10-Q 1 f10q_204.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2004 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) (203) 255-6044 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes[ ] No[x] Common Stock outstanding as of March 1, 2004 - 6,243,697 shares Exhibit Index on sequentially numbered page 30 of 76. Page 1 of 76 sequentially numbered pages COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements A. Condensed Financial Statements (Unaudited) Consolidated Balance Sheets at January 31, 2004 and (Unaudited) July 31, 2003 (Audited) 3 Consolidated Statements of Operations for the three months ended January 31, 2004 and 2003 4 Consolidated Statements of Operations for the six months ended January 31, 2004 and 2003 5 Consolidated Statement of Changes in Shareholders' Interest for the six months ended January 31, 2004 6 Consolidated Statements of Cash Flows for the six months ended January 31, 2004, and 2003 7 Notes to Consolidated Financial Statements 8-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Item 4. Controls and Procedures 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 30-31 Signatures 32 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets January 31, 2004 and July 31, 2003 January 31, July 31, 2004 2003 (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 1,497,279 $ 1,404,615 Short-term investments 100,031 99,680 Receivables 897,281 957,275 Prepaid expenses and other current assets 152,134 275,019 Total current assets 2,646,725 2,736,589 Property and equipment, net 19,245 29,834 Investments, at cost 40,993 43,356 Intangible assets acquired, net 116,270 142,722 TOTAL ASSETS $ 2,823,233 $ 2,952,501 LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable $ 261,247 $ 501,655 Accrued liabilities 824,799 1,281,419 Total current liabilities 1,086,046 1,783,074 Commitments and contingencies -- -- Shareholders' interest: 5% preferred stock, $25 par value 60,675 60,675 Common stock, $.01 par value 62,437 62,013 Capital in excess of par value 26,904,985 26,747,229 Accumulated deficit (25,290,910) (25,700,490) Total shareholders' interest 1,737,187 1,169,427 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 2,823,233 $ 2,952,501 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the three months ended January 31, 2004 and 2003 (Unaudited) 2004 2003 Revenues Retained royalties $ 698,055 $ 833,004 Retained royalty settlements 250,000 -- 948,055 833,004 Patent enforcement expenses, net of reimbursements 14,174 118,362 Personnel and other direct expenses relating to revenue 588,085 670,672 General and administrative expenses 371,157 515,787 973,416 1,304,821 Operating loss (25,361) (471,817) Interest income 3,161 6,105 Other income (expense), net 86,487 (944,311) Net income (loss) $ 64,287 $(1,410,023) Net income (loss) per share: Basic and diluted $ 0.01 $ (0.23) Weighted average number of common shares outstanding: Basic 6,207,631 6,174,196 Diluted 6,398,726 6,174,196 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the six months ended January 31, 2004 and 2003 (Unaudited) 2004 2003 Revenue Retained royalties $ 1,084,954 $ 1,214,762 Retained royalty settlements 1,150,000 -- 2,234,954 1,214,762 Patent enforcement expenses, net of reimbursements 47,011 153,505 Personnel and other direct expenses relating to revenue 1,146,894 1,410,668 General and administrative expenses 797,327 939,781 Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) 1,991,232 920,509 Operating income 243,722 294,253 Interest income 5,622 18,942 Other income (expense), net 160,236 (944,311) Net income (loss) $ 409,580 $ (631,116) Net income (loss) per share: Basic and diluted $ 0.07 $ (0.10) Weighted average number of common shares outstanding: Basic 6,204,488 6,166,284 Diluted 6,300,036 6,166,284 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Interest For the six months ended January 31, 2004 (Unaudited)
Preferred Stock Shares Common Stock Capital in issued and Shares excess of Accumulated outstanding Amount issued Amount par value Deficit Balance - July 31, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 $(25,700,490) Exercise of common stock options 12,850 129 26,829 Stock issued under 1996 Directors' Stock Participation Plan 12,500 125 31,125 Stock issued under 401(k) Plan 17,002 170 99,802 Net income 409,580 Balance - January 31, 2004 2,427 $60,675 6,243,697 $62,437 $26,904,985 $(25,290,910)
See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the six months ended January 31, 2004 and 2003 (Unaudited) 2004 2003 Cash flows from operating activities: Net income (loss) $ 409,580 $ (631,116) Noncash items included in net income (loss): Depreciation and amortization 30,875 95,474 Stock compensation 33,266 40,740 Reversal of accounts payable exchanged for contingent note payable -- (1,583,445) Impairment loss on investment -- 944,000 Collection on Unilens receivable (160,235) -- Other, net 6,165 311 Net changes in various operating accounts: Receivables 59,994 (730,335) Prepaid expenses and other current assets 122,885 (3,208) Accounts payable and accrued liabilities (599,072) 52,005 Net cash flows used in operating activities (96,542) (1,815,574) Cash flows from investing activities: Purchases of property and equipment -- (13,567) Purchase of intangible assets -- (50,000) Proceeds from short-term investments (351) 1,036,025 Sale of interests in E. L. Specialists, Inc. -- 200,000 Collection on Unilens receivable 160,235 -- Other 2,364 -- Net cash flows provided by investing activities 162,248 1,172,458 Cash flows from financing activities: Proceeds from exercise of stock options 26,958 -- New cash flows provided by financing activities 26,958 -- Net increase (decrease) in cash and cash equivalents 92,664 (643,116) Cash and cash equivalents, beginning of period 1,404,615 750,421 Cash and cash equivalents, end of period $ 1,497,279 $ 107,305 See accompanying notes PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Interim Financial Statements Interim financial information presented in the accompanying financial statements and notes hereto is unaudited. In the opinion of management, all adjustments that are necessary to present the financial statements fairly in conformity with accounting principles generally accepted in the United States of America, consisting only of normal recurring adjustments, have been made. The interim financial statements and notes thereto as well as the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended July 31, 2003. The year-end balance sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. 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. At January 31, 2004, the Company's accumulated deficit was $25,290,910. At January 31, 2004, its cash, cash equivalents and short-term investments were $1,597,310. The Company has incurred substantial operating and net losses in the three years ended July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations and investment losses have been substantial. In addition, the Company has incurred $534,000 cumulatively through January 31, 2004 for professional advice related to the ongoing SEC investigation (see Note 8 to Consolidated Financial Statements). Accordingly, our auditor's opinion with respect to our financial statements as of and for the year ended July 31, 2003 included an explanatory paragraph with respect to our ability to continue as a going concern. Management has and continues to take actions to improve the Company's results. These actions include aggressively pursuing new license agreements, reducing cash operating expenses, deferring payment of certain liabilities, structuring payment obligations contingent upon revenues, selling portions of CTT's share of the potential Materna award, and collecting amounts previously written off. See also Note 10 to the accompanying Consolidated Financial Statements. The amounts and timing of the Company's future cash requirements will depend on many factors, including the results of the Company's marketing efforts, the Materna(TM) award, Fujitsu and LabCorp lawsuits (see Note 8 to accompanying Consolidated Financial Statements), 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 greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. 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. Although we cannot assure you that we will be successful in these efforts, management believes its plan would sustain the Company at least through fiscal 2005. 2. Net Income (Loss) Per Share The following table sets forth the computations of basic and diluted net income (loss) per share.
Six months Quarter ended January 31, ended January 31, 2004 2003 2004 2003 Net income (loss) applicable to common stock: $ 409,580 $ (631,116) $ 64,287 $(1,410,023) Weighted average number of common shares outstanding 6,204,488 6,166,284 6,207,631 6,174,196 Effect of dilutive securities: Stock options 95,548 -- 191,095 -- Weighted average number of common shares outstanding and dilutive securities 6,300,036 6,166,284 6,398,726 6,174,196 Net income (loss) per share of common stock: Basic and diluted $ 0.07 $ (0.10) $ 0.01 $ (0.23)
At January 31, 2004 and 2003, respectively, options and warrants to purchase 573,428 and 997,767 shares of common stock were outstanding but were not included in the computation of earnings per share because they were anti-dilutive (of total options and warrants outstanding of 1,113,717 and 997,767, respectively). 3. Stock-Based Compensation The Company accounts for 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:
Six months Quarter ended January 31, ended January 31, 2004 2003 2004 2003 Net income (loss), as reported $ 409,580 $ (631,116) $ 64,287 $(1,410,023) Deduct total stock-based compensation determined under the fair value method (169,556) (149,029) (73,802) (92,086) Pro forma net income (loss) $ 240,024 $ (780,145) $ (9,515) $(1,502,109) Net income per share: Basic and diluted - as reported $ 0.07 $ (0.10) $ 0.01 $ (0.23) Basic and diluted - pro forma $ 0.04 $ (0.13) $ 0.00 $ (0.24)
The pro forma information above may not be representative of pro forma fair value compensation effects in future periods. 4. Unilens Receivable In 1989, the Company sold substantially all the assets of University Optical Products Co. (UOP) to Unilens Corp. USA for $6 million dollars, including a $5.5 million installment receivable. Due to uncertainties related to its collection, the Company wrote off the entire installment receivable in fiscal 1989 and 1990. The Company deemed the receivable balance of $4.7 million uncollectible. Effective October 17, 2003, Unilens Corp. USA and Unilens Vision Inc. (Unilens) agreed 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. CTT and Unilens also agreed to settle all prior claims and to terminate all prior agreements between them. At January 31, 2004, Unilens has paid aggregate installments of $203,000. 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. Due to Unilens' financial condition and the uncertainty of its payments on this receivable ($1,047,000 at January 31, 2004), the Company will record other income as it receives payments from Unilens. 5. Receivables Receivables were: January 31, July 31, 2004 2003 Royalties $ 888,952 $ 905,654 Other 8,329 51,621 $ 897,281 $ 957,275 6. Intangible Assets Acquired The Company reported an impairment charge of $6,166 in the first half of fiscal 2004. The Company reported amortization expense of $20,286 and $78,759, in the first half of fiscal 2004 and 2003, respectively, and expects to record annual amortization expense of approximately $39,000 for fiscal 2004, $38,000 for fiscal 2005, $24,000 for fiscal 2006 and $3,000 for fiscal 2007 and 2008. January 31, July 31, 2004 2003 Intangible assets acquired, principally licenses and patented technologies, at adjusted cost $ 1,204,820 $ 1,687,067 Impairment charge (6,166) (482,247) Accumulated amortization (1,082,384) (1,062,098) $ 116,270 $ 142,722 7. Accrued Liabilities Accrued liabilities were: January 31, July 31, 2004 2003 Royalties payable $ 532,070 $ 854,616 Accrued professional fees 31,750 156,840 Accrued compensation 155,103 217,952 Accrued rent 48,750 -- Other 57,126 52,011 $ 824,799 $ 1,281,419 Accrued compensation at January 31, 2004 and July 31, 2003 included bonuses aggregating $50,000 for the fiscal year ended July 31, 2003. The Board of Directors awarded cash bonuses to administrative and professional staff (with the exception of Mr. Nano) for their efforts towards furthering the Company's goals to build recurring revenue streams and increase shareholder value. These bonuses will be paid to employees upon receipt of the potential Materna award (see Note 8 to accompanying Consolidated Financial Statements). 8. Contingencies Contingent Obligations CTT and Vector Vision, Inc. (VVI, a CTT consolidated subsidiary) have contingent future royalty obligations of $199,569 and $224,127, respectively, at January 31, 2004 to repay grant funding. Under a promissory note, the Company is contingently obligated to our former patent litigation counsel in the Fujitsu matter for $1,683,349 plus simple interest at the annual rate of 11% from October 28, 2002, payable only from future receipts in a settlement or other favorable outcome of the litigation against Fujitsu, if any. When we made this agreement 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. 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. Currently, no trial is scheduled pending the outcome of summary judgment motions and possible appeal options. Since July 23, 2002, the University of Illinois has taken the lead in this litigation and assumed the cost of new lead counsel. Before that, 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 refiled 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. On February 3, 2004, the U.S. Court of Appeals for the Federal Circuit heard oral arguments on appeal by the University of Illinois (now a defendant in this suit) of the District Court ruling that sovereign immunity does not attach to certain of the counterclaims. 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 heard oral arguments in this case on November 5, 2003 and we await its decision. 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 paid $250,000 for homocysteine assays performed from November 1, 2001 through October 31, 2002. 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. Since January 2003, CTT has received cumulative royalties of $1,003,029 (revenues of $401,211 (of which $99,954 relate to assays performed from November 1, 2001 through October 31, 2002) and royalties paid or payable of $601,818 to our clients) from LabCorp pursuant to this January 2003 Stipulated Order. If the November 2002 judgment in favor of CTT is reversed on appeal, LabCorp's ability to recover amounts paid to CTT, if at all, may 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. In November 2003, the CAFC denied the defendant's appeal requesting a rehearing en banc. On February 12, 2004, the defendant filed petition for certiorari (a request that the U.S. Supreme Court hear its appeal) to the U.S. Supreme Court. Based on the language of the September 3, 2003 judgment, CTT's management believes there is a very reasonable possibility the Company will receive its share of damages finally awarded 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. Sales of portions of expected Materna award Effective October 30, 2003, CTT sold to LawFinance Group, Inc. (LFG) a second portion of its expected $6,000,000 patent infringement judgment against American Cyanamid Company (Defendant) in the Materna lawsuit. On October 31, 2003, CTT received $900,000 cash in exchange for an Assigned Portion (plus court awarded interest thereon from October 31, 2003) of CTT's share of the potential award and recorded $900,000 in retained royalty settlement revenue in first quarter 2004. In management's opinion, it is most likely that the Assigned Portion will be $1,125,000. According to this LFG agreement, the Assigned Portion relating to the above transaction will be: a) $1,125,000 if, in the current Appeal, Defendant does not file a petition for certiorari with the United States Supreme Court (Supreme Court) or the Supreme Court denies Defendant's petition for certiorari during the current 2003-2004 Term and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or b) $2,160,000 if, in the current Appeal, Defendant files a petition for certiorari with the Supreme Court and the Supreme Court grants Defendant's petition and LFG receives full payment within 7 days of CTT's receiving payment from Defendant, or c) $1,400,000 in any circumstance that does not meet the conditions of a) or b). CTT has no financial obligation to repay LFG or to return any portion of the aggregate $1,500,000 received from LFG as of January 31, 2004. (On May 19, 2003, CTT received $600,000 cash from LFG in exchange for $1,290,000 (plus court awarded interest from May 19, 2003) of CTT's share of the potential award.) If CTT's share of the potential award is less than the total amount sold to LFG, the entire amount would be paid to LFG and LFG would be deemed paid in full. CTT granted LFG a first security interest in CTT's share of the potential award. Effective November 17, 2003, CTT sold to a CTT shareholder $312,500 (plus court awarded interest thereon from November 14, 2003) of its expected judgment in the Materna lawsuit in exchange for $250,000 in cash. CTT granted this shareholder a security interest subordinate to that of LFG in CTT's share of the potential award. If the judgment in the Materna lawsuit is reversed in an unappealable decision by the appropriate court, or if there are no litigation proceeds to be distributed, the Company has no financial obligation to repay this shareholder in either cash or shares of CTT common stock. If the award remaining after all amounts due to LFG is less than $312,500, CTT shall pay this shareholder the difference in shares of CTT common stock valued at its market value on the day of distribution, after which he would be deemed paid in full. Depending on the conditions described in a), b) and c) above relative to LFG, at January 31, 2004, CTT retained the remaining anticipated a) $3,272,500, b) $2,237,500, or c) $2,997,500 proceeds from this expected award (plus court awarded interest thereon) in addition to the $1,750,000 already received from LFG and this shareholder. 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, the Commission might take against the Company. 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 January 31, 2004, the Company has advanced $101,000 pursuant to this agreement. As of January 31, 2004, the Company has also paid $356,000 and accrued an additional $77,000 for the Company's and several current and former directors' (excluding Mr. Fodale, addressed above) related legal fees in the matter, which were in the aggregate approximately $433,000 to January 31, 2004. Except for Mr. Fodale, no individual current or former director's cumulative fees exceeded $60,000 at January 31, 2004. The Company has filed a claim under its directors' and officers' liability insurance with Federal Insurance Company of Warren, New Federal Jersey (Federal) for reimbursement of these fees in excess of the policy deductible. Federal denied the Company's claim. As a result, on February 3, 2004, the Company filed a complaint in the U.S. District Court for the District of Connecticut against Federal to enforce its claim. The Company will record any reimbursements for these expenses when it receives them. Other Pursuant to a severance agreement dated November 1, 2003, CTT agreed, among other things, to pay Mr. McPike up to $112,500 if and only if CTT receives settlement funds from the Materna litigation discussed above. CTT also agreed to extend the expiration date of his stock options vested at November 1, 2003 to the earlier of ten years from their grant date or November 1, 2006. 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's assistance in obtaining fair and reasonable reimbursement and compensation for damages. Management believes these claims are without merit and the Company has responded to the complaints. It cannot estimate the final outcome of these complaints or the related legal or other expenses it may incur. 9. Related Party Transactions During the six months ended January 31, 2004 and 2003, CTT incurred charges (reported in personnel and other direct expenses relating to revenues) of approximately $5,300 and $6,000, respectively, related to consulting services provided by one director. 10. Subsequent Event On February 25, 2004, CTT entered into an agreement to obtain up to $5 million in equity financing from Fusion Capital Fund II, LLC (Fusion). Under the agreement, Fusion agreed to purchase up to $5 million of newly issued CTT common stock over a period of time up to 20 months. CTT has the right to control the timing and the amount of stock sold, if any, to Fusion. In this agreement, CTT agreed to initially issue at no cost to Fusion 53,138 commitment shares of CTT restricted common stock and an additional 35,425 commitment shares of CTT common stock on a pro rata basis as CTT obtains funds from selling common stock to Fusion. CTT will pay no cash commitment fee to Fusion to obtain this agreed funding. Under this agreement, funding of the initial $5 million would occur over a period of time commencing upon fulfillment of certain conditions, including the Securities and Exchange Commission declaring effective a registration statement covering the resale by Fusion of the commitment shares and newly issued shares of common stock to be purchased by Fusion. Upon completion of this funding, at CTT's sole discretion, it has the right to enter into a new agreement with Fusion covering the sale of up to an additional $5 million of common stock. When funding commences, Fusion has agreed to purchase on each trading day $12,500 of our common stock. The purchase price per share will be equal to the lesser of: -- the lowest sale price of our common stock on the purchase date; or -- the average of the three lowest closing sale prices during the 12 consecutive trading days prior to the date of purchase. We may, subject to certain provisions, set a minimum purchase price from time to time (currently $3.00 per share). Fusion does not have the right or obligation to purchase our stock in the event that the price of our stock is less than $1.00 per share. We presently estimate that the maximum number of shares we will sell to Fusion (exclusive of commitment fee shares) will be 1,159,552 shares. Therefore, the selling price of our common stock to Fusion will have to average at least $4.32 per share for us to receive the maximum proceeds of $5 million. Under our agreement with Brooks, Houghton & Company, Inc., our financial advisor who assisted in arranging the transaction with Fusion, we will pay the advisor a cash fee of $50,000 plus up to $200,000 in installments as we receive amounts from Fusion (5% of $5 million in the aggregate). In addition, we will grant to the advisor five-year warrants to purchase 57,537 shares of our common stock (approximately 5% of 1,159,552 shares, the maximum number of shares that may be sold to Fusion) at an exercise price of $4.345 per share (110% of the $3.95 average closing price of our common stock for a ten (10) day trading period ended January 21, 2004 that was used to determine the 88,563 commitment shares issuable to Fusion). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We have rounded all amounts in this Item 2 to the nearest thousand dollars. In addition, all periods discussed in this Item 2 relate to our fiscal years ending July 31 (first, second, third and fourth quarters ending October 31, January 31, April 30 and July 31 respectively). Results of Operations - Three Months Ended January 31, 2004 (Second Quarter 2004) vs. Three Months Ended January 31, 2003 (Second Quarter 2003) Summary Results Net income for our second quarter 2004 was $64,000 compared with a loss of $1,410,000 for our second quarter 2003, an improvement of $1,474,000. Revenues In our second quarter 2004, $790,000 (83%) of our revenues were from four technologies: Ethyol $300,000 (32%), the sale of a portion of expected Materna award, $250,000 (26%), the homocysteine assay, $135,000 (14%) and gallium arsenide $105,000 (11%). Total revenues in our second quarter 2004 were $948,000, which was $115,000 (14%) higher than in our second quarter 2003, principally because of $300,000 royalty revenues from Ethyol(TM) (none in second quarter 2003) and retained royalty settlement revenues of $250,000 from sale of a portion of our potential award in the Materna(TM) lawsuit in our second quarter 2004 (see Note 8 to the accompanying Consolidated Financial Statements). Offsetting these increases were a $173,000 reduction in gallium arsenide revenues, $162,000 of nonrecurring second quarter 2003 revenues (see the Company's Annual Report on form 10-K for the year ended July 31, 2003) and a reduction of $100,000 because of other expiring licenses. Lower sales of licensed products, timing differences and expiring licenses caused the reduction in gallium arsenide revenues. Our licenses generally expire when the last of the licensed patents expires. Operating expenses Patent enforcement expenses, net of reimbursements, of $14,000 in second quarter 2004 were $104,000 (88%) lower than in second quarter 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 8 to the accompanying Consolidated Financial Statements. Personnel and other direct expenses relating to revenue were $588,000 for second quarter 2004, which was $83,000 (12%) lower than the $671,000 in second quarter 2003. Personnel expenses (which include costs of consultants engaged to assist us in developing specific revenue opportunities and strategic alliances and relationships) were $68,000 lower in second quarter 2004. In second quarter 2004, we had approximately 14 full-time equivalents compared with approximately 16 in second quarter 2003. In addition, amortization expense on intangible assets was $30,000 lower in second quarter 2004. General and administrative expenses for second quarter 2004 were $371,000, which was $145,000 (28%) lower than the $516,000 for second quarter 2003. We reduced proxy and annual report expenses by $57,000, audit and tax expenses by $33,000 and legal expenses directly related to the SEC investigation by $69,000 (see Note 8 to Consolidated Financial Statements) in our second quarter 2004. Financing expenses increased $31,000. Other income, net Other income, net, for second quarter 2004 included a $103,000 installment received from Unilens Corp. USA pursuant to a settlement agreement effective October 17, 2003, partially offset by related expenses. We recorded an impairment charge of $944,000 on our investment in NTRU Cryptosystems, Inc. in our second quarter 2003. Results of Operations - Six Months Ended January 31, 2004 (First Half 2004) vs. Six Months Ended January 31, 2003 (First Half 2003) Summary Results Net income for our first half 2004 was $410,000 compared with a loss of $631,000 for our first half 2003, an improvement of $1,041,000. Revenues In our first half 2004, $1,850,000 (83%) of our revenues were from three technologies: the sales of portions of expected Materna award $1,150,000 (52%), the homocysteine assay $401,000 (18%) and Ethyol $300,000 (13%). Total revenues in our first half 2004 were $2,235,000, which was $1,020,000 (84%) higher than in our first half 2003, principally because of retained royalty settlement revenues of $1,150,000 in our first half 2004 from sales of portions of our potential award in the Materna(TM) lawsuit discussed in Note 8 to accompanying Consolidated financial Statements. Royalty revenues from Ethyol increased $153,000 due to increasing sales and their effect on when we record these royalties, up to our $500,000 per calendar year maximum. In our first half 2004, we recorded $300,000 of Ethyol royalties in the second quarter and none in the first quarter. In our first half 2003, we recorded $147,000 of Ethyol royalties in the first quarter and none in the second quarter. We expect to record the remaining $200,000 of our calendar year 2004 Ethyol royalties in our third quarter 2004. CTT received $140,000 homocysteine revenues from settlement of a royalty audit in our first half 2004. Recurring royalty revenues from homocysteine assays increased $101,000 (63%). Partially offsetting these increases were a $200,000 reduction in gallium arsenide revenues, a $163,000 reduction because of other expiring licenses and $162,000 of nonrecurring first half 2003 revenues (see the Company's Annual Report on Form 10-K for the year ended July 31, 2003). Lower sales of licensed products, timing differences and expiring licenses caused the reduction in gallium arsenide revenues. Operating expenses Patent enforcement expenses, net of reimbursements, of $47,000 in first half 2004 were $106,000 (69%) lower than in first half 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 8 to the accompanying Consolidated Financial Statements. Personnel and other direct expenses relating to revenue were $1,147,000 for first half 2004, which was $264,000 (19%) lower than the $1,411,000 in first half 2003. Personnel expenses (which include costs of consultants engaged to assist us in developing specific revenue opportunities and strategic alliances and relationships) were $250,000 lower in first half 2004. In first half 2004, we had approximately 14 full-time equivalents compared with approximately 16 in first half 2003. General and administrative expenses for first half 2004 were $797,000, which was $142,000 (15%) lower than the $940,000 for first half 2003. We reduced proxy and annual report expenses by $83,000, audit and tax expenses by $45,000 and legal expenses directly related to the SEC investigation by $36,000 (see Note 8 to accompanying Consolidated Financial Statements) in first half 2004. Financing expenses increased $65,000. Reversal of accounts payable exchanged for contingent note payable In first quarter 2003, we reversed from accounts payable $1,583,000 that was accrued at July 31, 2002. This one-time reversal constituted other operating income (see Note 8 to accompanying Consolidated financial Statements). Other income, net Other income, net, for first half 2004 included $203,000 of installments received from Unilens Corp. USA pursuant to a settlement agreement effective October 17, 2003, partially offset by related and other expenses (see Note 4 to accompanying Consolidated Financial Statements). We recorded an impairment charge of $944,000 on our investment in NTRU Cryptosystems, Inc. in our second quarter 2003. The Company has substantial net operating and capital loss carryforwards for Federal income tax purposes. Financial Condition and Liquidity Condition at January 31, 2004 At January 31, 2004, the Company had net working capital of $1,561,000 (which was $607,000 more than at July 31, 2003) and no outstanding debt or available credit facility. However, see $5 Million Equity Financing below. At January 31, 2004, cash, cash equivalents and short-term investments of $1,597,000 were $93,000 higher than at July 31, 2003 and were available to support our current operating needs. Operating activities in first half 2004 used $97,000 of cash: $600,000 for paying accounts payable and accrued liabilities partially offset by $410,000 from net income, $123,000 from prepaid expenses and other current assets and $60,000 from collecting receivables. Investing activities provided $162,000 of cash primarily from the Unilens payment described above. Financing activities provided $27,000 from exercise of stock options. In addition to fluctuations in the amounts of royalties reported, changes in royalties receivable and payable reflect the Company's normal cycle of royalty collections and payments. Funding and capital requirements $5 Million Equity Financing On February 25, 2004, CTT entered into an agreement to obtain up to $5 million in equity financing from Fusion Capital Fund II, LLC (Fusion). Under the agreement, Fusion agreed to purchase up to $5 million of newly issued CTT common stock over a period of time up to 20 months. CTT has the right to control the timing and the amount of stock sold, if any, to Fusion. In this agreement, CTT agreed to initially issue at no cost to Fusion 53,138 commitment shares of CTT restricted common stock and an additional 35,425 commitment shares of CTT common stock on a pro rata basis as CTT obtains funds from selling common stock to Fusion. CTT will pay no cash commitment fee to Fusion to obtain this agreed funding. Under this agreement, funding of the initial $5 million would occur over a period of time commencing upon fulfillment of certain conditions, including the Securities and Exchange Commission declaring effective a registration statement covering the resale by Fusion of the commitment shares and newly issued shares of common stock to be purchased by Fusion. Upon completion of this funding, at CTT's sole discretion, it has the right to enter into a new agreement with Fusion covering the sale of up to an additional $5 million of common stock. When funding commences, at CTT's sole option, Fusion has agreed to purchase $12,500 of our common stock on each trading day. The purchase price per share will be equal to the lesser of: -- the lowest sale price of our common stock on the purchase date; or -- the average of the three lowest closing sale prices during the 12 consecutive trading days prior to the date of purchase. See Note 10 to the accompanying Consolidated Financial Statements. Capital requirements 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. At January 31, 2004, the Company's accumulated deficit was $25,290,910. At January 31, 2004, its cash, cash equivalents and short-term investments were $1,597,310. The Company has incurred substantial operating and net losses in the three years ended July 31, 2003. Net patent enforcement expenses related to the Fujitsu and LabCorp litigations and investment losses have been substantial. In addition, the Company has incurred $534,000 cumulatively through January 31, 2004 for professional advice related to the ongoing SEC investigation (see Note 8 to Consolidated Financial Statements). Accordingly, our auditor's opinion with respect to our financial statements as of and for the year ended July 31, 2003 included an explanatory paragraph with respect to our ability to continue as a going concern. Management has and continues to take actions to improve the Company's results. These actions include aggressively pursuing new license agreements, reducing cash operating expenses, deferring payment of certain liabilities, structuring payment obligations contingent upon revenues, selling portions of CTT's share of the potential Materna award, and collecting amounts previously written off. See also the $5 Million Equity Financing above. The amounts and timing of the Company's future cash requirements will depend on many factors, including the results of the Company's marketing efforts, the Materna(TM) award, Fujitsu and LabCorp lawsuits (see Note 8 to accompanying Consolidated Financial Statements), 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 greater than its operating expenses. To sustain profitability, the Company must continually add such licenses. 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. Although we cannot assure you that we will be successful in these efforts, management believes its plan would sustain the Company at least through fiscal 2005. Compliance with American Stock Exchange listing standards At July 31, 2003, CTT's shareholders' interest was $1,169,000. On November 12, 2003, the American Stock Exchange (AMEX) notified CTT that it did not meet certain AMEX listing standards and that the Company must submit a plan for returning to compliance with those standards to maintain its AMEX listing. On January 23, 2004, AMEX notified CTT that AMEX had accepted CTT's plan to regain compliance with AMEX continued listing standards and that AMEX was continuing CTT's listing pursuant to an extension. To maintain its listing, CTT is required to make progress consistent with its plan during the extension period and to regain compliance with AMEX continued listing standards by May 12, 2005. We cannot assure you if or when we will again meet AMEX listing requirements. Installment receivable from Unilens Corp. USA and Unilens Vision, Inc. (Unilens) Due to Unilens' financial condition and the uncertainty of its payments on our installment receivable ($1,047,000 at January 31, 2004), the Company will record other income as it receives payments from Unilens (see Note 4 to accompanying Consolidated Financial Statements). Commitments In addition to liabilities recorded at January 31, 2004, the Company's commitments were: Payments Due by Period Less More At January 31, 2004 than 1-3 3-5 than 5 Contractual Obligations Total 1 year years years years Operating lease obligations $735,000 $294,000 $441,000 $ -- $ -- Other obligations 19,000 4,000 15,000 -- -- $754,000 $298,000 $456,000 $ -- $ -- The Company's other commitments are either contingent upon a future event or terminable on less than thirty days' notice. 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 8 to accompanying 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. In 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 another agreement (which the Company may also terminate on ninety days' written notice), it has committed to pay $4,000 in June 2004 and a $15,000 termination fee if the agreement is terminated in certain circumstances before January 31, 2006. In addition, the Company has agreed to reimburse patent expenses ($59,000 as of January 31, 2004) 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 remaining contingent obligations of $199,569 and $224,127, respectively, at January 31, 2004 to repay grant funding. 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 several lawsuits all of which are detailed in Note 8 to the accompanying Consolidated Financial statements. 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. Royalty settlements We recognize royalty settlement revenue when our rights to litigation awards related to our patent and license rights are final and unappealable and we have assurance of collecting those awards. We also recognize royalty settlement revenue when we have collected litigation awards in cash (from the adverse party or by sale of our rights to another party without recourse) and we have no obligation or are very unlikely to be obligated to repay such collected amounts. We include royalty settlement revenue in operating revenue. Although final litigation awards may be infrequent, they are an integral aspect of our patent and technology licensing and commercialization business. 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 milestone billing arrangements on a case-by- case basis. Generally we recognize upfront fees ratably over the entire arrangement and milestone payments as we achieve 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. Related Party Transactions CTT incurred charges (reported in personnel and other direct expenses relating to revenue) of $5,300 and $6,000 related to consulting services provided by one director in the first half of fiscal 2004 and 2003, respectively. 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). Forward-Looking Statements Statements about our future expectations, including development and regulatory plans, and all other statements in this Quarterly Report on Form 10-Q other than historical facts, are "forward- looking statements" within the meaning of applicable Federal Securities Laws and are not guarantees of future performance. When used in this Form 10-Q, 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 our 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 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures The Company's Chief Executive and 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 January 31, 2004. 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 Financial Officer concluded that these controls were effective as of January 31, 2004. (b) Change in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses in our internal controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in pending litigation matters, including the Company's complaint filed on February 3, 2004, against Federal Insurance Company of Warren, New Jersey, that are fully detailed in Note 8 to the accompanying Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of stockholders held January 16, 2004, the following directors were elected: Name Votes For Votes Withheld Richard E. Carver 5,467,573 436,564 George W. Dunbar, Jr. 4,913,809 990,328 Samuel M. Fodale 4,916,409 987,728 John B. Nano 5,654,557 249,580 Charles J. Philippin 5,475,673 428,464 John M. Sabin 4,975,609 928,528 There were no broker non-votes. In addition, at the Company's annual meeting of stockholders held January 16, 2004, stockholders did not approve the proposal to amend the 1996 Directors' Stock Participation Plan by increasing the number of shares of Common Stock available for issuance under the Plan by 25,000 shares to a total of 125,000 shares. There were 1,150,834 shares voted for and 1,296,705 shares voted against this proposal, and 39,376 shares abstained. There were 3,417,222 broker non-votes on this matter. Item 5. Other Information (a) Effective January 1, 2004, the Company appointed Dr. Donald J. Freed as Executive Vice President and Chief Technology Officer. Prior thereto, he consulted for CTT from April 2003 to December 2003. From November 1998 through March 2003, he served as Vice President, Business Development, and prior thereto, as Vice President of Marketing of Nanophase Technologies Corporation, a publicly held nanomaterials company. Effective November 1, 2003, the Company agreed, among other things, to terminate Frank R. McPike, Jr.'s employment with the Company. Prior to July 1, 2003, Mr. McPike served as Executive Vice President and Chief Financial Officer of the Company (see Note 8 to accompanying Consolidated Financial Statements). Item 6. Exhibits and Reports on Form 8-K Page A) Exhibits 10.1 Agreement between registrant and a CTT shareholder effective November 17, 2003** 33-54 10.2* Severance agreement between registrant and Frank R. McPike, Jr. effective November 1, 2003 55-64 10.3 Letter agreement between registrant and Brooks, Houghton & Company, Inc. and Brooks, Houghton Securities, Inc. and their affiliates dated October 7, 2002 and extended July 10, 2003 65-73 31.1 Certification by the Principal Executive 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)) 74-75 32.1 Certification by the Principal Executive and Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 76 __________________ * Management Contract or Compensatory Plan ** Portions of this Exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, and such portions have been filed separately with the Commission. B) Reports on Form 8-K The Company filed the following two reports on Form 8-K during the period covered by this report on Form 10-Q: 1) On November 10, 2003, the Company filed a report on Form 8-K under Items 2, 5 and 7 to report its October 30, 2003 sale to LawFinance Group, Inc. of a second portion of its expected patent infringement judgment against American Cyanamid Company in the Materna lawsuit. 2) On January 29, 2004, the Company filed a report on Form 8-K (date of earliest event reported January 23, 2004) under Items 5 and 7 to report that the American Stock Exchange had accepted the Company's plan to regain compliance with AMEX continued listing standards within the extension period ending May 12, 2005. In addition, on December 15, 2003, the Company furnished a report on Form 8-K under Item 12 to the SEC for furnishing the press release announcing results for its first quarter ended October 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (the registrant) By /s/ John B. Nano John B. Nano President, Chief Executive Officer, Chief Financial Officer and Authorized Signer Date: March 16, 2004