6.63
Expired or
terminated (36,000) $ 9.94 (45,000) $10.92 (19,000) $12.42
Options
outstanding,
end of year 554,542 $ 8.30 478,042 $ 9.39 460,900 $ 9.10
Options
exercisable
at year-end 450,167 $ 8.61 382,542 $ 9.04 460,900 $ 9.10
Weighted-average
fair value of
options
granted during
the year $ 1.65 $3.05 $2.94
The following table summarizes information about stock options
outstanding at July 31, 1999:
Weighted-
Range Average Weighted- Weighted-
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$ 4.22-$ 9.875 358,542 5.38 years $ 6.85 293,542 $ 7.37
$10.31-$11.875 196,000 4.07 years $10.97 156,625 $10.93
Directors' Stock Participation Plan
Under the terms of the 1996 Directors' Stock Participation Plan
which was approved by shareholders on December 20, 1996 and expires
January 2, 2006, on the first business day of January each year, CTT
shall issue to each outside director who has been elected by
shareholders and served at least one year as a director the lesser of
2,500 shares of CTT's common stock or shares of CTT's common stock
equal to $15,000 on the date such shares are issued. Should an
eligible director terminate as a director before January 2, CTT shall
issue such director a number of shares equal to the proportion of the
year served by that director.
Under the terms of the Directors' Stock Participation Plan which
expired in January, 1996, outside directors who served a full annual
term were eligible to receive shares of common stock of CTT. The
number of shares issuable each year to any director was the lesser of
2,000 shares or an aggregate fair market value of $10,000 on the date
of issuance.
In 1999, 1998 and 1997, CTT issued 10,625, 12,006, and 6,000
shares of common stock, respectively, to eligible directors. In 1999,
1998 and 1997, CTT charged to expense $60,215, $75,000 and $77,500,
respectively, over the directors' respective periods of service.
Common Stock Warrants
From time to time CTT compensates certain of its consultants in
part by granting them warrants to purchase shares of its common stock.
Such warrants generally become exercisable six months after issuance.
In 1999, 1998 and 1997, CTT charged to expense the fair value of
warrants to purchase 3,000, 11,500 and 15,000 shares, of its common
stock, respectively, totalling $11,740, $22,273 and $3,410, respec-
tively.
A summary of the status of CTT's common stock warrants as of July
31, 1999, 1998 and 1997, and changes during the years then ended is
presented below:
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Warrants
outstanding,
beginning
of year 28,500 $ 10.01 34,000 $ 8.34 131,000 $ 7.95
Granted 3,000 $ 9.00 11,500 $ 9.46 15,000 $10.38
Exercised -- -- (6,000) $ 5.44 (6,000) $ 6.38
Expired or
terminated ( 2,000) $(10.50)(11,000) $ 6.74 (106,000) $ 8.26
Warrants
outstanding,
end of year 29,500 $ 9.88 28,500 $10.01 34,000 $ 8.34
Warrants
exercisable
at year-end 29,500 $ 9.88 25,500 $10.13 28,000 $ 7.87
Weighted-average
fair value of
warrants
granted during
the year $3.91 $2.71 $2.27
The following table summarizes information about common stock warrants
outstanding at July 31, 1999:
Weighted-
Range Average Weighted- Weighted-
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$9.00 - $11.094 29,500 1.31 years $9.88 29,500 $9.88
Number Warrant Aggregate
of Price per Exercise Expiration
Issued Shares Share Price Date
September 1996 3,000 $ 9.875 $ 29,625 September 2001
November 1996 6,000 $10.500 $ 63,000 October 1999
May 1997 6,000 $10.500 $ 63,000 October 1999
August 1997 2,500 $11.094 $ 27,735 August 2002
November 1997 6,000 $ 9.000 $ 54,000 October 2000
May 1998 3,000 $ 9.000 $ 27,000 April 2001
August 1998 3,000 $ 9.000 $ 27,000 July 31, 2001
29,500 $ 291,360
Employees' Stock Retirement Plan
Effective August 1, 1990, CTT adopted an Employees' Common Stock
Retirement Plan. Under the terms of this Plan, a committee of outside
directors annually recommends for full Board approval a contribution
of shares of CTT's common stock to the Plan. For the fiscal years
ended July 31, 1999, 1998 and 1997 the Board authorized contributions
of 13,384, 11,594, and 9,654 shares, respectively, valued at
approximately $79,900, $100,000 and $106,200, respectively, based on
year-end closing prices. CTT charged these amounts to expense in
1999, 1998, and 1997, respectively.
9. STOCK REPURCHASE PLAN
In October, 1998, the Board of Directors authorized CTT to
repurchase up to 250,000 shares of CTT's common stock. The Company
may repurchase shares on the open market or in privately negotiated
transactions at times and in amounts determined by management based
on its evaluation of market and economic conditions. The Company
repurchased 25,400 shares of its common stock for $109,380 in cash
between October, 1998, and July 31, 1999.
10. 401(k) PLAN
Effective January 1, 1997, the Company established a 401(k)
defined contribution plan for all employees meeting certain service
requirements. Eligible employees may contribute up to 15% of their
annual compensation to this plan. The Company may also make
discretionary matching contributions. During the years ended July 31,
1999, 1998 and 1997, the Company made no matching contributions.
11. REVENUES
All of the Company's royalty revenues derive from its patent
rights to various technologies. Although patents may be declared
invalid, may not issue on patent applications, or may be rendered
uncommercial by new or alternative technologies, the Company is not
aware of any such circumstances specific to its portfolio of licensed
technologies. In addition, licensees may not develop products
incorporating the Company's patented technologies or they may be
unsuccessful in obtaining governmental approvals required to sell such
products. In such cases, except for minimum fees provided in certain
license agreements, royalty revenues generally would not accrue to the
Company.
Approximately $972,000 (28%) of retained royalties (27% of total
revenues) in 1999 was from several licenses of the Vitamin B12 assay.
Approximately $542,000 of this total was from a licensee's change in
its previously estimated royalties for the period from July, 1993
through July, 1998. Certain of these licensed patents expired in
April, 1998 and in April, 1999. These expiring licenses contributed
approximately $137,000 (4%) of total retained royalties in fiscal
1999. The remaining Vitamin B12 assay licenses are expected to expire
in May, 2001.
Retained royalties in 1999 included $661,500 (19% of retained
royalties and 18% of total revenues) from a paid-up, non-exclusive,
worldwide, field-of-use limited license granted to an unrelated
foreign corporation in November, 1998, on an encryption technology.
All performance milestones agreed in the license were met during
fiscal 1999 and the licensee paid all the agreed milestone payments.
Retained royalties for 1999, 1998 and 1997, include $1,094,415
$192,433 and $225,233, respectively, from foreign licensees. The 1999
foreign royalties include the $661,500 from the paid-up license noted
above.
12. NET INCOME (LOSS) PER SHARE
The following table sets forth computations of basic and diluted
net income (loss) per share.
For the Year Ended July 31,
1999 1998 1997
Net income (loss)
applicable to common stock:
Basic and diluted: $2,919,384 $(1,235,489) $(1,571,045)
Weighted average number of
common shares outstanding 5,982,112 5,969,434 5,914,868
Effect of dilutive securities:
Stock options 27,589 -- --
Stock warrants -- -- --
Weighted average number of
common shares outstanding
and dilutive securities 6,009,701 5,969,434 5,914,868
Net income (loss) per
share of common stock:
Basic and diluted $ 0.49 $ (0.21) $ (0.27)
At July 31, 1999, 1998 and 1997, respectively, options and
warrants to purchase 449,042, 506,542 and 494,900 shares of common
stock were outstanding but were not included in the computation of
earnings per share because they were anti-dilutive.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
In November, 1996, CTT relocated its principal executive office
to Fairfield, Connecticut under a lease which expires December 31,
2001. CTT has the option to extend the lease for an additional five
years.
At July 31, 1999, future minimum rental payments required under
operating leases with initial or remaining noncancelable lease terms
in excess of one year are as follows:
For the years ending July 31:
2000 $ 212,489
2001 204,931
2002 84,375
Total minimum payments
required $ 501,795
Total rental expense for all operating leases was:
1999 1998 1997
Minimum rentals $ 195,602 $ 219,265 $ 148,603
Less: Sublease rentals (29,356) (25,323) (27,449)
$ 166,246 $ 193,942 $ 121,154
The lessor of CTT's office space during fiscal 1997 (through
November, 1996) was a partnership comprising four former officers of
CTT.
Contract Settlement Obligation
The Company's former President and Chief Executive Officer, whose
employment contract ran through July 31, 1999, resigned his employment
with the Company to pursue other opportunities. In connection with
his resignation, the Company accrued contract settlement costs of
$300,000 in the fourth quarter of fiscal 1998. The Company paid all
settlement costs, totalling $298,000, during the year ended July 31,
1999.
Other Obligations
The Company also has employment contracts with two of its
officers from January, 1997 through January, 2000 with aggregate
minimum compensation of $262,000 per year.
CTT-PA and VVI have contingent obligations to repay up to
$209,067 and $224,127, respectively, (three times total grant funds
received) in consideration of grant funding received in 1994 and 1995.
CTT-PA is obligated to pay at the rate of 7.5% of its revenues, if
any, from transferring rights to inventions supported by the grant
funds. VVI is obligated to pay at rates of 1.5% of its net sales of
supported products or 15% of its revenues from licensing supported
products, if any. These obligations are recognized when any such
revenues are recognized. During fiscal 1999, CTI-PA charged $3,188
in related royalty expenses to operations. No other such expenses
were charged in any prior years.
In connection with Renova litigation settled in June, 1992, CTT
incurred approximately $67,000 of contingent legal fees. CTT agreed
to pay one-half of proceeds received from settlement of the related
litigation, if any, to a limit of three times the contingent fees
incurred (approximately $202,000). Through July 31, 1999, CTT had
paid cumulative contingent legal fees of $166,418, of which $44,098,
$45,494 and $30,417 were charged to operations in 1999, 1998 and 1997,
respectively.
Litigation
On May 4, 1999, Metabolite Laboratories, Inc. (MLI) and CTT
(collectively plaintiffs) filed a complaint and jury demand against
Laboratory Corporation of America Holdings d/b/a/ LabCorp (LabCorp)
in the United States District Court for the District of Colorado. The
complaint alleges, among other things, that LabCorp owes plaintiffs
royalties for homocysteine assays performed during and since the
summer of 1998 using methods and materials falling within the claims
of a patent owned by CTT. CTT licensed the patent non-exclusively to
MLI and MLI sublicensed it to LabCorp. Plaintiffs claim LabCorp's
actions constitute breach of contract and patent infringement. Their
claim seeks an injunction ordering LabCorp to perform all its
obligations under its agreement, to cure past breaches, to provide an
accounting of wrongfully withheld royalties and to refrain from
infringing the patent. Plaintiffs also seek unspecified money and
exemplary damages and attorneys' fees, among other things. LabCorp
has filed an answer and counterclaims alleging noninfringement, patent
invalidity and patent misuse. CTT is unable to estimate the related
legal expenses it may incur in this suit and has recorded no revenue
for these withheld royalties.
On July 7, 1997, in a case previously filed in the United States
District Court for the District of Colorado by University of Colorado
Foundation, Inc., The University of Colorado, The Board of Regents of
the University of Colorado, Robert H. Allen and Paul A. Seligman,
plaintiffs, against American Cyanamid Company, defendant, judgment was
entered in favor of plaintiffs and against defendant in the amount of
approximately $44.4 million. The case involved an idea by professors
at the University of Colorado that improved Materna, a prenatal
vitamin compound sold by defendant. The District Court concluded that
defendant fraudulently obtained a patent on the improvement without
disclosing the patent application to plaintiffs and without naming the
professors as the inventors and that the defendant was unjustly
enriched. While the Company was not and is not a party to this case,
the Company had a contract with the University of Colorado to license
University of Colorado inventions to third parties, and the Company
is entitled to a share of the judgment. If the judgment is affirmed
in full upon appeal, the Company expects its share to be approximately
$5.2 million. The Company has recorded no potential judgment proceeds
in its financial statements to date. The case is currently pending
on appeal in the Federal Circuit Court of Appeals. Oral arguments
were heard on December 7, 1998. There can be no assurance that
plaintiffs will prevail on appeal, nor can the Company predict the
amount of the judgment, if any, that may ultimately be entered
following the appeal.
In 1989 UOP, a majority-owned subsidiary of CTT which had
developed a computer-based system to manufacture specialty contact
lenses, intraocular lenses and other precision optical products, sold
substantially all its assets to Unilens Corp. USA. The proceeds of
the sale included an installment obligation for $5,500,000 payable at
a minimum of $250,000 per year beginning in January 1992. Due to the
uncertainty of the timing and amount of future cash flows, income on
the installment obligation is recorded net of related expenses as the
payments are received. Cash received in excess of the fair value
assigned to the original obligation is recorded as other income from
continuing operations. As cash proceeds are received, CTT records a
4% commission expense payable to its joint venture partner, Optical
Associates, Limited Partnership ("OALP").
CTT recognized other expenses from continuing operations of
$41,337, $29,334, and $50,905 in 1999, 1998 and 1997, respectively,
for legal expenses related to the suit described in the following
paragraph.
In November, 1991, a lawsuit was filed in Connecticut against
CTT, its wholly-owned subsidiary, GTM, its majority-owned subsidiary,
UOP, and one current and several former directors on behalf of the 59
limited partners of OALP. The complaint alleges, among other things,
that the January 1989 sale of UOP's assets to Unilens violated the
partnership agreement and that OALP is entitled to the full proceeds
of the sale to Unilens. The complaint claims, among other things,
money damages and treble and punitive damages in an unspecified amount
and attorneys' fees. The Company believes that the asserted claims
are without merit and intends to defend vigorously the action
instituted by plaintiffs. Hearings in the case have commenced before
an attorney referee; however, due to scheduling conflicts, further
hearings have been adjourned and are expected to occur later in
calendar 1999 or 2000. Through July 31, 1999, the Company had
received aggregate cash proceeds of approximately $1,011,000 from the
January 1989 sale of UOP's assets to Unilens.
14. RELATED PARTY TRANSACTIONS
During 1997, CTT incurred charges of approximately $41,000 for
consulting services provided by a former chief executive officer who
was also a director.
CTT-PA earned approximately $5,000, $101,000 and $142,000 in
1999, 1998 and 1997, respectively, from contracts with Lehigh
University, which owns 20% of the outstanding common stock of CTT-PA.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information with respect to each
director and executive officer of the registrant according to informa-
tion furnished to the registrant by him:
Name, Age and Principal Occupation
Positions Currently During Past Five Director of
Held with Years; Other Public Registrant
Registrant Directorships Since
George C.J. Bigar, Professional Investor. December,
42, Director 1996
Samuel M. Fodale, President, Central Maintenance October, 1998
56, Director Services, Inc. (a service and
warehousing corporation serving
the automobile industry).
Frank R. McPike, Jr. President and Chief Operating February, 1999
50, President, Chief Officer of the registrant since
Operating Officer, October, 1998; Interim Chief
Treasurer, Chief Executive Officer of the
Financial Officer registrant from August to
and Director October, 1998; Secretary of the
registrant from August, 1989 to
February, 1999; Treasurer of the
registrant since July, 1988;
Vice President, Finance and
Chief Financial Officer of the
registrant since December, 1983;
Director of the registrant from
July, 1988 to March, 1998, and
since February, 1999
Charles J. Philippin A member of the management June, 1999
49, Director committee of Investcorp Inter-
national, Inc. (a global
investment group that acts as a
principal and intermediary in
international investment
transactions). Director of
Saks Incorporated, CSK Auto
Corporation, Nations Rent,
Inc., Harborside Healthcare
Corporation, Werner Holding
Co. (DE), Inc. and Falcon
Building Products, Inc.
John M. Sabin, Business consultant since December, 1996
45, Director and September 1999; Executive
Chairman of the Vice President and Chief
Board of Directors Financial Officer of
Hudson Hotels Corporation
(a limited service hotel
development and management
company) May, 1998 to September,
1999; Senior Vice President and
Treasurer, Vistana, Inc. (a
developer of vacation timeshares)
February, 1997 to May, 1998; Vice
President, Finance, Choice Hotels
International, Inc. October, 1996
to February, 1997; Vice President-
Mergers and Acquisitions, Choice
Hotels International, Inc. June,
1995 to October, 1996; Vice
President-Finance and Assistant
Treasurer, Manor Care, Inc. and
Choice Hotels International, Inc.
December, 1993 to October, 1996;
Vice President-Corporate Mergers
and Acquisitions, Marriott
Corporation, 1988 to December,
1993. Director of Cysine, Inc.
The terms of all officers of the registrant are until the first
meeting of the newly elected Board of Directors following the forthcom-
ing annual meeting of stockholders of the registrant and until their
respective successors shall have been duly elected and shall have
qualified, subject to employment agreements. Mr. McPike has an
employment contract with the registrant; this contract is described in
Item 11, Executive Compensation. There is no family relationship
between any director or executive officer of the registrant.
<PAGE>
Item 11. Executive Compensation
Summary Compensation
The following table summarizes the total compensation accrued,
earned or paid by the registrant for services rendered during each of
the fiscal years ended July 31, 1999, 1998 and 1997 to the Chief
Executive Officer of the registrant and each of the other executive
officers of the registrant who had annual compensation for the fiscal
year ended July 31, 1999 in excess of $100,000 (the Specified Execu-
tives):
SUMMARY COMPENSATION TABLE
Annual Compensation (A)
Long Term
Compensation
Awards
Securities All Other
Name and Principal Fiscal Underlying Compensation
Position Year Salary ($) Bonus ($) Options (#) ($)
Frank R. McPike, Jr. 1999 179,200 -- -- 16,422 (B)
President, Chief 1998 167,000 -- 20,000 17,460 (B)
Operating Officer 1997 167,712 12,000 12,000 14,320 (B)
and Chief Financial
Officer
George M. Stadler, 1999 -- -- -- -- (C)
formerly President 1998 197,000 -- 20,000 318,245 (C)
and Chief Executive 1997 197,808 18,000 20,000 15,105 (B)
Officer
(A) The aggregate amount of any perquisites or other personal benefits
was less than 10% of the total of annual salary and bonus and is not
included in the above table.
(B) Consists principally of amounts contributed for each executive officer
to Competitive Technologies, Inc.'s Employees' Common Stock Retirement
Plan. The registrant contributed shares of its Common Stock valued at
the mean between its high and low prices on the American Stock Exchange
on July 31 of each year. Also includes premiums paid for term life
insurance policies (see below).
(C) In 1999, the registrant paid all settlement costs, totalling $298,000,
which had been accrued in 1998. In 1998, includes $300,000 accrued in
the fiscal quarter ended July 31, 1998, to settle Mr. Stadler's
employment contract which ran until July 31, 1999. On October 15, 1998,
Mr. Stadler resigned from all positions with the registrant. See
Employment Agreements below. Also includes amounts contributed for
Mr. Stadler to Competitive Technologies, Inc.'s Employees' Common
Stock Retirement Plan. The registrant contributed shares of its
Common Stock valued at the mean between its high and low prices on
the American Stock Exchange on July 31, 1998. Also includes premiums
paid for term life insurance policy (see below).
Option Grants
There were no option grants to the Specified Executives during the
fiscal year ended July 31, 1999.
Option Exercises and Year End Value
The following table summarizes stock options held by the Specified
Executives at the end of the fiscal year ended July 31, 1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options Options at
on Value at FY-End (#) FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) $ Unexercisable Unexercisable
Frank R. McPike, Jr. None -- 68,542/15,000 N/A / N/A
George M. Stadler None -- 190,000/0 N/A / N/A
Employment Agreements
On January 7, 1997, the registrant entered into an employment
contract with Frank R. McPike, Jr. providing for his employment as Chief
Financial Officer of the registrant through January 6, 2000 and for
payment of compensation to him at a minimum rate of $167,000 per year
with such rate to be reviewed annually by the Board of Directors. The
agreement provides for automatic one-year renewals beginning in 2000
unless terminated by either party and for noncompetition by Mr. McPike
for two years following termination. The agreement contains provisions
for termination in the event of death or disability and gives the
registrant the right to terminate for cause, which is defined as any
criminal act by Mr. McPike.
On October 15, 1998, Mr. Stadler and the registrant entered into a
Voluntary Release and Exit Agreement under which Mr. Stadler resigned
from his employment, positions, offices and directorships with the
registrant, including his employment under an employment contract dated
August 1, 1995 which had provided for a term of employment through July
31, 1999. The Voluntary Release and Exit Agreement provided, among
other things, that (i) the registrant continue to pay Mr. Stadler his
base salary at the rate of $197,000 per year through July 31, 1999; (ii)
the registrant pay Mr. Stadler the gross sum of $25,000 to cover unused
vacation pay; (iii) the registrant pay the costs of outplacement
assistance for Mr. Stadler up to six months at up to $2,000 per month;
(iv) the registrant make payments in connection with maintenance of
health, life and dental insurance and car expenses through July 31,
1999; and (v) 190,000 vested options held by Mr. Stadler under the
registrant's stock option plans remain vested and exercisable though
July 31, 2001.
Other Arrangements
The registrant provides term life insurance for certain of its
officers. The policy amount in the event of death is $250,000 for Mr.
McPike and $500,000 for Mr. Stadler. Premiums of $460 for Mr. McPike's
policy in each of 1999, 1998 and 1997 were paid by the registrant and
$1,245 for Mr. Stadler's policy in each of 1999 (accrued in contract
settlement costs in fiscal 1998), 1998 and 1997.
Through December 31, 1996, the registrant maintained a simplified
employee pension (SEP) plan for its employees pursuant to the Internal
Revenue Code. Effective January 1, 1997, the registrant established a
401-K plan. Under both the SEP plan and the 401-K plan, an eligible
employee may elect a salary reduction up to 15% of his compensation as
defined in the plan to be contributed by the registrant to the plan for
the employee. Employee contributions for any calendar year are limited
to a specific dollar amount determined by the Internal Revenue Service
($10,000 for 1999 and 1998). For fiscal 1999, the registrant contribut-
ed $10,000 each for Mr. McPike and Mr. Stadler.
Effective August 1, 1990, the registrant adopted the Competitive
Technologies, Inc. Employees' Common Stock Retirement Plan (the
Retirement Plan). The Retirement Plan is a qualified stock bonus plan
under the Internal Revenue Code. All employees of the registrant are
eligible to participate in the Retirement Plan. Annually, a committee
of independent directors determines the number of shares of the
registrant's Common Stock, if any, to be contributed to the Retirement
Plan. These shares are allocated among participants employed on the
last day of the year and who performed at least 1,000 hours of service
during the year in proportion to their relative compensation in a manner
that is integrated with the registrant's Social Security contribution on
behalf of employees; that is, the contribution made with respect to
compensation in excess of the Social Security wage base generally will
be twice as large in proportionate terms as the contribution made with
respect to compensation below that wage base. The registrant's
contributions are held in trust with a separate account established for
each participant.
The maximum amount of registrant Common Stock that may be contrib-
uted to the Retirement Plan in any year is the number of shares with a
fair market value equal to 15% of that year's compensation reduced by
the 401-K plan contributions made for Retirement Plan participants, but
in no event more than 1% of the registrant's outstanding shares at the
end of the previous year. There is no minimum or required contribution.
The maximum number of shares that can be allocated to any individual
participant's account in any year is the number of shares with a fair
market value equal to the lesser of $30,000 or 25% of his compensation
for that year reduced by his 401-K plan contributions.
Participants become entitled to distributions of the vested shares
allocated to their accounts upon disability, death or other termination
of employment. Participants obtain a 100% vested interest in the shares
allocated to their accounts upon completing 5 years of service with the
registrant. If the Retirement Plan becomes top heavy as defined by the
Internal Revenue Code, participants become 20% vested after 2 years of
service, 40% vested after 3 years of service, 60% vested after 4 years
of service, and 100% vested after 5 years of service.
Registrant stock contributed to the Retirement Plan is held in the
custody of the Retirement Plan's trustee, Webster Trust in New Britain,
Connecticut. The trustee has the power to vote registrant shares owned
by the Retirement Plan. For the fiscal years ended July 31, 1999 and
1998, the Board authorized a contribution of 13,384 and 11,594 shares,
respectively. Shares allocated to Mr. McPike, the registrant's sole
executive officer at July 31, 1999, under the Retirement Plan for the
year ended July 31, 1999 were 2,674. See also Summary Compensation
Table - "All Other Compensation" for dollar values ascribed to contribu-
tions for Mr. McPike.
The registrant has an incentive compensation plan pursuant to which
an amount equal to 10% of the operating income of the registrant
(defined and adjusted as provided in said plan) shall be credited each
year to an incentive fund from which cash awards are to be made to key
employees of the registrant by a committee, none of whose members is
eligible to receive awards. Amounts may be credited to the incentive
fund when the registrant earns operating income (as defined in said
plan) for a fiscal year. In fiscal 1999, the registrant credited
$46,837 to this incentive fund. No amounts were credited to this fund
prior to fiscal 1999.
The registrant has in effect a Key Employees' Stock Option Plan and
a 1997 Employees' Stock Option Plan (the Option Plans) with respect to
its Common Stock, $.01 par value, which provide for granting either
incentive stock options under Section 422 of the Internal Revenue Code
or nonqualified options. (Incentive options under both Option Plans and
non-qualified options granted under the 1997 Employees' Stock Option
Plan must be granted at not less than 100% of fair market value on the
grant date. Nonqualified options under the Key Employees' Stock Option
Plan may be granted at not less than 85% of fair market value on the
grant date.) Stock appreciation rights may also be granted under the
Key Employees' Stock Option Plan. In certain instances, stock options
which are vested or become vested upon the happening of an event or
events specified by the registrant's Stock Option Committee, may
continue to be exercisable through up to 10 years after the date
granted, irrespective of the termination of the optionee's employment
with the registrant.
Director Compensation
The registrant pays each director who is not an employee of the
registrant or a subsidiary of the registrant $1,000 for each Board
meeting attended (increased from $750 in April, 1999). Directors also
receive $250 for attending each committee meeting that coincides with a
Board meeting and $500 for attending a committee meeting that does not
coincide with a Board meeting. Directors who participate in telephonic
board and/or committee meetings are paid one half the fee for attending
such meetings. The registrant reimburses directors for out-of-pocket
expenses incurred to attend Board and committee meetings. In addition
to meeting fees, the registrant pays outside directors an annual cash
retainer of $7,500, ($5,000 for quarters before July 1, 1999) payable in
quarterly installments.
In August, 1999, the Board formed an executive committee with Mr.
Bigar as chairman and provided that the registrant compensate him at the
rate of $8,000 per month for two months due to the substantial commit-
ment of time to be required of Mr. Bigar as chairman.
The registrant has a 1996 Director's Stock Participation Plan
pursuant to which, on the first business day of January from January
1997 through January 2006, the registrant issues, to each non-employee
director who has been elected by the stockholders and has served at
least one full year, a number of shares of the registrant's Common Stock
equal to the lesser of (i) $15,000 divided by the per share fair market
value of such stock on the issuance date, or (ii) 2,500 shares. If a
non-employee director were to leave the Board after serving at least one
full year but prior to the January issuance date, the annual stock
compensation described above would be payable in shares on a pro-rata
basis up to the termination date. In January, 1999 an aggregate of
10,625 shares was issued under this plan (2,500 each to Messrs. Bigar,
Michael G. Bolton (who resigned as a director effective September 30,
1999), Robert H. Brown, Jr., (who resigned as a director February 11,
1999) and Sabin and 625 shares to Mr. Fodale).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following information indicates the beneficial ownership of the
registrant's Common Stock by each director and executive officer of the
registrant and by each person known to the registrant to be the
beneficial owner of more than 5% of the registrant's outstanding Common
Stock. Such information has been furnished to the registrant by the
indicated owners as of October 15, 1999 except as otherwise indicated in
the footnotes.
Name (and Address if more
than 5%) of Beneficial Amount Beneficially
Owners Owned (A) Percent (B)
Directors and executive officer
George C.J. Bigar 12,418 --
Samuel M. Fodale 162,325 (C) 2.7%
Frank R. McPike, Jr. 113,114 (D) 1.9%
Charles J. Philippin 5,000 --
John M. Sabin 4,918 --
All directors and executive
officers as a group 297,775 (E) 4.9%
Additional 5% Owner
Dimensional Fund Advisors, Inc. 305,044 (F) 5.1%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
(A) Except as indicated in the notes which follow, the designated
person or group has sole voting and investment power.
(B) Percentages of less than 1% are not shown.
(C) Includes 99,100 shares of Common Stock held by Central Maintenance
Services, Inc., 9,000 shares of Common Stock held by Missouri
Recycling - St. Louis, Inc., 3,200 shares of Common Stock held by
children and 2,000 shares held by spouse.
(D) Consists of 19,572 shares of Common Stock, plus 93,542 stock
options deemed exercised solely for purposes of showing total
shares owned by Mr. McPike. Includes 6,214 shares of Common Stock
held by Webster Trust as Trustee under the registrant's Employees'
Common Stock Retirement Plan, as to which Mr. McPike has shared
investment power. Does not include 9,665 shares of Common Stock
allocated to Mr. McPike under said Retirement Plan; Trustee has
sole voting and investment power with regard thereto.
(E) Consists of 204,233 shares of Common Stock plus 93,542 stock
options to purchase shares of Common Stock deemed exercised solely
for purposes of showing total shares owned by such group.
(F) Information taken from Schedule 13G which states that the informa-
tion is as of December 31, 1998 and shows sole voting and disposa-
tive power as to 305,044 shares. The Schedule 13G states that all
securities reported on the schedule are owned by advisory clients
of Dimensional Fund Advisors, Inc. and Dimensional Fund Advisors,
Inc. disclaims beneficial ownership of all such securities.
At October 15, 1999, the stock transfer records maintained by the
registrant with respect to its Preferred Stock showed that the largest
holder of Preferred Stock owned 500 shares.
The following table sets forth information with respect to the
common stock, $.001 par value per share, of University Optical Products
Co. ("UOP"), a subsidiary of the registrant, beneficially owned by each
director or executive officer of the registrant and by each person known
to the registrant to be the beneficial owner of more than 5% of the
registrant's outstanding Common Stock at October 15, 1999.
Shares of Common Percent
Name Stock of UOP (A) of Class (B)
George C.J. Bigar None --
Samuel M. Fodale None --
Frank R. McPike, Jr. 14,000 --
Charles J. Philippin None --
John M. Sabin None --
All directors and executive
officers of the registrant
as a group 14,000 --
(A) Does not include 1,333,333 shares of UOP class A stock (which have
four votes per share and are convertible into an equal number of
shares of UOP common stock) and 2,757,735 shares of UOP common
stock owned by the registrant and 1,927 shares of UOP common stock
owned by Genetic Technology Management, Inc., a wholly-owned
subsidiary of the registrant.
(B) Percentages of less than 1% are not shown.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) List of financial statements and schedules. Page
Competitive Technologies, Inc. and Subsidiaries:
Consolidated Balance Sheets as of July 31, 1999
and 1998. 24-25
Consolidated Statements of Operations for the
years ended July 31, 1999, 1998 and 1997. 26
Consolidated Statements of Changes in
Shareholders' Interest for the years ended
July 31, 1999, 1998 and 1997. 27
Consolidated Statements of Cash Flows for the
years ended July 31, 1999, 1998 and 1997. 28-29
Notes to Consolidated Financial Statements. 30-44
All financial statement schedules have been omitted because the
information is not present or is not present in sufficient amounts to
require submission of the schedule or because the information required
is included in the financial statements or the notes thereto.
(b) Reports on Form 8-K
A report on Form 8-K dated May 28, 1999 was filed to report under
Item 2 a disposition of significant assets and under Item 7 certain
pro forma financial information.
(c) List of exhibits: See Exhibit Index immediately preceding
exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPETITIVE TECHNOLOGIES, INC.
(Registrant)
By S/ Frank R. McPike, Jr.
Frank R. McPike, Jr.
President, Chief Operating Officer,
Chief Financial Officer, Director
and Authorized Signer
Date: October 28, 1999
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
GEORGE C. J. BIGAR* Director )
George C. J. Bigar )
)
SAMUEL M. FODALE* Director )
Samuel M. Fodale )
)
S/ Frank R. McPike Jr. President, Chief )
Frank R. McPike, Jr. Operating Officer, )
Chief Financial ) October 28, 1999
Officer (Principal )
Financial and Accounting )
Officer), and Director )
)
CHARELS J. PHILIPPIN* )
Charles J. Philippin Director )
)
JOHN M. SABIN* Director )
John M. Sabin )
)
)
* By S/ Frank R. McPike, Jr. )
Frank R. McPike, Jr., Attorney-in-Fact )
EXHIBIT INDEX
Exhibit
No. Description Page
3.1 Unofficial restated certificate of incorpora-
tion of the registrant as amended to date filed
as Exhibit 4.1 to registrant's Registration
Statement on Form S-8, File Number 333-49095
and hereby incorporated by reference.
3.2 By-laws of the registrant as amended to date
filed as Exhibit 3.1 to registrant's Form 10-Q
for the quarter ended October 31, 1997 and
hereby incorporated by reference.
10.1* Registrant's Restated Key Employees' Stock
Option Plan, filed as Exhibit 4.3 to regis-
trant's Registration Statement on Form S-8,
File No. 33-87756 and hereby incorporated by
reference.
10.2* Incentive Compensation Plan of the registrant,
filed as Exhibit 10.2 to the registrant's Form
10-K for the year ended July 31, 1997 and
hereby incorporated by reference.
10.3* Registrant's Restated Directors' Stock Partici-
pation Plan filed as Exhibit 10.3 to regis-
trant's Form 10-Q for the quarter ended January
31, 1995 and hereby incorporated by reference.
10.4* Registrant's 1996 Directors' Stock Participa-
tion Plan filed as Exhibit 4.3 to registrant's
Form S-8 No. 333-18759 and hereby incorporated
by reference.
10.5 Limited Partnership Agreement of Optical Asso-
ciates, Limited Partnership dated November 3,
1983 filed as Exhibit 19.02 to registrant's
Form 10-Q for the quarter ended January 31,
1984 and hereby incorporated by reference.
10.6 Joint Venture Agreement dated April 30, 1984
between Optical Associates, Limited Partnership
and University Optical Products Co., filed as
Exhibit 19.02 to registrant's Form 10-Q for the
quarter ended April 30, 1984 and hereby incor-
porated by reference; moratorium agreement
dated July 20, 1987 between University Optical
Products Co. and Optical Associates, Limited
Partnership filed as Exhibit 10.14 to regis-
trant's Form 10-K for the fiscal year ended
July 31, 1987 and hereby incorporated by refer-
ence.
10.7 Asset Purchase Agreement among University
Optical Products Co., Unilens Corp. USA, Uni-
lens Optical Corp. and the registrant dated
January 23, 1989 filed as Exhibit 19.1 to
registrant's Form 10-Q for the quarter ended
January 31, 1989 and hereby incorporated by
reference.
10.8* Registrant's 1997 Employees' Stock Option Plan
filed as Exhibit 4.3 to registrant's Registra-
tion Statement on Form S-8, File Number 333-
49095 and hereby incorporated by reference.
10.9 Asset Purchase Agreement between Unilens Corp.
U.S.A. and University Optical Products Co.
dated November 30, 1989 filed as Exhibit 19.1
to registrant's Form 10-Q for the quarter ended
October 31, 1989 and hereby incorporated by
reference.
10.10* Voluntary Release and Exit Agreement between
registrant and George M. Stadler signed October
15, 1998 filed as Exhibit 10.11 to registrant's
Form 10-K for the year ended July 31, 1998 and
hereby incorporated by reference.
10.11* Employment Agreement between registrant and
Frank R. McPike, Jr. dated January 7, 1997
filed as Exhibit 10.1 to registrant's Form 10-Q
for the quarter ended January 31, 1997 and
hereby incorporated by reference.
10.12 Settlement and Forbearance Agreement dated July
15, 1993 among registrant, Unilens Corp. USA
and Unilens Vision Inc. filed as Exhibit 10.47
to registrant's Form 10-K for the year ended
July 31, 1993 and hereby incorporated by refer-
ence.
10.13 Stock Purchase Agreement dated July 15, 1993
among registrant, Unilens Corp. USA and Unilens
Vision Inc. filed as Exhibit 10.48 to regi-
strant's Form 10-K for the year ended July 31,
1993 and hereby incorporated by reference.
10.14 Amendment and Modification Agreement dated
September 27, 1993 among registrant, Unilens
Corp. USA and Unilens Vision Inc. filed as
Exhibit 10.49 to registrant's Form 10-K for the
year ended July 31, 1993 and hereby incorporat-
ed by reference.
10.15 Agreement for Purchase and Sale of Partnership
Interests in USET Acquisition Partners, L.P.
effective January 31, 1996 by and between UPAT
Services, Inc., Texas Research and Technology
Foundation and United Services Automobile
Association filed as Exhibit 2.1 to regi-
strant's Form 8-K dated January 31, 1996 and
hereby incorporated by reference.
10.16 Lease agreement between registrant and The
Bronson Road Group made August 28, 1996 filed
as Exhibit 10.34 to registrant's Form 10-K for
the year ended July 31, 1996 and hereby incor-
porated by reference.
11.1 Schedule of computation of earnings per share
for the three years ended July 31, 1999. 58
21.1 Subsidiaries of the registrant. 59
23.1 Consent of PricewaterhouseCoopers LLP. 60
24.1 Power of attorney. 61-62
27.1 Financial Data Schedule - EDGAR only.
* Management Contract or Compensatory Plan
Exhibit 11.1
COMPETITIVE TECHNOLOGIES, INC.
Schedule of Computation of Earnings Per Share
(Unaudited)
Year ended July 31,
1999 1998 1997
Net income (loss) applicable to
common stock $ 2,919,384 $(1,235,489) $(1,571,045)
Common and common equivalent
shares - diluted:
Basic weighted average common
shares outstanding 5,982,112 5,969,434 5,914,868
Adjustments for assumed
exercise of stock options 27,589 38,571* 60,294*
Adjustments for assumed exercise
of stock warrants -- 3,501* 15,310*
Weighted average number of common
and common equivalent shares
outstanding 6,009,701 6,011,506 5,990,472
Net income (loss) per share of
common stock:
Basic and diluted $ 0.49 $ (0.21) $ (0.27)
* Anti-dilutive.
These calculations are submitted in accordance with Regulation S-K item
601 (b) (11) which differs from the requirements of paragraph 13 of
Statement of Financial Accounting Standards No. 128 because they
produce an anti-dilutive result.
Exhibit 21.1
COMPETITIVE TECHNOLOGIES, INC.
Subsidiaries of the Registrant
(omitting subsidiaries which do
not constitute significant
subsidiaries)
University Optical Products Co. (Delaware)
Competitive Technologies of PA, Inc. (Pennsylvania)
Competitive Technologies of Ohio, Inc. (Delaware)
University Science, Engineering and Technology, Inc. (Delaware)
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Competitive Technologies, Inc. on Form
S-8 and the related prospectus (No. 33-87756) pertaining to the Key
Employees' Stock Option Plan, on Form S-8 and the related
prospectus (No. 33-10528) pertaining to the Key Employees' Stock
Option Plan and Directors' Stock Participation Plan, on Form S-8
and the related prospectus (No. 33-44612) pertaining to the Key
Employees' Stock Option Plan, Directors' Stock Participation Plan
and Employees' Common Stock Retirement Plan, on Form S-8 and the
related prospectus (No. 333-18759) pertaining to the 1996
Directors' Stock Participation Plan and on Form S-8 and the related
prospectus (No. 333-49095) pertaining to the 1997 Employees' Stock
Option Plan of our report dated September 24, 1999, on our audits
of the consolidated financial statements of Competitive
Technologies, Inc. and Subsidiaries as of July 31, 1999 and 1998
and for each of the three years in the period ended July 31, 1999,
which report is included in this Annual Report on Form 10-K.
s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
October 28, 1999
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, COMPETITIVE
TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and each
of the undersigned directors and officers of the Company, does hereby
constitute and appoint Frank R. McPike, Jr., the true and lawful
attorney and agent of the undersigned, with full power to act without
any other and with full power of substitution and resubstitution, to
do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or desirable to enable
the Company to comply with the Securities Exchange Act of 1934, as
amended (the "Act"), and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder in connection with the
filing under the Act of the Company's Annual Report on Form 10-K for
fiscal year ended July 31, 1999, and all related matters, including
specifically, but without limiting the generality of the foregoing,
power and authority to sign the name of the Company and the names of
the undersigned directors and officers in the capacities indicated
below to the Form 10-K to be filed with the Securities and Exchange
Commission, and to any and all amendments to said Form 10-K, and to any
and all instruments or documents filed as part of or in connection with
any of the foregoing and any and all amendments thereto; and each of
the undersigned hereby ratifies and confirms all that said attorney and
agent shall do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which, when taken together, shall be and constitute one instrument.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents this 8th day of October, 1999.
COMPETITIVE TECHNOLOGIES, INC.
By: s/ FRANK R. McPIKE, JR.
Frank R. McPike, Jr.
President
ATTEST:
By: s/ JEANNE WENDSCHUH
Jeanne M. Wendschuh
Secretary
Capacities Signatures
President, Chief Operating
Officer and Chief Financial
Officer (Principal Financial
and Accounting Officer) s/ FRANK R. McPIKE, JR.
Frank R. McPike, Jr.
Director s/ GEORGE C.J. BIGAR
George C.J. Bigar
Director s/ SAMUEL M. FODALE
Samuel M. Fodale
Director s/ CHARLES J. PHILIPPIN
Charles J. Philippin
Director s/ JOHN M. SABIN
John M. Sabin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Form 10-K for July 31, 1999
</LEGEND>
<CIK> 0000102198
<NAME> COMPETITIVE TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 185,838
<SECURITIES> 5,352,229
<RECEIVABLES> 1,726,046
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,407,284
<PP&E> 319,156
<DEPRECIATION> 164,067
<TOTAL-ASSETS> 8,959,021
<CURRENT-LIABILITIES> 1,778,735
<BONDS> 0
0
60,675
<COMMON> 60,032
<OTHER-SE> 7,059,579
<TOTAL-LIABILITY-AND-EQUITY> 8,959,021
<SALES> 0
<TOTAL-REVENUES> 3,639,324
<CGS> 0
<TOTAL-COSTS> 3,217,791
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<INCOME-PRETAX> 2,919,384
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