-----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, I90onrDQk+3nunqbrVRXbJZ1ySMhxuXvApZRprYsDBsSvlFG7IYBjzPdXN4qpz2T PdcYWplIJjopoE6qCTDLiA== 0000102198-03-000020.txt : 20031029 0000102198-03-000020.hdr.sgml : 20031029 20031029171938 ACCESSION NUMBER: 0000102198-03-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20031029 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 03964451 BUSINESS ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 BUSINESS PHONE: 2032556044 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-K 1 f10-k_03.txt FORM 10-K FOR YEAR ENDED JULY 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 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 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered Common Stock ($.01 par value) American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x]Yes [ ]No Exhibit Index on sequentially numbered page 69. Page 1 of 104 sequentially numbered pages. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ]Yes [x]No Based on the $2.33 closing price of the registrant's common stock on the American Stock Exchange on January 31, 2003 (the last business day of the registrant's most recently completed second fiscal quarter) the aggregate market value of the common equity held by non-affiliates of the registrant was approximately $13,900,000. As of October 15, 2003, 6,201,345 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Incorporated Document Location in Form 10-K Registrant's definitive proxy Part III - Items 10, statement if filed within 120 11, 12, 13 and 14 days after the end of the fiscal year covered by this Form 10-K PART I Item 1. Business Technology Commercialization Services Competitive Technologies, Inc. (the registrant, we, CTT or the Company), is a Delaware corporation incorporated in 1971 to succeed an Illinois business corporation incorporated in 1968. We provide technology transfer and licensing services focused on the technology needs of our customers and matching those requirements with commercially viable solutions. We identify, develop and commercialize innovative technologies in life, digital, nano and physical sciences developed by universities, companies, independent research institutions and individual inventors. We seek to maximize the value of intellectual property for the benefit of our customers, clients and shareholders by selling, licensing, or otherwise commercializing technologies from our clients' or our portfolio of intellectual property rights. We obtain customers' technology requirements and match them with effective technology solutions, bridging the gap between market demand and raw innovation. In a few cases, we are enforcing our clients' and our patent rights with respect to certain of our technologies. Our customers (licensees) pay license and royalty fees for licensed rights to use our clients' and our technologies. We also realize revenues from court awarded judgments and settlements of patent enforcement actions. We share these fees, judgments and settlements with our clients under our respective agreements with them. Our life science portfolio includes pharmaceuticals, biotechnologies, and medical devices. We include communications, semiconductors, Internet, e-commerce and consumer electronics technologies in our digital portfolio. Our physical science portfolio targets display, environmental and nano-technologies and smart/novel materials. On October 15, 2003, we employed 9 people (full-time equivalents). On June 30, 2003, the Company released its 2 full-time employees responsible for marketing technologies. Their responsibilities were reassigned to 4 consultants who also provided business development services under contracts with the Company during fiscal 2003. In addition to the diverse technical, intellectual property, legal, financial, marketing and business expertise of our professional team, we rely on advice from technical and professional specialists to satisfy our clients' unique technology needs. The technologies that produced revenues equal to or exceeding 15% of our consolidated revenue for 2003, 2002 or 2001 were: 2003 2002 2001 Ethyol(TM) $ 647,000 $ 391,000 $ 228,000 Materna(TM) $ 600,000 $ * * Homocysteine assay $ 584,000 $ * * Gallium arsenide, including laser diode $ 508,000 $1,012,000 $2,190,000 As a percentage of retained royalties, they represented: 2003 2002 2001 Ethyol 20% 15% * Materna 18% * * Homocysteine assay 18% * * Gallium arsenide, including laser diode 15% 39% 60% * Amounts were less than 15% of revenues in these years. Ethyol is a chemotherapeutic mitigation agent licensed by Southern Research Institute (SRI) exclusively to MedImmune, Inc. (formerly U.S. BioScience, Inc.). Pursuant to an agreement between CTT and SRI, SRI pays CTT a share of Ethyol license income it receives, which payments are limited to $500,000 maximum in any calendar year. According to information reported by MedImmune, U.S. patents for Ethyol expire between July 2012 and June 2019. Since October 2001, when MedImmune began selling Ethyol directly in the United States, the underlying royalty base has been higher than when it sold Ethyol through a distributor. Our retained royalties from Ethyol in fiscal 2003 exceeded $500,000 because fiscal 2003 included $500,000 for calendar 2003 and $147,000 for calendar 2002. Effective May 19, 2003, CTT sold to LawFinance Group, Inc. (LawFinance) the first $1,290,000 (plus court awarded interest from May 19, 2003) of its potential share from the judgment in the Materna lawsuit for $600,000 cash. CTT granted LawFinance a security interest in CTT's share of the potential award. At July 31, 2003, CTT retained the remaining anticipated approximately $4,710,000 proceeds from the potential award in addition to the $600,000 received from LawFinance (see Item 3. Legal Proceedings and Note 16 to Consolidated Financial Statements). The homocysteine assay is used to determine homocysteine levels and a corresponding deficiency of folate or vitamin B12. Studies suggest that high levels of homocysteine are a primary risk factor for cardiovascular, vascular and Alzheimer's diseases, and rheumatoid arthritis. Our U.S. patent that covers this homocysteine assay expires in 2007. In the second quarter of fiscal 2003, we licensed this assay to two additional clinical laboratories and LabCorp began paying us under the terms of a January 2003 Stipulated Order (see also Item 3. Legal Proceedings and Note 16 to Consolidated Financial Statements). Before that, we had ten homocysteine licenses (including one sublicense), which provided $171,000 and $203,000 of revenues in fiscal 2002 and 2001, respectively. Based on information we have obtained, we believe that the number of homocysteine assays performed is growing substantially. We continue our accelerated program to license laboratories performing homocysteine assays and manufacturers and distributors of automated homocysteine assays. We cannot predict if or when we will succeed in closing these additional license agreements or how the growth in volume will affect assay prices. Inventions employing gallium arsenide to improve semiconductor operating characteristics were developed at the University of Illinois. U.S. patents have issued from March 1983 to May 1989 and expire from May 2001 to September 2006. These patents include a laser diode technology used in optoelectronic storage devices and another technology that improves semiconductor operating characteristics. We have licensed these inventions to Mitsubishi Electric Corporation, NEC Corporation, Semiconductor Company, Matsushita Electric Industrial Co., Ltd., SDL, Inc., Hitachi Ltd., Tottori Sanyo Electric Co., Ltd. and Toshiba Corporation. These inventions are in current use according to information received from licensees and other sources. Approximately $156,000, $417,000 and $1,715,000 of retained royalties in fiscal 2003, 2002 and 2001, respectively, were from one U.S. licensee's sales of licensed product; the remaining $351,000, $595,000 and $475,000, respectively, were from several foreign licenses. Retained Royalties from Foreign Sources We are developing relationships with Asian companies seeking technology solutions. Currently, our foreign operations are principally royalties received from foreign licensees. See Note 13 to Consolidated Financial Statements. Investments From time to time in the past, in addition to providing other forms of assistance, we have funded certain development-stage companies to exploit specific technologies. In view of our financial condition, we discontinued that practice during the fourth quarter of fiscal 2002. NTRU Cryptosystems, Inc. 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). CTT exchanged its NTRU Preferred Stock for $90,741 in cash ($88,377 received in May 2003 and $2,364 received in September 2003), and 76,509 shares of NTRU common stock. CTT recorded in other expense a charge of approximately $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. 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 Company recorded an impairment loss in other expense on its loans to ELS of $781,924 in fiscal 2002 ($519,200 in the second quarter and $262,724 in the fourth quarter). (In addition, CTT previously charged against other revenues from ELS approximately $75,000 deemed uncollectible in fiscal 2002.) The transferred interests included CTT's notes receivable in the face amount of $1,056,300 (plus interest) from ELS, its related security interest in ELS's 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. Code of Ethics The Board of Directors adopted CTT's Corporate Standards of Conduct for all its directors, officers and employees in January 1999. A copy of it as amended to date is filed as Exhibit 14.1 to this Annual Report on Form 10-K. Available Information We make available without charge copies of Competitive Technologies, Inc.'s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports and any other of its reports filed with or furnished to the Securities and Exchange Commission (SEC) on or through our Company's website, www.competitivetech.net, as soon as reasonably practicable after their filing with the SEC. You may also request a paper copy of materials we file with the SEC by calling us at (203) 255-6044. You may also read and copy materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 or on the SEC's website, http://www.sec.gov. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. Risk Factors We cannot assure you that we will be successful in reducing cash expenses or increasing cash resources sufficiently to sustain the Company until it obtains additional cash from revenues, potential litigation awards or other funding sources. At July 31, 2003, the Company's cash, cash equivalents and short- term investments of $1,504,295 were $1,383,000 lower than at July 31, 2002. The table below summarizes our consolidated cash, cash equivalents and short-term investments and changes therein for the five years ended July 31, 2003:
2003 2002 2001 2000 1999 Net cash, cash equivalents and short-term investments $ 1,504,295 $ 2,887,295 $ 5,017,877 $6,716,429 $ 5,498,486 Net increase (decrease) in cash, cash equivalents and short-term investments $(1,383,000) $(2,130,582) $(1,698,552) $1,217,943 $ 2,897,200
The amounts and timing of the Company's future capital requirements will depend on many factors, including the results of the Materna, Fujitsu and LabCorp lawsuits (see Item 3, Legal Proceedings), the Company's marketing efforts, the pending SEC investigation (see Item 3, Legal Proceedings) and the Company's fund raising efforts. Management has taken certain steps to reduce ongoing cash operating expenses (including fourth quarter fiscal 2003 staff reductions), to defer payment of certain liabilities, to make payment of certain obligations contingent upon receipt of revenues, and to sell additional portions of its share of the potential Materna award. In addition to seeking debt and/or equity funding, we also seek to increase our cash resources by obtaining substantial 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. We cannot predict when we might receive our anticipated approximately $4,710,000 potential Materna award (which is net of the $1,290,000 sold to LawFinance). While receipt of that award would satisfy our cash requirements and fund our current level of operations until we believe we could generate revenues to sustain our operations, we cannot rely on it for our current cash requirements. If we do not obtain sufficient additional cash resources in the next several months, management plans additional cash expense reductions sufficient 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 further cost reductions and cost containment actions to reduce operating costs. 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 these reductions are insufficient or if our efforts do not generate sufficient cash, management would make further necessary reductions that could affect our ability to achieve our growth strategy. Although we cannot assure you that we will be successful in these efforts, management believes that its plan will sustain the Company at least into fiscal 2005. Our auditor's opinion with respect to our financial statements as of and for the year ended July 31, 2003 includes an explanatory paragraph with respect to our ability to continue operating as a going concern. See Item 8, Financial Statements and Supplementary Data, Report of BDO Seidman, LLP. We have generated relatively limited income and experienced operating and net losses in fiscal 2003, 2002, 2001 and prior to fiscal 1999. The table below summarizes our consolidated results of operations and cash flows for the five years ended July 31, 2003:
2003 2002 2001 2000 1999 Operating income (loss) $(1,017,973) $(3,278,885) $(2,232,361) $ 774,038 $ 421,533 Net income (loss) $(1,935,301) $(4,016,428) $(2,500,749) $1,300,937 $2,919,384 Net cash flow from: Operating activities $(1,604,910) $(1,666,360) $ (246,834) $ 458,295 $ 626,083 Investing activities $ 2,259,104 $ 2,192,345 $ (586,941) $ (993,362) $ (979,646) Financing activities $ -- $ -- $ (658,164) $1,342,928 $ (361,843) Net increase (decrease) in cash and cash equivalents $ 654,194 $ 525,985 $(1,491,939) $ 807,861 $ (715,406)
The Company has incurred substantial operating and net losses in the three years ending July 31, 2003. Net patent enforcement expenses principally related to the Fujitsu and LabCorp litigations were $425,790, $2,132,090 and $2,474,017 in fiscal 2003, 2002 and 2001, respectively. Effective July 23, 2002, the University of Illinois took the lead and assumed the cost of lead counsel in the litigation against Fujitsu (see Item 3, Legal Proceedings). Previously we had borne the entire cost of lead counsel in this litigation. This reduced our net patent enforcement expenses substantially in fiscal 2003. 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 was 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 $139,000 at July 31, 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 and recognized other operating income. Since interest is also contingently payable, the Company has recorded no interest expense with respect to this note. During fiscal 2003, the Company has focused its efforts and resources on increasing revenues to replace revenues from expiring licenses; however, these efforts and resources have not yet increased revenues sufficiently. In addition, the Company has incurred $494,000 cumulatively through July 31, 2003 for professional advice related to the ongoing SEC investigation (see Item 3, Legal Proceedings). To achieve profitability, the Company must successfully license technologies with current and long-term revenue streams substantially greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. The time required to reach profitability is highly uncertain and we cannot assure you that the Company will be able to achieve profitability on a sustained basis, if at all. In addition, our future revenues and profits or losses depend on certain factors beyond our control, including technological changes and developments, economic cycles or the ability of our licensees to successfully commercialize our technologies. Consequently, we may not be able to generate sufficient revenues to be profitable. We have received and responded to written "Wells Notices" dated June 12, 2003 from the staff of the Securities and Exchange Commission. However, until this matter is resolved, our ability to obtain debt or equity financing is restricted. On June 12, 2003, the staff of the Securities and Exchange Commission sent written "Wells Notices" indicating that the staff intended to recommend that the Commission bring a civil action against the Company and certain individuals (including the Company's then Chief Financial Officer, a director and a former director) in the matter of trading in the stock of the Company. The Company and the individuals have responded in writing to their respective "Wells Notices." The Company continues to cooperate with the Commission staff in this matter and awaits the staff's formal recommendation of what action, if any, should be brought against the Company by the Commission (see Item 3, Legal Proceedings). While this matter is pending, we have found our efforts to obtain debt or equity financing severely restricted and our operations and expenses negatively affected. Our By-Laws provide that we will indemnify our directors, officers, employees and agents in certain circumstances. We carry directors' and officers' liability insurance (subject to deductibles) to reduce these financial obligations. Our directors, officers, employees and agents may claim indemnification in certain circumstances. We are currently exposed to potential indemnification claims in connection with the SEC investigation and with complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 (see Note 16 to Consolidated Financial Statements). We seek to limit and reduce our potential financial obligations for indemnification by carrying directors' and officers' liability insurance (subject to deductibles). We received 71% of our retained royalties in fiscal 2003 from four technologies. In 2003, $2,339,000 (71%) of our 2003 revenues were from four technologies: $647,000 (20%) from Ethyol, $600,000 (18%) from our sale of the first $1,290,000 of CTT's share of the potential award in the Materna lawsuit, $584,000 (18%) from the homocysteine assay, and $508,000 (15%) from gallium arsenide semiconductors. Ethyol's royalty base is higher since October 2001 when the licensee began selling Ethyol (a chemotherapeutic mitigation agent) directly in the United States rather than through a distributor. Our retained royalties from Ethyol reached our $500,000 per calendar year maximum for calendar 2003 in fiscal 2003. In the future, we expect to receive and record our total $500,000 per calendar year Ethyol retained royalties in our third and fourth fiscal quarters. 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 (recognized in retained royalty settlement revenue) in exchange for the first $1,290,000 (plus court awarded interest thereon from May 19, 2003) of CTT's share of the potential award. CTT has no financial obligation to repay LawFinance or to return any portion of the $600,000 received from LawFinance; accordingly, CTT recorded this amount as revenue. If CTT's share of a final award is less than the amount sold to LawFinance, the entire amount received would be paid to LawFinance and LawFinance would be deemed paid in full. CTT granted LawFinance a security interest in CTT's share of the potential award. At July 31, 2003, CTT retains the remaining anticipated approximately $4,710,000 proceeds from this potential award in addition to the $600,000 already received. See Note 16 to Consolidated Financial Statements. The increase in homocysteine assay royalties includes amounts for assays performed in several quarters by LabCorp ($294,000 under a stipulated order in the LabCorp litigation) and other clinical laboratories ($132,000 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 of and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. See Note 16 to Consolidated Financial Statements. Our 2003 royalties from gallium arsenide semiconductors were lower than in 2002 due to expiring licenses and licensees' much lower sales. Such a concentration of revenues makes our operations vulnerable to changes in any one of them, particularly to one-time, nonrecurring transactions such as the sale of a portion of our share of the potential award in the Materna lawsuit. Certain of our licensed patents have recently expired or will expire in the near future and we may not be able to replace their royalty revenues. In fiscal 2003, we received royalties from licenses on thirty- three (33) patented technologies, excluding the $600,000 sale related to Materna. We expect royalties from nineteen (19) of those patented technologies to expire in the next five years. Those patented technologies represented approximately 44% of our revenue in fiscal 2003. Fiscal 2003 revenues of approximately $191,000 (6%), $359,000 (11%), and $891,000 (27%) were from patents expiring in fiscal 2003, 2004 and 2007, respectively. Loss of these royalties may adversely affect our operating results if we are unable to replace them with revenue from other licenses or other sources. We are currently involved in lawsuits that have historically involved significant legal expenses. If the courts in these suits decide against us, this could have a materially adverse effect on our business, results of operations and financial condition. For a complete description of these lawsuits, see Item 3. Legal Proceedings. The AMEX may de-list our common stock. At July 31, 2003, CTT's shareholders' interest was $1,169,000. Under American Stock Exchange (AMEX) listing standards, since CTT sustained a net loss in 2003 and has less than $4,000,000 shareholders' interest at July 31, 2003, the AMEX may suspend dealings in or de-list CTT's common stock. We cannot predict when we might receive our anticipated approximately $4,710,000 potential award from the Materna lawsuit (which is net of the $1,290,000 sold to LawFinance). Since all of this $4,710,000 potential award would be recorded as revenue upon its receipt, it would increase our shareholders' interest. Raising additional equity financing or generating net income would also increase CTT's shareholders' interest. We cannot assure you if or when we will again meet AMEX listing requirements. Our revenue growth depends on our ability to understand the technology requirements of our customers in the context of their markets. If we fail to understand their technology needs or markets, we limit our ability to meet those needs and to generate revenues. We believe that by focusing on the technology needs of our customers, we are better positioned to generate revenues by providing them technology solutions. In this way, our revenues are driven by the market demands of our customers. The better we understand their markets and requirements, the better we are able to identify and obtain effective technology solutions for our customers. Since we released our 2 full-time employees responsible for marketing technologies, we currently rely on our contract business development consultants to understand the technical, commercial and market demands, requirements and constraints of our customers and to identify and obtain effective technology solutions for them. Our success depends on our ability to attract and retain key personnel. Our success depends on the knowledge, efforts and abilities of a small number of key personnel. John B. Nano, President, Chief Executive Officer and Chief Financial Officer, is currently our sole Executive Officer. We rely on our professional staff and contract business development consultants to identify intellectual property opportunities and technology solutions and to negotiate and close license agreements. Competition for these personnel is intense and we cannot assure you that we will be able to attract and retain qualified personnel. If we were unable to hire and retain highly qualified professionals and consultants, our revenues, prospects, financial condition and future activities could be materially adversely affected. We depend on our relationships with inventors to gain access to new technologies and inventions. If we fail to maintain existing relationships or to develop new relationships, we may reduce the number of technologies and inventions available to generate revenues. We do not invent new technologies and products ourselves. We depend on relationships with universities, corporations, governmental agencies, research institutions, inventors, and others to provide us technology-based opportunities we can develop into profitable royalty- bearing licenses. Our failure to maintain our relationships with them or to develop new relationships could adversely affect our business, operating results and financial condition. If we are unable to forge new relationships or to maintain our current relationships, we may be unable to identify new technology-based opportunities. Further, we cannot be certain that our current or new relationships will provide the volume or quality of available new technologies necessary to sustain our business. In some cases, universities and other sources of new technologies seek to develop and commercialize these technologies themselves or through entities they develop, finance and/or control. In other cases, universities receive financing for basic research from companies in exchange for the exclusive right to commercialize resulting inventions. These and other strategies may reduce the number of technology sources (potential clients) to whom we can market our services. If we are unable to secure new sources of technology, this could have a material adverse effect on our business, operating results and financial condition. We receive most of our revenues from licensees over whom we have no control. We rely on royalties received from our licensees for revenues. The royalties we receive from our licensees depend on their efforts and expenditures and we have no control over their efforts or expenditures. Additionally, our licensees' development of new products involves great risk since many new technologies do not become commercially profitable products despite extensive development efforts. Our license agreements do not require licensees to advise us of problems they may encounter in attempting to develop commercial products and licensees usually treat such information as confidential. You should expect that licensees will encounter problems frequently. Our licensees' failure to resolve such problems may result in a material adverse effect on our operating results. Our licensees, and therefore we, depend on receiving government approvals to exploit certain licensed products commercially. Commercial exploitation of some licensed patents may require the approval of governmental regulatory agencies and there is no assurance that those agencies will grant such approvals. In the United States, the principal governmental agency involved is the U.S. Food and Drug Administration (FDA). The FDA's approval process is rigorous, time consuming and costly. Unless and until a licensee obtains approval for a product requiring such approval, the licensee may not sell the product in the U.S.A. and therefore we will not receive royalty income based on U.S. sales of the product. If our clients and we are unable to protect the intellectual property underlying our licenses or to enforce our patents adequately, we may be unable to exploit such licensed patents or technologies successfully. Our success in earning revenues from licenses is subject to the risk that issued patents may be declared invalid, that patents may not issue on patent applications, or that competitors may circumvent our licensed patents and thereby render our licensed patents uncommercial. In addition, when all patents underlying a license expire, our royalties from that license cease, and there can be no assurance that we will be able to replace those royalties with royalty revenues from other licenses. Patent litigation has increased; it can be expensive and may delay or prevent our licensees' products from entering the market. Our clients and/or we pursue patent infringement litigation or interference proceedings against sellers of products that we believe infringe our patent rights. See Item 3. Legal Proceedings. Holders of conflicting patents or sellers of competing products may also challenge our patents in patent infringement litigation or interference proceedings. We cannot assure you that our clients and/or we will be successful in any such litigation or proceeding, and the results and costs of such litigation or proceeding may materially adversely affect our business, operating results and financial condition. In the markets for our licensees' products, technology can change rapidly and industry standards are continually evolving. This often makes products obsolete or results in short product lifecycles. Our profitability depends on our licensees' ability to adapt to such changes. Therefore, our profitability will depend in large part on our clients', our licensees' and our abilities to: - introduce products in a timely manner; - maintain a pipeline of new technologies; - enhance and improve existing products continually; - maintain development capabilities; - anticipate or adapt to technological changes and advances in relevant industries; and - ensure continuing compatibility with evolving industry standards. Developing new products, creating effective commercialization strategies for technologies and enhancing those products and strategies are subject to inherent risks. These risks include unanticipated delays, unrecoverable expenses, technical problems or difficulties, as well as the possibility that development funds will be insufficient. Any one of these could make us abandon or substantially change our technology commercialization strategy. Our success will depend upon, among other things, products meeting targeted cost and performance objectives for large-scale production, our licensees' ability to adapt technologies to satisfy industry standards, satisfy consumer expectations and needs and bring their products to market before the market is saturated. They may encounter unanticipated technical or other problems that result in increased costs or substantial delays in introducing and marketing new products. Current and future products may not be reliable or durable under actual operating conditions or otherwise commercially viable and competitive. New products may not satisfy price or other performance objectives when introduced in the marketplace. Any of these events would adversely affect our realization of royalties from such new products. Strong competition within our industry may reduce our client base. We compete with universities, law firms, venture capital firms and other technology commercialization firms for technology licensing opportunities. Many organizations offer some aspect of technology transfer services. This market is highly fragmented and participants are frequently focused on a specific technology area. Some of our competitors are well established and have more financial and human resources than we do. We have not paid dividends and do not expect to pay dividends on our common stock in the foreseeable future. Since 1981, we have not paid cash dividends on our common stock and we do not expect to declare or pay cash dividends in the foreseeable future. Item 2. Properties Our principal executive office is approximately 9,000 square feet of leased space in an office building in Fairfield, Connecticut. The office lease expires December 31, 2006, and provides for annual base rent of $225,000. We have an option to renew the lease through December 31, 2011. We believe that our facilities are adequate for our current and near-term operations. Item 3. Legal Proceedings Fujitsu In December 2000, (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. On July 31, 2003, the judge in this case issued his Markman decision to determine the scope of and the interpretation of terms in the underlying patent claims. The Court has since stayed all issues in both the underlying case and the counterclaims except issues relating to summary judgment. At present, no trial is scheduled pending the outcome of summary judgment motions and possible appeal options. 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 (subsequently dismissed and reinstituted in the Northern District of California). 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 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, $560,000 attorneys' fees and $132,000 prejudgment interest. If the Court's judgment is upheld on appeal, CTT will retain approximately $1,100,000 of damages awarded plus post-judgment interest at the statutory rate. The U.S. Court of Appeals for the Federal Circuit is scheduled to hear oral arguments in this case in November 2003. 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, awarded attorneys' fees or awarded interest from the Court's November 2002 judgment. CTT will record these revenues, if any, when the awards are final and collectible. 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 $187,000). 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. For the year ended July 31, 2003, CTT recorded total royalties of $734,429 (revenues of $293,772 (of which $99,954 relate to assays performed from November 1, 2001 through October 31, 2002) and royalties paid or payable of $440,657) 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 (now 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 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. The defendant has posted a $59 million bond. On September 3, 2003, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) unanimously affirmed the August 13, 2002 judgment. The defendant has filed an appeal requesting a rehearing or a rehearing en banc (before the full bench). Based on the language of the September 3, 2003 judgment, CTT's management believes there is a reasonable possibility the Company will receive its share of damages finally awarded, approximately $4.7 million at July 31, 2003, plus its proportionate share of interest. CTT has recorded no potential judgment proceeds in its financial statements to date. CTT will record revenue for judgment proceeds when it receives them. Optical Associates, Limited Partnership (OALP) This lawsuit (described in detail in Note 16 to 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. SEC Investigation By letter of May 17, 2001, CTT received a subpoena from the Securities and Exchange Commission (SEC) seeking certain documents in connection with the SEC's private investigation captioned "In the Matter of Trading in the Securities of Competitive Technologies, Inc." On June 12, 2003, the staff of the Securities and Exchange Commission sent written "Wells Notices" to the Company, Frank R. McPike, Jr., (then the Company's Executive Vice President and Chief Financial Officer), Samuel M. Fodale (a director of the Company) and George C. J. Bigar (a former director of the Company). The "Wells Notices" indicated that the staff intended to recommend that the Commission bring a civil action against the Company and the individuals in the matter of trading in the stock of the Company, which the Company believes relates to the Company's stock repurchase program under which the Company repurchased shares of its stock from time to time during the period from October 28, 1998 to March 22, 2001. The Company, Mr. McPike, Mr. Fodale and Mr. Bigar have responded in writing to their respective "Wells Notices." The Company continues to cooperate with the Commission staff in this matter and awaits notice of the staff's formal recommendation of what action, if any, should be brought against the Company by the Commission. CTT has agreed, pursuant to Article IV of its By-laws, to advance to Mr. Fodale his expenses incurred in connection with this investigation, and Mr. Fodale has agreed to repay amounts so advanced if it is ultimately determined that he is not entitled to be indemnified by CTT as authorized by Article IV. As of July 31, 2003, the Company has advanced $58,000 and accrued an additional $40,000 for Mr. Fodale pursuant to this agreement. As of July 31, 2003, the Company has also paid $210,000 and accrued an additional $185,000 for the Company's, the Company's current directors' (excluding Mr. Fodale), Mr. McPike's, Mr. Bigar's and two other former directors' related legal fees in the matter, which were in the aggregate approximately $395,000 to July 31, 2003. Cumulative fees for current or former director (except Mr. Fodale) individually exceeded $60,000 at July 31, 2003. The Company may receive reimbursement of certain of these fees in excess of the deductible from its directors' and officers' liability insurance policy. The Company will record any reimbursements for these expenses when they are received. Other By letter dated October 7, 2003, the U.S. Department of Labor notified CTT that certain former employees had filed complaints alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A, also known as the Sarbanes-Oxley Act. The complainants request that the Occupational Safety and Health Administration (OSHA) investigate and, if appropriate, prosecute such violations and request OSHA assistance in obtaining fair and reasonable reimbursement and compensation for damages. The Company believes the claims are without merit and is preparing its response to the complaints. It cannot estimate the final outcome of these complaints or the related legal or other expenses it may incur. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market Price of and Dividends on the Company's Common Equity and Related Stockholder Matters (a) Market information. The Company's common stock is listed on the American Stock Exchange. The following table sets forth the high and low sales prices as reported by the American Stock Exchange for the periods indicated. Fiscal Year Ended July 31, 2003 High Low First Quarter $3.84 $1.82 Second Quarter 3.50 1.80 Third Quarter 2.40 1.76 Fourth Quarter 2.12 1.49 Fiscal Year Ended July 31, 2002 High Low First Quarter $6.25 $2.60 Second Quarter 4.45 2.30 Third Quarter 3.60 2.37 Fourth Quarter 3.00 1.82 (b) Holders. At October 15, 2003 there were approximately 700 holders of record of the Company's common stock. (c) Dividends. No cash dividends were declared on the Company's common stock during the last two fiscal years. (d) Securities authorized for issuance under equity compensation plans. The following table sets forth information about the Company's equity compensation plans as of July 31, 2003. Equity Compensation Plan Information (a) (b) (c) Number of securities remaining Number of available for securities to future issuance be issued under equity upon compensation exercise of Weighted-average plans outstanding exercise price of (excluding options, outstanding securities warrants and options, warrants reflected in Plan category rights and rights column (a)) Equity compensation plans approved by security holders 943,267 $ 5.08 590,331 Equity compensation plans not approved by security holders None Not applicable None COMPETITIVE TECHNOLOGIES, INC. Selected Financial Data (1) (5) For the years ended July 31 Item 6. Selected Financial Data
2003 2002 2001 2000 1999 Retained royalties $ 2,692,933 $ 2,570,931 $ 3,637,764 $ 3,202,194 $ 3,463,176 Retained royalty settlement (2) 600,000 -- -- 736,375 -- Other revenues -- 25,000 3,520 174,298 176,148 Total revenues $ 3,292,933 $ 2,595,931 $ 3,641,284 $ 4,112,867 $ 3,639,324 Operating income (loss) (2)(3) $(1,017,973) $(3,278,885) $(2,232,361) $ 774,038 $ 421,533 Net income (loss) (4) $(1,935,301) $(4,016,428) $(2,500,749) $ 1,300,937 $ 2,919,384 Net income (loss) per share: basic and diluted $ (0.31) (0.65) $ (0.41) $ 0.21 $ 0.49 Weighted average number of common shares outstanding: Basic 6,182,657 6,148,022 6,135,486 6,079,211 5,982,112 Diluted 6,182,657 6,148,022 6,135,486 6,187,407 6,009,701 At year end: Cash, cash equivalents and short-term investments $ 1,504,295 $ 2,887,295 $ 5,017,877 $ 6,716,429 $ 5,498,486 Total assets $ 2,952,501 $ 6,399,783 $10,640,873 $12,093,965 $ 8,959,021 Long-term obligations $ -- $ -- $ -- $ -- $ -- Shareholders' interest $ 1,169,427 $ 2,992,643 $ 6,967,746 $ 9,928,112 $ 7,180,286
(1) Should be read in conjunction with Consolidated Financial Statements and Notes thereto. (2) Fiscal 2003 includes $600,000 exchanged for the first $1,290,000 of CTT's share of the potential award in the Materna lawsuit (see Note 16 to Consolidated Financial Statements) and reversal of approximately $1,583,000 that was charged to patent enforcement expense in fiscal 2002 (see Note 16 to Consolidated Financial Statements). Fiscal 2000 includes $736,375 for royalty participation exchanged for NTRU common stock (see Note 3 to Consolidated Financial Statements). (3) In fiscal 2003, includes $341,000 of corporate legal expenses directly related to the SEC investigation (See Item 3, Legal Proceedings). (4) Includes approximately $944,000 impairment loss on investment in NTRU Cryptosystems, Inc. in fiscal 2003 (see Note 3 to Consolidated Financial Statements), $781,924 loan impairment loss on E. L. Specialists, Inc. in 2002, $600,000 investment and loan impairment loss on Micro-ASI, Inc. in 2001 and $2,313,227 gain on sale of investment in NovaNET Learning, Inc. in 1999. (5) No cash dividends were declared or paid in any year presented. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations We have rounded all amounts in this Item 7 to the nearest thousand dollars. In addition, all periods discussed in this Item 7 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 - 2003 vs. 2002 Financial Results Our net loss for 2003 was $1,935,000 compared with $4,016,000 for 2002, an improvement of $2,081,000. Our operating results improved $2,261,000 from a loss of $3,279,000 for 2002 to $1,018,000 for 2003 as discussed below. Revenues Our total revenues for 2003 were $3,293,000, which was $697,000 (27%) higher than in 2002. Retained royalty settlement revenues of $600,000 in 2003 were from the sale of $1,290,000 of our potential award in the Materna lawsuit discussed below. Excluding this $600,000, revenues increased 4% over 2002. In 2003, $2,339,000 (71%) of our revenues were from four technologies: $647,000 (20%) from Ethyol(TM), $600,000 (18%) from the sale discussed above, $584,000 (18%) from the homocysteine assay, and $508,000 (15%) from gallium arsenide semiconductors. 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. Our retained royalties from Ethyol reached our $500,000 per calendar year maximum for calendar 2003 in fiscal 2003. In the future, we expect to receive and record our total $500,000 per calendar year Ethyol retained royalties in our third and fourth fiscal quarters. 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(TM) lawsuit. CTT received $600,000 cash (recognized in retained royalty settlement revenue) in exchange for the first $1,290,000 (plus court awarded interest thereon from May 19, 2003) of CTT's share of the potential award. CTT has no financial obligation to repay LawFinance or to return any portion of the $600,000 received from LawFinance; accordingly, CTT recorded this amount as revenue. If CTT's share of a final award is less than the amount sold to LawFinance, the entire amount received would be paid to LawFinance and LawFinance would be deemed paid in full. CTT granted LawFinance a security interest in CTT's share of the potential award. At July 31, 2003, CTT retains the remaining anticipated approximately $4,710,000 proceeds from this potential award in addition to the $600,000 already received. The increase in homocysteine assay royalties includes amounts for assays performed in several quarters by LabCorp ($294,000 under a stipulated order in the LabCorp litigation) and other clinical laboratories ($132,000 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 of and reason for the reversal. CTT's management believes the probability that LabCorp will recover such amounts is very unlikely. See Note 16 to Consolidated Financial Statements. 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 last vitamin B12 patent expired in November 2002. As a result, our 2003 revenues (which include final royalty payments under these licenses) declined $149,000 from our 2002 royalties. Our 2003 royalties from gallium arsenide semiconductors were lower than in 2002 due to expiring licenses and licensees' much lower sales. Operating expenses Patent enforcement expenses, net of reimbursements, in 2003 were $426,000, which was $1,706,000 (80%) lower than in 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 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 16 to Consolidated Financial Statements. Personnel and other direct expenses relating to revenue were $3,418,000 for 2003, which was $1,176,000 (52%) higher than in 2002. A reduction of $118,000 in recruiting expense partially offset increases of $774,000 in expenses for salaries and benefits and for consultants we engaged to assist us in developing specific revenue opportunities and strategic alliances and relationships. In 2003 we had approximately 16 full-time equivalents compared with approximately 13 in 2002. In the fourth quarter of 2003, we recorded $482,000 of impairment charges related to intangible assets principally due to the uncertainty of future revenues from the ribozyme technology. In the fourth quarter of 2002, we recorded $156,000 of impairment charges related to intangible assets. General and administrative expenses for 2003 were $2,051,000, which was $549,000 (37%) higher than in 2002. Expenses that increased were corporate legal expenses directly related to the SEC investigation (increased $252,000) (see Note 16 to Consolidated Financial Statements), financing (increased $192,000) and investor relations (increased $107,000). We had expected to charge $196,000 of financing costs incurred since October 2002 against the proceeds of a debt or equity financing in 2003. We expensed them in the fourth quarter of 2003 since the placement memorandum was no longer current and we have not yet obtained funding. 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 ($139,000 at July 31, 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 other operating income in the first quarter of 2003 and increased shareholders' interest. Other expense 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). CTT exchanged its NTRU Preferred Stock for $90,741 in cash ($88,377 received in May 2003 and $2,364 received in September 2003), and 76,509 shares of NTRU common stock. CTT recorded other expense 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. Interest income of $27,000 for 2003 was $71,000 (73%) lower than in 2002. Our average invested balance was approximately 49% lower and our weighted average interest rate was approximately 1.2% per annum compared with approximately 2.2% per annum in 2002. The Company has substantial net operating and capital loss carryforwards for Federal income tax purposes. See Note 9 to Consolidated Financial Statements. Results of Operations - 2002 vs. 2001 Our total revenues for fiscal 2002 were $2,596,000, which was $1,045,000 (29%) lower than for fiscal 2001. For fiscal 2002, retained royalties were $2,571,000, which was $1,067,000 (29%) lower than for fiscal 2001. In fiscal 2002, approximately $1,838,000 (71%) of our retained royalties were from four technologies: $1,012,000 (39%) from gallium arsenide patents (including a laser diode technology used in optoelectronic storage devices and another technology that improves semiconductor operating characteristics); $391,000 (15%) from Ethyol (a chemotherapeutic mitigation agent); $264,000 (10%) from the vitamin B12 assay; and $171,000 (7%) from the homocysteine assay. Retained royalties from the gallium arsenide semiconductor inventions (which include laser diode applications) for fiscal 20 02 were approximately $1,012,000 compared with approximately $2,190,000 for fiscal 2001, a decline of approximately $1, 178,000 (54%). This reflects lower telecom industry sales partially offset by higher DVD product sales. Most of our royalties from these inventions are reported semi-annually in the second and fourth fiscal quarters. Retained royalties were also lower because a licensee (which had previously been paying $100,000 minimum pre-market annual retained royalties in prior fiscal years) terminated its license and therefore paid no minimum in fiscal 2002. Also lower were retained royalties from homocysteine and expiring vitamin B12 assay patents (our last vitamin B12 assay patent expired in November 2002). A homocysteine licensee that had been paying certain royalties in fiscal 2001 began withholding those royalties in fiscal 2002, taking a position similar to LabCorp's position. Retained royalty increases from other technologies partially offset these reductions. Royalties from Ethyol in fiscal 2002 increased approximately $163,000 (71%) over fiscal 2001. Other increases included higher minimum royalties on licenses of our sunless tanning technology and a treatment for sexual dysfunction, one-time royalties from a Retin-A(TM) royalty audit and earned royalties from a new license in 2002. Licensees of our endoscopic ligator have withheld royalties since the third quarter of fiscal 2000. (Our retained royalties from the endoscopic ligator were approximately $138,000 for fiscal 2000.) We believe we are entitled to all withheld and future royalties for use of our patented technology. However, we cannot predict when, if ever, licensees will resume remitting royalties for this technology. 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 second and fourth fiscal quarters have been higher than in its first and third fiscal quarters. In fiscal 2002 we employed 13 people (full-time equivalents) compared with 11 in fiscal 2001. We increased our professional staff and reduced consultants compared with fiscal 2001. Recruiting expenses in fiscal 2002 (to search for a new President and Chief Executive Officer) were higher than those for professional staff hired in fiscal 2001. Corporate legal expenses were higher due in part to legal expenses related to an SEC investigation, (see Note 16 to Consolidated Financial Statements) and increased legal services related to certain contractual matters with a client. Patent enforcement expenses, net of reimbursements, in fiscal 2002 were $2,132,000, which was $342,000 (14%) lower than in fiscal 2001. Patent enforcement expenses were principally for outside litigation counsels' services in the three patent litigations (Fujitsu, LabCorp and Materna, two of which were active in fiscal 2002) in which our clients and/or we have sued to enforce their and our patent rights. The level of activity in these two cases was lower in fiscal 2002 than in fiscal 2001. In fiscal 2002 we paid a client $201,000 as reimbursement of certain of our previously deducted patent enforcement expenses. We included this charge in patent enforcement expenses in fiscal 2002. If and when the related enforcement action is settled, we are entitled to reimbursement of these and additional litigation expenses we have then incurred from any recovery we receive as a result of the litigation and from subsequent income from the related patents. Personnel and other direct expenses relating to revenue were $2,241,000 for 2002, which was $398,000 (22%) higher than in 2001. This increase principally reflects increased costs for salaries and recruiting expenses. It also includes approximately $156,000 of intangible asset impairment charges in fiscal 2002 (see Note 7 to Consolidated Financial Statements). General and administrative expenses for 2002 were $1,501,000, which was $55,000 (4%) lower than in 2001. Reductions in acquisition costs, audit and tax fees, directors' fees and expenses and depreciation were partially offset by increases in legal expenses directly related to the SEC investigation (see Note 16 to Consolidated Financial Statements). Other expense, net Effective August 5, 2002, CTT sold and transferred all its interests related to E. L. Specialists, Inc. to MRM Acquisition s, LLC for $200,000 cash. As a result of this transaction, CTT wrote down its $1,056,300 notes receivable from ELS to their fair value of $200,000, which it collected on August 5, 2002. In fiscal 2002 , CTT incurred a total $782,000 impairment loss on loans to ELS ($519,000 and $263,000 in the second and fourth quarters, respectively) and charged against other revenues approximately $75,000 deemed uncollectible (see Note 3 to Consolidated Financial Statements). Because of Digital Ink, Inc.'s (DII) inability to arrange financial support to continue its operations, CTT recorded an impairment loss of $50,000 in other expense to write off 100% of our equity investment in DII in the third quarter of fiscal 2002. In fiscal 1999 and 2000, CTT provided patenting, marketing and accounting services in exchange for its $50,000 equity in DII. In the third quarter of fiscal 2002, CTT recorded a recovery of $22,000 of its secured bridge financing advances to Micro-ASI, Inc. At July 31, 2001, CTT reduced its carrying value for all its investments and advances to Micro-ASI to zero because of Micro- ASI's bankruptcy filing in August 2001. We are unable to predict the timing or amount of CTT's potential future recoveries of our advances to Micro-ASI, if any (see Note 3 to Consolidated Financial Statements). Interest income of $97,000 for fiscal 2002 was $303,000 (76%) lower than in fiscal 2001. Our average invested balance was approximately 37% lower and our weighted average interest rate was approximately 2.2% per annum compared with approximately 5.6% per annum in fiscal 2001. Other expenses in fiscal 2001 were legal expenses incurred in connection with a suit brought against CTT, some of its subsidiaries and directors. See Optical Associates, Limited Partnership (OALP) in Item 3. Legal Proceedings. Financial Condition and Liquidity At July 31, 2003, the Company had no outstanding debt or available credit facility. Effective October 17, 2003, CTT agreed with Unilens Corp. USA and Unilens Vision Inc. (Unilens) to settle all prior claims, to terminate all prior agreements between them and for Unilens to pay CTT an aggregate of $1,250,000 in quarterly installments of the greater of $100,000 or an amount equal to 50% of the royalties received by Unilens from one licensee. Unilens paid the first $100,000 installment on October 17, 2003. Installments are due each March 31, June 30, September 30 and December 31 beginning December 31, 2003. Unilens granted CTT a security interest in all Unilens real and personal property that is subordinate to a security interest held by UNIINVEST Holding AG in respect of $450,000 plus interest owed by Unilens to UNIINVEST Holding AG. Before this agreement, Unilens owed $4,712,000 (previously written off due to uncertainties relating to its collection) remaining from an original installment obligation of $5,500,000 to CTT under previous agreements made in connection with the Company's January 1989 sale of substantially all the assets of University Optical Products Co. (UOP) to Unilens Corp. USA. Due to Unilens' financial condition and the uncertainty of its payments on this obligation, the Company will record revenue from continuing operations when payments (all of which are in excess of the fair value assigned to the original obligations) are received. The Company will also record certain related contingent expenses when incurred. On August 13, 2002, the District Court judge in the Materna lawsuit awarded the plaintiffs approximately $54 million plus certain interest from January 1, 2002. The defendant has posted a $59 million bond. On September 3, 2003, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) unanimously affirmed the August 13, 2002 judgment. The defendant has filed an appeal requesting a rehearing or a rehearing en banc (before the full bench). Based on the language of the September 3, 2003 judgment, management believes there is a reasonable possibility CTT will receive its share of damages finally awarded, approximately $4.7 million at July 31, 2003, plus its proportionate share of interest. However, we cannot predict when these will occur. We have recorded no potential judgment proceeds in CTT's financial statements to date. CTT will record revenue for judgment proceeds when it receives them. We have included details of progress and status in this case in Note 16 to Consolidated Financial Statements. At July 31, 2003, cash, cash equivalents and short-term investments of $1,504,000 were $1,383,000 lower than cash, cash equivalents and short-term investments of $2,887,000 at July 31, 2002. During 2003, the Company sold $2,037,000 of short-term investments, while cash and cash equivalents increased $654,000 to $1,405,000. Operating activities used $1,605,000 of cash during 2003, primarily as a result of the net loss, partially offset by collection of $242,000 of accounts receivable. Investing activities provided $2,259,000 of cash primarily from sales of short-term investments described above, sales of the Company's interests in E. L. Specialists, Inc. and NTRU Cryptosystems, Inc. preferred stock, partially offset by purchases of intangible assets and equipment. At July 31, 2003, cash, cash equivalents and short- term investments of $1,504,000 were available to support our current operating needs. The Company's net loss for 2003 included noncash charges of $1,737,000 comprising $944,000 for the impairment loss on our investment in NTRU Cryptosystems, Inc., $188,000 for depreciation and amortization, $123,000 for stock compensation and $482,000 for impairment of intangible assets. In addition, the reversal of accounts payable of $1,583,000 exchanged for a contingent note payable was a noncash credit. At July 31, 2003, the Company's commitments were: Payments Due by Period Less More At July 31, 2003 than 1-3 3-5 than 5 Contractual Obligations Total 1 year years years years Operating lease obligations $809,000 $245,000 $470,000 $ 94,000 $ -- Other obligations 10,000 10,000 -- -- -- $819,000 $245,000 $470,000 $ 94,000 $ -- The Company's other commitments are either contingent upon a future event or terminable on less than thirty days' notice (see Note 16 to Consolidated Financial Statements). Our directors, officers, employees and agents may claim indemnification in certain circumstances. We are currently exposed to potential indemnification claims in connection with the SEC investigation and with complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 (see Note 16 to Consolidated Financial Statements). We seek to limit and reduce our potential financial obligations for indemnification by carrying directors' and officers' liability insurance (subject to deductibles). The Company has several agreements with third parties to assist it in licensing specific technologies or to audit licensees' royalty reports. Under these agreements, the third parties are compensated only from the new revenues generated by their efforts. Under the terms of one of the Company's agreements (which the Company may terminate on ninety days' written notice), it has committed to pay minimum annual license fees of $10,000 on each January 1, beginning January 1, 2004. In addition, the Company has agreed to reimburse patent expenses of $26,000 as of July 31, 2003 from future royalty receipts before retaining any revenue. Under another agreement, the Company has agreed to pay $25,000 per technology portfolio when a candidate transferee demonstrates firm interest in two technology portfolios. CTT and Vector Vision, Inc. (VVI), a CTT consolidated subsidiary, 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 2003 and 2002, respectively, CTT charged $563 and $3,018 in related royalty expenses to operations. CTT's and VVI's remaining contingent obligations were $199,569 and $224,127, respectively, at July 31, 2003 and $200,128 and $224,127, respectively, at July 31, 2002. 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 as extended July 10, 2003, (which either party currently may terminate at any time), the Company committed to pay $10,000 per month plus out-of-pocket expenses through January 10, 2004 plus certain fees payable only if CTT completes a financing transaction. We expensed $196,000 of financing costs incurred since October 2002 in the fourth quarter of 2003 and will expense such costs in the future. The Company will use the net proceeds of any completed financing transaction for working capital and other general corporate purposes including funding CTT's technology commercialization strategy. We cannot assure you that a financing transaction will be completed. At July 31, 2003, we had net working capital of $954,000, which was $187,000 less 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." The Company has incurred substantial operating and net losses in the three years ending July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations have been substantial. During fiscal 2003, the Company has focused its efforts and resources on increasing revenues to replace revenues from expiring licenses; however, these efforts and resources have not yet increased revenues sufficiently. In addition, the Company has incurred $494,000 cumulatively through July 31, 2003 for professional advice related to the ongoing SEC investigation (see Note 16 to Consolidated Financial Statements). The amounts and timing of the Company's future capital requirements will depend on many factors, including the results of the Materna, Fujitsu and LabCorp lawsuits, the Company's marketing efforts, the pending SEC investigation and the Company's fund raising efforts. To achieve profitability, the Company must successfully license technologies with current and long-term revenue streams substantially greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. The time required to reach profitability is highly uncertain and we cannot assure you that the Company will be able to achieve profitability on a sustained basis, if at all. Management has taken certain steps to reduce future cash operating expenses (including fourth quarter fiscal 2003 staff reductions), to defer payment of certain liabilities, to make payment of certain obligations contingent upon receipt of revenues, and to sell additional portions of its share of the potential Materna award. In addition to seeking debt and/or equity funding, we also seek to increase our cash resources by obtaining substantial 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. 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). While receipt of that award would satisfy our cash requirements and fund our current level of operations until we believe we could generate revenues to sustain our operations, we cannot rely on it for our current cash requirements. If we do not obtain sufficient additional cash resources in the next several months, management plans additional cash expense reductions sufficient 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 further cost reductions and cost containment actions to reduce operating costs. 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 these reductions are insufficient or if our efforts do not generate sufficient cash, management would make further necessary reductions that could affect our ability to achieve our growth strategy. Although we cannot assure you that we will be successful in these efforts, management believes that its plan will sustain the Company at least into fiscal 2005. If the Company is unsuccessful at its plans to raise funding as described above, it is unlikely we will continue as a going concern. Accordingly, our auditor's opinion with respect to our financial statements as of and for the year ended July 31, 2003 includes an explanatory paragraph with respect to our ability to continue as a going concern. At July 31, 2003, CTT's shareholders' interest was $1,169,000. Under American Stock Exchange (AMEX) listing standards, if CTT has less than $4,000,000 shareholders' interest at July 31, 2003, the AMEX may consider suspending dealings in or de-listing CTT's common stock. We cannot assure you if or when we will again meet AMEX listing requirements. The most substantial changes in operating accounts were the $1,225,000 (71%) decrease in accounts payable, the $454,000 (35%) decrease in royalties payable and the $253,000 (22%) decrease in royalties receivable. At July 31, 2003, amounts related to LabCorp's $250,000 (under the stipulated order discussed in the 2003 results above) included $83,000 royalties receivable and $62,000 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. 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. In addition, the SEC is investigating "In the Matter of Trading in the Securities of Competitive Technologies, Inc." and the Company has been notified of complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002. All are detailed in Note 16 to 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. We evaluate billing arrangements on a case-by-case basis. Generally we recognize upfront fees ratably over the entire arrangement and milestone payments as it achieves milestones. 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 to all acquired intangible assets. 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." 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 2003 and 2002. However, the Company's adoption of this statement on August 1, 2002 did not affect the amount or timing of those impairment charges. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. The Company's adoption of this statement did not have a material effect on its financial condition or results of operations. 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 were effective for the Company's third quarter ended April 30, 2003; the Company made these disclosures in Note 2 to Consolidated Financial Statements. Related Party Transactions CTT incurred charges for consulting services (including expenses and use taxes) provided by one director in fiscal 2003 and two directors in fiscal 2002 and 2001. In the past, the Company's board of directors determined that when a director's services were outside the normal duties of a director, the Company should compensate the director at the rate of $1,000 per day plus expenses (which is the same amount it pays a director for attending a one-day Board meeting). The Company has discontinued this practice. CTT classified these amounts as consulting expenses. Related party consulting services were as follows: For the years ended July 31, 2003 2002 2001 George C. J. Bigar $ -- $117,000 $118,000 All directors $ 6,000 $124,000 $146,000 George C. J. Bigar's consulting services (which were discontinued in June 2002) related to the Company's investments and potential investments in development-stage companies. The Company compensated Mr. Bigar at the rate of $8,000 per month except for three months, which were at $12,000. See also Note 17 to Consolidated Financial Statements. Forward-Looking Statements Statements about our future expectations, including development and regulatory plans, and all other statements in this Annual Report on Form 10-K other than historical facts, are "forward-looking statements" within the meaning of applicable Federal Securities Laws and are not guarantees of future performance. When used in this Form 10-K, the words "anticipate," "believe," "intend," "plan," "expect" and similar expressions as they relate to us or our business or management are intended to identify such forward-looking statements. These statements involve risks and uncertainties related to market acceptance of and competition for our licensed technologies and other risks and uncertainties inherent in our business, including those set forth in Item 1 of this Annual Report on Form 10-K for the year ended July 31, 2003 under the caption "Risk Factors," and other factors that may be described in our other filings with the Securities and Exchange Commission, and are subject to change at any time. Our actual results could differ materially from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data Page Reports of Independent Accountants and Auditors 36-37 Consolidated Balance Sheets 38 Consolidated Statements of Operations 39 Consolidated Statements of Changes in Shareholders' Interest 40 Consolidated Statements of Cash Flows 41-42 Notes to Consolidated Financial Statements 43-66 Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Competitive Technologies, Inc. Fairfield, Connecticut We have audited the accompanying consolidated balance sheet of Competitive Technologies, Inc. and Subsidiaries as of July 31, 2003 and the related consolidated statements of operations, changes in shareholders' interest and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Competitive Technologies, Inc. and Subsidiaries as of July 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and negative cash flow from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP BDO Seidman, LLP Valhalla, New York October 10, 2003, except for Note 18, for which the date is October 27, 2003 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Competitive Technologies, Inc.: In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Competitive Technologies, Inc. and its Subsidiaries (the "Company") at July 31, 2002 and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2002 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 28, 2002 COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 2003 and 2002 2003 2002 ASSETS Current assets: Cash and cash equivalents $ 1,404,615 $ 750,421 Short-term investments 99,680 2,136,874 Accounts receivable 957,275 1,199,483 Notes receivable - E. L. Specialists, Inc. -- 200,000 Prepaid expenses and other current assets 275,019 261,198 Total current assets 2,736,589 4,547,976 Property and equipment, at cost, net 29,834 42,877 Investments, at cost 43,356 1,075,684 Intangible assets acquired, net 142,722 733,246 TOTAL ASSETS $ 2,952,501 $ 6,399,783 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable $ 501,655 $ 1,726,237 Accrued liabilities 1,281,419 1,680,903 Total current liabilities 1,783,074 3,407,140 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; 6,201,345 and 6,190,785 shares issued in 2003 and 2002, respectively, and 6,201,345 and 6,154,351 shares outstanding in 2003 and 2002, respectively 62,013 61,907 Capital in excess of par value 26,747,229 26,893,287 Treasury stock, at cost; 36,434 shares in 2002 -- (258,037) Accumulated deficit (25,700,490) (23,765,189) Total shareholders' interest 1,169,427 2,992,643 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 2,952,501 $ 6,399,783 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended July 31, 2003, 2002 and 2001 2003 2002 2001 Revenues: Retained royalties $ 2,692,933 $ 2,570,931 $ 3,637,764 Retained royalty settlement 600,000 -- -- Other revenues -- 25,000 3,520 3,292,933 2,595,931 3,641,284 Patent enforcement expenses, net of reimbursements 425,790 2,132,090 2,474,017 Personnel and other direct expenses relating to revenue, of which $6,122, $124,073 and $145,673 were to related parties in 2003, 2002 and 2001, respectively 3,417,909 2,241,439 1,842,998 General and administrative expenses 2,050,652 1,501,287 1,556,630 Reversal of accounts payable exchanged for contingent note payable (1,583,445) -- -- 4,310,906 5,874,816 5,873,645 Operating loss (1,017,973) (3,278,885) (2,232,361) Other expense, net (917,328) (737,543) (268,388) Net loss $(1,935,301) $(4,016,428) $(2,500,749) Net loss per share: Basic and diluted $ (0.31) $ (0.65) $ (0.41) Weighted average number of common shares outstanding: Basic and diluted 6,182,657 6,148,022 6,135,486 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Interest For the years ended July 31, 2003, 2002 and 2001
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, 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) Stock issued under 1996 Directors' Stock Participation Plan. . . . (81,891) 15,000 123,216 Net loss. . . . . . . . . . (4,016,428) 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 1,814 4,440 30,181 Stock issued under 401(k) Plan . . . . . . . (147,872) 31,994 227,856 Net loss. . . . . . . . . . (1,935,301) Balance - July 31, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 -- $ -- $(25,700,490)
See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 2003, 2002 and 2001 2003 2002 2001 Cash flows from operating activities: Net loss $(1,935,301) $(4,016,428) $(2,500,749) Noncash items included in net loss: Reversal of accounts payable exchanged for contingent note payable (1,583,445) -- -- Depreciation and amortization 187,787 193,775 214,768 Impairment of intangible assets 482,247 156,080 -- Minority interest -- 26,936 15,982 Stock compensation 123,350 121,325 207,298 Other, net 311 (25,624) -- Impairment losses on investments and advances 943,640 810,326 600,000 Net changes in operating accounts: Accounts receivable 242,208 1,604,391 (362,096) Prepaid expenses and other current assets (13,821) (191,154) 79,439 Accounts payable and accrued liabilities (51,886) (345,987) 1,498,524 Net cash flows from operating activities (1,604,910) (1,666,360) (246,834) (continued) See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended July 31, 2003, 2002 and 2001 (Continued) 2003 2002 2001 Cash flows from investing activities: Purchases of property and equipment, net (16,467) (30,986) (27,572) Purchase of intangible assets (50,000) -- -- Proceeds from NTRU Cryptosystems, Inc. preferred stock 88,377 -- -- Investments in cost-method affiliates -- (100,000) (100,000) Proceeds from (advances to) E. L. Specialists, Inc. 200,000 (306,300) (650,000) Sales of short-term investments 2,037,194 2,656,567 206,613 Other -- (26,936) (15,982) Net cash flows from investing activities 2,259,104 2,192,345 (586,941) Cash flows from financing activities: Proceeds from exercise of stock options and warrants -- -- 21,125 Purchases of treasury stock -- -- (679,289) Net cash flows from financing activities -- -- (658,164) Net increase (decrease) in cash and cash equivalents 654,194 525,985 (1,491,939) Cash and cash equivalents, beginning of year 750,421 224,436 1,716,375 Cash and cash equivalents, end of year $ 1,404,615 $ 750,421 $ 224,436 See accompanying notes COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. BUSINESS Competitive Technologies, Inc. (CTT) and its majority owned subsidiaries (the Company) provide patent and technology licensing and commercialization services throughout the world (with concentrations in U.S.A., Europe and Asia) with respect to a broad range of life, digital, physical, and nano science technologies originally invented by various individuals, corporations and universities. The Company is compensated for its services primarily by sharing in the license and royalty fees generated from its successful licensing of technologies. Capital Requirements, Management's Plans and Basis of Presentation The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Company incurred a net loss of $1,935,301 and negative cash flows from operations of $1,604,910 for the fiscal year ended July 31, 2003 and has an accumulated deficit of $25,700,490 at July 31, 2003. The Company's net working capital declined $187,321 in fiscal 2003. At July 31, 2003, the Company's cash, cash equivalents and short-term investments of $1,504,295 were $1,383,000 lower than at July 31, 2002. The Company has incurred substantial operating and net losses in the three years ending July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations have been substantial. During fiscal 2003, the Company has focused its efforts and resources on increasing revenues to replace revenues from expiring licenses; however, these efforts and resources have not yet increased revenues sufficiently. In addition, the Company has incurred $494,000 cumulatively through July 31, 2003 for professional advice related to the ongoing SEC investigation (see Note 16 to Consolidated Financial Statements). The amounts and timing of the Company's future capital requirements will depend on many factors, including the results of the MaternaTM, Fujitsu and LabCorp lawsuits (see Note 16 to Consolidated Financial Statements), the Company's marketing efforts, the SEC investigation and the Company's fund raising efforts. To achieve profitability, the Company must successfully license technologies with current and long- term revenue streams substantially greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. The time required to reach profitability is highly uncertain and we cannot assure you that the Company will be able to achieve profitability on a sustained basis, if at all. Management has taken certain steps to reduce ongoing cash operating expenses (including fourth quarter fiscal 2003 staff reductions), to defer payment of certain liabilities, to make payment of certain obligations contingent upon receipt of revenues, and to sell additional portions of its share of the potential Materna award. In addition to seeking debt and/or equity funding, we also seek to increase our cash resources by obtaining substantial 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. 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). While receipt of that award would satisfy our cash requirements and fund our current level of operations until we believe we could generate revenues to sustain our operations, we cannot rely on it for our current cash requirements. If we do not obtain sufficient additional cash resources in the next several months, management plans additional cash expense reductions sufficient 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 further cost reductions and cost containment actions to reduce operating costs. 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 these reductions are insufficient or if our efforts do not generate sufficient cash, management would make further necessary reductions that could affect our ability to achieve our growth strategy. Although we cannot assure you that we will be successful in these efforts, management believes that its plan will sustain the Company at least into fiscal 2005. If the Company is unsuccessful at its plans to raise funding as described above, it is unlikely we will continue as a going concern. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of 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. The Company's more significant estimates include the future cash flows used in evaluating intangible assets for potential impairment and the remaining useful lives of long-lived and intangible assets. Actual results could differ from those estimates. Reclassifications Certain amounts, including operating expenses, have been reclassified to conform with the presentation in financial statements for fiscal 2003. 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. 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 fee revenue when the contingency is resolved and it can estimate the amount of royalty fees, which is upon receipt of licensees' royalty reports. In limited instances, the Company enters 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 these 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. Expenses The Company recognizes expenses related to evaluating, patenting and 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. Personnel and other direct expenses relating to revenue include: employee salaries and benefits; marketing and consulting expenses related to technologies and specific revenue initiatives; domestic and foreign patent legal filing, prosecution and maintenance expenses (net of reimbursements); amortization and impairment of intangible assets acquired; and commissions and other direct costs relating to revenue. General and administrative expenses include directors' fees and expenses, public company expenses, professional service expenses (including corporate legal, litigation, financing and audit), rent and other general business and operating expenses. Cash Equivalents and Short-Term Investments The Company classifies overnight bank deposits as cash equivalents. The Company classifies all highly liquid investments other than overnight deposits as short-term investments. Cash equivalents and short-term investments are carried at fair value. The Company's bank and investment accounts are maintained with one financial institution; amounts on deposit exceed the FDIC insurance limit. The Company's policy is to monitor the financial strength of this institution on an ongoing basis. Property and Equipment The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives (3 to 5 years for equipment) or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation or amortization 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 2003 and recorded at the lower of cost or fair value. That value is amortized on a straight-line basis over their estimated remaining lives. Income Taxes Deferred income taxes are recognized for future tax consequences 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 outstanding during the period. 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: For the years ended July 31, 2003 2002 2001 Net loss, as reported $(1,935,301) $(4,016,428) $(2,500,749) Deduct total stock-based compensation determined under the fair value method, net of related tax effects $ (222,855) $ (135,373) $ (303,058) Pro forma net los $(2,158,156) $(4,151,801) $(2,803,807) Basic and fully diluted losses per share: As reported $ (0.31) $ (0.65) $ (0.41) Pro forma $ (0.35) $ (0.68) $ (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, 2003 2002 2001 Dividend yield 0.0% 0.0% 0.0% Expected volatility 78.8% 79.1% 79.5% Risk-free interest rates 3.8% 4.1% 5.2% Expected lives 4 years 3 years 3 years The pro forma information above may not be representative of pro forma fair value compensation effects in future years. Impairment of Long-lived and Intangible 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 measured by the amount the asset's carrying value exceeds its fair value and re-evaluates the remaining useful life of the asset. If a quoted market price is available for the asset or a similar asset, the Company uses it in determining fair value. If not, the Company determines fair value as the present value of estimated cash flows based on reasonable and supportable assumptions. 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. 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 2003 and 2002. However, the Company's adoption of this statement on August 1, 2002, did not affect the amount or timing of those impairment charges. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. The Company's adoption of this Statement did not have a material effect on its financial condition or results of operations. 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 were effective for the Company's third quarter ended April 30, 2003; the Company made these disclosures in "Stock Based Compensation" above. 3. INVESTMENTS AND NOTES RECEIVABLE NTRU Cryptosystems, Inc. In fiscal 2000, CTT acquired 3,172,881 shares of NTRU Cryptosystems, Inc. (NTRU) common and preferred stock in exchange for reducing its future royalty participation on NTRU's sales of CTT licensed products and $198,006 in cash. CTT recorded the exchange of its future 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. In August 2001, CTT acquired additional shares of NTRU Series B convertible preferred stock for $100,000 in cash. CTT recorded an impairment of this investment in other expense of approximately $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 NTRU's recapitalization. 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. CTT exchanged its NTRU Preferred Stock for $88,377 in cash and 76,509 shares of NTRU common stock. CTT 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, 2003 and 2002, CTT's carrying value for this investment was $2,364 and $1,034,381, respectively. CTT accounts for this investment on the cost method. 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. 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). 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 in other expense. During fiscal 2002, CTT recovered $21,598 of its advance. CTT cannot predict the timing or amounts of additional potential recoveries; therefore CTT will record further recoveries, if any, when it can estimate their timing and amounts. 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). The Company recorded an impairment loss in other expense on its loans to ELS of $781,924 in fiscal 2002 ($519,200 in the second quarter and $262,724 in the fourth quarter). (In addition, CTT previously charged against other revenues from ELS approximately $75,000 deemed uncollectible in fiscal 2002.) 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 included CTT's notes receivable in the face amount of $1,056,300 (plus interest) from ELS, its related security interest in ELS's 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. 4. ACCOUNTS RECEIVABLE Accounts receivable were: July 31, July 31, 2003 2002 Royalties $ 905,654 $1,158,685 Other 51,621 40,798 $ 957,275 $1,199,483 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets were: July 31, July 31, 2003 2002 Prepaid insurance $ 184,950 $ 155,662 Other prepaid expenses and other current assets 90,069 105,536 $ 275,019 $ 261,198 6. PROPERTY AND EQUIPMENT Property and equipment were: July 31, July 31, 2003 2002 Equipment and furnishings $ 170,160 $ 269,253 Leasehold improvements 59,860 59,860 230,020 329,113 Accumulated depreciation and amortization (200,186) (286,236) $ 29,834 $ 42,877 Depreciation expense was $29,510, $55,103 and $76,096 in 2003, 2002 and 2001, respectively. 7. INTANGIBLE ASSETS ACQUIRED The Company purchased additional patent rights during fiscal 2003 for $50,000. These patent rights are being amortized on a straight line basis over their estimated remaining lives, approximately 17 years. Certain of the Company's acquired licenses stopped producing revenues and certain of its acquired patents are no longer expected to generate revenues in the future. The Company reviewed all acquired intangible assets for impairment at each quarter end in fiscal 2003 and at July 31, 2002. For each technology, the Company compared the estimated future revenues with the then current carrying value. For those technologies with a carrying value greater than estimated future revenues, the Company recorded an impairment charge. The Company reported total impairment charges of $482,247 and $156,080 in personnel and other direct expenses relating to revenue in the fourth quarters of fiscal 2003 and 2002, respectively. The Company adjusted the amortization period after each impairment charge based upon the weighted average life of the remaining technologies, 2.5 years at July 31, 2003. The Company reported amortization expense of $158,000 for fiscal 2003 and $139,000 for fiscal 2002 and 2001; it expects to record annual amortization expense of approximately $41,000 for fiscal 2004 and 2005, $22,000 for fiscal 2006 and $3,000 for fiscal 2007 and 2008. July 31, July 31, 2003 2002 Intangible assets acquired, principally licenses and patented technologies, at cost $ 1,687,067 $1,793,147 Impairment charge (482,247) (156,080) 1,204,820 1,637,067 Accumulated amortization (1,062,098) (903,821) $ 142,722 $ 733,246 8. ACCRUED LIABILITIES Accrued liabilities were: July 31, July 31, 2003 2002 Royalties payable $ 854,616 $1,308,381 Accrued professional fees 156,840 65,162 Accrued compensation 217,952 157,416 Deferred revenues -- 106,667 Other 52,011 43,277 $ 1,281,419 $1,680,903 9. INCOME TAXES The income tax provision of $0 for each of 2003, 2002 and 2001 resulted from 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, 2003 2002 Net operating loss carryforwards $ 3,512,000 $ 2,670,000 Net capital loss carryforwards 567,000 586,000 Installment receivable from sale of discontinued operation 341,000 1,449,000 Impairment of investments 380,000 227,000 Accounts payable -- 618,000 Impairment of receivables -- 305,000 Other, net 271,000 (13,000) Deferred tax assets 5,071,000 5,842,000 Valuation allowance (5,071,000) (5,842,000) Net deferred tax asset $ -- $ -- At July 31, 2003, the Company had Federal net operating loss carryforwards of approximately $9,827,000, which expire from 2004 through 2023 ($157,000 in 2004, $57,000 in 2005, $2,000 in 2006, $767,000 in 2007, $65,000 in 2008, $459,000 in 2009, $182,000 in 2010, $677,000 in 2011, $1,171,000 in 2012, $618,000 in 2013, $2,000 in 2014, $1,891,000 in 2021, $1,262,000 in 2022 and $2,517,000 in 2023). Changes in the valuation allowance were: 2003 2002 2001 Balance, beginning of year $ 5,842,000 $ 5,613,000 $ 6,078,000 Change in temporary differences (1,593,000) 1,281,000 40,000 Change in net operating and capital losses 822,000 (1,052,000) (505,000) Balance, end of year $ 5,071,000 $ 5,842,000 $ 5,613,000 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. 10. 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 could 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 161,300 shares of its common stock for $1,065,214 during 1999, 2000 and 2001. 11. STOCK-BASED COMPENSATION PLANS Employee Stock Option Plans CTT has a stock option plan that 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 vested over a period of up to three years after the grant date and expire ten years after the grant date if not terminated earlier. No option may be granted under this plan after December 31, 2000. The following information relates to this stock option plan. July 31, July 31, 2003 2002 Common shares reserved for issuance on exercise of options 368,838 368,838 Shares available for future option grants 0 0 CTT may grant either incentive stock options or nonqualified options to employees under its 1997 Employees' Stock Option Plan as amended in January 2003. They may be granted at an option price not less than 100% of the fair market value of the stock at grant date. The Compensation Committee or the Board of Directors determines vesting provisions 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, 2003 2002 Common shares reserved for issuance on exercise of options 975,777 825,777 Shares available for future option grants 406,752 244,252 2000 Directors Stock Option Plan Under the 2000 Directors Stock Option Plan, CTT grants each non- employee director 10,000 fully vested nonqualified options when he or she is first elected as a director and on each January 1 he or she is a director. All such options are granted at an option price not less than 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, 2003 2002 Common shares reserved for issuance on exercise of options 394,000 244,000 Shares available for future option grants 160,000 70,000 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 2003, 2002 and 2001, CTT issued 15,000, 15,000 and 11,540 shares of common stock, respectively, to eligible directors. (In 2001 CTT issued 2,898 additional shares to directors outside the 1996 Directors' Stock Participation Plan.) In 2003, 2002 and 2001, CTT charged to expense $23,350, $41,325 and $75,000, respectively, over the directors' respective periods of service. The following information relates to the 1996 Directors' Stock Participation Plan. July 31, July 31, 2003 2002 Common shares reserved for future share issuances 23,579 38,579 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, 2003, 2002 and 2001 and changes during the years then ended is presented below. For the years ended July 31, 2003 2002 2001 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 940,267 $5.44 500,767 7.48 480,517 $9.14 Granted 60,000 $2.14 452,500 3.35 212,000 $7.29 Forfeited (9,375) $5.00 -- -- (1,750) $7.22 Exercised -- -- -- -- (3,250) $6.50 Expired or terminated (47,625) $8.42 (13,000) 11.41 (186,750) $9.08 Outstanding, end of year 943,267 $5.08 940,267 5.44 500,767 $7.48 Exercisable at year-end 646,092 $6.00 485,929 7.22 377,704 $7.51 Weighted average fair value per share of grants during the year: At market $0.72 $ 2.89 $2.49 Above market $ -- $ 0.27 $ -- The following table summarizes information about all common stock options outstanding at July 31, 2003. Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price $2.140-$ 2.150 360,000 8.79 years $ 2.15 135,000 $ 2.15 $4.220-$ 6.875 337,567 5.97 years $ 5.84 287,582 $ 5.95 $7.300-$ 8.813 188,000 5.42 years $ 7.83 165,810 $ 7.83 $9.063-$11.094 57,700 3.14 years $10.03 57,700 $10.03 Employees' Common Stock Retirement Plan Effective August 1, 1990, CTT adopted an Employees' Common Stock Retirement Plan. For the fiscal year ended July 31, 2001, the Board authorized a contribution of 14,814 shares valued at approximately $80,000, based on the year-end closing price. CTT charged this amount to expense in 2001. The Employees' Common Stock Retirement Plan was merged into the Company's 401 (k) Plan effective January 31, 2003. 12. 401(k) PLAN Effective January 1, 1997, the Company established a 401(k) defined contribution plan for all employees meeting certain service requirements. All employees who have attained the age of 21 are eligible to participate in the 401(k) plan. Employee contributions for any calendar year are limited to a specific dollar amount determined by the Internal Revenue Service ($12,000 plus an additional $2,000 for participants over age 50 for 2003, $11,000 plus an additional $1,000 for participants over age 50 for 2002, and the lesser of 15% of their annual compensation or $10,500 for 2001). The Company may also make discretionary contributions. For the fiscal years ended July 31, 2003 and 2002, CTT's directors authorized discretionary contributions of $100,000 and $80,000, respectively, payable in the Company's common stock. CTT charged these amounts to expense in fiscal 2003 and 2002, respectively. CTT contributed shares of Company common stock valued at $80,000 to the 401 (k) plan in December 2002. CTT expects to contribute shares of Company common stock valued at $100,000 to the 401 (k) plan during the second quarter of fiscal 2004. The Company has made no matching contributions. 13. CONCENTRATIONS OF 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 $2,339,000 (71%) of the Company's 2003 revenues were from four technologies: $647,000 (20%) from Ethyol(TM) (a chemotherapeutic mitigation agent); $600,000 (18%) exchanged for the first $1,290,000 of CTT's share of the potential award in the Materna(TM) lawsuit; $584,000 (18%) from the homocysteine assay; and $508,000 (15%) from gallium arsenide patents (including a laser diode technology used in optoelectronic storage devices and another technology that improves semiconductor operating characteristics). Certain of the Company's patents have expired recently or will soon expire. The vitamin B12 assay patents expired between April 1998 and November 2002. The gallium arsenide patents expire between May 2001 and September 2006. Fiscal 2003 revenues of approximately $191,000 (6%), $359,000 (11%), and $891,000 (27%) were from patents expiring in fiscal 2003, 2004 and 2007, respectively. In addition, CTT's $600,000 revenue from selling $1,290,000 of its potential award in the Materna lawsuit is an infrequent transaction. Retained royalties for 2003, 2002 and 2001, include $657,194, $878,894, and $682,011, respectively, from foreign licensees, including $351,000, $595,000 and $475,000, respectively, from the gallium arsenide portfolio. Retained royalties from Japanese licenses were $486,000, $730,000 and $577,000, respectively in 2003, 2002 and 2001. 14. Other expense, net Other income (expense), net, comprised: For the years ended July 31, 2003 2002 2001 Impairment loss on investment in: NTRU Cryptosystems, Inc. $ (943,640) $ -- $ -- Digital Ink, Inc. -- (50,000) -- Impairment loss (recovery) on loans and advances to: E. L. Specialists, Inc. -- (781,924) -- Micro-ASI, Inc. -- 21,598 (600,000) Interest income 26,623 97,335 400,054 Other, net (311) 2,384 (52,460) Minority interest -- (26,936) (15,982) $ (917,328) $ (737,543) $(268,388) 15. NET LOSS PER SHARE At July 31, 2003, 2002 and 2001, respectively, options and warrants to purchase 943,267, 940,267 and 500,767 shares of common stock were outstanding but were not included in the computation of earnings per share because they were anti-dilutive. 16. COMMITMENTS AND CONTINGENCIES Operating Leases CTT occupies its executive office in Fairfield, Connecticut under a lease that expires December 31, 2006. CTT has an option to renew this lease for an additional five years. At July 31, 2003, 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: 2004 $ 245,097 2005 243,303 2006 226,590 2007 93,750 2008 -- Total minimum payments required $ 808,740 Total rental expense for all operating leases was: For the years ended July 31, 2003 2002 2001 Minimum rentals $ 233,390 $ 223,613 $209,828 Less: Sublease rentals (9,600) (6,665) (18,500) $ 223,790 $ 216,948 $ 191,328 Other Obligations The Company has an employment agreement with Mr. Nano that provides for his employment as the Company's President and Chief Executive Officer at a base compensation of $250,000 per year, subject to reviews and increases in the sole discretion of the Company's Board of Directors. His employment is at will and can be terminated by either party at any time and for any reason. Certain obligations under this agreement survive the end of Mr. Nano's employment. The Company has four contracts (two of which have expired by their terms, but continue on a month to month basis) with consultants for business development services. Three agreements are terminable on seven days' written notice and one is terminable on thirty days' written notice. Compensation to the consultants under these contracts is at a daily rate plus reimbursement of reasonable expenses. In addition, these contracts include terms for incentive compensation generally as a percentage of new revenues generated by the consultants. During fiscal 2003, CTT charged approximately $572,000 (including use taxes) under these contracts to personnel and other direct expenses relating to revenue. At July 31, 2003, CTT has neither accrued nor paid incentive compensation under these contracts since none was earned. The Company has several agreements with third parties to assist it in licensing specific technologies or to audit licensees' royalty reports. Under these agreements, the third parties are compensated only from the new revenues generated by their efforts. Under the terms of one of the Company's agreements (which the Company may terminate on ninety days' written notice), it has committed to pay minimum annual license fees of $10,000 on each January 1, beginning January 1, 2004. In addition, the Company has agreed to reimburse patent expenses of $26,470 as of July 31, 2003 from future royalty receipts before retaining any revenue. Under another agreement, the Company has agreed to pay $25,000 per technology portfolio when a candidate transferee demonstrates firm interest in two technology portfolios. Under its agreement with an investment banker, which may be terminated on thirty days' written notice, the Company has agreed to pay $10,000 per month plus out-of-pocket expenses through January 10, 2004. If CTT completes a financing transaction, it will also pay certain additional fees under this agreement. Contingent Obligations 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 2003 and 2002, respectively, CTT charged $563 and $3,018 in related royalty expenses to operations. CTT's and VVI's remaining contingent obligations were $199,569 and $224,127, respectively, at July 31, 2003 and $200,128 and $224,127, respectively, at July 31, 2002. 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 was 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 $139,000 at July 31, 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 and recognized other operating income of $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. Indemnification Our By-Laws provide that we will indemnify our directors, officers, employees and agents in certain circumstances. We are currently exposed to potential indemnification claims in connection with the SEC investigation and with complaints filed by certain former employees alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 (see below). We carry directors' and officers' liability insurance (subject to deductibles) to reduce these financial obligations. 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. On July 31, 2003 the judge in this case issued his Markman decision to determine the scope of and the interpretation of terms in the underlying patent claims. The Court has since stayed all issues in both the underlying case and the counterclaims except issues relating to summary judgment. At present, no trial is scheduled pending the outcome of summary judgment motions and possible appeal options. 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 (subsequently dismissed and reinstituted in the Northern District of California). 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 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, $560,000 attorneys' fees and $132,000 prejudgment interest. If the Court's judgment is upheld on appeal, CTT will retain approximately $1,100,000 of damages awarded plus post-judgment interest at the statutory rate. The U.S. Court of Appeals for the Federal Circuit is scheduled to hear oral arguments in this case in November 2003. 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, awarded attorneys' fees or awarded interest from the Court's November 2002 judgment. CTT will record these revenues, if any, when the awards are final and collectible. 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 $187,000). 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. For the year ended July 31, 2003, CTT recorded total royalties of $734,429 (revenues of $293,772 (of which $99,954 relate to assays performed from November 1, 2001 through October 31, 2002) and royalties paid or payable of $440,657) 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 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 (now 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 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. The defendant has posted a $59 million bond. On September 3, 2003, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) unanimously affirmed the August 13, 2002 judgment. The defendant has filed an appeal requesting a rehearing or a rehearing en banc (before the full bench). Based on the language of the September 3, 2003 judgment, CTT's management believes there is a reasonable possibility the Company will receive its share of damages finally awarded, approximately $4.7 million at July 31, 2003, plus its proportionate share of interest. CTT has recorded no potential judgment proceeds in its financial statements to date. CTT will record revenue for judgment proceeds when it receives them. Sale of a portion 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 (recognized in retained royalty settlement revenue) in exchange for the first $1,290,000 (plus court awarded interest thereon from May 19, 2003) of CTT's share of the potential award. CTT has no financial obligation to repay LawFinance or to return any portion of the $600,000 received from LawFinance; accordingly, CTT recorded this amount as revenue. If CTT's share of a final award is less than the amount sold to LawFinance, the entire amount received would be paid to LawFinance and LawFinance would be deemed paid in full. CTT granted LawFinance a security interest in CTT's share of the potential award. At July 31, 2003, CTT retains the remaining anticipated approximately $4,710,000 proceeds from this potential award in addition to the $600,000 already received. SEC Investigation By letter of May 17, 2001, CTT received a subpoena from the Securities and Exchange Commission (SEC) seeking certain documents in connection with the SEC's private investigation captioned "In the Matter of Trading in the Securities of Competitive Technologies, Inc." On June 12, 2003, the staff of the Securities and Exchange Commission sent written "Wells Notices" to the Company, Frank R. McPike, Jr., (then the Company's Executive Vice President and Chief Financial Officer), Samuel M. Fodale (a director of the Company) and George C. J. Bigar (a former director of the Company). The "Wells Notices" indicated that the staff intended to recommend that the Commission bring a civil action against the Company and the individuals in the matter of trading in the stock of the Company, which the Company believes relates to the Company's stock repurchase program under which the Company repurchased shares of its stock from time to time during the period from October 28, 1998 to March 22, 2001. The Company, Mr. McPike, Mr. Fodale and Mr. Bigar have responded in writing to their respective "Wells Notices." The Company continues to cooperate with the Commission staff in this matter and awaits notice of the staff's formal recommendation of what action, if any, should be brought against the Company by the Commission. CTT has agreed, pursuant to Article IV of its By-laws, to advance to Mr. Fodale his expenses incurred in connection with this investigation, and Mr. Fodale has agreed to repay amounts so advanced if it is ultimately determined that he is not entitled to be indemnified by CTT as authorized by Article IV. As of July 31, 2003, the Company has advanced $58,000 and accrued an additional $40,000 for Mr. Fodale pursuant to this agreement. As of July 31, 2003, the Company has also paid $210,000 and accrued an additional $185,000 for the Company's, the Company's current directors' (excluding Mr. Fodale), Mr. McPike's, Mr. Bigar's and two other former directors' related legal fees in the matter, which were in the aggregate approximately $395,000 to July 31, 2003. Cumulative fees for no current or former director (except Mr. Fodale) individually exceeded $60,000 at July 31, 2003. The Company may receive reimbursement of certain of these fees in excess of the deductible from its directors' and officers' liability insurance policy. The Company will record any reimbursements for these expenses when they are received. Other By letter dated October 7, 2003, the U.S. Department of Labor notified CTT that certain former employees had filed complaints alleging discriminatory employment practices in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A, also known as the Sarbanes-Oxley Act. The complainants request that the Occupational Safety and Health Administration (OSHA) investigate and, if appropriate, prosecute such violations and request OSHA assistance in obtaining fair and reasonable reimbursement and compensation for damages. The Company believes the claims are without merit and is preparing its response to the complaints. It cannot estimate the final outcome of these complaints or the related legal or other expenses it may incur. 17. RELATED PARTY TRANSACTIONS During 2003, 2002 and 2001, CTT incurred charges of approximately $6,000, $124,000 and $146,000, respectively, for consulting services (including expenses and use taxes) provided by one director in fiscal 2003 and two directors in fiscal 2002 and 2001. 18. Subsequent Event Unilens Agreement Effective October 17, 2003, CTT agreed with Unilens Corp. USA and Unilens Vision Inc. (Unilens) to settle all prior claims, to terminate all prior agreements between them and for Unilens to pay CTT an aggregate of $1,250,000 in quarterly installments of the greater of $100,000 or an amount equal to 50% of the royalties received by Unilens from one licensee. Unilens paid the first $100,000 installment on October 17, 2003. Installments are due each March 31, June 30, September 30 and December 31 beginning December 31, 2003. Unilens granted CTT a security interest in all Unilens real and personal property that is subordinate to a security interest held by UNIINVEST Holding AG in respect of $450,000 plus interest owed by Unilens to UNIINVEST Holding AG. Before this agreement, Unilens owed $4,711,875 (previously written off due to uncertainties relating to its collection) remaining from an original installment obligation of $5,500,000 to CTT under previous agreements made in connection with the Company's January 1989 sale of substantially all the assets of University Optical Products Co. (UOP) to Unilens Corp. USA. Due to Unilens' financial condition and the uncertainty of its payments on this obligation, the Company will record revenue from continuing operations when payments (all of which are in excess of the fair value assigned to the original obligations) are received. The Company will also record certain related contingent expenses when incurred. 19. Selected Quarterly Financial Data (unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter For the year ended July 31, 2003 Revenues (1) $ 381,758 $ 833,004 $ 659,455 $ 1,418,716 Patent enforcement expenses, net of reimbursements 35,143 118,362 193,948 78,337 Personnel and other direct expenses relating to revenue (2) 739,996 670,672 707,358 1,299,883 General and administrative expenses (3) 423,994 515,787 307,862 803,009 Reversal of accounts payable exchanged for contingent note payable (4) (1,583,445) -- -- -- (384,312) 1,304,821 1,209,168 2,181,229 Operating income (loss) $ 766,070 (471,817) $ (549,713) $ (762,513) Net income (loss) (5) $ 778,907 $(1,410,023) $ (545,729) $ (758,456) Net income (loss) per share (basic and diluted) $ 0.13 $ (0.23) (0.09) $ (0.12) Weighted average number of common shares outstanding: Basic 6,154,351 6,174,196 6,201,345 6,201,345 Diluted 6,200,084 6,174,196 6,201,345 6,201,345 For the year ended July 31, 2002 Revenues $ 409,739 $ 797,189 $ 547,278 $ 841,725 Patent enforcement expenses, net of reimbursements (6) 631,615 553,022 602,345 345,108 Personnel and other direct expenses relating to revenue (7) 451,529 594,383 542,435 653,092 General and administrative expenses (7) 410,639 296,929 419,844 373,875 1,493,783 1,444,334 1,564,624 1,372,075 Operating loss $(1,084,044) $ (647,145) $(1,017,346) $ (530,350) Net loss (8) $(1,039,040) $(1,167,059) $(1,031,879) $ (778,450) Net loss per share (basic and diluted) $ (0.17) $ (0.19) $ (0.17) $ (0.13) Weighted average number of common shares outstanding: Basic 6,139,351 6,144,242 6,154,351 6,154,351 Diluted 6,139,351 6,144,242 6,154,351 6,154,351
(1) Includes $600,000 exchanged for the first $1,290,000 of CTT's share of the potential award in the Materna lawsuit in the fourth quarter of fiscal 2003. See Note 16 to Consolidated Financial Statements. (2) Includes impairment charges on intangible assets of approximately $482,000 in the fourth quarter of fiscal 2003. (3) Includes $196,000 of financing costs expensed and $237,000 of legal expenses related to the SEC investigation (see Note 16 to Consolidated Financial Statements) in the fourth quarter of fiscal 2003. (4) Charged to patent enforcement expense in fiscal 2002. (5) Includes impairment loss on investment in NTRU Cryptosystems, Inc. in the second quarter of fiscal 2003. See Note 3 to Consolidated Financial Statements. (6) Includes $1,583,445 that was reversed in the first quarter of fiscal 2003. See Note 16 to Consolidated Financial Statements. (7) Certain expenses have been reclassified in each quarter to conform with the presentation in the financial statements for fiscal 2003. (8) Includes $519,200 and $262,724 impairment loss on loans to E. L. Specialists, Inc. in the second and fourth quarters of fiscal 2002. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Competitive Technologies, Inc. previously reported its dismissal of PricewaterhouseCoopers LLP and its engagement of BDO Seidman, LLP to serve as the Company's independent accountant and audit its financial statements for the year ended July 31, 2003. The Company reported these actions in Current Reports on Forms 8-K and 8-K/A as follows: Form 8-K dated September 2, 2003 filed September 10, 2003; Form 8-K/A Amendment No. 1 dated September 2, 2003 filed September 19, 2003; Form 8-K/A Amendment No. 2 dated September 2, 2003 filed October 3, 2003; Form 8-K/A Amendment No. 3 dated September 2, 2003 filed October 7, 2003; and Form 8-K dated September 16, 2003 filed September 16, 2003. Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures The Company's Chief Executive 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 July 31, 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 and Chief Financial Officer concluded that these controls were effective as of July 31, 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 III Pursuant to General Instruction G(3), the information called for by Part III, except as otherwise indicated, is incorporated by reference, to the extent required, from the registrant's definitive proxy statement for its annual meeting of stockholders scheduled to be held on January 16, 2004 (the "Proxy Statement"), to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. Item 10. Directors and Executive Officers of the Registrant The information set forth under the captions "Election of Directors", "Section 16(A) Beneficial Ownership Reporting Compliance", and the sub- caption "Audit Committee" under "Board Meetings and Committees" in the Proxy Statement is incorporated herein by reference. The information regarding a code of ethics is incorporated herein by reference to Item 1 of this Form 10-K under the sub-caption "Code of Ethics." Item 11. Executive Compensation The information set forth under the captions "Executive Compensation" and "Director Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters The information set forth under the caption "Beneficial Ownership of Shares" in the Proxy Statement is incorporated herein by reference. The equity compensation plan information is incorporated herein by reference to Item 5(d) of this Form 10-K. Item 13. Certain Relationships and Related Transactions The information set forth under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information set forth under the caption "Accounting Fees and Services" in the Proxy Statement is incorporated herein by reference. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List of financial statements and schedules. Page Competitive Technologies, Inc. and Subsidiaries: Reports of Independent Accountants and Auditors. 36-37 Consolidated Balance Sheets as of July 31, 2003 and 2002. 38 Consolidated Statements of Operations for the years ended July 31, 2003, 2002 and 2001. 39 Consolidated Statements of Changes in Shareholders' Interest for the years ended July 31, 2003, 2002 and 2001. 40 Consolidated Statements of Cash Flows for the years ended July 31, 2003, 2002 and 2001. 41-42 Notes to Consolidated Financial Statements. 43-66 All financial statement schedules have been omitted because the information is not present or is not present in sufficient amounts to require submission of the schedule or because the information required is included in the financial statements or the notes thereto. (b) Reports on Form 8-K The Company filed the following three reports on Form 8-K during the last quarter of the period covered by this report on Form 10-K: 1) On May 28, 2003, the Company filed a report on Form 8-K under Items 2, 5 and 7 to report the Company's sale on May 19, 2003 of the first $1,290,000 of its share of the potential award in the Materna lawsuit to LawFinance Group for $600,000. 2) On June 16, 2003, the Company filed a report on Form 8- K (date of earliest event reported June 12, 2003) under Items 5 and 7 to report receipt of a "Wells Notice" from the staff of the Securities and Exchange Commission by each of the Company, Frank R. McPike, Jr. (then the Company's Chief Financial Officer), and Samuel M. Fodale (a director of the Company). 3) On July 2, 2003, the Company filed a report on Form 8-K (date of earliest event reported July 1, 2003) under Items 5 and 7 to report the Company's internal restructuring of its organization. In addition, the Company furnished to the SEC a report on Form 8-K on June 10, 2003 for the purpose of furnishing the press release announcing third quarter fiscal results. (c) List of exhibits: See Exhibit Index immediately preceding exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (the registrant) By /s/ John B. Nano John B. Nano President, Chief Executive Officer, Chief Financial Officer, Director and Authorized Signer Date: October 29, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Name Title Date /s/ Richard E. Carver Director ) Richard E. Carver ) ) /s/ George W. Dunbar, Jr. Director ) George W. Dunbar, Jr. ) ) /s/ John B. Nano President, Chief ) October 29,2003 John B. Nano Executive Officer, Chief ) Financial Officer and ) Director ) ) /s/ Charles J. Philippin Director ) Charles J. Philippin ) ) /s/ John M. Sabin Director ) John M. Sabin ) ) /s/ Jeanne Wendschuh Controller and ) Jeanne Wendschuh Principal Accounting ) Officer ) EXHIBIT INDEX Exhibit No. Description Page 3.1 Unofficial restated certificate of incorpora- tion of the registrant as amended to date filed (on April 1, 1998) as Exhibit 4.1 to registrant's Registration Statement on Form S- 8, File Number 333-49095 and hereby incorporated by reference. 3.2 By-laws of the registrant as amended effective January 24, 2003, filed (on January 29, 2003) as Exhibit 4.2 to registrant's Registration Statement on Form S-8, File Number 333-102798 and hereby incorporated by reference. 10.1* Registrant's Restated Key Employees' Stock Option Plan filed as Exhibit 4.3 to registrant's Registration Statement on Form S- 8, File Number 33-87756 and hereby incorporated by reference. 10.2* Registrant's Annual Incentive Compensation Plan filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended April 30, 2003 and hereby incorporated by reference. 10.3* Registrant's 2000 Directors Stock Option Plan as amended January 24, 2003 filed (on January 29, 2003) as Exhibit 4.4 to registrant's Registration Statement on Form S-8, File Number 333-102798 and hereby incorporated by reference. 10.4* Registrant's 1996 Directors' Stock Participation Plan filed as Exhibit 4.3 to registrant's Form S-8, File Number 333-18759 and hereby incorporated by reference. 10.5* Registrant's 1997 Employees' Stock Option Plan as amended January 24, 2003, filed (on January 29, 2003) as Exhibit 4.3 to registrant's Registration Statement on Form S-8, File Number 333-102798 and hereby incorporated by reference. 10.6* Employment Agreement between registrant and John B. Nano dated June 17, 2002 filed as Exhibit 10.1 to registrant's Form 8-K dated June 17, 2002, (filed June 20, 2002) and hereby incorporated by reference. 10.7* 1997 Employees' Stock Option Agreement between registrant and John B. Nano dated June 17, 2002 filed as Exhibit 10.19 to registrant's Form 10-K for the year ended July 31, 2002 and hereby incorporated by reference. 10.8 Asset Purchase Agreement among University Optical Products Co., Unilens Corp. USA, Unilens Optical Corp. and the registrant dated January 23, 1989 filed as Exhibit 19.1 to registrant's Form 10-Q for the quarter ended January 31, 1989 and hereby incorporated by reference. 10.9 Settlement and Forbearance Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.47 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.10 Stock Purchase Agreement dated July 15, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.48 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.11 Amendment and Modification Agreement dated September 27, 1993 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed as Exhibit 10.49 to registrant's Form 10-K for the year ended July 31, 1993 and hereby incorporated by reference. 10.12 Settlement Agreement dated October 17, 2003 among registrant, Unilens Corp. USA and Unilens Vision Inc. filed (on October 22, 2003) as Exhibit 10.1 to registrant's Form 8-K dated October 17, 2003 and hereby incorporated by reference. 10.13 Lease agreement between registrant and The Bronson Road Group made August 28, 1996 filed as Exhibit 10.34 to registrant's Form 10-K for the year ended July 31, 1996 and hereby incorporated by reference. 10.14 First Amendment of Lease Agreement dated August 9, 2001 between registrant and The Bronson Road Group, LLP filed as Exhibit 10.15 to registrant's Form 10-K for the year ended July 31, 2001 and hereby incorporated by reference. 10.15 Agreement between registrant and Samuel M. Fodale dated June 13, 2001 filed as Exhibit 10.16 to registrant's Form 10-K for the year ended July 31, 2001 and hereby incorporated by reference. 10.16 Assignment of Promissory Notes, Technology Servicing Agreement, Note Purchase Agreement, Security Interest Agreement, and Intercreditor Agreement between registrant and MRM Acquisitions, LLC effective August 5, 2002 filed as Exhibit 10.1 to registrant's Form 8-K dated July 16, 2002 (on August 6, 2002) and hereby incorporated by reference. 10.17 Agreement closed on May 19, 2003 (made April 30, 2003) and LawFinance Group, Inc. filed (on May 28, 2003) as Exhibit 10.1 to registrant's Form 8-K dated May 19, 2003 and hereby incorporated by reference. 10.18 Registrant's Contingent Promissory Note dated October 28, 2002 in the principal amount of $1,683,349 together with its attached Exhibit A filed as Exhibit 10.20 to registrant's Form 10-K/A for the year ended July 31, 2002 (filed November 18, 2002) and hereby incorporated by reference. 11.1 Schedule of computation of earnings per share for the three years ended July 31, 2003. 75 14.1 Registrant's Corporate Standards of Conduct for all its directors, officers and employees as amended to date. 76-99 16.1 Letter to registrant from PricewaterhouseCoopers LLP dated October 6, 2003, regarding change in certifying accountant filed (on October 7, 2003) as Exhibit 16.2 to registrant's Form 8-K/A Amendment No. 3 dated September 2, 2003 and hereby incorporated by reference. 23.1 Consent of BDO Seidman, LLP. 100 23.2 Consent of PricewaterhouseCoopers LLP. 101 31.1 Certification by the Principal Executive 102-103 and Financial Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 32.1 Certification by the Principal Executive and 104 Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). * Management Contract or Compensatory Plan EX-11.1 3 ex11-1.txt COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 COMPETITIVE TECHNOLOGIES, INC. Schedule of Computation of Earnings Per Share (Unaudited) Year ended July 31, 2003 2002 2001 Net income (loss) applicable to common stock: Basic and diluted $(1,935,301) $(4,016,428) $(2,500,749) Weighted average common shares outstanding 6,182,657 6,148,022 6,135,486 Adjustment for assumed exercise of stock options and warrants 28,744* 5,093* 40,802* Weighted average number of common shares outstanding and dilutive securities 6,211,401 6,153,115 6,176,288 Net income (loss) per share of common stock: Basic and diluted $ (0.31) $ (0.65) $ (0.41) * Anti-dilutive. These calculations are submitted in accordance with Regulation S-K Item 601 (b) (11) which differ from the requirements of paragraph 13 of Statement of Financial Accounting Standards No.128 because they produce an anti-dilutive result. EX-14.1 4 ex14-1.txt CORPORATE STANDARDS OF CONDUCT Exhibit 14.1 COMPETITIVE TECHNOLOGIES, INC. Corporate Standards of Conduct 1. Introduction Competitive Technologies, Inc.'s (the "Company") financial success, value to society and the respect it earns depend not only on the Company's financial performance, but also on the principles under which the Company does business and its directors', officers', and employees' reputation for integrity, excellence and service. Pride in our Company must be based both on what we accomplish and how we accomplish it. The policies that follow reflect the philosophy that the Company's integrity is a fundamental and valuable asset. These Standards go beyond the letter of the law. Where possible, guidance provided by these policies is specific. However, there are cases in which specific guidance is not feasible. Therefore, the most important source of guidance must be each individual's good judgment, sensitivity to what is right, and strong desire to do nothing that might bring discredit upon the individual or the Company. All of the Company's officers, directors and employees, wherever they may be located, must read these Standards of Conduct and be familiar with them. Adherence to these Standards is a condition of employment. These Standards of Conduct govern the relationship between the Company and its directors, officers and employees; they are not intended, however, to confer on any party other than the Company any additional rights or remedies. These Standards of Conduct apply to the officers, directors and employees of all subsidiaries of the Company, and references in these Standards to the "Company" include, unless the context requires otherwise, officers, directors and employees of such subsidiaries. 2. Corporate Compliance Officer The Company's Board of Directors has designated Paul Levitsky to be the Corporate Compliance Officer and has charged him with the responsibility for ensuring that these Standards of Conduct and the Company's related policies and procedures govern the business activities of all Company directors, officers and employees. You may contact the Corporate Compliance Officer by calling (203) 255-6044. 3. Duty to Seek Guidance The designation of a Corporate Compliance Officer in no way diminishes your responsibility to comply with these Standards of Conduct and the Company's related policies and procedures, nor does it diminish every supervisor's responsibility to ensure that those employees for whom he or she has responsibility comply with these Standards of Conduct and related policies and procedures. If you have any questions regarding these Standards of Conduct or how to comply with them, you have a duty to seek guidance from your immediate supervisor or the Corporate Compliance Officer. 4. Duty to Report Violations If you have knowledge of a violation of these policies and/or of questionable or improper behavior, you should report the matter to your immediate supervisor and to the Corporate Compliance Officer. If the foregoing reporting requirements are inappropriate under the circumstances, violations should be reported to the Chairman of the Audit Committee of the Board of Directors. 5. Compliance with the Law It is the Company's objective that its business at all times be conducted in compliance with applicable laws, regulations and government requirements. 6. Policy on Harassment It is the Company's express policy that everyone is responsible for assuring that the workplace is free of sexual harassment and harassment based on any other protected classification (as listed in our Policy on Discrimination). The Company is committed to providing a work environment that is free of discrimination and unlawful harassment. Because of the Company's strong disapproval of offensive and inappropriate sexual behavior, all directors, officers and employees must avoid any action or conduct which could be viewed as sexual harassment. It is illegal and against Company policy for any director, officer or employee to sexually harass another employee by: (a) making unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature a condition of an employee's employment; or (b) creating an intimidating, hostile or offensive work environment by such conduct. Similarly, actions, words, jokes, or comments based on an individual's sex, race, ethnicity, age, religion, or any other legally protected characteristic will not be tolerated. Sexual harassment (both overt and subtle) is a form of misconduct that is demeaning to another person, undermines the integrity of the employment relationship, and is strictly prohibited. Any director, officer or employee who wants to report an incident of sexual harassment or other unlawful discrimination or harassment should promptly report the matter to the Corporate Compliance Officer. If the Corporate Compliance Officer is unavailable or the director, officer or employee believes it would be inappropriate to contact that person, the director, officer or employee should immediately contact the Chairman of the Audit Committee of the Board of Directors or any other officer of the Company so the Company can properly investigate the matter. Employees can raise concerns and make reports without fear of reprisal. Any officer, director or supervisor who becomes aware of possible sexual harassment or other unlawful discrimination or harassment should promptly advise the Corporate Compliance Officer or the Chairman of the Audit Committee of the Board of Directors or any other officer who will handle the matter in a timely and confidential manner. Anyone engaging in sexual or other unlawful discrimination or harassment will be subject to disciplinary action, up to and including termination of employment. 7. Policy on Discrimination Discrimination has no place in workplace decisions. The Company is committed to allowing employees to progress based on their talents. No employment decision may be based on, for example, an employee's or employment applicant's race, color, sex, religion, age, national origin, marital status, or sexual orientation. Each director, officer and employee is subject to this standard. The Corporate Compliance Officer is the officer responsible for enforcement of this policy. If you believe that this policy has been violated, contact him immediately. 8. Non-Fraternization Policy 1. Restrictions on Dating and Romantic Relationships The Company recognizes that potential problems may arise when directors, officers or employees engage in romantic or sexual relationships (collectively referred to as "romantic relationships") with other officers, directors, employees or individuals having business relationships with the Company. The Company has adopted this policy in recognition of its responsibility to provide guidelines on and caution officers, directors and employees of the potential problems posed by romantic relationships with other officers, directors, employees or business relations. Potential problems posed by dating and romance in the workplace include conflicts of interest, sexual harassment, and discord that can interfere with the productivity of officers, directors and employees. These problems can be particularly serious in situations in which one person has a position of authority over the other, such as in a supervisor- subordinate relationship. Accordingly, the Company has adopted the following policy and guidelines: - -The Company prohibits supervisory personnel from dating or engaging in romantic relationships with non-supervisory personnel. This prohibition extends to cover relationships between directors or officers of the Company and non-officers of the Company. - -The Company strongly discourages all directors, officers and employees from engaging in romantic relationships with other directors, officers or employees. - -The Company prohibits dating or engaging in romantic relationships between officers, directors, employees and the Company's business relations (such as the Company's independent contractors, representatives, vendors, clients, and other persons or entities that do business (or seek to do business) with the Company) or officers, directors, or employees of the Company's business relations (collectively "Business Relations"). This restriction applies whenever there is the potential of misuse or abuse of power. 2. General General provisions applicable to this policy are as follows: - -The restrictions in this policy apply whenever there is a potential abuse or misuse of power or where decisions potentially may be made for reasons other than the sole benefit of the Company, including without limitation decisions regarding the hire, discharge or other terms and conditions relating to employees, or the dealings with current or potential vendors, clients or other Business Relations. - -The term "romantic relationship," as used in this policy, includes, but is not limited to: casual dating, serious dating, casual sexual involvement where the parties have no intention of carrying on a long-term relationship, cohabitation, and any other conduct or behavior normally associated with romantic or sexual relationships. - -This policy is not intended to discourage friendships between co-workers or between supervisory and non-supervisory personnel. Relationships with clients and Business Relations must remain on a professional level at all times and be solely for the Company's benefit. - -The restrictions on romantic relationships apply regardless of the sexual orientation of the parties involved. Thus, this policy applies equally to opposite-sex and same-sex relationships. This policy will be implemented in a nondiscriminatory manner and the Company shall take any steps necessary to avoid disparate impact on either sex. - -This policy applies only to consensual romantic or sexual relationships between officers, directors or employees. Unwanted sexual attention (including physical contact) and sexually oriented behavior with the purpose or effect of creating an offensive environment is strictly prohibited in all instances. See the Company's Sexual Harassment Policy. 3. Reporting Requirements and Possible Corporate Action As discussed below, any relationships prohibited or discouraged by this policy must be immediately reported to the Company. The Company will strive to receive and respond to these disclosures in a confidential manner. A. Between Non-Supervisory Employees Or Between Supervisory Employees Any romantic relationship between two non-supervisory co- workers or between two supervisory employees must be disclosed promptly, by one or both of the persons involved, to the Corporate Compliance Officer. The Corporate Compliance Officer shall assess the situation and make a determination or recommendation to resolve any actual or potential conflict of interest or impropriety created by the relationship. The purpose of this review is to avoid any potential detrimental business consequences of the romantic relationship, considering its impact on both persons involved and on the Company as a whole. Based on this review, the Corporate Compliance Officer may make recommendations regarding appropriate action, which might include any of the following: - -Requiring both parties to the relationship to sign a written statement affirming that the relationship is consensual for both partners. Any change in the consensual nature of the relationship must be reported immediately, by either party, to the Corporate Compliance Officer. - -Requiring the dating couple to select one partner to resign. - -Such other actions to insure that the parties to the relationship neither report to one another nor work together in a way which will affect their performance or their independent decision making solely for the Company's benefit. B. Between Supervisory and Non-Supervisory Employees To avoid any potential abuse of power, any romantic relationship between a supervisor and non-supervisory employee must be disclosed promptly to the Corporate Compliance Officer. If the relationship involves a director or a corporate executive officer, the relationship also must be disclosed to the Board of Directors. The Corporate Compliance Officer and/or the Board shall review the situation and make a determination or recommendation to resolve any actual or potential conflict of interest or impropriety created by the relationship. Such action may include any of the examples listed in Section A or any other action which the Corporate Compliance Officer or Board deems appropriate under the circumstances. C. Between an Officer, Director or an Employee and a Business Relation Any romantic relationship between an officer, a director or an employee and a Business Relation must be disclosed promptly to the Corporate Compliance Officer. If the relationship involves a corporate executive officer, the relationship also must be disclosed to the Board of Directors. The Corporate Compliance Officer and/or the Board shall assess the situation and make a determination or recommendation to resolve any actual or potential conflict of interest or impropriety created by the relationship. 4. Failure to Comply Any employee who fails to comply with the disclosure requirements in this policy or the recommended action that the Company deems necessary to resolve a conflict, or otherwise violates this policy, is subject to disciplinary action up to and including termination of employment. 9. Nepotism Policy The Company recognizes that potential problems may arise through the employment of relatives. Such employment can result in favoritism, breach of confidentiality and disciplinary problems, or the perception of such problems, especially when relatives work in the same department or have a reporting relationship. The Company has developed this policy to better assure that employees are treated on a consistent basis and without favoritism. For purposes of this policy, "relative" is defined as a spouse, child, grandchild, parent, parent-in-law, grandparent, sibling, or sibling-in-law. Without prior notice and approval, the Company shall not employ, hire or utilize in any capacity, whether as an employee, independent contractor or other business relation, the relative of any director, officer or employee. The Company may hire qualified relatives of employees if prior notice is given to and advance clearance of the relationship is provided by the Corporate Compliance Officer. Relatives may not have a reporting relationship. Similarly, no employee transfers will be permitted which will cause this situation to occur. If two employees with a reporting relationship become related while employed, the Company will attempt to locate a suitable position to which one of the relatives may transfer. If no suitable position is available, one of the employees may have to resign. Employees in this situation are expected to cooperate with the Company in its determination as to how to address such a situation. Similarly, the Company will not retain or use the services of an employee's relative in any of its business relations (such as the Company's independent contractors, representatives, vendors, clients, and other persons or entities that do business with the Company) except with advance disclosure to and clearance from the Corporate Compliance Officer. Approval for employment of relatives under this Policy must be granted in advance by the Corporate Compliance Officer. If the situation involves a corporate officer or director, approval also must be given by a majority of the Company's Board of Directors. 10. Authority to Sign Contracts and Incur Obligations Only the President or an officer specifically designated by the President or the Board of Directors can sign contracts or otherwise incur obligations on behalf of the Company involving amounts in excess of $10,000. Any such designation by the President must be as to a specific transaction or matter, and not a blanket grant of authority. Absent a specific designation or approval of the Board of Directors or the President, an officer or other employee of the Company is only authorized to sign contracts or otherwise incur obligations on behalf of the Company that are normally within the scope of such officer's or employee's duties and (i) are entered into in the ordinary course of business, or (ii) involve amounts not greater than $10,000 in the aggregate. 11. Prohibited Payments Bribery, kickbacks or other improper payments have no place in the Company's business. No payment from Company funds or assets shall be made to or for the benefit of any director, officer or employee of any domestic or foreign entity, a representative of any domestic or foreign entity, a labor union or any current or prospective customer or supplier, for the purpose of improperly obtaining a desired government action, or any sale, purchase, contract or other commercial benefit. These same standards should govern your contacts with those in the private sector. Entertainment of business prospects must be reasonable and documented carefully. This prohibition is intended to prevent bribes, kickbacks and similar payments. It covers both direct payments and indirect payments, such as through a consultant or other third party or by reimbursement of Company directors, officers or employees for payments made personally by them. In addition, the Company's directors, officers and employees shall not directly or indirectly accept any payments of the types described above. 12. Political Contributions No Company contributions shall be made to support the campaign of any candidate seeking political office or the activities of any political party except as permitted under U.S. law. Contributions include direct payments, purchase of tickets to fund-raising events, and provision of Company-paid employees, facilities, equipment, transportation or other services to a candidate seeking political office or to political committees. Corporate political contributions may be made only upon receipt of written authorization of the Company's President or Board of Directors. The Company encourages individual participation by directors, officers and employees in political activity and directors', officers' and employees' personal financial support for the candidate or political party of their choice. In addition to the above, Company-sponsored public affairs programs and support for the activities of a political action committee conducted in accordance with applicable laws are permitted. 13. Relationship with Government Entities and Officials The Company's relationships and contacts with government entities and officials must be proper. Company directors, officers and employees must avoid impropriety and exercise judgment to avoid the appearance of impropriety in their and the Company's relationships and dealings with any government entity or official. 14. Integrity of Company Records Each director, officer and employee must help maintain the integrity of the Company's financial and compliance records. No Standards of Conduct can review the extensive financial accounting and compliance requirements the Company must fulfill. However, the Company must rely on truthfulness in all its record- keeping practices to meet these obligations. Every reasonable effort should be made to maintain the books and records of the Company accurately, in reasonable detail, and in accordance with the Company's policies and procedures. 1. Directors, officers and employees may not knowingly participate in any intentional misstatement of Company accounts or records. 2. No records or information shall be manipulated for the purposes of altering or distorting business results and no deliberately false or inaccurate entries shall be made for any purpose. 3. All funds, assets and accounts established or maintained for any purpose, shall be recorded on the books and records of the Company established for those purposes. 4. No payment or business arrangement shall be approved or made with the intention or understanding that any part of the payment or any aspect of the business arrangement is for any purpose other than that described by the documents supporting the payment or business arrangement. No circumstances justify the maintenance of "off the books" accounts to facilitate questionable or illegal payments. 15. Internal Control Company supervisors are responsible for maintaining an effective system of administrative/ accounting controls in their areas of responsibility. 1. Reasonable procedures for carrying out Company policies and preventing and identifying deviations shall be established. 2. Business transactions of all kinds shall be executed only by those authorized to do so. 3. Access to assets of all kinds (e.g. cash, inventory, property, etc.) is permitted only with the authorization of appropriate management personnel. 4. Business transactions shall be reported as necessary to: (a) permit preparation of accurate financial and other records and (b) clearly reflect the responsibility for assets. 5. Records identifying the responsibility for assets shall be compared with actual assets at reasonable intervals. Appropriate action must be taken if there are discrepancies. 16. Conflicts of Interest Avoid any situation in which your personal interests conflict with those of the Company. Each director, officer and employee owes a duty of loyalty to the Company. For that reason, all directors, officers and employees must exercise great care any time their personal interests may conflict with those of the Company. Directors, officers and employees should avoid situations that would involve them in a conflict of interest or create the appearance of a conflict. Usually there should be no real or apparent conflict between the full discharge of a director's, officer's or employee's responsibilities to the Company and the director's, officer's or employee's personal financial interests or obligations to any other person, organization or activity. However, in some circumstances an individual may find that a conflict of interest is inevitable. Under such circumstances, the nature of the conflict should be fully disclosed and discussed with the Company's Board of Directors or President, and in their discretion, with inside or outside legal counsel, to determine how best it should be addressed. Where the conflict of interest policy prohibits a director, officer or employee from engaging in a specified activity or transaction, the same prohibition extends to the director's, officer's or employee's "Immediate Family." For purposes of these Standards of Conduct, "Immediate Family" is defined to include only a director's, officer's or employee's spouse, parents, grandparents, children, grandchildren, brothers and sisters and their lineal descendants, first cousins (in each of the foregoing cases, whether by blood or adoption), any spouses of the foregoing, and any other person who lives in the same household. The following is a more specific, but not exhaustive, list of conflicts of interest to avoid: Financial Interests and Relationships. A director, officer or employee shall not knowingly have an investment or financial interest in, or have any financial relationship, management or advisory position with, a supplier, customer, current or potential competitor of the Company, except: - - An insubstantial interest or ownership (generally defined as not more than one percent of the outstanding shares) in publicly traded securities of a supplier, customer or competitor. However, depending on the circumstances, a conflict of interest might still exist, even if the stock held is less than one percent, where the director, officer or employee is in a position to control or influence the Company's decisions or actions with respect to a transaction with such corporation. In addition, if the investment or interest by the director, officer or employee or Immediate Family member is in a small organization doing business with the Company, a conflict of interest is likely in view of the possible relative importance of the transaction to such organization. - - A transaction considered customary and conducted on standard commercially available terms, such as a home mortgage or bank loan. - - A transaction or relationship disclosed in writing to the Company's Corporate Compliance Officer and determined in writing by him not to be inconsistent with the purpose of this policy. Gifts and Entertainment. To avoid both the reality and the appearance of improper business relations with suppliers or customers, this policy applies to both the giving and receiving of gifts and entertainment. Directors, officers and employees shall not accept from or give to any supplier, customer or competitor, gifts, hospitality or entertainment that could be considered lavish or excessive by reasonable standards. This policy, however, permits gifts of reasonable value, reasonable business meals and entertainment, the exchange of which constitutes customary reciprocal courtesies between the Company's directors, officers or employees and their business associates, and similar customary and reasonable expenditures to promote general business goodwill not otherwise inconsistent with these Standards of Conduct. Related Party Transactions. Except as specifically approved by both a majority of the Company's Board of Directors and a majority of the Company's disinterested directors who are not employees of the Company, no sale or purchase of property, supplies or services shall be made by the Company to or from any director or officer of the Company, members of a director's or officer's Immediate Family or entities in which any of such persons is a director, officer or owner of 5% or more of such entity's equity interests (each such transaction is a "Related Party Transaction"). Corporate Opportunities. Part of your duty of loyalty to the Company requires that you offer to the Company any business opportunity of which you become aware that is related to the Company's business, or which otherwise ought to belong to the Company. Therefore, if a director, officer or employee of the Company becomes aware of a business opportunity related to the Company's business, (each such business opportunity is referred to as a "Corporate Opportunity"), the director, officer or employee has an obligation to offer that Corporate Opportunity to the Company first before taking the Corporate Opportunity for himself or herself. Only if the Company elects not to pursue the Corporate Opportunity may you pursue the Corporate Opportunity for yourself. If you become aware of a Corporate Opportunity, you must report it to the President. The President will inform you as promptly as practicable regarding the Company's interest in pursuing the Corporate Opportunity. Nepotism. See the Company's Nepotism Policy (Policy #9). Misuse of Company Resources. Directors, officers and employees shall not utilize the services of Company personnel or utilize Company assets for their own personal benefit or the benefit of any member of their Immediate Family, except as specifically authorized in the Company's written benefit policies. 17. Confidential Information One of the Company's most important assets is its confidential corporate information and the confidential information licensed or otherwise entrusted to it by others. The Company's legal obligations and its competitive position often mandate that this information remain confidential. Confidential corporate information generally falls into two categories. The first category encompasses information intended for internal use only. This information typically relates to the Company's operations, customer lists, pricing policies and trade secrets (confidential information used in the course of business to give the Company a competitive advantage). It also relates to technology owned by third parties and licensed, marketed or otherwise used by the Company in providing technology evaluation and management services to corporations, government agencies and universities. This information is entrusted to the Company and its directors, officers and employees on a confidential basis, and includes technology licenses, patent applications and prosecutions and the Company's assessments of the marketability of new technology. The Company endeavors to keep this information confidential indefinitely. The second category, by contrast, involves confidential corporate information that the Company routinely discloses to the investing public. This information often gauges the Company's financial performance (e.g. quarterly financial results of the Company's operations) or identifies events that have a significant (or material) impact on the value of the Company's securities. As outlined below, premature disclosure of such information may expose the individual involved to onerous civil and criminal penalties. Confidential corporate information of either category must not be disclosed by directors, officers or employees to anyone outside the Company, except for a legitimate Company business purpose (such as contacts with the Company's accountants or its outside lawyers). Even within the Company, confidential corporate information should be discussed only with those who have a need to know the information. A director's, officer's or employee's obligation to safeguard confidential corporate information continues even after he or she leaves the Company. 18. Policy on Antitrust All applicable antitrust laws shall be observed. For example, directors, officers or employees must refrain from discussions, agreements or understandings with any party with respect to any matter which could be construed as price fixing or stabilization, bid-rigging, limits on service or allocation of services, customers or territories. 19. Outside Business Activities The Company requires the full attention of its officers and employees. In general, this level of attention makes it impractical for officers and employees to pursue employment outside the Company. Therefore, the following specific limitations are applied to officers and employees with respect to outside business and management activities. 1. Officers and employees are expected to devote their entire working time to the performance of their duties for the Company. They should avoid outside business or consulting activities that could divert their time, interest or talents from Company business. Prior approval in writing by the President is required before entering into any such outside business or consulting activity. Such approval shall not be granted without written concurrence from the Company vice president most directly responsible for the affected employee. Approval for officers shall not be granted without written concurrence from the Chairman of the Audit Committee of the Board of Directors. 2. Outside offices and directorships. The director of a corporation has access to sensitive information and charts the course of the corporation. When a Company officer or employee is invited to play that role for an outside organization, the Company must take steps to shield both the organization and the officer or employee from even the appearance of impropriety. For that reason, except with respect to an officer or employee serving at the Company's request as a director or officer of a company in which the Company has an investment interest, officers and employees may not serve as officers or directors of any other commercial enterprise unless it is pursuant to an exception approved in writing. The term "commercial enterprise" includes business corporations or entities, banks, trust companies, other financial institutions and similar organizations. Such approval shall be by the Company's President or the Board of Directors. 20. Insider Trading The Company has a long-standing commitment to comply with the federal and state securities laws and regulations. In the course of business operations, you may become aware of nonpublic material information relating to important business matters. Securities laws prohibit persons from trading securities on the basis of nonpublic material information. If you are aware of material information relating to the Company or relating to firms with which the Company is negotiating or competing, you may not buy or sell shares or other securities of the Company or such firms nor disclose such information to people outside the Company until such information has been disclosed to the public and has an adequate opportunity to be absorbed by the market. Material information is any information that an investor might consider important in deciding whether to buy, sell, or hold securities. Here are some examples: - financial results and forecasts - new product developments - obtaining or losing important contracts - changes in the rates or estimated rates of sales, earnings or dividends - changes in auditors - stock splits or reverse splits - possible mergers, acquisitions, joint ventures, tender offers or major purchases or sales of securities or assets - major management changes or change in control of the Company - major changes in business direction - sales or purchases by the Company of its own securities - major litigation developments Information is considered to be nonpublic unless is has been disclosed to the public. Examples of effective disclosure include public filings with securities regulatory authorities and issuance of Company press releases. The information must not only be publicly disclosed; there also must be adequate time for the market as a whole to digest the information. The Company has adopted the following Policy Prohibiting Insider Trading: All directors, officers and employees must treat as confidential any inside information they learn in the course of their employment. Don't leave such information on top of your desk where anyone can see it. Keep inside information in secure files and share it only with other directors, officers or employees who have a need to know the information. Do not discuss inside information with friends or family. Do not discuss inside information in elevators, restaurants or other public places. Inside information is any information or development which may have a material effect on the Company or on the market price of its stock (or on an investor's decision to buy or sell the stock) and which has not been publicly disclosed. Material information (see the examples described above) that is nonpublic should be treated as inside information. Inside information can be favorable or unfavorable. Getting a major new contract or customer and losing a major contract or customer can both be inside information. Directors, officers and employees must not trade in securities of the Company based on inside information. Equally important, they must not give "tips" on inside information to their relatives - or to anyone else - which would enable the receiver of the tip to profit from such information through securities trading. If you obtain inside information about another company, such as a supplier or a customer, or you learn that we are planning a major transaction with another company (such as a take-over), you must not trade in securities of the other company. The policy against insider trading and misuse of inside information applies to all directors, officers and employees of the Company and its subsidiaries. This includes secretaries, mailroom staff, personnel who handle Xerox - and FAX - type machines and messengers as well as executives and management. The policy also applies to consultants and independent contractors. Periods when the trading door is closed. It is particularly dangerous to trade immediately before the Company announces quarterly sales and earnings results. Even if there have been no significant changes in such results from prior periods, there may be street expectations that can cause stock prices to fluctuate depending on whether expectations have been exceeded or not. Therefore it is Company policy that directors, officers or employees of the Company may not trade in the Company's stock during the period from the end of any fiscal quarter (October 31, January 31, April 30 and July 31) until at least one business day has elapsed following the release for publication of quarterly or annual statements of sales and earnings. Even after such publication, however, you should not trade if you are aware of material information that has not yet been disclosed. However, the trading door will be open if the purchase or sale is made pursuant to a contract, instruction, or plan in full compliance with SEC Rule 10b 5-1. Any director, officer or employee of the Company who establishes an arrangement under Rule 10b 5-1 should promptly deliver a written copy of the arrangement to the Corporate Compliance Officer. The Company will be free, in its discretion, to make such arrangements public. The Company is aware that the Securities and Exchange Commission has enacted Rule 10b(5) 1 which provides a safe harbor for trading in Company stock at any time so long as a written plan is put in place before entering into a blackout period that provides for a plan that: (i) a specific document specifying that particular trades will occur at specified prices, on specified dates, for specified numbers of shares; (ii) a document specifying a formula pursuant to which trades will occur; or (iii) a document granting an outsider complete discretion to make the trades, without access to any material nonpublic information about the Company. While plans such as this fall within the spirit of the regulations, the Company has determined that it will not permit any employee, director or consultant to purchase or sell any shares during periods when the trading window is closed. Such plans, in the opinion of the Company, would not be viewed positively by shareholders. These are very serious matters. Insider trading is illegal and can result in jail sentences as well as civil penalties, including treble damages. Sanctions by the Company may include termination of employment. Please contact the Compliance Officer if at any time you have questions about this policy. If you have a question regarding the trading of securities or whether certain information is material or if it has been adequately disclosed to the public you should contact the Corporate Compliance Officer, and abstain from trading in the Company's securities or disclosing such information to people outside the Company until you have been informed that such trading is permissible or that the information is not material or has been publicly disclosed and digested. 21. Information About the Company's Business It is the Company's policy that its communications with the public be accurate. Only the President and persons specifically designated by him are authorized to issue press releases, speak with shareholders and securities analysts or otherwise similarly communicate with the public on behalf of the Company. Frequent dissemination of information about the Company is made through press releases, reports to shareholders, reports filed with government agencies and other Company communications. Unauthorized dissemination of certain information may cause injury to individuals or to the business interests of the Company. Further, directors, officers and employees expressing personal opinions on subjects related to Company business should avoid giving the impression that they are speaking on behalf of the Company. Many employees have written agreements with the Company concerning the confidentiality of certain proprietary information. However, every Company director, officer and employee has the obligation to insure that information they have concerning the Company's business, finances and personnel is handled professionally, with discretion, and disseminated only through the appropriate authorized channels. All advertising and promotional activities shall be conducted in a manner consistent with scrupulous business ethics and applicable government requirements. 22. Computer and Electronic Communications The Company provides computer and telecommunications equipment and software for use in conducting the business of the Company. The Company reserves the right to limit or prohibit any and all use of Company equipment for any purpose not related to Company business. Anyone violating this policy may be subject to disciplinary action, up to and including termination. Staff members with supervisory responsibilities must ensure that individuals under their supervision are aware of their responsibilities under this policy. Users of Company computers, e-mail, voice mail, network/Internet access and files should not expect privacy for anything stored on or sent through a Competitive Technologies computer or network or Internet connection or stored on Company equipment; all such material is subject to monitoring and review by the Company. All communications using Company equipment or supplies, including telephones, e-mail and voice mail, should be carried out in a professional manner. Confidential Company business should never be discussed over a cellular or cordless telephone. With regular software updates, potential program viruses, client confidentiality, copyright laws, and the high cost of computer and telecommunications equipment, it is necessary for us to protect Company assets and information and maintain a high level of professional integrity. There are high risks associated with improper use of computer equipment and software. Therefore, it is imperative that only the Company's staff members be allowed to operate our equipment. Authorization for anyone else to use our equipment must be arranged with the President or General Counsel in advance or must be under the continual supervision of a Company staff member. The following is the Company's Computer and Electronic Communications Policy and it applies to all employees,' officers' and directors' use of Company computers and telecommunications equipment: A. Passwords Each employee is responsible for choosing a secure password or access code for network, e-mail and voice mail access. Donna Mays will assist you in selecting a secure password. You may not write down your password or access code and leave it in your work area. Each employee must provide his or her current network and screen saver passwords to Donna Mays on a regular basis. Donna Mays will keep them in a secure place for authorized Company use only. Employees may not read or access another employee's e-mail, voice mail or files without the prior approval of an authorized Company officer. B. Computer Equipment (Computers, Printers, Monitors, etc.) All of our computer equipment is assigned to individual employees or to a permanent location within the office. Each employee is responsible for his or her assigned equipment and is expected to exercise reasonable care in operating and transporting it. Equipment may only be used for Company business. Employees may not borrow Company equipment without the prior approval of a Company officer. C. Software Only software authorized and properly licensed by the Company may be stored on a hard disk or used on a Company computer. With the increasing risk posed by computer viruses, it is mandatory that unauthorized software not be run on a Company computer or loaded onto a hard disk. Each Company computer may be examined periodically or at any time. This examination may include viewing of the contents of the hard disk. Unauthorized software found on a Company computer will be removed and may result in serious consequences to the individual involved, including possible termination of employment. Software Guidelines are as follows: It is strictly forbidden to copy software unlawfully or use unauthorized copies of computer software knowingly for any reason whatsoever. If you have any question as to whether a copy or use is permissible, check with Paul Levitsky or Jeanne Wendschuh before any questioned use. A standard package of software is loaded onto each Company computer. This package should not be altered without approval from Paul Levitsky or Jeanne Wendschuh, as an altered package will prevent automated updates from working properly and may damage other programs on the computer. If it is noted that a Company computer has a changed or altered standard package, you will be notified that the computer will be re-imaged to remediate any issues. Computer equipment is for business purposes only; games may not be loaded onto the hard drive or run on the floppy drive. In addition, many computer viruses are sometimes transmitted through shareware and games. Any files received from others outside the Company, whether attached to e-mail or on a transportable disk, must be checked for viruses. E-mail attachments often contain viruses, especially executable programs such as games. Correcting the damage caused by a virus is a time consuming and costly process and is one of our greatest challenges in relation to our technology. Any client information or work product stored on Company computers or premises is the property of the Company and is strictly confidential. At no time may this information be disclosed or used for any purposes other than those of the Company or the applicable client. Software and applications developed by employees, as well as reports and documents prepared by them within the context of their work or using its software and equipment, are the property of the Company. When employees leave the Company, they must return all software, hard copies, forms and other documents. Anti-virus software is part of the standard package on all Company computers. You are responsible for updating virus definitions and scanning all files on the Company computer you use regularly. Please pay attention to all Company notices from Donna Mays regarding viruses. D. Internet and E-mail and Telecommunications All e-mail sent to or received from your Company e-mail address and all Web sites visited using Company equipment and all telephone calls are subject to monitoring and logging and may be actively monitored or logged by an authorized person. Any e-mail or communication sent to a public forum should be treated with the same care and consideration as a letter sent out on Company letterhead that may be discoverable by an opponent in litigation. Any such communication should be consistent with the Company's business practices, must not disclose any trade secrets or intellectual property, may not violate another's rights (e.g. defame or harass), and should be treated as if it is a communication with the media. The Company and its business may not be discussed in public Internet forums of any kind by employees, officers or directors during business hours or on their own time unless participation in such discussions is approved by the President in advance. Employees may not use Company equipment or time to access web sites containing "inappropriate" content (such as adult or pornographic web sites, gambling sites, or web sites with pirated software). The Company's computer and telecommunications equipment may not be used to transmit viruses and similar harmful code, conduct denial of service attacks, violate any other system's acceptable use policy, or violate the law. Participation in chain letter type mailings is not acceptable as it creates unnecessary strain on the system and in some cases may be against the law. Conclusion It is necessary for everyone to conform to this policy in order to protect the Company's reputation and to avoid serious financial consequences or legal liability. 23. Penalties for Violations If a director, officer or employee violates any law or regulation in the course of his or her employment or service on the Board of Directors, as the case may be, the director, officer or employee will be subject to sanctions from the Company. These sanctions may include, but are not limited to, termination, suspension, demotion, reduction in pay and reprimand. The Board of Directors or the President may determine that failure to adhere to the Company's Standards of Conduct constitutes willful misconduct or reckless disregard of duty and this may result in termination for cause or other disciplinary action. The following are examples of actions or omissions that will subject a director, officer or employee to discipline: a breach of these Standards of Conduct; failure to report a suspected or actual violation of law or a breach of these Standards of Conduct; falsification of any certificate required under these Standards of Conduct or any related compliance program; lack of attention or diligence on the part of supervisory personnel that directly or indirectly leads to a violation of law; or direct or indirect retaliation against a director, officer or employee who reports a violation. These Standards of Conduct govern the relationship between the Company and its directors, officers and employees; they are not intended to confer on any party other than the Company any additional rights or remedies. 24. Implementation 1. Upon hire as an officer or employee or election as a director and on an annual basis thereafter (on or about a date set by the Board), all managers and supervisors shall insure that a copy of these Standards of Conduct is furnished to every officer, director or employee under their supervision. In addition, in relation to providing a copy of these Standards of Conduct upon hire or election and annually thereafter, all managers and supervisors will insure that every officer, director or employee under their supervision returns to the Corporate Compliance Officer a signed and dated Acknowledgment of Receipt. 2. Within 10 business days after reviewing these Standards of Conduct, each director, officer and employee of the Company must report to the Corporate Compliance Officer using the attached Noncompliance Report Form any noncompliance or suspected noncompliance with these Standards of Conduct, whether on his or her own part or on the part of another director, officer or employee. Failure to do so is itself a violation of these Standards of Conduct. 25. Procedures for Requesting and Granting Exceptions to the Standards of Conduct Certain situations may warrant an exception to the Standards of Conduct. Examples of special situations include (but are not limited to) cases of particular hardship, or other circumstances where the nature or location of the organization or activity may properly require or permit different treatment. Requests for exemptions must be submitted in writing using the attached "Exemption Request Form". Be certain to describe in detail all pertinent information regarding the proposed transaction so that an informed decision may be made regarding the exemption request. In emergency situations, a request may be made orally and subsequently confirmed in writing. In the case of a member of the Board of Directors or an officer, only the President of the Company may authorize an exception or special handling. The necessary approvals for an exemption are required to be obtained in advance of an action requiring an exemption. 26. Private Communications with the Audit Committee of the Board of Directors As a part of its charter, the Audit Committee of the Board of Directors has determined that it will meet privately at least annually with the Company's internal accountants. In addition, any employee may communicate privately with the Audit Committee or its Chairperson on any matter the employee believes should be discussed privately. At October 15, 2003, the members of the Audit Committee are John M. Sabin, Chairman, George W. Dunbar, Jr., Charles J. Philippin and Richard E. Carver (ex-officio member). You may communicate privately with them by telephone or by private letter. You may get current telephone numbers or mailing addresses from Lorraine Frauenhofer. Competitive Technologies, Inc. Corporate Standards of Conduct Noncompliance Report Form To: From: Date: Re: After reviewing the Standards of Conduct, I have noted the noncompliance described below: (The description should include the nature of the noncompliance, the names of the parties involved, and whether an exemption to the Standards of Conduct is also being requested (if an exemption is being requested, also attach the Exemption Request Form). Please use additional sheets, if necessary. __________________________________ _________________________ Signature Date Competitive Technologies, Inc. Corporate Standards of Conduct Exemption Request Form To: From: Date: Re: I am requesting an exemption from the Standards of Conduct in connection with the matter described below: (The description should include the purpose and proposed date of the action, the names of the parties involved, and the consequences of not receiving approval for the exception.) Please use additional sheets, if necessary. _________________________________ _________________________ Signature Date Competitive Technologies, Inc. Corporate Standards of Conduct Acknowledgment of Receipt To: Corporate Compliance Officer Re: Corporate Standards of Conduct The undersigned hereby certifies that he or she has received a copy of, has read, understands and agrees to comply with the Company's Standards of Conduct. Date:_____________ _________________________________ Signature Name:___________________________ (please print) EX-23.1 5 ex23-1.txt BDO CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS Competitive Technologies, Inc. Fairfield, Connecticut We hereby consent to the incorporation by reference in the Registration Statements of Competitive Technologies, Inc. on Form S-8 (Registration Nos. 33-87756, 33-44612, 333-18759, 333-49095, 333-95763, 333-58612, 333-81456 and 333-102798) of our report dated October 10, 2003, except for Note 18, for which the date is October 27, 2003, relating to the consolidated financial statements of Competitive Technologies, Inc., which contains an explanatory paragraph related to the Company's ability to continue as a going concern, appearing in the Company's Annual Report on Form 10- K for the year ended July 31, 2003. /s/ BDO Seidman, LLP BDO Seidman, LLP Valhalla, New York October 29, 2003 EX-23.2 6 ex23-2.txt PWC CONSENT Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-87756, 33- 44612, 333-18759, 333-49095, 333-95763, 333-58612, 333-81456 and 333-102798) of Competitive Technologies, Inc. of our report dated October 28, 2002 relating to the consolidated financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Stamford, Connecticut October 29, 2003 EX-31.1 7 ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, John B. Nano, President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K of Competitive Technologies, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 29, 2003 /s/ John B. Nano John B. Nano President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. EX-32.1 8 ex32-1.txt CERTIFICATION OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 CERTIFICATION BY THE PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL 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, Chief Executive Officer 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 Annual Report on Form 10-K for the fiscal year ended July 31, 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: October 29, 2003 /s/ John B. Nano John B. Nano President, Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. -----END PRIVACY-ENHANCED MESSAGE-----