10-K/A 1 f10ka2.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2001 Commission file number 1-8696 COMPETITIVE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report for the fiscal year ended July 31, 2001 on Form 10-K as set forth in the page attached hereto: (List all such items, financial statements, exhibits or other portions amended) Item 8. Financial Statements and Supplementary Data (amended to include unaudited Selected Quarterly Financial Data on page 27 hereof). Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC Registrant Date: December 4, 2001 s/ Frank R. McPike, Jr. By: Frank R. McPike, Jr. President, Chief Executive Officer, Chief Financial Officer, Director and Authorized Signer Item 8. Financial Statements and Supplementary Data Page Report of Independent Accountants 3 Consolidated Balance Sheets 4-5 Consolidated Statements of Operations 6 Consolidated Statements of Changes in Shareholders' Interest 7 Consolidated Statements of Cash Flows 8-9 Notes to Consolidated Financial Statements 10-26 Unaudited Selected Quarterly Financial Data 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Competitive Technologies, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Competitive Technologies, Inc. and its Subsidiaries (the "Company") at July 31, 2001 and July 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. s/ PricewaterhouseCoopers LLP Stamford, Connecticut October 12, 2001 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 2001 and 2000 2001 2000 ASSETS Current assets: Cash and cash equivalents $ 224,436 $ 1,716,375 Short-term investments 4,793,441 5,000,054 Accounts receivable, including $9,925 receivable from related parties in 2000 2,782,276 2,420,180 Notes receivable - E.L. Specialists, Inc. 650,000 -- Prepaid expenses and other current assets 70,044 149,483 Total current assets 8,520,197 9,286,092 Property and equipment, at cost, net 66,994 115,518 Investments, at cost 1,025,684 1,525,685 Intangible assets acquired, principally licenses and patented technologies, net of accumulated amortization of $765,149 and $626,477 in 2001 and 2000, respectively 1,027,998 1,166,670 TOTAL ASSETS $10,640,873 $12,093,965 (continued) See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 2001 and 2000 (Continued) 2001 2000 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable, including $3,876 payable to related parties in 2001 $ 585,966 $ 65,443 Accrued liabilities 3,087,161 2,100,410 Total current liabilities 3,673,127 2,165,853 Commitments and contingencies -- -- Shareholders' interest: 5% preferred stock, $25 par value; 35,920 shares authorized; 2,427 shares issued and outstanding 60,675 60,675 Common stock, $.01 par value; 20,000,000 shares authorized; 6,190,785 shares issued in 2001 and 2000 and 6,139,351 and 6,190,785 shares outstanding in 2001 and 2000, respectively 61,907 61,907 Capital in excess of par value 26,975,178 27,053,542 Treasury stock, at cost; 51,434 shares in 2001 (381,253) -- Accumulated deficit (19,748,761) (17,248,012) Total shareholders' interest 6,967,746 9,928,112 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 10,640,873 $ 12,093,965 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended July 31, 2001, 2000 and 1999 2001 2000 1999 Revenues: Retained royalties $ 3,637,764 $ 3,202,194 $ 3,463,176 Retained royalty settlement -- 736,375 -- Other revenues, including $9,925 and $4,947 from related parties in 2000 and 1999, respectively 3,520 174,298 176,148 3,641,284 4,112,867 3,639,324 Patent enforcement expenses, net of reimbursements 2,474,017 157,459 57,075 Other costs of technology management services 1,859,455 1,879,757 1,957,497 General and administration expenses, of which $145,673, $132,806 and $4,800 were paid to related parties in 2001, 2000 and 1999, respectively 1,540,173 1,301,613 1,133,219 Restructuring charges -- -- 70,000 5,873,645 3,338,829 3,217,791 Operating income (loss) (2,232,361) 774,038 421,533 Gain on sale of investment in NovaNET Learning, Inc. -- -- 2,313,227 Investment and loan impairment loss (600,000) -- -- Interest income 400,054 373,207 190,272 Other income (expense), net (52,460) 90,234 (45,692) Income (loss) before minority interest (2,484,767) 1,237,479 2,879,340 Minority interest in losses of subsidiary (15,982) 63,458 40,044 Net income (loss) (2,500,749) 1,300,937 2,919,384 Other comprehensive income (loss): Net unrealized holding gains (losses) on available-for- sale securities -- 105,863 6,249 Reclassification adjustment for realized gains included in net income (loss) -- (90,238) -- Comprehensive income (loss) $(2,500,749) $ 1,316,562 $ 2,925,633 Net income (loss) per share: Basic and diluted $ (0.41) $ 0.21 $ 0.49 Weighted average number of common shares outstanding: Basic 6,135,486 6,079,211 5,982,112 Diluted 6,135,486 6,187,407 6,009,701 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Interest For the years ended July 31, 2001, 2000 and 1999
Accumulated Preferred Stock Other Shares Common Stock Capital in Comprehensive issued and Shares excess of Treasury Stock Income Accumulated outstanding Amount issued Amount par value Shares held Amount (Loss) Deficit Balance - July 31, 1998 2,427 $60,675 6,003,193 $60,032 $25,637,881 (10,190) $ (95,968) $ (21,874) $(21,468,333) Exercise of common stock options. . . . . . . . (48) 11,500 48,578 Stock issued under 1996 Directors' Stock Participation Plan. . . (2,370) 7,500 38,697 Stock issued to directors (20,313) 3,125 35,450 Stock issued under Employees' Common Stock Retirement Plan . (1,818) 13,384 81,704 Grant of warrants to consultants 11,740 Other comprehensive income: Net change in unrealized holding gains on available-for-sale securities . . . . . . 6,249 Purchase of treasury stock (25,400) (109,380) Net income. . . . . . . . 2,919,384 Balance - July 31, 1999 2,427 60,675 6,003,193 60,032 25,625,072 (81) (919) (15,625) (18,548,949) Exercise of common stock options. . . . . 187,425 1,873 1,462,744 43,598 254,856 Tender of common stock as payment for exercise of common stock options. . (7,599) (100,000) Stock issued under 1996 Directors' Stock Participation Plan. . . (6,004) 9,375 55,340 Stock issued under Employees' Common Stock Retirement Plan. . 167 2 (28,270) 4,107 67,268 Other comprehensive income: Net change in unrealized holding gains on available-for-sale securities . . . . . . . 15,625 Purchase of treasury stock (49,400) (276,545) Net income. . . . . . . . 1,300,937 Balance - July 31, 2000 2,427 60,675 6,190,785 61,907 27,053,542 -- -- -- (17,248,012) Exercise of common stock options. . . . . (5,208) 3,250 26,333 Stock issued under 1996 Directors' Stock Participation Plan. .. (25,849) 11,540 100,849 Stock issued to directors. (2,073) 2,898 25,620 Stock issued under Employees' Common Stock Retirement Plan . (42,138) 14,814 122,138 Stock issued to employee in lieu of cash compensation . . . . . (3,096) 2,564 23,096 Purchase of treasury stock. (86,500) (679,289) Net loss. . . . . . . . . (2,500,749) Balance - July 31, 2001 2,427 $60,675 6,190,785 $61,907 $26,975,178 (51,434) $(381,253) $ -- $(19,748,761)
See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 2001, 2000 and 1999 2001 2000 1999 Cash flow from operating activities: Net income (loss) $(2,500,749) $ 1,300,937 $ 2,919,384 Noncash items included in net income (loss): Retained royalty settlement paid with shares of NTRU common stock -- (736,375) -- Depreciation and amortization 214,768 209,225 201,277 Minority interest 15,982 (63,458) (40,044) Stock compensation 207,298 97,085 140,101 Other noncash items -- 63,461 56,160 Investment and loan impairment loss 600,000 -- -- Gain on sale of investments -- (90,503) (2,313,227) Net changes in various operating accounts: Receivables (362,096) (694,134) (184,109) Prepaid expenses and other current assets 79,439 (6,312) (3,391) Accounts payable and accrued liabilities 1,498,524 378,369 (150,068) Net cash flow from operating activities (246,834) 458,295 626,083 (continued) See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 2001, 2000 and 1999 (Continued) 2001 2000 1999 Cash flow from investing activities: Purchases of property and equipment, net (27,572) (30,983) (46,480) Investments in and advances to cost-method affiliates (750,000) (698,006) -- Sales (purchases) of short-term investments and available- for-sale securities 206,613 (264,638) (3,612,606) Sales (purchases) of investments in affiliates -- -- 2,671,452 Other, net (15,982) 265 7,988 Net cash flow from investing activities (586,941) (993,362) (979,646) Cash flow from financing activities: Proceeds from exercise of stock options and warrants 21,125 1,619,473 48,530 Purchases of treasury stock (679,289) (276,545) (109,380) Repayment of purchase obligation -- -- (300,993) Net cash flow from financing activities (658,164) 1,342,928 (361,843) Net (decrease) increase in cash and cash equivalents (1,491,939) 807,861 (715,406) Cash and cash equivalents, beginning of year 1,716,375 908,514 1,623,920 Cash and cash equivalents, end of year $ 224,436 $ 1,716,375 $ 908,514 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. BUSINESS The Company provides patent and technology commercialization services with respect to a broad range of digital/electronic, life sciences and physical sciences technologies originally invented by various individuals, corporations, federal agencies and laboratories and universities. The Company provides these parties technical evaluations, patent and market assessments, patent application and prosecution, patent enforcement, licensing, license management and royalty distribution services. The Company is compensated for its services primarily by sharing in the license and royalty fees generated from its successful marketing of technologies. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Competitive Technologies, Inc. (CTT) and its majority-owned subsidiaries (the Company). CTT's majority-owned subsidiaries are Digital Acorns, Inc., University Optical Products Co. (UOP), Genetic Technology Management, Inc. (GTM) and Vector Vision, Inc. (VVI). Intercompany accounts and transactions have been eliminated in consolidation. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain accounts have been reclassified to conform with the presentation in financial statements for fiscal 2001. Revenue Recognition The Company derives revenues primarily from patent and technology license and royalty fees. Since these revenues result from the Company's representation agreements with owners and assignees of intellectual property rights, the Company records revenues net of the owners' and assignees' shares of license and royalty fees. The Company stipulates the terms of its licensing arrangements in its written agreements with the owners, assignees and licensees. Generally these arrangements are single element arrangements since the Company has no significant obligations after executing the license agreements. The Company applies a contingency model in determining its revenue recognition. Under the terms of the Company's license arrangements, the Company generally receives an upfront license fee and a royalty stream based on the licensee's sales of the licensed technology. License Fees The Company recognizes upfront, nonrefundable license fees upon execution of the license arrangement and collection of the license fee. Upon the occurrence of these two events, the Company has persuasive evidence of an arrangement, delivery is complete, collectibility is assured and there are no continuing obligations. Royalty Fees Although the royalty rate is fixed in the license agreement, the amount of earned royalties is contingent upon the amount of product the licensee sells. Royalties earned in each reporting period are contingent on the outcome of events occurring within that period and such events are not within the control of the Company and are not directly tied to the Company's providing service. Therefore, the Company recognizes royalty revenue when the contingency is resolved and it knows the amount of royalty fees. The Company recognizes royalty fees upon receipt of licensees' royalty reports. In limited instances, the Company may enter into multiple element arrangements with continuing service obligations or milestone billing arrangements. Based upon the limited verifiable objective evidence available, the Company generally defers all revenue from such multiple element arrangements until it delivers all elements. The Company evaluates milestone billing arrangements on a case by case basis. Generally, the Company recognizes revenues under the milestone payment method. Under this method, the Company recognizes upfront fees ratably over the entire arrangement and milestone payments as it achieves milestones. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views for applying generally accepted accounting principles to revenue recognition in financial statements. Adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations. Expenses The Company recognizes expenses related to evaluating inventions, patenting inventions, licensing inventions and enforcing intellectual property rights in the period incurred. Patent enforcement expenses include direct costs incurred to enforce the Company's patent rights but exclude personnel costs. Other costs of technology management services include direct costs associated with patent and technology commercialization services and personnel costs (including benefits and overhead expenses). Cash Equivalents, Short-Term Investments and Available-for-Sale Securities The Company classifies overnight bank deposits as cash equivalents. Cash equivalents are carried at fair value. The Company classifies all highly liquid investments other than overnight deposits as short-term investments. Short-term investments are carried at fair value. The Company's bank and investment accounts are maintained with two financial institutions. The Company's policy is to monitor the financial strength of these institutions on an ongoing basis. From time to time the Company invests in available-for-sale securities with original maturities greater than 90 days. Property and Equipment The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives (3 to 5 years for equipment) or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in earnings. Intangible Assets Acquired Intangible assets acquired comprise certain licenses and patented technologies acquired in 1996 and recorded at fair value. That value is amortized on a straight-line basis over their estimated remaining lives (approximately 13 years from the date acquired). Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Provision for income taxes is the tax payable for the year and the change during the year in deferred tax assets and liabilities. Net Income (Loss) Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding without giving any effect to potentially dilutive securities. Diluted earnings per share is computed giving effect to all potentially dilutive securities that were outstanding during the period. Stock-Based Compensation The Company accounts for employee and director stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and discloses the pro forma effects that fair value accounting would have on net income and earnings per share. Impairment of Long-lived Assets The Company reviews long-lived and intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss based on the fair value of the asset. Comprehensive Income (Loss) Comprehensive income (loss) includes all changes, net of tax, in shareholders' interest that result from recognized transactions and other economic events of the period other than transactions of shareholders in their capacities as shareholders. Segment Information The Company operates in a single reportable segment determined on the basis management uses to make operating decisions and assess performance. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, "Business Combinations." This statement establishes financial accounting and reporting for business combinations and requires that purchase accounting be used for all business combinations. The provisions of this statement apply to all business combinations initiated after June 30, 2001. In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." This statement establishes financial accounting and reporting for acquired goodwill and other intangible assets acquired individually or with a group of other assets but not acquired in a business combination. The Company does not expect adoption of Statement No. 142 to have a material effect on its financial condition or results of operations. The Company will adopt this Statement on August 1, 2002. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement establishes a single accounting model for the impairment of long-lived assets. The Company does not expect adoption of this standard to have a material effect on its financial condition or results of operations. The Company will adopt this statement on August 1, 2002. 3. INVESTMENTS AND NOTES RECEIVABLE NTRU Cryptosystems, Inc. In March and July 2000, CTT acquired 3,172,881 shares, approximately 10% of the then outstanding equity, of NTRU Cryptosystems, Inc. (NTRU) in exchange for reducing its royalty participation on NTRU's sales of CTT licensed products and $198,006 in cash. CTT recorded the exchange of a substantial portion of its royalty participation at the estimated fair value of 2,945,500 shares of NTRU common stock, $0.25 per share, as retained royalty settlement of $736,375. NTRU's stock is not publicly traded and there is no quoted market price for its stock. At July 31, 2001 and 2000, CTT's carrying value for this investment was $934,381. CTT accounts for this investment on the cost method. In August 2001, CTT acquired additional shares of NTRU Series B convertible preferred stock for $100,000 in cash as part of a $26.1 million financing round. After this round of financing, CTT held approximately 7% of NTRU's outstanding equity. Micro-ASI, Inc. In April 2000, CTT paid $500,000 for 500,000 shares of convertible preferred stock and warrants to purchase 300,000 shares of common stock at $1.00 per share of Micro-ASI, Inc. (Micro-ASI) as part of Micro-ASI's $8 million private placement. In May 2001, CTT advanced $100,000 of secured bridge financing to Micro-ASI. Based on Micro-ASI's bankruptcy filing in August 2001, management determined that CTT's investment in and advance to Micro-ASI were impaired as of July 31, 2001 and recorded a $600,000 impairment charge. Although the Company is a secured lender, it is uncertain how much the Company may recover from the bankruptcy estate. E. L. Specialists, Inc. Through a series of bridge financing agreements, the Company committed to lend $821,000 to E. L. Specialists, Inc. (ELS). As of July 31, 2001, the Company had advanced $650,000 and had reset the date for repayment to September 28, 2001. Interest accrues on the advances at 7% per annum on the first $750,000 and at 10% per annum on the remainder. However, the Company has recognized no interest since March 31, 2001. Certain of ELS's intellectual property secures the loan and this security interest is shared pro rata with another ELS lender that has advanced $470,000 to ELS. CTT's advances are convertible into ELS's common stock in certain circumstances, including an ELS financing round in excess of $3,000,000. On September 28, 2001, ELS defaulted on payment of the advances. The Company waived this default and reset the demand date to November 5, 2001. Based on the decline of the electronics and wireless markets, ELS's recent financial results and the absence of quoted values for ELS's stock, management validated the recoverability of CTT's advances through a valuation of its security interest in ELS's intellectual property. Management considered the timing of CTT's advances, CTT's ability to withstand a prolonged recovery in the electronics and wireless industries and the results of the valuation of CTT's security interest in ELS's intellectual property. Management expects both secured lenders to be able to recover their advances fully either through ELS's repayment of the advances or, if required, by taking possession of the intellectual property that secures the loan and through licensing the intellectual property to recover the amount of the loan. As of July 31, 2001, CTT classified the advances as current notes receivable based on their November 5, 2001 maturity. NovaNET Learning, Inc. Effective May 28, 1999, CTT sold its 14.5% interest in NovaNET Learning, Inc. (NLI) for $2,472,602 in cash in connection with NLI's acquisition by National Computer Systems, Inc. From February 15, 1995 through May 28, 1999, CTT accounted for its $159,375 investment in NLI under the cost method. CTT recognized a gain of $2,313,227 in its fiscal quarter ended July 31, 1999. Capital loss carryforwards sheltered the gain from Federal and state income taxes. 4. ACCOUNTS RECEIVABLE Receivables were: July 31, July 31, 2001 2000 Royalties $2,731,228 $2,347,176 Other 51,048 73,004 $2,782,276 $2,420,180 5. AVAILABLE-FOR-SALE SECURITIES For the year ended July 31, 2000, proceeds from the sale of available-for-sale securities were $145,444 which resulted in gross realized gains of $90,238. The Company computes realized gains based on specific identification. Because the Company has capital loss carryforwards, no tax effect is reported on the Company's unrealized gains on securities reported in other comprehensive income (loss). 6. PROPERTY AND EQUIPMENT Property and equipment were: July 31, July 31, 2001 2000 Equipment and furnishings, at cost $ 244,555 $ 228,326 Leasehold improvements, at cost 59,860 59,860 304,415 288,186 Accumulated depreciation and amortization (237,421) (172,668) $ 66,994 $ 115,518 Depreciation expense was $76,096, $70,554 and $62,605 in 2001, 2000 and 1999, respectively. 7. ACCRUED LIABILITIES Accrued liabilities were: July 31, July 31, 2001 2000 Royalties payable $1,852,207 $1,780,988 Accrued professional fees 1,024,927 95,510 Accrued compensation 70,543 147,766 Deferred revenues 100,000 10,521 Other 39,484 65,625 $3,087,161 $2,100,410 8. INCOME TAXES The income tax provision of $0 for each of 2001, 2000 and 1999 resulted from utilizing operating and capital loss carryforwards and providing a full valuation allowance against the Company's net deferred tax asset. Components of the Company's net deferred tax assets were: July 31, July 31, 2001 2000 Net operating loss carryforwards $ 3,922,000 $ 4,483,000 Net capital loss carryforwards 387,000 331,000 Installment receivable from sale of discontinued operation 1,449,000 1,449,000 Other, net (145,000) (185,000) Net deferred tax assets 5,613,000 6,078,000 Valuation allowance (5,613,000) (6,078,000) Net deferred tax asset $ -- $ -- At July 31, 2001, the Company had Federal net operating loss carryforwards of approximately $11,536,000, which expire from 2002 through 2016 ($4,371,000 in 2002, $157,000 in 2004 and $57,000 in 2005). Changes in the valuation allowance were: 2001 2000 1999 Balance, beginning of year $ 6,078,000 $ 7,091,000 $ 8,236,000 Change in temporary differences 40,000 124,000 (499,000) Change in net operating and capital losses (505,000) (1,137,000) (646,000) Balance, end of year $ 5,613,000 $ 6,078,000 $ 7,091,000 The Company's ability to derive future tax benefits from the net deferred tax assets is uncertain and therefore it provided a full valuation allowance. 9. SHAREHOLDERS' INTEREST Preferred Stock Dividends on preferred stock are noncumulative and preferred stock is redeemable at par value at CTT's option. Treasury Stock In October 1998, the Board of Directors authorized CTT to repurchase up to 250,000 shares of CTT's common stock. CTT may repurchase shares on the open market or in privately negotiated transactions at times and in amounts determined by management based on its evaluation of market and economic conditions. CTT repurchased 86,500, 49,400 and 25,400 shares of its common stock for $679,289, $276,545 and $109,380 in cash in 2001, 2000 and 1999, respectively. 10. STOCK-BASED COMPENSATION PLANS The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock- based compensation plans. Accordingly, no compensation expense has been recognized for its employee stock option plans or for its 2000 Directors Stock Option Plan. The compensation expense charged against income for grants under its 1996 Directors' Stock Participation Plan, Common Stock Warrants and Employees' Common Stock Retirement Plan is reported below. Had compensation expense for CTT's employees' and directors' stock option plans been determined based on the fair value at the grant dates for options awarded under those plans consistent with the fair value provisions of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: For the years ended July 31, 2001 2000 1999 Net income (loss) As reported $(2,500,749) $1,300,937 $2,919,384 Pro forma $(2,803,807) $ 707,572 $2,784,168 Basic earnings As reported $ (0.41) $ 0.21 $ 0.49 per share Pro forma $ (0.46) $ 0.12 $ 0.46 Fully diluted earnings per As reported $ (0.41) $ 0.21 $ 0.49 share Pro forma $ (0.46) $ 0.11 $ 0.46 The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: For the years ended July 31, 2001 2000 1999 Dividend yield 0.0% 0.0% 0.0% Expected volatility 79.5% 62.1% 51.0% Risk-free interest rates 5.2% 5.9% 4.9% Expected lives 3 years 3 years 4 years The pro forma information above may not be representative of pro forma fair value compensation effects in future years. Employee Stock Option Plans CTT has a stock option plan which expired December 31, 2000. Under this plan both incentive stock options and nonqualified stock options were granted to key employees. Incentive stock options could be granted at an exercise price not less than the fair market value of the optioned stock on the grant date. Nonqualified stock options could be granted at an exercise price not less than 85% of the fair market value of the optioned stock on the grant date. Options generally vest over a period of up to three years after the grant date and expire ten years after the grant date if not terminated earlier. For nonqualified stock options, the difference between the exercise price and the fair market value of the optioned stock on the grant date, if any, is charged to expense over the term of the option. Stock appreciation rights may be granted either at the time an option is granted or any time thereafter. There are no stock appreciation rights outstanding. No option may be granted under the plan after December 31, 2000. The following information relates to this stock option plan. July 31, July 31, 2001 2000 Common shares reserved for issuance on exercise of options 368,838 372,088 Shares available for future option grants 0 45,096 CTT may grant either incentive stock options or nonqualified options under its 1997 Employees' Stock Option Plan as amended in January 2001. They may be granted at an option price not less than 100% of the fair market value of the stock at grant date. Option vesting provisions are determined when options are granted. The maximum term of any option under the 1997 option plan is ten years from the grant date. No options may be granted after September 30, 2007. The following information relates to the 1997 Employees' Stock Option Plan. July 31, July 31, 2001 2000 Common shares reserved for issuance on exercise of options 525,777 225,777 Shares available for future option grants 336,752 143,752 2000 Directors Stock Option Plan Options granted under the 2000 Directors Stock Option Plan are nonqualified options granted at an option price equal to 100% of the fair market value of the stock at grant date. The maximum term of any option under the 2000 option plan is ten years from the grant date. No options may be granted after January 1, 2010. The following information relates to the 2000 Directors Stock Option Plan. July 31, July 31, 2001 2000 Common shares reserved for issuance on exercise of options 244,000 244,000 Shares available for future option grants 130,000 190,000 1996 Directors' Stock Participation Plan Under the terms of the 1996 Directors' Stock Participation Plan which expires January 2, 2006, on the first business day of January each year, CTT shall issue to each outside director who has been elected by shareholders and served at least one year as a director the lesser of 2,500 shares of CTT's common stock or shares of CTT's common stock equal to $15,000 on the date such shares are issued. Should an eligible director terminate as a director before January 2, CTT shall issue such director a number of shares equal to the proportion of the year served by that director. In 2001, 2000 and 1999, CTT issued 11,540, 9,375 and 7,500 shares of common stock, respectively, to eligible directors. (In 2001 and 1999, 2,898 and 3,125, respectively, additional shares were issued to directors outside the 1996 Directors' Stock Participation Plan.) In 2001, 2000 and 1999, CTT charged to expense $75,000, $58,085 and $45,078, respectively, over the directors' respective periods of service. The following information relates to the 1996 Directors' Stock Participation Plan. July 31, July 31, 2001 2000 Common shares reserved for future share issuances 53,579 65,119 Common Stock Warrants From time to time CTT compensates certain of its consultants in part by granting them warrants to purchase shares of its common stock. Such warrants generally become exercisable six months after issuance. In 1999 CTT charged to expense the fair value of warrants to purchase 3,000 shares of its common stock totaling $11,740. Information about CTT's common stock warrants outstanding as of July 31, 2001 is presented below. Number Warrant Aggregate of Price per Exercise Expiration Issued Shares Share Price Date September 1996 3,000 $ 9.875 $ 29,625 September 2001 August 1997 2,500 $11.094 $ 27,735 August 2002 5,500 $ 57,360 Summary of Common Stock Options and Warrants A summary of the status of all CTT's common stock options and warrants as of July 31, 2001, 2000 and 1999, and changes during the years then ended is presented below.
For the years ended July 31, 2001 2000 1999 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price 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 Renova(R) litigation settled in June 1992, CTT incurred approximately $67,000 of contingent legal fees. CTT agreed to pay one-half of proceeds received from settlement of the related litigation, if any, to a limit of three times the contingent fees incurred (approximately $202,000). At July 31, 2001, CTT had paid the entire cumulative contingent legal fees of $201,778, of which $1,731, $33,629 and $44,098 were charged to operations in 2001, 2000 and 1999, respectively. Litigation Fujitsu In December 2000, CTT filed a complaint with the United States International Trade Commission (ITC) on behalf of CTT and the University of Illinois against Fujitsu Limited of Tokyo, Japan, (Fujitsu), Fujitsu Hitachi Plasma Display Limited, Japan, et al. under Section 337 of the Tariff Act of 1930, as amended. CTT requested that the ITC stop Fujitsu and/or its subsidiaries from unlawfully importing plasma display panels (PDPs) into the United States on the basis that the panels infringe U.S. Patent Numbers 4,866,349 and 5,081,400 held by CTT's client, the University of Illinois. The two patents cover energy recovery in PDPs and plasma display flat-screen televisions. The ITC has the power to issue orders directing U.S. customs officials to stop future importation of Fujitsu PDPs and plasma display products that infringe the two named patents. In June 2001, CTT requested withdrawal of its complaint before the ITC and the ITC complaint was withdrawn in August 2001. Coincident with filing its ITC complaint, CTT and the University of Illinois also filed a complaint against Fujitsu in the United States District Court for the Central District of Illinois seeking damages for past infringements and an injunction against future sales of PDPs that infringe these patents. In July 2001, CTT reactivated this complaint to pursue these additional legal remedies (a permanent injunction against future sales of PDPs that infringe these patents, damages for past infringing sales and possibly damages for willfulness) which are not available at the ITC. CTT intends to seek to expedite this case. In September 2001, Fujitsu and Fujitsu Hitachi Plasma Display Limited, Japan, filed suit against CTT and Plasmaco, Inc. in the United States District Court for the District of Delaware. This lawsuit alleges, among other things, that CTT misappropriated confidential information and trade secrets supplied by Fujitsu. It also alleges that, with Plasmaco's assistance, CTT abused the ITC process to obtain information to which it otherwise would not have been entitled and which it will use in the action against Fujitsu in the United States District Court for the Central District of Illinois. Fujitsu seeks damages in an unspecified amount and injunctive relief. The Company intends to defend vigorously the action instituted by Fujitsu. CTT is unable to estimate the legal expenses or the loss it may incur in these suits, if any, and has recorded no potential judgment proceeds in its financial statements to date. LabCorp On May 4, 1999, Metabolite Laboratories, Inc. (MLI) and CTT (collectively plaintiffs) filed a complaint and jury demand against Laboratory Corporation of America Holdings d/b/a LabCorp (LabCorp) in the United States District Court for the District of Colorado. The complaint alleges, among other things, that LabCorp owes plaintiffs royalties for homocysteine assays performed beginning in the summer of 1998 using methods and materials falling within the claims of a patent owned by CTT. CTT licensed the patent non-exclusively to MLI and MLI sublicensed it to LabCorp. Plaintiffs claim LabCorp's actions constitute breach of contract and patent infringement. The claim seeks an injunction ordering LabCorp to perform all its obligations under its agreement, to cure past breaches, to provide an accounting of wrongfully withheld royalties and to refrain from infringing the patent. Plaintiffs also seek unspecified money and exemplary damages and attorneys' fees, among other things. LabCorp has filed an answer and counterclaims alleging noninfringement, patent invalidity and patent misuse. Discovery has been completed. Trial is scheduled to begin in November 2001. CTT is unable to estimate the related legal expenses it may incur in this suit and has recorded no revenue for these withheld royalties. MaternaTM The University of Colorado Foundation, Inc., the University of Colorado, the Board of Regents of the University of Colorado, Robert H. Allen and Paul A. Seligman, plaintiffs, previously filed a lawsuit against American Cyanamid Company, defendant, in the United States District Court for the District of Colorado. This case involved a patent for an improved formulation of MaternaTM, a prenatal vitamin compound sold by defendant. While the Company was not and is not a party to this case, the Company had a contract with the University of Colorado to license University of Colorado inventions to third parties. As a result of this contract, the Company is entitled to share approximately 18% of damages awarded to the University of Colorado, if any, after deducting the expenses of this suit. On November 19, 1999, the United States Court of Appeals for the Federal Circuit vacated a July 7, 1997 judgment by the District Court in favor of plaintiffs for approximately $44 million and remanded the case to the District Court for further proceedings. On July 7, 2000, the District Court concluded that Robert H. Allen and Paul A. Seligman were the sole inventors of the reformulation of MaternaTM that was the subject of the patent and that defendant is liable to them and the other plaintiffs on their claims for fraud and unjust enrichment. In March 2001, the District Court heard arguments to determine the nature and amount of damages to be paid by defendant. The District Court judge has issued a preliminary favorable opinion to guide findings of fact and conclusions of law. The parties await the judge's decision. The Company cannot predict the amount of its share of the judgment, if any, which may ultimately be awarded. The Company has recorded no potential judgment proceeds in its financial statements to date. While the Company has incurred certain expenses in connection with this suit, it does not expect to incur additional expenses in this suit in the future. The Company records such expenses as they are incurred. Optical Associates, Limited Partnership (OALP) In 1989 UOP, a majority-owned subsidiary of CTT which had developed a computer-based system to manufacture specialty contact lenses, intraocular lenses and other precision optical products, sold substantially all its assets to Unilens Corp. USA (Unilens). The proceeds of the sale included an installment obligation for $5,500,000 payable at a minimum of $250,000 per year beginning in January 1992. Due to the uncertainty of the timing and amount of future cash flows, income on the installment obligation is recorded net of related expenses as the payments are received. Cash received in excess of the fair value assigned to the original obligation is recorded as other income from continuing operations. As cash proceeds are received, CTT records a 4% commission expense payable to its joint venture partner, Optical Associates, Limited Partnership (OALP). Unilens made no payments in fiscal 2001, 2000 or 1999. On November 4, 1991, a suit was filed in the Superior Court of the Judicial District of Fairfield, Connecticut, at Bridgeport by Bruce Arbeiter, Jeffrey A. Bigelow, Jeffrey W. Leiderman, Optical Associates, Limited Partnership (OALP) and Optical Associates Management Corp. (OAMC) purportedly on behalf of all the limited partners of OALP, as plaintiffs, against Genetic Technology Management, Inc. (GTM), University Optical Products Co. (UOP), the registrant, Jay Warren Blaker, L.W. Miles, A. Sidney Alpert, Frank R. McPike, Jr., Michael Behar, Bruce E. Langton, Arthur M. Lieberman and Harry Van Benschoten, as defendants. The complaint alleges, among other things, that in January 1989 the defendants, GTM, UOP and the registrant, sold substantially all of the assets of OALP to Unilens Corp. USA (Unilens) and disbursed only 4% of the sales price to OALP, all in violation of certain agreements, representations and legal obligations; that OALP is entitled to the full proceeds of the sale to Unilens; and that by vote of limited partners holding in excess of 80% of the capital interests of OALP, the limited partners have removed GTM as the general partner of OALP and replaced GTM with OAMC. The complaint claims, among other things, money damages (in an amount not specified in the claim for relief); treble and punitive damages (with no amounts specified); attorneys fees; an accounting; temporary and permanent injunctive relief; and judgment holding that OAMC was legally substituted for GTM as the general partner of OALP. Management of the registrant believes, based upon all the facts available to management, that the claims asserted in the suit are without merit, and the registrant has vigorously defended against plaintiffs' claims. In November 2000, the Company made a motion to dismiss this case. On September 14, 2001, the attorney referee recommended that the Court grant defendants' motion for a judgment of dismissal. No final order has yet been entered. Through July 31, 2001, the Company had received aggregate cash proceeds of approximately $1,011,000 from the January 1989 sale of UOP's assets to Unilens. CTT recognized other expenses from continuing operations of $52,460, $269 and $41,337 in 2001, 2000 and 1999, respectively, for legal expenses related to this suit. 15. RELATED PARTY TRANSACTIONS During 2001 and 2000, CTT incurred charges of approximately $146,000 and $133,000, respectively, for consulting services (including expenses and taxes) provided by two directors. During 2000, CTT earned approximately $10,000 performing services for a company of which another director is president. Supplementary Data Selected Quarterly Financial Data (1) (unaudited) For the years ended July 31
First Second Third Fourth Quarter Quarter Quarter Quarter Total Year 2001 Retained royalties $ 462,669 $ 1,558,587 $ 416,562 $1,199,946 $ 3,637,764 Other revenues 909 2,611 -- -- 3,520 Total revenues $ 463,578 $ 1,561,198 $ 416,562 $1,199,946 $ 3,641,284 Patent enforcement expenses, net of reimbursements 60,085 305,792 791,880 1,316,260 2,474,017 Other costs of technology management services 332,394 386,308 514,316 626,437 1,859,455 General and administration expenses 375,944 469,614 287,354 407,261 1,540,173 Total operating expenses $ 768,423 $ 1,161,714 $ 1,593,550 $2,349,958 $ 5,873,645 Operating income (loss) $ (304,845) $ 399,484 $(1,176,988) $(1,150,012) $(2,232,361) Net income (loss) (2) $ (185,140) $ 494,203 $(1,103,268) $(1,706,544) $(2,500,749) Net income (loss) per share basic and diluted $ (0.03) $ 0.08 $ (0.18) $($0.28) $ (0.41) 2000 Retained royalties $ 444,730 $ 1,118,229 $ 553,402 $ 1,085,833 $ 3,202,194 Retained royalty settlement 736,375 736,375 Other revenues 126,097 27,840 9,233 11,128 174,298 Total revenues $ 570,827 $ 1,146,069 $ 1,299,010 $ 1,096,961 $ 4,112,867 Patent enforcement expenses, net of reimbursements 32,070 73,896 19,318 32,175 157,459 Other costs of technology management services 532,014 438,340 476,775 432,628 1,879,757 General and administration expenses 228,663 352,150 346,752 374,048 1,301,613 Total operating expenses $ 792,747 $ 864,386 $ 842,845 $ 838,851 $ 3,338,829 Operating income (loss) $ (221,920) $ 281,683 $ 456,165 $ 258,110 $ 774,038 Net income (loss) $ (141,066) $ 428,725 $ 580,100 $ 433,178 $ 1,300,937 Net income (loss) per share (basic and diluted) $ (0.02) $ 0.07 $ 0.09 $ 0.07 $ 0.21
(1) Should be read in conjunction with Consolidated Financial Statements and Notes thereto. (2) Includes $600,000 investment and loan impairment loss on Micro-ASI, Inc. in Fourth Quarter.