SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2001
Commission file number 1-8696
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Annual
Report for the fiscal year ended July 31, 2001 on Form 10-K as set
forth in the page attached hereto:
(List all such items, financial statements, exhibits or other
portions amended)
Item 8. Financial Statements and Supplementary Data
(amended to include unaudited Selected Quarterly
Financial Data on page 27 hereof).
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this amendment to be signed on its behalf by the undersigned
thereunto duly authorized.
COMPETITIVE TECHNOLOGIES, INC
Registrant
Date: December 4, 2001 s/ Frank R. McPike, Jr.
By: Frank R. McPike, Jr.
President, Chief Executive
Officer, Chief Financial Officer,
Director and Authorized Signer
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Accountants 3
Consolidated Balance Sheets 4-5
Consolidated Statements of Operations 6
Consolidated Statements of Changes
in Shareholders' Interest 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-26
Unaudited Selected Quarterly Financial Data 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Competitive Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the
financial position of Competitive Technologies, Inc. and its
Subsidiaries (the "Company") at July 31, 2001 and July 31, 2000,
and the results of their operations and their cash flows for each
of the three years in the period ended July 31, 2001, in conformity
with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
October 12, 2001
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2001 and 2000
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 224,436 $ 1,716,375
Short-term investments 4,793,441 5,000,054
Accounts receivable, including $9,925
receivable from related parties
in 2000 2,782,276 2,420,180
Notes receivable - E.L. Specialists, Inc. 650,000 --
Prepaid expenses and other current assets 70,044 149,483
Total current assets 8,520,197 9,286,092
Property and equipment, at cost, net 66,994 115,518
Investments, at cost 1,025,684 1,525,685
Intangible assets acquired, principally
licenses and patented technologies, net
of accumulated amortization of $765,149
and $626,477 in 2001 and 2000,
respectively 1,027,998 1,166,670
TOTAL ASSETS $10,640,873 $12,093,965
(continued)
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2001 and 2000
(Continued)
2001 2000
LIABILITIES AND SHAREHOLDERS' INTEREST
Current liabilities:
Accounts payable, including $3,876
payable to related parties in 2001 $ 585,966 $ 65,443
Accrued liabilities 3,087,161 2,100,410
Total current liabilities 3,673,127 2,165,853
Commitments and contingencies -- --
Shareholders' interest:
5% preferred stock, $25 par value;
35,920 shares authorized; 2,427 shares
issued and outstanding 60,675 60,675
Common stock, $.01 par value; 20,000,000
shares authorized; 6,190,785 shares
issued in 2001 and 2000 and 6,139,351
and 6,190,785 shares outstanding in
2001 and 2000, respectively 61,907 61,907
Capital in excess of par value 26,975,178 27,053,542
Treasury stock, at cost;
51,434 shares in 2001 (381,253) --
Accumulated deficit (19,748,761) (17,248,012)
Total shareholders' interest 6,967,746 9,928,112
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 10,640,873 $ 12,093,965
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended July 31, 2001, 2000 and 1999
2001 2000 1999
Revenues:
Retained royalties $ 3,637,764 $ 3,202,194 $ 3,463,176
Retained royalty settlement -- 736,375 --
Other revenues, including $9,925
and $4,947 from related parties
in 2000 and 1999, respectively 3,520 174,298 176,148
3,641,284 4,112,867 3,639,324
Patent enforcement expenses, net of
reimbursements 2,474,017 157,459 57,075
Other costs of technology management
services 1,859,455 1,879,757 1,957,497
General and administration expenses,
of which $145,673, $132,806 and
$4,800 were paid to related
parties in 2001, 2000 and 1999,
respectively 1,540,173 1,301,613 1,133,219
Restructuring charges -- -- 70,000
5,873,645 3,338,829 3,217,791
Operating income (loss) (2,232,361) 774,038 421,533
Gain on sale of investment
in NovaNET Learning, Inc. -- -- 2,313,227
Investment and loan
impairment loss (600,000) -- --
Interest income 400,054 373,207 190,272
Other income (expense), net (52,460) 90,234 (45,692)
Income (loss) before minority
interest (2,484,767) 1,237,479 2,879,340
Minority interest in losses of
subsidiary (15,982) 63,458 40,044
Net income (loss) (2,500,749) 1,300,937 2,919,384
Other comprehensive income (loss):
Net unrealized holding gains
(losses) on available-for-
sale securities -- 105,863 6,249
Reclassification adjustment for
realized gains included in
net income (loss) -- (90,238) --
Comprehensive income (loss) $(2,500,749) $ 1,316,562 $ 2,925,633
Net income (loss) per share:
Basic and diluted $ (0.41) $ 0.21 $ 0.49
Weighted average number of common
shares outstanding:
Basic 6,135,486 6,079,211 5,982,112
Diluted 6,135,486 6,187,407 6,009,701
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Interest
For the years ended July 31, 2001, 2000 and 1999
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, 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. . . (2,370) 7,500 38,697
Stock issued to directors (20,313) 3,125 35,450
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 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)
Exercise of common
stock options. . . . . 187,425 1,873 1,462,744 43,598 254,856
Tender of common stock
as payment for exercise
of common stock options. . (7,599) (100,000)
Stock issued under 1996
Directors' Stock
Participation Plan. . . (6,004) 9,375 55,340
Stock issued under
Employees' Common
Stock Retirement Plan. . 167 2 (28,270) 4,107 67,268
Other comprehensive income:
Net change in unrealized
holding gains on
available-for-sale
securities . . . . . . . 15,625
Purchase of treasury stock (49,400) (276,545)
Net income. . . . . . . . 1,300,937
Balance - July 31, 2000 2,427 60,675 6,190,785 61,907 27,053,542 -- -- -- (17,248,012)
Exercise of common
stock options. . . . . (5,208) 3,250 26,333
Stock issued under
1996 Directors' Stock
Participation Plan. .. (25,849) 11,540 100,849
Stock issued to directors. (2,073) 2,898 25,620
Stock issued under
Employees' Common
Stock Retirement Plan . (42,138) 14,814 122,138
Stock issued to employee
in lieu of cash
compensation . . . . . (3,096) 2,564 23,096
Purchase of treasury stock. (86,500) (679,289)
Net loss. . . . . . . . . (2,500,749)
Balance - July 31, 2001 2,427 $60,675 6,190,785 $61,907 $26,975,178 (51,434) $(381,253) $ -- $(19,748,761)
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 2001, 2000 and 1999
2001 2000 1999
Cash flow from operating
activities:
Net income (loss) $(2,500,749) $ 1,300,937 $ 2,919,384
Noncash items included in
net income (loss):
Retained royalty settlement
paid with shares of NTRU
common stock -- (736,375) --
Depreciation and
amortization 214,768 209,225 201,277
Minority interest 15,982 (63,458) (40,044)
Stock compensation 207,298 97,085 140,101
Other noncash items -- 63,461 56,160
Investment and
loan impairment loss 600,000 -- --
Gain on sale of investments -- (90,503) (2,313,227)
Net changes in various
operating accounts:
Receivables (362,096) (694,134) (184,109)
Prepaid expenses and other
current assets 79,439 (6,312) (3,391)
Accounts payable and
accrued liabilities 1,498,524 378,369 (150,068)
Net cash flow from
operating activities (246,834) 458,295 626,083
(continued)
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended July 31, 2001, 2000 and 1999
(Continued)
2001 2000 1999
Cash flow from investing
activities:
Purchases of property and
equipment, net (27,572) (30,983) (46,480)
Investments in and advances
to cost-method affiliates (750,000) (698,006) --
Sales (purchases) of short-term
investments and available-
for-sale securities 206,613 (264,638) (3,612,606)
Sales (purchases) of
investments in affiliates -- -- 2,671,452
Other, net (15,982) 265 7,988
Net cash flow from
investing activities (586,941) (993,362) (979,646)
Cash flow from financing
activities:
Proceeds from exercise of
stock options and warrants 21,125 1,619,473 48,530
Purchases of treasury stock (679,289) (276,545) (109,380)
Repayment of purchase
obligation -- -- (300,993)
Net cash flow from financing
activities (658,164) 1,342,928 (361,843)
Net (decrease) increase in cash
and cash equivalents (1,491,939) 807,861 (715,406)
Cash and cash equivalents,
beginning of year 1,716,375 908,514 1,623,920
Cash and cash equivalents, end
of year $ 224,436 $ 1,716,375 $ 908,514
See accompanying notes
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BUSINESS
The Company provides patent and technology commercialization
services with respect to a broad range of digital/electronic, life
sciences and physical sciences technologies originally invented by
various individuals, corporations, federal agencies and laboratories and
universities. The Company provides these parties technical evaluations,
patent and market assessments, patent application and prosecution,
patent enforcement, licensing, license management and royalty
distribution services. The Company is compensated for its services
primarily by sharing in the license and royalty fees generated from its
successful marketing of technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Competitive Technologies, Inc. (CTT) and its majority-owned subsidiaries
(the Company). CTT's majority-owned subsidiaries are Digital Acorns,
Inc., University Optical Products Co. (UOP), Genetic Technology
Management, Inc. (GTM) and Vector Vision, Inc. (VVI). Intercompany
accounts and transactions have been eliminated in consolidation.
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 2001.
Revenue Recognition
The Company derives revenues primarily from patent and technology
license and royalty fees. Since these revenues result from the
Company's representation agreements with owners and assignees of
intellectual property rights, the Company records revenues net of the
owners' and assignees' shares of license and royalty fees. The Company
stipulates the terms of its licensing arrangements in its written
agreements with the owners, assignees and licensees. Generally these
arrangements are single element arrangements since the Company has no
significant obligations after executing the license agreements.
The Company applies a contingency model in determining its revenue
recognition. Under the terms of the Company's license arrangements, the
Company generally receives an upfront license fee and a royalty stream
based on the licensee's sales of the licensed technology.
License Fees
The Company recognizes upfront, nonrefundable license fees
upon execution of the license arrangement and collection of the
license fee. Upon the occurrence of these two events, the Company
has persuasive evidence of an arrangement, delivery is complete,
collectibility is assured and there are no continuing obligations.
Royalty Fees
Although the royalty rate is fixed in the license agreement,
the amount of earned royalties is contingent upon the amount of
product the licensee sells. Royalties earned in each reporting
period are contingent on the outcome of events occurring within
that period and such events are not within the control of the
Company and are not directly tied to the Company's providing
service. Therefore, the Company recognizes royalty revenue when
the contingency is resolved and it knows the amount of royalty
fees. The Company recognizes royalty fees upon receipt of
licensees' royalty reports.
In limited instances, the Company may enter into multiple element
arrangements with continuing service obligations or milestone billing
arrangements. Based upon the limited verifiable objective evidence
available, the Company generally defers all revenue from such multiple
element arrangements until it delivers all elements. The Company
evaluates milestone billing arrangements on a case by case basis.
Generally, the Company recognizes revenues under the milestone payment
method. Under this method, the Company recognizes upfront fees ratably
over the entire arrangement and milestone payments as it achieves
milestones.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements." SAB 101 summarizes certain of the SEC's views
for applying generally accepted accounting principles to revenue
recognition in financial statements. Adoption of SAB 101 did not have a
material effect on the Company's financial position or results of
operations.
Expenses
The Company recognizes expenses related to evaluating inventions,
patenting inventions, licensing inventions and enforcing intellectual
property rights in the period incurred. Patent enforcement expenses
include direct costs incurred to enforce the Company's patent rights but
exclude personnel costs. Other costs of technology management services
include direct costs associated with patent and technology
commercialization services and personnel costs (including benefits and
overhead expenses).
Cash Equivalents, Short-Term Investments and Available-for-Sale
Securities
The Company classifies overnight bank deposits as cash equivalents.
Cash equivalents are carried at fair value. The Company classifies all
highly liquid investments other than overnight deposits as short-term
investments. Short-term investments are carried at fair value. 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.
From time to time the Company invests in available-for-sale
securities with original maturities greater than 90 days.
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 comprise certain licenses and patented
technologies acquired in 1996 and recorded at fair value. That value is
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.
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 and director stock-based
compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and discloses the pro forma
effects that fair value accounting would have on net income and earnings
per share.
Impairment of Long-lived Assets
The Company reviews long-lived and intangible assets for impairment
when events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. If the sum of expected
future undiscounted cash flows is less than the carrying amount of the
asset, the Company recognizes an impairment loss based on the fair value
of the asset.
Comprehensive Income (Loss)
Comprehensive income (loss) 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
The Company operates in a single reportable segment determined on
the basis management uses to make operating decisions and assess
performance.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations." This statement establishes
financial accounting and reporting for business combinations and
requires that purchase accounting be used for all business combinations.
The provisions of this statement apply to all business combinations
initiated after June 30, 2001.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." This statement establishes financial accounting and
reporting for acquired goodwill and other intangible assets acquired
individually or with a group of other assets but not acquired in a
business combination. The Company does not expect adoption of Statement
No. 142 to have a material effect on its financial condition or results
of operations. The Company will adopt this Statement on August 1, 2002.
In August 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets." This statement
establishes a single accounting model for the impairment of long-lived
assets. The Company does not expect adoption of this standard to have a
material effect on its financial condition or results of operations.
The Company will adopt this statement on August 1, 2002.
3. INVESTMENTS AND NOTES RECEIVABLE
NTRU Cryptosystems, Inc.
In March and July 2000, CTT acquired 3,172,881 shares,
approximately 10% of the then outstanding equity, of NTRU Cryptosystems,
Inc. (NTRU) in exchange for reducing its royalty participation on NTRU's
sales of CTT licensed products and $198,006 in cash. CTT recorded the
exchange of a substantial portion of its royalty participation at the
estimated fair value of 2,945,500 shares of NTRU common stock, $0.25 per
share, as retained royalty settlement of $736,375. NTRU's stock is not
publicly traded and there is no quoted market price for its stock. At
July 31, 2001 and 2000, CTT's carrying value for this investment was
$934,381. CTT accounts for this investment on the cost method. In
August 2001, CTT acquired additional shares of NTRU Series B convertible
preferred stock for $100,000 in cash as part of a $26.1 million
financing round. After this round of financing, CTT held approximately
7% of NTRU's outstanding equity.
Micro-ASI, Inc.
In April 2000, CTT paid $500,000 for 500,000 shares of convertible
preferred stock and warrants to purchase 300,000 shares of common stock
at $1.00 per share of Micro-ASI, Inc. (Micro-ASI) as part of Micro-ASI's
$8 million private placement. In May 2001, CTT advanced $100,000 of
secured bridge financing to Micro-ASI. Based on Micro-ASI's bankruptcy
filing in August 2001, management determined that CTT's investment in
and advance to Micro-ASI were impaired as of July 31, 2001 and recorded
a $600,000 impairment charge. Although the Company is a secured lender,
it is uncertain how much the Company may recover from the bankruptcy
estate.
E. L. Specialists, Inc.
Through a series of bridge financing agreements, the Company
committed to lend $821,000 to E. L. Specialists, Inc. (ELS). As of July
31, 2001, the Company had advanced $650,000 and had reset the date for
repayment to September 28, 2001. Interest accrues on the advances at 7%
per annum on the first $750,000 and at 10% per annum on the remainder.
However, the Company has recognized no interest since March 31, 2001.
Certain of ELS's intellectual property secures the loan and this
security interest is shared pro rata with another ELS lender that has
advanced $470,000 to ELS. CTT's advances are convertible into ELS's
common stock in certain circumstances, including an ELS financing round
in excess of $3,000,000. On September 28, 2001, ELS defaulted on
payment of the advances. The Company waived this default and reset the
demand date to November 5, 2001.
Based on the decline of the electronics and wireless markets, ELS's
recent financial results and the absence of quoted values for ELS's
stock, management validated the recoverability of CTT's advances through
a valuation of its security interest in ELS's intellectual property.
Management considered the timing of CTT's advances, CTT's ability to
withstand a prolonged recovery in the electronics and wireless
industries and the results of the valuation of CTT's security interest
in ELS's intellectual property. Management expects both secured lenders
to be able to recover their advances fully either through ELS's
repayment of the advances or, if required, by taking possession of the
intellectual property that secures the loan and through licensing the
intellectual property to recover the amount of the loan. As of July 31,
2001, CTT classified the advances as current notes receivable based on
their November 5, 2001 maturity.
NovaNET Learning, Inc.
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.
4. ACCOUNTS RECEIVABLE
Receivables were:
July 31, July 31,
2001 2000
Royalties $2,731,228 $2,347,176
Other 51,048 73,004
$2,782,276 $2,420,180
5. AVAILABLE-FOR-SALE SECURITIES
For the year ended July 31, 2000, proceeds from the sale of
available-for-sale securities were $145,444 which resulted in gross
realized gains of $90,238. 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).
6. PROPERTY AND EQUIPMENT
Property and equipment were:
July 31, July 31,
2001 2000
Equipment and furnishings, at cost $ 244,555 $ 228,326
Leasehold improvements, at cost 59,860 59,860
304,415 288,186
Accumulated depreciation
and amortization (237,421) (172,668)
$ 66,994 $ 115,518
Depreciation expense was $76,096, $70,554 and $62,605 in 2001, 2000
and 1999, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities were:
July 31, July 31,
2001 2000
Royalties payable $1,852,207 $1,780,988
Accrued professional fees 1,024,927 95,510
Accrued compensation 70,543 147,766
Deferred revenues 100,000 10,521
Other 39,484 65,625
$3,087,161 $2,100,410
8. INCOME TAXES
The income tax provision of $0 for each of 2001, 2000 and 1999
resulted from utilizing operating and capital loss carryforwards and
providing a full valuation allowance against the Company's net deferred
tax asset.
Components of the Company's net deferred tax assets were:
July 31, July 31,
2001 2000
Net operating loss carryforwards $ 3,922,000 $ 4,483,000
Net capital loss carryforwards 387,000 331,000
Installment receivable from
sale of discontinued operation 1,449,000 1,449,000
Other, net (145,000) (185,000)
Net deferred tax assets 5,613,000 6,078,000
Valuation allowance (5,613,000) (6,078,000)
Net deferred tax asset $ -- $ --
At July 31, 2001, the Company had Federal net operating loss
carryforwards of approximately $11,536,000, which expire from 2002
through 2016 ($4,371,000 in 2002, $157,000 in 2004 and $57,000 in 2005).
Changes in the valuation allowance were:
2001 2000 1999
Balance, beginning of year $ 6,078,000 $ 7,091,000 $ 8,236,000
Change in temporary differences 40,000 124,000 (499,000)
Change in net operating and
capital losses (505,000) (1,137,000) (646,000)
Balance, end of year $ 5,613,000 $ 6,078,000 $ 7,091,000
The Company's ability to derive future tax benefits from the net
deferred tax assets is uncertain and therefore it provided a full
valuation allowance.
9. SHAREHOLDERS' INTEREST
Preferred Stock
Dividends on preferred stock are noncumulative and preferred stock
is redeemable at par value at CTT's option.
Treasury Stock
In October 1998, the Board of Directors authorized CTT to
repurchase up to 250,000 shares of CTT's common stock. CTT 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. CTT repurchased
86,500, 49,400 and 25,400 shares of its common stock for $679,289,
$276,545 and $109,380 in cash in 2001, 2000 and 1999, respectively.
10. STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock-
based compensation plans. Accordingly, no compensation expense has been
recognized for its employee stock option plans or for its 2000 Directors
Stock Option Plan. The compensation expense charged against income for
grants under its 1996 Directors' Stock Participation Plan, Common Stock
Warrants and Employees' Common Stock Retirement Plan is reported below.
Had compensation expense for CTT's employees' and directors' 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,
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
For the years ended July 31,
2001 2000 1999
Net income (loss) As reported $(2,500,749) $1,300,937 $2,919,384
Pro forma $(2,803,807) $ 707,572 $2,784,168
Basic
earnings As reported $ (0.41) $ 0.21 $ 0.49
per share Pro forma $ (0.46) $ 0.12 $ 0.46
Fully diluted
earnings per As reported $ (0.41) $ 0.21 $ 0.49
share Pro forma $ (0.46) $ 0.11 $ 0.46
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:
For the years ended July 31,
2001 2000 1999
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 79.5% 62.1% 51.0%
Risk-free interest rates 5.2% 5.9% 4.9%
Expected lives 3 years 3 years 4 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 expired December 31, 2000. Under
this plan both incentive stock options and nonqualified stock options
were granted to key employees. Incentive stock options could be granted
at an exercise price not less than the fair market value of the optioned
stock on the grant date. Nonqualified stock options could be granted at
an exercise price not less than 85% of the fair market value of the
optioned stock on the grant date. Options generally vest over a period
of up to three years after the grant date and expire ten years after the
grant date if not terminated earlier. For nonqualified stock options,
the difference between the exercise price and the fair market value of
the optioned stock on the grant date, if any, is charged to expense over
the term of the option. Stock appreciation rights may be granted either
at the time an option is granted or any time thereafter. There are no
stock appreciation rights outstanding. No option may be granted under
the plan after December 31, 2000. The following information relates to
this stock option plan.
July 31, July 31,
2001 2000
Common shares reserved for
issuance on exercise of options 368,838 372,088
Shares available for future
option grants 0 45,096
CTT may grant either incentive stock options or nonqualified
options under its 1997 Employees' Stock Option Plan as amended in
January 2001. They may be granted at an option price not less than 100%
of the fair market value of the stock at grant date. Option vesting
provisions are determined when options are granted. 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. The following
information relates to the 1997 Employees' Stock Option Plan.
July 31, July 31,
2001 2000
Common shares reserved for
issuance on exercise of options 525,777 225,777
Shares available for future
option grants 336,752 143,752
2000 Directors Stock Option Plan
Options granted under the 2000 Directors Stock Option Plan are
nonqualified options granted at an option price equal to 100% of the
fair market value of the stock at grant date. The maximum term of any
option under the 2000 option plan is ten years from the grant date. No
options may be granted after January 1, 2010. The following information
relates to the 2000 Directors Stock Option Plan.
July 31, July 31,
2001 2000
Common shares reserved for
issuance on exercise of options 244,000 244,000
Shares available for future
option grants 130,000 190,000
1996 Directors' Stock Participation Plan
Under the terms of the 1996 Directors' Stock Participation Plan
which 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.
In 2001, 2000 and 1999, CTT issued 11,540, 9,375 and 7,500 shares
of common stock, respectively, to eligible directors. (In 2001 and
1999, 2,898 and 3,125, respectively, additional shares were issued to
directors outside the 1996 Directors' Stock Participation Plan.) In
2001, 2000 and 1999, CTT charged to expense $75,000, $58,085 and
$45,078, respectively, over the directors' respective periods of
service. The following information relates to the 1996 Directors' Stock
Participation Plan.
July 31, July 31,
2001 2000
Common shares reserved for
future share issuances 53,579 65,119
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 CTT charged to expense the fair value of warrants to purchase
3,000 shares of its common stock totaling $11,740. Information about
CTT's common stock warrants outstanding as of July 31, 2001 is presented
below.
Number Warrant Aggregate
of Price per Exercise Expiration
Issued Shares Share Price Date
September 1996 3,000 $ 9.875 $ 29,625 September 2001
August 1997 2,500 $11.094 $ 27,735 August 2002
5,500 $ 57,360
Summary of Common Stock Options and Warrants
A summary of the status of all CTT's common stock options and
warrants as of July 31, 2001, 2000 and 1999, and changes during the
years then ended is presented below.
For the years ended July 31,
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding,
beginning of year 480,517 $ 9.14 584,042 $ 8.38 506,542 $9.43
Granted 212,000 $ 7.29 239,500 $ 6.54 127,000 $4.33
Forfeited (1,750) $ 7.22 (44,000) $ 6.82 -- $ --
Exercised (3,250) $ 6.50 (231,023) $ 6.94 (11,500) $4.22
Expired or
Terminated (186,750) $ 9.08 (68,002) $ 9.19 (38,000) $9.97
Outstanding,
end of year 500,767 $ 7.48 480,517 $ 9.14 584,042 $8.38
Exercisable
at year-end 377,704 $ 7.51 397,567 $ 8.42 479,667 $8.69
Weighted average
fair value per
share of grants
during the year $ 2.49 $ 2.09 $ 1.70
The following table summarizes information about all common stock
options and warrants outstanding at July 31, 2001.
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<s> <c> <c> <c> <c> <c>
$4.220-$ 5.563 115,525 8.24 years $ 5.41 96,650 $ 5.39
$6.500-$ 8.813 305,042 8.77 years $ 7.54 200,854 $ 7.44
$9.063-$11.875 80,200 4.14 years $10.27 80,200 $10.27
Employees' Common Stock Retirement Plan
Effective August 1, 1990, CTT adopted an Employees' Common Stock
Retirement Plan. For the fiscal years ended July 31, 2001, 2000 and
1999, the Board authorized contributions of 14,814, 4,274 and 13,384
shares, respectively, valued at approximately $80,000, $39,000 and
$79,900, respectively, based on year-end closing prices. CTT charged
these amounts to expense in 2001, 2000 and 1999, respectively.
11. 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 subject to certain limitations. The
Company may also make discretionary matching contributions. The Company
has made no matching contributions.
12. 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 $2,190,000 (60% of retained royalties) in 2001 was
from several licenses of the gallium arsenide patents. These patents
include a laser diode technology used in optoelectronic storage devices
and another technology that improves semiconductor operating
characteristics. Approximately $1,715,000 of this total was from one
U.S. licensee's sales of licensed product during the year. The
remaining $475,000 was from several foreign licensees and included
license issue fees from executing two new licenses. The U.S. patents
for these technologies expire between May 2001 and September 2006.
Approximately $417,000 (11% of retained royalties) in 2001 was from
several licenses of the Vitamin B12 assay. Certain of these licensed
patents expired in April 1998, April 1999, February 2000 and May 2001.
The remaining Vitamin B12 assay licensed patents will expire in April
and November 2002.
Retained royalties for 2001, 2000 and 1999, include $682,011,
$534,880 and $1,094,415, respectively, from foreign licensees. These
fiscal 2001 and 2000 foreign royalties include $475,000 and $371,000
from the gallium arsenide portfolio and 1999 foreign royalties include
$661,500 from the paid-up license of the encryption technology.
13. NET INCOME (LOSS) PER SHARE
The following table sets forth computations of basic and diluted
net income (loss) per share.
For the years ended July 31,
2001 2000 1999
Net income (loss)
applicable to common stock:
Basic and diluted: $(2,500,749) $1,300,937 $2,919,384
Weighted average number of common
shares outstanding 6,135,486 6,079,211 5,982,112
Effect of dilutive securities:
Stock options -- 106,022 27,589
Stock warrants -- 2,174 --
Weighted average number of common
shares outstanding and dilutive
securities 6,135,486 6,187,407 6,009,701
Net income (loss) per
share of common stock:
Basic and diluted $ (0.41) $ 0.21 $ 0.49
At July 31, 2001, 2000 and 1999, respectively, options and warrants
to purchase 500,767, 97,500 and 449,042 shares of common stock were
outstanding but were not included in the computation of earnings per
share because they were anti-dilutive.
14. COMMITMENTS AND CONTINGENCIES
Operating Leases
CTT occupies its executive office in Fairfield, Connecticut under a
lease which expires December 31, 2006. CTT has an option to renew this
lease for an additional five years.
At July 31, 2001, future minimum rental payments required under
operating leases with initial or remaining noncancelable lease terms in
excess of one year were:
For the years ending July 31:
2002 $ 222,765
2003 232,140
2004 232,140
2005 230,345
2006 226,000
2007 93,750
Total minimum payments
required $1,237,140
Total rental expense for all operating leases was:
For the years ended July 31,
2001 2000 1999
Minimum rentals $ 209,828 $ 212,425 $ 195,602
Less: Sublease rentals (18,500) (27,870) (29,356)
$ 191,328 $ 184,555 $ 166,246
Other Obligations
The Company has an employment contract with one of its officers
from December 1999 through December 2002 with aggregate minimum
compensation of $185,000 per year.
CTT 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 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 2000 and 1999, CTT charged $2,733 and $3,188 in related
royalty expenses to operations. No other such expenses were charged in
any prior years. CTT's and VVI's remaining contingent obligations were
$203,146 and $224,127, respectively, at July 31, 2001.
In connection with Renova(R) 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). At July 31, 2001, CTT had paid the
entire cumulative contingent legal fees of $201,778, of which $1,731,
$33,629 and $44,098 were charged to operations in 2001, 2000 and 1999,
respectively.
Litigation
Fujitsu
In December 2000, CTT filed a complaint with the United States
International Trade Commission (ITC) on behalf of CTT and the University
of Illinois against Fujitsu Limited of Tokyo, Japan, (Fujitsu), Fujitsu
Hitachi Plasma Display Limited, Japan, et al. under Section 337 of the
Tariff Act of 1930, as amended. CTT requested that the ITC stop Fujitsu
and/or its subsidiaries from unlawfully importing plasma display panels
(PDPs) into the United States on the basis that the panels infringe U.S.
Patent Numbers 4,866,349 and 5,081,400 held by CTT's client, the
University of Illinois. The two patents cover energy recovery in PDPs
and plasma display flat-screen televisions. The ITC has the power to
issue orders directing U.S. customs officials to stop future importation
of Fujitsu PDPs and plasma display products that infringe the two named
patents. In June 2001, CTT requested withdrawal of its complaint before
the ITC and the ITC complaint was withdrawn in August 2001. Coincident
with filing its ITC complaint, CTT and the University of Illinois also
filed a complaint against Fujitsu in the United States District Court
for the Central District of Illinois seeking damages for past
infringements and an injunction against future sales of PDPs that
infringe these patents. In July 2001, CTT reactivated this complaint to
pursue these additional legal remedies (a permanent injunction against
future sales of PDPs that infringe these patents, damages for past
infringing sales and possibly damages for willfulness) which are not
available at the ITC. CTT intends to seek to expedite this case.
In September 2001, Fujitsu and Fujitsu Hitachi Plasma Display
Limited, Japan, filed suit against CTT and Plasmaco, Inc. in the United
States District Court for the District of Delaware. This lawsuit
alleges, among other things, that CTT misappropriated confidential
information and trade secrets supplied by Fujitsu. It also alleges
that, with Plasmaco's assistance, CTT abused the ITC process to obtain
information to which it otherwise would not have been entitled and which
it will use in the action against Fujitsu in the United States District
Court for the Central District of Illinois. Fujitsu seeks damages in an
unspecified amount and injunctive relief. The Company intends to defend
vigorously the action instituted by Fujitsu.
CTT is unable to estimate the legal expenses or the loss it may
incur in these suits, if any, and has recorded no potential judgment
proceeds in its financial statements to date.
LabCorp
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 beginning in 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. The 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. Discovery has been completed. Trial is scheduled to begin in
November 2001. CTT is unable to estimate the related legal expenses it
may incur in this suit and has recorded no revenue for these withheld
royalties.
MaternaTM
The University of Colorado Foundation, Inc., the University of
Colorado, the Board of Regents of the University of Colorado, Robert H.
Allen and Paul A. Seligman, plaintiffs, previously filed a lawsuit
against American Cyanamid Company, defendant, in the United States
District Court for the District of Colorado. This case involved a
patent for an improved formulation of MaternaTM, a prenatal vitamin
compound sold by defendant. 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.
As a result of this contract, the Company is entitled to share
approximately 18% of damages awarded to the University of Colorado, if
any, after deducting the expenses of this suit. On November 19, 1999,
the United States Court of Appeals for the Federal Circuit vacated a
July 7, 1997 judgment by the District Court in favor of plaintiffs for
approximately $44 million and remanded the case to the District Court
for further proceedings. On July 7, 2000, the District Court concluded
that Robert H. Allen and Paul A. Seligman were the sole inventors of the
reformulation of MaternaTM that was the subject of the patent and that
defendant is liable to them and the other plaintiffs on their claims for
fraud and unjust enrichment. In March 2001, the District Court heard
arguments to determine the nature and amount of damages to be paid by
defendant. The District Court judge has issued a preliminary favorable
opinion to guide findings of fact and conclusions of law. The parties
await the judge's decision. The Company cannot predict the amount of
its share of the judgment, if any, which may ultimately be awarded. The
Company has recorded no potential judgment proceeds in its financial
statements to date. While the Company has incurred certain expenses in
connection with this suit, it does not expect to incur additional
expenses in this suit in the future. The Company records such expenses
as they are incurred.
Optical Associates, Limited Partnership (OALP)
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 (Unilens). 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). Unilens made no payments in
fiscal 2001, 2000 or 1999.
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 Management, 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 the facts available to management, that the claims
asserted in the suit are without merit, and the registrant has
vigorously defended against plaintiffs' claims. In November 2000, the
Company made a motion to dismiss this case. On September 14, 2001, the
attorney referee recommended that the Court grant defendants' motion for
a judgment of dismissal. No final order has yet been entered. Through
July 31, 2001, the Company had received aggregate cash proceeds of
approximately $1,011,000 from the January 1989 sale of UOP's assets to
Unilens.
CTT recognized other expenses from continuing operations of
$52,460, $269 and $41,337 in 2001, 2000 and 1999, respectively, for
legal expenses related to this suit.
15. RELATED PARTY TRANSACTIONS
During 2001 and 2000, CTT incurred charges of approximately
$146,000 and $133,000, respectively, for consulting services (including
expenses and taxes) provided by two directors. During 2000, CTT earned
approximately $10,000 performing services for a company of which another
director is president.
Supplementary Data
Selected Quarterly Financial Data (1) (unaudited)
For the years ended July 31
First Second Third Fourth
Quarter Quarter Quarter Quarter Total Year
<s> <c> <c> <c> <c> <c>
2001
Retained royalties $ 462,669 $ 1,558,587 $ 416,562 $1,199,946 $ 3,637,764
Other revenues 909 2,611 -- -- 3,520
Total revenues $ 463,578 $ 1,561,198 $ 416,562 $1,199,946 $ 3,641,284
Patent enforcement expenses,
net of reimbursements 60,085 305,792 791,880 1,316,260 2,474,017
Other costs of technology
management services 332,394 386,308 514,316 626,437 1,859,455
General and administration expenses 375,944 469,614 287,354 407,261 1,540,173
Total operating expenses $ 768,423 $ 1,161,714 $ 1,593,550 $2,349,958 $ 5,873,645
Operating income (loss) $ (304,845) $ 399,484 $(1,176,988) $(1,150,012) $(2,232,361)
Net income (loss) (2) $ (185,140) $ 494,203 $(1,103,268) $(1,706,544) $(2,500,749)
Net income (loss) per share
basic and diluted $ (0.03) $ 0.08 $ (0.18) $($0.28) $ (0.41)
2000
Retained royalties $ 444,730 $ 1,118,229 $ 553,402 $ 1,085,833 $ 3,202,194
Retained royalty settlement 736,375 736,375
Other revenues 126,097 27,840 9,233 11,128 174,298
Total revenues $ 570,827 $ 1,146,069 $ 1,299,010 $ 1,096,961 $ 4,112,867
Patent enforcement expenses,
net of reimbursements 32,070 73,896 19,318 32,175 157,459
Other costs of technology
management services 532,014 438,340 476,775 432,628 1,879,757
General and administration expenses 228,663 352,150 346,752 374,048 1,301,613
Total operating expenses $ 792,747 $ 864,386 $ 842,845 $ 838,851 $ 3,338,829
Operating income (loss) $ (221,920) $ 281,683 $ 456,165 $ 258,110 $ 774,038
Net income (loss) $ (141,066) $ 428,725 $ 580,100 $ 433,178 $ 1,300,937
Net income (loss) per share
(basic and diluted) $ (0.02) $ 0.07 $ 0.09 $ 0.07 $ 0.21
(1) Should be read in conjunction with Consolidated Financial Statements and
Notes thereto.
(2) Includes $600,000 investment and loan impairment loss on Micro-ASI, Inc.
in Fourth Quarter.