10-K 1 f10k_01a.txt 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, 2001 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 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Exhibit Index on sequentially numbered page 65. Page 1 of 77 sequentially numbered pages. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 17, 2001, 6,139,351 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 $3.275, which was 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 $19,371,000. 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, we, CTT or the Company), is a Delaware corporation incorporated in 1971 to succeed an Illinois business corporation incorporated in 1968. We provide 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, research institutions, and universities. Our goal is to maximize returns on intellectual property. We do this by selling, licensing, or otherwise transferring technologies to others and enforcing our and our clients' patent rights with respect to these technologies, or by investing in new entities to commercialize them. On October 1, 2001, we employed approximately 12 people (full- time equivalents). Substantially all employees are salaried and none is represented by a labor union. Patent and Technology Commercialization Services We bridge the gap between conceptualization and commercialization to bring useful, innovative, new products and technologies to the marketplace. A key component of our approach is that, as early in the process as possible, we assess the strength of each invention's intellectual property rights, patentability or protectability, and its potential marketability. This permits us to focus our efforts and resources on inventions with higher potential for successful commercial exploitation. We provide patent and technology commercialization services with respect to a broad range of digital/electronic, life sciences, and physical sciences technologies invented by various individuals, corporations, research institutions, and universities. We include telecommunications, data security, signal processing, digital entertainment, electrical circuitry, microelectronic, and semiconductor technologies in our digital/electronic portfolio. Our life sciences portfolio includes pharmaceuticals, biotechnologies, and medical devices. Our physical sciences portfolio includes materials, manufacturing, and environmental technologies. Our professional staff has diverse technical, legal, intellectual property, financial, market and business experience and training to serve our clients' unique needs. We supplement our professional staff, as needed, with a network of scientific, business, and patent experts. We have also established strategic alliances with Innovation Partners International, k.k., in Osaka, Japan, and Angle Technology Limited in England and Scotland. For a technology or group of technologies, we may evaluate technical feasibility, assess potential patentability, assess marketability and commercial potential, apply for and prosecute patents, and enforce issued patents or other intellectual property rights by litigation, if necessary and appropriate. We determine the optimal strategy to commercialize a technology based on our evaluations. We may sell or license the technology to others, manage the related license agreements, and distribute license revenues to their respective owners. We may assist our clients in obtaining funding, technical skills or other resources to accelerate developing their technologies to the next stage of commercialization. We may also invest in a new entity to commercialize an invention or group of inventions. When we invest in early-stage technology-based enterprises, we expect to reap significant returns as they mature and their products enter the marketplace. Our objective is to develop technologies into profitable royalty bearing licenses and equity investments. We realize revenues from technologies in three ways. -- We license technologies to obtain license fees and royalty revenues. -- We invest in new ventures to exploit specific technologies. -- We provide technology marketing and commercialization services to earn agreed fees. Our clients are inventors and invention owners - individuals, corporations, universities, and other research institutions. In our agreements with clients, we specify the particular services we will provide them and how they will compensate us for those services. We tailor each agreement to satisfy the unique needs of each client. Most clients agree to share with us a specific percentage of amounts received from commercialization of technologies. Some clients agree to pay a fixed percentage of royalty revenue from licensed technology, a fee for specific services and/or specified annual fees for our services. In some situations, our clients give us equity or the right to purchase equity in them. In addition, some clients agree to share expenses of the technology commercialization process. The three technologies that produced retained royalties equal to or exceeding 10% of consolidated revenue for us during 2001, 2000 or 1999 were gallium arsenide semiconductors, encryption and Vitamin B12 assay. Retained royalty revenues from these technologies were: 2001 2000 1999 Gallium arsenide, including laser diode $2,190,000 $1,363,000 $ 518,000 Public key encryption $ -- $ 736,375 $ 661,500 Vitamin B12 assay $ 417,000 $ 381,000 $ 972,000 As a percentage of retained royalties, they represented: 2001 2000 1999 Gallium arsenide, including laser diode 60% 35% 15% Public key encryption -- 19% 19% Vitamin B12 assay 11% 10% 28% 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 patents include a laser diode technology used in optoelectronic storage devices and another technology that improves semiconductor operating characteristics. We have licensed these inventions to Mitsubishi Electric Corporation, NEC Corporation, Semiconductor Company, Matsushita Electric Industrial Co., Ltd., SDL, Inc., Hitachi Ltd., Tottori Sanyo Electric Co., Ltd. and Toshiba Corporation. These inventions are in current use according to information received from licensees and other sources. Approximately $1,715,000 of 2001's retained royalties was from one U.S. licensee's sales of licensed product; the remaining $475,000 was from several foreign licenses and included license issue fees from executing two new licenses. The public key encryption and digital authentication technology was developed by NTRU Cryptosystems, Inc. (NTRU). It can secure and verify authenticity in wireless and Internet communications and in electronic commercial transactions. NTRU has applied for U.S. patents on this technology and one patent issued in June 2000. NTRU has licensed this technology non-exclusively to NCT Group, Inc., Sony Corporation, TAO Group Limited and others. NTRU has developed security products and is marketing them to customers and securing strategic alliances to provide security in wireless and other digital media applications. In 2000 we recognized a retained royalty settlement of $736,375 (19% of total retained royalties) for the estimated fair value of the royalty participation we exchanged for 2,945,500 shares of common stock of NTRU valued at $0.25 per share. This transaction occurred simultaneously with an $11 million cash investment in NTRU by Sony Corporation and Greylock Partners. In addition, we retained a small royalty participation in NTRU's sales of CTT licensed products. Retained royalties in 1999 included $661,500 from a paid-up, non-exclusive, worldwide, field of use limited license granted to an unrelated foreign corporation in November 1998 on this encryption technology. All performance milestones agreed in the license were met during fiscal 1999 and the licensee paid all the agreed milestone payments. The improved assay procedure for diagnosing Vitamin B12 deficiencies was developed at the University of Colorado. U.S. patents issued from February 1980 to May 1984. Certain of these U.S. and foreign licensed patents expired in April 1998, April 1999, February 2000 and May 2001. The remaining Vitamin B12 licensed patents will expire in April and November 2002. We have licensed these assay procedures to Abbott Laboratories, Bayer Corporation, Beckman Instruments, Inc., Bio-Rad Laboratories, Inc., Chiron Diagnostics Corporation, Microgenics, Inc., Roche Diagnostics GmbH and Tosoh Corporation. These assay procedures are in current use according to information received from licensees and other sources. 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, we have 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. Our U.S. patent that covers this homocysteine assay expires in 2007. We had ten homocysteine licenses (including one sublicense) throughout fiscal 2001, 2000 and 1999. Homocysteine retained royalties in fiscal 2001, 2000 and 1999 were approximately $203,000, $392,000 and $265,000, respectively. A sublicensee's withholding royalties on certain tests reduced retained royalties in 2001, 2000 and 1999. We have joined with our licensee in a lawsuit against the sublicensee. See also Item 3. Legal Proceedings and Note 14 to Consolidated Financial Statements. We cannot predict the timing or amounts of retained royalties we may earn or the timing or costs we may incur in licensing and enforcing the patents for this assay. Our foreign operations are limited to royalties received from foreign licensees. See Note 12 to Consolidated Financial Statements. Investments in and Advances to Development-Stage Companies We generally do not finance research and development of technologies. However, in certain instances, as well as providing other forms of assistance, we also invest in development-stage companies to exploit specific technologies we believe are beyond the pure research and development stage. NTRU Cryptosystems, Inc. In March and July 2000, we acquired 3,172,881 shares, approximately 10% of the then outstanding equity, of NTRU Cryptosystems, Inc. (NTRU) in exchange for reducing our royalty participation on NTRU's sales of CTT licensed products and $198,006 in cash. We recorded the exchange of a substantial portion of our royalty participation at the estimated fair value of 2,945,500 shares of NTRU common stock, $0.25 per share, as a retained royalty settlement of $736,375. We have worked with NTRU and its founders since 1997 and acquired our original royalty interest in exchange for providing NTRU with custom incubation services, including patent filing support, interim business management, technical marketing, licensing and initial capital sourcing services. NTRU's mathematicians and cryptographers developed a new generation of memory efficient high-speed public key encryption solutions. NTRU's stock is not publicly traded and there is no quoted market price for its stock. At July 31, 2001, our carrying value for this investment was $934,381. In August 2001, we acquired additional shares of NTRU Series B convertible preferred stock for $100,000 in a $26.1 million financing round. After this round of financing, CTT held approximately 7% of NTRU's outstanding equity. We account for this investment on the cost method. Advances to E. L. Specialists, Inc. E. L. Specialists, Inc. (ELS) is a Texas corporation established to develop and commercialize innovative flexible electronic products based on advanced polymer thick film technology, including a flexible printed electroluminescent lamp and a low cost, non-silicon based biometric sensor. We provide certain technology evaluation, marketing and licensing services for ELS under a service agreement with them. Through a series of bridge financing agreements, we committed to lend $821,000 to ELS. As of July 31, 2001, we 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, we have recognized no interest since March 31, 2001. 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. Our 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. We 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, we validated the recoverability of our advances through a valuation of our security interest in ELS's intellectual property. We considered the timing of our advances, our ability to withstand a prolonged recovery in the electronics and wireless industries and the results of the valuation of our security interest in ELS's intellectual property. We expect both secured lenders to be able to recover fully their advances either through ELS's repayment of the advances or, if required, by taking possession of the intellectual property that secures the loan and licensing the intellectual property to recover the amount of the loan. As of July 31, 2001, we classified our advances as current notes receivable. If we determine that it would be in the best interests of the Company to restructure the financing agreement, we may extend the repayment period, increase the interest rate, and/or increase the loan's conversion rate to ELS equity and reclassify the loan according to its repayment terms. If we determine that the Company must license the intellectual property to recover the advances, we will reclassify the advances as non- current intellectual property and amortize the balance over its useful life. 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, we determined that our investment in and advance to Micro-ASI were impaired as of July 31, 2001, and recorded a $600,000 impairment charge. Although CTT is a secured lender with respect to the bridge financing, it is uncertain how much we may recover from the bankruptcy estate. NovaNet Learning, Inc. In May 1999, we sold our remaining 14.5% interest in NovaNET Learning, Inc. (NLI) and recorded a gain of $2,313,227 on the sale. In February 1995, we sold the then majority of our shares of NLI common stock to Barden Companies, Inc. and recorded a $2,534,505 gain on the sale. We formed University Communications, Inc., later renamed NovaNET Learning, Inc., in June 1986 to commercialize an interactive education and communication network developed at the University of Illinois. At various times since starting NLI, we had invested an aggregate of $1,997,000 in NLI equity. During NLI's first five years, we provided custom incubation services, including interim business management and initial capital sourcing services. Others In 1995, we worked with the University of Kentucky to establish and finance Equine Biodiagnostics, Inc. (EBI), a company organized to provide diagnostic laboratory services for the equine industry. EBI marketed its initial product in its first month of operations. We made a seed investment of $25,000 in 1995 and sold our investment in EBI during fiscal 1999 for $198,850 in cash. Because we had recorded our equity in EBI's net income during our investment period, we recognized no gain or loss at the time of our sale in fiscal 1999. In June 1999, we obtained equity in Digital Ink, Inc. (Digital Ink) in exchange for $50,000 in patenting, marketing, and accounting services provided from June 1999 through January 2000. Digital Ink has developed an electronic pen that captures and stores handwriting in its memory. Digital Ink expects applications of this proprietary technology to include wireless devices, personal computers and personal digital assistants. We provided patenting, marketing and accounting services during the time Digital Ink developed a working prototype of this digital pen invention. Since its inception, Digital Ink has obtained more than $5.5 million of funding. Digital Ink is currently seeking additional funding to implement its plan to market and license its digital pen to device manufacturers and wireless service providers. At July 31, 2001, we owned 11% of Digital Ink's outstanding common and preferred stock. In 1994, we established a majority-owned subsidiary, Vector Vision, Inc. (VVI), to develop and exploit a video compression technology developed at Lehigh University. Since its inception VVI has obtained $498,000 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 14 to Consolidated Financial Statements). At July 31, 2001, we owned 53.3% of VVI's outstanding common stock. At July 31, 2001, VVI was operationally inactive. Certain of VVI's proprietary technology has been accepted in a portion of the MPEG-4 standard, an international standard for low bandwidth applications such as video teleconferencing, video databases and wireless video access. Risk Factors We have generated relatively limited income and we experienced operating losses in fiscal 2001 and prior to fiscal 1999. The table below summarizes our consolidated results of operations and cash flows for the five years ended July 31, 2001:
2001 2000 1999 1998 1997 Operating income (loss) $(2,232,361) $ 774,038 $ 421,533 $(1,381,903) $(1,785,891) Net income (loss) $(2,500,749) $1,300,937 $2,919,384 $(1,235,489) $(1,571,045) Net cash flow from: Operating activities $ (246,834) $ 458,295 $ 626,083 $ (485,035) $ (896,712) Investing activities $ (586,941) $ (993,362) $ (979,646) $ 600,680 $ 1,467,919 Financing activities $ (658,164) $1,342,928 $ (361,843) $ (351,257) $ (317,408) Net increase (decrease) in cash and cash equivalents $(1,491,939) $ 807,861 $ (715,406) $ (235,612) $ 253,799
Although we had both operating and net income in fiscal 2000 and 1999, we cannot assure you that earnings will resume in fiscal 2002, and it is possible that we could continue to incur losses in the foreseeable future. Patent enforcement litigation is an expensive but essential component of our business strategy to obtain the revenues to which we believe we and our clients are entitled. In addition, our future revenues and profits or losses depend on certain factors beyond our control, including technological changes and developments, downturns in the economy or our inability to successfully commercialize the inventions and innovations of our clients. Consequently, we may not be able to generate sufficient revenues to be profitable. We receive most of our revenues from licensees over whom we have no control. We rely on royalties received from our licensees for most of our revenues. Retained royalties (including retained royalty settlement in 2000) constituted 100%, 96% and 95% of our consolidated total revenues for the years ended July 31, 2001, 2000 and 1999, respectively. The royalties we receive from our licensees depend on the efforts and expenditures of those licensees and we have no control over their efforts or expenditures. Additionally, our licensees' development of new products involves great risk since many new technologies do not become commercially profitable products despite extensive development efforts. Our license agreements do not require licensees to advise us of problems they may encounter in attempting to develop commercial products and licensees usually treat such information as confidential. You should expect that licensees will encounter problems frequently. We cannot assure you that our licensees' failure to resolve such problems will not result in a material adverse effect (financial or otherwise) on our operations. Our licensees, and therefore we, depend on receiving government approvals to exploit certain licensed products commercially. Commercial exploitation of some licensed patents may require the approval of governmental regulatory agencies and there is no assurance that those agencies will grant such approvals. In the United States, the principal governmental agency involved is the U.S. Food and Drug Administration (FDA). The FDA's approval process is rigorous, time consuming and costly. Unless and until a licensee obtains approval for a product requiring such approval, the licensee may not sell the product and therefore we will not receive royalty income based on the sales of the product. If we are unable to protect the intellectual property underlying our licenses or to enforce our patents adequately, we may be unable to exploit such licensed patents or technologies successfully. This could adversely affect our revenues from those licenses. Our success in earning revenues from licensees is subject to the risk that issued patents may be declared invalid, that patents may not issue on patent applications, or that competitors may circumvent our licensed patents and thereby render our licensed patents uncommercial. In addition, upon expiration of all patents underlying a license, our royalties from that license will cease, and there can be no assurance that we will be able to replace those royalties with royalty revenues from other licenses. Certain of our licensed patents have recently expired or will expire in the near future and we may not be able to replace their royalty revenues. We currently receive royalties from licenses that we hold on thirty-four (34) patented technologies. We expect eleven (11) of those patented technologies to expire in the next three years. Those patented technologies represented approximately 68% of our revenue in fiscal 2001. During fiscal 2001, approximately 60% of our royalties were from our gallium arsenide patents including 47% of our royalties which were from one U.S. licensee. Of our fiscal 2001 revenues, patents covering technologies representing approximately 13% expire in fiscal 2002, 4% expire in fiscal 2003 and 51% expire in fiscal 2004. The loss of those royalties may adversely affect our operating results if we are unable to replace them with revenue from other licenses or other sources. Patent litigation has increased; it can be expensive and may delay or prevent our licensees' products from entering the market. In the event we determine that competitive products infringe our patent rights, we may pursue patent infringement litigation or interference proceedings against sellers of those competing products. During fiscal 2001 we brought such litigation against Fujitsu. See Item 3 and Note 14 to Consolidated Financial Statements. Holders of conflicting patents or sellers of competing products may also challenge our patents in patent infringement litigation or interference proceedings. We cannot assure you that we will be successful in any such litigation or proceeding, and the results and costs of such litigation or proceeding may materially adversely affect our business, operating results and financial condition. In the markets for our licensees' products, technology can change rapidly and industry standards are continually evolving. This often makes products obsolete or results in short product lifecycles. Our profitability depends on our licensees' ability to adapt to such changes. Therefore, our profitability will depend in large part on our, our clients' and/or our licensees' abilities to: -- introduce products in a timely manner; -- maintain a pipeline of new technologies; -- enhance and improve existing products continually; -- maintain their development capabilities; -- anticipate or adapt to technological changes and advances in their relevant industries; and -- ensure continuing compatibility with evolving industry standards. Evaluating and securing funding for new business and product development is difficult and we cannot assure you that, once we have found a new business or product, it will be successful. We continue to seek business opportunities which are synergistic with our expertise in commercializing technology or which have the potential to generate excess cash flow that we could use to build our business. We cannot assure you that we will succeed in acquiring or developing such businesses or products or that they will be profitable. In instances where we invest our own funds, whether directly, through a subsidiary or a joint venture or otherwise, in researching, developing, manufacturing or marketing new products, we incur the same risks as licensees with respect to new product development. New products may require additional 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. New competing products or alternative technologies may render our products obsolete or otherwise unsuitable for commercialization. We need significant capital to operate our business and we may require additional financing. If we cannot obtain such additional financing, we may not be able to continue our operations or pursue our growth strategies. We need significant capital to invest in new developing businesses and in obtaining and marketing new technologies. Currently available funds may be insufficient to fund our growth strategy or our long-term operations. We may need to seek additional financing sooner than we currently anticipate or to curtail our activities. Developing new products, creating effective commercialization strategies for technologies and enhancing those products and strategies are subject to inherent risks. These risks include unanticipated delays, unrecoverable expenses, technical problems or difficulties, as well as the possibility that development funds will be insufficient. Any one of these could make us abandon or substantially change our technology commercialization strategy. Our success will depend upon, among other things, products meeting targeted cost and performance objectives for large-scale production, our licensees' ability to adapt technologies to satisfy industry standards, satisfy consumer expectations and needs, and bring their products to the marketplace before it is saturated. They may encounter unanticipated technical or other problems resulting in increased costs or substantial delays in introducing and marketing new products. Current and future products may not be reliable or durable under actual operating conditions or otherwise commercially viable and competitive. New products may not satisfy price or other performance objectives when introduced in the marketplace. Any of these events would adversely affect our realization of royalties from such new products. Strong competition within our industry may reduce our client base. Competition for technology development and commercialization services is vigorous. Several organizations, some of which are well established and have greater financial resources than we do, provide technology development and commercialization services. Our success depends on our ability to attract and retain key personnel and consultants. Our success depends on the knowledge, efforts, and abilities of a small number of key personnel. Our principal key employee is Mr. Frank R. McPike, Jr. In addition, we rely on services of third party consultants. To the extent we implement our plans to identify and acquire synergistic businesses, we will also need to retain the managerial and technical personnel necessary to supervise or manage these developing companies. Competition for all of these personnel is intense and we cannot assure you that we will be able to attract and retain qualified personnel. If we were to lose Mr. McPike's services or be unable to hire and retain qualified technology advisors, business consultants, intellectual property specialists, operating, financial, technical, marketing, sales, and other personnel, our profitability, prospects, financial condition and future activities could be adversely affected. We depend on our relationships with inventors to gain access to new technologies and inventions. If we fail to maintain existing relationships or to develop new relationships, we may reduce the number of technologies and inventions available to generate revenues. We do not invent new technologies and products ourselves. We depend on our current relationships with universities, corporations, governmental agencies, research institutions, inventors, and others to provide us technology-based opportunities we can develop into profitable equity investments and/or royalty-bearing licenses. Our failure to maintain our relationships with them could affect our business, operating results and financial condition both materially and adversely. If we are unable to forge new relationships or to maintain our current relationships, we may be unable to identify new technology-based opportunities. Further, we cannot be certain that our current or new relationships will maintain the volume or quality of available new technologies they currently present to us. In some cases, universities and other sources of new technologies seek to develop and commercialize these technologies themselves or through entities they develop, finance and control. In other cases, universities receive financing for basic research from companies in exchange for the exclusive right to commercialize resulting inventions. These and other strategies may reduce the number of technology sources to whom we can market our services. If we are unable to secure new sources of technology, this could have a material adverse effect on our business, operating results and financial condition. As part of our business strategy, we pursue other transactions or investments that may generate significant charges to earnings and may adversely affect our financial condition. We regularly review potential transactions or investments related to technologies, products or product rights, technology-driven enterprises and businesses complementary to our business. Such transactions include acquisitions of or investments in new technologies or the entities developing them. We may make such acquisitions or investments in the future. Depending upon the nature of any such transactions, we may incur charges to earnings that could be material and could have an adverse impact on the market price of our common stock. At July 31, 2001, we had invested $934,381 (9% of total assets) in NTRU Cryptosystems, Inc., a development-stage company. This includes $736,375 from our royalty settlement with NTRU in fiscal 2000. We also hold equity interests in additional development-stage companies that we acquired in exchange for cash or our professional services. As discussed earlier, we recorded a $600,000 impairment charge against our investment in and advance to Micro-ASI in fiscal 2001. In addition, through a series of secured bridge financing agreements, we committed to lend $821,000 to ELS. Although we expect to be able to recover our advances fully from ELS, we may incur impairment charges if we are unable to recover them. See Note 3 to Consolidated Financial Statements. While we hold these investments, we may incur charges to earnings for impairment losses that could be material, as we did in fiscal 2001. In addition, we cannot be certain that we will be able to sell these investments, that such sales proceeds will be greater than the amounts we have invested, or that we will be able to sell these investments within any particular timeframe. We have not paid dividends recently and do not expect to pay dividends on our Common Stock in the foreseeable future. Since paying a single $0.10 per share dividend in March 1981, we have not paid cash dividends on our Common Stock and do not expect to declare or pay cash dividends in the foreseeable future. We are currently involved in three lawsuits. If the courts in these suits decide against the Company, these lawsuits could have a materially adverse effect on our business, results of operations and financial condition. For a description of these lawsuits, see Item 3. Legal Proceedings. These three lawsuits are: (a) The Fujitsu litigation (involving several separate cases). (b) The LabCorp suit, where we seek royalties and injunctive relief under our homocysteine patent. LabCorp has filed a counterclaim alleging noninfringement, patent invalidity and patent misuse. If LabCorp were to prevail, we could encounter substantial difficulty collecting further royalties from licensees under this patent. (c) The suit involving the sale of assets to Unilens. On September 14, 2001, the attorney referee recommended that the Court grant our motion for dismissal. No final order has yet been entered. An adverse ruling in this suit could result in a substantial money judgment against the Company. Item 2. Properties Our principal executive office is approximately 9,000 square feet of leased space in an office building in Fairfield, Connecticut. The office lease expires December 31, 2006, and provides for a base rent of $225,000. We have an option to renew the lease through December 31, 2011. We believe that our facilities are adequate for our current and near-term operations. Item 3. Legal Proceedings 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 January 2001, the ITC voted to investigate CTT's complaint. 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. SEC Investigation By letter of May 17, 2001, CTT received a subpoena from the Securities and Exchange Commission (SEC) seeking certain documents in connection with the SEC's private investigation captioned "In the Matter of Trading in the Securities of Competitive Technologies, Inc." In June 2001, CTT complied with the subpoena by producing the called for records. CTT is aware of other parties, including its director Samuel M. Fodale, who received SEC subpoenas. According to SEC court filings, the documents sought from Mr. Fodale were in connection with its investigation to determine whether a former registered representative in the Hyannis, Massachusetts office of a brokerage firm and/or others may have violated anti-fraud provisions of the securities laws by effecting manipulative transactions in the securities of CTT that affected its price and market from at least October 1, 1999 to at least October 31, 2000. The SEC is apparently also investigating whether the brokerage firm and certain persons associated with it may have failed to reasonably supervise with a view to preventing violations of the Securities Act of 1933. Based on the information available to us at the time of preparation of this Form 10-K, we believe that neither CTT nor Mr. Fodale is a target in this investigation. CTT has agreed, pursuant to Article IV of its By- laws, to advance to Mr. Fodale his expenses incurred in connection with this investigation, and Mr. Fodale has agreed to repay amounts so advanced unless it shall ultimately be determined that he is entitled to be indemnified by CTT as authorized by Article IV. As of October 17, 2001, the Company has made no advances to or for Mr. Fodale and Mr. Fodale has not requested that CTT advance any amounts pursuant to this agreement. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters (a) The Company'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, 2001 High Low First Quarter.................... 9.6875 6.2500 Second Quarter................... 9.1250 5.3750 Third Quarter.................... 8.6000 6.3700 Fourth Quarter................... 7.8500 5.0000 Fiscal Year Ended July 31, 2000 High Low First Quarter.................... 6.7500 5.1250 Second Quarter................... 9.7500 4.8750 Third Quarter.................... 23.5000 8.0000 Fourth Quarter................... 15.5000 7.6250 No cash dividends were declared on the Company's common stock during the last two fiscal years. At October 17, 2001 there were approximately 700 holders of record of the Company's common stock. COMPETITIVE TECHNOLOGIES, INC. Selected Financial Data (1) For the years ended July 31 Item 6. Selected Financial Data
2001 2000 1999 1998 1997 Retained royalties $ 3,637,764 $ 3,202,194 $ 3,463,176 $ 2,400,534 $ 1,935,041 Retained royalty settlement -- 736,375 -- -- -- Other revenues (2) 3,520 174,298 176,148 211,300 541,176 Total revenues $ 3,641,284 $ 4,112,867 $ 3,639,324 $ 2,611,834 $ 2,476,217 Operating income (loss) $(2,232,361) $ 774,038 $ 421,533 $(1,381,903) $(1,785,891) Net income (loss) (3) $(2,500,749) $ 1,300,937 $ 2,919,384 $(1,235,489) $(1,571,045) Net income (loss) per share: basic and diluted $ (0.41) $ 0.21 $ 0.49 $ (0.21) $ (0.27) Weighted average number of common shares outstanding: Basic 6,135,486 6,079,211 5,982,112 5,969,434 5,914,868 Diluted 6,135,486 6,187,407 6,009,701 5,969,434 5,914,868 At year end: Cash, cash equivalents and short-term investments $ 5,017,877 $ 6,716,429 $ 5,498,486 $ 2,634,618 $ 3,465,005 Total assets $10,640,873 $12,093,965 $ 8,959,021 $ 6,301,864 $ 7,203,480 Long-term obligations $ -- $ -- $ -- $ -- $ 260,265 Shareholders' interest $ 6,967,746 $ 9,928,112 $ 7,180,286 $ 4,172,413 $ 5,014,746
(1) Should be read in conjunction with Consolidated Financial Statements and Notes thereto. (2) Includes approximately $79,000 in 1997 from a cost reimbursement contract for the Department of the Air Force. (3) Includes $600,000 investment and loan impairment loss on Micro-ASI, Inc. in 2001, $2,313,227 gain on sale of investment in NovaNET Learning, Inc. in 1999 and net income related to equity method affiliates of approximately $58,000 in 1997. (4) 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 At July 31, 2001, cash and cash equivalents of $224,436 were $1,491,939 lower than cash and cash equivalents of $1,716,375 at July 31, 2000. Operating activities used $246,834, investing activities used $586,941 and financing activities used $658,164 in the year ended July 31, 2001. In addition, Competitive Technologies, Inc. (CTT) and its majority-owned subsidiaries (the Company or we) held $4,793,441 in short-term investments at July 31, 2001. These investments are available for our current operating, investing and financing needs. The Company's net loss of $2,500,749 for the year ended July 31, 2001, included its $600,000 loss on its investment in and advance to Micro-ASI, Inc. and non-cash charges of approximately $215,000 for depreciation and amortization and approximately $207,000 for employee and directors' stock compensation. 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. Royalties receivable increased approximately $384,000 reflecting the Company's normal cycle of royalty collections. The approximately $929,000 increase in accrued liabilities for professional fees is principally accrued legal fees related to our enforcement actions. In the third quarter of fiscal 2001, we granted one company a license to a technology for one use and an option to license it for another use. That company paid both a license issue fee and an option fee, but our agreements do not provide for another license issue fee if or when the optionee exercises the option. We treated these agreements as a multiple element arrangement and deferred the $100,000 license issue and option fee revenue. We expect to recognize this revenue when the optionee exercises the option and executes the second license or when the option expires. During fiscal 2001, we sold $206,613 of highly liquid short- term investments. Advances to E. L. Specialists, Inc. Through a series of bridge financing agreements, we committed to lend $821,000 to E. L. Specialists, Inc. (ELS). As of July 31, 2001, we 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, we have recognized no interest since March 31, 2001. 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. Our 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. We 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, we validated the recoverability of our advances through a valuation of our security interest in ELS's intellectual property. We considered the timing of our advances, our ability to withstand a prolonged recovery in the electronics and wireless industries and the results of the valuation of our security interest in ELS's intellectual property. We expect 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 licensing the intellectual property to recover the amount of the loan. As of July 31, 2001, we classified the advances as current notes receivable based on their November 5, 2001 maturity. If we determine that it would be in the best interests of CTT to restructure the financing agreement, we may extend the repayment period, increase the interest rate, and/or increase the loan's conversion rate to ELS equity and reclassify the loan according to its repayment terms. If we determine that we must license the intellectual property to recover the advances, we will reclassify the advances as intellectual property and amortize the balance over its useful life. Loss on Investment in and Advance to Micro-ASI, Inc. Micro-ASI, Inc. (Micro-ASI) is a Texas corporation which planned to design, develop and manufacture flip-chip modules and boards. As a result of Micro-ASI's filing for protection under Chapter 7 of the United States Bankruptcy Code in August 2001, CTT recorded a $600,000 loss on its investment in and advance to Micro- ASI in the fourth quarter of fiscal 2001. CTT wrote off its entire $500,000 investment in Micro-ASI preferred stock (purchased in April 2000 for cash) and its $100,000 cash advance to Micro-ASI under a secured bridge promissory note made in May 2001. It is uncertain when and how much, if any, CTT may realize from the final accounting and distribution of Micro-ASI's bankruptcy estate. Other Matters During fiscal 2001, CTT repurchased 86,500 shares of its common stock for $679,289 in cash under the stock repurchase plan authorized in October 1998 by CTT's Board of Directors. At July 31, 2001, CTT may repurchase 88,700 additional shares under that original authorization. At July 31, 2001, the Company had no outstanding commitments for capital expenditures other than those discussed above. The Company carries liability insurance, directors' and officers' liability insurance and casualty insurance for owned or leased tangible assets. It does not carry key person life insurance. There are no legal restrictions on payments of dividends by CTT. We continue to pursue additional technology commercialization opportunities. If and when such opportunities are consummated, we may commit capital resources to them. The Company is involved in four pending litigation matters. Full descriptions of them are reported in Note 14 to Consolidated Financial Statements. During fiscal 2001, the Company incurred a total of approximately $2,474,000 of unreimbursed patent litigation expenses principally related to three patent suits. We expect to continue to incur substantial unreimbursed patent litigation expenses in fiscal 2002 as we pursue enforcement of our patent rights in these three suits. We are exploring various arrangements to limit or share our cash requirements for these enforcement actions. At July 31, 2001, we had cash and cash equivalents of $224,436, short-term investments of $4,793,441, royalties receivable of $2,731,228 and royalties payable of $1,852,207. Cash, cash equivalents and short-term investments represented 47% of our total assets at July 31, 2001. Currently we do not have any outstanding debt or maintain a credit facility. Based on our current expectations, we anticipate that currently available funds will be sufficient to finance our cash needs for the foreseeable future for our current operating activities. However, expansion of our business is subject to many factors outside our control or that we cannot currently anticipate, including without limitation business opportunities that may arise in the future. We may seek additional debt or equity funding to support our future business growth. There can be no assurance that our current expectations regarding the sufficiency of currently available funds will prove to be accurate or that we will be successful in raising additional funding. Results of Operations - 2001 vs. 2000 Retained royalties for fiscal 2001 were $3,637,764, $435,570 (14%) higher than retained royalties of $3,202,194 in fiscal 2000. Retained royalties from the gallium arsenide semiconductor inventions, which include laser diode applications, were approximately $2,190,000 in fiscal 2001, an increase of approximately $828,000 (61%). This increase resulted principally from increased sales of licensed products. We cannot predict whether our licensees' sales of licensed products will continue to grow at this rate. Retained royalties in fiscal 2000 included approximately $168,000 for a homocysteine licensee's increase in its previously estimated royalties for the period from 1995 through 1999. Homocysteine retained royalties in both fiscal years 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 in Note 14 to Consolidated Financial Statements. Retained royalties from the Vitamin B12 assay in fiscal 2001 were approximately $417,000 compared with approximately $381,000 in fiscal 2000. 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. In fiscal 2001, retained royalty revenues on our endoscopic ligator were less than $2,000 and approximately $136,000 lower than in fiscal 2000. Our retained royalties from the endoscopic ligator were approximately $138,000 and $247,000 for the fiscal years ended July 31, 2000 and 1999, respectively. Since an arbitrator ruled that claims in our original patent were invalid, licensees of this technology have withheld royalties. We amended our claims, filed for reexamination of our patent and received the reexamination certificate. We believe we are entitled to all withheld and future royalties and are actively pursuing them. However, we cannot predict when, if ever, licensees will resume remitting royalties for this technology. Retained royalties also fluctuate due to changes in the timing of royalties reported by licensees and changes in licensees' sales of licensed products. In fiscal 2000, we recognized a retained royalty settlement of $736,375 for the estimated fair value of the royalty participation we exchanged for 2,945,500 shares of NTRU Cryptosystems, Inc. (NTRU) common stock valued at $0.25 per share. We had no similar royalty settlement in fiscal 2001. Other revenues under fee-for-service contracts for fiscal 2001 were $170,778 lower than in fiscal 2000. We are not actively seeking additional fee-for-service contracts, although we may agree to them in the future in certain circumstances. Many of these contracts are one-time arrangements unique to a particular client at a particular time. Total operating expenses for fiscal 2001 were $5,873,645, including $2,474,017 of patent enforcement expenses, net of reimbursements. Total operating expenses for fiscal 2000 were $3,338,829, including $157,459 of patent enforcement expenses, net of reimbursements. Other increases included recruiting fees in connection with hiring additional technology commercialization professionals in February and March 2001 and consultants' fees and expenses, which more than offset reductions in personnel and related expenses. We employed approximately 11 people (full-time equivalents) in fiscal 2001 compared with 13 people (full-time equivalents) in fiscal 2000. We supplement our full-time staff with consultants' services in certain matters. Patent enforcement expenses, net of reimbursements, were $2,316,558 higher in fiscal 2001 than in fiscal 2000. These costs exclude personnel costs related to our enforcement activities, which are included in other costs of technology management services discussed below. CTT is involved in three litigations (Fujitsu, LabCorp and MaternaTM)in which it and its clients have sued to enforce their patent rights. We have included detail of progress and status in these three cases in Note 14 to Consolidated Financial Statements under Litigation. Although the costs to enforce our patent rights are high, we expect the potential returns to be substantially greater than these expenses. We expect to continue incurring substantial unreimbursed patent litigation expenses in fiscal 2002 as we pursue enforcement of our patent rights in these three suits and we are actively exploring various arrangements to limit or share our cash requirements for these enforcement actions. Other costs of technology management services were $1,859,455 in fiscal 2001, $20,302 (1%) lower than in fiscal 2000. Increases in costs related to licensing and retained royalties and new client development were offset by a reduction in costs related to fee-for- service contracts. General and administration expenses for fiscal 2001 were $238,560 (18%) higher than in fiscal 2000. Increases in recruiting fees (in connection with hiring additional technology commercialization professionals in February and March 2001) and consultants' fees and expenses (related to potential acquisitions we have considered but not consummated) more than offset reductions in personnel and related expenses. Interest income of $400,054 for fiscal 2001 was $26,847 (7%) higher than in fiscal 2000. Our average invested balances were 8% higher and our weighted average interest rate was approximately the same as in fiscal 2000. During fiscal 2000, CTT sold available-for-sale securities and realized gains of $90,238, which were included in other income. There were no such sales in fiscal 2001. Other expenses in fiscal 2001 were legal expenses incurred in connection with a suit brought against CTT, some of its subsidiaries and directors. See Note 14 to Consolidated Financial Statements. Unilens Corp. USA made no payments in either fiscal year. The Company has substantial net operating and capital loss carryforwards for Federal income tax purposes, of which a significant portion expires in fiscal 2002. See Note 8 to Consolidated Financial Statements. Results of Operations - 2000 vs. 1999 The Company's $774,038 operating income for the fiscal year ended July 31, 2000, was $352,505 (84%) higher than for the fiscal year ended July 31, 1999. Net income was $1,300,937 for the fiscal year ended July 31, 2000, compared with net income of $2,919,384 for the fiscal year ended July 31, 1999, which included an after tax gain of $2,313,227 from the Company's sale of its remaining 14.5% interest in NovaNET Learning, Inc. (NLI). The Company increased its revenues by $473,543 (13%), more than the $121,038 (4%) increase in its operating expenses. Total revenues in fiscal 2000 were $4,112,867, compared with $3,639,324 in fiscal 1999. Retained royalties in fiscal 2000 were $3,202,194, which was $260,982 (8%) lower than in fiscal 1999. Retained royalties from the gallium arsenide semiconductor inventions, which include laser diode applications, were approximately $1,363,000 in fiscal 2000, an increase of approximately $845,000 (163%) compared with approximately $518,000 in fiscal 1999. This included new license issue fees, a minimum royalty, and royalties based on sales of licensed products. Retained royalties in fiscal 2000 included approximately $168,000 from a homocysteine licensee's increase in its previously estimated royalties for the period from 1995 through 1999. Homocysteine retained royalties in both fiscal years 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 noted above and detailed in Note 14 to Consolidated Financial Statements. Retained royalties from the Vitamin B12 assay in fiscal 2000 were approximately $381,000 compared with approximately $972,000 in fiscal 1999. However, fiscal 1999 included approximately $542,000 from a licensee's change in its previously estimated royalties under Vitamin B12 assay licenses for the period from July 1993 through July 1998. Certain of these licensed patents have expired. Retained royalties in fiscal 2000 on our endoscopic ligator technology were approximately $108,000 lower than in fiscal 1999 because licensees (including sublicensees) claimed that our patent did not cover their products. As noted above, we have since received a reexamination certificate and believe we are entitled to royalties withheld by these licensees and sublicensees. Retained royalties in fiscal 1999 also included $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 paid all the agreed milestone payments. Retained royalties also fluctuate due to changes in the timing of royalties reported by licensees and changes in licensees' sales of licensed products. In fiscal 2000, CTT recognized a retained royalty settlement of $736,375 (19% of retained royalties) for the estimated fair value of the royalty participation it exchanged for 2,945,500 shares of common stock of NTRU valued at $0.25 per share. In addition, CTT retained a small royalty participation in NTRU's sales of CTT licensed products. Retained royalties in 1999 included $661,500 on this encryption technology as discussed in the second paragraph above. Fiscal 2000 other revenues under fee-for-service contracts were slightly lower than in fiscal 1999. In fiscal 2000, the Company earned approximately $129,000 on two contracts, one for a government agency and one for a domestic start-up corporation. In fiscal 1999, the Company earned substantially all such revenues from contract services to domestic corporations, including a one- time fee for assisting a start-up company to obtain equity financing. Total operating expenses for fiscal 2000 were $3,338,829. This was $121,038 (4%) higher than for fiscal 1999. The Company incurred higher charges for patent litigation expenses, consultants' fees and expenses and shareholder expenses. Lower charges for public and investor relations services partially offset these increases. In addition, the Company charged $70,000 for restructuring its operations in fiscal 1999. There was no similar charge in fiscal 2000. Patent enforcement expenses, net of reimbursements, were $100,384 (176%) higher in fiscal 2000 than in 1999. We incurred these higher expenses in connection with several litigation and pre- litigation matters. Other costs of technology management services were $1,879,757, $77,740 (4%) lower than in fiscal 1999. Increases in costs related to licensing and retained royalties partially offset reductions in costs related to fee-for-service contracts and new client development. General and administration expenses in fiscal 2000 were $168,394 (15%) higher than in fiscal 1999. Directors' fees and expenses, consultants' fees and expenses, and shareholder expenses were higher; however, lower charges for public and investor relations services partially offset these increases. Interest income in fiscal 2000 was $182,935 (96%) higher than for fiscal 1999. The Company's average invested balance was approximately 66% higher and its weighted average interest rate was approximately 0.9% per annum higher than for fiscal 1999. 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. Recently Issued Accounting Pronoucements 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 financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is assessing the impact of Statement No. 144 on its financial condition and results of operations and will adopt this statement on August 1, 2002. 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 "forward-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 technologies 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, 2001 under the caption "Risk Factors," 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 28 Consolidated Balance Sheets 29-30 Consolidated Statements of Operations 31 Consolidated Statements of Changes in Shareholders' Interest 32 Consolidated Statements of Cash Flows 33-34 Notes to Consolidated Financial Statements 35-51 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 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 un- realized 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 Pronoucements 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 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 $4.220-$ 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 Renovar 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. 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 Company The following table sets forth information with respect to each director and executive officer according to the information furnished the Company by him: Principal Occupation Name, Age and During Past Five Positions Currently Years; Other Public Director of the Held with the Company Directorships Company Since George C.J. Bigar, Professional December 1996 44, Director Investor. Richard E. Carver, President and Chief January 2000 64, Director and Executive Officer, Chairman of the MST America (an Board of Directors international business strategies consultancy) since January 1995; President and Chief Executive Officer, RPP America (a company that sells solid waste wrapping systems) from November 1998 to April 2000; Chairman and Chief Executive Officer, Carver Lumber Company (provider of building materials for new home construction and prefabrications) from May 1988 to December 1999. George W. Dunbar, Chief Executive November 1999 Jr., 55, Director Officer, EPIC Therapeutics, Inc. (a drug delivery technology company) since September 2000; Acting President and Chief Executive Officer of StemCells, Inc. (previously known as Cyto- Therapeutics, Inc.) since February 2000; Acting President of StemCells California, Inc. (a wholly-owned subsidiary of StemCells, Inc.) since November 1999 (companies developing organ-specific, human platform stem cell technologies to treat diseases); President and Chief Executive Officer, Metra BioSystems, Inc. (a developer of products to detect and manage bone and joint diseases) from 1991 to August 1999. Director of Sonus Pharmaceuticals, Inc. Samuel M. Fodale, 58, President, Central October 1998 Director Maintenance Services, Inc. (a service and warehousing corporation serving the automobile industry). Frank R. McPike, Jr., Chief Executive February 1999 52, President, Chief Officer of the Executive Officer, Company since Treasurer, Chief November 2000; Financial Officer and President of the Director Company since October 1998; Chief Operating Officer of the Company from October 1998 to November 2000; Interim Chief Executive Officer of the Company from August to October 1998; Secretary of the Company from August 1989 to February 1999; Treasurer of the Company since July 1988; Vice President, Finance and Chief Financial Officer of the Company since December 1983; Director of the Company from July 1988 to March 1998 and since February 1999. Charles J. Philippin, Chief Executive June 1999 51, Director Officer, Accordia, Inc. (formerly On- Line Retail Partners) (a provider of management and technology resources for branded e- commerce businesses) since June 2000; a member of the management committee of Investcorp International, Inc. (a global investment group that acts as a principal and intermediary in international investment transactions) from July 1994 to May 2000. Director of Jostens, Inc. John M. Sabin, 46, Chief Financial December 1996 Director Officer and General Counsel of NovaScreen Biosciences Corporation (previously known as Oceanix Biosciences Corporation) (a developer of biotechnology-based tools to accelerate drug discovery and development) since January 2000; business consultant from September 1999 to January 2000; Executive Vice President and Chief Financial Officer, 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. Each director holds office until the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation or removal. The terms of all executive officers of the Company are until the first meeting of the newly elected Board of Directors following the forthcoming annual meeting of stockholders 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 Company; this contract is described in Item 11, Executive Compensation. There is no family relationship between any director or executive officer of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 (Exchange Act) requires the Company's directors and officers and persons who own more than ten percent of the Company's Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the American Stock Exchange. SEC regulations require reporting persons to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such reports received or written representations from certain reporting persons with respect to fiscal 2001, the Company believes that all reporting persons complied with all applicable reporting requirements, except for Mr. Bigar, Mr. Carver and Mr. Fodale. Mr. Bigar failed to file on a timely basis two required reports with regard to two transactions in the Company's securities. Mr. Carver failed to file on a timely basis one required report with regard to one transaction in the Company's securities. Mr. Fodale failed to file on a timely basis four required reports with regard to five transactions in the Company's securities. Item 11. Executive Compensation Summary Compensation The following table summarizes the total compensation accrued, earned or paid by the Company for services rendered during each of the fiscal years ended July 31, 2001, 2000 and 1999 to the sole person who served as an executive officer of the Company during the fiscal year ended July 31, 2001 (the Specified Executive). SUMMARY COMPENSATION TABLE Annual Compensation (A)
Long Term Compensation Awards ______ Securities Name and Principal Fiscal Underlying All Other Position Year Salary ($) Bonus ($) Options (#) Compensation ($) Frank R. McPike, Jr. 2001 217,500 25,000 25,000 23,773 (B) President, Chief 2000 184,039 25,000 100,000 17,174 (B) Executive Officer, 1999 179,200 -- -- 16,422 (B) Chief Operating Officer and Chief Financial 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 Mr. McPike to Competitive Technologies, Inc.'s Employees' Common Stock Retirement Plan. The Company 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). Option Grants The following table summarizes the stock options granted by the Company during the fiscal year ended July 31, 2001 to the Specified Executive.
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Percent Potential Number of of Total Realizable Securities Options Value at Underlying Granted to Assumed Annual Options Employees Exercise Rates ofStock Granted in Fiscal Price Expiration Appreciation Name (#)(1) Year ($/Sh) Date for Option Term 5% ($) 10% ($) Frank R. McPike, Jr. 25,000 16% $8.1250 1/19/2011 $127,744 $323,729
(1) Options vest 25% one year from the grant date of January 19, 2001 with the balance to vest pro-rata quarterly over the subsequent 36 months. Option Exercises and Year End Value For the Specified Executive, the following table summarizes stock options held at July 31, 2001. The Specified Executive exercised no stock options during the fiscal year ended July 31, 2001. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Number of Securities Value of Underlying Unexercised Shares Unexercised In-the-Money Acquired Options Options at On Value at FY-End (#) FY-End ($) Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable Frank R. McPike, Jr. 0 $0 133,067/37,500 $0/$0 Employment Agreements Effective December 7, 1999, the Company entered into an employment agreement with Mr. McPike providing for his employment as President and Chief Operating Officer for a three-year term and for base compensation at a minimum rate of $185,000 per year, subject to annual reviews and increases in the sole discretion of the Board of Directors. The employment is at will and can be terminated by either party at any time with or without cause. The agreement also provides, among other things: -- a procedure for annual renewals of the employment term with continuation of pay for six months after non-renewal unless non-renewal is for cause -- severance payments of up to one year's base compensation in certain circumstances -- a period of non-competition covering the remainder of the employment term plus six months in certain circumstances. The employment agreement also confirmed ten-year stock options for the purchase of 100,000 shares of the Company's Common Stock granted to Mr. McPike on December 7, 1999 at a price of $5.5625 per share and vesting on a specified schedule. All options have now vested except for 12,500 options which will vest on December 7, 2001. Other Arrangements The Company provides term life insurance for certain of its officers. The policy amount in the event of death is $250,000 for Mr. McPike. The Company paid premiums of $460 for Mr. McPike's policy in each of 2001, 2000 and 1999. Effective January 1, 1997, the Company established a 401-K plan. Under the 401-K plan, an eligible employee may elect a salary reduction up to 15% of his or her compensation as defined in the plan to be contributed by the Company to the plan. Employee contributions for any calendar year are limited to a specific dollar amount determined by the Internal Revenue Service ($10,500 for 2001 and 2000 and $10,000 for 1999). The Company may also make discretionary matching contributions. The Company has made no matching contributions. Effective August 1, 1990, the Company 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 Company are eligible to participate in the Retirement Plan. Annually, the independent directors determine the number of shares of the Company'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 Company'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 Company's contributions are held in trust with a separate account established for each participant. The maximum amount of Company Common Stock that may be contributed 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 Company'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 or her compensation for that year reduced by his or her 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 Company. 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. Company 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 Company shares owned by the 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, to the Retirement Plan. Shares allocated to Mr. McPike, the Company's sole executive officer at July 31, 2001, under the Retirement Plan were 3,308, 1,268 and 2,674 for the fiscal years ended July 31, 2001, 2000 and 1999, respectively. See also Summary Compensation Table - "All Other Compensation" for dollar values ascribed to contributions for Mr. McPike. The Company has an incentive compensation plan pursuant to which an amount equal to 10% of operating income of the Company (defined and adjusted as provided in said plan) shall be credited each year to an incentive fund. A committee, none of whose members is eligible to receive awards, makes cash awards to key employees of the Company from the incentive fund. Amounts may be credited to the incentive fund when the Company earns operating income (as defined in said plan) for a fiscal year. In fiscal 2001, no amounts were credited to this fund. In fiscal 2000 and 1999, the Company credited $86,004 and $46,837, respectively, to this incentive fund. No amounts were credited to this fund prior to fiscal 1999. In October 1999, the Company paid $46,750 in incentive bonuses to employees other than Mr. McPike. In November 2000, the Company paid $86,000 in incentive bonuses to employees, including $25,000 to Mr. McPike. The Company has in effect a 1997 Employees' Stock Option Plan (the Option Plan) with respect to its Common Stock, $.01 par value, which provides for granting either incentive stock options under Section 422 of the Internal Revenue Code or nonqualified options. (Incentive options and non-qualified options granted under the Option Plan must be granted at not less than 100% of fair market value on the grant date). In certain instances, stock options which are vested or become vested upon the happening of an event or events specified by the Company'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 Company. Director Compensation The Company pays each director who is not an employee of the Company or a subsidiary $1,000 for each Board meeting attended. The Company also pays each director $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. The Company pays directors who participate in telephonic board and/or committee meetings one half the fee for attending such meetings. The Company reimburses directors for out-of-pocket expenses incurred to attend Board and committee meetings. When a director of the Company represents the Company as a director of an investee company, the Company pays the director for attending investee board meetings the difference, if any, between (a) the amount the investee company pays and (b) the amount the Company pays for attendance at such meetings. During fiscal 2001 and 2000, the Company paid Mr. Sabin $7,500 and $2,500, respectively, for his attendance at investee board meetings. No other director received any such fees. In addition to meeting fees, the Company pays outside directors an annual cash retainer of $7,500 payable in quarterly installments. In August 1999, the Board formed an executive committee with Mr. Bigar as chairman and provided that the Company compensate him at the rate of $8,000 per month due to the substantial commitment of time to be required of Mr. Bigar as chairman. This arrangement continued until August 2000. See Item 13 Certain Relationships and Related Transactions. Under the Company's 1996 Directors' Stock Participation Plan, on the first business day of January from January 1997 through January 2006, the Company 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 Company'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 Company would pay the annual stock compensation described above on a pro-rata basis up to the termination date. In January 2001, the Company issued an aggregate of 11,540 shares under this plan (2,308 each to Messrs. Bigar, Dunbar, Fodale, Philippin and Sabin). In January 2001, 2,898 shares were issued outside the 1996 Directors' Stock Participation Plan (217, 1,720 and 961 shares to Messrs. Dunbar, Carver and Philippin, respectively). These shares were pro-rated for service before January 1, 2000. Effective January 27, 2000, the Company adopted the Competitive Technologies, Inc. 2000 Directors Stock Option Plan (the Directors Option Plan) with respect to its Common Stock, $.01 par value. Directors who are not employees of the Company or a subsidiary are eligible for options granted pursuant to this plan. This plan provides that the Company grant an option for 10,000 shares to each new director elected during the term of this plan on the date he or she is first elected to office, whether by the stockholders or by the Board. This plan also provides that the Company grant an additional option for 10,000 shares to each director holding office on the first business day in each subsequent January. Options under this plan will be non-statutory options, have an exercise price of 100% of the fair market value at the grant date, have a term of ten years from the grant date, and fully vest on the grant date. If a person's directorship is terminated because of death or permanent disability, options may be exercised within one year after termination. If the termination is for any other reason, options may be exercised only within 180 days after termination. In no event may an option be exercised after expiration of its ten-year term. The Company may not grant options under the Directors Option Plan after the first business day of January 2010. On January 2, 2001, the Company granted 60,000 options under this plan (10,000 each to Messrs. Bigar, Carver, Dunbar, Fodale, Philippin and Sabin). Item 12. Security Ownership of Certain Beneficial Owners and Management The following information indicates the beneficial ownership of the Company's Common Stock by each director and executive officer of the Company and by each person known to the Company to be the beneficial owner of more than 5% of the Company's outstanding Common Stock. The indicated owners furnished such information to the Company as of October 1, 2001 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 24,331 (C) -- Richard E. Carver 17,720 (D) -- George W. Dunbar, Jr. 22,525 (E) -- Samuel M. Fodale 180,458 (F) 2.9% Frank R. McPike, Jr. 205,223 (G) 3.3% Charles J. Philippin 34,269 (H) -- John M. Sabin 24,726 (I) -- All directors and executive officers as a group 509,252 (J) 7.9% Additional 5% Owner Richard D. Corley 323,200 (K) 5.3% 416 St. Mark Court Peoria, IL 61603 (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) Consists of 4,331 shares of Common Stock plus 20,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Bigar. (D) Consists of 3,720 shares of Common Stock plus 14,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Carver. (E) Consists of 2,525 shares of Common Stock and 20,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Dunbar. (F) Consists of 160,458 shares of Common Stock plus 20,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Fodale. 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 of Common Stock held by spouse. (G) Consists of 34,656 shares of Common Stock plus 170,567 stock options deemed exercised solely for purposes of showing total shares owned by Mr. McPike. Includes 1,500 shares of Common Stock held by daughter as to which Mr. McPike disclaims beneficial ownership. Includes 9,922 shares of Common Stock held by Webster Trust as Trustee under the Company's Employee Common Stock Retirement Plan, as to which Mr. McPike has shared investment power. Does not include 10,533 shares of Common Stock allocated to Mr. McPike under said Retirement Plan; Trustee has sole voting and investment power with regard thereto. (H) Consists of 14,269 shares of Common Stock plus 20,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Philippin. (I) Consists of 4,726 shares of Common Stock plus 20,000 stock options deemed exercised solely for purposes of showing total shares owned by Mr. Sabin. Includes 200 shares of Common Stock held by spouse. (J) Consists of 224,685 shares of Common Stock plus 284,567 stock options to purchase shares of Common Stock deemed exercised solely for purposes of showing total shares owned by such group. (K) Information taken from Schedule 13D/A filed September 25, 2001 which states that the information is as of September 14, 2001. At October 17, 2001, the stock transfer records maintained by the Company 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 Company, beneficially owned by each director or executive officer of the Company and by each person known to the Company to be the beneficial owner of more than 5% of the Company's outstanding Common Stock at October 17, 2001. Shares of Common Percent Name Stock of UOP (A) of Class (B) George C.J. Bigar None -- Richard E. Carver None -- George W. Dunbar, Jr. None -- Samuel M. Fodale None -- Frank R. McPike, Jr. 14,000 -- Charles J. Philippin None -- John M. Sabin None -- All directors and executive officers 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 Company and 1,927 shares of UOP common stock owned by Genetic Technology Management, Inc., a wholly-owned subsidiary of the Company. (B) Percentages of less than 1% are not shown. Item 13. Certain Relationships and Related Transactions Since August 2000, the Company has compensated George C.J. Bigar, a director of the Company, at the rate of $8,000 per month for consulting services related to the Company's investments and potential investments in development-stage companies. Mr. Bigar has received $120,000 for these services from August 2000 through October 2001. 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, 2001 and 2000. 29-30 Consolidated Statements of Operations for the years ended July 31, 2001, 2000 and 1999. 31 Consolidated Statements of Changes in Shareholders' Interest for the years ended July 31, 2001, 2000 and 1999. 32 Consolidated Statements of Cash Flows for the years ended July 31, 2001, 2000 and 1999. 33-34 Notes to Consolidated Financial Statements. 35-51 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 The Company filed no reports on Form 8-K during the fourth quarter. (c) List of exhibits: See Exhibit Index immediately preceding exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (the Company) By s/ Frank R. McPike, Jr. Frank R. McPike, Jr. President, Chief Executive Officer, Chief Financial Officer, Director and Authorized Signer Date: October 29, 2001 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 Company and in the capacities and on the dates indicated. Name Title Date GEORGE C. J. BIGAR* Director ) George C. J. Bigar ) ) RICHARD E. CARVER* Director ) Richard E. Carver ) ) GEORGE W. DUNBAR, JR.* Director ) George W. Dunbar, Jr. ) ) SAMUEL M. FODALE* Director ) Samuel M. Fodale ) ) ) s/ FRANK R. McPIKE, JR. President, Chief ) Frank R. McPike, Jr. Executive Officer, ) Chief Financial ) October 29, 2001 Officer (Principal ) Financial and Accounting ) Officer), and Director ) ) CHARLES J. PHILIPPIN* Director ) Charles J. Philippin ) ) 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 registrant's Registration Statement on Form S-8, File No. 33-87756 and hereby incorporated by reference. 10.2* Registrant Incentive Compensation Plan 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 2000 Directors Stock Option Plan filed as Exhibit 4.3 to registrant's Registration Statement on Form S-8, File Number 333-95763 and hereby incorporated by reference. 10.4* Registrant's 1996 Directors' Stock Participation Plan filed as Exhibit 4.3 to registrant's Form S-8 No. 333-18759 and hereby incorporated by reference. 10.5 Limited Partnership Agreement of Optical Associates, 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 incorporated by reference; moratorium agreement dated July 20, 1987 between University Optical Products Co. and Optical Associates, Limited Partnership filed as Exhibit 10.14 to registrant's Form 10-K for the fiscal year ended July 31, 1987 and hereby incorporated by reference. 10.7 Asset Purchase Agreement among University Optical Products Co., Unilens Corp. USA, Unilens 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 as amended January 19, 2001 filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended January 31, 2001 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* Employment Agreement between registrant and Frank R. McPike, Jr. dated December 7, 1999 filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended January 31, 2000 and hereby incorporated by reference. 10.11 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 reference. 10.12 Stock Purchase Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.48 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.13 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 incorporated by reference. 10.14 Lease agreement between registrant and The Bronson Road Group made August 28, 1996 filed as Exhibit 10.34 to registrant's Form 10-K for the year ended July 31, 1996 and hereby incorporated by reference. 10.15 First Amendment of Lease Agreement dated August 9, 2001 between registrant and the Bronson Road Group, LLP. 68-72 10.16 Agreement between registrant and Samuel M. Fodale dated June 13, 2001. 73 21.1 Subsidiaries of the registrant. 74 23.1 Consent of PricewaterhouseCoopers LLP. 75 24.1 Power of attorney. 76-77 * Management Contract or Compensatory Plan