-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiCiHGokoOGBdt+z4JooEjexKU0XSSIZnrhNe41Yw9722WonY9wDA5CS/KywWVKT 5Qs5E+gDek17sgqAaFCMBg== 0000102198-03-000009.txt : 20030611 0000102198-03-000009.hdr.sgml : 20030611 20030611114402 ACCESSION NUMBER: 0000102198-03-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 03740050 BUSINESS ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 BUSINESS PHONE: 2032256044 MAIL ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 f10q_303.txt FORM 10-Q FOR THE QTR ENDED 4/30/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2003 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 06824 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (203) 255-6044 N/A Former name, former address and former fiscal year, if changed since last report 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 . Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes ____. No X. Common Stock outstanding as of June 1, 2003 - 6,201,345 shares Exhibit Index on sequentially numbered page 28 of 39. Page 1 of 39 sequentially numbered pages COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements A. Condensed Financial Statements (Unaudited) Consolidated Balance Sheets at April 30, 2003 and July 31, 2003 3 Consolidated Statements of Operations for the three months ended April 30, 2003 and 2002 4 Consolidated Statements of Operations for the nine months ended April 30, 2003 and 2002 5 Consolidated Statement of Changes in Shareholders' Interest for the nine months ended April 30, 2003 6 Consolidated Statements of Cash Flows for the nine months ended April 30, 2003 and 2002 7 Notes to Consolidated Financial Statements 8-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27-28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 Certifications 30-33 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets April 30, 2003 and July 31, 2002 (Unaudited) April 30, July 31, 2003 2002 ASSETS Current assets: Cash and cash equivalents $ 434,378 $ 750,421 Short-term investments 1,103,170 2,136,874 Accounts receivable 932,368 1,199,483 Notes receivable - E. L. Specialists, Inc. -- 200,000 Prepaid expenses and other current assets 284,314 261,198 Total current assets 2,754,230 4,547,976 Property and equipment, at cost, net 35,906 42,877 Investments, at cost 42,996 1,075,684 Intangible assets acquired, net 664,713 733,246 TOTAL ASSETS $ 3,497,845 $ 6,399,783 LIABILITIES AND SHAREHOLDERS' INTEREST Accounts payable $ 276,263 $ 1,726,237 Accrued liabilities 1,293,699 1,680,903 Total current liabilities 1,569,962 3,407,140 Commitments and contingencies (Note 9) -- Shareholders' interest: 5% preferred stock, $25 par value 60,675 60,675 Common stock, $.01 par value 62,013 61,907 Capital in excess of par value 26,747,229 26,893,287 Treasury stock, at cost; 36,434 shares at July 31, 2002 -- (258,037) Accumulated deficit (24,942,034) (23,765,189) Total shareholders' interest 1,927,883 2,992,643 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 3,497,845 $ 6,399,783 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the three months ended April 30, 2003 and 2002 (Unaudited) 2003 2002 Revenue $ 659,455 $ 547,278 Patent enforcement expenses, net of reimbursements 193,948 602,345 Personnel and other direct expenses relating to revenue, of which $47,900 were to related parties in 2002 707,358 542,435 General and administrative expenses 307,862 419,844 1,209,168 1,564,624 Operating loss (549,713) (1,017,346) Impairment loss: On investment in Digital Ink, Inc. -- (50,000) Recovery of advances to Micro-ASI, Inc. -- 21,598 Interest income 3,984 13,869 Net loss $ (545,729) $(1,031,879) Net loss per share: Basic and diluted $ (0.09) $ (0.17) Weighted average number of common shares outstanding: Basic and diluted 6,201,345 6,154,351 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the nine months ended April 30, 2003 and 2002 (Unaudited) 2003 2002 Revenue $ 1,874,217 $ 1,754,206 Patent enforcement expenses, net of reimbursements 347,453 1,786,982 Personnel and other direct expenses relating to revenue, of which $6,122 and $112,630 were to related parties in 2003 and 2002, respectively 2,118,026 1,588,347 General and administrative expenses 1,247,643 1,127,412 3,713,122 4,502,741 Operating loss (1,838,905) (2,748,535) Reversal of accounts payable exchanged for contingent note payable 1,583,445 -- Impairment losses: On investment in NTRU (944,000) -- On loans to E. L. Specialists, Inc. -- (519,200) On investment in Digital Ink, Inc. -- (50,000) Recovery of advances to Micro-ASI, Inc. -- 21,598 Interest income 22,926 85,494 Other income (expense), net (311) (399) Loss before minority interest (1,176,845) (3,211,042) Minority interest in losses of subsidiary -- (26,936) Net loss $(1,176,845) $(3,237,978) Net loss per share: Basic and diluted $ (0.19) $ (0.53) Weighted average number of common shares outstanding: Basic and diluted 6,176,359 6,145,889 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Interest For the nine months ended April 30, 2003 (Unaudited)
Preferred Stock Shares Common Stock Capital in issued and Shares excess of Treasury Stock Accumulated outstanding Amount issued Amount par value Shares held Amount Deficit Balance - July 31, 2002 2,427 $60,675 6,190,785 $61,907 $26,893,287 (36,434) $(258,037) $(23,765,189) Stock issued under 1996 Directors' Stock Participation Plan. . . 10,560 106 1,813 4,440 30,181 Stock issued under CTT's 401(k) Plan . . . (147,871) 31,994 227,856 Net loss. . . . . . . . . (1,176,845) Balance - April 30, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 -- $ -- $(24,942,034)
See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the nine months ended April 30, 2003 and 2002 (Unaudited) 2003 2002 Cash flow from operating activities: Net loss $(1,176,845) $(3,237,978) Noncash items included in net loss: Depreciation and amortization 141,971 151,577 Minority interest -- 26,936 Stock compensation 81,099 77,976 Reversal of accounts payable exchanged for contingent note payable (1,583,445) -- Impairment losses on investments and 944,000 569,200 loans Recovery of advances to Micro-ASI, Inc. -- (21,598) Other 311 (1,425) Net changes in various operating accounts: Receivables 267,115 2,205,958 Prepaid expenses and other current assets (23,116) (51,550) Accounts payable and accrued liabilities (222,747) (818,944) Net cash flow from operating activities (1,571,657) (1,099,848) Cash flow from investing activities: Purchases of property and equipment, net (16,467) (47,204) Purchase of intangible assets (50,000) -- Proceeds from other short-term investments 1,033,704 2,167,574 Investments in and loans to cost- method affiliates -- (100,000) Proceeds from (advances to) E. L. Specialists, Inc. 200,000 (330,500) Proceeds from NTRU Cryptosystems, Inc. preferred stock 88,377 -- Other, net -- (26,936) Net cash flow from investing activities 1,255,614 1,662,934 Net increase (decrease) in cash and cash equivalents (316,043) 563,086 Cash and cash equivalents,(A) beginning of period 750,421 224,436 Cash and cash equivalents,(B) end of period $ 434,378 $ 787,522 (A) Does not include short-term investments of $2,136,874 and $4,793,441 in 2003 and 2002, respectively. (B) Does not include short-term investments of $1,103,170 and $2,625,867 in 2003 and 2002, respectively. See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Interim Financial Statements Interim financial information presented in the accompanying financial statements and notes hereto is unaudited. The year-end balance sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. Certain amounts, including operating expenses, have been reclassified to conform with the presentation in financial statements for fiscal 2003. In the opinion of management, all adjustments that are necessary to present the financial statements fairly in conformity with accounting principles generally accepted in the United States of America, consisting only of normal recurring adjustments, have been made. The interim financial statements and notes thereto as well as the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended July 31, 2002. The Company has incurred substantial losses and negative cash flows from operations for the periods ended April 30, 2003 and 2002, respectively. For the year ended July 31, 2002, the Company incurred a net loss of approximately $4,016,000 and negative cash flows from operating activities of approximately $1,666,000. If we do not obtain sufficient additional cash resources before early July 2003, management plans to reduce cash expenses sufficiently to sustain the Company until it obtains additional cash from revenues, potential litigation awards or other funding sources. However, we cannot assure you that the Company will be able to obtain additional cash resources. Under this plan, the Company will implement certain cost reductions and cost containment actions to reduce operating costs. 2. Per Share Computations The computation of per share amounts in each period presented is based on the weighted average number of common shares outstanding in the period. At April 30, 2003 and 2002, respectively, options and warrants to purchase 955,767 and 650,267 shares of common stock were outstanding but were not included in the computation of earnings per share because they were anti-dilutive. 3. Stock-Based Compensation The Company accounts for its stock-based compensation at its intrinsic value under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, the Company has recognized no compensation expense for options granted under its employees and directors stock option plans since the exercise price of all options granted under those plans was at least the market value of the underlying common stock on the grant date. If CTT had determined compensation expense for its option grants under its employees and directors stock option plans using the fair value method of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's results would have been:
Nine months Quarter ended April 30, ended April 30, 2003 2002 2003 2002 Net loss, as reported $(1,176,845) $(3,237,978) $(545,729) $(1,031,879) Deduct total stock-based compensation determined under the fair value method, net of related tax effects (190,701) (146,569) (41,672) (30,303) Pro forma net loss $(1,367,546) $(3,384,547) $(587,401) $(1,062,182) Net loss per share: Basic - as reported $ (0.19) $ (0.53) $ (0.09) $ (0.17) Basic - pro forma $ (0.22) $ (0.55) $ (0.09) $ (0.17) Diluted - as reported $ (0.19) $ (0.53) $ (0.09) $ (0.17) Diluted - pro forma $ (0.22) $ (0.55) $ (0.09) $ (0.17)
The pro forma information above may not be representative of pro forma fair value compensation effects in future years. 4. Notes Receivable E. L. Specialists, Inc. Through a series of bridge financing agreements, the Company loaned $1,056,300 ($956,300 in cash and $100,000 in services) to E. L. Specialists, Inc. (ELS). Effective August 5, 2002, CTT sold and transferred all its interests related to ELS to MRM Acquisitions, LLC (MRM) for $200,000 cash. The transferred interests include CTT's notes receivable in the face amount of $1,056,300 (plus interest) from ELS, its related security interest in ELS' intellectual property, all its other interests under agreements in connection with its notes receivable from ELS and CTT's interest in a technology servicing agreement related to ELS's intellectual property. CTT collected $200,000 from MRM on August 5, 2002, after which CTT had no remaining interest in ELS. 5. Receivables Receivables were: April 30, July 31, 2003 2002 Royalties $ 806,775 $1,158,685 For NTRU preferred stock 88,377 -- Other 37,216 40,798 $ 932,368 $1,199,483 6. Investment in NTRU Cryptosystems, Inc. In April 2003, NTRU Cryptosystems, Inc. (NTRU) redeemed all outstanding shares of its Series A and Series B Preferred Stock (NTRU Preferred Stock) in exchange for cash or NTRU common stock. Competitive Technologies, Inc. (CTT) is a minority investor in NTRU and currently owns 3,129,509 shares of NTRU common stock, including 76,509 shares received in April, 2003 (approximately 10% of NTRU's outstanding common stock.) At July 31 and October 31, 2002, CTT carried its investment in NTRU on the cost method at $1,034,381. CTT recorded a charge of $944,000 in its second quarter ended January 31, 2003 due to the uncertain timing and amount of CTT's expected future cash flows from its investment in NTRU's common stock after its recapitalization. CTT exchanged its NTRU Preferred Stock for $88,377 in cash (included in receivables at April 30, 2003; received May 5, 2003) and 76,509 shares of NTRU common stock. CTT continues to hold a seat and participate actively on NTRU's Board of Directors. CTT's management continues to believe NTRU's encryption technology has value and these actions provide NTRU an opportunity to allow applications to evolve to meet its customers' needs. 7. Intangible Assets Acquired The Company purchased additional patents during the first three quarters of fiscal 2003 for $50,000. These patents are being amortized on a straight-line basis over their estimated remaining lives, approximately 18 years. The Company reported amortization expense of $118,533 in the first three quarters of fiscal 2003 and expects to record annual amortization expense of approximately $158,000 for fiscal 2003, 2004, 2005, 2006, $111,000 for fiscal 2007, and $3,000 for fiscal 2008. April 30, July 31, 2003 2002 Intangible assets acquired, principally licenses and patented technologies, at adjusted cost $ 1,687,067 $1,637,067 Accumulated amortization (1,022,354) (903,821) $ 664,713 $ 733,246 8. Accrued Liabilities Accrued liabilities were: April 30, July 31, 2003 2002 Royalties payable $ 965,666 $1,308,381 Accrued professional fees 155,000 65,162 Accrued compensation 118,873 157,416 Deferred revenues -- 106,667 Other 54,160 43,277 $1,293,699 $1,680,903 The exclusive licensee terminated its license for the electrochromic display during the third quarter of fiscal 2003. As a result, we recognized $107,000 previously deferred revenue on this license and $50,000 in license termination fees. 9. Contingencies Contingent Obligation On October 28, 2002, the Company signed an agreement making any further payments to our former patent litigation counsel in the Fujitsu matter completely contingent on future receipts from Fujitsu. This contingent obligation is reflected in a promissory note payable to our former patent litigation counsel for $1,683,349 plus simple interest at the annual rate of 11% from the agreement date (approximately $93,000 at April 30, 2003) payable only from future receipts in a settlement or other favorable outcome of the litigation against Fujitsu, if any. Accordingly, in the first quarter of fiscal 2003, we reversed from accounts payable $1,583,445 that was accrued at July 31, 2002. Since interest is also contingently payable, the Company has recorded no interest expense with respect to this note. Litigation Fujitsu In December 2000, (coincident with filing a complaint with the United States International Trade Commission (ITC) that was withdrawn in August 2001) CTT and the University of Illinois filed a complaint against Fujitsu Limited, Fujitsu General Limited, Fujitsu General America, Fujitsu Microelectronics, Inc. and Fujitsu Hitachi Plasma Display Ltd. (Fujitsu et al.) in the United States District Court for the Central District of Illinois seeking damages for past infringements and an injunction against future sales of plasma display panels (PDPs) that infringe two U. S. patents held by CTT's client, the University of Illinois. The two patents cover energy recovery in flat plasma display panels. In July 2001, CTT reactivated this complaint to pursue legal remedies (damages for past infringing sales and possibly damages for willfulness) that are not available at the ITC. In May 2002, the District Court granted defendants' motion to transfer this case to the Northern District of California. The trial in this case is currently scheduled for March 2004. Effective July 23, 2002, CTT and the University of Illinois agreed that the University of Illinois would take the lead in this litigation and assume the cost of new lead counsel. Before this agreement, CTT bore the entire cost of lead counsel in this litigation. In December 2002, CTT was dismissed as co-plaintiff from this litigation but retains its economic interest in any potential favorable outcome. In September 2001, Fujitsu et al. filed suit against CTT and Plasmaco, Inc. in the United States District Court for the District of Delaware. This lawsuit alleged, among other things, that CTT misappropriated confidential information and trade secrets supplied by Fujitsu during the course of the ITC action. It also alleged 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 (now in the Northern District of California). The Delaware District Court dismissed this action at the request of Fujitsu who subsequently re-instituted the case in the Northern District of California. CTT is unable to estimate the legal expenses or the loss it may incur or the possible damages it may recover in these suits, if any, and has recorded no potential judgment proceeds in its financial statements to date. The Company records expenses in connection with this suit as they are incurred. 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 alleged, among other things, that LabCorp owes plaintiffs royalties for homocysteine assays performed beginning in the summer of 1998 using methods 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 claimed LabCorp's actions constitute breach of contract and patent infringement. The claim sought 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 sought unspecified money and exemplary damages and attorneys' fees, among other things. LabCorp filed an answer and counterclaims alleging noninfringement, patent invalidity and patent misuse. The jury that heard this case in November 2001 confirmed the validity of CTT's patent rights and found that LabCorp willfully contributed to and induced infringement and breached its contract. In December 2001, the Court entered judgment affirming the jury's verdict. In November 2002, the Court confirmed its judgment in favor of CTT and MLI. The Court's amended judgment awarded CTT approximately $1,019,000 damages, $1,019,000 enhanced damages, and $132,000 prejudgment interest. If the Court's judgment is upheld in post- trial motions and on appeal, CTT will retain approximately $1,000,000 of damages awarded and post-judgment interest at the statutory rate. This judgment is pending appeal and post-trial motions relating to awarding attorneys' fees to CTT. CTT is unable to estimate the legal expenses it may incur or the possible damages it may ultimately recover in this suit, if any. CTT has not recorded revenue in its financial statements to date for awarded damages, awarded enhanced damages or awarded interest from the Court's November 2002 judgment. The Company records expenses in connection with this suit as they are incurred. In a January 2003 Stipulated Order, LabCorp agreed to post a bond for all damages awarded in the November 2002 judgment and to pay CTT a percentage of sales of homocysteine tests performed since November 1, 2002 through final disposition of this case. In addition, pursuant to this order, LabCorp agreed to pay $250,000 (in twelve monthly installments of $20,824 each) for homocysteine assays performed from November 1, 2001 through October 31, 2002 (of which it has paid approximately $104,000). In exchange, this Stipulated Order stayed execution of the monetary judgment and the permanent injunction against LabCorp in the Court's November 2002 judgment. This Stipulated Order is without prejudice to any party's position on appeal. At April 30, 2003, CTT had recorded total royalties of $514,735 (revenues of $205,894 (of which $99,954 relate to assays performed from November 1, 2001 through October 31, 2002) and royalties paid or payable of $308,841) from LabCorp pursuant to this January 2003 Stipulated Order. LabCorp has appealed the November 2002 judgment in favor of CTT. If the judgment is reversed on appeal, LabCorp's ability to recover amounts paid to CTT will depend on the extent and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. Materna(TM) 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 (a subsidiary of Wyeth), defendant, in the United States District Court for the District of Colorado. This case involved a patent for an improved formulation of Materna, 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 18.2% of damages awarded to the University of Colorado, if any, after deducting the legal expenses of this suit. On July 7, 2000, the District Court concluded that Robert H. Allen and Paul A. Seligman were the sole inventors of the reformulation of Materna 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. On August 13, 2002, the District Court judge awarded approximately $54 million, plus certain interest from January 1, 2002, to the plaintiffs, of which CTT's share would be approximately $6 million plus its proportionate share of interest. The defendant has appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC) and posted a $59 million bond and plaintiffs have responded. The CAFC heard oral arguments in this appeal in June 2003. CTT is unable to predict when this lawsuit will finally be settled or when it will receive its share of damages finally awarded, if any. CTT has recorded no potential judgment proceeds in its financial statements to date. The Company records expenses in connection with this suit as they are incurred. See Note 11 to these Consolidated Financial Statements. 10. Related Party Transactions During the nine months ended April 30, 2003 and 2002, CTT incurred charges of approximately $6,000 and $113,000, respectively, for consulting services (including expenses and use taxes) provided by one and two directors in the respective periods. 11. Subsequent Events Sale of potential Materna award Effective May 19, 2003, CTT sold to LawFinance Group, Inc. a portion of its potential $6 million from the patent infringement judgment against American Cyanamid Company in the Materna lawsuit. CTT received $600,000 cash in exchange for the first $1,290,000 (plus court awarded interest from May 19, 2003) of CTT's share of the potential award. CTT has no financial obligation to repay LawFinance. If CTT's share of the potential award is less than the amount sold to LawFinance, the entire amount would be paid to LawFinance and LawFinance would be paid in full. CTT granted LawFinance a security interest in CTT's share of the potential award. CTT retains the remaining anticipated approximately $4,710,000 proceeds from the potential award in addition to the $600,000 already received. CTT will include this $600,000 in revenue in its fourth quarter of fiscal 2003. Optical Associates, Limited Partnership (OALP) This lawsuit (described in detail in Note 16 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended July 31, 2002) was dismissed on May 16, 2003. CTT incurred no legal expenses related to this suit in the first three quarters of either fiscal year. 12. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (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's adoption of this statement on August 1, 2002, did not have a material effect on its financial condition or results of operations. 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 has recognized impairment charges on investments in fiscal 2002 and 2003. However, the Company's adoption of this statement on August 1, 2002, did not affect the amount or timing of those impairment charges. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative transition methods for a voluntary change to the fair value method of accounting for stock- based employee compensation. This statement also requires prominent disclosures in annual and interim financial statements about the method of accounting for stock-based employee compensation and its effect on reported results. The disclosure provisions of this statement are effective for the Company's third quarter ended April 30, 2003; the Company made these disclosures in Note 3 above. PART I. FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We have rounded all amounts in this Item 2 to the nearest thousand dollars. In addition, all periods discussed in this Item 2 relate to our fiscal years ending July 31 (first, second, third and fourth quarters ending October 31, January 31, April 30 and July 31 respectively). Results of Operations - Three Months Ended April 30, 2003 (Third Quarter of 2003) vs. Three Months Ended April 30, 2002 (Third Quarter of 2002) Financial Results Our net loss for the third quarter of 2003 was $546,000 compared with $1,032,000 for the third quarter of fiscal 2002, an improvement of $486,000. Revenues Our revenues for the third quarter of 2003 were $659,000, which was $112,000 (20%) higher than in the third quarter of 2002. In the third quarter of 2003, $532,000 (81%) of our retained royalties were from three technologies: $277,000 (42%) from Ethyol(TM) (a chemotherapeutic mitigation agent); $157,000 (24%) from the electrochromic display (a thin, flexible, low power flashing graphic display); and $99,000 (15%) from the homocysteine assay. Increases in royalties from these three technologies more than offset decreases in royalties from gallium arsenide semiconductors, Retin-A, vitamin B12 and other technologies. We recorded $277,000 royalties from Ethyol in the third quarter of fiscal 2003. These royalties are limited to $500,000 per calendar year. The exclusive licensee terminated its license for the electrochromic display during the third quarter of fiscal 2003. As a result, we recognized $107,000 previously deferred revenue on this license and $50,000 in license termination fees. The increase in homocysteine assay royalties results from assays performed by LabCorp and other recently licensed clinical laboratories. (See Note 9 to the accompanying consolidated financial statements.) The decrease in royalties from gallium arsenide semiconductors was principally due to expired licenses. The third quarter of fiscal 2002 included additional Retin-A royalties from a royalty audit. The last vitamin B12 assay patent expired in November 2002. Other changes in retained royalty revenues reflect changes in the timing of royalties reported by licensees and in licensees' sales of licensed products. Historically, the Company's royalty revenues in its first and third quarters have been lower than in its second and fourth quarters. Since much of our retained royalty revenue depends on our licensees' sales of licensed products, current economic conditions may affect our royalties from them. However, we cannot predict either the timing or the amount of such potential changes, if any. Operating expenses Patent enforcement expenses, net of reimbursements, in the third quarter of 2003 were $194,000, which was $408,000 (68%) lower than in the third quarter of 2002. Our July 23, 2002, agreement with the University of Illinois (for the University to take the lead and assume the cost of new lead counsel in the litigation against Fujitsu) substantially reduced our net patent enforcement expenses in the third quarter of 2003. Patent enforcement expenses are principally for outside litigation counsels' services in patent litigations where our clients and we have sued to enforce their and our patent rights. We have included details of progress and status in these cases in Note 9 to the accompanying consolidated financial statements. We have reclassified certain 2002 amounts between personnel and other direct expenses relating to revenue and general and administrative expenses to conform to the presentation for 2003. We classify domestic and foreign patent legal expenses (net of reimbursements), amortization of intangible assets acquired, employee salaries and benefits, marketing and consulting expenses related to technologies and specific revenue initiatives as personnel and other direct expenses relating to revenue. We classify directors' fees and expenses, public company expenses, professional service expenses (including corporate legal, litigation and audit), rent, and other general business and operating expenses as general and administrative expenses. Personnel and other direct expenses relating to revenue were $707,000 for the third quarter of 2003, which was $165,000 (30%) higher than in the third quarter of 2002. We incurred higher expenses for salaries and consulting services in order to increase revenues by developing new revenue opportunities and strategic relationships and alliances. In the third quarter of 2003, we had approximately 15 full time equivalents compared with approximately 14 in the third quarter of 2002. Partially offsetting these increases was the absence of recruiting expenses. We incurred recruiting expenses in the third quarter of fiscal 2002 but not in the third quarter of fiscal 2003. General and administrative expenses for the third quarter of 2003 were $308,000, which was $112,000 (27%) lower than in the third quarter of 2002. This decrease reflects decreases in directors' fees and expenses due to our reduction to five independent directors compared to six in 2002, corporate legal and professional service expenses. Interest income Interest income of $4,000 for the third quarter of 2003 was $10,000 (71%) lower than in the third quarter of 2002. Our average invested balance was approximately 49% lower and our weighted average interest rate was approximately 0.9% per annum compared with approximately 1.5% per annum in fiscal 2002. Income taxes The Company has substantial net operating and capital loss carryforwards for Federal income tax purposes. See Note 9 to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended July 31, 2002. Results of Operations - Nine Months Ended April 30, 2003 (Three Quarters of 2003) vs. Nine Months Ended April 30, 2002 (Three Quarters of 2002) Financial Results Our net loss for the three quarters of 2003 was $1,177,000 compared with $3,238,000 for the three quarters of fiscal 2002, an improvement of $2,061,000. Our operating results improved $910,000 in addition to other improvements discussed below. Revenues Our total revenues for the three quarters of 2003 were $1,874,000, which was $120,000 (7%) higher than in the three quarters of 2002. In the three quarters of 2003, $1,315,000 (70%) of our retained royalties were from four technologies: $423,000 (23%) from Ethyol, $420,000 (22%) from the homocysteine assay, $315,000 (17%) from gallium arsenide semiconductors, and $157,000 (8%) from the electrochromic display. Increases in royalties from the homocysteine assay and Ethyol more than offset decreases in royalties from gallium arsenide semiconductors and vitamin B12 assays. Ethyol's royalty base is higher since October 2001 when the licensee began selling Ethyol directly in the United States rather than through a distributor. We expect our retained royalties from Ethyol to reach our $500,000 per calendar year maximum for calendar 2003 in fiscal 2003. The increase in homocysteine assay royalties includes amounts for assays performed in several quarters by LabCorp ($206,000 under a stipulated order in the LabCorp litigation) and other clinical laboratories ($106,000 under license agreements made in the second quarter of 2003). LabCorp has appealed the judgment in favor of CTT. If the judgment is reversed on appeal, LabCorp's ability to recover amounts paid to CTT will depend on the extent and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. See also Note 9 to the accompanying consolidated financial statements. We discussed the increase in electrochromic display royalties and decreases in royalties from gallium arsenide semiconductors, vitamin B12 assays and other technologies in the third quarter results above. Operating expenses Patent enforcement expenses, net of reimbursements, in the three quarters of 2003 were $347,000, which was $1,440,000 (81%) lower than in the three quarters of 2002. Our July 23, 2002, agreement with the University of Illinois, our client, (for the University to take the lead and assume the cost of new lead counsel in the litigation against Fujitsu) substantially reduced our net patent enforcement expenses in the three quarters of 2003. The level of patent enforcement expenses varies depending on the stage of the litigation. We have included details of progress and status in these cases in Note 9 to the accompanying consolidated financial statements. Personnel and other direct expenses relating to revenue were $2,118,000 for the three quarters of 2003, which was $530,000 (33%) higher than in the three quarters of 2002. A reduction in recruiting expense partially offset increases in expenses for salaries and consultants we engaged to assist us in developing specific revenue opportunities and strategic alliances and relationships. In the three quarters of 2003 we had approximately 16 full time equivalents compared with approximately 13 in the three quarters of 2002. During the first quarter of 2003, we paid discretionary bonuses (which were both approved and paid in the first quarter of 2003) in lieu of increasing base salaries for our professional staff. General and administrative expenses for the three quarters of 2003 were $1,248,000, which was $120,000 (11%) higher than in the three quarters of 2002. Expenses that increased were investor relations, travel, marketing, public company and corporate litigation expenses directly related to the SEC investigation (see Item 3 "Legal Proceedings" in our Annual Report on Form 10-K for the year ended July 31, 2002 and Item 1 "Legal Proceedings" in Part II of this Quarterly Report on Form 10-Q for the quarter ended April 30, 2003). During the three quarters of 2003, we participated in five international marketing events. Directors' fees and expenses and professional services expenses decreased. Reversal of accounts payable exchanged for contingent note payable On October 28, 2002, the Company signed an agreement making future payments to our former patent litigation counsel in the Fujitsu matter completely contingent on future receipts from Fujitsu. This contingent promissory note payable is for $1,683,000 plus simple interest at the annual rate of 11% from the agreement date ($93,000 at April 30, 2003) payable only from future receipts in a settlement or other favorable outcome of the litigation against Fujitsu, if any. Accordingly, in the first quarter of 2003, we reversed from accounts payable $1,583,000 that was accrued at July 31, 2002. This one-time reversal constituted income in the first quarter of 2003 and increased shareholders' interest. Impairment loss on investment in NTRU Cryptosystems, Inc. (NTRU) In April 2003, NTRU redeemed all outstanding shares of its Series A and Series B Preferred Stock (NTRU Preferred Stock) in exchange for cash or NTRU common stock. Competitive Technologies, Inc. is a minority investor in NTRU and currently owns 3,129,509 shares of NTRU common stock, including 76,509 shares received in April 2003 (approximately 10% of NTRU's outstanding common stock). At July 31 and October 31, 2002, CTT carried its investment in NTRU on the cost method at $1,034,000. CTT exchanged its NTRU Preferred Stock for $88,377 in cash (included in receivables at April 30, 2003; received May 5, 2003) and 76,509 shares of NTRU common stock. CTT recorded a charge of $944,000 in its second quarter ended January 31, 2003 due to the uncertain timing and amount of CTT's expected future cash flows from its investment in NTRU's common stock after its recapitalization. CTT continues to hold a seat and participate actively on NTRU's Board of Directors. CTT's management continues to believe NTRU's encryption technology has value and these actions provide NTRU an opportunity to allow applications to evolve to meet customer's needs for strong encryption, a small footprint and low processing requirements. Other Items in 2002 In the second quarter of 2002, CTT recorded an impairment loss of $519,200 against its notes receivable from E. L. Specialists, Inc. In the third quarter of 2002, CTT recorded a $50,000 impairment loss on its investment in Digital Ink, Inc. and recovery of $22,000 of advances to Micro-ASI, Inc. Interest income Interest income of $23,000 for the three quarters of 2003 was $63,000 (73%) lower than in the three quarters of 2002. Our average invested balance was approximately 52% lower and our weighted average interest rate was approximately 1.3% per annum compared with approximately 2.3% per annum in fiscal 2002. Financial Condition and Liquidity At April 30, 2003, the Company had no outstanding debt or available credit facility. On August 13, 2002, the District Court judge in the Materna(TM) case awarded the plaintiffs approximately $54 million plus certain interest from January 1, 2002, of which CTT's share would be approximately $6 million plus its proportionate share of interest. The defendant has appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC) and posted a $59 million bond and plaintiffs have responded. The CAFC heard oral arguments in this appeal in June 2003. We cannot predict when this lawsuit will finally be settled or when we will receive our share of damages finally awarded, if any. We have included details of progress and status in this case in Note 9 to the accompanying consolidated financial statements. Effective May 19, 2003, CTT sold to LawFinance Group, Inc. a portion of its potential $6 million from the patent infringement judgment against American Cyanamid Company in the MaternaTM lawsuit. CTT received $600,000 cash in exchange for the first $1,290,000 (plus court awarded interest from May 19, 2003) of CTT's share of the potential award. CTT has no financial obligation to repay LawFinance. If CTT's share of the potential award is less than the amount sold to LawFinance, the entire amount would be paid to LawFinance and LawFinance would be paid in full. CTT granted LawFinance a security interest in CTT's share of the potential award. CTT retains the remaining anticipated approximately $4,710,000 proceeds from this potential award in addition to the $600,000 already received. CTT will include this $600,000 in revenue in its fourth quarter of fiscal 2003. Since this transaction closed after April 30, 2003, it has not been reflected in the accompanying consolidated financial statements or the following discussion, which is as of April 30, 2003. At April 30, 2003, cash and cash equivalents of $434,000 were $316,000 lower than cash and cash equivalents of $750,000 at July 31, 2002. Operating activities used $1,572,000 and investing activities provided $1,256,000 in the three quarters of 2003. In addition, the Company held $1,103,000 in short-term investments at April 30, 2003 compared with $2,137,000 at July 31, 2002. These investments are available for our current operating, investing and financing needs. The Company's net loss for the three quarters of 2003 included noncash charges of $1,167,000 comprising $944,000 for the impairment loss on investment in NTRU Cryptosystems, Inc., $142,000 for depreciation and amortization and $81,000 for stock compensation. In addition, the reversal of accounts payable of $1,583,000 exchanged for a contingent note payable was a noncash credit. The most substantial changes in operating accounts were the $352,000 (30%) decrease in royalties receivable, the $1,450,000 (84%) decrease in accounts payable and the $343,000 (26%) decrease in royalties payable. At April 30, 2003, amounts related to LabCorp under the stipulated order discussed in the three quarters results above included $146,000 royalties receivable and $266,000 royalties payable. In addition to fluctuations in the amounts of royalties reported, the changes in royalties receivable and payable reflect the Company's normal cycle of royalty collections and payments. During the nine months ended April 30, 2003, the Company sold $1,034,000 of short-term investments to support its operating and investing activities. In November 2002, the Company purchased certain intangible assets for $50,000 cash. Effective August 5, 2002, CTT sold and transferred all its interests related to E. L. Specialists, Inc. to MRM Acquisitions, LLC for $200,000 cash it collected on August 5, 2002. At April 30, 2003, the Company's purchase commitments were less than $5,000. In October 2002, we retained an investment banker to advise and assist the Company in obtaining additional debt and/or equity funding. Under this retainer (which either party currently may terminate at any time), the Company committed to pay $10,000 per month plus out-of-pocket expenses for six months plus certain fees payable only if CTT completes a financing transaction. The investment banker is assisting the Company in offering notes, warrants or other Company securities in an offering exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated under the Securities Act. These securities will be sold only to "accredited investors" within the meaning of Rule 501 under the Securities Act. The Company will use the net proceeds of this offering for working capital and other general corporate purposes including funding CTT's technology commercialization strategy. There can be no assurance that this offering will be successful. At April 30, 2003, we had net working capital of $1,184,000, which was $43,000 more than at July 31, 2002. Our accounts payable at July 31, 2002, included $1,583,000 of invoices we reversed in October 2002, as discussed above under "Reversal of accounts payable exchanged for contingent note payable." In addition to seeking debt and/or equity funding and exchanging a portion of our share of the potential Materna award for $600,000 in cash (both discussed in detail above), we seek to increase our cash resources by obtaining up-front license fees in potential new licenses, by collecting additional amounts we believe are due to us and by selling future royalty streams from our portfolio. Although the CAFC heard oral arguments in the Materna appeal in June 2003, we cannot predict when we might receive our anticipated approximately $4,710,000 potential award (which is net of the $1,290,000 sold to LawFinance), if at all. While receipt of that award would satisfy our cash requirements and fund our current level of operations until we could generate revenues to sustain our operations, we cannot rely on it for our near-term cash requirements. If we do not obtain sufficient additional cash resources before early July 2003, management plans to reduce cash expenses sufficiently to sustain the Company until it obtains additional cash from revenues, potential litigation awards or other funding sources. Under this plan, the Company will implement certain cost reductions and cost containment actions to reduce operating costs. The Company would continue to focus sales and marketing resources to identify and license technologies with near-term revenue potential. However, royalty revenues, obtaining rights to new technologies, granting licenses, and enforcing intellectual property rights are subject to many factors outside our control or that we cannot currently anticipate. If our initial reductions are insufficient or if our sales and marketing efforts do not generate sufficient cash, management would make further necessary reductions. Although we cannot assure you that we will be successful in these efforts, management believes that its plan will sustain the Company through at least fiscal 2005. At April 30, 2003, CTT's shareholders' interest was $1,928,000. Under American Stock Exchange (AMEX) listing standards, if CTT sustains a net loss in 2003 and has less than $4,000,000 shareholders' interest at July 31, 2003, or if CTT has less than $2,000,000 shareholders' interest before July 31, 2003, the AMEX may consider suspending dealings in or de-listing CTT's common stock. With the $600,000 transaction on May 19, 2003, we believe we currently meet the $2,000,000 AMEX listing requirement. However, we cannot assure you that we will continue to meet AMEX listing requirements. Other Matters The Company carries liability insurance, directors' and officers' liability insurance and casualty insurance for owned or leased tangible assets. The Company is involved in three pending patent enforcement litigation matters. They are detailed in Note 9 to the accompanying consolidated financial statements. The lawsuit described under "Optical Associates, Limited Partnership (OALP)" in Note 16 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended July 31, 2002, was dismissed on May 16, 2003. Critical Accounting Policies Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses for the reporting period, and related disclosures. We base our estimates on the information available at the time and assumptions we believe are reasonable. We believe that significant estimates, assumptions and judgments affect the following critical accounting policies used in preparing our consolidated financial statements. Our audit committee has reviewed their selection, application and disclosure. Revenue Recognition We derive revenues primarily from patent and technology license and royalty fees. Since these revenues result from our representation agreements with owners and assignees of intellectual property rights, we record revenues net of the owners' and assignees' shares of license and royalty fees. We stipulate the terms of our licensing arrangements in written agreements with the owners, assignees and licensees. Single element arrangements Since we usually have no significant obligations after we execute license agreements, they are generally single element arrangements. Under the terms of our license agreements, we generally receive an upfront license fee and a royalty stream based on the licensee's sales of products applying the licensed technology. License fees under single element arrangements We recognize upfront, nonrefundable license fees when our licensee executes the license agreement and pays the license fee. When these two events occur, we have persuasive evidence of an arrangement, no continuing obligations, completed delivery, and assurance of collection. Royalty fees under single element arrangements Although we fix the royalty rate (e.g., percentage of sales or rate per unit sold) in the license agreement, the amount of earned royalties is contingent upon the amount of licensed product the licensee sells. Royalties earned in each reporting period are contingent on the outcome of events (i.e., the licensee's sales of licensed products) occurring within that period that are not within our control and are not directly tied to our providing services. Therefore, we recognize this royalty revenue when the contingency is resolved and we can estimate the amount of royalty fees earned, which is upon our receipt of the licensee's royalty report. Other arrangements In limited instances, we enter into multiple element arrangements with continuing service obligations. Based upon the limited verifiable objective evidence available, we generally defer all revenue from such multiple element arrangements until we deliver all elements. In limited instances, we enter into milestone billing arrangements, which we evaluate on a case-by-case basis. In these arrangements, we generally defer upfront fees and recognize the related revenue and other services revenue as earned over the entire arrangement. Impairment of Intangible Assets and Long-Term Investments We review intangible assets and investments in equity securities that do not have readily determinable fair values for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, we recognize an impairment loss measured by the amount the asset's carrying value exceeds its fair value and re- evaluate the remaining useful life of the asset. If a quoted market price is available for the asset or a similar asset, we use it in determining fair value. If not, we determine fair value as the present value of estimated cash flows based on reasonable and supportable assumptions. We regularly apply this policy to our equity investments in privately held companies. We consider the investee's financial health (including cash position), business outlook (including product stage and viability to continue operations), recent funding activities, and business plan (including historical and forecast financial information). These investments are not readily transferable and our opportunities to liquidate them are limited and subject to many factors beyond our control, including circumstances internal to the investee and broader economic conditions. We also apply this policy regularly to all acquired intangible assets. See Notes 3, 7 and 14 to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended July 31, 2002, for complete discussions of the results of applying this policy in prior fiscal years. See Note 6 to the accompanying consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q for complete discussions of the results of applying this policy in the current fiscal year. Impairment of Loans We review loans for impairment when events or changes in circumstances indicate that the carrying amount of the loan may not be recoverable. We determine the present value of expected future cash flows under the loan (discounted at the loan's effective interest rate) or the fair value of the collateral if the loan is collateral dependent. If the fair value of the loan is less than its carrying amount, we recognize an impairment loss based on the fair value of the loan. This policy is consistent with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan - an amendment of Statements No. 5 and 15." See Notes 3 and 14 to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended July 31, 2002, for discussion of the results of applying this policy in prior fiscal years. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (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's adoption of this statement on August 1, 2002, did not have a material effect on its financial condition or results of operations. 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 has recognized impairment charges on investments in fiscal 2002 and 2003. However, the Company's adoption of this statement on August 1, 2002, did not affect the amount or timing of those impairment charges. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative transition methods for a voluntary change to the fair value method of accounting for stock- based employee compensation. This statement also requires prominent disclosures in annual and interim financial statements about the method of accounting for stock-based employee compensation and its effect on reported results. The disclosure provisions of this statement are effective for the Company's third quarter ended April 30, 2003; the Company made these disclosures in Note 3 to the accompanying Consolidated Financial Statements. Forward-Looking Statements Statements about the Company's future expectations, including development and regulatory plans, and all other statements in this Quarterly Report on Form 10-Q 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 the Company's Annual Report on Form 10-K for the year ended July 31, 2002 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 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures The Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of April 30, 2003. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the Securities and Exchange Commission's rules and forms. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that these controls were effective as of April 30, 2003. (b) Change in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses in our internal controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in three pending litigation matters. They are fully detailed in Note 9 to the accompanying consolidated financial statements. The lawsuit formerly described under "Optical Associates, Limited Partnership (OALP)" was dismissed on May 16, 2003. By letters dated April 16, 2003, Richard E. Carver, George W. Dunbar, Jr., Charles J. Philippin, John M. Sabin, currently CTT directors, and Michael G. Bolton and Robert H. Brown, Jr., former CTT directors, each received a subpoena from the SEC seeking documents from July 1, 1998 to date in connection with the SEC's private investigation (detailed under Item 3 "Legal Proceedings" in our Annual Report on Form 10-K for the year ended July 31, 2002) and setting dates for each named director or former director to testify before officers of the SEC. All named directors and former directors have produced the subpoenaed documents and completed testimony before the SEC. The Company has assumed responsibility for these directors' and former directors' related legal fees in the matter, which were approximately $27,000 to April 30, 2003. As reported in the Company's Quarterly Report on Form 10-Q for the period ended January 31, 2003, by letter of January 6, 2003, George C. J. Bigar, a former director of CTT, also received a subpoena from the SEC seeking documents from July 1, 1998 to date in connection with the SEC's private investigation referenced above and setting a date for Mr. Bigar to testify before officers of the SEC. Mr. Bigar has produced the subpoenaed documents and completed his testimony before the SEC. The Company has assumed responsibility for Mr. Bigar's legal fees in this matter, which were approximately $24,000 to April 30, 2003. Item 6. Exhibits and Reports on Form 8-K Page A) Exhibits 10.1 Registrant's Annual Incentive Compensation Plan adopted March 28, 2003 34-37 99.1 Additional Exhibit - Certification by the Principal Executive Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 38 99.2 Additional Exhibit - Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 39 B) Reports on Form 8-K On February 21, 2003, the Company filed a report on Form 8- K (date of earliest event reported February 7, 2003) under Item 5 to report a potential substantial write-down of its investment in NTRU. On May 28, 2003, the Company filed a report on Form 8-K (date of earliest event reported May 19, 2003) under Item 2, Item 5 and Item 7 to report the sale to LawFinance Group, Inc. of a $1,290,000 (plus court awarded interest from May 19, 2003) portion of its potential $6 million patent infringement judgment against American Cyanamid Company in the Materna(TM) lawsuit for $600,000 cash. SIGNATURES Pursuant to the requirements 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. COMPETITIVE TECHNOLOGIES, INC. (the Company) (the Company) By /s/ John B. Nano By /s/ Frank R. McPike, Jr. John B. Nano Frank R. McPike, Jr. President, Chief Executive Executive Vice President, Officer and Authorized Signer Chief Financial Officer and Authorized Signer Date: June 11, 2003 CERTIFICATIONS I, John B. Nano, President and Chief Executive Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Competitive Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 11, 2003 /s/ John B. Nano John B. Nano, President and Chief Executive Officer Competitive Technologies, Inc. I, Frank R. McPike, Jr., Executive Vice President and Chief Financial Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Competitive Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 11, 2003 /s/ Frank R. McPike, Jr. Frank R. McPike, Jr. Executive Vice President and Chief Financial Officer of Competitive Technologies, Inc. EX-10.1 4 ex10-1.txt ANNUAL INCENTIVE COMPENSATION PLAN Exhibit 10.1 COMPETITIVE TECHNOLOGIES, INC. ANNUAL INCENTIVE COMPENSATION PLAN 1. DEFINITIONS Unless the context otherwise requires, the following words as used herein shall have the following meanings: (a) "Plan" - This Annual Incentive Compensation Plan, as amended from time to time. (b) "Company" - Competitive Technologies, Inc., a Delaware corporation, and its subsidiaries. (c) "Board" - The Board of Directors of the Company. (d) "Compensation Committee" - The Compensation Committee of the Board. (e) "Participant" - Employees of the Company who, in the opinion of the Compensation Committee, serve in key executive, administrative, professional or technical capacities with the Company. (f) "Plan Year" - Each fiscal year of the Company beginning after July 31, 2002. 2. PURPOSE The purpose of the Plan is to attract and keep in the employ of the Company personnel of experience and ability by providing additional incentive to those who contribute significantly to the successful and profitable operation of the business and affairs of the Company. To that end, the Plan provides an opportunity for such employees to participate in the successful results of such operations through participation in the Plan. 3. ADMINISTRATION (a) The Plan shall be administered by the Compensation Committee, composed of not less than two independent directors of the Company. No member of the Compensation Committee shall be eligible to participate in the Plan. (b) The Compensation Committee shall have the power to interpret the Plan and, subject to the provisions herein set forth, to prescribe, amend and rescind rules and regulations and make all other determinations necessary or desirable for the Plan's administration. (c) Changes to the Plan will be communicated to the affected employees by the CEO. 4. ELIGIBLE POSITIONS TO PARTICIPATE (a) From the positions eligible to participate in the Plan (and those positions to be added), the Company's Chief Executive Officer (the "CEO") shall annually make recommendations to the Compensation Committee for those positions that will participate in the Plan. (b) In the Compensation Committee's discretion when an employee shall have died during the Plan Year, the Annual Incentive Compensation Award, if any, granted to him or her for the Plan Year by the Compensation Committee shall be paid to his or her spouse or legal representatives, as may be directed by the Compensation Committee. 5. RANGE OF ANNUAL INCENTIVE COMPENSATION AWARDS (a) At the beginning of each Plan Year, the CEO will obtain from Participants goals and objectives for the Plan Year which relate to CTT's annual operating plan. Each Participant will prepare quantitative and qualitative objectives and review these with the CEO who will further review them with the Compensation Committee. Once goals and objectives are agreed upon, the Participants Annual Incentive Compensation award will be allocated with up to 70% of the award tied to Company financial performance metrics and up to 30% tied to individual performance. The CEO's performance metrics and results achieved will be reviewed and approved by the Compensation Committee. (b) Should the Company achieve below 80% of the Company's financial performance metrics, there may be no Annual Incentive Compensation Award for this portion, 70%, of the award. (c) Should the Company achieve above 115% of the Company's financial performance metrics, the Annual Incentive Compensation Award may increase to 150% of the Plan Year's Annual Incentive Compensation Award based on the recommendation of the CEO with approval of the Compensation Committee. (d) The 30% portion of a Participant's Annual Incentive Compensation Award that is directed to individual performance may be paid out regardless of whether the company achieves its financial performance metrics, so long as a Participant meets his or her individual performance goals. The award will be based on the recommendation of the CEO with approval of the Compensation Committee. (e) The following table outlines the targeted range of Annual Incentive Compensation Award as a percentage of the Participant's annual salary as of December 31st of Each Plan Year: Cash Bonus i) President and CEO 50% ii) Professional Staff 30% iii) Administrative Staff 10% (f) The CEO may make recommendations for special awards in addition to the bonus described above, outside the parameters described above and the Compensation Committee may make such awards in their sole discretion. 6. Integration with Commission Plan The Company also has a Commission Plan for Professional, Support Staff and consultants that sets aside a pool of funds up to 10% of new business revenue (less direct costs, other than personnel costs). This pool of funds shall be allocated among employees who participated in generating the new business by the lead professional staff responsible for the overall project. The allocation shall be subject to review and approval by the Company's Chief Executive Officer. The Commission earned on new business shall be paid for a maximum of five (5) years from the signing of the license agreement and shall be payable to the allocated pool of employees and consultants in their pro-rata share. Should the employee or consultant die while the commission is being paid, his or her pro rata share would be paid to his or her estate. Employees no longer with the Company may be able to receive the remaining portion of their award based on recommendations made by the CEO with approval by the Compensation Committee. Participants have the opportunity to earn the greater of the Commission or the Cash Bonus Incentive Compensation. 7. AWARD OF ANNUAL INCENTIVE COMPENSATION (a) As soon as practicable after the end of each Plan Year, but no later than three months after the end of the Plan Year, the CEO shall review the Company's annual results as well as the individual goals and objectives of each Participant, and shall recommend to the Compensation Committee the amount of award for each Participant. The CEO may recommend exclusion of extraordinary expenses or income from the annual results for Plan purposes with approval of the Compensation Committee. (b) The CEO's recommendations will be in accordance with the Plan. Upon receipt of the CEO's recommendations with respect to each Participant, the Compensation Committee shall review and determine the amount of the award for each Participant. The decision of the Compensation Committee shall be final and conclusive, and nothing in the Plan shall be deemed to give any Participant, his or her legal representatives or assigns, any rights over and above those specified in the Plan. 8. FORM OF INCENTIVE AWARD Incentive and commission awards shall be in the form of cash. 9. SETTLEMENT OF INCENTIVE AWARDS AND COMMISSIONS The Compensation Committee shall instruct the CEO to have the Annual Incentive Compensation Awards and Commissions paid promptly after approval, in no event later than 30 days after approval. 10. DEATH OF PARTICIPANT In case of death of a Participant before or after determination of an award, should the Compensation Committee make such award, it shall be paid to the Participant's spouse or legal representatives at the same time as other awards are paid out. 11. POWERS OF THE BOARD OF DIRECTORS The Board may suspend or terminate this Plan, in whole or in part, and may amend the Plan at any time or from time to time in such respects as the Board may deem advisable. EX-99.1 5 ex99-1.txt CERTIFICATION BY JOHN B. NANO EXHIBIT 99.1 CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, John B. Nano, am President and Chief Executive Officer of Competitive Technologies, Inc. (the Company). This certification is being furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2003 (the Report). I hereby certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. Date: June 6, 2003 /s/ John B. Nano John B. Nano President and Chief Executive Officer of Competitive Technologies, Inc. A signed original of this written statement required by Section 906 has been provided to Competitive Technologies, Inc. and will be retained by Competitive Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 6 ex99-2.txt CERTIFICATION BY FRANK R. MCPIKE, JR. EXHIBIT 99.2 CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, Frank R. McPike, Jr., am Executive Vice President and Chief Financial Officer of Competitive Technologies, Inc. (the Company). This certification is being furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2003 (the Report). I hereby certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. Date: June 11, 2003 /s/ Frank R. McPike, Jr. Frank R. McPike, Jr. Executive Vice President and Chief Financial Officer of Competitive Technologies, Inc. A signed original of this written statement required by Section 906 has been provided to Competitive Technologies, Inc. and will be retained by Competitive Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----